Diamond Offshore Drilling Inc (DO) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2018 Diamond Offshore Drilling Inc. Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to turn the call over to Samir Ali, Vice President Investor Relations and Corporate Development. Sir, (inaudible) begin.

Thank you, Marc. 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, Executive 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 the time sensitive information may no longer be accurate at the 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 today are covered by that disclosure. We will be referencing non-GAAP figures on our call today. Please find the 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. In the fourth quarter of 2018, including onetime charges related to Tax Reform, Diamond Offshore posted a loss per share of $0.58. Excluding these onetime items, adjusted loss per share was $0.42 compared to fourth quarter 2017 adjusted loss per share of $0.05. The decline year-over-year was primarily driven by various rigs being contracted at lower rates in the fourth quarter of 2018 compared to the fourth quarter of 2017, partially offsetting the year-over-year revenue decrease. Our operating costs were reduced by 24% over the same period.

Despite the continued decline in revenue, we believe dayrates have now found a floor. In the moored market, we are increasing our dayrates as contracts renew, albeit, of a very low market trough. And on the dynamically positioned side, rates appear to be moving higher, however, we still expect the continued oversupply of 6- and seventh-generation drillships to push a real recovery of dayrates for this asset class beyond 2019, but allow me to address Diamond's 7-generation assets for a minute. Our focus, for a long time, has been on driving efficiency gains into deepwater drilling through a differentiated offering in what has traditionally been a commoditized space. And to this end, I have spoken about our unique service offerings such as Pressure Control by the Hour, Sim-Stack and more recently, Blockchain Drilling. I have previously mentioned how such innovation, during 2018, reduced BOP downtime on this complex piece of equipment to less than 1%, how we have delivered 31,000-foot wells here in the Gulf of Mexico up to 54 days ahead of schedule, and how we have reached drilling depths of 28,000 feet in only 38 days. This is best-in-class performance, but how does this translate as a benefit to our clients? As you know, 2 of our drillships have been working as the sole drilling contractor on a significant development project in the Gulf of Mexico. Diamond Offshore has exceeded expectations on this development by delivering first oil 6 months ahead of schedule and $1.2 billion or some 20% under budget. During this program, and according to independent third-party data supplied by the client, our drillships delivered 3 of the 4 most efficient drilling curves in the deepwater Gulf of Mexico to date. In other words, normalized for well depth, we have recently manufactured for the client, 3 of the 4 most cost-effective deepwater wellbores, which were at the same time some of the deepest and most difficult drilled in the region. And this record drilling performance has not come at the cost of safety as 2018 represented the safest year in company history. In an oversupplied market, differentiated performance makes our assets the most desirable in the marketplace. And the success of this strategy is proven out by our ability last year to add over 4 years of backlog to our drillships at rates that were above that of the market.

As a company, we reached such milestones in 2018, whereby in the month of August, we had only 12 hours of downtime across the entire fleet. 3 of our 4 drillships achieved 100% operational efficiency for an entire quarter. And at one point in the year, our subsea reliability exceeded that of our already excellent surface reliability. On this last point, it is worth highlighting that this is a stellar achievement and a first in the history of the company. This outstanding performance could not have been achieved without the hard work and dedication of the many Diamond employees we have around the world, and I would personally like to thank them for their efforts. However, we do not rest on our laurels and will continuously innovate and provide thought leadership in an ongoing effort to further improve efficiencies in deepwater drilling. Despite already demonstrating best-in-class performance, this year, we will take the opportunity to further improve the capability of our seventh-generation drillships to keep them at the very top of the deli line of desirability. Scott will speak to our 2019 CapEx spending in detail in his prepared remarks, but allow me to give you some initial color.

Starting with our drillships, we are now commencing the 5-year cycle whereby, we have to complete their special regulatory surveys. Although, a yard visit is not essential to the completion of these surveys, we will be bringing these drillships into a yard to also upgrade certain elements of the rig. Amongst other improvements, we will further enhance drill floor automation and implement a new technology that will materially improve tripping speed. I have just mentioned that these rigs have already delivered 3 of the 4 most efficient drilling curves seen in deepwater Gulf of Mexico, but in a space where drilling efficiency so significantly impacts the economics of deepwater developments, we want to push the curve even further. Somewhat unique in our space, and perhaps due in part to our differentiated strategy, all of our marketable rigs are now contracted as seen in our fleet status report issued earlier this morning. And because it is important to keep them working, when our current contracts expire, we believe that these investments will hold the rigs at the front of this deli line. The total cash cost of bringing a stacked rig, whether warm or cold, back into play and on contract is significant. So investing in the fleet in this manner and at this time and keeping these rigs active during this extended downturn is in our shareholders' best long-term interests.

Also announced this morning is the further upgrade and reactivation of the moored semi, the Ocean Onyx. This rig is a victory-class rig, an original design that has successfully been upgraded many times across our fleet. The Ocean Apex and the Ocean Endeavor, both sought after rigs, are good examples. As a part of the upgrade, we are increasing the deck area, variable deck load and elements of the drilling package in preparation for the rig's contract with Beach Energy for initial 1-year term commencing early 2020.

Interest in this rig has also been shown from multiple other clients active in the Otway Basin of South Australia. Although the initial term is 1 year, local market demand for gas-driven power generation suggests that this rig will have work for many years to come.

Also in 2019, we are completing the reactivation of the Ocean Endeavor, putting the Ocean GreatWhite on contract in the North Sea, completing the upgrade of the Ocean Apex and will be upgrading the BOP on the Ocean Courage in Brazil. In total, 9 rig projects in 2019, all related to enhancing our current fleet and ensuring these assets remain contracted.

So staying with this theme, allow me to now turn to our fleet contracting activities during the fourth quarter of 2018, where we were able to secure additional work for 4 rigs, including the Ocean Onyx just mentioned. We were able to fill the 8-month gap on the Ocean Monarch between February 2019 and the Myanmar program, which commences in late 2019. The new contract will bring the rig back to the Bass Strait to operate for Cooper and Exxon and will be at a higher dayrate than the work completed at the end of 2018.

Also in Australia, the Ocean Apex has secured a short job to help fill the gap in the Woodside program. This new work with Shell will cover approximately 60 days of the roughly 100-day gap between the programs. And in the U.K., we were also able to secure an additional 15 months of work for the Ocean Valiant with Shell. This contract will commence in 2020 and is in direct continuation of the program for Total. The rate on this new work is also at a premium to the old program.

Now allow me to provide some commentary on the market. The moored market continues to show signs of improvement. This is clearly evidenced by the contract awards for the previously cold-stacked Ocean Onyx and Ocean Endeavor, the gap fills we are seeing between contracts on the Ocean Monarch and the Ocean Apex and the fact that we continue to increase dayrates on our moored contract rollovers. Of the 116 rigs that have been scrapped during this downturn, over 80% have been moored rigs, and so this assets class is beginning to see a recovery in dayrates. Our clients are beginning to show flexibility in their own schedules as it relates to securing the availability of moored assets. The recovery in this segment is not limited to the North Sea alone as we are seeing it in all moored markets around the world. In the DP market, we are beginning to see some upward pressure on prices, and a few customers are willing to lock in multiyear programs at dayrates, which afford drillers positive margin. However, pricing in 2019 remains depressed as much of the work being tendered today is for 2020 and beyond.

Despite recent volatility in the spot price of oil and U.S. onshore production that has surprised to the upside, we remain firm in our belief that future demand growth cannot be met entirely by onshore production alone and that Deepwater will remain an important and growing component of the supply mix. We are witnessing encouraging signs of an uptick in offshore exploration in the Golden Triangle and close to record cash flows across our client base, both of these will lead to an increase in demand for deepwater drilling.

Diamond's strategy remains unchanged. We continue to drive innovation and focus on providing class-leading operational performance that helps lower the total cost of ownership and make offshore drilling more viable for operators. This strategy to provide a differentiated product is working as our fleet is being pushed to the top of the desirability list, and we now have all of our marketed rigs contracted. We continue to add backlog during a difficult 2018. We have recently strengthened our liquidity position and are reactivating 2 rigs with contracts in the tightening moored market.

By significantly upgrading the current fleet in 2019, Diamond Offshore is positioned well for the eventual market recovery. 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 $79 million or negative $0.58 per share for the fourth quarter of 2018, which includes unfavorable tax adjustments related to Tax Reform and further restructuring costs. Excluding these adjustments, our adjusted net loss for the fourth quarter was $58 million or negative $0.42 per share. This compares to our third quarter 2018 adjusted net loss of $35 million or negative $0.26 per share.

The quarter-over-quarter decline was primarily driven by lower revenue across a number of rigs, partially offset by decreased contract drilling costs.

Let's take a closer look at the quarter-over-quarter variances. First, contract drilling revenues of $226 million during the fourth quarter decreased $55 million from the third quarter, mostly driven by the nonrepeating third quarter recognition of unamortized deferred revenue and the onetime termination fee, both relating to the Ocean GreatWhite. If you recall, we successfully negotiated an early termination of the GreatWhite contract with BP in exchange for 4 years of drillship work at above market rates and an additional $135 million of future margin commitments.

Also contributing to the decrease, were fewer days on contract for the Ocean Monarch, Ocean Guardian and Ocean Valor in Q4 compared to the prior quarter. Partially offsetting the revenue decrease were more on-rate days for the Ocean Valiant in the fourth quarter compared to the third. Contract drilling expenses of $160 million came in 15% lower in the fourth quarter compared to the third quarter and were below prior guidance. As cautioned last quarter, the timing of our various shipyard projects spend is fluid as we evaluate the most efficient ways to carry out the work. Most of the favorable variance relates to timing of shipyard expenses and their deferral of certain contract preparation costs for the Ocean Endeavor, Ocean GreatWhite and Ocean Apex and the nonrepeating third quarter recognition of unamortized deferred expense relating to the early termination of the Ocean GreatWhite.

Depreciation of $86 million was slightly higher than guidance due to normal, year-end adjustments. Fourth quarter G&A expense of $15 million and net interest expense of $29 million, both came in at previous guidance.

Fourth quarter income tax expense of $13 million includes a $21 million charge, primarily related to additional guidance issued in Q4 2018 around the mandatory deemed repatriation provisions of the U.S. Tax Reform Act that was enacted at the end of 2017. Excluding this $21 million charge, our normalized effective tax rate of 13% for the quarter was in line with our prior guidance.

Full year 2018 capital expenditures of $222 million came within the guidance given at the beginning of last year.

And finally, during 2018, we increased our cash and cash equivalent position to over $450 million with nothing borrowed against our $1.275 billion credit facility.

Before we get into first quarter guidance, I would like to provide a few comments relating to full year 2019. During 2019, we plan to undergo 4 special surveys. The Ocean BlackHawk is scheduled to go into a shipyard towards the latter half of the first quarter to conduct its survey and the various upgrades Marc described earlier, which will take the rig out of service through most of the second quarter. The Ocean Courage is scheduled to undergo its survey and BOP upgrade during the second quarter and the BlackHornet and Ocean BlackRhino are scheduled to undergo their surveys during the second half of 2019. The Ocean BlackHornet will take advantage of the time in the yard and will undergo a similar upgrade as planned on the Ocean BlackHawk.

While these are our current projections, planned surveys can either be pushed out or brought forward for a variety of reasons. I will update the timing of surveys in future quarters as necessary. For 2019, we anticipate capital expenditures to be between $340 million and $360 million. This includes approximately $110 million for the upgrade and reactivation of the Ocean Onyx and about $20 million to complete the reactivation of the Ocean Endeavor as it prepares for its 2-year contract with Shell.

We also have a number of capital projects planned for 2019, most notably, the upgrades previously described on the Ocean Courage, Ocean BlackHawk and Ocean BlackHornet as we continue to upgrade our fleet ahead of the eventual recovery.

Finally, I want to highlight the accounting treatment of contract preparation costs that will impact contract drilling expense during 2019. U.S. GAAP dictates that cost incurred in connection with contract preparation activities are be -- are to be deferred and amortized over the initial term of the related contract. For the Ocean GreatWhite, Ocean Apex, Ocean Endeavor and Ocean Valor new contracts, we anticipate contract preparation costs of about $70 million, a vast majority of which has already been spent. As 2 of these initial contracts are for less than 6 months, the amortization will be quick. For 2019, we are anticipating $50 million to $60 million of contract drilling expense in addition to normal expenses and directly related to the amortization of deferred contract preparation costs. I will provide guidance each quarter going forward.

So with that, let me provide some thoughts on the first quarter of 2019, but before I do, I will remind you to refer to our fleet status report, which was published earlier today for known and projected out-of-service time for the first quarter.

We expect contract drilling expenses for the first quarter to come in between $185 million and $195 million. The sequential increase from prior quarter is mostly driven by the timing of the shipyard expenses on the Ocean Endeavor, Ocean GreatWhite and Ocean Apex I discussed earlier. In addition, we will begin incurring normal operating cost on the Ocean GreatWhite when its first quarter job in the North Sea commences.

Finally, during the first quarter, we will recognize about $10 million of previously deferred contract prep costs as discussed in my earlier comments. We estimate our depreciation expense to be approximately $87 million for the first quarter of 2019. G&A costs are expected to be between $16 million and $17 million during the first quarter. The slight increase from the fourth quarter of 2018 relates to the additional support needed for the Ocean GreatWhite, Ocean Endeavor and Ocean Onyx as they prepare for the start of their new contracts.

Net interest expense on our current debt and credit facility is projected to remain flat at approximately $29 million for the first quarter of 2019. And finally, we anticipate our effective tax rate to be around 10% during the first quarter of 2019. 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 as well as tax assessments, settlements or movements in exchange rates.

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

Thank you, Scott. Before we open up the call for questions, I would like to reiterate that our differentiated strategy is keeping all of our marketed rigs contracted in an industry with significant overcapacity. Our operating performance is best in class and our clients are seeing tangible results as a consequence. We are upgrading and bringing assets back into the moored rig category, the one that has seen the most attrition and which is showing early signs of a pricing recovery. And we are also making our seventh-generation drillships even more efficient. We believe that the proactive fleet investment we are undertaking, particularly this year in preparation for an eventual recovery in deepwater drilling, is the most efficient use of capital available today.

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

(Operator Instructions) Our first question comes from the line of Kurt Hallead of RBC Capital Markets.

I think I would, maybe, just start out in -- with respect to some of the commentary on the new rig contracts, and you mentioned that the new contracts are coming in at higher rates and -- than the prior. So I wonder if you could either give us the new contract rate or at least give us some general sense of kind of magnitude of change on the new contracts relative to the old ones.

Kurt, this is Ron. So as I'm sure you know we don't dig it into those kinds of details in this conversation. What I would say though is, I think the rates do reflect kind of a mutual acknowledgment by both operator and drilling contractor that rates over time, I think, have room to grow rather than recede. And so as I go through these contracting events and processes I think, there's a pretty aligned recognition that those rates have to be higher over time. So I've described them as profitable, as healthy, as sort of smart moves for us to make. I don't think they are dramatic in that regard, but I think overall, the trend is positive in terms of where we had come from. So in that regard, we feel good about the level of contracting activity that we've undertaken.

And so in every moored rig that we are looking at renewing, we are pushing dayrates higher and the customer is accepting of that. And certainly, for the most part, down in Australia, I think, that you will find that rates for moored assets are probably higher than what you can get in the spot market for a 6 or a seventh-generation assets. So this is a good place for us to be.

And then, Marc, you've mentioned you're going to rollout your Blockchain and Sim-Stack in -- onto rigs that don't currently have them in 2019. So just curious as to what that cadence may be as the year progresses? And how many rigs you think that could ultimately be? And I guess if I were just to layer in one more thing, to what extent is that rollout of the Blockchain and Sim-Stack is that incorporated into your CapEx plan?

So Sim-Stack and Blockchain are already in the CapEx plan. For Sim-Stack, during the course of 2019, we will have that capability embedded, not just on our sixth-generation drillships, but also on the Courage and the Valor down in Brazil, and of course, the Ocean GreatWhite in the North Sea. Sim-Stack has been a huge success, and as I mentioned in one of my earlier calls, we've well recovered the investment cost plus more on that activity. Blockchain, we're still rolling it out. For the most part, we'll have it available on all of our rigs by the end of this year, but I think what is pleasing around Blockchain is that we're seeing interests and traction building from our client base. Our clients have formed a forum in which to get a better understanding of how Blockchain can further drive efficiency gains into offshore drilling, especially deepwater. And of course, we're plugged in and monitoring that forum ourselves as it relates to the introduction and the rollout of that technology.

And our next question comes from the line of Sasha Sanwal of UBS.

Marc, maybe the first one for you. Just in terms of the major upgrades you announced, could you kind of give us your thought on how you balanced the IRR from these investments with your outlook for the recovery and the timing -- and the timing of the recovery? And then maybe what E&P are asking for or thinking about in terms of rig specs as you think about future opportunities?

Sure. Yes, I'll stay at a high level, Sasha, rather than get into the weeds necessarily on IRR, et cetera, et cetera. We have some capital allocation choices ahead of us, and we believe that it is in the best interest of our shareholders to be spending money today to keep the fleet attractive and keep it on contract rather than allowing units to go cold stacked or warm stacked and then incur the cost, which will be significant of bringing further stacked rigs back into the market. We're also taking the opportunity today of accessing yards when they don't have that much work. So one can conclude from that, that the rates are very, very attractive, that they have excess capacity on their own schedules, and we can get in there now ahead of what will be a rush of activity further down the road when our competitors are lining up to bring rigs back into the market. So we're taking advantage of lower unit costs in terms of upgrading today and getting rigs out into that market. I think, when it comes to the recovery itself, I think for the first time, when you look at the budgets that have been announced for 2019 and beyond by our major clients, and I'm talking about NOCs and IOCs, what I think we're seeing for the first time is a significant uptick in exploration activity, and that needs to come first as it relates to the green shoots of any recovery. We've seen, certainly, the majors out of Europe be quite specific on how they're increasing their exploration budgets to include, of course, Petrobras down in Brazil. Their exploration budget is heading north as well. So all this points to an imminent recovery. I can't say it's necessarily here today, but I think we are beginning to see signs of activity picking up certainly on the horizon. And especially in the moored fleet category, as we've spoken to quite a bit on the call already, we have certainly seen the opportunity to discuss, in a collegiate manner with our clients, improve dayrates moving forward.

Great. That's helpful. And you touched on this in your prepared remarks, but I just wanted to make sure I'm reading this properly. Would it be fair to say kind of given the focus on rig upgrade that at this point in time, Diamond's near-term focus is, maybe, step back from M&A and more focused on kind of internal, essentially, rig upgrades?

Well, I'm not going to specifically comment on our M&A focus today other than suggest that as always, we keenly look at what opportunities are in the marketplace, but as it relates to our current focus, the best allocation of capital that we see when we compare it with alternatives today, is indeed keeping our fleet running. As I earlier mentioned in the call, we've already drilled 3 of the most efficient wells here that have ever been drilled in the Gulf of Mexico, 3 of the 4 most efficient wells. Yet, we are bringing our drillships in to make them even more efficient and more attractive. We do have a couple of rigs that in a few years' time need to be recontracted, and we're just positioning around that with the intent to get a premium over whatever the market rate may be for these best-in-class assets.

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

Marc, I think you probably answered this with the way you're positioning the fleet, but we had some recent, obviously, volatility with the old price that has thrown back I think some programs a bit or at least caused some people to take a step back and reassess. How are your -- how's the tone of your and Ron's conversations with customers at this point? Has there been a noticeable change? Or is it kind of all systems go for 2020?

So I've recently been on the road. I spent 2.5 weeks in the Eastern Hemisphere visiting clients. I think that there is a certain amount of optimism out there in the space still despite the recent volatility that we've seen in the price of crude. Yes, certain projects have shifted slightly to the right, and that is somewhat of a concern as it relates to our own recovery in this cyclical industry, but having said that, our clients are still very, very optimistic as it relates to the long-term return so they can get out of deepwater plays even at these prices. A number of our clients have suggested that in all cases, deepwater is profitable in their portfolio at an oil price of $50 or below. And that translates well in terms of the visits that I've been having with many of our clients and potential clients. So again, as it relates to our fleet, I think our brand is perhaps the best it's ever been based on what is common knowledge as it relates to our operating performance, and our assets remain very attractive to the clients that I'm speaking to. So it came as a bit of a shock to the system, I think, certainly with the surprise that we had in North American production or the increase in North American production last year, but in terms of general optimism, I think that the real proof point this last quarter, that perhaps we didn't see on previous quarters, is a discussion around exploration budgets and how they are moving north. Indeed, there's one major in -- that's out of Europe who is doubling the exploration budget moving forward '19 compared with '18. So I think there's cause for optimism still despite the recent volatility that we've seen in the price of oil.

And our next question comes from the line of Ian MacPherson.

I wanted to clarify on the work that the BlackRhino and BlackLion -- I'm sorry, the -- it was the BlackHornet and the BlackRhino that have their upgrades and yard time scheduled in the second half. Were those comparable in scope and duration, it's what the BlackHawk is receiving, which I think -- we think it's about 120 days?

Yes, that is correct.

Ian -- this is Scott here. And on the Hornet, that is correct. The Rhino is just coming in for a special survey. So the duration of that will be much shorter than for the Hawk and the Hornet.

Okay. I was curious how the revenue recognition will unfold, while those yard period occur, and if your -- if you'd be remain on dayrate or at least subtracted from your backlog? Or made up on the back end of your backlog? Or what?

Yes. So during that time, when they're in the yard doing the work, we will not be earning anything. If you recall the deal that we struck on the Hawk and the Hornet, we will always have one of those rigs on-rate. So Hornet will remain on-rate, while the Hawk's in the yard. And then when the Hawk is done, the Hornet will go off rate, when it goes in the yard, and the Hawk will go on rate. So we'll always have one of those on for earnings, 0 on the other while it's in the shipyard.

Got it. And then I think this question's been teased a little bit. I wanted to, maybe, come at it of from a slightly different angle. Really, just -- when [it's] compare the health of your leadening edge contracts and maybe ask the question with regard to the Onyx upgrade, if the return profile or the return opportunity has measurably improved relative to what you garnered for the Ocean Endeavor about 9 months ago?

Yes, it has. So I was -- as I mentioned, I was traveling through the Eastern Hemisphere. I spent quite a bit of time in Australia and certainly, in Adelaide where I met a number of clients relating to the opportunities for, specifically, the Ocean Onyx. Eastern Australia is suffering a lot of blackouts as it relates to the ability to supply the local grid down there. So this is gas for the local market, and it's not going to be solved by one drilling program. This is going to take years of drilling work in that particular area to move forward with. So we sat with Beach. We went through the rig upgrade with them. What we're doing on this particular rig is we're adding 4,500 tons of steel to the rig. When the rig comes out, once again, it's going to look very different to when it went into the shipyard. This is a major upgrade that we believe will keep the rig working in that particular part of Australia for many, many years to come. Similar to the Endeavor, apart from the initial contract that was awarded to the rig, there were 2 other clients that were talking to us about that rig, and it's the same position here. Apart from Beach, we're talking to 2 other clients about activity for this rig moving forward. So in terms of the return, the return is somewhat better than what we were looking at with the Endeavor, but that's the passage of time and the increased optimism in the industry and the necessity to increase dayrates moving forward, but this is not a project that you should look at in terms a 1-year revenue cycle. We are very, very comfortable in the fact that this rig will be working for many years to come in that region.

Got it. And so Beach has 6 wells plus 5 options. Do you get some improvement in pricing on the option wells?

This is Ron. So that potential exists, of course. And so we think about the Onyx overall, there's an expectation over time that rig will earn higher dayrates as timing on it clicks on. So that's part of the original, kind of, economics of our thinking.

And our next question comes from the line of Sean Meakim of JPMorgan.

Marc, you mentioned customer realization that rates need to move higher. Would you consider restructuring some of the option tales preemptively? Or are there scenarios where that's possible for you?

In terms of pricing options at a high dayrate moving forward, generally what we do in the market when we have options on the table, our clients have asked us to fix pricing at the current rates for the initial term of the contract, and we have declined to do so. So the options that we are talking with our clients today remain unpriced with the intent to move them from our perspective upwards. I'm not sure if that was -- if that answers your question?

That's helpful. It does. Then on the Hawk and the Hornet, can you maybe just shed a little more light on the specifics of the upgrades beyond this desire to further improve their efficiency? Just -- and how maybe specifically, you think that'll help them reposition to compete in 2020? Any other specific projects or customers that align with these incremental capital outlays?

Sure. So we are moving forward with further automation of the rig floors taking people off, but also what automation brings and certainly a repetitive task is it brings speed and efficiencies to the table. So we're certainly increasing that area of the technical performance of the rig, but we're also attacking tripping speed, especially when it's unrestricted in order to further increase what is already best-in-class performance. These are the best rigs that are drilling in the Gulf of Mexico today, and that information is -- has come from a client database of clients that are currently working in the Gulf of Mexico, but in an effort to further bring the cost and drive efficiencies into this space, we're looking at a technology that does materially increase the tripping speed. I'm not going to speak to the details today. Suffice to say that it's -- it does require slight modification to the derrick in terms of its capability. And so we'll be doing that in the shipyard, and certainly, by the time these rigs get reconstructed that technology will be available to the new client. So as it relates to interests that we have in these rigs, there is certainly a lot of interest, of course. In the performance of any drilling that we do in the North Sea, there are at least 3 other partners and the word gets out. So we are actually actively engaged in conversations with potential clients, moving forward to take the 2 rigs that we'll have available in 18, 24 months back into the market on term contracts.

And our next question comes from the line of Taylor Zurcher of Tudor, Pickering, Holt.

Scott, maybe one for you. On the cost side, I appreciate all the color you provided on -- in prepared remarks. As we think about the near-term moving pieces, you obviously have several special-purposed surveys that'll be starting up, and I think in 2019 your revenue days would be higher as well. So as we think beyond the Q1 guidance, should we -- is it reasonable to assume that Q1 marks a low point for 2019 in terms of quarterly OpEx? Or at least Q2, Q3, should we expect those -- the OpEx in those quarters to be sequentially higher? Any color there would be helpful.

Yes, sure, Taylor. So as Marc mentioned, we're going to have throughout the year, 9 rig at various times down. While there will be some CapEx there, there's also going to be some increased cost associated with depending on what the project is itself. Also, as I mentioned, and this really starts becoming material specifically in Q2 and Q3, are those deferred contractor prep costs. I mentioned we'll have $50 million to $60 million for the year, and then I guided $10 million in Q1. We're going to see the bulk of that in the middle of the year. Though it's not a cash cost, we have already incurred the cash, but when you're looking at bottom line, it will hit there.

Okay. Got it. Only other question for me is on the BlackHornet that'll go to its special survey and upgrade I think in June, but there's a gap there between the next program with BP. Any way to frame if you think you can fill that gap with some other work in the meantime? Or is that with rig likely to be idle until it starts up its next program with BP following the Anadarko work?

Taylor, this is Ron. So that possibility exists. I think there's enough room where that's possible, nothing we're, of course, talking to you today, but clearly, filling up the schedule is something we pay a lot of attention to.

And our next question comes from the line of David Smith of Hackney and Energy Advisors.

Just regarding the Ocean Guardian, it was my impression that recent rates for third-gen semis in the U.K. had been on the rise with decently positive margins. So I was curious for any color regarding your decision to stack it, whether that was driven by an upcoming survey or something else?

This is Ron. Well, it took us almost an hour to bring that one out, so I'm glad we're there. So let me give some voice boys to what I think your models probably already show on the Guardian. I mean, you look at a lot of third- and fourth-generation rigs will work in the U.K. this spring and summer come the sweet season in that market and then remain uncontracted for, kind of, late fall through the winter. So if you look at a combination of weather-driven utilization plus where the dayrates are today, that rig really provides marginal economic benefit to -- overall. And then you -- I think, layer on top of a survey coming up in the next 12 months, it becomes, I think, smart for us to not continue to put more money into that rig. And so right now, really, our focus in the U.K. is going to be on, of course, the rigs we have, the Valiant, the Patriot, the important start-up through the Endeavor, the GreatWhite, but the Guardian was a really marginal benefit overall, and so we've acted accordingly.

Makes perfect sense, appreciate the color. And the follow-up, just wanted to make sure I understood the guidance for reactivation on Onyx. Was that $110 million of CapEx in '19? And if so, are there any associated expenses that aren't capitalized, maybe, kind of, any color on those? The level and when those -- and the timing?

David, this is Scott. So the guidance I gave at $110 million, that is CapEx, but let me remind you, that is not just the reactivation, the reactivation is a small piece of it. Most of this spend is going to the upgrade. There will be some expense related to that as well. As you know historically, we have expensed special surveys, and there'll be some ancillary stuff as well. So I would call it an 80-20 split roughly if you're looking CapEx versus expense.

And ladies and gentlemen, that's all the time that we have for questions today. I would now like to turn the call back over to Marc Edwards, President and Chief Executive Officer for any closing remarks.

Thank you for participating in today's call, and we look forward to speaking with you again next quarter.

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