Transocean Ltd (RIG) 2015 Q4 法說會逐字稿

Good day, and welcome to the Transocean's fourth-quarter 2015 earnings conference. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Brad Alexander. Please, go ahead sir.

Thank you, Eric. Welcome to Transocean's fourth-quarter 2015 earnings conference call. A copy of the press release covering our financial results, along with supporting statements and schedules including reconciliations and disclosures regarding non-GAAP financial measures, are posted on the Company's website at deepwater.com. Joining me on this morning's call are: Jeremy Thigpen, President and Chief Executive Officer; Mark Mey, Executive Vice President and Chief Financial Officer; and Terry Bonno, Senior Vice President, Marketing.

During the course of this call, participants may make certain forward-looking statements regarding various matters related to our business and Company that are not historical facts. Such statements are based upon the current expectations and certain assumptions of Management and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially.

Please refer to our SEC filings for more information regarding our forward-looking statements including the risks and uncertainties that could impact our future results. Also please note that the Company undertakes no duty to update or revise forward-looking statements.

Finally, to give the participants an opportunity to speak on this call, when we get to our question-and-answer session, please limit your questions to one initial question and one follow-up question.

Thank you very much. I'll now turn the call over to Jeremy Thigpen.

Thank you, Brad. A warm welcome to our employees, customers, investors, and analysts participating in today's call. Our performance in the fourth quarter was strong across the board, as we reported adjusted net income of $615 million, or $1.68 per diluted share, on $1.9 billion in revenues. For the full year, our adjusted net income was $1.7 billion, or $4.74 per diluted share, on $7.4 billion in revenue.

During the quarter, our strong revenue efficiency, our intense focus on our cost structure, and the proceeds from some early contract terminations resulted in an operating margin, including G&A, of approximately 54%. For the full year, excluding the impact of the Macondo settlement, our adjusted operating margin was 47%. These results reflect the unwavering commitment of the entire Transocean team to delivering the best operational performance in the industry. So, to those Transocean employees who may be listening to today's call, thank you for your continued focus and dedication throughout what was a very challenging year for our industry.

In addition to delivering strong financial results, I'm pleased to report that Transocean further reduced its total recordable incident rate during the quarter, while simultaneously improving uptime and revenue efficiency, which was an impressive 95.9% for the fourth quarter. For the full-year 2015, we produced the lowest annual total recordable incident rate in the Company's history, while delivering our highest annual average revenue efficiency of 96%, which further solidifies our position that safety and efficiency go hand in hand. Once again, I would like to recognize and thank our crews and our shore-based personnel for their continued commitment to both protecting each other and the environments in which we operate and maximizing uptime for our customers.

I would also like to take a moment to recognize our marketing and contracts team. Despite the extremely challenging market conditions, by leveraging our excellent operational performance and introducing some new commercial models and alternative solutions for customers, we added a number of contracts to our backlog, late in the fourth quarter. While most of the awards were of short duration, we were pleased to secure some longer-term arrangements in Canada, India, and the North Sea. Terry will soon provide more detail regarding each of these fixtures.

Needless to say, we are pleased with the Company's performance in the fourth quarter and throughout the full year of 2015; however, we recognize that there is more to be done. As we move through 2016, we will further define and capitalize on opportunities to reduce our incident rate and improve our uptime performance. We will also take additional actions to streamline and drive efficiencies into our organization and our processes. And we will continue to high grade our fleet.

In an effort to further improve our safety and operational performance in 2016, we are investing time and resources into enhancing our tools, procedures, and training programs. Once completed and rolled out Companywide, we will be in an even stronger position to drive procedural discipline and consistency of performance across our entire fleet. While investing in new tools and training programs to drive safety and performance improvements, we are also reevaluating our organization and our internal processes, and identifying opportunities to optimize each.

As discussed in some detail last quarter, we are reorganizing internally. Among other things, we have significantly reduced the layers between senior management and the rig. As a result, our organization has become flatter and our operational efficiency has improved materially. This organizational change has also resulted in a majority of our support functions being centralized in Houston, with a downsizing or outright elimination of hub offices around the world. These changes began in late 2015 and should be fully implemented by the end of the second quarter of 2016, which will result in additional cost savings as we progress through the year.

In addition to improving the efficiency of our structure, you will remember from the last call that we are also defining and implementing innovative approaches to enhance our maintenance activities and to reduce the time and cost required to stack a rig. Well, I'm pleased to report that we are now realizing the benefits of these approaches. And, as you will hear in Mark's guidance, we expect to recognize further cost reductions in both areas as we move through the year.

Finally, since we remain confident in the ultimate recovery of commodity prices and the offshore industry, we are continuing to high grade our fleet. The Deepwater Thalassa, the first of four newbuild ultra-deepwater drillships that will operate for Shell on 10-year contracts, went on dayrate in early February in the Gulf of Mexico. The second newbuild drillship for Shell, the Deepwater Proteus, is expected to arrive in the Gulf of Mexico in several weeks, where it will begin its contract for Shell in the second quarter. Lastly, the Deepwater Conqueror, which has a five-year contract with Chevron, is on schedule and due to be delivered later this year.

While we are certainly excited about these additions to our fleet and the future revenue and earnings that they represent, we also recognize the need to continually reevaluate the composition, capability and marketability of individual rigs within our fleet. Consistent with our fleet-renewal strategy, during the quarter, we classified two additional rigs, the Deepwater Navigator and the GSF Grand Banks, as held for sale.

For those keeping score, since the start of this downturn, we have now 24 floaters either scrapped or held for sale. As we move forward, we will continue to objectively evaluate both our rigs coming off of contract, as well as our currently stacked rigs, to quickly determine whether or not each individual asset still supports our long-term asset strategy.

Before I hand the call over to Mark, who will provide you with additional comments on the Company's financial performance, and then Terry, who will provide an update on the market, I would just like to take a moment to stress that the deepwater floater market is the most challenged it has ever been. To overcome this challenge, we will continue with the approach of managing those things within our control, such as continuing to improve upon safety and operational performance, streamlining the business and our processes, and high grading our fleet and our crews.

Our customers need superior execution. And our ability to distinguish Transocean in these areas is what will keep our rigs working and allow us to build on our reputation as the industry's preferred contract driller. With our $15.5 billion backlog -- of which approximately 89% is with investment-grade companies -- and our more than $5 billion of liquidity, we have the platform that we need to emerge from this downturn in a much stronger leadership position -- and I have every confidence that we will.

With that, let me hand it over to Mark.

Thank you, Jeremy. Good day to all. As we provided extensive details on the fourth-quarter's results in our earnings release, I will only briefly touch on the quarter's financial performance during this call. I will focus instead on providing you with an update to our 2016 guidance and discuss our balance sheet and liquidity position. For the fourth-quarter 2015, we reported net income attributable to controlling interest of $611 million, or $1.66 per diluted share. These results included $4 million, or $0.02 per share, in net unfavorable items, which are detailed in our press release. Excluding these items, adjusted net income was $615 million, or $1.68 per diluted share.

Total revenue for the fourth quarter of 2015 increased by $243 million sequentially to $1.85 billion. Other revenue increased $356 million, due to the early terminations of the Polar Pioneer, Discoverer Americas, and Sedco 714. Contract drilling revenue decreased $113 million, due to reduced activity and rig retirement, partially offset by higher ultra-deepwater revenue efficiency and higher demobilization revenue.

The demobilization revenue during the period was primarily associated with the lump-sum revenue recognized in the Polar Pioneer and the completion of the Development Driller II contract in December. We recognized approximately 80% of the Polar Pioneer's lump-sum payment as revenue in 2015; the remaining portion associated with the demobilization of the rig will largely be recognized as contract drilling revenue in 2016.

Fourth-quarter fleet utilization was 60%, down from 70% in the prior quarter. This resulted in 630 fewer operating days, many attributable to fewer re-contracting opportunities with our harsh-environment and midwater semis. As Jeremy mentioned, we achieved another quarter of outstanding revenue efficiency of 95.9%, with full-year 2015 averaging 96%. So that's two consecutive years with revenue efficiency at or above 95%. So far in 2016, the uptime performance of our rigs remains strong. This is attributable to the exceptional focus and execution of our operational and technical teams worldwide.

Fourth-quarter operating and maintenance expense decreased by $86 million sequentially, to $794 million. Although within our full-year guidance, fourth-quarter O&M was slightly higher than we forecasted, due to unplanned demobilization costs, which were offset by increased revenue just discussed. The quarter was also impacted by lower activity due to 630 fewer operating days during the quarter and the Company's actions to reduce onshore and offshore costs.

G&A expenses increased sequentially by $13 million, to $58 million. As discussed during last quarter's call, fourth-quarter G&A included restructuring costs associated with employee severance payments and office lease termination charges. Operating margin including G&A expense was approximately 54% in the quarter, driven higher by the impact of early contract terminations included in other revenue mentioned above. Adjusted for this additional revenue, our operating margins were approximately 43% and in line with the prior quarter.

The fourth-quarter annual effective tax rate was 13.1%, compared with 7.5% in the prior quarter. The increase was due largely to changes in adjusted pretax income, currency exchange rates, and the impact of jurisdictional and operational structure changes for certain rigs implemented last quarter. The annual effective tax rate for 2015 was 16.4%, lower than guidance due largely to the revenue associated with contract terminations during the fourth quarter.

We end the quarter with $2.34 billion in cash and cash equivalents. This includes cash from operations of $960 million. Capital expenditures totaled $665 million related to a second delivery of the Deepwater Proteus and other newbuild CapEx payments during the quarter.

During the fourth quarter, we opportunistically repurchased $211 million of debt at a cost of $196 million, bringing our total 2015 repurchases to $503 million at a cost of $473 million. About 85% of the early debt repurchases were of near-dated maturities. Cash interest for the debt repurchases is approximately $84 million over their remaining term, the vast majority of which benefit cash flows over the next three years.

[Despite] organizational streamlining currently underway, we recently announced our intention to delist from the Swiss Stock Exchange. The last trading day is scheduled for March 30. The Company shares will continue to be listed and traded on the New York Stock Exchange.

I will now provide an update on our financial expectations for 2016, which reflect our confidence in continued strong uptime performance and more efficient cost structure. I will also update our liquidity expectations through 2017. Our 2016 revenue efficiency guidance remains at 95%. Other revenue for 2016 is expected to be between $60 million and $70 million. This includes customer reimbursables but excludes $200 million of early termination fees associated with the contract cancellations recognized to date in 2016.

After having completed our annual budgeting process, we can now update our preliminary cost guidance provided in the previous earnings call. We expect full-year operating and maintenance expense to range between $2.2 billion and $2.5 billion. This level is about 12% lower than our earlier expectations due to fewer forecasted operating days associated with the early contract terminations in some of our rigs and limited opportunities for recontracting some of these assets in 2016.

The updated 2016 earnings guidance is also about 40% lower than the under-adjusted 2015 O&M costs. Of this reduction, approximately 70% is associated with reduced activity and lower ultra-deepwater cold-stacking costs, and about 10% from lower out-of-service costs. The remaining 2016 O&M cost decrease is related to more streamlined operating and overhead support models. As we discussed last quarter, we're implementing structural changes to our organization which will improve operating margins, earnings, and related cash flow.

These cost reductions are partially offset by: the reactivation of the Henry Goodrich, which will commence its two-year contract with Husky in the second quarter of 2016; the contract commencement for our three newbuild ultra-deepwater drill ships -- the Deepwater Thalassa, which Jeremy mentioned, as well as the Deepwater Proteus and Deepwater Conqueror -- in the second and fourth quarters respectively. Our G&A expense for 2016 is still expected to be approximately $165 million. The reduced expense expectations are due mainly to our smaller corporate structure and related office closures.

This guidance excludes approximately $5 million in restructuring costs. We expect annual depreciation expense for 2016 to be between $875 million and $925 million. Full-year 2016 net interest expense is expected to be between $365 million and $380 million. The year-over-year decrease is mainly associated with the increased levels of capitalized interest, due largely to changes in the construction progress balances. Net interest expense includes capitalized interest and interest income of $175 million and $10 million, respectively.

Full-year 2016 annual effective tax rate from continuing operations is expected to be between 28% and 32%. The increase is a result of the lower level of pretax income. Capital expenditures for 2016 are expected to be approximately $1.4 billion -- including $1.15 billion for the Deepwater Conqueror, Deepwater Pontus, and Deepwater Poseidon -- and $180 million for capitalized interest. Maintenance CapEx is estimated to approximate $100 million. This reduced level of maintenance capital expenditures is consistent with our estimate for a limited number of out-of-service days.

Turning now to our financial position. We have made the following assumptions and updated the liquidity forecast through 2017. These include: revenue efficiency of 95%; a limited number of new contract awards with dayrates assumed at or near cash breakeven; existing drilling contacts remain intact; and a working capital release of approximately $600 million in total for the years 2016, 2017. Related to 2017, we expect total CapEx of approximately $600 million. This includes $175 million in newbuild [shipyard] payments, $150 million in capitalized interest, and approximately $250 million in maintenance CapEx. This maintenance CapEx guidance excludes the reactivation of the rigs for potential future contract awards.

Based upon our current forecast, our projected liquidity at December 31, 2017, remains in the range of $4 billion to $5 billion, as the vast majority of the contract termination payments received approximated forecasted operating cash flow under these contracts. An exception is the recent cancellation of the DD1 contract. Unfortunately, we will not receive a termination payment as the customer had the contractual option to cancel with convenience.

We estimate that this contract cancellation will reduce cash flow by approximately $56 million in 2016 and 2017. Terry will discuss this in more detail during her prepared comments. Our projection continues to include our $3 billion [annual] revolving credit facility that remains available to us through mid-2019.

To conclude, we are very pleased with our operational results, including exceptional revenue efficiency and improvements in our cost structure. We shall become a lean organization who are doing more with less, but the quality of our services remain high. We are not satisfied, however, and will continue to challenge the status quo to build on this momentum and strive for even greater performance to help mitigate the reduced vitalization.

This concludes my prepared comments, I will now turn the call over to Terry. Terry?

Thanks, Mark. Good day to everyone. To simply say the offshore drilling market continues to be challenging is an understatement. Yet, in the fourth quarter, our teams onshore and offshore fired on all cylinders to deliver multiple contracts when opportunities were scarce. With oil prices recently falling as low as the mid-$20s and continuing to hover around $30 a barrel, contract terminations that began accelerating in December have continued. Fortunately, because of our strong contracts and relationships, we do not have other contracts in our backlog that permit uncompensated cancellation for convenience like the termination we recently announced related to the Global Santa Fe Development Driller I.

I will reiterate what I said in our last earnings call: although demand is limited, we continue to fight for every opportunity in this highly competitive market. As a testament to our safety and operational performance and the creativity and tenacity of our marketing team, we've added $378 million of contract backlog since the last earnings call, bringing our total 2015 to $763 million.

We have contracted to reactivate the Henry Goodrich in Canada for two years, secured contracts to return the Rig 140 in India and the MG Hulme to work. We have also extended the contract for the Jack Bates in Australia and rewarded over 80 days for the Cajun Express in the Ivory Coast, while signing new contracts for active rigs, the Sedco 704 in the UK and the Transocean Arctic in Norway. Our global footprint is vast and our ability to compete for work with our diverse fleet of rigs, while capitalizing on our operational excellence, is strong.

As evidence of our competitive positioning, I'm especially pleased to report that, since issuing our fleet status report earlier this month, we were awarded a six-month contract for the KG2 with an undisclosed operator, and we expect to consummate several additional contracts in the near term. However, due to negotiations not yet being final and the competitiveness of the current market, we will refrain from commenting specifically on these today.

Our backlog as of February 11 was $15.5 billion, the strongest in the industry, comprising primarily of IOCs with strong balance sheets. This balance sheet provides for solid cash flow generation, with 78% of revenues contracted with the IOCs, 15% contracted with the independent, and 7% contracted with the NOC.

Turning to the current market, challenging conditions are now likely to continue into 2017, negatively impacting both utilization and dayrates while limiting recontracting opportunities for all classes of rigs. Ultra-deepwater rates are near cash operating costs breakeven in most areas. And market utilization is down to 79%, with 27 rigs idle and 21 cold stacked.

To provide a little more perspective on the competitiveness of the market, the longest-term contracting opportunity, currently in the Indian market, has attracted 14 rigs from 10 different competitors. The associated rig classes range from fourth- to sixth-generation units with very competitive pricing expected. Deepwater market utilization is down to 70%, with only three fixtures year-to-date being recorded. This is coming off a total of 10 fixtures in 2015, primarily Australia and Asia. There are currently 10 idle and 11 cold-stacked deepwater rigs.

In India, the second ONGC two-year tender attracted eight rigs from seven different contractors ranging from second- to fourth-generation rigs. The bidding on these opportunities will also be very competitive. Midwater utilization is at 69%, with three fixtures contracted year to date for UK in Norway. This adds to a total of 19 fixtures in 2015. Currently, there are 16 idle midwater rigs and 15 units cold stacked.

There are 47 cold-stacked units plus 48 floaters that are retired or being held for sale, with Transocean accounting for over 40% of the combined total. We expect these numbers to continue increasing with the overcapacity of supply and near-term lack of demand forcing the retirement of more assets.

The difficult macro conditions are also resulting in more customers terminating contracts early. This further exacerbates the oversupplied floater market and is a direct result of customers curtailing parts of their offshore programs to preserve liquidity. Despite the severity of the downturn, there is some emerging opportunities we are discussing with customers. Some are taking the counter-cyclical approach of contracting low-cost solutions for their programs later in 2016 and into 2017, realizing the benefit of the reduced dayrates to their overall project economics.

The jackup market continues to deteriorate as a result of increased market oversupply. This is also being exacerbated by a few rigs being cold stacked for scrap, and the newbuild deliveries continue unabated. Utilization and dayrates are rapidly declining, marketed utilization is approximately 72%, with 119 rigs currently warm stacked and 65 cold stacked. With the relatively low costs associated with stacking a jackup rig, scrapping activity is expected to be slower.

Unlike the floater market, NOCs are leveraging their local market dominance and renegotiating dayrates lower, based on the decline in oil prices. Industry delays of newbuild deliveries for both ultra-deepwater assets and jackups provide some medium-term relief in the excess rig supply. But continued industry attrition in stacking will contribute the most to permanently correcting the global oversupply situation. Overall, our customers are focused on reducing costs, but remain keenly focused on improving operational and safety performance.

Additionally, with the duration of this downturn increasing, balance sheet strength of drilling contractors and their long-term viability are becoming key selection criteria for operators. With our strong liquidity, industry-leading backlog, diverse fleet, and excellent safety and operational track record, we are positioning Transocean to increase our market-leading position. As such, we are keenly focused on extending both our customer and stakeholder expectations.

This concludes my overview of the market, so I will turn it over to Brad.

Thank you, Terry. Eric, we are now ready to open the line for questions. As a reminder to the participants, please limit your comments to one question and one follow-up.

(Operator Instructions)

Angie Sedita, UBS.

I appreciate all the details, Jeremy and Mark. This is for either one of you, Jeremy or Mark. I know you've talked in the past about your ability to potentially tap into secured financing for $1 billion or more on the four new-build with Shell. Any further color there on the feasibility of that avenue in this market?

Thanks, Angie. Look, as we discussed in the past, we are very fortunate to have four of the best contract against four of the best ultra-deepwater drill systems in the industry. So those are highly marketable assets to raise additional secured financing. We are evaluating options currently as you can imagine but it's a tough market out there. Not only is the energy market difficult but the banks also are having a pretty tough time of it. So until we actually get something completed, we're not going to comment further on this. But you can be sure we are focused on using those assets in the most effective way to be able to raise additional financing to be able to increase our backlog liquidity as we navigate this downturn.

Okay, very, very helpful. Then one for Terry. Congrats Terry on getting the handful of contracts in this marketing, obviously, a very challenging but impressive. So on the Exxon contract, you mentioned no other contracts have cancellations for convenience without compensation, could you talk a little bit about the Petrobras contracts? If there's anything unique on the contract as far as terminations for convenience or cause?

Thanks, Angie. Our contracting relationship with Petrobras is much like our competitors, it's all the same contracts. So, they don't deviate or negotiate anything different with any of us. They are standard. So they can terminate for cause. But it is for cause. We haven't seen anything else from them to suggest that would be anything other than that. We don't --

(multiple speakers) I was going to say performance with Petrobras has been outstanding.

Yes, absolutely. So we don't have anything there. So what we said is, we've gone through every contract. We do this all the time. Every contract is solid, I think a testament to that -- look at the early termination we've gotten, even though it's a sad thing to early terminate a rig, because our crews go home and the rig doesn't operate. We've collected over $500 million in the last couple of months on these unfortunate early terminations. So that should demonstrate the strength of the contracting opportunities that we have left in our fleet.

Okay, that's helpful. Then one final one for Jeremy. I know you mentioned some thoughts in the past on industry consolidation and that your Board was actually supportive of consolidation. Any further thoughts as we go along here in the cycle?

Sure. I would say that we remain committed to high grading our fleet, certainly. We would certainly like to lead the consolidation of the market; however, we have three very important criteria that have to be met in that process. One is asset quality. Two, would be near-term liquidity. Three would be a reasonable and realistic valuation. So aligning those three is a bit challenging but we're continuing to pursue opportunities and still believe that ultimately, we will lead this consolidation effort.

Great. Thanks, I will turn it over.

Thanks, Angie.

(Operator Instructions)

James West, Evercore ISI.

Jeremy, you mentioned in your prepared comments that Terry had worked on some new commercial solutions that was helpful in adding some backlog during this quarter. Could you maybe elaborate? Or Terry, could you maybe elaborate further on what those new solutions were? How the market is accepting those solutions?

Thanks, James. I will just speak generally. The primary tweak that we have introduced is really aligning with the expectations of our customers around performance. So we've actually put a bit of spin in the game if you will and worked with them on the dayrate and then built our upside based on our performance. To date, our customers have responded extremely well. Our performance has been very solid, so overall, we're earning above market rate on most of these agreements. So for us, we think it's a win-win, better alignment with customers around performance and ultimately, their guaranteed dayrate may be below market, but our overall dayrate is actually above market. So all in, both parties seem to be very satisfied with the approach thus far.

Okay, that's what I figured it was. Then I'm assuming you canvassed your customer base -- I'm sure you're constantly doing that. But with this recent early termination, understanding that any other terminations would be paid for by the customer then you don't have any of those -- there is no recourse to you. Are there -- is there a large number of rigs that are still up for what potentially could be early terminated here? Or do you think we're now down to a steady-state working rig environment?

Hi, James. I think it's a little early to call that because I think it's dependent on each of our customers' circumstances. But we do have such a strong customer base that from our discussions, they are just trying to get to the other side like we are. They have got their programs planned on the majority of our rigs to continue on. But that doesn't mean things can change. Some of these discussions surprised us too. But I would just say, as of today, we are very confident in the contracts. We don't have any other contracts that don't provide for compensation. We are fighting together to keep the rigs working.

Kurt Hallead, RBC.

That's good color so far. Terry, when you went through the market by market dynamics and mentioned the available work that's out there and the number of different operators that are bidding on this work. I remember in certain times in the past there have been discussion that these operators don't want to take a cut rate and risk safety or performance around that. But now with so many different assets available to the market, has there been a change in the customer dynamic? Or are they more focused on getting the lowest price now, irrespective of the perspective of safety or operational dynamics?

I don't think any customer would ever sacrifice safety or any operational dynamic. They have to trust who they are going to work with. But certainly in order to get their project off the launch pad, they are going to fight for the lowest price. They are getting it, as you say, because, Kurt, the availability is there. They are good operators that can certainly do this work. But I think the dynamic that has changed is they are looking for contract drillers who are going to be viable. Because from their perspective, they can't sacrifice the safety. If they are going to contract with someone that may be cutting their maintenance or something like that, not that I'm saying they would, then I think they've got to question that. I think they are taking that into consideration, so I think that's the difference.

Great. My follow-up question for Jeremy. You mentioned the consolidation and the different criteria around the prospect for doing any kind of -- type of deal and the discipline around that. It's always hard it seems in this business to get deals done at the very trough of the market, like we're in right now. Then it becomes even more difficult to go through your discounted cash flow analysis because somebody you want to consolidate with might have a view that their rig's going to work 90% of the time. You may have a different view on that. So do you see that there's been a narrowing at all of the gap on the outlook for the bid ask? Or any of the dynamic that might be the consolidation in the industry?

Yes. I don't know that there's been a narrowing necessarily, Kurt. I appreciate your comment about the trough, I'm not sure that anybody knows if we're at that point yet. I would say that people are definitely becoming more sober about the current reality. As we've stated and I think our competitors have stated, I don't think anybody expects 2016 to get any better. Most don't believe that 2017 is going to be real pretty. So I think as we continue to work through the rest of 2016 you could see that bid and ask come together. You could see more opportunities out there for some consolidation.

Sean Meakim, JPMorgan.

Mark, I just wanted to drill in a little more on the cost guidance that you offered. You noted 20% of savings coming from SG&A. How much flex is in that guidance related to lower activity? You noted 70% of the cost are coming from lower activity. If activity were to undershoot your expectations, will there be an impact to SG&A, where you could cut that further? How is the flexibility of that SG&A guide?

Yes. Thanks, Sean. You're thinking about it correctly. Obviously our costs are very flexible as it relates to both the operational cost and the SG&A costs. We discussed, both Jeremy and I, some of the structural changes that we are implementing at the Company. That's going completely through the first two quarters. In addition to that, we've taken a view on activity for 2016. As that activity either increases or decreases, our costs will increase or decrease accordingly. You can rest assured that we look at this on a monthly basis. We'll update you on a go-forward basis, as we see our activity in our rigs going back to work or coming off in the form of cancellations.

Thank you, that's helpful. Jeremy, one of your competitors recently announced a deal for -- it was a BOP OEM for sale leaseback of some of the newer gen dual BOP stacks in the Gulf of Mexico. So just curious if you have any thoughts on the prospects of that type of arrangement, since you have some newer rigs with a similar profile?

Yes. There's been a bit of publicity around that, I've noticed. (laughter) I will say, we have obviously been in conversations with various equipment providers. I don't know if it's the same model that Diamond and GE entered into, but my guess is they are probably fairly similar. For us, we see some positives and some negatives. On the positive side, there is obviously an impact in near-term liquidity for the drilling contractor, which is good. We also think it's positive to align critical equipment providers with drilling contractors with ultimately the operators to improve uptime performance. So those are two good things and things that we've certainly considered.

For us though, there appear to be two challenges. One is while we recognize the benefit of near-term liquidity, when you sell the BOP and the associated spares, the ongoing cost from the equipment provider, the healthcare contract if you will, is a bit prohibitive. So that's a concern for us. The other piece of it is -- if you think about that cost of the contract, it really increases your total cost of ownership. So while you get the benefit near-term, the total cost of ownership longer-term becomes a bit of a challenge for us. The other thing for us is, we have been unbelievably successful in improving our uptime performance for all subsea-related equipment.

So when you look at the incremental costs associated with the service agreements, plus we don't see a lot of incremental opportunity of improvement that this could potentially bring, for us, we are not quite sure that the model works, as we understand it today. Having said that, we are working with our equipment providers to look at other ways to align different models that may make more sense for us and also improve our uptime performance on our equipment. So it's something that we are pursuing. We're talking to equipment providers. My guess is the model will be different than what was announced by Diamond. But it's something that we are looking at.

Dan Boyd, BMO Capital Markets.

You mentioned that no other contracts can be canceled without penalty. Is it fair to say that if a rig were canceled at this point, you would be made whole from an operating cash flow perspective?

Hi, Dan. We really don't go into the type of detail on the individual contracts as to what the negotiated position is. So I really can't give you a lot of color on that.

Okay. Then lastly, just as I look at your new-builds and those that are contracted and you look at the ones with Shell, they were already delayed. Are you in current negotiations to further delay those new-builds? Or are those looking pretty solid from a scheduling standpoint?

I would say that we will continue to look at all options as this market unfolds. We've already announced the delays of the two -- the final two Shell new-builds. We've announced delays on the five uncontracted jackups. We've announced delays on the two uncontracted drill ships. But as the market continues to unfold, if it continues to look bleak, we obviously could go back to our shipyards where we have great relationships and talk to them about further delays.

But, Dan, let's be specific over here. As it relates to the two Shell rigs, those were delayed a year each at the request of Shell. At the moment, there's no discussions on going with regard to delaying those rigs any further. We understand from Shell that they have programs for those rigs when they come out in 2017 and 2018. So there's no further discussions on that. What Jeremy's referring to is the uncontracted rates.

Darren Gacicia, KLR Group.

Just with regard to lowering cost in sub [floor] base, especially when I think of it in regards to other costs as you guys reported. When you talk about closing basis, how many were originally opened? What is that number at now? What are we thinking of moving to? What are some of the other moving parts both in terms of process and in terms of straight up how you cut those costs? I love to get a little more granular on some of those points.

Yes. Sorry, Darren. I know you would like to get a little more granular but that's a lot of detail. I think you should probably just stick with Mark's guidance that looks like a 40% year-over-year reduction in cost. All of those fall into that.

Sure. Does it generate from consolidating different separately operating companies that were acquired in the past and how that consolidates? Or how does that -- there's some commentary to be had about what is going on internally?

I think internally, it's just around business simplification. This is an organization that had multiple acquisitions over the years, maybe not all of them were fully integrated. We've been in a market where everything's been up and to the right for a number of years. In a market like that sometimes you build an infrastructure, you build-in processes you maybe you don't necessarily need. Especially, as you're shrinking to a much smaller business than you were a few years ago. So we're taking a fresh look at our entire infrastructure, all of our position, all of our roles, all of our processes to try to simplify and drive waste and cost out of the business. So its full scale across the board.

Got you. If I could just take one more in a different direction. I think you mentioned in the prepared comments about debt repurchases further out into the maturity range. How are you weighing those versus liquidity and keeping cash and liquidity available on hand? Because clearly there's some value in buying discounted debt. How do you weigh the benefit of that and how lenders may look at that as well versus holding cash on hand? What's the balance and the logic there?

Darren, I think it's pretty obvious that liquidity over the near term, near-term being the next three to five years is of the utmost importance to us. If you look at what we've done to date, about 10% of the funds we've used to repurchase debt has been focused on debt outside of that near-term liquidity window. So obviously that indicates to you that our most important focus is on maintaining and increasing liquidity. But we'll all opportunistically take a look at buying some of the heavily discounted debt securities that we feel are vastly mispriced in the market.

(Operator Instructions)

Ian Macpherson, Simmons.

Just one for me please. Mark, did you already in part or would you mind imparting the working capital reduction expectation specifically for this year?

Ian, what I did indicate in my prepared comments was there would be a $600 million over the next two years, that's 2016 and 2017. It's roughly equal so little more this year, but I would say somewhere in 350/250 split would not be too far off.

Okay. Good, that's all I have, thanks a lot.

Robin Shoemaker, KeyBanc Capital Markets.

Mark, I would like to ask about the revolver. On a lot of these calls, we're hearing about restructured revolvers in some cases being reduced in size in exchange for more generous covenants, which is what prompts my question. But can you describe what covenants or restrictions might apply to your ability to access the revolver in the next year, two years?

Thanks, Robin. Yes, I'll even go further than that, I'll give it to you through the middle of 2019 as well. As you've probably read in our 10-K, we have one financial covenant on our revolver. That's a debt to cap covenant of 60%. We are currently sub 40% on that. We have to occur significant additional reductions in our capital base or increases in our debt to get close to that level. So we have unfettered access to that revolver through the middle of 2019, whenever occurs. Specifically focused on our internal projections and models. So we don't have the three or four different financial problems we typically find in these revolvers because this was negotiated during the time when the Company was still investment grade.

Right, understood. Okay. My other question is kind of more strategic, but in the downturn, drilling contractors always weight this issue of length of term versus dayrate. In past downturns, the strategy is always, keep the term short if the dayrates are very weak and under pressure. But as you continuously take a fresh look at the market and the opportunities that may be out there, I just wonder if it's any different this time where there are some advantages to term even if the rate is just slightly cash positive? Or maybe if you could share some thoughts on that?

Yes, thanks, Robin. I would say there aren't a lot of opportunities that are out there. Those that are out there, we are chasing aggressively. As long as it's a good solid professional customer that is credit worthy, we know they are going to pay their bills, we're getting aggressive. As I think Terry said in her prepared remarks, a lot of these new opportunities are at or near cash breakeven. So I don't know that there's a lot of term to be had out there. That, that is out there, I think we secured in Q4. So we are just aggressively pursuing what's available.

Waqar Syed, Goldman Sachs.

Terry, my question relates to stabilization of demand or what price level would be required to maybe stabilize demand. It's been just falling for the last term. We have several sets of quarters now. So what do you think the price level would be?

Hi Waqar. I think that what the customers are saying is they just need to see some stability. I think that would be the most positive thing that can happen. In the conversations we're having with our customers, the majority are saying they believe that there will be some stability towards the end of 2016. Does that immediately translate into demand? It's not going to immediately. But at least it gives them a basis to have some more time to have thoughts and considerations of the type of programs that they would like to push out there. You can read and see and certainly in our conversations they are going to take a pause until they get some comfort. But again, we just need to have some stability and get that price moving in a positive direction.

That stability, do you need that at the $50 or $60 level or higher or even at the lower level? Then recently do you see any differences where it could stabilize first and maybe grow first as well?

Well, I think you need to look at what our customers are telling us. A lot of the things that we're seeing now is that they are resetting their cost basis. I think there was a report that came out about Norway. They were saying they had to take significant cost out of their structures and now that $35 a barrel in Norway, if you can imagine, doesn't look so bad. So I think it's case-by-case customer by customer and area by area. It's a really difficult thing to nail exactly what is the rate because it's so dependent on the area of operation all the constraints involved with that but again I think it's just confidence and stability.

That does conclude our question-and-answer session for today. At this time, I'd like to turn things back over to Brad Alexander for any additional or closing remarks.

Thank you, Eric. Thank you to everyone for your participation and questions today. If you have any further questions, please feel free to contact me. We look forward to talking to you again when we report our first-quarter 2016 results. Have a good day.

That does conclude today's conference. Thank you for your participation.