Transocean Ltd (RIG) 2017 Q1 法說會逐字稿

Good day, and welcome to the Transocean Ltd. First Quarter 2017 Earnings Conference Call. Today's call is being recorded.

And at this time, I would like to turn the conference over to Brad Alexander. Please go ahead, sir.

Thank you, Yolanda. Good morning, and welcome to Transocean's first quarter 2017 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, Industry and Community Relations.

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.

(Operator Instructions)

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

Thank you, Brad, and a warm welcome to our employees, customers, investors and analysts participating in today's call. First and foremost, I'd like to recognize and thank the entire transition team for achieving an impressive and important milestone in the company's long and distinguished history. In late March, Transocean eclipsed 1 full year of operation without a single lost-time incident. While we're certainly proud of this extraordinary achievement, we know that we must remain vigilant as we continue our relentless drive towards an incident-free workplace. In addition to our outstanding safety record, we have started the year with very strong first quarter results, carrying on the momentum we built in 2016. As reported in yesterday's earnings release, the company generated adjusted net income of $4 million in the first quarter or $0.01 per diluted share on $785 million in revenue.

Our continued commitment to maximizing uptime and performance for our customers, combined with the efficiencies we've achieved through streamlining our business and our processes have enabled us to remain profitable in this challenging market.

As a testament to our uptime performance, for the quarter, revenue efficiency was 97.8%. Of note, we delivered this performance while placing into service our third newbuild drillship within the last 12 months, the Deepwater Conqueror, which has performed almost flawlessly since commencing operations for Chevron. Needless to say, we're very pleased with this outcome and it validates the extreme focus we placed on ensuring that our newbuild assets are ready to exceed our customer's expectations from day 1.

In addition to our strong uptime performance, we continue to focus more intensely on improving the efficiency and consistency with which, we conduct well construction activities. Over the past 3 months, we launched our performance dashboard, which provides us with increased monitoring of key benchmarks from crew to crew and rig to rig for those drilling activities that lie principally within our control. The combination of this heightened focus and new dashboard application has resulted in a marked improvement in drilling efficiency, which will drive material cost savings and lower break-even levels for our customers.

While delivering safer and more efficient operations, we also continue to realize opportunities to more cost effectively deliver our industry-leading services to our customers. Across the organization, we are thoroughly evaluating every activity, every process and every dollar spent. As a direct result of this laser-like focus, our first quarter adjusted normalized EBITDA margin was an impressive 48%, despite a 7% sequential decline in adjusted normalized revenue. And through the thoughtful analysis of data, the application of new technologies, our innovative approach with key suppliers and our ongoing exhaustive review of key processes, we believe that we can deliver additional structural cost savings, which should drive best-in-class incremental margins as we come out of this downturn.

Looking at the macro environment, we remain encouraged that global demand for oil continues to increase and according to the IEA, 2016 marked a record low in new discoveries, which certainly raises questions about future supply. We're also encouraged to see that OPEC has demonstrated both the willingness and ability to adhere to their stated production cuts. We also see that many of the named Deepwater projects that have been on hold for the last couple of years, now carry break-evens at or below $50 per barrel and, in increasing numbers, at or below $40 per barrel. And finally, we see that cost inflation onshore coupled with structural and sustainable cost savings offshore are narrowing the risk/reward gap between onshore and offshore investments. As a result, our conversations with customers remain constructive. During our last earnings conference call, we stated that a price per barrel in excess of $50 seemed to spark demand from certain independent and national oil companies. We also stated that we are seeing pockets of demand emerging in the U.K., Norway, India and Southeast Asia. Well as noted in our Fleet Status Report, we successfully contracted the harsh environment floater, the Transocean Spitsbergen, with Statoil for work in both the U.K. and Norway beginning in the third quarter and extending into late 2018.

We were able to secure this important contract because we once again offered a unique commercial model, which is completely aligned with our customer's objectives and includes performance-based compensation and the provision of integrated services. We were able to offer this model because the breadth of our historical data and the performance of our crews, assets and shore-based support teams give us confidence in our ability to deliver. While we're not sure if this type of model will become more commonplace across the industry, we recognize that our ability to seamlessly integrate our drilling services with other services greatly enhances the cost profiles of our customers' projects. We believe that in the long run, this type of collaboration will lower the total cost of and further the viability of Deepwater projects. This in turn will increase the number of final investment decisions made by our customers.

As we look out over the balance of the year, demand for our assets and services will continue to be driven primarily by oil prices. If prices continue to hover around $50 per barrel, then we would expect to see more contracts materialize over the coming months. Consistent with this expectation, Terry will tell you about some recent contract awards that we secured after our Fleet Status Report.

While we certainly remain hopeful that we will continue to experience incremental demand for offshore drilling services, we acknowledge that we must take the steps necessary to further strengthen our enterprise as we successfully navigate this downturn and prepare for the eventual recovery.

One such step includes our ongoing negotiations with Borr Drilling to sell our current fleet of 10 high-specification jackups as well as our 5 jackups under construction, for a total consideration of approximately $1.35 billion. This potential transaction is consistent with our strategic goal of remaining the industry's undisputed leader in the ultra-deepwater and harsh environment markets, where our high-quality assets, unmatched operational experience and trusted customer relationships provide us with a clear competitive advantage.

This proposed transaction is also consistent with our goal of enhancing our near-to-midterm liquidity to provide greater strategic optionality. Once this transaction is consummated, over 80% of our fleet will be comprised of either ultra-deepwater or harsh environment floaters. This ratio will increase within the next 12 months with the introduction of the Deepwater Pontus and Deepwater Poseidon, our 2 remaining drillships contracted to Shell for 10-year terms.

And as previously discussed, we will continue to look outside Transocean and evaluate opportunities to further grow and enhance our ultra-deepwater and harsh environment fleet. As you well know, many of the distressed players in the industry with attractive assets are now restructuring, which increases their appeal as consolidation candidates. There are also a number of stranded rigs available in shipyards that are highly capable and therefore, desirable. We will continue to closely monitor the entire landscape as we consider opportunities to grow and high-grade our fleet.

In addition to restructuring our fleet to support our strategic objectives, we will continue to strengthen our financial position, continue to realize opportunities to streamline our business and continue to manage our operations in a manner that consistently delivers the safest, most reliable and most efficient operating results in our space.

In conclusion, I'd like to once again thank all Transocean employees for delivering another great quarter. As a team, we continue to deliver exceptional revenue efficiency, strong EBITDA performance and solid cash flow generation, all with a continued focus on realizing the long-term strategy of the company. Most importantly, we're delivering these results while never losing sight of our most sacred responsibility, the safety of our operations and our people.

I'll now hand the call over to Mark.

Thank you, Jeremy, and good day to all. For today's call, I will recap the first quarter results and provide an update to our 2017 guidance. I'll also provide an update to our financial position and liquidity forecast through 2018.

For the first quarter of 2017, we reported net income attributable to controlling interest of $91 million or $0.23 per diluted share. As detailed in our press release, first quarter results include $87 million or $0.22 per diluted share in net favorable items. Excluding these items, adjusted net income was $4 million or $0.01 per diluted share.

Contract drilling revenue decreased $55 million sequentially to $738 million, due largely to reduced activity related to 215 fewer operating days. Offsetting this decrease was a full quarter's contribution from our latest deepwater drillship, the Deepwater Conqueror, and higher day rates associated with a change in the operating location to the Gulf of Mexico from Trinidad on the ultra-deepwater drillship, Deepwater Invictus.

And as Jeremy mentioned, we achieved another solid quarter of revenue efficiency of 97.8%. So consistent delivery of 95% with better uptime for 12 of the past 13 quarters, we continue to effectively monetize our backlog. Other revenue was $47 million, which included customer reimbursables, and $37 million associated with early termination fees. This compares with $181 million in the prior quarter. The first quarter's operating and maintenance expense was $343 million, which included $8 million in favorable items associated with litigation matters. This compares with $314 million in the prior quarter, which also included favorable litigation matters totaling $30 million. Sequential difference was due primarily to the commencement of operations of Deepwater Conqueror and a full quarter of activity on the Transocean Arctic.

First quarter OpEx was slightly below our forecast, due largely to a performance litigation matter and a delay in performing certain maintenance projects during the quarter. G&A expense for the quarter decreased sequentially by $8 million to $39 million, as the fourth quarter was impacted by restructuring costs. And also as Jeremy mentioned, our adjusted normalized EBITDA margin was 48% for the first quarter. This is most impressive, given the challenging environment of revenue declining day rates. It can't be overemphasized how much focus the entire organization has placed on streamlining operations, while continuing to operate our rigs consistently at a high level of safety and operational performance.

As anticipated, our first quarter effective tax rate excluding discrete items was 82.1% compared with 3.3% in the previous quarter. The increase was due to reduced pretax income. Remember that as pretax income decreases during a downturn, the effective tax rate increases significantly.

Cash flow from operations of $184 million compared with $633 million in the prior quarter. The decrease was due mainly to a prior quarter collection of payments associated with the deferral of our 4 contracted newbuild drillships.

Capital expenditures in the first quarter were $122 million and were largely related to the construction of the aforementioned drillships. And we ended the first quarter with cash and cash equivalents of $3.1 billion.

I will now provide an update on our financial expectations for the second quarter and the full year 2017.

Other revenue for the second quarter of 2017 is expected to be approximately $45 million, which includes customer reimbursables and approximately $40 million of revenue, primarily associated with the early termination of the Deepwater Asgard.

We expect second quarter 2017 O&M expense to range between $355 million and $365 million. The increase over the first quarter of 2017, when excluding the litigation matters, is mainly associated with the timing of certain maintenance projects that moved from the first into the second quarter as well as further costs associated with the reactivation of the Transocean Barents. We expect second quarter G&A expense to range between $33 million and $38 million. Capital expenditures, including capitalized interest for the second quarter of 2017 are expected to be approximately $180 million, mainly associated with our newbuild drillships.

For the full year, we reiterate our 2017 revenue efficiency guidance of 95%. Other revenue for 2017 is expected to be approximately $115 million, which includes customer reimbursables and the revenue associated with the early termination of the Deepwater Asgard. Our guidance also includes additional services related to our recently announced contract in our harsh environment semi-submersible, Transocean Spitsbergen.

We're reducing our full year 2017 operating and maintenance guidance to between $1.4 billion and $1.45 billion, emphasizing the lower end of our previous range. This updated range excludes any additional reactivations.

There are no changes to our prior guidance for G&A expense, depreciation expense and capital expenditures. All guidance excludes the potential sale of our jackup fleet to Borr Drilling, which will likely close in the second quarter of 2017. We'll provide updated guidance once the transaction has closed.

Regarding the potential Borr transaction, we are in advanced negotiations towards a definitive agreement to sell our fleet of 10 high-specification jackups plus 5 jackups under construction for a total consideration of $1.35 billion, which includes the assumption of approximately $950 million of future newbuild commitments and $400 million of cash, which includes approximately $80 million associated with the cash flow from the remaining back --- contract backlog on the operating jackups.

Full year 2017 net interest expense is expected to be between $455 million and $475 million. Net interest expense includes capitalized interest of $135 million and previous income of approximately $15 million. The increase in net interest expense is associated with the amortization of debt issue costs and other capitalized interest due to a pause in the construction of 2 jackups and 2 drillships in the first quarter.

We are lowering our full year tax guidance to between $70 million and $80 million. This updated forecast includes approximately $30 million paid in the first quarter of 2017. We anticipate noncontrolling interest for the year to result in a charge ranging between $20 million and $25 million.

Turning now to our financial position and liquidity. The window related to our open-market repurchase program was shortened this quarter due to potentially material nonpublic information associated with the Borr transaction. As such, we only repurchased debt totaling $15 million during the quarter. When included in the potential Borr transaction, our end-of-year 2018 liquidity is projected to be between $4.5 billion and $4.9 billion.

Moving on to the operating assumptions behind the projected liquidity. Revenue efficiency of 95% throughout the period, a limited number of new contract awards with various assumed at or near cash breakeven costs through 2017 with marginal revenue improvement in 2018 and no expected reactivations. In 2018, we expect total CapEx of approximately $325 million, this includes approximately $100 million in newbuild jackup CapEx and $225 million for maintenance CapEx.

Liquidity pro forma for the aforementioned jackup sale exceeds $6.3 billion, all of which remains available for immediate use. This includes our unsecured $3 billion revolving credit facility maturing in mid-2019. With respect to the significant level of liquidity and in keeping with our stringent return on capital employed requirements, we continue to evaluate a number of value-creating options, including liability management, single-asset and corporate transactions. This strong liquidity position combined with our industry-leading contract backlog of $10.8 billion positions us very well to take advantage of these opportunities.

To conclude, we are very pleased with our level of safety and operational performance, including our operating revenue efficiency and continued improvements in our cost structure. We will continue to challenge the status quo and build upon this momentum as we [ever] give a greater performance to [rebridge] ourselves in the future.

I'll now turn the call over to Terry.

Thanks, Mark, and good day to everyone. I'd like to start off today's call by celebrating an important and strategic contract we recently won. Our extensive customer relationship and innovative commercial models helped us capture multiple well programs in both the U.K. and Norway, with Statoil, for the harsh environment semisubmersible Transocean Spitsbergen, adding approximately $83 million in contract backlog. The Spitsbergen has delivered some of the best harsh environment wells in the industry. You may recall that the last well the Spitsbergen drilled for Statoil was named the perfect well, based on the speed in which it was drilled, blowing away their technical limit. We are further excited to be contracting her in conjunction with an integrated package of services. That includes the ROV and casing running, plus performance incentives with the expectation we can continue to increase our drilling efficiency. The initial contract award is for 3 exploration wells with an estimated duration of 90 days in the U.K. sector of the North Sea. This contract includes a price option for an additional well with an estimated duration of 30 days. The second contract in the Norwegian North Sea is for 6 production wells with an estimated duration of 1 year. This contract includes price options for an additional 6 exploration wells with an estimated total duration of 180 days. The first contract is scheduled to commence in the third quarter of 2017. We are also currently seeing more positive signs of life offshore. Consistent with our optimism, we are very happy to announce a new contract award, plus 4 extensions in multiple operating areas. Of the 5 new awards, 4 will be commencing drilling operations in 2017. This will include the restarting of a warm-stacked 6th generation ultra-deepwater floater.

Before I discuss these new awards, I'd like to mention that we are very close on the reactivation from warm stack and the signing of a related contract for the Deepwater Asgard with an operator in the U.S. Gulf of Mexico. This will put her back to work before year-end, another opportunity in 2017. Additionally, the Development Driller III has just signed for a 2-well program plus a 1-well option. We are confident of attracting follow-on opportunities for both of these floaters. We've also extended 2 floater and 2 jackup contracts. The Paul B. Loyd, Jr. has received a 1-well extension offshore U.K. and the Transocean Arctic has extended for 3 wells offshore Norway. The Transocean Andaman and the Siam Driller have received extension for 1 and 2 months, respectively, in Thailand. We also remain engaged in productive dialogue with several national oil companies and independents that are assessing opportunities and looking to take advantage of the low-cost environment. Additionally, customers are requesting more information on readiness of crews and floaters to return to work.

As of April 24, our backlog continues to be industry-leading at $10.8 billion. Excluding some brief movements, oil prices have generally remained above $50 for the first 4 months of the year. Longer-term forecasts continue to support prices moving upwards. With OPEC maintaining production cuts and global demand for oil continuing to trend upward, we remain confident the supply/demand balance will continue to narrow.

In a recent article, the IEA warns of oil shortages by 2020 due to lack of investment as discoveries fall to record lows, resulting in the lowest oil discoveries of 2.4 billion in 2016. This is the lowest since the IEA began recording in 1950. Their analysis also indicates U.S. shale cannot fill the void of global declining production, resulting in a lack of supply to meet the growing energy needs of the world.

With continuing strengthening in oil, we expect more sanctioning of Deepwater projects in 2017. As we look towards 2018, we remain encouraged with many of the IOCs now stating that their Deepwater projects are economic around $50 per barrel and in some cases, lower. Recently at OTC, BP stated Deepwater can compete with Shell any day. Through BP's cost-cutting efforts, standardization and optimization of their portfolio, Deepwater breakeven costs are now below $40 a barrel compared to $80 a barrel in 2014.

Now I'd like to turn to Brazil. As we previously discussed on our last call, new legislation in Brazil will further pave the way for international investment by the majors through multiple bidding round opportunities in 2017 and '18, and promising exploration incentives. New initiatives being discussed are: lower royalty fees for frontier blocks, streamlining of environmental licensing and permitting and an extension of special tax breaks from ported offshore equipment to name a few. Increasing pro-business discussions are creating huge interests in the upcoming bidding rounds. As we have recently participated in tendering offerings from Statoil and Chevron, many other IOCs are looking at their portfolio of drilling opportunities in this key area and we expect to see contracts awarded and wells being drilled in Brazil by 2018.

On a very positive note, the mid-April injunction was lifted on Tuesday, allowing Statoil's $2.5 billion deal with Petrobras to proceed. We are also seeing opportunities in other parts of Latin America, including Trinidad, Colombia and Guyana as a number of operators have programs that should begin in the next 12 months. Additionally, Uruguay just -- it's announced tendering for 17 blocks offshore for water depths up to 3,000 meters. We also continue to remain encouraged by the likelihood of Deepwater work in Mexico with a second licensing round for Deepwater blocks to occur in December. Offshore Mexico activity for 2018 is gathering steam as customers focus on logistical planning, well program preparation and completion of tendering packages. We expect to receive at least 1 tender within the next few weeks.

Looking at the Eastern Hemisphere, we are also encouraged by indications that activity in West Africa could begin to proceed after a couple of years of stagnation. BP has indicated they will continue their focus on West Africa as reflected by their recent investment in Senegal. Senegal is also taking steps to improve their petroleum and natural gas legal framework in Angola. Several measures of flexibility are being introduced for consideration to encourage development of Angola's natural resources. We are seeing operators express an emphasis on drilling contractors' financial stability by including financial metrics in recent tenders. This is narrowing the pool of suitable competitors for upcoming work and has potentially put at risk a couple of near-term awards to drilling contractors that, when placed under more financial scrutiny, could be disqualified from bidding. Over the past few weeks, we have been on the road at industry events, conferences and customer engagements. Clearly, the attitude has shifted over the course of the past 6 months. On Monday, we attended an OTC industry event, where attendance was 50% above last year's number. The optimism was much improved and presentations are signaling an improving path where the train is about to leave the station.

In conclusion, we will continue to monitor the industry indicators, improve and focus on what we can control and position Transocean to win contracts, while exceeding our employees', customers' and shareholders' expectations.

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

Thank you, Terry. Yolanda, I think we're ready now to take questions. (Operator Instructions)

(Operator Instructions) We'll hear first from James West with Evercore ISI.

Jeremy or Terry, when I look at the market overall, I think it's pretty easy for most people to say, okay, we're still pretty oversupplied for floaters and jackups. The one area that perhaps has been overlooked here is the harsh environment, where we've seen a pickup and we're starting to see I think a real tightening there. Is that on track on that statement, that harsh environment is getting closer to some perhaps an inflection point? Or to a better place where we can easily stabilize pricing and maybe even move pricing higher?

James, thank you for a great question, and I think you're spot on. I think what we're seeing right now is we're seeing a lot of tenders coming out. And simply, there's not enough availability of hot, warm and ready to go. So now you'll have to be looking at the opportunity of bringing some rigs out. So we think that we're going to see some of that coming up here in the near future. We're very optimistic.

And then Jeremy, you talked about the dashboard and I got a chance to see it the other night but I know that's newer to the efficiency programs you put in place and we've talked a little bit about drilling efficiency and just kind of the massive increases you've seen over the last probably 4 quarters. With the dashboard in place now, with the intracrew competition that you've been able to create, I guess what kind of magnitude have we seen so far, if you could just remind us of that. And what do you see going forward for increased efficiency?

Great question. Thanks, James. We actually started getting intentional about this, I would say, late Q1, Q2 of last year. And so since we've started really measuring -- let's just talk tripping times for right now because that's where we spend the majority of our time. Just since we started measuring in Q2 of last year through Q1 of this year, we've seen a 22% improvement in tripping time. If you look at when we implemented the dashboard, which was towards the beginning of Q1, just from Q4 to Q1 performance, we saw an 11% improvement in tripping time. So just by measuring, making it visible to all the rig leadership and our -- the shore-based support, we're already seeing improvement. And so as we continue to mature with this particular dashboard, we'll identify best practices, specific crews that are overperforming benchmark on a consistent basis, we'll take -- we'll go and visit them, take a look at the process, see if we can adjust our own across-the-fleet procedures and spread that best practice. Likewise, if we see a crew or a rig that's underperforming, we can quickly send a SWAT team out there and go address those issues as well. So just by making it visible and intuitive and just immediately available has demonstrated -- has resulted in improvement.

We'll take our next question from Angie Sedita with UBS.

So Terry, really impressive, the number of contracts you've signed here in the short-term and reactivation from -- reactivating rigs and so forth. But can you and -- can you talk about oil prices as far as -- if oil prices stay in the mid-40s, do you think the tone of the conversations could change? Or the quantity of conversations could slow? Or it still would continue in the 45, 46 level?

Angie, with the activity that we're seeing right now and the tenders that are coming up, I think largely the customers are ignoring at the moment that where the Brent is today, I mean, we're hovering right now on 50, right? So they're ignoring it and the tenders that we're seeing in the future, there's a lot. And it's not just confined to U.K. and Norway, we're also seeing a lot of activity in Asia. We're seeing a lot of activity in Trinidad, Canada. We're seeing quite a few -- quite a bit of interest from customers. And actually having meetings with customers, asking our expertise on how do you get into Canada. So we're now seeing a bit more of a broader look than just some of the U.K., Norway bidding.

Okay. So your thought is in the mid-40s, the pace of conversations would not slow?

Well we're not seeing it now, and I don't think the -- certainly, our expectation is that we're going to see oil stabilize and improve. And I know that we don't have the crystal ball, but I think that that's what our customers are telling us too.

And another one quickly for Jeremy. I know you've been a proponent of M&A both on looking at other companies as well as buying individual assets. But I guess, a separate question would be do you think there's anything to be gained by the established contract drillers merging with each other?

Yes, for us, it's not so much about size, Angie, as it is about asset quality, so to the extent that we can first agree on valuations, which has been a -- the -- kind of the holdup to date, but to the extent that we can bring some new high-quality assets into our fleet, we think that there's some opportunities there for us. Now looking at some of the larger, more established traditionals coming together, I suppose there could be some benefit for that, but for us, it's really around fleet quality and really targeting ultra-deepwater and harsh environment.

And then real quick for Jeremy, you guys talked about additional structural cost savings. Can you give us some further color?

No, I think it's just this market has forced us all as an industry and certainly at this Transocean to just take a really hard look at how we conduct business. And so as we continue to do that, I mean, we're implementing changes whether it be structural, process-driven, technology-driven changes, that will enable us to grow as the market improves without adding a lot of costs to our support base, and so that's really the focus for us now. We've obviously reaped all the low-hanging fruit and now it's really getting to this process and structural issues that are sustainable despite growth.

(Operator Instructions) We'll hear next from Ian MacPherson with Simmons.

I wanted to ask you, Jeremy or Terry, really, congratulations on the contracts with the Spitsbergen with Statoil, and I wondered if you could talk about whether that integrated service approach and the performance structure of the contract was really pulled from the customer or pushed by Transocean? And how prevalent you see that becoming going forward? And also are the integrated services such as the casing running, are those -- are you subcontracting that to a third-party? Or is that a capability that you were providing in-house?

Okay. Good morning, Ian. To answer the first question -- and thank you, by the way, the teams have done a marvelous job working on that contract. And the contract specifications actually require that we take on some services that Statoil believed that we had the capability so to do as contract drillers. So that was mandated by the contract. But also we found them to be very positive, they also included the performance incentives. And we were able to negotiate something that we were very interested in, and also something that would -- we would be winning and they would be winning, so we're very, very happy with all of those things. In working with third parties, there are some synergies on the rig where we can actually take on fewer people from a casing crew. We would still bring obviously the third-party expertise on, but there are some synergies where casing crew -- where our crews can do the function of some of the casing crews, so there's some savings there. But this is a very exciting opportunity that we can showcase with our ability to understand the areas that we drill in. And also to demonstrate our incredibly efficient drilling and operational expertise. So we are very excited about this opportunity.

I wanted to follow up on Angie's question on sort of the price elasticity of demand. Brazil, specifically, I think we think of the pre-salt having superior well economics to a lot of the other ultra-deepwaters. Would you suppose that the opportunities there are probably the sturdiest with regard to price volatility over the next few months?

I think that's fair. I mean it's -- Brazil is always a question because there's always so much going on, but I'd say here recently, all the indications are very positive right now. And I think you're right. I think if oil did drop a bit, that programs would continue and Brazil maybe would continue with their plans.

Our next question will come from Ole Slorer with Morgan Stanley.

I wonder if you could expand a little bit more on the efficiencies. You touched briefly on this as more process-oriented. But we're hearing more and more about preventive maintenance models and kind of changing total cost of ownership. A lot of your competitors are capitalizing what I would call maintenance cost, so you can either take that into account too when it comes to the total cost of ownership. So Jeremy, I just wonder whether you could expand a little bit more on how you're taking it to the next level.

Yes. Sure, thanks Ole, thanks for the question. We -- so we've recently entered into agreements with 2 large OEMs, they've put out public releases on that. One was GE, the other was Cameron Schlumberger. And the approach that we took in both of those cases was to look at the total lifecycle cost of the assets. So we started with BOPs and so you look at our pressure control equipment, you look at the total cost over a 10-year period, you factor in the 5-year and 10-year overhauls and you can see what that costs you over the 10 years. And so our approach with the OEMs was, hey, we need to bring that cost over the 10-year period down. We would like to make it more predictable and we'd like to get away from calendar-based overhauls and really move to more reliability-centered maintenance. And so we've worked really closely with them to build a model that I mean, guarantees us a much lower cost than we historically incurred over the 10-year life of the asset and smooths out our costs on a monthly and quarterly basis. And so through closer coordination, we're guaranteeing ourselves now a lower cost of ownership over the 10 years. Now added to that, we also want to continue to bring improved reliability to our customers. And so as a sweetener for the OEMs to the extent that we can reduce downtime, reduce the number of unplanned pulls on these stacks, there's a bonus in it for them. And so that's really complete alignment between our customer, ourselves and the OEM. And so we've done that with -- across the pressure control equipment with GE and Cameron. We're working on other pieces of critical equipment with other OEMs on similar types of models. And so you won't see the cost benefit probably in the first couple of years, it will be relatively flat, hopefully, we see continued uptime performance improvements. But then as you get into year 5 and year 10, when you would've incurred those large overhauls, that's when you start to really recognize the savings.

I have one follow-up question. On the recent reactivation on the 6th generation rig, how -- what was the overhead cost to achieve that?

So were you referring to the Asgard, Ole?

Yes.

Yes. That's not going to be much because you're looking mainly at adding some of the junior crews to the rig. So that rig is currently warm-stacked in the Gulf of Mexico. So to reactivate that and any other rig that is warm-stacked, it's around $5 million and most of that is around labor.

We'll move now to Greg Lewis with Crédit Suisse.

Terry, I just had a question for you regarding -- you talked about some of your customer conversations with I guess the oil price coming down for Deepwater projects being more competitive. As you talk to your customers, do you get a sense that they're making these projections based on the rig environment in terms of pricing that we're in today? Or do we get a sense since these are multiyear endeavors that they're thinking more around more of a normalized rig rate?

I think that's a really good question. I mean, the customers that we deal with, they're fully understanding that rig rates are going to go up whenever -- and they'll bake that into their 5-year plan, so they'll run a model like you'll run a model, based on the assumptions of how -- that supply and demand is a commodity. So they're really structurally changing the game and it's part of the conversations we've been having is, these are sustained -- sustaining cuts that they believe that they're not going to see a whole lot more arising, except for what you would expect. Services are going to increase and labor's going to increase, but the structural changes have been standardization of their programs, their subsidy programs, that's where a significant amount of their savings are coming from. And they're just able to do things just like we have just to be able to focus on taking costs out of the system that will be everlasting. So they don't -- I don't think that from the rig rates, they have any delusion that they would be this -- these low over the next 5 years.

And then just with the potential or I guess jackup sale ongoing. Just given that there was some backlog associated with a couple of those rigs, does -- did the count -- did the rig customer need to be involved in that negotiation? Be made aware of it? Does that potentially impact that contract given the change in control of the rig? Is there any color around that you -- anyone can provide?

Yes, thanks, Greg. With regard to that transaction, we intend to operate the rig through the remaining term of the contract. So as I mentioned in my prepared comments, included in the compensation for those rigs is about $80 million of backlog, which we retain through operating those rigs to the end, so Chevron was not a party to the transaction.

Having said that, they were informed. Yes, I mean we've had several conversations with both their corporate as well as the regional leadership and -- just to assure them that performance would continue as per usual.

And then Terry, maybe I'll just squeeze another one in. Just as we think about it that, I mean, you guys have just sold off your jackup fleet, what has -- is the customer feedback? And like, is anyone saying, Hey, you give me those, go buy some more jackup rigs so we can contract a jackup rig from you?

That's a great question. I think one of our major customers always asks us the question, why is it www.deepwater.com, when you own jackups? So we've made the decision and I think it's been a clear strategy that we talk about all the time is that we're focused on high-specification floaters and harsh environment. So that's where we're headed and we're excited about it.

And visited with multiple customers since the board announced the letter of intent and most have expressed just congratulations, they thought it was actually a good move for us to really focus on the Deepwater and harsh environment, and really streamline our service offering and our story. So I don't think there's been any negative -- there's certainly no pushback from any customers so far.

Our next question will come from Rob MacKenzie with Iberia Capital.

Terry, I wanted to come back to your comments on tenders and the customer outlook. And in particular, if you could frame it for us a little differently perhaps. Subjectively, you talked about a lot of tenders in a number of markets. But how would you contrast that against, I guess, industrywide, the number of rigs that are rolling off contract? Are those tenders enough to keep all active rigs working? Are they enough to put back to work a handful of rigs? Can you help to frame it for us in those kind of terms?

So if we look a year ago in April and then we look to today, April '17, a year ago there was very little tendering that you could even see in '17 and '18, there was just no visibility. So now, we roll it forward 1 year, we've seen an increase of 58% of the tendering opportunities that are out there. So that's clearly a huge indication of where we were a year ago to where we are today. You look at harsh environments, talk about that and we'll talk about contract years because the contracts have been so, of small duration. So last year, there was about 30 rig years of harsh environment executed. This year, we expect that we're going to see 40. So things have -- so things are really, you can see an incremental increase. And then let's just look at the number of floater fixtures. For the last 2 years, we have executed 69 floater -- total floater fixtures. today, we've already executed almost 30 and we're only at the end of April. So it -- that kind of gives you an idea of -- definitely you can see the increase. There are a lot of tenders out there that haven't even really -- that we're hearing about and that are not becoming public. So we're now seeing a little bit more of direct negotiation opportunity, and that's always a good indicator because if you've got a lot of folks that you want to work with, you would definitely put most of these things to tender. As far as rollover of fleet, in the olden days, rollover of fleet used to be about 50%, and that wouldn't even go into the demand column. They would just be rolled over. So today, when you look at the rollovers coming off, there's a big -- there's a large amount of rollovers. But if I look at the tenders that are out there, I don't see a lot of tenders being priced against the rollovers. So maybe 2 or 3. So these are things that we're really, as we've said we're going to focus on the milestones and focus on opportunities, and we are seeing certainly positive signs right now.

(Operator Instructions) We'll go next to Colin Davies with Bernstein.

Just to expand a little bit on the conversation around the nature of the tendering market. I think on the last call, you talked about the nature of the customer base and perhaps that broadening out to NOCs and independents. Can you give some color around, is the breadth of this increasing, tendering, are you seeing the majors reengaging on a large scale? Or is it more broad across large independents and NOCs?

We're not seeing in this -- increase in tendering right now. We're not seeing a huge representation of the majors, but we're seeing a very large representation of the IOCs and some NOCs. So that's -- this is typically what happens when you're coming out of a cycle. You'll see a -- it will shift because the majors have already gone long and they're working off their -- they're working off their term. Whereas the independents, they're always -- they always have their inventory ready to go. And so do the NOCs, they'll typically work through the cycles, the lower cycle anyway. So that's what we're seeing.

And then just to follow up on the supply side. Given what you're seeing now in the marketplace and the tendering activity, how are you thinking about the supply-side portfolio? Perhaps your attitude to your own scrapping? And then perhaps what you're seeing across the industry more broadly, do you see that level of supply-side adjustment beginning to slow down in any way?

The one thing I would say to start this is, don't look at the absolute number on the supply side. I think that would be a mistake, for a number of reasons. One, if you look at the total supply, there are a number of rigs in there that just don't have the technical capability that our customers are demanding in the current environment. And so you can go and you can cut a few out there. Then Terry mentioned that customers are putting a greater focus on financial stability of drilling contractors so you can probably take a few out there. And then we know for a fact that a lot of these rigs that are being stacked are not being preserved the way that they need to be preserved, and so the costs to reactivate them are going to be prohibitive. And so I think if you look at the total -- the absolute number on the supply side, you'd probably be making a bit of a mistake. So I don't think the supply side is near -- and the gap is nearly as wide as it seems just by looking at the absolute number. So I would say, that would be my starting point. With respect to continued retirement, we have retired 31 rigs from our fleet over the course of the last 2.5 years, I guess it is, we continue to evaluate our fleet on a regular basis. And as we get a little more visibility to the downturn and customer sentiment, we run models to say what's it going to cost to reactivate this rig. Does it require upgrades, what does that cost, what do we think the first day rate's going to look like? And as time evolves, we may make the decision on some of our rigs to say, you know what, it's time to go ahead and scrap it. I can't speak for the rest of the industry but that's our approach.

And our final question today will come from Ian MacPherson with Simmons.

This is for you, Mark. Your O&M guidance for the year of $1.4 billion to $1.45 billion, which does not assume the jackup sale, would I be correct in estimating that would be about $100 million on an annualized basis at current activity levels for the jackups?

Yes. That's probably close, Ian. I don't want to give you definitive color on that yet because as I've mentioned, we are operating some of those rigs through the end of their contracts, which run through second half of next year in some cases. But that doesn't seem unreasonable.

And with that being our final question, I would like to turn the conference back over to Brad Alexander for any additional or closing remarks.

Thank you to everyone for your participation on today's call. If you have further questions, please feel free to contact me. We will look forward to talking with you again when we report our second quarter 2017 earnings results. Have a nice day.

That will conclude today's conference. Thank you all once again for your participation.