Q3 2020 Transocean Ltd Earnings Call
Ladies and gentlemen, thank you for your patience in holding will be beginning today's conference in approximately two minutes.
Thank you for holding well be beginning today's conference and approximately two minutes.
[music].
Ladies and gentlemen, good day and welcome to the third quarter were 2020 transmission earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Mr., Washington, <unk> manager of Investor Relations. Please go ahead Sir.
Thank you David.
Good morning, and welcome to Trans Ocean third quarter 2020 earnings Conference call.
A copy of our press release covering financial result.
Along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures are posted on our website at deepwater dotcom.
Joining me on this morning's call are Jeremy Thigpen, President and Chief Executive Officer.
Mark Mey, Executive Vice President and Chief Financial Officer and Ray.
Hi, Mackenzie senior Vice President of marketing innovation and industry relations.
During the course of this call transaction management may make certain forward looking statements regarding various matters related to our business and company that are not historical facts.
Such statements are based upon current expectations and 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 that could.
Could impact our future results.
Also please note that the company undertakes no duty to update or revise forward looking statements.
Following Jeremy in Mark's prepared comments.
We will conduct a question and answer session.
During this time to give more participants an opportunity to speak on this call. Please limit yourself to one initial question and one follow up.
Thank you very much I'll now turn the call over to Jeremy.
Thank you, Alex and welcome to our employees customers investors and analysts participating in todays call.
As we have since March we continue to work remotely to do apart to prevent the spread of COVID-19. Therefore, please forgive any challenges associated with maintaining audio quality during this call.
As reported in yesterday's earnings release for the third quarter transaction delivered adjusted EBITDA margin of almost 41% was $338 million in adjusted EBITDA on $830 million and adjusted revenue.
Importantly, the strong operating performance, which was driven by our experienced and committed teams enabled us to generate $81 million and operating cash flow.
Despite a number of challenges, including a global pandemic in an extremely active storm season in the Gulf of Mexico, We continue to deliver safe reliable and efficient operations for our customers around the world.
During the third quarter, we had 26 active rigs across 10 countries.
But just some of our pandemic related challenges in perspective.
I hear what you said before crude change 14 of our rigs require crew members to enter a secured quarantine period, ranging from five to 14 days, depending on customer protocols in country regulations and then it's also had a negative 19 test before joining the rig.
In addition to the delays associated with quarantines and testing to reduce overall exposure. We have asked more than 2500 of our crew members to sort of extended pitches, meaning even more time away from home family and friends.
In addition to the quarantine periods and extended hitches, well onboard I rigs our crews are subjected to daily temperature checks and required to wear faced coverings and practiced certain social distancing protocols when possible.
Needless to say these are sub optimal operating conditions, yet our crews persevere with absolute resolve their sacrifice and dedication to our company is truly inspiring.
It's not just our crew members demonstrating their commitment to transition success, our excellent customer service could not be delivered without the contribution of the entire organization, including our shore based staff.
Logistics involved in planning coordinating testing in executing the movement of thousands of personnel spare parts and pieces of equipment. During a global lock down is nothing short of extraordinary.
19 has forced our organization to adapt offices around the world largely remain closed and our employees continue to work remotely to help mitigate the spread of the virus.
Virtual meetings that remotely provided expert technical support or the new normal and.
And is a testament to the strength and resilience of our entire organization. We've continued to deliver the same high level to perform performance as we did before coke at 19.
For all of this I extend my deepest gratitude to all of the men and women of transition for the personal sacrifices they make each and every day to keep our rigs operating safely reliably and efficiently to support our customers.
We faced tremendous challenges as a result of COVID-19, however, the strength and resilience. Our team has demonstrated throughout this pandemic is truly remarkable.
We will continue to take every necessary precautions to keep our crews and our shore based personnel safe and healthy for as long as necessary, while we deliver best in class operating performance to our customers.
Now looking more closely at our third quarter performance as a whole our fleet continues to meet and often exceed expectations.
I'm extremely proud of our crews for the $10 million in performance bonuses achieved during the third quarter as a result of exceeding our customers' drilling schedules.
This is a direct result of our collective efforts each day to continuously improve transition, including through our investments in high specification assets, the development and deployment of innovative technologies and our industry leading training programs.
In addition, we have aligned interest with our customers by linking compensation and performance a practice that many of our competitors have to shoot right.
Resulting in an enhancement to our revenues.
Obviously this high level of performance helps in the efficient conversion of our $8 billion backlog into revenue and ultimately into cash.
Now turning to the fleet starting in Canada. The transition Barron's recently completed a successful campaign with Ecuador.
The future prospects in Canada are somewhat bleak and demanded Norway continues to be robust we have already begun the process to prepare for mobilization to Norway.
In Trinidad the D. Three completed her first full quarter of operations with shell and continues on her one year contract until mid 2021.
We believe the DD three is well placed and we are encouraged about potential follow on opportunities in the area.
In the UK quite sore kicked off its 10 month campaign with the poll below a junior.
As you May recall the work was originally slated for the 712, but was transferred to the policy Lloyd, allowing us to further rationalize our fleet.
Last quarter, we reported the anticipated early termination of the deepwater India's work in Egypt.
However, upon review of the successful drilling program, coupled with the improvement of oil prices, but what was reversed course and fulfill the full program without early termination.
Kept the India drilling into July Unfortunately, with no near term prospects on the horizon, we moved quickly to cold stack her in Greece.
Moving to offshore India I'm pleased to report reliance exercise its 180 day option on the kg. One this will keep her busy through the second quarter of 2021.
Moving to Asia Pacific The DB, one recently completed her successful campaign in Australia with Chevron.
As we currently do not see any near term opportunities for her we've decided to cold stack or.
And finally, the kg to just this week commenced her contract with Woodside in Myanmar, and it's currently on standby at a reduced day rate.
We believe the Woodside will commence mobilization in January at which point, we will be on full operating day rate of $250000 per day.
In addition to keeping are actively working we remain diligent in assessing our fleet for ongoing marketability.
And as we have demonstrated since the start of the downturn in 2014. Once we determined that a rig has few profitable opportunities we quickly remember from our active fleet.
Consistent with past practice, and our disciplined lots to be on retirements of less competitive units. Upon the completion of a recent drilling campaign, we decided to recycle the trans Ocean Arctic.
Looking now at upcoming market opportunities the contracting environment has materially improved from when we last spoke three months ago. When it was minimal customer interest.
As a reminder, when we enter 2020, we were starting to see tangible signs of the recovery unfolding.
Our high specification harsh environment assets were fully utilized dayrates exceeded $300000 and visibility to future work was very encouraging and improving.
And in the ultra deepwater market utilization is also starting to trend higher indeed.
Indeed at the end of 2019 in early 2020, we were awarded several ultra deepwater fixtures with day rates around $250000, a day, which represented a 100% increase from fixture side earlier in 2019.
In light of these data points, we were increasingly optimistic that the protracted market recovery was picking up sustainable momentum.
Unfortunately, the world was hit with COVID-19, reducing demand for energy.
Yes, when coupled with a temporary increase in supply that was spurred by production disputes among major producers drill well prices to historic lows stalling the momentum that we were experiencing through early 2020.
Understandably this caused many of our customers to pause and reassess how and when to utilize the respective portfolios and ultimately led to them delaying many of the projects that we expect it to be sanctioned in the latter half of this year and the first half of 2021.
Well the delay in awards has certainly been disheartening, we're encouraged by the fact that most of these previously anticipated projects have not been canceled instead.
Instead, they've been deferred by approximately 12 months.
In fact, our bidding activity level. This quarter has doubled from the low point in the second quarter and has returned to pre cobot levels.
During the third quarter, we participated in 18 bid, which is the same amount we participated in during the fourth quarter of 2019, just before cobot hit.
Taking a closer look around the globe and starting in the U.S. Gulf of Mexico, what the near term is a bit challenging a handful of projects with start dates in the second half of 2021 are beginning to emerge among independents iOS sees an entire season.
In Brazil, Petrobras recently awarded long term fixtures for the trace marinas project in the pre salt and we expect to see several more Petrobras awards in the near future.
Furthermore, Ecuador has recently Retendered its four year program in the bucket lot field and we remain encouraged by the improving activity in Brazil.
Moving over to Norway, we're excited about the opportunities unfolding as a result of the region governments recent enactment of favorable tax incentives, but willing gas project sanctioned over the next two years.
We anticipate this market will continue to tighten as more projects are brought forward to capitalize on the favorable investment incentives in.
In fact, we've identified two dozen projects that could be given the green light as a result of the tax change.
If all of these projects before we believe that the market for high specification assets could be sold out as we exit 2021 and enter 2022.
And with the most recent fixtures for such assets around the $300000 per day, Mark plus performance bonus incentives.
We're optimistic about the future prospects of our industry, leading fleet in Norway, which once again will soon include the transition barracks.
In Africa, excluding hotels multiyear tender for Mozambique, we could be which could be awarded in the coming months, we see several medium and long term programs that could be awarded for work beginning in 2021.
In the Asia Pacific region, including Australia, We anticipate 11 awards will be made over the next few months for work starting in 2021.
As you May know this region has demonstrated continued activities through these difficult times and the volume of opportunities is nearing pre COVID-19 levels.
In summary, while we're certainly disappointed that the ultra deepwater recovery continues to be delayed we're encouraged by the emergence of multiple opportunities for work in 2021 and beyond.
While we take some comfort in our approximately $8 billion backlog, we remain very pragmatic recognizing the challenges to the industry and specifically those that transition will continue to face in the near term.
As such we will continue to take the necessary actions to preserve and enhance liquidity, including but not limited to delivering flawless operations that enable us to convert as much of our backlog into revenue as possible.
Further improving our cost structure to fit the evolving active fleet.
Quickly cold stacking or scrapping nonworking idle assets and executing timely and opportunistic financing transactions.
In this regard as you likely know the third quarter was very active from a capital markets perspective, Gary.
In the period, we undertook a series of actions to reduce our debt and more importantly did so while also improving our liquidity forecast.
As a result during the quarter, we successfully reduced our debt by almost $1 billion, reducing our interest expense and extending our liquidity runway as we continue to navigate through this economic cycle.
And as we have demonstrated over the last several years, we're not done.
Finance and legal teams have proven time and again that we can successfully execute fiscally responsible transactions and favorably resolved dispute as they arise.
We will continue to be proactive in managing our balance sheet in a way that enables us to continue to invest in our people our assets in the development of new and differentiating technologies.
I would now like to provide a few comments regarding the state of the offshore drilling sector from our perspective.
The majority of our peers have either formally started the restructuring process were taken steps that indicates that they are likely to do so in the near future.
Given our large backlog strong operating performance and liquidity enhancing balance sheet transactions Trans Ocean is in a very different an advantageous position relative to our competitors and we are not currently facing restructuring decision nor are we experiencing the difficult and sometimes demoralizing crippling distractions associated with such a process.
Instead, we believe we have the liquidity to continue to prudently invest in our business and importantly, we were able to maintain a singular focus on delivering best in class operations to our customers.
As our competitors emerge from restructuring it is possible that we may see some consolidation, which we believe is a natural and inevitable result, based upon industry economics.
Furthermore, market marketable supply of rigs is likely to fall at a pace that we expect will eventually meet with the contracted rig count, which we're already starting to see.
Therefore, when oil prices stabilize at more favorable levels, an inflection in rig contracting should have an almost immediate positive impact on day rate due to the shortage of marketable rigs and the significant expense associated with reactivating stacked rigs.
Transaction will continue to take the necessary actions to ensure that we maintain the most competitive fleet in the industry and remain disciplined in our approach to contracting that fleet.
In conclusion transition has strategic strategically assembled the largest and most competitive floating fleet in the industry with the industry's most experienced crews and shore based support teams.
We maintain the largest contracted fleet with the strongest and most lucrative backlog, providing us with the visibility to future cash flows that we need to continue to invest in the training of our crews and the maintenance of our assets.
Ask that we're best positioned to survive this latest challenge and benefit from the eventual market recovery.
We've accepted that a full scale recovery in the deepwater offshore market will not likely begin before the middle of 2021.
However, as the market has begun to stabilize it gives us confidence that our customers will be ready to increase their offshore activity in the years to come.
In the interim we are committed to our customers and to the preservation and generation of cash flows.
We are proud to have positioned ourselves as the clear leader in harsh environment Ultra deepwater drilling and will continue to strategically refiner fleet further enhanced that position.
As such we expect that our marketed fleet will remain the industry's most utilized as we successfully navigate this current economic cycle.
With that I'll turn it over to Mark.
Thank you Jeremy and good day to wall.
During today's call <unk>, Oh third quarter results provide guidance for the fourth quarter and provides <unk>, let's not financial expectations were 2021.
Yes, the older but upgrades or liquidity forecast through 2022.
As reported press release for the third quarter was 2020.
Net income attributable to controlling interest so you have to.
$9 million was 51 cents per diluted share.
After adjusting for certain items associated with his retirement and restructuring about there.
Discrete tax items.
Items associated with the Muslim disposal of assets and liabilities management costs, We reported an adjusted net loss of $69 million were 11 cents per diluted share.
Well the details.
<unk>.
Oh, that's good quarterly adjusted EBITDA.
<unk> $38 million, reflecting strong suite blood grouping accretion sea, coupled with robust performance bonuses.
Well I grew up in this business exceeding 96%.
60, operational excellence and strong backlog conversion.
$81 million operating cash flow.
Looking closer at our results through the third quarter, we delivered adjusted contract drilling revenues of $773 million.
It's primarily by strong religious recency and $10 million performance bonuses across the suite.
That's one of the sort extensions of transactions every student contracts.
Operating and maintenance expense in the third quarter was $472 million.
This is because it on guidance due to the timing instead this many times and those in expenses costs associated with corporate and magazine.
During the quarter, we recognize the flexibility.
Flexibly to $14 million of Cobra direct expenses.
It's approximately half what we booked by our customers.
Turning to cash flow and balance sheet.
The third quarter with liquidity of approximately $2.9 billion.
Restricted.
Unrestricted cash cash equivalents of approximately $1.4 billion approximately $200 million, obviously, the cash debt service.
And and a $1.3 billion undrawn revolving credit facility.
As Jordan mentioned during the quarter, but it took a series of steps to school districts.
Our balance sheet by meaningfully reducing our debt.
Are you always when you said the exchange since sections for multiple cities like it sort of gives you do actually gets currency.
The movie by existing branches and you senior guaranteed construction.
As a result of these exchanges were able to reduce our debt would be almost a billion dollars, but consuming any cash.
By improving liquidity by approximately 260 million going to screw 23 pool.
This is inclusive of $90 million net interest savings.
To say the maturity of the extreme sports exceeds $560 million.
Furthermore, during the quarter, we also opportunistically repurchased approximately $49 million Oh God debts in the open market, resulting in more than $20 million of savings.
We continued our efforts to improve our balance sheet.
Sorry, but you.
Shifting a cash tender offer for civil service of our new they did it maturities.
Yes, it does and the personal business we.
Participation is very good.
We were trying to approximately $248 million face value of debt.
Discounts of approximately 39%, resulting in a balance sheet improvement of more than $135 million.
Including cash interest savings. This tend to also improved our liquidity through 2025 Bucks to it depends on Who's next fall.
Okay and also closes on November nine.
Expenses sections and cash tender on them. They just actions amongst the financing transactions have you taken to improve our financial flexibility and capital structure.
Beginning of the industry gone to six years ago.
Since 2016, remember kind of approximately 9.4 million.
Moving goods.
Your debt maturities through various ordinary course and liability management transactions.
And issued approximately $9.3 billion you did you have the <unk> capital markets.
We will continue to take actions to improve our liquidity runway and capital structure, but nevertheless shareholders.
Maybe another uptick on expectations for the fourth quarter.
Fourth quarter 2020, we expect adjusted contract drilling revenues to be approximately $710 million.
Fixing or Rubin your frequency or 95 cents before.
Lets you fix the logo rebrands.
So picks Nogales, we quote activity has five rigs to discover India scrubber inspiration Transocean, Barents, transposed nita and transaction or the local couldn't do you some prospective drilling campaigns.
Well the movies listeners not warm stacked U.S Gulf of Mexico.
Yeah, and then either.
We expect to be greason, nowait, respectively, and they serve.
You mentioned in script the Oxy Bourbon.
<unk> good morning, Bruce will be woken simple work 2021.
We expect fourth quarter I wouldn't have expenses approximately $455 million.
Quarter over quarter decrease attributable to another activity.
Ultra rigs rolling off contract.
We expect <unk> expense for the fourth quarter to be approximately $42 million in line with the prior quarter.
Interest expense for the fourth quarter is expected to be approximately $145 million. This.
This forecast excludes capitalized interest of approximately $13 million interest income of $1 million.
Capital expenditures, including capitalized interest for the fourth quarter, well anticipated to be approximately $55 million. This includes approximately $37 million newbuild drillships under construction and $18 million of maintenance Capex.
Okay, Texas for the fourth quarter expenses to be approximately $3 million.
Now I'd like to provide a smooth the consonants expectations with 2021.
We anticipate adjusted contract drilling revenues to be between 2.6 and $2.8 billion.
80% of which one it causes previously established contract backlog.
Furthermore, we believe full year 2021 operations and maintenance expense will be between 1.4 billion and $1.6 billion.
Finally, we expect to do you need to be between $150 million and $160 million.
Let me now talk objective liquidity at December 31, 2022.
Including our Undrawn revolving credit facility at potential securitization the deepwater Tyson.
Yes, 2022 liquidity say somebody between 1.1 billion and $1.3 billion.
This liquidity book is it true there's some incremental 2020 Catholics 50 buttons on this.
2021, capex expectation of $1.5 billion.
2021 kept expenses $1.4 billion to our Newbuilds.
$100 million maintenance Capex.
As always I Catholics God, it excludes expenses rig reactivations upgrades.
Now I'd like to address the recent news regarding a compliance with the New York stock exchange.
Alcobra, reducing the continued listing standards notice and then why is he because the average closing price about shoes fell below $1 trillion of consecutive so do they.
Trading period.
Thank you and you get this deficiency and regain compliance with the <unk> loaded by the NYSE.
We remain in compliance with all other NYSE listing standards.
In conclusion in addition to the safe and efficient operation about rigs, we continue to focus on preserving and enhancing our liquidity well.
Well optimistic we've seen our debt.
We are actively managed.
Mmm expenses requirements and explore all opportunities to reduce costs without compromising operational integrity and.
The safety of our employees.
Knox and pulled over two legs.
Thanks Mark.
David We're now ready to take questions and as a reminder.
Please limit yourself to one initial question and one follow up question.
Thank you ladies and gentlemen at this time the floor is open for your questions. If you would like to ask a question you may do so by pressing star. One. That's now if you are using a speaker phone. Please make sure that your mute function is disabled to allow your signal to reach our equipment.
One to ask a question. Please press star one now.
Our first question comes from Connor Lynagh with Morgan Stanley.
Yeah. Thanks, I wanted to focus on the debt.
The back half 21 opportunities you were discussing here I appreciate.
The commentary around that I guess I will.
Well, we're trying to figure out is what do you think the customer sensitivity to oil prices. These days and how would you think about if oil prices remain yeah.
Probably where they are today or or move up five to $10. How would you think about the relative sensitivity of those opportunities.
Yeah kind of this year.
I'll, let rob.
Ready chime in the you know from our perspective, there's still so much uncertainty in the world you know what.
When do we find a real solved a if you will for cobot and what does that do to global economies and when did that take place.
And then how does that impact or oil prices certainly you know as we saw in 2019, we had a relatively stable oil price the bounced around $60 a barrel for quite a period of time and.
And that's really where we started to see these offshore projects pick up with the with the Ernest So I think right now our customers are growing increasingly encouraged that oil prices have moved up from that from their bottoms have stabilized a bit and.
And that if we can get through but I think the election to kind of determine what the landscape is going to look like there and then and then start to find whether it's a vaccine or whatever kind of software code I think that that gives them even more more confidence in that as you can get to what prices up closer to $50. A barrel I think we start to see quite a bit more activity and whatever you want to add to that.
Yeah I would.
Just back to the fact that you know what we and we do off another 10 or $15 that will really make a huge difference because I think as you mentioned this before customers I've spent a tremendous amount of time retooling the wells simplifying the designs to make them.
Motor more profitable at a you know runs about $50 Mark. So I think if we can see something sustained and under $50. Mark then a universe. That's that's going to bode very very well for also dealing with you all.
Competitiveness is relatively easy substantially over the past few years.
Yeah makes sense you if you could speak in broad terms I know you don't want to give away too much for competitive reasons, but are these opportunities that you're starting to see.
How should we think about yeah, yeah, and certainly I think you alluded to this on the harsh environment side of things, but on the on the benign environment rigs.
What do you see contract durations rates trending you know it seems it certainly seems like things have been holding up a bit better relative to the prior downturn, but but just any comments around that would be helpful.
Yeah, Yeah, that's a really interesting point, we were actually going to make that point that if you compare to where we were before in the previous and blip theory suggests to me that had alluded to that had been done pretty low and that kind of mid one hundreds, but you know not who we're seeing that the boss Amanda This is clearly not there.
You know that I think some of the Lewis needs are really seeing a that you know one need you to 190 Mark.
While we are certainly not in the some folks are but there seems to be you know just the economic reality of delivering these services kicking in.
I think we also expect to see that you know with a number of tenders that culminated in places like Brazil, and a lot of awards to be made in other parts of Latin America that daily seem to be less of a spread and everything seems to be moving up a bit so.
You may see some near term.
Competitive stuff, but we think because of a lot of these tenders on a multi year in fact, it's probably at least half a dozen multi year tenders I. Just now we think that is going to have folks bidding you know above 200, and Oh, so looking at four and five year terms are well above.
Do you want that they're going to be closer to 300. So.
It remains to be seen whether the operators move on those right now, but certainly we're optimistic about that because we certainly haven't seen that the gap. So.
Daily job that we did last time right. So clearly economics are better this go around.
Yeah, just to sneak one more in here is.
What do you attribute that change in behavior to was it is it less optimism less less sort of logic of why just maintain their customer now know monetize later is it is it more financial constraints what it basically.
Basically what I'm, what I'm trying to figure out here is if you have your competitors do emerge with cleaner balance sheets, probably not a ton of liquidity, but maybe more than they're working with today.
D. rail this discipline or do you think it's more sustainable than that.
My first response.
Already idle.
I don't believe it does I think it could in the short term if you're looking at individual rigs that are rolling off contract and they're just looking for a near term filler opportunity you might see a little more competitive play to try to just position that rig for a short duration, but but as we said in the prepared remarks, and we're starting to see play out we're starting to see more rigs.
Cold stacked more quickly more rigs scrapped and so the real active marketable fleet is shrinking.
And so if you want to get into one of these long term arrangements and it's going to require a rig reactivation, but like you said that liquidity will be improved but you know you're looking at a 50 million dollar plus ticket to to reactivate and ask that you can't do that today day rates you have to go much higher or you have to get compensated on the front end from from the operator.
Right right, Yes, yes, yes, I was going to add to that that and you know and that's been a few mistakes made in the past you've seen folks do the reactivation to mobilization speculatively and it just didn't work out so I think there's a lot of hard lesson learned.
I also think there's going to be a tremendous expectation due to read or some form of earnings from these contracts. So as Johnny said reactivation costs are going to act until that but dip into rates again, but you know more interesting like that than not that the relative utilization of high spec assets.
Only going to get better.
The opportunities have dropped in the lead is cool that debt. So has the number of active rigs. So if you look at the chart of you know that the seven Gen Drillships.
Those are stacked the vast majority are cold stack, so we aren't coming I anytime soon.
And if you actually look at the Melissa I track it every six or seven rigs.
The are listed as being warm stacked and we know that four or five of them already have.
Leading positions in tenders that will take them out of the market. So you really do you find yourself in a situation similar to the backend to 29 as studying 2019, when we yeah. We saw that that boost in rates from that kind of 150 level up to the 250 level and its just driven by the fact and then a few.
<unk> says available.
Makes sense thanks for the color.
Thank you. Our next question comes from Taylor, <unk> with Tudor Pickering Holt.
Hey, good morning, and thank you.
I appreciate all the all the colors are the initial color on 2021, and if I'm doing my math correctly. The implied EBITDA number for 2021 is much better than than what consensus is thinking right now and so I.
Mark I think I heard you say that.
At the revenue line about 80% of of your forecast is contracted today.
So a two part question for the other 20% could you help us understand which rigs that are currently idle today are going to help move the needle.
Most are that you see the best opportunity for work in 2021 and embedded in that forecast and then secondarily. It seems like the biggest delta would be at least versus our thinking would be on the cost side. So it's a good to see that if I just take the midpoint of the cost guidance for 2021, I think it's about one.
<unk> 5 billion and divide that by four that's that's 375 million type quarterly run rate for 2021 relative to the 455 million you're guiding to in Q4. This year. So just hoping you could help us understand how you get to that structurally lower cost run rate moving forward absent.
Number of rigs rolling off contract in the coming quarters. Thank you.
Oh, Thank you good morning.
In response to your first question.
Regarding the 20% all state grid with you that's built into our forecast, it's really comes down to 45 rigs one being the ESCO.
The inspiration D C and B notes.
And those all almost equally split between those and then we've also got two other rigs. The that's your best 10000, and the Nautilus that's coming in at much lower numbers or for next year. So like I said four rigs what drives the vast majority of that sort of 20% total spec revenue.
As you look at the cost for next year, it's not I think youre your calculation of the body in the 1.5 Bucks for is is a is a way of doing that but as you know this is going to be coming all throughout the year as they come off cost would be.
Reducing on a quarter by quarter basis next year. We also see the full benefit all about cost cutting efforts, which we implemented this year.
The second has to do you [noise].
As it became a contract we've had to reduce costs, we've stacked or cold stacked several rigs. So all of that has happened incrementally 2020.
2020 wanted to get the full benefit from day one.
Got it that's helpful.
And second question is on liability management from here completely been extremely busy over the past few months, which has been really good to see that moving forward you still have a quite a bit of capex slated for 2021 on the on the two new builds you have remaining.
Can you talk about the timing of those back end payments and whether there's.
There's any potential to potentially push those out a little bit to the right and you've seen a lot of your competitors do that over the years and I know you got contracts in place for these two rigs.
And there's some time constraints there, but do you see any potential as part of your liability management playbook to figure.
Figure out a way to push those back in payments to the right a little bit.
Oh would look at that in a different light that's really isn't like wealth management, you know there will be a commitment to the shipyard. So those two rigs and obviously the final payments have been delayed several.
Several times in the past.
With those rigs not slated to be delivered next year, we would need to take delivery on those rigs and pay depend at the time that being said, we're always in conversations with Oh vendors in the shipyards.
And there's a potential that something could happen there, but at this stage well, we all know what I'm pointing to anything specific.
Understood well thanks for the answers.
Your next question comes from Kurt Hallead with RBC [laughter] Hey.
Hey, good morning.
Good morning, Kurt.
Thanks for that thanks for that color I wanted to come back around to make sure that I understood. Some of the dynamics around the market outlook correctly, you guys talked about how currently ultra deepwater rates or are in the one you need one nines range effectively looks like they are unchanged over the last few months. Then you then mentioned.
Just a half a dozen tenders like multiple years, and then I thought I heard you something heard something that with day rates approaching $300000. A day. So those multi year tenders could you could you go back and just kind of clarify that a bit.
Yeah, sure Hey, look so I said that that the low end is that 180 to 190, we weren't were seeing and responses to tenders all the way up to us if you want to give a date, but that that's really because of the length of time. So I mean, I would see that the near term market is somewhere between 180 to June 30.
And then not long term market, oh that looks to be substantially higher.
And then it really depends on how many rigs will be taken by these long prospects.
And what you see there is essentially a little bit and we didn't get your question. So as those rigs come off the market in other words the committee and then the balance of rigs available combined with relative number of warm assets. We think that's going to really help push the dynamic so.
Hopefully that makes sense and you know we see an uptick in bidding activity now that should translate into an up tick in a war.
Six 912 months from now.
Got it all right. That's helpful. And then and then Jeremy I Wonder if you could help us put into context, you've been among the leaders.
Taking assets out of the market and rationalizing.
You know your fleet I was wondering if you could give us some general sense as to maybe how many rigs you could expect to rationalize and in 2021, and maybe put that into the broader context of how many industry wide assets can be rationalized next year.
Well I take offense to among the leaders I mean, we've been the clear leader Unfortunately [laughter] yeah.
So with with respect to our own fleet I think you can you can continue to watch as follow past practice I mean, we've been pretty consistent as rigs roll off contract and we we see limited prospects for them and we don't see them as overly marketable are profitable going forward, we won't waste any time.
Moving those assets from from our fleet, but I take it you know given what we've done so far with vast.
Vast majority of those assets out of the fleet as you as you well know, but certainly there could be.
A couple more going forward, but we'll address those as they come regarding the rest of the industry it'll be interesting to see.
How these competitors about emerged from restructuring and whether as part of that restructuring they are forced to to retire recycle some of the older less capable assets are our expectation is that well because they're just too costly to keep around and not overly viable going forward and so that'll that'll certainly help with the a b.
The supply side on the spreadsheet, but candidly we've said for a long time that were not as worried about the total number and the excel spreadsheet because we know a lot of these rigs will never find another contract, but optically it'll certainly it will certainly improve things.
Okay great.
Yeah, Yeah. We just see you know is that several of our competitors as they're transitioning management teams are making a lot of old Gen, writing simply taking that supply.
It's just not viable <unk> does not help market dynamics, so oh, we publish that.
Got it and then maybe one for Mark what do you what do you anticipate the securitization of the Titan will be.
So look as you know that's a five year contract with Chevron.
Pretty healthy right. So I think we could get somewhere between 350 and $400 million.
Oh go secured financing against Madrid.
Okay Awesome, hey, thanks for the color everybody appreciate it.
Thanks Kurt.
Thank you. Our next question comes from Frederic Steen with Clarksons Platou Securities.
Hi, guys. Thank you for for your optimistic comments today, it's it's nice to hear that.
It's more activity out there now than it was three months ago, what I'm wondering about that today is.
Or has to do with rig efficiency and how your customers have approached that then I'm thinking.
When or where are we with the recent right. The Big award was very vocal that they're now looking even more at cost per well.
Versus adjusted day rate. So so how do you I think it's been in place for some time, but have you kind of help that's even more now and when you're hearing about the high grading of fleets cold.
Stacking scrapping et cetera, and leaving the best assets on water.
That's something that you feel will be important both from a competitive standpoint, a point or going forward.
But also from a utilization standpoint, and as a follow up to that I think I mentioned that we know or that you're taking the parents to Norway.
How do.
Do you view the re contracting chance for the four rigs you had with clean or already thanks.
Yeah, Let me take the efficiency question first and so.
That's been the to show over the past several years and I really think why were seeing offshore potentially deepwater and harsh environment.
Doing well in terms of collecting buena season, and that kind of stuff. It's all about about well cost and push for the well cost is and not only obvious that it's better to drill a well for less cost, but you don't typically brings the well on earlier. So then you have less bad read that runs for a long time and then you get.
Production and you get to drill more wells in the CBD times. So it really is the catalyst to more and more activity. So yes, we are fully behind that finish. We we have our customers you know are equally participating and upgrades to regs.
Allowing us to make substantial compensation on that so it's a it's a very healthy vitamin from that point of view in terms of performance and high specification assets. So you'll have had to see many times and that is our philosophy is to be at that <unk> cutting edge of performance, but not because it's just not only funded.
Either but because it drives the economics of more activity and put you in a better spot sad reputation wise with the customers and he knows the pickup truck Ocean rig then are they going to be drilling fast as well that yeah.
Oh look that's really important for us and obviously makes a big.
Big difference in terms of how much we can collect on a contract and how much profitability isn't it for the alternatives as well.
The second part of your question was around and you know, bringing the bad and said to Norway. So that's her natural home she was and always in a long time, she opening extremely well there so.
So she's been over to Canada very successful campaign from our point of view operations wise or also from a financial point of view what type of any well. So yeah, we bring it back to Norway, you know without tipping.
Tipping, our hand, where one in discussions with a a few folks but.
We think the market nor are we is.
Continues to be robust funds, Louis high specification and high performing assets and we do see a bifurcation between the lower spec assets on that.
Have you see that the more performance reputations.
And in rates that is a you know driving apart, but a substantial clip.
Clip, so really we think that those high space. That's occasion, I says I'm going to see what they are going to see it.
Solid rates.
While there may be a few gaps here than they had on some schedules and think it's going to be fairly robust activity and especially towards the second half and 21. When we begin to see a lot of the tax incentives that would offer by the Norwegian government chicken and stimulate more activity. So maybe that's that long shot.
The reason for bringing up to Norway, but but that seems to give me a good fit for the Reagan.
Fairly positive on huh.
Yeah Super Thanks.
Okay. So on the just just to pull up there just for rigs that you've had with Ecuador in Norway already how you view the outlook of where those rigs I I spent a lot of time discussing with investors around those recently, so I think Ah you know anything that you can give a do you think that.
They will be extended and that there's work that's kind of rigs. We wouldn't you know the mid water rigs a completion drilling et cetera.
In the same way that you will find work for for.
The parents that you believe that these we will continue to be kind of ecuador's, we're of course as well so when the firm terms expire.
Yes, so when we look at those and that the cat deals and the kind of work that they deliver as I said they are absolutely fit for purpose and not only the fit for purpose for when they were built but you know we've done some upgrades to them. We then brought them more and more into the digital realm. So you know with Ecuador, we've worked too.
To enhance the performance of those rigs and there that seem to be pleased with the results of that has borne on actually again from AWS results and collection of bonus season, those kind of things. So we continue what not to show them keeping those rigs are right up there in terms of performance and the latest digital technologies.
And as we see it and as the feedback we get is that like ethanol are very keen to see them continuing not mean beyond their phone contracts. They caught EPS do you have options on them. So we think there's plenty of scope for those to be extended and then not too distant future.
[laughter] final follow up to that do you think.
Yes, there's an extension, but it's fair to assume that you know that they have options, but maybe a rate that's more in line with the current markets.
I like I think it's going I'm you type of discussion.
I think it's a little early to see but you know that's always a possibility, but you know what they are.
Engaging in a significant and.
In this negotiation on those them I think out almost be drawn on that front I will just wait to see how that time, though when we when we do intend to full time negotiation.
Okay. Thank you so much.
So for me.
Thank you. Our next question comes from Greg Lewis with B T G.
Hey, Thank you and good morning, everybody you know Mark I guess I just wanted to you ask a question around the Uh huh ongoing tender realizing that it's it's ongoing you know.
No one and it initially came out it was a was a 200 million dollar number and then you kind of reserve the right to increase it or decrease it you know assuming that it's it's successful you know how should we thinking about how should we think about the capacity or scope to increase it.
Beyond that that 200 million dollar number if there is any.
Yeah. Thanks, Chris.
I think at this stage, we are disinclined to increase that cap.
$200 million clearly once we finish this will be I think the false.
Liability management initiative, we completed this year. So we're going to we're going to take a step back they could look at our five year plan the ground liquidity and reassess the next step in.
Oh, it was to improve our capital structure and increase our liquidity runway, but so those trends I think we're going to keep it to 200 okay.
Okay, Great and then just you know I mean <unk>, whether this is variety or more calm you know I know on.
On the question around revenue from the ads Guard, which was mentioned does as a rig that's gonna <unk> or has the potential to generate revenue in 2021 that you know that that rig is scheduled to roll off and at some point you know this quarter I'm just kind of curious how we think about that.
Like she should we be thinking about maybe you know heading into winter should we be thinking about maybe some idle time around that rig before it starts working maybe in the spring or summer or or is do we think that there could be an opportunity really to just keep that rig.
You know really working you know post.
Oh, it's roll off later this year.
Yeah, I think you do have the opportunity to keep on going but you know with.
Or some gaps in the schedule, we expect that there will be relatively short you know a month or two you know there, but yeah, she's a performing well in general She's you know really a high specification units. So we've been.
Got a few irons in the fire on her so yes, I would expect to see her are working but that certainly is possible that in a few idle spots on their schedule.
Okay, and then just in thinking about that knowing that you know its yeah. I mean, it's the things looked a bottomed and turning the corner, but as we think about you know and clearly once you guys don't seem like Rod even once you don't see much of an opportunity to to keep the rig working you probably start lowering you know daily Opex.
You know what is kind of the window that we did it make you know <unk> realize many tricks probably different is it kinda hey, if we have line of sight for 90 to 100 days, what kind of keep everything staffed up or I mean, like just trying to understand if that's changed relative to you.
You know what it was a couple years ago.
That I'm not sure it's really changed tremendously I mean, as we go into these short idle periods and we we have some levers that did pull that a you know reduce costs quite significantly and that as a an idle spot on a campaign, but then you know you've got to work on the back end of that but it really depends.
Hands on that the future marketability, the regs, which of course. He asked part is right up there, but he told me that with and and also that the prospects and that Kinda region and look I mean, that's gone to spin that into some parts of Latin America. Several times, she's very mobile unit. So you know what's within Latin America.
General doing extremely well just now.
We would expect that.
Yeah in Taiwan or would be.
Limited, but we'd be able to reduce expenditure during that time, but again I think because this rig is in demand or this class of rig is that the day rates are going to be a pretty reasonable. So you can offset a little bit of idle time with.
Sounds good good to hear hide everybody hey, Thank you very much for the time.
That's correct.
Thank you were next question comes from Microsoft below with Bank of America.
Hey, good morning, everyone.
Morning.
Oh, that's kinda, hoping we can maybe go back back to the kind of cost discussions and really kind of try to unpack the guy for next year.
When we think of bottom of the cycle type activities and then layering in some of the advancements we've seen sort of globally and in remote monitoring AI, you'll understand lower activity and lower costs. Here you know how should we be thinking about you know lowering costs on the rigs that are that are working just as we see advancements you know here and.
Hi, and remote monitoring and kind of the same question on where you think you could take the shore base.
So Mike let me take a southern disposed with regard to.
Sure guys personally.
He has leased from Wolfe research your people on the shore base to manage supports as Rick said that happens as the rig count varies overtime.
As it relates to.
This is ization or.
Any other comments.
And they should because there's going to be an investment into that that initially offsets and these cost savings you're going to see in that in that quarter will that yet.
We've done a lot of this over the last several years. So we started to see the benefit of that right now.
And there was looking to see this into the future as we continue to invest in our rigs that makes them more efficient and more able to support customers on their end user groups is on digitization.
Yeah, I think I'd just add to that to say you know are the equivalent equipment analytics programs and a system that we do on the rigs that are remotely monitoring from should have already proven to be extremely useful and primarily a you know what I'm being much more accurate and your maintenance and your assessment of the condition of the equipment, thereby.
No spending unnecessary maintenance dollars time and effort. So we're already well does not track and you know our steady implementation of digitizing some projects like that while they may not be grabbing headlines. They are certainly helping us manage costs and through these difficult times.
Yeah, and just just one more add to that I mean, we have been working extremely hard over the last several years now to optimize the size of our crew and activities onboard to optimize fuel consumption not only from a cost standpoint, but from a carbon footprint standpoint, and so continuing to work down those areas and then just delivering these wells faster drive.
Cost out.
Out of these projects and out of the organization, while also improving our carbon footprint as well.
Yeah perfect. Appreciate all that and then just kind of switching gears, maybe maybe on the working capital front that was a bit of a their threeq. You you know as revenues kind of come lower you know are there are there targets for working capital you could share with US just as we head into next year.
How we should be thinking about the working capital from here.
So if you're looking at working capital. So this year, we've had for the year to date you got two things that happens that's a you're not gonna see no written on grain basis. Once we had the Macondo you see settlements was $125 million. So given this year and also the your nice element, which Oh you receive wanting storm.
On calls that someone like put through its super doing expected to be collected over the next three years.
The quarter, specifically, we had a increase in interest payments for the quarter given the liability management actions we took.
In addition to the fact that we actually wasn't some eight p. payments that were a little slower in Q2. So between the two of those who go to about $80 million to $90 million that show also is not a trend and shouldn't reoccur.
Reoccur in the ordinary course.
Great. Thanks, a lot everyone.
Thank you our final question will come from Sean Meakim with JP Morgan.
Thanks, Hey, good morning.
Oh just to my question Yeah. Most of my questions have been covered here. So just one on the backend.
Maybe mark can we just talk about what type of liquidity levels are needed to run the business at current activity and if.
You take possession of the new builds next year.
How did you look at liquidity position look relative to your needs exiting 21 anything else that needs to be done besides securing a the secured financing on the Titan.
So sure if I gave you all isn't the fully diluted EPS of 2022, I've never broken out the prior to any one right. So we can certainly get that to you, but we built and the payments to Ajay speed also those rigs axis and I'm excited and we list of books and be a 10.
So financing or using the cash flow from the ship on contracts on the types and so all of that is both in addition to that as I mentioned earlier we.
Took a significant action this year with regard to reducing Oh showcase overhead Oh, DNA and any other cost associated with running the business, which has been implemented as I recon came down during the second half of this year you just heard me talk about five rigs are capable of contract.
This quarter, so as those we've come off obviously correspondingly we reduce the folks involved in managing those rigs. So that is what I would I would point to with regard to costs.
Okay fair enough I appreciate it.
Thank you I'll now turn it back to Mr. Lexington man for closing comments.
Thank you David.
And thank you everyone for your participation on today's call.
If you have further questions. Please.
Please feel free to contact me, we look forward to talking with you again, when we report our fourth quarter 2020 results.
Have a good day.
Ladies and gentlemen that concludes the third quarter 2020 transmission earnings Conference call. You may disconnect your phone lines and thank you for joining us this morning.
[music].
[noise] Oh [noise].
[music].