Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the fourth quarter 2019 Diamond offshore drilling incorporated earnings conference call.
At this time, all participants' lines are in listen only mode.
Speakers presentation, there will be a question and answer session.
And during the start from 20 to press Star one wonder telephone.
Please be advised to today's conference is being recorded in the from Macquarie any further assistance. Please press star zero.
I like your hand, the conference over to your speaker today severely. Thank you Maam. Please go ahead Sir.
Thank you Chris Good morning, everyone and thank you for joining us.
With me on the call today are Mark Edwards, President and Chief Executive Officer.
<unk> Executive Vice President and Chief Commercial Officer, and Scott Cornwell, Senior Vice President and Chief Financial Officer.
Well, we began our remarks I remind you that the information reported on this call speaks only as of today and therefore, you're advised the time sensitive information.
No longer be accurate at the time any replay of this call.
In addition, certain statements made during this call maybe forward looking in nature.
Those statements are based on our current expectations and include known and unknown risks and uncertainties many of which we are unable to predict for control.
It may cause our actual results or performance to differ materially from any future results or performance expressed or implied by these days.
These risks and uncertainties include the risk factors disclosed in our filings with the FCC included in our 10-K intended Q filings.
Further we expressly disclaims any obligation to update or revise any forward looking statement.
Please refer to the disclosure regarding forward looking statements incorporated in our press release issued earlier today and please note that the content of our call are covered by that disclosure.
We will be referencing non-GAAP figures on our call today. Please find a reconciliation to GAAP financials on the website.
Now I'll turn the call over to Mark.
Thank you Matt Good morning, everyone. Thank you for being on the call today.
In the fourth quarter of 2019 Diamond offshore had an adjusted loss per share a 45 cents.
This compares to an adjusted loss per share a 42 cents in the fourth quarter of 2010 day team.
The slight decline year over year was primarily driven by the ocean blackhornet undergoing its upgrades in the fourth quarter of 2019 compared to working in the fourth quarter of 2018.
Partially offsetting this year over year decrease.
With the improved operational uptime on the remaining black ships.
Today I'll begin with the performance update of off late I'm pleased to report the 2019 represented the safest yet and diamond offshore history as I said previously the safety of our employees on the protection of the environment is first and foremost a highest priority.
<unk> record performance in 2019 reflects this continued commitment.
And during the fourth quarter of 2019, we reached a new major milestone and that we achieved 100% revenue efficiency across our entire drillship fleet.
According operating performance record operating performance was delivered on the back of the unique innovations we have introduced to the industry over the past years, and two which I have previously spoken.
This performance is why these assets it has proven to be so desirable and walk continues to be an oversupplied market.
And as a result, all fall Drillships will transition to new term contracts in the coming yes, the first of which will be the ocean Blackhornet, which is shortly to commence its two year campaign with BP in the Gulf of Mexico. Following completion of its five year survey and rig floor automation upgrade.
As early adopters of a new technology to further automate the dream process, Oh, Drillships well continue to be among the most advanced rigs and the market.
The Ocean Blacklion will begin the same upgrades next month.
Prior to commencing its two year campaign with BP and the second half of the also in the Gulf of Mexico.
Switching now to onboard assets. The Ocean apex has recently returned to work for Woodside in Australia. This in addition to a drilling campaign for BP well keep the rig utilized until late 2021.
The Ocean Monuc recently completed this program for zone in the by straight and is currently mobilize into Singapore, where it will spend approximately three rigs undergoing upgrades I contract preparations.
Once complete the rig will commence a 16 month campaign Posco international in Myanma.
And finally in the coming weeks following the completion of its extensive upgrade the ocean Onyx will depart from the shipyard in Singapore for the harsh environment said to of the best straight to begin working on its drilling campaign for Beach energy.
So turning to awfully contracting activities during the fourth quarter of 2019.
We secured an additional 12 months of work for the third generation most Sammy the Ocean Patriot.
This extension comes at a higher day right then the legacy contract and that's over $50 million of additional backlog.
Further we have also been awarded an additional two wells on top of the original 18 wells Skype for the Woodside Drillship program.
Senegal.
So allow me to make a few comments on the market.
It is clear that since the trough in 2016 day rates have risen for all asset classes.
However, upward pricing momentum remained slow due to ongoing rig capacity overhang, especially in the drillship market as well as the short term nature of the awards.
Nevertheless, we believe the Dod differentiated strategy has enabled us to price our assets I premium within the market in both the drillship and Mod semi markets.
Within this environment of depressed day rates. However, we are anticipating negative cash flow the twentytwenty.
And as Scott will discuss in greater detail, we'll start to draw on our revolver in the coming month.
2019 was an unusually heavy capex yet the diamond as we focused on strategic upgrades for our most marketable rigs.
We believe these investments will be beneficial to diamond in the long run.
Moving forward, we will focus on preserving liquidity and limiting capex into twentytwenty and beyond at this time.
We will not reactivate the Ocean America, all the Ocean Rover.
Additionally, it is unlikely we will add maureen to the ocean carriage and ocean violent.
So with that I will turn the call over to Scott and then I'll have some closing remarks Scott.
Thanks, Mark and good morning, everyone.
Earlier today, we reported a net loss of $75 million or negative 54 cents per share for the fourth quarter of 2019, which include unfavorable tax adjustments related to Swiss tax reform.
Excluding these items, our adjusted net loss for the fourth quarter was $63 million or negative 45 cents per share. This compares to our third quarter 2019, adjusted net loss of $93 million or negative 67 cents per share.
Let's now take a closer look at the quarter over quarter variances first.
Contract drilling revenues of $259 million during the fourth quarter 2019 increased $16 million from the third quarter.
The largest driver of the quarter over quarter increase relates to the fourth quarter, a seat and recognition of $30 million, which is a portion of the previously negotiated 135 million dollar margin commitment from one of our major customers as a reminder, the remaining $105 million.
Commitment can be satisfied through the contracting of additional rig or through payments designated period.
The next commitment of $30 million conclude at the end of 2020 of which approximately $5 million is expected to be satisfied by the margin earn through a previously executed contract.
Also contributing to the fourth quarter revenue increase.
Rationed or the ocean Blackhawk compared to the rig spending about a month of the third quarter completing a special survey and varied upgrade focused around efficiency and automation.
This increase was mostly offset by the ocean Blackhornet moving into the shipyard at the same time, the Black Hawk was leaving the began its survey and similar upgrade compared to working most of the third quarter also partially offsetting the revenue increase was the October completion of the Ocean Greatwhite.
Contract in the North Sea after working most of the third quarter.
Fourth quarter 2019 revenue was about $15 million higher than previous guide.
Part of the variance is attributed to the Ocean Blackrhino planned fourth quarter Special survey shifting into the first quarter of 2020 to accommodate ongoing operation.
Also contributing to the variance was a fourth quarter customer reimbursement of previously withheld taxes related to a prior contract.
Lastly, as Mark discussed earlier, our black ships continued to exceed expectations with zero unpaid unplanned downtime during the fourth quarter, which is positively reflected on our topline hats off to our operations team for this tremendous accomplishment.
Contract drilling expense of $200 million during the fourth quarter 2019 was down slightly compared to the third quarter and within the middle of the guidance range given during the last call.
Alright view minor offsetting deviations from expectation, but nothing worth noting.
Depreciation of $92 million was slightly higher than guidance due to normal year end adjustment.
Fourth quarter, 2019, Gionee expand a $16 million and net interest expense of $30 million both came in at previous guidance.
The fourth quarter 2019 income tax benefit of $6 million include the recording of a 12 million dollar deferred tax liability related to Swiss tax reform legislation enacted in 2019.
Excluding this onetime noncash charge, our normalized effective tax rate was 22% for the quarter.
The variance from guidance was primarily driven by 13 million dollar release of certain valuation allowances.
Full year 2019 capital expenditures of $326 million came in approximately $45 million less than the mid range of the revised guidance of 360 $380 million given on our previous calls as caution than the timing of the spend for several.
Of our large dollar project was fluid I will provide some color on the shift into 2020, when I give next year's Capex guidance.
Before we get into first quarter guidance, let me provide a few comments relating to full year 2020.
During 2020, we plan to undergo two special surveys.
The first one is already complete as the Ocean Blackrhino spent about two weeks in January performing it survey.
The Ocean Blacklion is scheduled to go into a shipyard in the latter half of the first quarter to conduct it survey and the automation upgrade Mark discussed earlier.
Upon completion of the Black line shipyard stay which is estimated to be at the end of the second quarter rig will commence its two year contract in the Gulf of Mexico also during 2020, the Ocean Blackrhino will go into a shipyard to perform similar upgrade to the other black ships and prepare for it to.
21 contract commencement in West Africa as of now these are the only surveys and shipyard stays expected during 2020, but please be reminded that surveys and shipyard projects can either be pushed out or brought forward for a variety of reasons I will update the timing in future quarters as necessary.
For 2020, we anticipate cash capital expenditures to be between 190 and $210 million. This does not include any additional capex that may be required for the ocean courage and ocean valor on top of normal maintenance Capex.
Included in the guidance is approximately $45 million of Capex previously expected to be spent in 2019 that has slipped into the first half of 2020, including approximately $15 million to complete the upgrade and reactivation of the Ocean Onyx.
Also included in the 2020 guide in our the upgrades discussed earlier to the Ocean Blackrhino and Ocean Blacklion and finally, approximately $30 million of the committed 2020 capital project will be reimbursed by customers over the course of their related contract.
This is an addition to the approximately $20 million of 2019 Capex spend that will also be reimbursed.
So with that let me provide some thoughts on the first quarter 2020, but before I do I will remind you refer to our fleet status report, which was published earlier today for known and projected out of service time for the first quarter.
We expect first quarter 2020 contract drilling revenues to come in between 205 and $215 million.
Most of the decrease from the fourth quarter is attributed to the Nonrepeating 30 million dollar margin commitment discussed earlier.
Also contributing to the decrease is fewer days on contract for the Ocean Blacklion as it begins its shipyard stay towards the end of the first quarter. The Ocean Blackrhino, which spent two weeks in January performing it special survey the Ocean monarch, which completed contract at the end of January and will spin.
And the remainder of the first quarter Mobing and preparing for its upcoming campaign in mine Maher and the Ocean Greatwhite, which will be stacked the entire first quarter compared to working part of the fourth quarter 2019.
Partially offsetting the expected revenue decreased the commencement of the Ocean Blackhornet two year campaign during the first quarter 2020 compared to spanning the entire fourth quarter in the shipyard also the ocean Valiant, we'll get the benefit of working the entire first quarter under its current contract.
Which is at a higher day rate than the previous contract. It worked under during the fourth quarter 2019.
We expect contract drilling expenses for the first quarter 2020 to come in below fourth quarter costs at between 185 and $195 million. The biggest driver for the decrease is a deferral of mobe and contract preparation costs for the ocean monarch prior to its upcoming camp.
Pain.
We expect depreciation expense to increase to approximately $94 million for the first quarter of 2020, primarily due to the recent upgrades for the ocean on it.
First quarter 2020, Gionee and net interest expense are expected to remain relatively flat at $17 million and $30 million respectively.
And finally, we anticipate our effective tax rate to be in the low single digit for the first quarter of 2020 of course the rate may the rate may fluctuate up or down based on a variety of factors, including but not limited to changes to the geographic mix of earning as well as tax assessments settlement.
Our movements in exchange rate.
Additionally, during the first half of 2020, we are expecting a cash refund of approximately $38 million related to prior year amended tax returns.
Before I hand, it back to Mark let me provide some thoughts on liquidity.
We finished 2019 with $156 million of cash and nothing drawn on our revolver. However, we soon expect to start drawing on our role valvular on our revolver likely in the second quarter and we expect to be cash flow negative during 2020 and end the year, where they drawn revolver balance.
But now that the heavy capex spend is in the rear view mirror, our focus will remain on delivering top notch performance minimizing costs and preserving liquidity and with that I will pass it back to Mark. Thank you Scott.
Our differentiated strategy is keeping a marketed rigs contracted and what is still a challenging environment.
And with a proactive fleet investment soon to be complete we will focus on improving our backlog and we've continued to drive further innovation and improvements to deliver best in class.
Operating performance for our clients.
So with that let's open it up for questions.
Thank you and as a reminder to ask a question do we need to press star one telephone to withdraw your question. Please press the pound.
Please standby, we compile the culinary roster.
All right in our first question comes from the line of Sean Meakim with Jpmorgan. Your line is now open.
<unk>.
Thank you good morning.
Morning, Sean.
So mark.
Could you, maybe just talk a little little bit about the tendering in contracting momentum and the market its been pretty anemic. The last few quarters, but Meanwhile, there is a lot of activity and some projects moving forward could you maybe just help us calibrate how you expect to see so that momentum offshore.
Translate into a little more backlog growth as we go through 2020.
Sure I think.
One of the things we have seen.
That is helping us kind of.
Path to the future is we've seen the number of licensing awards.
For offshore has has increased for the third consecutive yet.
To include Africa.
Which I think saw the most significant decline this downturn.
And ER and as you know way away with.
Participating in the growth of Africa, with Messina recovery and offshore Brazil.
Bit off a very low trough and and the Australia Australasia region.
Perhaps didnt decrease on a percentage ton as much as other areas that continues to show opportunity moving forward and as you step back Oh, you look at the number of subsea trees that have been awarded last three years and close with but probably three times higher.
19 than we were off the off the trust 2016, so definitely there is more activity coming to the market I think one of the things that is perhaps a frustrating for US is the time and these contracts isn't as large as it needs to be too.
Dredge utilization growing higher and the long run but.
There's definitely more activity out there.
I appreciate that they don't make sense just digging in on one.
Specifically, maybe could you just talk a little bit about.
You are tendering strategy for the great White on UK still seems pretty sluggish.
Our other markets like Australia that you consider just how you think about how wide net you'll cast.
In terms of next steps for the great White.
Sean This is Ron good morning. Good question the logical place to go the great why did well for us in 19 would her first to clients she drilled well as her inaugural programs. We were quite pleased and the interest in her from operators, both was and remains strong for UK, Canada and impossibly.
Failure.
That said the 2020 UK floater market really did not fulfill the full promise expected a year ago and several the harsh environment programs that are best suited for her got pushed from the 2020 calendar into 2021. So has was referenced during the prepared remarks, it's unlikely that the great White, we'll have some.
Meaningful work in the a in the immediate future for 2020.
And from our standpoint, I think as part of a broader theme in the UK market, where we had expectations intentions express where operators in early 19.
Did not fully matured during the course of the year now that said I think the UK market overall for US is a healthy place for us to be so we've got three rigs a long term contracts several years of backlog and as Mark mentioned more more work. The Patriot recently I think that although that market is I think recovering in the present tense. It hasn't recovered comes.
Fleet, Lee Oreo or evenly for that matter.
And so from our standpoint, we've got to manage both our top and bottom line. So our plans for this year include looking to position or for good work in 21 as well as manager our cost here in 20, but Sean I think we're still in the UK, Canada and I'd keep probably Australia on the long list as well.
Got it that's very helpful. Thank you both.
Thank you and our next question comes from the line of Cole Sullivan with Wells Fargo. Your line is now open.
Hi, good morning.
Hi.
The the valor encourage.
You mentioned not not expecting to do the morning upgrades. This year, what does the prospects for these kind of as they as they ramp up contracts this year.
Hello, Good morning, this or what Ron Ron will again here. So good question glad you went there so let's start with encouraged tissue rolls off first I think that makes more sense you know the most important steps to get the next work is to do a good job. The work we have today. So on that front, we're succeeding so she's doing well operationally we've got a please client we've got some impressive.
Subsea NPT on that front here, we've got some stack in place a lot of good things going our way.
Now building out on that success, we do intend to have her work further in Brazil as was mentioned in the remarks, we don't plan, we don't plan to convert or into a into a more configuration. So we think of her in a DP lane in Brazil.
There is work underway I think with good monocytes a more work ahead for the courage in Brazil.
In terms of the contracting kind of arc and process. We are where we wanted to be in February here of 2020, so that that's in progress, but I should I should I should note that work is competitive so it's not a gift anyone we have to earn that work and we'll do so would the a sharp by on our Capex. So.
Although there is no headline to make today on that front I think where do we are where we want to be and I think we can speech at more definitively on the next call.
Alright fair enough.
On the Blacklion and Rhino. This year, you mentioned, the capex to expect and for the for their upgrades any additional opex, we should factor in for the survey side.
Yes, so while the rig is in the yard.
Of course will do to serve and we've got and we've already done it on on one of the rigs and that would actually we were able to do offshore that was just down a couple of weeks.
The expense for that will be nominal and that was within the guidance that I gave thinking forward lie and wallets in the yard I mean kind of what we've said in the past the special survey runs in the range of $5 million and just remember that we do expense surveys as opposed to capitalize them.
So that will be included when I when I give.
Guidance for the next quarter, but again I wouldn't I wouldn't expect it to be anything unusual than you normally see on our service.
All right I'll turn it back thanks.
Thank you and our next question comes from the line of James West with Evercore ISI. Your line is now.
Hey, good morning, guys.
James High.
Mark.
Or maybe Ron to here, what do you guys think breaks the.
The log jam here for day rate.
Seen obviously rigs go you have some going in West Africa, 300 seem to fit the upper or other rigs yet we gotta contract, a lesser <unk> or <unk> 150 range in Mexico, what's the the.
Adam This most holding up the the day rate momentum this year.
Visit behaviour is it still to see utilization issue. What do you guys suspect is the thing we need to do the most hit the baby term the most at the that they read a book split.
Yeah. James Good question I think I think we're still struggling somewhat with significant oversupply in other words this abolish supply demand balance for especially the Drillships for example, as is working against us.
You know since the downturn started.
As being around 120 130 floaters retired.
But if we look back into 2019, we only had around.
Six.
Floaters retired so that's been a significant slowdown in attrition I'm, we definitely need more deepwater floaters to come out of the market.
That has to include some of the some of the Drillships.
We for example, we estimate.
Around 83 assets.
Currently stacked.
Which 32 being cold stacked for more than two years, and it's really difficult this environment to see how those assets.
Could could come back into the market so.
Yeah, I think you can take those 32 assets out of the supply demand stack, but but we need to see more attrition a four day rights to become more competitive now within that Dara niche.
There are niche markets and that's one of the reasons why has the company was specifically focused on on allocating certain capital to our Mod assets.
And your.
Some of more advanced more assets were bidding price is that at a higher than drillships.
Being better in this market today, so it depends it depends which asset category you specifically looking at we're very pleased as I think you. Many of you sell side guys realized.
With West Africa Awards, we think that.
We were able to through Differentiations show a performance level that has attracted a premium in the market. So.
If you look at all the awards in 2019 for stand at six some generation.
Drillship.
I think you'll realize that.
Some of our clients more the.
The most sophisticated clients understand that there is a value.
In terms of contracting with.
Diamonds assets based on the performance record that we've shown here and the Gulf of Mexico, and that's something of course I've spoken to in a and our protocols.
Sure Bill for W. Baird off and that's a good points.
What mark the.
What would that hey, I guess the terms of rates here to pull some of your stacked assets.
Back into the market.
This is Ron good morning, you know from our standpoint, it really don't yet see a we don't you see alain or that sort of that's likely to happen just given Scott mentioned the emphasis on sort of capex discipline and you look at where rates are and even where if you. If you move the movie forward by few frames where rates might might go it's still hard to paint.
Helane, where you see those stacked assets coming back so I think for now we've got to think about them in their current state.
Got to that.
To to that extent, James we need rights to move north.
For the assets that not only ourselves but off his also have in the market we need those rights to significantly move moved further north.
As Ron said is right now we do not see aligned to bring back those two stacked rigs.
I spoke to previously in the.
And are cool.
Okay got it thanks.
Thank you and our next question comes online in Macpherson with Simmons. Your line is now.
Thanks, Good morning, guys congratulations on.
Crushing it only operations on the Drillships the fourth quarter.
Thank you.
Yes, yes mark.
So the outlook for some of these these rigs that have some exposure near term stood still sounds.
Somewhat hedged, but on the great white and in particular I've been speaking about walk in modeling that rig running at a fully.
Ready opex level and if the outlook is.
That it might remain stacked.
Longer it should we contemplate any.
Reduction and the cost level of that rig that's either embedded already in your Q1 guidance or if it's not maybe if that will if that will taper down at the rig remains idle for a big portion of this year.
Good morning. This around good question Ian to make makes a lot of sense you know from our standpoint.
Given kind of art wanted sites. The work ahead, I don't I don't envision and keeping her at sort of full soared battle stations for the balance of 2020, I think we should expect to take those costs down we'll have we'll have to kind of worked through the exact these that level, but I wouldn't keep that in your model.
The full rates from full cost standpoint, Hey, and this is Scott the only thing I would add to that is if we we will do everything we can we will take crews down but while the rig as operating we're able to put fuel on the operator, while we have that if we keep the rig fully warm in the thrusters going that fuel cost im going to be on us. So.
That will offset some of the savings it'll still be a net net lower but but just keep the fuel cost in mine.
Okay, great. Thanks, guys. My other questions been asked I'll pass it over thank you.
Thank you.
Our next question comes from in line of Mike Sabella with Bank of America. Your line is now open.
Hey, good morning, guys.
Hi.
So when we think about the gross margin commitment that's remaining in 2020, how should we be thinking about that $25 million with respect to how about paid out this year or should we be thinking that you. All are are trying to secure some some work for the customer instead.
Yes, So hey, Mike. This is Scott. So you you know the rigs that we have available in 2020 and.
Besides the two in Brazil, which Ron talked about.
I hope to keep those in Brazil, It's really just a great why theres really just the path 2020 for one rig.
Right now as I said in my comments.
We do have a apex program towards the end of the year with BP and that's going to be roughly the $5 million, but absent that an absent any other work that we were able to put on for BP. In 2020, we would expect the $25 million to be treated like 30 in 19, and we'd receive that the cash paid.
In the fourth quarter.
Perfect. Thanks, and then maybe trying to just walk us through M&A. You know you guys are still relatively positive more demi's, there's lots of drill ships out there.
Realistically you think that are real well from sale.
Can you walk us through updated thinking on M&A and industry and how we should think about diamonds position there.
Yeah I.
I think I'll focus today as a company is more on on our liquidity.
And conservation of.
Cash and taking us as we mentioned North I mentioned in my in my prepared remarks.
We will be a cash flow negative this year.
On the focus that we have right now.
Is how do we get back to a cash flow positive scenario and we've got very.
Various.
Strategies that were looking out in the pipeline, but as of this moment in time M&A and it's not one of those opportunities that we're currently looking at right now.
Thank you and our next question comes from the line of Taylor Zurcher with Tudor Pickering Holt. Your line is now.
Hi, Thanks, and good morning.
Scott one for you as we think about cash flow in 2020 or working capital of the use of cash for almost all 2019 can you help us think about how we should model changes in working capital for 2020.
Yeah, So I'm not I'm not ready to give specific where we will end up toward towards 20.
As we said we are $150 million a cash right now and we do plan on ending the year when when they drawn revolver balance. So obviously means we're going through that cash in and there will be in amount on top of that but if that is just not quite ready to to nail that down at this point for what the full year will look like.
Okay got it and then for the Blackrhino realize that one.
Going to go into the shipyard for some upgrades that into the has program and then it's going to have to move over to Senegal for that year of sort of contract gap that you have a between the hasn't been Woodside program should we should we assume that rigs and effectively.
You are a percent utilizers any chance that there's some intermediary work you can pick up a along the way.
Yeah. This is Ron good question makes a lot of sense to us. So I would say that so we have lot of side just some potential programs for for the Rhino that's possibility nothing we're making news on today, but I would characterize the channel it as active and we'll just see how that works out going forward.
Okay got it thanks guys.
Thank you and our next question comes from the line of Kurt.
With RBC your line is now.
Hey, good morning.
Hi.
So.
Mark I'd say that you did piqued my interest in the answer to one of the previous questions, where you said you have a a number of strategies that you're looking at two oh find a pathway to becoming free cash flow positive or was it was hoping to kind of Stoke that a little bit and sicad little more color.
Yeah, I think there's always a the drive here is to is to make sure that in this kind of environment.
We are.
We are focused on on capital discipline moving forward on how we can how we can take the company back to free cash flow.
It all starts with the macro environment.
And I think as we entered 2020 there're a number of things from a a market dynamic perspective, which was quite frankly blowing a called wind on off face, but but some of the stuff that we've been looking at relates to.
How the global oil market will be challenged.
Due to the week fundamental balance that presents itself today, but but I think the emphasis here is on the short term and.
And and we believe that possibly 2020.
Presents an inflection point in the global market balance.
Primarily driven by non OPEC supply growth. If you look at what's happening in Brazil, if you'd look at a Norway I think that.
Those increases well well Peter out this year I think if we look at.
Other non opex growth such as shale I think thats definitely.
Thats definitely coming back down.
I mean, it's absolutely clear that show production growth has started to slow for various reasons that are out there and I.
And even the Gulf of Mexico, I think if you look at that.
That will turn into a decline post 2020 and of course Guiana, We don't really see phase two Lisa coming until 2023 so.
We do see a potential rebalancing of all supply post post 2020, which is in sharp contrast, the last three years. So I I think it's how we position ourselves as a company moving forward into a potential new you arena.
Client demand growth.
And how we capitalize on that on we're looking at various different options that we've got so.
The main priority that we have right now is to control what we can control and I think as as we as we've already shown.
With 100% revenue uptime on all Drillships and the last quarter. The technology innovation that we brought to this market around since stack stem view et cetera, et cetera pressure control by the hour. We've seen the results of that and of course were rolling some of that technology down through.
The fleet, two or more to assets and I was a result of that.
What we're giving a level of performance that our clients believe from a value basis is worthy of a premium. So so as we drive all that together path for a.
A a recovery in the market.
I'm not going to get into specifics as to as to what those strategies may be other than that we've got a number of.
A number of opportunities that we're looking at in order to address liquidity and.
And position ourselves for for a somewhat bright future and 2021 and beyond.
And pre appreciate that now maybe follow up for Scott Hi, Tom If you commented about.
You know have an undrawn revolver for the year and having a limited.
Input for us on 2020 on working capital.
So maybe just taking it to a very high level you know, what's what's a minimum cash balance that does diamond is generally comfortable with carrying on a quarter on quarter basis. Yeah. Obviously once we dip into the revolver, we're going to try to keep the cash balance as low as possible because with the revolver, obviously, we can ebb and flow and draw as we need to I would say general rule.
The thumb its pencil in probably $50 million, but again that could you just kind of jump up and down depending on the needs for that day that week, but that's probably a good or something to pencil in <unk>.
And just just one more thing for clarification on the Capex number you threw out the 190 to 210 and then you indicated that you had another 30 million of reimbursement. So that's a that's going be coming over the contract term. So that at 30 million will get extended out I'm, assuming through what 2020 2021.
One kind of 2022 timeframe is is that a good way to look at that 30 million reimbursable.
So you know and that 30 million is made up of a few different contract.
The general rule, we try and we push to get a lump sum reimbursements as opposed to over a I would characterize most of that 30 will be a lump sum now it may it may hit the ended 20. It may hit the beginning of 21.
Our expectations will see most of that is a lump sum and also the 20 million that I referred to for 2019, we have not receive that yet, but our expectation is that will also most of that be in a lump sum during 2020.
That's great. Thanks, Scott Thanks, Mark.
Thank you.
Thank you and our next question comes from the line of JB Lowe with Citi. Your line is now.
Hey, guys. Good morning, just a.
Quick one for me.
You've done a really good job of keeping your rigs contracted the next couple of years and Capex was coming down 2020, but you're still gonna be.
Free cash flow negative.
This year I'm, just kind of wondering and maybe this is a little bit too Simplistically, we'll look at it but.
What do you think that day rates.
On a percentage basis would need to increase for you guys to get to that free cash flow breakeven levels, given given the status of current fleet.
Yeah, Hey, JV this is Scott a higher.
[laughter] I mean.
Yeah. That's you know a lot of but you're right. It depends on utilization and we can we can there is a path to being cash flow positive.
When they when they lower day rates you might think if the rates continue to work and I think that's a key a big key here that everybody's got to be mindful up is that the gaps are meaningful and as you said I think we've done a really good job so not not necessarily going to quantify for you.
But I will say that you know as you look forward into the next few years there is a path.
If they raise get to a.
Reasonable level and it doesn't have to be to the peaks that we saw a handful years ago. It it can be something south of there, where we can still thrive and build cash yeah.
We know that number exactly cause.
Hoping for.
[laughter] I mean, that's just good governance, we know exactly what that number isn't we've got various scenarios.
Johnson an.
Analysis around that but it's Scott says, it's it's a would there is a path to positive free cash flow again, but it does need day rates to increase across the industry and and the thing that we can do best hair Diamond offshore and as you mentioned a is to.
Keep the assets that we've got.
Utilized and you know the black ships for example, the Drillships I've got visibility through to 2023 and.
And as Ron kind of alluded to earlier in the conversation Hey, we're in conversations about filling some gaps and and the.
And the schedule before they embark on on term contracts. So.
Yeah way, we're quite pleased with the opportunities that we've got frock on rigs.
Obviously, the focus is on the Ocean Greatwhite as we mentioned, it's going to be hard to get at work in this year. So we do have visibility on to various.
Sorry, yes opportunities into 2021 so.
Yeah, its keep the rate the fleet working keep it working at a premium based on.
A differentiated service and a and then keep an eye on on on continued rising rig rates because one thing that is not the debate is the rights for all asset classes have come off I'll say Boston now every once in a while you'll see outliers to that but were very pleased with.
Wait with away right, so moving certainly for the more assets for the more sami's.
Alright, great. Thanks, guys. Good luck up there.
Thank you.
Thanks.
Thank you and our next question question comes on line of Connor Lynagh with Morgan Stanley. Your line is now.
Yes. Thanks, I think we've hit on this in different ways, but I guess, just stepping back at a high level.
If we think about the uses of cash in 2020.
Occurs to me that some of these are sort of nonrecurring there might be a path to better cash flows 2021.
Could you maybe help us think through what the large lumpy cash expenditures are currently in your budget, that's driving that the negative free cash flow expectation for 2020.
Yeah, Hey, Conor it's got so yeah, we have as I mentioned, we do have the second to black ships. The Ryan in line going into the yard. So of course, that's a double cash whammy the cost for the Capex and then of course the zero on the revenue line. So you know couple that we said that the great white is probably unlikely to working.
2020.
There was another big zero going across and then we do have that gap in 2020 I'm on the Rhino. We go into the shipyard and then we do at least now have the stack time before we start the contracting in 21% involves I'd say those are really kind of the three big driver when you look.
At 2020 that we don't expect to see a repeat the 21, let me fast forward a second into 21 right now we have zero surveys plant and we have zero shipyard stays plan right now so.
Even though 2020 capex came down quite a bit my expectation right. Now you know absent any other news is that 2020 cap 2021, Capex will go down even from the 2020 levels.
So just building on that.
We don't see a scenario, where we've got anymore reactivation costs coming our way.
We upgraded the apex, we upgraded the on it and we've upgraded the endeavor full victory class rigs now that as a top of the line of of desirability.
We we showed last quarter that weve added on to the endeavor.
We've got a good pull would look at where the apex is going.
Were in conversation with the with various clients about keeping the onyx contracted beyond this initial term contract.
With various operators, so and then on the black ships themselves look.
As does a significant number of drillships six and some jokes generation drillships that are coming off that and the next 12 months. That's plenty that are in the market that are available, but what we have successfully done is invested in these assets to make them amongst if not the best assets and the.
Industry and that's not just by having the biggest.
Putting capacity Youre, all et cetera, et cetera, it's actually how it's the processes that you said you have behind the steel to keep the rigs working like we have done you know that's labor on the fact that we have achieved 100% revenue uptime on all drillships.
In Q4 that that's a huge achievement.
But that does not go unnoticed amongst our clients.
According to the Rushmore database, we have drilled the best three wells sorry, three of the best Falwell sort of ever been drilled in the Gulf of Mexico now they might not have.
The highest hook load et cetera, et cetera, they might not have the highest.
Displacement they might not be the biggest but that certainly the best in the market and if we can take this learn these learnings from our drillships and put them on to our Mod semis and other assets in the fleet than that ensures that we keep working what we have available in the market I'm from that then we can build that platform.
On into a improved cash flows and moving forward.
Got it and just to circle back what you would you feel comfortable putting.
A dollar number two how much of a detriment somebody's.
Recurring or or transitory items in 2020 are.
Cash.
I I would not [laughter].
[laughter] nice nice try you try to getting at the end the call when I might be a little loopy I I will say, though that.
For the two ships that are going in I mean, it should play out those two should somewhat mirror that the hawk in the order that we saw in 19.
Alright, perfect. Thanks for the color guys got it.
Thank you went on last question comes from a lot of David Smith with Heikkinen Energy Advisors. Your line is now open.
Thank you for fitting me in not not to beat a dead horse, but look in that 2020 Capex guidance. If we back out the 45 million that slipped from 19. It looks like 145 to 165 wondering if the low end of that is a good baseline for thinking about 21 capex.
Well and then I'd also remind you you're you're right with the math you did and then we have the right on the line shipyard projects will which would not be repeating as well so.
If you're if you're trying to look for more of a level set maintenance capex for 21, that's probably another piece you need to take out.
Which starts getting you know what I would say did a much lower triple digit number.
Appreciate it.
Ken can I, just given that the contract coverage that you already have and kind of the visibility you have on lack of.
Okay.
Shipyard time in 21.
Do you expect to be free cash flow positive in 21.
I mean, there there's it's still going to be very dependent on what happens with the market I mean, if market conditions don't improve I mean, it's very likely we will be negative cash flow beyond 20.
They do improve there is a path for us the cash flow positive.
You know market will dictate what the next few years will look like but let me remind you that while we do have to deal with the market. We can't control that kind of looking forward of what else. We have to worry about you know we have done a good job taking care of our balance sheet. We have no maturities until the end to 23, so the while we're dealing with the market dynamics, we don't have to worry about.
That noise, we have no new build deliveries and well just continue control, we can control, which is operation and reducing costs and let's not forget that certainly amongst amada. Since we are pushing day rates higher the.
The Patriot.
As just come off a contract well as we announced this quarter has got another 12 months of work had a day right that is higher than the previous contract and this is a third generation asset working in the UK sector of the North Sea.
Which is not quite seen the same recovery that we saw in prior years. So we are cautiously.
Optimistic the day rates will continue to rise.
And you know we've been.
Very clear on the call went exactly stating how much higher they have to go.
In order to get back to free.
As opposed to free cash flow, but ER.
Our pathways that we see that would enable that so I think that's as far as we're gonna say joined the contents of this call.
So with that.
I'd like to thank everyone for participating.
Today, and Oh, we look forward to see new again.
Next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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