Diamond Offshore Drilling Inc (DO) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2019 Diamond Offshore Drilling Inc. Earnings Conference Call. (Operator Instructions). As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Samir Ali, Vice President Investor Relations and Corporate Development. Please go ahead.

Thank you, Sarah. Good morning, everyone, and thank you for joining us. With me on the call are 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 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 are 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.

In the first quarter of 2019, Diamond Offshore posted a loss per share of $0.53. This compares to an adjusted loss per share of $0.16 in the first quarter of 2018. The decline year-over-year was primarily driven by a change in our contract mix, 2 special surveys and 4 rigs undergoing new contract preparations in the first quarter of 2019. Partially offsetting the year-over-year revenue decrease was a decline in our operating costs as we focus on controlling expenses across the organization. Despite lower revenue year-over-year, we believe offshore drilling dayrates have found a bottom and are beginning to recover. We expect that the moored semisubmersible segment will continue to lead the recovery, given that it has seen the most attrition since the downturn began over 5 years ago and remains an important component of our clients' future investment portfolio.

Diamond Offshore has a strong position in this segment where the market has clearly tightened in the U.K. sector of the North Sea and is beginning to tighten in Australia.

I will further discuss our moored rig strategy later in my prepared remarks but first I will build on my commentary our last earnings call with specific reference to our ultra-deepwater drillships. Over 4 years ago, realizing that the drillship category was becoming the most distressed asset class in offshore drilling, we embarked on a strategy to differentiate our asset in a manner that made them unique and more desirable to our clients. To this end, we introduced a number of services that were and remain today differentiated and are focused on allowing Diamond Offshore to reduce the cost of drilling through reliability and efficiency gains.

We remain the only offshore driller that sold the BOP stacks on our drillships back to the original equipment manufacturer and subsequently leased them based on equipment availability and reliability. Bringing the original equipment manufacturer to the table and giving them skin in the game was, without exception, applauded by our clients worldwide as it brings tangible efficiency gains to our customers.

Although, we remain unique in our industry today as the only offshore driller operating under this construct, which we call Pressure Control by the Hour, it is something that is very common in other industries, such as aviation and power generation.

Next, with input from the regulator in the Gulf of Mexico, we developed a true virtual twin of the BOP stack that enables us to simulate up to 10,000 failure modes. And without the need for human debate, we can immediately establish whether a service shutdown and unplanned stack pull is required. This service is called Sim-Stack. And once again, it is unique to Diamond Offshore and also brings proven efficiency gains to our clients. We are also exploring the use of blockchain and other exclusive initiatives that will lower the cost of deepwater drilling for our clients when they use Diamond rigs.

I have previously spoken to the tangible benefits of this differentiated strategy. This includes driving subsea reliability to as low as 0.7% nonproductive time in the most highly regulated and prescriptive operating environment in the world, being the Gulf of Mexico. I have spoken about consistently drilling complex wells up to 54 days ahead of schedule and drilling some of the most challenging wells in the world to 28,000 feet in as few as 38 days. But while these are, indeed, good data points and should be of interest to the investment community, they are meaningless unless they translate into real value creation to both our clients and our investors. Again, I have previously spoken about how this differentiation has helped a client in the Gulf of Mexico.

As publicly reported by this customer, and according to a recognized industry database, Diamond Offshore has drilled 3 of the top 4 most efficient wells here in the Gulf. This has helped to deliver the development project 6 months ahead of schedule and more significantly $1.2 billion under budget. But differentiation as a strategy can only be successful if we are able to share some of this value creation with other stakeholders, too. And so today, I am pleased to announce that Diamond Offshore has secured over 4 years of additional work across 2 of our drillships with Woodside in Senegal. The Ocean BlackRhino is expected to commence its contract with Woodside in late 2020 and the Ocean BlackHawk is expected to join the program at the beginning of 2022.

Our differentiated product offering is now widely recognized within the industry, and the efficiency gains and cost savings we have delivered are readily transferable to other projects on a worldwide basis.

Consequently, all of our drillships are now contracted until 2022 and beyond at rates that are meaningfully higher than the current spot market and recent short-, medium-term features.

In the past 9 months alone, we have added over 9 years of backlog to our drillships, the asset class that remains the most distressed in today's market. Also, during this past quarter, BP selected the Ocean BlackLion as the second rig to join the Ocean BlackHornet as part of their forward-drilling requirements. Recall that this relates to the 2-year contract with BP that was announced last year. The Ocean BlackLion is expected to commence its contract in the second quarter of 2020. Again, the dayrate for this work is also materially higher than work recently awarded in the market to other contractors.

Additionally, during the quarter, Diamond Offshore was able to secure a new award for the Ocean Apex with BP in Australia. This contract covers approximately 3 months of work which will run in direct continuation with the Woodside campaign.

Now allow me to give a brief update on the Ocean GreatWhite which went to work west of Shetland during this past quarter and has since successfully commenced the drilling of its maiden well. We are pleased to announce the rig has been awarded a follow-up fixture for a leading U.K. operator that last approximately 3 months and will run in direct continuation of the Siccar Point contract. This new award is further proof that our strategy to move the rig to the North Sea is producing solid benefits for the company. The market in the North Sea remains robust and we are optimistic that this rig will continue to have further follow-on opportunities.

So now let me return to our strategy relating to the moored-asset category and to give you further color on the reactivation and upgrade of the Ocean Onyx. Our projection suggested that the asset class that would recover before the ultra-deepwater drillships would be the moored rigs to this effect we can confirm that as of today, each new fixture that we are renewing on our mode fleet is, without exception, at a higher dayrate than the prior contract. This has been driven by the fleet attrition in this asset category as much as it has been by a definitive recovery and demand. A third-party survey on operator's forward intentions released last year suggested that the asset category that would see the most growth, when compared to all other categories, was indeed that of the moored floater fleet. We only have to point to the transparent increase in demands in the North Sea and Australia has proved positive.

The dayrate we have secured for the Ocean Onyx initial contract upon reactivation is higher than the current spot market for drillships, and it should be no surprise that its operating cost as a moored rig is substantially lower than that of drill ship. Marketed utilization for moored asset is higher than for dynamically positioned floaters, and the hydrocarbon resource at water depths between 400 and 1,500 feet is not going away. A snapshot of the pipeline of all upcoming deepwater project sanctioning suggests that up to 50% of projects may require some form of mooring. Once again, our strategic focus is somewhat unique. We are the only company that has contracted all of its ultra-deepwater drill ships until 2022 and beyond.

We are also the only drilling company that is investing in the underserved moored-asset category. Recently, we have returned 3 moored rigs to work, effectively, as almost new assets. The Endeavor was reactivated with an upgrade following interest from 3 clients. The Apex will shortly return to work in Australia after a shipyard stay to address its special survey and an upgrade to its off-line capability, and the Onyx will return to work early next year, following a significant upgrade, while also having garnered interest from multiple clients.

So allow me to stay with the Onyx and suggest that this upgrade and reactivation is also further allowing us to differentiate our fleet. When the rig leaves the shipyard at the end of the year, it will be double the size of the original victory classed design. The original victory-classed rigs had a displacement of 24,000 long tons. The Ocean Onyx will go to work for Beach Energy at 48,000 long tons.

Similar to the Apex, these 2 rates will be particularly suited to hot environments such as Australia and West Africa, where supply chains can be stretched and logistics, problematic. From an engineering perspective, the remaining working life of the Ocean Onyx is over 20 years.

Over the past 5 years, we have transformed Diamond Offshore from one of the largest community deepwater drillers to a company that is uniquely differentiated and is able to command a premium for its services.

Now allow me to provide some commentary on the overall offshore market, which continues to show some green shoots of a recovery. The number of offshore projects that are awaiting sanction is forecasted to more than double on an annual basis moving forward, and our clients have communicated a significant increase in exploration budgets year-over-year. Our clients are generating cash flows that are close to the peak of 2011 and which are expecting to only grow further in the coming years. Hydrocarbon demand remains robust and while shale production growth, here in the U.S. may remain an overhang, there is still uncertainty as to how much shale can continue to grow.

Considering these factors, we believe that we are in the early days of a recovery in the overall offshore market. And the moored asset class is leading this recovery. We have seen continued attrition in this particular segment and we have always positioned around the advantages of having a broad portfolio of deepwater assets. We continue to maintain one of the most diversified and capable floater fleets in the industry, positioning us well for the opportunities that the eventual recovery will bring.

As to our forward capital allocation strategy, we have had a busy year by investing in the moored rig fleet and taking a number of assets through their special surveys. However, we will continue to evaluate the contribution opportunity of our cold-stacked rigs, being the Ocean Rover, the Ocean Confidence and the Ocean America. Though we have not elected to remove them from the fleet at this time, it is unlikely that they will be reactivated in the near term. Further, we decided that the Ocean Guardian did not fit into our forward-rig strategy and we have chosen to remove it from the fleet.

With that, I'll turn the call over to Scott and then I'll have some closing remarks. Scott?

Thanks, Marc, and good morning, everyone.

As always, I'll give a little color on this past quarter's results and then I'll provide some guidance for the upcoming quarter.

Earlier today, we reported a net loss of $73 million or negative $0.53 per share for the first quarter of 2019. This compares to our fourth quarter 2018 adjusted net loss of $58 million or negative $0.42 per share. The quarter-over-quarter decline was primarily driven by higher operating expenses as we began recognizing previously deferred costs which were partially offset by the Ocean GreatWhite commencing operations in the North Sea.

Now let's take a closer look at the quarter-over-quarter variances. First, contract drilling revenue of $227 million during the first quarter 2019 was relatively flat compared to the fourth quarter 2018. An increase from prior quarter was contributed by the Ocean Valor working the entire first quarter 2019 compared to working half of the fourth quarter of 2018 as the rig was completing its special survey.

In addition, the Ocean GreatWhite successfully kicked off its maiden drilling campaign during the latter part of the first quarter of 2019.

Offsetting these increases was the Ocean BlackHawk beginning its special survey and upgrades in March compared to operating the entire fourth quarter 2018. Contract drilling expenses of $167 million were $7 million higher in the first quarter compared to the fourth quarter and were below prior guidance. Most of the favorable variance to guidance relates to the timing of shipyard expenses for the Ocean Endeavor, Ocean BlackHawk, Ocean Apex and Ocean Onyx.

The increase in the first quarter 2019 compared to the fourth quarter 2018 is mostly attributed to the cost associated with the startup of the Ocean GreatWhite along with the rig amortization of previously deferred mobilization and contract preparation costs discussed on last quarter's call. Partially offsetting the increase were lower costs on the Ocean Guardian upon the completion of its contract during the fourth quarter of 2018.

First quarter depreciation expense of $87 million, G&A expense of $17 million and net interest expense of $28 million all came in at previous guidance. Our first quarter effective tax rate of 5% resulted in an income tax benefit of $4 million and was in line with our previous guidance.

And finally, as Marc mentioned earlier, during the first quarter, we decided to sell the Ocean Guardian and as a result have re-classed the rig from fixed assets to assets held for sale on the March 31 balance sheet.

With that, let me provide some thoughts on the second quarter of 2019. But before I do, I will remind you to refer to our Fleet Status Report, which was published earlier today for contract detail as well as known and projected out-of-service time for the remainder of the year. We expect contract drilling expenses for the second quarter 2019 to come in between $225 million and $235 million, which includes approximately $50 million of noncash amortization of previously deferred contract preparation and mobilization costs mostly related to the Ocean GreatWhite and Ocean Apex. Due to U.S. GAAP accounting rules, we are required to amortize these costs over the initial contract after the mobe and shipyard work is complete. Because of the relatively short duration of both of these initial contracts, the amortization will be quick and will occur primarily in the second quarter. Excluding this, contract drilling expenses are expected to come in between approximately $175 million and $185 million. Most of the increase from prior quarter is driven by the second quarter special surveys and upgrades for the Ocean BlackHawk and Ocean Courage.

Also, contributing to the quarter-over-quarter increase is the timing of certain expenses related to the completion of the Ocean Endeavor and Ocean Apex shipyard stays, as both rigs are expected to commence operations during the second quarter. Also, for the second quarter 2019, we expect depreciation, G&A and net interest expense to remain relatively flat at $88 million, $17 million and $29 million, respectively. Additionally, during the second quarter, we expect to recognize a gain on disposition of assets of $10 million to $15 million upon the closing of the Ocean Guardian sale.

And, finally, we anticipate our effective tax rate to be between 5% and 10% during the second 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. I'm extremely pleased with the contract awards and substantial backlog increase we have just announced. With over $450 million of backlog added since our last call, it is clear our differentiated strategy is working. We will continue to focus on providing innovative and class-leading operational performance that adds value to our customers and our stakeholders.

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

(Operator Instructions) Our first question comes from the line of Jud Bailey with Wells Fargo.

A question, if I could, on the 2 contracts, on the Rhino and the Blackhawk. Can you maybe talk a little bit about, kind, of the rate structure? And how to think about that given the one is a 3-year contract, one is 1 year, and they started at different times. So if we can do the math on the average rate, which I think probably comes out around to $290 million or so. But can we -- can you help us understand is there escalation in that 3 years? Or the difference between a 3- and 1-one year contract?

Jud, this is Ron. So thanks for the question. That was important, I think, win for us in the quarter. So as we -- obviously, we're not get into the exact sort of rates here. I respect the math that you've done. That kind of get close. We did, of course, contemplate the fact that this contract doesn't start today. It starts forwards. We priced it forward. It's relatively a clean number, one we can describe in those frames. We, of course, did consider the staggered start times for those rigs so we've baked that into how we thought about that contract with Woodside.

I'll just add here that the reason for that stagger and the way it dovetails with the opportunity it presents is it quite closely dovetails well with the current commitments of the rigs. So it was very fortunate that the opportunity for 3 and -- 1 rig to go to work for 3 years and the other for 1 year fell into our lap because it actually provides not quite but almost continuous work from where we are today.

Okay. So can you say that the 3 on the Rhino, is that a firm rate fixed for 3 years? Or is it -- is there any variability over the course of the 3 years?

Yes. So we've -- Jud, we've thought about, of course, how to price that work and, of course, thinking that forward. What I would say is that we have contemplated a rate that works for both parties. It also, though, provides for both -- I think both parties have thought through the fact that the rigs have performed very well in the Gulf of Mexico. And so we're looking forward to the fact those contracts do contemplate, there's a reward for performance. If you look at the history those rigs have here in the Gulf of Mexico with 2 leading operators, they really just distinguish themselves, I think, quite, quite well. And I would say that we're eager to see those rigs work now out outside the Gulf. I think that the rates, although, we have thought about, as Marc said, the staggered start window that correlate to both the program and the rigs' availability. We've also, again, contemplated how performance may tie in, and there will be I think some rewards tied to that.

Okay. All right. I appreciate the color on that. And then, my follow-up is can you help us on giving some color on what operating costs are for those rigs in Senegal? And is there any -- how you treat taxes and are there any other services provided with that top line rate?

Jud, this is Ron. Let me just start with a services piece. So really to answer that question, it's a clean rate that we have not bundled, sort of, different scopes of work into those contracts, as I know, it does exist elsewhere in the marketplace. So from an integrated services standpoint, I would describe those contracts as relatively clean.

Okay. And then, what about on taxes or just op cost for that country?

Jud, it's Scott. Yes, so the way that contract is structured, the vast majority and, I mean, 95-plus percent of the taxes are on the operators so not on us. And OpEx Senegal versus Gulf, it's a -- I would say, it's Gulf of Mexico-ish. Maybe just a hair higher but right in the ballpark.

Our next question comes from the line of Sasha Sandoval with UBS security.

Congratulations on the avenue contracts. Very good to see. Yes, so maybe, kind of, building off of Jud's question, could we get maybe some more color on just the Blackhawk and the BlackHornet contracts with these, kind of, direct negotiations? And maybe you can give us some color on how to, kind of, think about -- at a high level, the rate premium that you might be getting for Pressure Control by the Hour and Sim-Stack? And if I could just tag on to that as well for the GreatWhite, would it be fair to, kind of, think about a dayrate with a 2 handle without, kind of, get into details, right, can be at least just 2 and 2.5?

Sasha, this is Ron. So well-framed questions on your part. Let's start with the ships first. So this work was competitively bid. There's no question about that. There was a hard, sort of, earned victory on our part. I would say that we had a number of things working in our favors. The rigs were hot, are hot. And so they have a strong working history that I think shrinks the peer group considerably. They have strong resumes over several years that include [bragging] rights in some of the deepest most complex well in the Gulf of Mexico. I think the Blackship crews themselves were also closely knit and highly proficient. I know operators often stress the premiums were tied to the man-machine combination not just the iron by themselves. A layer on top of that, I think some of the subsea reliability success is pressure control, sim-Stack that really have a [forward], as I think, some good result. And that adds up to, I think, a strong contract win for us. I would describe these rates as confidently above the spot market. Certainly, I think, a pricing high in this cycle for us. But, again, that's tied in many ways, I think, back to the fact that these rigs are both hot and performing. So I think we're quite pleased.

In terms of -- you asked a question on the GreatWhite. So obviously, that rig in many ways, I think, proved out our strategy on how to think about that harsh environment rigs. So we moved her to North Sea. She, of course, is underway now with her first contract. We're pleased to see a second contract now in our hands. And I'd say there's probably more to follow in 2020. So we're quite pleased. I think broadly speaking, Although, the numbers are not -- the kind of detail we'll get in to today. But I think broadly speaking, you're thinking the right way that with each contract, as Marc said, the market is improving in the moored space, I think, in particular, for harsh rigs. So we see those rates improving I think with each contracting term. So it's going the right way.

I think a lot of the attention on this call, obviously, is the win we've had here in achieving somewhat premium pricing for a premium service on our drill ships. But let's not lose sight of the fact that the Ocean GreatWhite has just drilled its maiden well without a hitch. And so it was very important for us to get to -- to get that one back working, drill its first well and start building a reputation in the North Sea as a very, very capable rig, and the rig that is delivering a differentiated, service similar to what we have been other aspects of our fleet. So we're very pleased with the performance of the GreatWhite.

Great. Thank you for that color. Very helpful. And maybe, kind of, as a follow-up. This is for you, Marc. You mentioned, again, look, I mean the -- so rig availability is tightening up. It's a good problem to have but you were also pretty specific in saying that there are no immediate plans to reactivate any of the idle rigs. So as we -- maybe we can, kind of, get your color around M&A, specifically, in the context of optimal fleet size. And then, specifically, kind of, with 2 of the rigs going to Africa at this point, maybe just, kind of comment, on regional scale and how that comes into your thinking as well?

Well, we're very comfortable in our own skin with what we've got. We don't have any specific urge to merge. It's all about providing the correct returns to our shareholders. And we're continuing to look at opportunities out there. But in terms of the market recovery in the ultra-deepwater drill ships space, we've clearly shown that we've been able to garner some premium in our rates moving forward. And it would be very important that any assets or, perhaps, activity in the merger space that we can undertake comes with the fleet that we could do the same as to what we've currently done with our own fleet.

Now I think it's apparent to all that our CapEx spend this year is much higher than it was last year. We're very aware that moving forward that number is likely to come down. We're in no rush to activate other assets -- reactivate other assets in our fleet. We're very, very comfortable with the assets that we bought in place. And so we'll be continuing to look at opportunities very, very carefully moving forward, as it relates to our own capital allocation strategy. So right now this particular moment in time we're likely to see CapEx moving back down next year and we'll just be looking at opportunities that might present themselves moving forward.

Our next question comes from the line of James West with Evercore ISI.

So, Marc, you mentioned -- it's a comment on exploration, I thought were very interesting, Schlumberger, is there something similar when they reported -- when you hear it from maybe some of the seismic providers, too, but the spinner on exploration, I guess, has been doubled. Where is that -- or geographically, where is that capital? And where is the -- going and where is the interest? I can imagine, of course, the opening up to Mexico maybe sub-Sahara Africa. But any other areas where you're seeing the -- some heightened exploration activity?

I think it's all over, James. I think that people are very familiar with what's going on in Brazil. But the [IC] is going down there. There's a number of exploration well, sort of, being backed up, depending regulatory approval with ANP down there. That in itself is somewhat of a torturous exercise. But those will come through eventually. In the Gulf of Mexico, we're also seeing some opportunities, as you mentioned sub-Sahara Africa. But in truth, it's not one specific location. And the point that I want to bring to the table here is it's not related to ultra-deepwater only, there are opportunities in the mid-water space that are becoming apparent, too. This is not just a -- the recovery, as I said, somewhat in my prepared remarks, it's actually perhaps coming to us first in more of the mid-water space and then following on from that in the ultra-deepwater spacewalks. We've got quite a pipeline of FIDs coming to sanction moving forward. And some of our own research suggests that the number is going to appreciably increase in the next 3 years certainly and maintain its runway moving forward. So we're quite optimistic on the number of FIDs that are just over the horizon -- about to come back over the horizon. But as you'll see in our new investor deck, we've actually pinpointed where exploration budgets are moving on a company-by-company basis. And in terms of any recovery in our space, we absolutely needed exploration to start recovery.

Agreed. Agreed. Okay. So not related to like a follow-up for me. Diamond Offshore has always been a very astute and capital-disciplined company and provider of capital, the -- over its history and certainly as you've come on board from one of the other very astute capital companies out there, as you look to, kind of, upgrade moored assets and you've made some astute decisions along the way as well versus say, new bills that -- rig of the future, things of that nature. How do you -- I guess how should we think about the return profile on these upgrades versus the return profile, per se, something more innovative or M&A? I mean it must be a much higher threshold.

Yes. We are more comfortable with reactivating the moored rigs that we've already done so. As I pointed out during my prepared remarks, again, many people still classify the Apex and the Onyx, for example, as a victory-class rig. These are not a victory-class rigs anymore. They -- in terms of the displacement, the Onyx is double the displacement, long tons, of its original design. It looks nothing like it. And in essence, these rigs come out of the shipyards after these upgrades as essentially new rigs. And they should be classified as new rigs. The remaining working life on the Onyx is 20-plus years. The reason we have to put a plus on it is, because the engineering algorithms that we used to determine life, don't go beyond 20 years. So the Onyx and the Apex have substantial time left in them. And in terms of client interest, we have a number of clients that have asked us to bring these particular rigs back, and they bring certain features along with them as it relates to deck space, [VDL], costs that are relatively cheap to run. But as I said, positions them well in areas where you've got logistical challenges and long supply chain. So those rigs are commanding a return that today, and in terms of the forecast moving forward, suggests that allocation of capital is better for us as a company and our shareholders today than it would be in terms of chasing distressed assets in the yard today.

Now something else that you've just brought up on the call. Of course, a number of years ago, we looked at again, in terms of how we drive efficiency gains to lower the cost of ultra-deepwater drilling. We looked at the Floating Factory. The Floating Factory file has been laminated, stuck in the drawer and is pending a time that the recovery and the market truly is with us and we can bring it out and take a look at it. But as of today, the Floating Factory is not an option for us and the current position we find ourselves in this market.

Our next question comes from the line of Kurt Hallead with RBC Capital Markets.

So, Marc, maybe, kind of, start off question for you. In the context of how you've already referenced your capital allocation strategy, I think, it was pretty clear. So maybe looking for some additional insights on how you were looking at a prospect for investing for growth relative to, potentially, retaining cash to shareholders? And maybe at what point in time in the future might you be in such an envious position to be able to think about those 2 options?

A good question. Obviously, our long-term goal is to start -- is to be in a position where, indeed, we can return cash to shareholders. We're not at that stage yet. In terms of growth and what we can do with the fleet itself, we will continue to be opportunistic moving forward and see what opportunities are out there, but it has to stand the long-term test in terms of shareholder returns. By contracting these assets at a dayrate that we've just announced, which is transparent to everybody, it's much higher than where the current market is. We have shown that we can differentiate the fleet with the assets that we have. Now it's important that these assets remain working, that the service that they provide, the premium service that they provide is recognized by our clients, which I think we have done. And, therefore, as the market recovers, I think that we'll be able to maintain a premium above that which the market commands, moving forward, for when these assets get re-contracted further down the road. Now the first rig starts at the end of 2020. But remember that by the time 2023 comes around, these assets will be very, very desirable and the market will have repositioned itself and we'll write that upside once more.

Got it. Now the other comment, you mentioned in terms of oil companies' cash flow now back at 2011 peak -- 2011, kind of, peak levels. I would have to imagine that at some stage here, irrespective of the current utilization dynamics that dayrates have a pretty good shot at getting at least half back to where they were in that 2011 level, so I guess what I'm really trying to get at here is you talked positively about the demand dynamics for the moored semis. Maybe a less robust outlook for the ultra-deepwater drill ship market. Yet you have a number of FIDs coming. You've got more demand than supply, ultimately for your offshore market and you've got a free cash flow for the oil companies at different levels. I would think that would all translate into pretty substantial momentum overall for anybody involved in the offshore drilling business. So, again, you're involved with it day-to-day, what's your perspective on that?

Yes. I think you brought up an instant point there, we're still somewhat concerned about the ultra-deepwater drill ships. And that really relates to simple supply and demand factors that exist in that space. I think in terms of the sixth and seventh generation assets out there, we've only seen 1 6th-generation drill ship scrapped during this downturn. And so the overhang exists in terms of supply. Demand will come back and it will give us all an opportunity to push dayrates higher. But we still need some of those assets to be scrapped so that we can get to a more equilibrium in terms of supply and demand. Why we're more comfortable with the semi space, and particularly the moored-semi space, is that we've seen in terms of marketed utilization, the number of assets that are out there has been reduced by about half. So with all the scrapping that's been taken place. So that market is fixing itself correctly. We're seeing demand come back and we're seeing attrition in terms of the assets that are available.

In the ultra-deepwater drill ships base, yes, we're seeing demand come back but we've still got an overhang in terms of supply. And that might translate to somewhat of a drag on recovery in dayrates in that specific market, which was why some 4 years ago -- 3, 4 years ago, we embarked on this differentiated strategy for our drill ships. We wanted to command a premium through service excellence, through providing a standard that is a benchmark for all others to follow. And I think if you've just seen on the results that we've delivered in the Gulf of Mexico, that has come to fruition. But importantly, in terms of the contract to award that we've just had with the customer, who I might add, is one of the more sophisticated customers in terms of their own supply chain and procurement processes, I think that we have demonstrated to everybody today that we're able to command a premium for our assets when we deliver a premium service.

Got it. That's great color. And if I may have one housekeeping item for Scott. You guys referenced, generally speaking, well, I don't know if you did or not, I didn't pick up on it if you did the CapEx expectations for 2019, can you give us some sense on that, Scott?

And then, as you get into 2020, assuming you have no additional rigs coming out of stacked mobe, what's kind of a baseline of CapEx we should be thinking about?

Yes. Kurt, so last quarter, I guided full year CapEx between $340 million, $360 million. Nothing has changed to this point. So that'll still be our '19 guidance. And, again, we'll -- we're still not even into our '20 forecasting period yet. But, yes, your thesis is right. It should be less. We wouldn't expect, based on some of the commentary that Marc had, we will be at least looking at reactivation. So absent that, I would say it will definitely be a decline in CapEx in 2020.

Yes. Just to reiterate what I've already said on the call, it's -- we do not have any plans currently to reactivate any other rigs.

Our next question comes from the line of Ian MacPherson with Simmons.

Congratulations on the Woodside, Senegal. That's a nice, big award for Diamond and well earned. There are -- I think we've talked a lot about those contracts. One thing that I don't -- forgive me if it was addressed, I didn't hear it. There are options behind the firm period. Have you described what those entail in terms of term and whether fixed or floating, et cetera?

So there are options that are available on this contract. The -- this is a wells contract of which, according to ourselves and the client, the term is just over 4 years. There are a further 6 wells that the client is looking to procure, long lead time items for and then there's a couple of wells that come after that. So the primary term -- the primary well award is 18 wells with a further 6, at least a further 6 options, with possibly 1 or 2 more after that.

Are they fixed priced?

No. It's unpriced.

Unpriced. Okay. So BlackRhino has what looks like maybe a 4- to 7-month window between finishing same Stampede next year and then going to Senegal. Is that a window of time that you could -- expect you could fill substantially? Or how much time should we think about in terms of transit? And then any other prep time for that rig before it switches on to its long-term commitment in Africa?

Ian, this is Ron. Fair question. Certainly, that schedule gap is one we're focused on. It has to fit, I think, the right-sized programs. So we're looking at what might be available to us. But certainly, if we're going to respect and we're going to, of course, meet the Woodside commencements. So anything we look at has to fit within that time frame. There are some possibilities out there. Nothing we'll talk about today. But we're -- now that we have this substantial Senegal program, we're looking at what -- how do we fill in some of the blanks in between.

Okay. And then, last for me. I'm looking at, again, sort of, rollovers for next year. And when Courage and Valor roll, I guess it's unclear for me so far what the future holds for DP, semis in Brazil. But assuming that those are going to go to a different customer, maybe, maybe not. Are those rigs that could be candidates for mooring upgrades or adaptations for more -- just given your market outlook for the moored market, including in the Eastern Hemisphere?

Yes. This is Ron. So good questions. So now with the drill ships contracted into 2022, I think, one of the next -- I think, highest nails of the Board represents the Courage and the Valor. They've been doing well. Of course, with Petrobras in Brazil. I think, your -- kind of your thought, sort of, gift on the, could they be a candidate for mooring, that's a possibility. I think the comment on the rigs that are stacked today probably won't -- will not attract a lot of capital. But I think the possibility of investment in those rigs, that's real for us. I would point out that in the last couple of months, Petrobras did run a number of tenders down in Brazil that include moored, DP moored, drill ships as well. So there's a fair amount of activity underway down there. So certainly, I think -- the Courage and the Valor I think, now represents what's next for us to pay attention to. I think the notion of investing in those as part of the re-contracting is certainly a possibility, and that is a -- it's good work ahead for us.

Our next question comes from the line of Sean Makem with JP Morgan.

Marc, just to clarify, the Blackhawk, I think, is getting a CMC upgrade. Do the BlackRhino require any upgrades on the contract? I think that CMC upgrade is $15 million to $20 million. And just how we think about upgrades in the context of the negotiated rate on the rigs, how does that factors into your bid?

Yes. This is Ron. So certainly the CMCs for both rigs is what we see ahead. And that's certainly true. We've long, I think, to Marc's prior point, thought about these rigs and how do they both preserve and then even widened the, kind of, gaps of the market. So investing in those, that way performance makes a lot of sense. And so those rigs will, certain, have those kinds of upgrade. I don't know if we've gotten into the exact details of what they cost, but you should think about them with those -- that kind of capability.

Yes. So the -- as we've set the benchmark for performance, it's very clear to us that our competition is ourselves. And we're not going to rest in our laurels. We want to continue to drive efficiency gains on these rigs. So we have some interesting technologies around automation and tripping speed that we'll also be, over the course of the next few years, adding to these Blackships so that we actually either gap ourselves in terms of performance or just drive the bar higher. So it's not just CMCs that we're adding to this rig. It's not material CapEx that's required to these investments. But they will be added to the rigs themselves as well.

Right. Should we -- are there other bonus opportunities or other factors we should consider over the term of these contracts? (inaudible) like that?

I think, Ron -- yes. Ron, kind of, alluded to that in one of his early contracts that there is an opportunity with Woodside moving forward to include some financial remuneration as it relates to the performance of the rigs. But at this stage, we're not disclosing that right now.

Got it. And just one last. How about in terms of any revenue to offset the mobilization? Or anything else we should think about in terms of that factor?

No. Mobe is not considered in this rate. But understand that this is a very short mobe from the Gulf of Mexico across the Atlantic to the - to West Africa. It's not like the vessels need towing. So it really is just fuel to get us a crosswalk. So the mobilization is included in the clean rate. But it's -- but my point here is that is not a significant mobilization. It's much shorter than getting from Europe down to Brazil or indeed from the Gulf of Mexico down to Brazil.

Our next question comes from the line of Taylor Zurcher with Tudor, Pickering and Holt.

Congrats on the contract announcements this morning. Marc, maybe starting up with the moored market, you've spend a lot of time in the call talking about. And once again, how things on that side of the business are -- continue to improve. And so I realize it's a older rig, but with the Guardian, I was wondering if you could give us some more color on why you decided to sell that now? And then, as we think about the cash proceeds from that sale, whether or not those will be immaterial? Or how much you expect to get, I guess, here in Q2?

So Scott in his prepared remarks mentioned about the gain on the sale of the Guardian. It's not insignificant but it's not really material. But, yes, so the moored market is definitely coming back. But what I alluded to in the call is I said we've transformed the business from one of the largest commodity deepwater drillers into a business that is much more focused on differentiation. And when we look to the Guardian and to how it might fit in our fleet fridge strategy moving forward, we felt that it was somewhat of an outlier. We've got -- we had a special survey coming up on it next year. The rig was probably moving towards the bottom of the [deli] line in terms of moored rig desirability. And when we look to the opportunity to upgrade it from a CapEx perspective and the returns that it would likely throw off as a result, we just felt that this was, perhaps, a bridge too far. And we had not formed a rig from a third party that we decided to take because in that swing between the gain on the sale and the CapEx we would have to invest just didn't really sit well with us. So basically, that's the reason why we've elected to remove it from our fleet.

Okay. That's helpful. And then, maybe thinking 2 to 3 years out or right in the middle of when these Woodside contracts start up. I appreciate the different supply-demand dynamics in the moored market and in the 6 and 7 Gen market today. But it feels like the moored market, at least, from a daily margin perspective, is probably more healthy today. But looking at these rates you've gotten with Woodside, should we expect 2, 3 years out that -- or is it your expectation that 2, 3 years out, that the ultra-deepwater market, particularly the 6, 7 Gen side of things or margins per day and just on a gross margin percentage basis are going to be at a level that, that part of the business looks more attractive than the moored segment, again, out in the early 2020s?

Yes. This is Ron. So I think over time, we do expect that, that the drill ships base will improve. I think pricing will improve over time. There's no doubt about that. I think to Marc's earlier comments, we're seeing I think some of these forces reveal themselves first in the moored space. But I think the drillship space will follow as you look out a few years. But I think Marc pointed on to the key feature, which is we're going have to see [principally] as assets, I think the part -- the supply side of the equation, which we haven't seen that really in large force. We've seen it a lot on the moored space, not so much on the drill ship side of the market. So I think we do see the right, I think, ingredients sort of present, we see better economics, better commodity pricing, I think. But the important, I think, should we get to drop is anything around the supply side happening in the drill ship space. But I think over time, I think you'll see the ships that perform, as Marc pointed out, that have differentiated elements to them, as our drill ships do, I think they will command I think some premium rates. But over time, we expect that, that will improve.

Thank you. And this does conclude today's question-and-answer session. I would now like to turn the call back over to Marc Edwards for any further remarks.

So thank you for participating in today's call and we look forward to speaking with you once again next quarter.

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