Q2 2020 Transocean Ltd Earnings Call
Ladies and gentlemen, thank you for your patience and holding well be beginning today's conference and approximately two minutes again. Thank you for holding will be beginning today's conference in approximately two minutes.
[music].
Ladies and gentlemen, good day and welcome to the second quarter 2020 trends Ocean Earnings Conference call Today's conference is being recorded.
This time I would like to turn the conference over to Mr., Brad Alexander Vice President Investor Relations. Please go ahead Sir.
Thank you David.
Good morning, and welcome to translation second quarter 2020 earnings Conference call.
About plus released troubling financial results, along with supporting statements and schedules included reconciliations and disclosures regarding non-GAAP financial measures posted on our website <unk> deepwater dot com.
Joining me on this morning's call or Germany take them, President and Chief Executive Officer.
Mark My Executive Vice President and Chief Financial Officer, and body Mckenzie Senior Vice president of the marketing and contracts.
During the course of this call transition management may make certain forward looking statements regarding various matters related to our business in company that are not historical facts.
Such statements are based upon the current expectations in certain assumptions and are therefore subject to certain risks and uncertainties.
Many factors could cause actual results could differ materially.
Please refer to our FCC filings for more information regarding our forward looking statements, including the risks and uncertainties. It could impact our future results also please note that the company undertakes no duty to update or revise forward looking statements.
Oh in Germany and marks the third comments, we will conduct a question answer session. During this time to get more participants an opportunity to speak please limit yourself to one additional question and one follow up. Thank you very much I'll now turn the call over to Germany.
Thank you.
As we definitely getting it depends on mix continuing to work safely.
Hard to prevent the spread of code.
[laughter] did any challenges [laughter] audio quality from speaker to speaker during this call.
As reported in yesterday's earnings release for the second quarter transition delivered adjusted EBITDA margins of 42.5% generating $418 million adjusted EBITDA on $983 million in adjusted revenue.
Despite the unprecedented challenges associated with Koby 19 are experiencing committed teams delivered outstanding operating performance, writing a sequential improvement are ready to efficiency.
1%, resulting in better than forecasted revenue and EBITDA.
I want to take a moment to express my deepest gratitude to all of the men and women to transition we're working through these difficult Collins, our crews have shown tremendous strength and resilience Ralph it's been done.
I'd like to acknowledge the personal sacrifices that they continue to make each and everyday people.
Safely.
[laughter].
Additionally, I would like.
I think our shore base teammates, who have adapted well to working remotely and despite the continued and distractions associated with work.
[laughter] beat and supporting our operations and our customers.
[laughter] third quarter, it's balanced.
You need to take every precaution.
[laughter] healthy.
[noise] tore second quarter activity [laughter].
We also initiated a number of new programs the country too.
With that.
Into the transition parents kicked off.
Exactly.
We expect third quarter.
In Trinidad 50, Threek, that's true when your contract Sheldon.
It was very successful campaign in Equatorial Guinea with Exxon Mobil, Yeah [laughter]. This program we're.
83, working in country beyond its current huh.
Great and much drilling campaign.
[laughter] well.
Okay.
Actually fleet.
Egypt last quarter.
The success of the drilling program any permanent oil prices.
Exercise an option for additional wells.
Drilling into July.
Unfortunately, despite the success of the campaign, we see no near term prospects for the India and therefore in the process of cold stacking the rig.
Moving to Asia. The PD, one completed her first full quarter campaign with Chevron in Australia.
Thanks [noise].
Into the fourth quarter.
Yeah, Malaysia, then Dodd with commenced activity patronize, that's scheduled to continue into the first quarter of niche.
Turning to the contracting front with the continued uncertainty regarding global energy demand and correspondingly challenged oil prices contracting activity had been predictably disappointing.
However, we're very encouraged with executed a drilling contractor for the industry second ultra deepwater 20000, P.S. capable drillship, the deepwater Atlas with Beacon offshore energy, but the highly anticipated Shenandoah project in the Gulf of Mexico.
The Atlas will be the industry's most capable ultra deepwater drillship when delivered and will include among other upgrade a 3 million pound hoisting system.
The shouldn't door project is subject to final investment decision by Beacon, which we expect by March of next year.
Prior to that time, we do not expect to incur any additional material expenditures for equipment purchases associated with the program.
Conditioned upon sanction the program. It services would include the drilling and completion of four wells, which would involve commencing drilling operations in the first quarter of 2020 to keep the rigs under contract into the third quarter 2023, resulting in a total contract value of approximately $250 million.
Beyond the shouldn't do a project we are actively engaged in conversations with customers for additional opportunities in the lower tertiary the Gulf of Mexico that will require a ship with the Atlas is enhanced capabilities.
Importantly, these projects had expected start date that should closely follow shouldn't delta.
And since transaction will be the only drilling contractor with the assets and experience to successfully execute in this most challenging ultra deepwater environments, we will be very well positioned to secure a future contracts for the Atlas.
[noise] looking now at upcoming market opportunities the contracting environment has improved marginally from when we last spoke three months ago and oil prices were largely at or even below $20 per barrel.
Well what prices are still not where we want or need them too big to drive demand. We saw emerging as we exited 2019. The recent recovery in oil prices to approximately $40 per barrel has encouraged our customers to begin revisiting the projects that we initially expected to start and 2020, but are now likely pushed into 2021.
And the U.S. Gulf of Mexico, a 10, well project starting at 2021, we just awarded by an independent producer.
In Brazil, Petrobras has recently requested bids for two rigs both with terms of approximately three years for activity kicking off early next year in the Campos incentives basins.
Additionally, we could see some further movement from Iowa season country falling Exxonmobils recent contracting of a drill ship for initial drilling in the Santos basin.
Furthermore, we believe Ecuador is considering awarding a four year contract in Brazil in the coming months, which could begin operations at the end of 2021.
Speaking of back when or you will know that they recently awarded a multiyear fixture for a high specification harsh environment semi in Norway.
The contract day rate with the stepped down from recently awarded fixtures given the drop in oil prices and continued market uncertainty. We were encouraged to see based day rates remaining near $300000 a day with fairly significant upside opportunity tied to performance bonuses.
Additionally, within a we didn't government to recent enactment of favorable tax incentive for oil and gas operators related to offshore investments. We anticipate this market will stabilize and responded favorably to the investment incentive.
In Africa, we said expect to see the first multiyear ultra deepwater Drillship award in Mozambique.
We also think it is very likely we will see an 18 month award in Angola This year.
Activity for both of these awards would begin in 2021.
In Asia Pacific, We anticipated five will contract will be awarded this year for work offshore Australia with activity commencing in 2021.
Additionally, we have been pleasantly surprised to see the emergence of a few opportunities for shorter duration work in other countries throughout the region.
So what we are certainly disappointed that the ultra deepwater recovery has been a once again delayed we take comfort in our almost 9 billion dollar backlog and we are becoming encouraged by various opportunities we see emerging in 2021.
Looking at our rigs we continue to see the benefits of maintaining a young high specification fleet as we continue to operate significantly more floaters than any other contractor.
Consistent with a well defined asset strategy, we have recently taken action to responsibly retired the semi submersibles development driller too and the said co 712.
Beyond the assets ages, we continue to employ an objective criteria focused on cash flows when evaluating our fleet composition.
When the costs associated with maintaining reactivating, Andrew operating an asset outweigh our view of its cash flow potential we take prudent actions to remove the asset from our fleet.
Despite our increased optimism, we remain pragmatic and recognize the challenges the industry and more specifically transaction will continue to face in the near to medium term.
As we ended the year, we're optimistic that the ultra deepwater offshore recovery was beginning to take shape.
However, as a result at the pandemic the current demand for hydrocarbon has fallen significantly that's impacting offshore contracting activity.
As a result after thoughtful consideration, we recently took difficult decision to once again materially reduce our short they support costs, which mark will address in his comments.
More closely reflect what we anticipate being our contracted rig fleet over the coming month.
I'd like to stress the personnel reductions are without question. The most difficult decisions, we make as an organization as our team is your beautifully the most qualified and capable group of people within the industry.
We embarked on this global reduction in force purely as a result of the unprecedented an unforeseen circumstances, we hope that we will be in a position to welcome. Many of these teammates back to transition as the offshore market recovers and we had solid visibility to sustainable growth.
I'd now like to take a to provide a few comments regarding the state of the market from our perspective at the leading offshore drilling contractor.
As you know a number of other contractors have either form we started the restructuring process or taken steps that indicate that they are likely to do so in the near term.
Given our strong backlog strong operating performance and timely balance sheet transactions over the past several years transition is not facing the distractions and challenges associated with restructuring.
If he does every quarter Mark will provide an update on our liquidity runway and expectations in a few minutes.
As we watch the transformation of our industry unfold, we think that there's some very favorable data points in relation to transition, which I would like to detail.
When the downturn began almost six years ago and many of our competitors went through their first restructurings our customers as you might expect became more focused on the financial stability of drilling contractors and there are other service providers.
During this time transition was able to further its position as the undisputed leader in ultra deepwater in harsh environment drilling.
At the second phase of contract restructurings that now beginning to occur we anticipate our position will continue to serve us well on the contracting front with the more active I was season indices, preferring strong counterparties to safely reliably and efficiently deliver their projects.
Different than during the first group of restructuring activity has fallen to unprecedented levels, which will result in extensively stackings and recycling throughout the industry as we believe the cost to keep uncontracted rigs crude and an operating condition is prohibited.
As a result marketable supply rigs is likely to fall they pay similar to the contracted rig count.
Therefore, when oil prices stabilize at more favorable levels and inflection in would contracting should have an almost immediate and positive impact on day rates due to the shortage of marketable rigs and the significant expense associated with reactivating stacked assets.
At transaction, we have strategically symbol the largest and most competitive floating fleet in the industry with the industry's most experienced cruise.
We maintained the most contracted rig fleet with the strongest and most lucrative backlog, providing us with the visibility into future cash flows that we need to continue to invest in the training of our crews and the maintenance of our assets.
As such we're best positioned to survive this latest challenge and benefit from the eventual market recovery.
In conclusion, we have accepted they full scale, we cover in the deepwater offshore market will not begin before 2021.
The recent increase in oil prices has brought projects back into the fold. It is giving us confidence that our customers will be ready to increase their offshore activity as oil prices continue to stabilize and become more supportive.
In the interim we're committed to our customers.
The working with them to find the right contractual solution to enable their drilling programs, while operating safely at the highest performance levels with the industry's most capable assets.
We're proud to have positioned ourselves as the clean clear leader.
Okay.
We continue to strategically fine.
At that position.
As such we expect that are marketed fleet will remain the industry's moved utilized as we successfully navigate this downturn.
Mark.
Thank you Jeremy good day to wall.
Today's call the briefly recap our second quarter results they provide guidance for the third quarter.
That's helpful, but that's a chart liquidity smokers, who 2021.
As you wouldn't have you tell personalities, who second quarter 2020 reported a net loss attributable to controlling interest and $497 million.
81 cents <unk>.
After adjusting.
So should we be impairment charges related to previous you're not looking retirements.
Reported an adjusted net loss of $1 million.
Well the he feels like you did not personalities.
Well, that's the second quarter include.
Adjusted if it goes.
Second strong <unk> recency excuse me when of course controlled actions and illegal settlement.
Well said you to discussions with customers agreements, we reached regarding responsibility costs related to covert 19.
As a result arrangements.
We mitigated what could be more negative impact quarterly financial performance.
Before I agree with you should see exceeded 96% misrepresenting <unk> increase well first quarter results.
We generated $41 million because.
The sequential increase of $196 million.
It should be noted this does not include 46 million college ready to the legal settlements.
Well the dispute that was paid in the first week to life.
So stupid that God is approximately $87 million international operations, an increase of 130 seconds on this quarter over quarter.
During the second quarter, we generated adjusted contract will be revenues of Moneygram.
Got it is driven primarily by strong revenue efficiency across the street and legal settlements.
Also during the quarter.
Thanks.
Greg would you be Lloyd luxury looks it.
Just curious.
I think on standby rate for most of the quarter and delayed starts will be putting what does this DD sweet due to covert 19 trouble restrictions.
You said they start yourself, you know, but okay.
Days during the quarter.
Regarding the previously mentioned filament, we recognize that $77 million.
Got you, Okay, I just spoke nimbleness element.
Equal installments of $46 million on July 120, 21, 2021 June one pretty 22 and generally 16.
23.
Additionally, we recognize approximately $20 million vacancies in the second quarter associated with the settlement.
Okay.
During the second quarter was 500 2500 buckets.
Which is below our guidance due to timing of chip and should drop projects an in service maintenance.
And those unexpected costs associated with my team.
<unk> costs approximately.
Expenses related to covert 19.
Well, it's approximately $10 million are these costs are we supposed to go back.
[laughter] cash flows and got issue.
And second quarter with couple of liquidity approximately $3 billion.
I used to cash cash equivalents of $1.5 billion.
Approximately 200 million gallons of restricted cash forget service and $1.3 billion from I'm going to Bobby quick so too.
Furthermore, we forecast positive operating cash flows.
Yes.
As Truman mentioned during the quarter.
People decision to reduce our school based workforce.
I would expect operating antibody 20 and 21.
As a result of these decisions so approximately 80 million GOGAS annually.
For the whole recognized severance charges of approximately $12 million in a quarter.
Yeah.
On a quarterly financial expectations.
It appears could have 2020 rigs Jessica contractually river used to be approximately 800 million bonus you're picking they wouldn't efficiency of 95% before.
The streets Nexmos activity at six rigs.
You didn't really compare campaigns.
The kg to finishing its contract and ship on his schedule.
And in many warm stacked consider next fixture plan just starting November Woodside.
Well the board discovery, India discoveries separation transaction, barron's concessions, either and transmission ought to be competing with respect to contracts during the quarter.
Example, inspiration.
Well walks that could use Gulf of Mexico cold stacked Newsweek.
Inspirations well position.
It's a work in the Gulf of Mexico.
This activity reductions occipital cortex operations on people wouldn't work.
At least horizon.
83.
Because there was a scare us is driven operations, who day rate in July.
We expect good quarter over them expense to be approximately 500 million buckets.
Quarter over quarter decrease also relates to live up where they typically discussed above.
You can you might see was approximately $14 million related to covert 19 expenses and $6 million severance costs.
He's covert 19 costs include or not limited to overtime pay talk of watching both crude changes synacor and team quite the communications and certain other logistically expenses.
We expect G expenses.
Some of your 45 million Douglas <unk>.
This includes approximately $1 billion related to severance payments.
Net interest expense <unk> third quarter, [laughter], Debio, <unk> hundred 50 million going to us.
Forecast includes capitalized interest of approximately $18 million interest income of $1 million.
Everyone expenditures, including capitalized interest the third quarter participated to be approximately 80 million to others.
This includes approximately $50 million Newbuild drillships under construction.
$30 million of maintenance Capex.
Okay Nexus for the third quarter expected to be approximately $12 million.
No I, particularly liquidity at December 31, 2021.
Excluding unborn revolving credit facility.
Cancel securitization if you put it tightens contract Chevron.
Yeah, 2021 liquidity [laughter] like be between 1.2 $1.4 billion.
This liquidity for parents, who chooses to make the many 2020 capex.
A few million gallons.
At 2021, Capex expectation 1.5 billion goodness.
The 2021 Catholics includes $1.4 billion related to our Newbuilds and whenever it wasn't others, who maintenance capex.
Yes, Okay got it excludes any speculative rig reactivations upgrades.
In conclusion, while safety operational excellence remain a problem is a focus.
Acutely aware of extreme dislocation in engine business, and especially when fuel services, including offshore drilling.
Recognizing that customers can significantly reduce it 2020 budgets, which eliminates the potential recontracting rigs you didnt contracts this year.
However, the potential longer term I do clubbing supply constraints, you brought by customers exploration drilling budgets and coaches optimism, we remain constructive for 2021 or beyond.
Patient gradually increasing demand for energy and oil prices as a global conditions improve.
Even so we will continue to proactively manage our balance sheet.
Expenditure requirements like sports opportunities to reduce our costs.
I'll now turn the call back over to Greg.
Thank you Mark.
David We're now ready to take questions and as a reminder to all of our participants please limit yourself to one additional question and one follow up question.
Thank you ladies and gentlemen at this time the floor is open for questions. If you would like to ask a question you may do so by pressing star one that now if you are on a speakerphone. Please make sure that your mute function is able to allow your signal to reach our equipment again to ask your question. Please press star one now.
First question comes from Ian Macpherson with Simmons.
Hey, Thanks, good morning, everybody good morning.
Hey, I want to see if I could dig dig in on a little more detail on Atlas opportunity.
You said the initial for well program would be I think he said Q2 of 22 through.
The middle of 23 is it a it's a $250 million award.
To be fine wise over an 18 months specific term or is it is that not the correct interpretation.
Yeah, I'll start, but Roddy why don't you correct made it is it as well driven and we anticipate that to take about 17 months.
Okay, well driven.
And well you that's right.
Hi, Scott.
There's no that is correct yeah.
Well, driven and I know it and the details of you know options and ER and expect digit Asians Ah you know, what we're kinda not really going to talk about that until they f. ideas made but yes, certainly is a positive data points one is at the moment.
Absolutely so congrats and good luck getting that over the finish line and then also wanted to see if you can speak to the remaining capex as the rig will be stacked.
And how much if any of that is included in the 21 Capex that Mark just described the 1.4 billion need those capex that will fall next year.
Now I'll defer to mark on that one.
Thanks.
Mark you might be muted.
Oh.
Yeah. Good you asked that question again please.
Yeah, So I wanted to see how much remaining capex for the final.
Bill.
Yes.
In total and then how much of that might be included in the 1.4 billion Newbuilds spending that you outlined for next year.
So going forward is almost equally spread between the two rigs.
Except for some well controlled equipment all of that is included in the 1.4.
Other the rig will be effective liesl fully.
Built out.
Budgeted for within next year's spending.
Correct, yes.
Got it.
Okay. Thanks, guys.
Getting update on that one.
Hey, Dan.
Thank you. Our next question comes from Connor Lynagh, along with Morgan Stanley.
Yeah. Thanks morning, guys.
Morning.
There's there's a lot of questions out there as to what the impact of these bankruptcies across the industry are going to be to two sides of the question for you are you concerned about your competitive position.
As competitors reemergence clean balance sheets on one hand.
I would argue for them, having a lower cost structure on the other hand.
Did that sub $200000 today suggest.
Interest expense and a return on capital weren't really major factors in bidding behavior, So where do you think that shakes out.
Yeah. So it's it's interesting and all I can all I can do is look back to what we've seen recently and it kind of walk through that and assume that that will replicate itself as we go through the second wave. If you think back to the first wave you had companies like Pacific in Seadrill and Ocean rig and vantage go through restructuring.
Out of all four of those only ocean rig came out with a clean balance sheet. The rest came out with still pretty considerable that and so that'd be one piece of it I don't expect these companies to come out completely clean I think there's still going to have quite a bit of data will be pushed to the right.
Certainly be reduced from what it what it is today and.
I doubt that they're going to come out with lot of cash and as you. All know takes a lot of cash to operate maintain these assets and certainly a lot of cash to reactivate them. So I'm not sure that they're going to be in it and it.
The much better positioned than we are first of all so I'd just attack that will now the other thing we saw what's when these companies we're going through the restructuring process.
We increased our market share and and I can't tell you. It was because our customers were definitely choosing the more financially stable less distracted organization, but it sure showed up in the way that we want contracts because we were not the low better during that time. So I think at least in the interim period I think we have a decided advantage because we're not facing debt that uncertainty in those distractions.
And then we'll just see how these companies come out of the the restructuring process.
Got it. Thank you you alluded to the second part of my question, which is.
Every once in cash preservation mode right now it seems like cold stacking is the obvious preferred option for most rigs that are going idle how should we think through the cost of reactivating rigs that maybe really never came back this cycle and were were cold stacked really in the cycle and how do you think about how the cost curve.
Those idled assets is changing over time.
You know we've been we've been on record, saying this quite some time you know asset at the same and no preservation techniques are the same.
And you know we've looked at different rigs anywhere ranging from 20 to 25 million on the low into an excess of 100 million on the on the high end. So can you just wanted to take the midpoint of that it's a really significant investment to bring one of these assets back online and if you look at the kind of contracts that have been awarded recently with respect to date and term there aren't many that would justify it.
And so.
We said in the prepared comments as we see rigs roll off contract and I think over the course of this year next we expect 89 to 90 rigs to roll off contract those rigs go to cold stack because people can't afford to keep them active in crude.
It's a pretty big checked that one has to right and in order to reactivate does assets in the day rate today and the terms today well supported so we think supply and real marketable supply demand could come together pretty quickly.
Hey, Matt let me give them okay.
Yeah, I was just going to add to that you know I think Kim we saw it into bidding behavior that you know for for rigs that were rolling off contract and some of our competitors are being bidding extremely low rates, but certainly in the public tenders. So you can see what the rates where any of the rigs that didn't require riyadh.
Division or were being mobilized from a significant distances. The numbers were quite different and of course with said there being a very little cash on hand, and amongst those that have the.
Low active rig counts and we think that's going to be a key theme going forwards that as soon as that and hot supply is taken by the next uptick or that the rates just simply has to move to cover the expansion to Germany was talking about reactivations and equipment upgrades and what have you. So.
Yeah. The there may still be a little bit softness in some of the reason the near term, but certainly there's no other place for them to go but.
Got it and I was just going to sneak in one more if you guys. Good luck in your crystal ball or how many rigs would you guess leaves the marketed floater supply over the next year or two here.
You know if you look at the 89 or so floaters that are rolling off contract. This year and next there are I.
Let me see here 21 rigs that are over 30 years old.
You would you would think and hope that at least those 21 never seemed a lot of day again [laughter].
I think there another 20 or so that are better between the ages of 11 in 20 to 23.
You are probably at risk too. So you know there there could be good 30, 40 rigs that don't don't ever see contract again.
Yeah.
So I thought you know we've been we've been doing there.
We've been in the downturn long enough that I think everybody has very solid expedience of what it looks like to stack the rig in the condition that the rigs and to bring it back up. So I just think there's gonna be far fewer these specular speculative reactivations, where we've seen some folks lose a ton of money on that so one yeah, I think actually bodes pretty well.
Going forward is that a you know a is getting he says of those re contracting or necessities. The older ones are just not going to survive.
Appreciate it I'll turn it back.
Thank you aren't next question comes from retailers richer with Tudor Pickering Holt in company.
Hi, good morning, and thank you.
Jeremy I wanted to touch on some of your your comments on the marketing outlook you I take through a number of long term contract opportunities in Brazil Africa in Australia, and you know into sort of market all those opportunities you're going to be a fairly lucrative for not only you but for the rest of your peer group into <unk>.
Roger you touched on some of the pricing behavior right now I'm curious if you could frame, where you think maybe qualitatively pricing shakes out for that sort of work just given its you know it's real long term work and you know if you think in either the T. and season. Some of these contracts as it relates to move payments and things like that.
Might change a bit relative to where where they were entering 2020.
Given given the the downturn that we've we've sort of entered over the past few months.
Yeah, I think Kevin you know you asked specifically about Brazil. There you mentioned that so let me Brazil's. Good example, you know that it's actually the the one region showing an up tick and expected awards this year compared to where it was before but of course, they would daily dealing with different issues and prior.
You know when Petrobras, a low and looks like they're going to contract four to five rigs that Oh the city tends to have opened at the moment.
We actually expect that you know for stops in 21 that could be as many as 12 rig years awardee fairly soon and that includes not just Petrobras, but you know colored and in Ecuador, and total but 10.
That looks pretty pretty interesting because you know there's a big push on things like the Buzios field, there's a significant increase in autism Sps those so that's going to drive rig demand for sure and how does that relates to the pricing and so I just as you point I, you know mobilizations and upgrades.
A very important considerations and I think what you'll see is that those that are have assets in the region is very close perhaps already up to and the requirements that are in Brazil or.
I've been a 50, specifically for the Petrobas specification I think you you may see some of them still being quite competitive.
But after that are actually is driven by the necessity of spending money on the rigs and having to recover that and the interesting thing about those or prospects is that old reasonably long town. So.
To others little kinds of intuitive to take your.
Yes, it I know Bukit. So you know two or three years without any return on investment so.
Certainly we would expect that not only are the a and the activation costs on the mobilization costs cover than there was a contracts, but a in addition to that there should be a little bit bumps eight in it to so in somebody really I think you'll see that the the rigs are hot and ready on the spot nice they'll go.
Little bit cheap, but a after that supply is taken that that we expect that to be soaked up and 21, then should be much more interesting towards the end to anyone into 22.
Okay, that's helpful and.
One market I didnt hear much about the north sea.
Could you just.
As a flavor.
You see that market trending over the next.
12 to 24 months, and maybe just kind of parse the market between.
The higher end next gen assets in some of the.
On six and assets I know you have a couple those rigs rolling off in the next few months and so just curious what you're taking on that market is over the next one or two years.
Yeah. So let me deal with the UK side first and so a little bit lower specification on the assets and but really the UK is dominated by the independence and of course, the uncertainty brought by Covidien, there and they owe price war make or getting funding for them is tough right. So certainly when they do have funded.
They're going to be a very cautious about heavy spend that so really what's happened in the UK side of things is there a lot of this stuff has been pushed out so you're basically sitting on.
A significant number of prospects our drill ready, but are you know struggling for lack of funding. So when in the meantime, what's happened and that say to that the north sea is that older rigs have been scrapped we've seen some extensive cold stacking of rigs. So the active supply has base.
Finally being cut in half so you're going from about 15 rigs down into you know seven or eight rigs so.
Again going through the reactivation cost I'm, an expectations of the making some margin going forwards the <unk>.
It is cobot does subside and you know we hold that happens sooner rather than later you will see these guys being able to get some funding and when that does happen that the number of available rigs for the north sea is not going to be that many and then when we think about Norway, which is the highest back but yet you alluded to there.
Ah, we as Jeremy mentioned always good to see a fixtures being made and Akron order pretty active but as you know.
Normally has really a new bianculli not I mean, the really back up and running you know schools. It all back at you know people back in offices, and an economic reactive and not just Ecuador, but where we're hearing that you know the likes of Lindeen ER Ventas I'll I want to get through the ideal way Neptune et cetera. They they have.
That you know the better part of perhaps a dozen prospects that the expected going forwards.
Oh, that's been driven by the tax breaks so again, great to see the Norwegian government are essentially stimulating investment by that.
Putting together actually package that has really company evens by as much as 40%. So you know even mature fields like control. A you know breakevens are now in mid Twentys, you know that instead of the falk use with about before so.
That's all just really pause it so we really think when the high spec say the normally side of things.
That demand or just picks up steadily through the rest of this year as everybody gets to grips with the tax relief package.
I know it could be a very tight market and 21.
All right Super helpful response, Thank you.
Thank you. Our next question comes from Gregory Lewis with BP I G.
Yes, Thank you and good morning, everybody.
I guess my first question is is a follow up to arm I think counters question around.
You know some of the stress from some of your competitors in the market.
You know rowdy you know as he as you are out there are realizing that there's not a lot of activity out there, but as has it as it started to come off the conversations given the fact that relationships matter that hey, we traditionally used company ebay and we use you guys as well, but just given the fact that we don't know what company.
He is going to look like in any fashion, whether it's going to be acquired whether it's going to be on unwound.
Is there any sort of you know way, we need to keep some viable companies up there and maybe that's going to drive a little bit more work through trains oceans doors.
Yeah, Yeah for sure I mean, I mean, if we look back at a second half of 2019, we were actually very successful and breaking into several new customers. I know that you know we're very happy to report that our operations team have a you know absolutely nailed it so the customers. The you know getting a taste of trends.
Motion for the first time are seeing that you know, we really are delivering value that the well times are tumbling and of course the return on investment for the already I'm just looking back at a better and I know thing that's unique to us, but certainly we'd able to demonstrate that we are right up there. So I think where you where you may have.
Seen customers I Hadnt used as before there was the are using its just not extremely pleased so again hats off to the ops team they've done a fantastic job.
Then of course with a longtime customers that we're executing extremely well as can be seen in the you know the revenue efficiency numbers, but normally that and the way that the teams have dealt with coal that that you know almost uninterrupted operations I mean, only a few instances where rigs are went on standby for short periods of time, but.
I mean been able to keep the operations running worldwide or do you seem to pandemic since just outstanding and it comes to you know a tremendous focus on planning and being proactive and.
And do not gonna stuff. So we really believe that there's a lot of value and not we have some of our customers telling as you know what are we know what do you guys are a bit more expensive and you you perhaps deserve that premium you know that always caution is not to be too expensive, but [laughter], but what we've tried to say that we're able to get a premium but.
So I think we delivered tremendous value for that premium and actually I wouldn't describe as a premium I would I would describe as a saving for the LTV.
Okay, great. Thanks, Rodney and then just kinda for Jeremy here, Mark a little bit bigger picture question, you know more around capital allocation.
In any.
Yeah, as we look across the capital structure and obviously, there's there's bonds and in the back end that are trading at huge discounts, but there's also some in the near term that are trading at discounts in cash is king, but but are there or is there any arbitrage opportunity as you as you kind of.
Look at your equity versus your that where you could kind of take advantage to kind of pushed you know solidify trains Ocean you know <unk> liquidity position balance sheet position, you know a little bit more it looks like there should be.
I'll defer to mark on that one.
Yeah, great because you're going to we've been very proactive over the last several years and managing our balance sheet, we've raised over $3 billion we've refinanced.
Over 2 billion goes up that we've.
Darren tenders on a regular basis, we've done.
Good market repurchases.
Usually every quarter. So we look at every opportunity to.
Then cannot runway.
Two lucrative and your term maturities or make sure with good liquidity available to address that.
He is going to change, though and we're going to continue to do X and you're right, though oh bonds are trading at a deep discount right equities trading.
That's a pretty low price as well so it's very difficult to go out and say we wouldn't issue.
But in terms of equity to buying debt when you're both sides of the equation.
Deeply discounted moment.
But that being said we will continue to.
Look at interesting ways in which we can extend the runway and keep the company operating at a very high level of.
Excellent.
Okay, Hey, guys. Thank you very much everybody have a great that.
Correct.
Thank you were next question comes from Mike Sabella, What's the bank of America.
Hey, good morning, everyone.
<unk>.
I was kind of thinking maybe what can we can talk for a little bit more about about the upgrade the Atlas and just kind of walking us through that decision. So you know really kind of maybe maybe what are the options for you or you know kind of really any your peers.
To upgrade common existing rigs instead of taking a newbuilds.
And then and then maybe I'm kind of what you know on the flip side, what you could have reasonably expected from from the shipyard you know if you would decided to just delay or.
Cancel delivery that rig.
So let me start.
I'll start with the last piece first there really wasn't no opportunity to to cancel the rig.
Contractually we were we were committed in so you know we've obviously thought about every possibility over the course of the last five years. During this downturn in recognizing that this was a significant capex.
For us here as we roll into into 2021, 2020, 2021, so that was kind of off the table for us so with respect to the upgrade itself.
You know there's more than just buying the 20 K pressure control equipment I'm too to upgrade one of these assets to be able to two drilling complete effectively in a in the Gulf of Mexico, or the higher hook load, which we mentioned on the call me mentioned several times before is of Paramount importance.
The larger deck that both of these rigs the tightening the Atlas have are ideal for large completion work. There's several other features attributes that had been added to these rigs to to make them really optimal for these 20, K projects and <unk> and lower tertiary. So are there other assets that are out there for us or our competitors that could be upgraded yes, but signet.
I can't significant cash, bringing one of these efforts into shipyard upgrading the hook load capacity upgrading the mud system buying the acquiring the the 20 K a person control equipment and associated plumbing everything else that goes with it that's really as we look at <unk> at our competitive landscape, there's not really a viable option out there because everybody is.
So desperate right now with that with respect to their cash position. So we feel like we're in a very unique situation or having the only 220 today cable assets in the industry.
We feel good about it we're excited to have the drilling contract all their conditional with the beacon and their partners and we see other opportunities we've been active conversations with other customers about follow on work after the after the Shenandoah projects. So I'm still a few things left to be done but excited about the opportunity.
Mike This is mark as Jimmy indicated well the other upgrades you have to occur. The rig. We took this decision 12 to 18 months ago to go ahead and prepare the rig for 20000 pure site VIP. So those costs it won't be recruited and the numbers I mentioned earlier.
Your next question earlier does include everything I said that except for some well control equipment.
The reason I'm not specific on that is because the Clincheck every site is conditional and it has some margins.
Be agreed upon including.
Some of the goal control equipment. So once we get a better handle as to what that is we'll be able to give you a better estimate as to what got costs like the vast majority of the other costs associated with us.
It is included in the 1.4 billion.
That's great guys that was very helpful.
And then.
Just a follow up so we recently saw a contract disclosed by appear in Gulf of Mexico.
On a 40 450 days at 180 K per day going up 20. Thank you I was wondering you know just as we all try to figure out you know what the day rate curve looks like you know in you know assuming you all are a part of the bidding process on on that rig you know what it really kind of the front end.
That you that you didn't like the rate or the back end as well.
And then you know just kind of.
What does that indicate for you know where you guys think rates could go out into 2022.
Yeah.
We've been we've hired especially over the last couple of quarters with respect to the fact that we need to enter into contract that generate positive cash flow from operations and that means I don't want covering our rig specific cost because in our corporate overhead we have to generate cash as do all of our competitors and so that's how we're approaching up our response to tenders and.
Yeah go ahead.
Yes sure I'd also add you know you asked about the front end of the backend and the truth is a market is on on that when there's a there's a fairly significant PDH <unk> to elapse before that a campaign star so.
In our view you know trying to beat that kind of a rate. If you also have an asset that is not going to do anything for.
69 months ahead of it and as Jeremy said, if you're if you had honest about what you'd overhead as they are clearly that doesn't really work for us and I guess it may work, but others, but there's just not going to be any cash generated from it and ER and you know stated a.
Policy for quite some time is that we will not entered into contracts that are just trading water at all or that we're still and reducing our liquidity. So yes. We were involved in that and I agree operator, we've worked for them very well in the past them, but that was not that kind of rate level, we will.
A willing to look at.
That's great. Thanks, a lot everyone.
Thank you want next question comes from Kurt Hallead with RBC.
Hey, good morning.
Worker.
Uh huh.
The initial follow up here for for Mark you know when you provided the liquidity.
Got it so out going forward at $1.2 billion to $1.4 billion range I was just curious as to whether or not that you anticipate having a tap into your revolver TV to maintain that liquidity level.
Cook a revolver is $1.3 billion. So it's more of a range. So if we hit the middle range there Oh.
But there's a potential degree dip into its by as much as 100 million, but that's.
Okay. That's fair that's fair enough appreciate that and then just follow up on the cash flow dynamic here you got to provide your capex numbers for the back half of the year and you've indicated you'd be.
Positive from cash from operations given the overall level of Capex in the back half would you anticipate that you could potentially be free cash flow positive in the back after the here.
Ah, Yes, we would be close correct.
We do have $170 million and Capex for the second after the year.
It should be close.
Okay, and then just one follow up or you know for for Jeremy You know gets talked about you know the difficult decision to have to reduce would do is costing and to do some some personnel kinda on a broader dynamic around cost reductions are given these dynamics that have occurred over the course of the.
Here or has there been any opportunity potentially to reduced number one your daily rig operating costs, and secondly, or have you been able to negotiate better terms with vendors to be able to reduce your overall cost, let's say on the news outlets for example.
So constantly company, they're looking for opportunities to drive cost out of the system out about operations out of our shore based support Kurt as you know, but we've been at this now pretty diligently since the start of the downturn, let's call. It late 14 early 15, and so we've captured all of the low hanging fruit and then some we certainly work with.
Customers to to optimize the crews that we had on onshore assets.
And when we've done that on several assets, where we've been able to pretty substantially reduce criticize without negatively impacting performance. In fact, we've seen safety performance reliability improvement in most cases and so.
When I look for opportunities.
With respect to a with respect to our supplier base or supply partners. You know we've entered into and this is probably two years plus now entered into the long term care agreements with all of our major suppliers and equipment providers on every major pieces of equipment on our assets and and so those are long term.
There's a long term relationships long term contracts, where we negotiated fairly significant discounts.
A couple of years ago eat obviously, we continue to go back to two are our vendors for sport given these challenging times, but I think the incremental savings are gonna be.
But pretty de minimis not not overly material.
Yeah.
Thanks for that.
Thank you our final question will come from Sean Meakim with JP Morgan.
Thanks, Good morning.
Yes.
Maybe just a follow on the Atlas discussion in the Beacon contract you know the numbers look pretty good.
But it seems like there's pretty limited visibility on follow on opportunities North Platte seems like the other.
Big piece of the puzzle, it's unclear, maybe the likelihood or timing of that one are we missing some others out there from a 20 can't perspective, and just how do you think about follow on opportunities as you try to secure cash payback on that rig without a big anchor type contract.
That's right so that that auto and.
Other opportunities are there there's seven.
Basically you as we talk to the customers engaged in these kind of fields.
Probably go Google some of the really interesting stuff about how many of these high pressure fields that are in the Gulf of Mexico.
The operators that engaged in that are wide ranging so everyone from the old Chevron and ER Beacon and no other Shenandoah group, but I mean on top of that you know what yeah. There's there's two italgas also or you know I'm more requirements for some of that the bigger guys as well so you know.
And even chevron shell. The these folks are old talking about the possibility of incremental demand and not a idiots no of course right. This minute and in the midst to covert there's a there's some uncertainty about timing of those gonna things, but.
Needless to say that that ought additional opportunities I know you know where they are going into the details of that the beacon arrangement with where we put that in such a way that allows us to move forward with a minimal risk or to not recovering that the investment that will make and <unk> and the well control equipment.
But until about being able to capitalize on the upside on the other side of it I'm, having as Jeremy said, the most capable rig in the world on being 20 key a 50 done reighty when the happened so what a recontracting risk. We think is pretty low because as you know the recontracting wouldn't take place a so we see another three or.
More years, so certainly there's plenty of fields that require this equipment and the Gulf of Mexico, and we think you know three to four years, there's plenty of time for them.
You know the the efficiencies of deepwater to come through new we're already seeing how well performing versus she'll another places, but as time moves on and we continue this fantastic driving efficiency I think a there's there's lots of opportunities in Florida, and you kind of feel that we should be able to take advantage of.
But first mover position.
Got it thanks, right I think I think screamed that really well.
And Jeremy you know you certainly have an advantage in bidding right now as your peers restructure.
Unfortunately limit opportunity to that advantage given the lack of tenders.
So the goals the goal since the early days on the last downturn west for you to be the last man standing.
Seven years post peak, you're about there and you made all the right moves in the interim to position yourself there.
So you know you called it right even with.
Restructuring as a huge capital hold the sector. So just does your view on being the last man standing change.
Is there a shift in strategy on capital structure, if deepwater activity stays pretty anemic for the next 12 to 18 months.
No. It doesn't it doesn't change I think I mean, ultimately as you well know we're going to need some help from the market at some point in time, but we are you know we maintain a five year forecast and continue to look at our liquidity position under various different scenarios and in terms of utilization and day rate I feel comfortable with that with our near to midterm. Obviously, if we get three years out.
Plus and you know the market hasn't started to recover in day rates haven't started to recover where we can generate some some significant cash flow from operations.
And obviously, we're going to work and we're going to be like everybody everybody else, it's going to the process right. Now we have we are the last man standing we have done I think I made all the right news both from a fleet operations and balance sheet perspective, and we'll continue to to pull every lever we can to extend that liquidity runway and keep moving on.
Yeah fair enough exercise Jeremy I appreciate it.
[laughter].
Thank you I'd like to turn it back to Mr., Brian Alexander for closing comments.
Thank you David that huge all participants on today's call if you're a further questions. Please feel free to contact.
We look forward to talking with you again, when we report our third quarter 2020 results have a good day.
Okay. Thank you, ladies and gentlemen that concludes the second quarter 20 brands Ocean Earnings Conference call. You may disconnect your phone lines and thank you for joining us today.
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