Q4 2020 Transocean Ltd Earnings Call
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[music].
Good day and welcome to the Q4 2020 Transocean earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Lexington, a manager of Investor Relations. Please go ahead Sir.
Thank you Sarah.
Good morning, and welcome to Transocean fourth quarter 2020 earnings Conference call.
A copy of our press release, covering financial results, along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures are posted on our website at deepwater dot com.
Joining me on this morning's call are Jeremy Thigpen, President and Chief Executive Officer.
Mark Mey Executive Vice President and Chief Financial Officer.
And Roddie Mackenzie senior Vice President of marketing innovation and industry relations.
During the course of this call Transocean 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 the current expectations and certain assumptions and are therefore subject to certain risks and uncertainties.
Many factors could cause actual results to differ materially.
Please refer to our SEC filings for more information regarding our forward looking statements, including the risks and uncertainties that could impact our future results.
Also please note that the company undertakes no duty to update or revise forward looking statements.
Following Jeremy and 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 will now turn the call over to Jeremy.
Thank you <unk> and welcome to our employees customers investors and analysts participating on today's call.
We have for the better part of the past year. We continued to work following the appropriate protocols to do our part to prevent the spread of COVID-19, and as many of you know in Texas, we've been battling record low temperatures power and water outages and are also experiencing instrument in connectivity and communications challenges and therefore, please forgive us for any deterioration of the calls audio quality today.
As reported in yesterday's earnings release for the fourth quarter Transocean delivered adjusted EBITDA of $210 million on $747 million and adjusted revenue.
Accordingly, this strong operating performance, which was driven by our experienced committed and unbelievably resilient teams.
To generate $279 million in operating cash flow.
Despite a number of challenges that we faced during the past year, including a global pandemic that presented new an unparalleled logistical and physical hurdles. We continue to deliver best in class safe reliable and efficient operations for our customers and for.
Fact, we'd look at the best overall operational performance for any single year in the history of Transocean.
In 2020, we delivered a total recordable incident rate of zero point to for the second lowest in the history of our company.
Even more remarkably we achieved this with no lost time incidents.
We also delivered over 97% uptime across our global fleet, which marked a new best for Transocean Importantly, we delivered this result, with a fleet of floaters that are focused exclusively on ultra deepwater and harsh environment operations, which presents the most challenging operational conditions.
Additionally, due to market conditions, our active fleet has decreased therefore this makes each unplanned event, even more significant to our business.
So needless to say our operations team delivered a great 2020 and for that I would like to extend my deepest gratitude to our entire team of Transocean for the personal sacrifices made each and every day to deliver best in class service to our customers.
Despite the COVID-19 related challenges, we continue to face the strength of our team continues to demonstrate throughout this pandemic is truly inspiring.
In addition to the great effort delivered by our operations teams I'd like to take a moment to recognize our shore based support teams as well our.
Our HR and travel teams have moved Heaven and Earth to ensure that we have the right people on the right rig at the right time.
Our supply chain teams overcame numerous obstacles to deliver equipment parts and services to properly maintain and operate our assets.
Our finance and legal teams continue to demonstrate their creativity skill and efficiency is the identified and seize opportunities to extend our liquidity runway and reduce our material exposures.
Our teams continue to ensure that we remain connected inefficient in a remote working environment.
And while the opportunities were scarce for much of 2020, our marketing team continued to work with our customers to create mutually beneficial solutions and speaking about solutions I'm proud of the fact that we continue to align our interest with those of our customers by linking compensation from our customers to our operational performance a practice that many of our competitors have rejected but a practice that has resulted in an <unk>.
But to our revenues.
We believe the combination of our highly efficient performance and our ability to overcome challenges such as COVID-19 helps drive the efficient conversion of approximately $7 $8 billion backlog into revenue and ultimately into cash. So once again well done to the entire team and thank you for all that you continue to do for Transocean.
Now turning to the fleet, starting in Norway, where we recently repositioned the Transocean Barents. We're pleased to report she has already secured a contract with M O L Norge.
The campaign is set to kick off in the second quarter and is slated to run through the end of the year.
This fixture is a direct result of the outstanding reputation that Transocean and the parents had in Norway and further highlights the attractive market conditions, resulting from the Norwegian government's favorable change in tax law to help spur investment in offshore exploration and production.
Also in Norway, the Transocean Norge. It just recently secured an additional extension with Ecuador that will keep her busy until the summer.
We are actively bidding her into several projects that would commence after the completion of our current campaign. This state of the art rig has continued to garner customer interest improving she can deliver as such her future remains very bright.
Yeah.
The U K Chrysler extended the contract for the Paul B Loyd Junior, which will now continue working through the third quarter.
Moving over to the Gulf of Mexico, I am pleased to announce shell recently named the deepwater thalassa, it's floating rig of the year for its outstanding performance in the Gulf of Mexico.
This is a testament to our operational excellence and best in class customer service.
Staying in the Gulf of Mexico, I'm happy to announce that just last week BHP has exercised one of its options on the deepwater Invictus and increase day rate of $215000 per day.
The rig is expected to continue working through the summer.
And finally in the Gulf of Mexico. The Asgard recently completed a successful campaign for Beacon offshore in January the rig is now warm stacked but as you all know the Asgard is one of the most technically advanced and most well respected assets in the U S. Gulf of Mexico as such we're actively bidding her into multiple opportunities.
Continuing to look around the fleet now focusing on Trinidad I'm pleased to report that the DD three received a one well extension from shell and signed a new contract with BHP in Trinidad.
These fixtures, both carry attractive day rates ranging from $220000 a day to $250000 a day.
The work will keep her busy through August with an option that could further extend for activities into the fall.
In Brazil during the fourth quarter, we announced that Petrobras exercise the 680 day option for the deepwater Corcovado and the 815 day option for the deepwater mykonos.
These extensions will keep these rigs working in Brazil through the summer of 2023 and added a total of nearly 300 million to our industry leading backlog.
Moving to West Africa, I'm pleased to report that total has named the deepwater skyros as its rig of the year due in large part to its superior performance and zero lost time record.
Shifting over to India, I'm pleased to report that reliance exercised its seven well option on the K G. One this will keep her busy into the fourth quarter of 2022 and added more than $85 million in backlog.
In the Asia Pacific region, the kg to recently commenced for contract with Woodside in Myanmar.
Despite recent events in the area. The rig has continued to operate with the cruise safely on board rest assured we will continue to closely monitor the development there with our crew safety is our number one priority.
Also during the quarter the deepwater Nautilus was under contract with our customer Petronas in Malaysia for return on it was expected to expire at the end of February.
For the customer attempted to terminate the remaining term early in November 2020, we strongly believe that this attempt into early termination is invalid and we are urgently pursuing all applicable remedies.
Furthermore, I'm pleased to announce that just yesterday, we signed a new fixture for the Nautilus with Posco.
The rig was getting working at the end of March and continued into the summer.
In addition to keeping our active fleet working we remain diligent and continue to assess each assets long term marketability.
And as we have demonstrated repeatedly since early 2014 once we determined that a rig has limited profitable opportunities we quickly removed from our active fleet.
Consistent with past practice, and our discipline disciplined philosophy on retirements of less competitive units, we decided to responsibly recycle belief Ericsson after completion of her successful campaign with Conocophillips in Norway.
As we look toward upcoming opportunities, we're encouraged by the stability and steady improvement of oil prices since we last spoke.
Today, Brent is trading above $60 per barrel and as a result of okay. As a result of opec's production cuts disciplined spending from U S shale producers and demand slowly recovering as a COVID-19 vaccine is distributed around the world.
Our customers are reacting to this upwardly by stability and have started planning for new or previously delayed projects to commence later this year and going into next in line with the timing of the expected global economic recovery.
Taking a closer look around the globe starting in the U S. Gulf of Mexico activity is expected to increase with several projects starting in the second half of 2021 in early 2022.
With contract awards expected in the coming weeks and months.
And given their technical specification and stellar reputations, we believe both the Asgard and inspiration are well placed to capitalize on these opportunities.
In Brazil, Petrobras continues to make awards, adding long term fixtures for the trace marinas projects and recently launching several additional multi year tenders that should but many if not all of the available rigs in Brazil.
We expect the rig count in Brazil to sustain and steadily rise over the next couple of years based on Petrobras is tender count matching pace with rigs coming off contract coupled with demand from the ioc's incrementally adding to the pack.
Encouraged by the signs we are seeing we are optimistic that a handful of successful exploration wells in the pre salt fields by the Ioc's will signal a welcome return of activity in Brazil to levels that we haven't seen over the past few years.
In Norway, we are excited about the opportunities unfolding as a result of the Norwegian government's recent enactment of favorable tax incentives for oil and gas projects sanctioned during 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.
As I previously mentioned, we've already started to see this come to fruition with the contracting of the Transocean Barents.
Looking now at the U K, we've witnessed a slight resurgence following what appeared to be a dearth of prospects and we are now encouraged by new tendering activity that has emerged including the first multiyear tender we've seen since 2018.
The lack of warm rigs available in UK could actually see a pool of hot rigs from Norway to perform some of the work anticipated over the next year.
And Africa, excluding hotels multiyear agenda for Mozambique, which could be awarded in the coming months, we see several medium and long term programs that could be awarded for Angola, including exon 17, well tender and hotels multi year tender.
In the Asia Pacific region, including Australia, we see several short and medium term opportunities starting in the second half of this year.
As you May know this region has generated continued activity through these difficult times and the volume of opportunities is nearing pre COVID-19 levels.
In summary, we recognize the challenges brought on from a global pandemic and that our expectations for a sustained recovery in offshore drilling will likely not materialize before mid 2021.
We do expect the global floater count to continue to decline before stabilizing in the second half of the year. However, we are very encouraged by the improving macro environment and conversations with our customers for many opportunities emerging in the back half for 2021 and 2022.
Following the initial distrust disruptions caused by COVID-19, we have seized the opportunity to innovate adapt and deliver meaningful change across our organization.
I believe that this is the direct result of our collective efforts each and every day to continuously improve transocean, including through our investments in high specification assets the development and deployment of innovative technologies and our investment in the continued development of training of our value team members.
As evidence of our dedication to innovation, we recently announced the successful deployment of our patented Halo guard technology on the deepwater Conqueror in the Gulf of Mexico.
Halo Guard works the recombination of locating device technologies worn by personnel on the drill floor and a machine vision system, using leading edge techniques and machine learning and perception.
As a crew member moves around the drill floor. The technology is able to not only locate to track and alert the individual to equipment moving in his or her area. But also has the ability to halt moving equipment further enhancing the safety of our crew members and overall operations.
The ability for drilling equipment to identify and respond without human prompting is something we haven't seen before we are pleased to provide our crews with additional tools and resources to complement our industry, leading training and safety programs.
This technology adds an additional layer of protection for our crews and we believe other industry participants and potentially other industries will also want to consider incorporating this technology into their operations going forward.
We are currently planning to install this technology on six additional floaters this year.
I'd now like to take a moment to discuss the state of offshore drilling.
The majority of our peers have either formally started the restructuring process or have recently emerged transocean is in a very different and advantageous position relative to our competitors.
Given our liquidity position and industry, leading backlog, we're not facing a restructuring decision, but candidly we're pleased to see our competitors embracing the decision to restructure as we anticipate that post restructuring we will experience a wave of fleet rationalization and industry consolidation as the new owners of these restructured companies moved quickly to reduce cash cash costs, including.
Costs associated with stacking and ultimately reactivating less capable assets as well as the costs associated with maintaining multiple management teams.
This will undoubtedly make it easier for our peers to rationalize their fleets and the marketable supply for it and reduced the marketable supply of rigs and it consolidation unfolds. We believe that we will witness a more sustainable approach to contracting to benefit new and existing shareholders.
When looking at the demand side of the equation, we see activity starting to pick up in the later part of the year and heading into next as the COVID-19 vaccines continue to be distributed in the global economy begins to recover from the pandemic, we believe demand for hydrocarbons will increase.
This is setting up a potentially robust recovery for offshore drilling with increasing demand and a dwindling and consolidating supply of assets converging at precisely the same time.
If the market plays out the way. We currently think it will day rates could meaningfully increase as we move into 2022 and beyond.
Our fleet of high specific specification floaters is exceptionally well positioned to capitalize on the recovery.
Ultimately, providing us with opportunities to generate sufficient cash flow and meaningfully delever the balance sheet when opportunities arise.
While we are increasingly encouraged by the market dynamics and take comfort in our approximately $7 $8 billion backlog, we fully recognize that we have experienced a few major market related head fakes over the past six years.
As such we remain very pragmatic imprudent in our operational and financial planning recognizing the challenges to the industry and specifically those that Transocean will continue to face in the near term.
Now I'd like to address some of the potential concerns regarding drilling activity in the U S Gulf of Mexico.
As the leading deepwater drilling contractor in this region, we are paying close attention to any regulatory or legislative changes that could adversely impact the offshore drilling industry.
I can report that our current drilling activity has not been impacted by the recent executive orders.
We understand that by the administration is taking time to review the current policies and regulations around permitting and leasing for federal lands on waters. We believe this is an effort by the by the administration to impose more stringent regulatory requirements around hydrocarbon exploration and production on federal property as part of the administration's desire to reduce carbon emissions to by climate change.
However, we believe these actions may have two significant implications on the long term macro environment.
The first being that more stringent regulations will be placed on our customers that could ultimately cap U S production growth.
The second is that it will lead to our customers looking elsewhere to explore and produce hydrocarbons, including the vast and prolific offshore basins around the world, such as Brazil, and North Sea and West Africa among other areas.
It should be noted that one barrel of oil produced from the deepwater Gulf of Mexico had the lowest carbon intensity of all oil produced in the United States.
We believe oil production.
In the Gulf of Mexico is an important part of the United States economy is approximately 10% of the total U S. Oil production comes from the Gulf of Mexico and of that 90% comes from deepwater.
As such we believe that we will continue to need oil from the Gulf of Mexico to help fulfill the world's energy needs.
It's important to note that while we have heard from certain operators in the U S. Gulf of Mexico, you have received new permits for certain types of drilling activities. Following the initial announcements from the buy button administration. It is still too early to assess the full impact of Transocean regarding the actions that have been announced thus far but we will continue to be proactive in our approach to protecting our company and our shareholders.
In conclusion Transocean has strategically assembled the most competitive floating fleet in the industry with the industry's most experienced crews and shore based support team, we maintain the largest contracted fleet with the strongest 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.
Asset, we are best positioned to overcome challenges and benefit from the eventual market recovery.
We think that we should observe more compelling evidence supporting at full scale recovery in the deepwater market. Later this year indeed as oil prices have stabilized 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 Brent preservation and generation of cash flows.
We are proud to have positioned ourselves as the clear leader in harsh environment and ultra deepwater drilling and we will continue to strategically refine our fleet to further enhance that position.
As such we expect that our marketed fleet will remain the industry's most utilized as we successfully navigate the current economic cycle.
Mark.
Thank you Jeremy and good day to all.
During today's call I will briefly recap our fourth quarter results then provide guidance for the first quarter as well as expectations for the full year 2021.
Lastly, I'll provide an update on our liquidity forecast through 2020 true.
Before I begin. Please note that we expect to file our form 10-K later this week.
Which is a few days later than our typical filing cadence due to delays caused by the significant winter weather events of last week experienced by some of our team members on deciding Texas.
As reported in our press release for the fourth quarter of 2020, we reported a net loss attributable to controlling interest of $37 million was six cents per diluted share.
After adjustments associated with retirement of debt and discrete tax items.
Adjusted net loss of $209 million for 34 cents per diluted share.
So the details are included in our press release.
Highlights for the fourth quarter include adjusted EBITDA of $210 million, reflecting good revenue performance and cost control.
In fact, our fleet wide revenue efficiency exceeded 97% showcasing our operational excellence and another quarter of stellar backlog conversion.
Operating cash flow in the period with $277 million improved from 82 millions on this in the third quarter.
Largely due to reduced interest expense improved collections of receivables and lower personnel expenses, including severance expenses.
Free cash flow generated during the fourth quarter was about $230 million significant quarter over quarter improvement from $215 million.
Looking closer at our results for during the fourth quarter, we delivered contract drilling revenues of somehow commutes for.
$47 million above.
But I've got guidance due primarily to strong revenue efficiency as mentioned previously as well as additional operating days on the deepwater Asgard in December.
Operating and maintenance expense in the fourth quarter was 465 minutes on this this is above our guidance primarily due to a non cash provision for slow moving obsolete inventory.
Elevation of performance bonuses associated with that OEM agreements and a lot of unexpected activity deepwater Asgard.
Turning to cash flow and balance sheet, we ended the fourth quarter with total liquidity of approximately $2 $7 billion.
Unrestricted cash and cash equivalents for approximately $1 1 billion approximately.
It's $300 million of restricted cash for debt service and $1 $3 billion from our Undrawn revolving credit facility.
Furthermore, during the quarter, we opportunistically repurchased approximately $23 million about getting the open market.
Just kind of approximately 11%.
So looking at almost $3 million interest savings to maturity.
They may not provide an update on our expectations for the first quarter and full year financial performance.
For the first quarter of 'twenty and 'twenty, one we expect adjusted contract revenue.
For approximately $680 million based upon on average fleet wide revenue efficiency of 95%.
This reflects lower fleet productivity relative to the fourth quarter of 2020 and low export to the deepwater Asgard.
At least actions completed in respect of drilling campaigns during the quarter coupled with Covid.
On the termination notice on the reported modulus and that's true.
Jeremy mentioned Republic disputing the ability for this.
This termination notice.
Additionally, we will be retiring at least berkson as we concluded that the rig is limited commercial viability in the future.
For the full year, we are anticipating adjusted revenue to be approximately $2 seven trillion.
We expect first quarter O&M expense to be approximately $445 million.
For quarter over quarter decrease attributable to lower activity as a result of the previously mentioned rigs rolling off contract.
For the full year, we are anticipating O&M expense to be approximately $1 $6 billion.
We expect G&A expense for the first quarter to be approximately $40 billion and approximately 160.
A million dollars for the full year.
Net interest expense for the first quarter is forecasted to be approximately $10 million.
This includes capitalized interest of approximately $12 million.
For the full year, we anticipate net interest expense of $400 million, including capitalized interest of approximately $85 million.
Capital expenditures, including capitalized interest for the first quarter forecast to be approximately $115 million.
This includes approximately 100 billion gold described newbuild drillships under construction and $15 million of maintenance Capex.
Cash taxes are expected to be approximately $5 million for the first quarter and approximately $25 million to $30 million for the year.
Turning now to our projected liquidity at December 31, 2020 true.
Including potential securitization with reported charging on <unk> 'twenty 'twenty two liquidity is estimated to be between one two and $1 $4 billion.
This liquidity forecast includes an estimated 2021 capex of $1 $3 billion and 22, eight true capex expectation of $300 million.
For 'twenty 'twenty, one capex includes $1 $2 billion related to our new boats and $1 billion for maintenance Capex.
As always our guidance excludes any speculative rig reservations for upgrades.
In conclusion in addition to safe and efficient operation of our rigs will continue to focus on optimizing cash flow through revenue enhancement and cost control initiatives.
It will also take also continued to take steps to put our balance sheet on liquidity.
As we demonstrated in 2020 through a series of liability management transactions that include a debt refinancing private and public debt exchanges debt.
Tenders open market repurchases of our debt can be improved.
Overall liquidity through train 25 by approximately $1 $7 billion.
These transactions also resulted in a total interest expense to maturity savings of approximately $518 million.
You should expect us to continue to take steps to Delever, our balance sheet and extend our liquidity runway using all appropriate tools available in the market.
In this regard you will note from our press release yesterday that we've entered into private exchange transactions resulted in the maturity of approximately $252 million without principle.
About 23, and so we have tangible bonds effectively extended into a new priority guaranteed exchangeable bonds due December 2025.
Subsequent to the press release issued participation in one of the exchange transactions increased by $40 million, increasing the total principal participation by 2023 exchangeable bonds for approximately $293 million.
This will result in an aggregate principal amount.
Approximately $266 million.
Priority guarantee exchangeable bonds.
You said with 2025 being issued.
Yes.
After these exchange transactions close.
The remaining principal balance on the 20th rates, we acceptable bonds will be approximately $117 million.
Reflecting a principal reduction book.
$693 million since the beginning of 2020.
I will now turn it back over to index.
Thanks Mark.
Sarah we're now ready to take questions.
And as a reminder to the participants please limit yourself to one initial question and one follow up question.
Alright, if you would like to ask a question you may signal by pressing star one on your telephone keypad if youre on.
Using a speaker phone please make sure your mute function is turned off.
To reach our equipment again that is star one to ask a question.
And we'll take the first question from Ian Macpherson with Simmons.
Thanks, Good morning, Jeremy and Mark Thanks for all the detail.
Pardon me for.
For me is it seems like we're we're plowing forward with the deepwater Atlas Capex program, it's been a while since we've got an update on where we are with contract negotiations. So just I think that cash burn and the absence of contract news is one of the concerns here. So maybe you could update us there on.
Our strategy in any sort of trigger points for.
For greenlight or or maybe change of course with the capex.
Yeah. Thanks, Ian I'll I'll start and then and then Mark you want to chime in as well.
Obviously, the debt at the big delivery for for US and we're excited to take delivery of one of the what.
What will be awarded the best asset on the word wanted to we have been in constant conversation, obviously with beacon offshore.
And their commitment has been unwavering their enthusiasm for the project has been unwavering we are still awaiting F D. But they seem confident on their side and we talked to them. If not every day every other day and so we're continuing to monitor that situation closely and then of course on the on the back side of that we are obviously engaged with discussions on on the shipyard as well and so.
Moving forward at this point in time trying to do everything we can to get baked into the secure I'd and then and then work with the shipyard for timely delivery.
And Mark I don't know if you want to add anything to that.
You might be muted.
Oh, Yeah, I'm, sorry, yes, just one thing Jeremy.
Yeah, I think it's great to say that if the <unk> does not occur we will certainly engage with the shipyard to discuss options around whether we take the rig out now whether it be delay delivery as we have in the past several times and obviously, how we deal with the final payments on that rig as well. So I think it all comes back.
Two as Jeremy indicated contract discussions with debt.
Understood.
For those those comments.
Regarding the shape of the market heading forward I think you made a strong case that you've got.
A positive nexus is coming with supply and demand over the net year over the next year or so I think it's been argued also that the recapitalization of all not all but maybe the majority of your peers is more of a competitive threat.
The net benefit but when you look at how on disciplined bidding in the market had been before they were recapitalize its hard for me to imagine that the competitive dynamics don't get better as opposed to worse, but how much do you think that that particular dynamic the recapitalization of of your peers will influence bidding do you already see.
Evidence of it now do you think that it will manifest itself over the coming quarters.
I'll start and then and then Rodney you can you can chime in as well on upper even more color we're actually at.
Looking forward to all of the restructuring and then seeing what happens afterward, our sense is that the new owners, which are happy participants in each of these debt restructured companies will want to move quickly to conserve cash and find ways to generate cash and so we actually think that there could be a <unk>.
Wave if you will of rig retirements rigs debt that should have been retired probably years ago.
Because they do consume cash just to stack them and certainly consume a lot of cash once you go to reactivate them in there they're assets that are of lower technical standard and are probably less likely to be activated reactivated in the near term. So I think you'll we could see.
Quite a few rigs retired post restructuring also think that we could see quite a bit of consolidation. I mean, you you look across the space. There is a lot of cash tied up in G&A for each of the management teams of these companies that are going through restructuring and so if you're a large owner and probably have multiple board seats. On these restructured companies I think I think might move quickly.
Would you try to consolidate some of them on and so all of that I think brings.
It's certainly shrink supply of available rigs, but also brings more discipline, we think going forward. So we're actually more encouraged to see what happens post restructuring, we don't see it as a as a disadvantage there they're going to want to generate cash and theyre going to wonder what with the best market day rate. They can they can get will be.
And we will certainly set the standard on that but but but I think we could get into a much healthier industry structure, which could lead to a much healthier approach to bidding this work.
And right for you.
Want to add to that.
Sure Yeah, I would add in there.
The activity levels that we're seeing in the intending and in fact that the bed durations basically doubling now.
We see that.
Theres, a real opportunity here that the activity levels could return to the kind of 2016, maybe even 2015 levels, but the big difference now as Theres about 60 last rigs than there was in that timeframe and if you. If you count the competitive rigs that are not cold stacked and mothball debt I mean, you may be.
Much as 100 rigs different than you were in the market dynamics for floaters just.
For five years ago. So as Jeremy says you know that the announcements made by several of our competitors that the intend to scrap a lot of these assets because during the restructuring they basically have removed the financial shackles on on taking those steps.
Plus some consolidation I think its very easy to see significantly fewer number of rigs available in the hands of fewer competitors. So we would imagine that those bond holders are very keen to see a return on net investments eventually.
Yes, I'll make sense thanks, everyone.
Thank you once again that is star.
Wanted to ask a question. If you find your question has been answered you may remove yourself from the queue by pressing star.
And the next question is from Connor Lynagh with Morgan Stanley.
Yes, Thanks, I wanted to stay on the attrition team here.
You know one of the pushback that we hear on on some of the retirements that are taking places.
Large part maybe not entirely but in large part. These are older rigs that maybe have been less competitive in the market for a few years now I'm curious if we rewind the clock to 2017 2018 two.
2019, do you feel that the presence of some of these older rigs was still weighing on day rates are weighing on the bidding environment out there and I guess just sort of what's your what's your take on whether or not on the loss of some of these lower quality older rigs, it's going to impact the market.
Yes, I'll take that one.
Yeah, absolutely I think we are I think we have to recognize that add back in that timeframe.
When those rigs were perhaps not long term stacked at that point, they were being cat somewhat warm somewhat active.
Obviously, the desire to turn that into a contract pretty strong so when when faced with that decision. That's that's what a lot of that.
Lack of discipline enters the marketplace, but I think no, especially on this restructuring and you see some of those assets now.
<unk> being removed from debt covenants and those kinds of things.
Certainly moving forward as you know, there's there's fewer and fewer.
Ability or desire to keep those rigs warm so that's basically what you're seeing now we see quarter on quarter.
The number of cold stacked rigs is going down because the equivalent number are actually being scrapped.
If we look at scrapping in general I mean, we are by our count we're at about 160 rigs have been scrapped since the beginning of the downturn in 2014.
On a net he if you count the numbers I mean, it's approaching half of the fleet and.
And we think it will actually eclipse half the fleet at some point.
Later this year so.
Yes, so scrapping are retiring it really is the name of the game.
You know I think I think over the past couple of years adjusted.
Ben.
Over the past couple of years to divest assets have been the ones that are secured contracts and I think our customers have seen the efficiencies that can be driven from some of these higher spec newer assets and at the end of the day the day rate for them is not as meaningful if they can if they can compress the time of their projects and get that first of all more quickly and so.
I think they're starting to see that.
Won't accept the lower spec assets going forward.
Yeah understood I guess I guess, just the other side of that is the cold stacked assets and I would think that the longer that you set the higher cost it becomes prohibitive it becomes debt to reactivate them, but can you can you help us think theyre just in your experience.
For an asset that's been stacked for a year or two versus some of the assets that are looking to come out maybe.
Maybe 2023 2020 for how different is the cluster or put differently. How different is the day rate that you would require to justify the reactivation of some of those assets.
I don't know that we as an industry experienced this before you.
You might have you might have stacked a one asset for a year or two and then brought it back out but to see some of these sit now for multiple years I don't know that we fully understand what the what the process is going to be what the cost is going to be we obviously as we as we properly preserve these assets we put together a list of what we thought it was going to take to reactivate and put together a budget of what we thought it would cost to reactivate but.
Your points well made I think this is this is steel and sitting on water and electronics.
And saltwater and so you've got it you got to think that.
As more time passes the more cumbersome, the reactivation and probably the more expensive, but candidly. We just don't know yet I mean, we've I think we've repeatedly said depending on the asset and the length of time. It has been it stacks you might see a reactivation anywhere from 25 million to well over $100 million and so from from our perspective.
And hopefully our competitors perspective, we're not willing to invest that capital into a reactivation unless we're getting rewarded for it with the contract that gets us a return.
Okay.
Got it.
So let's say the zone.
Look at the balance sheet from liquidity of outcome.
Peers that cannot afford to go ahead and spend the.
Jeremy It starts at 25, I'm going to start at $50 million to $100 million plus on reactivating assets, it's just not possible.
Alright.
That was yes that was my point really was.
That once upon a time there was perhaps money in the coffers to do that but certainly amongst the groups know that would be a fairly bad use of the remaining capital that our competitors have so we imagine that that is not something they're going to want to do.
Makes sense. Thanks, thanks for all the color.
Alright. The next question is from Taylor Zurcher with Tudor Pickering Holt.
Hey, good morning, and thank you I wanted to start by asking on the new.
The new regulatory environment in the Gulf of Mexico.
This question might be a bit premature, but specific to the 20 K P. S high opportunities that most of that if not all of that is going to be in the Gulf of Mexico.
I'm just curious if you could help us think about whether some of these regulatory changes.
Might impact your thinking with respect to upgrading your two new builds with 28 Psi capability and I'm thinking here and mainly the Atlas, which only has a letter of intent right now, but any any thought there would be helpful. Thanks.
Yeah, I'll pick up right with Adam Yeah, Yeah sure. So look on the on that side of things and the development plans are in place for the 20 K prospects.
For the like yourself.
I encourage shenandoah.
For our fields that have been previously sanctioned they've got development plans that have been approved now obviously as they go through the.
The process of getting the drilling permits at all of the technology is being qualified so that they are following all the rules that are in the existing leases and all of these leases are current.
It means that in compliance so that the administration has shown that they are honoring their previous commitments, which means that they are approving drilling.
Drilling permits that are.
Filed in accordance with the rules on of course filed.
Under our current license so we really don't see any challenges to that because the.
The operators are doing exactly what they're supposed to do.
As we see the department of interior returning authorities to the.
The local.
Offices. It we just don't see that being a particular hurdle.
We're following all the rules.
All of the precautions are taken as they should do.
And again these are just really.
The permits to allow <unk>.
Development of these existing assets so from.
From that point of view, we really don't see much risk its all there on the qualifications of the 20 K equipment.
Alright Thats helpful. Thanks for that and my follow up is.
As it relates to the Asgard and inspiration both of those assets are idle today in the prepared remarks. It sounds like on both of those have had some good marketable opportunities within 2021 and it sounded like most of that was on the Gulf of Mexico. So I'm. Just curious are those rig a largely being bad for for opportunities in the U S. Gulf.
Mexico and.
If there's any way you could provide some guidance or color on whether you think both of those rigs might not be back working by let's say year end 'twenty 'twenty, one that that'd be super helpful.
Sure I'll take that one up and yes. So.
And on what we're seeing in the Gulf of Mexico, It's very interesting when we compare it to what we saw as we exited 2019. So you may or may not recall that and supply became real tight essentially that the whole assets available.
Just began to to shrink.
And we were quite successful in getting the rates from the kind of the 170 180 level up to the kind of mid twos.
So we're actually seeing the same thing again, when we put our supply and demand chart together and we go into in greater detail because of the number of rigs that have since been retired or.
Net of mothballed permanently cold stacked.
The number of available rates on the number of opportunities we see by the end of 2021.
I'm sure that there's actually.
Couple of rig sharp so when.
That combined with you know they have the new well control rules on sheeting and stuff like that so there's some long lead items required on share arms and those kind of things we're cautiously optimistic that the Gulf of Mexico is going to see.
On a pop in demand we're already seeing it in the tenders. So once a few of these things get booked up.
There's very good possibility both of those rigs will be working at the end of the year for sure.
Net and we can take it from there but.
It says, it's looking like a balanced market exiting this year so.
The very positive development compared to where we were.
Six nine months ago.
Awesome, Thanks for the answers.
Alright. The next question is from Fredrik Stene.
<unk> with Clarksons Plateau Securities.
Hey, guys Fredric here and on.
First congratulations on the on the very strong.
<unk> quarter.
My question. Thank you for this year relates to what you had.
Mostly relates to what you've done on the financial side here, which I hope so.
I think it's impressive and you've kind of pulled every day every lever you haven't been able to.
Substantially reduce the particularly them on the unsecured debt that you have now in the next.
A few years, so I was wondering.
We don't name called the minimal amounts left now compared to what you have do you have any.
Other levers left that you can can poll for example, more senior guarantee heat capacity or do you think that you would.
From your efforts towards for example, the <unk>.
Three bond debt on the secured bonds and instead to credit to get even more runway out to this.
Perfect. That's a good question.
Our philosophy has been for the last several years to try and maintain a liquidity runway of about five years. So we look at over five years, whether it's secured unsecured.
Guaranteed on convertible bonds whatever is in that one way we've tried on attack that as soon as we can.
I mean, any way, which we can so last year, we were sitting here in February we had no idea, we're getting hit with Covid a month later, which had a dramatic impact on our <unk>.
And that pricing and that provided an opportunity for us to go out and do some exchanges. So as we look through the rest of this year as opportunities arrive arise we would take advantage of debt and continue to keep that runway as clear as possible.
Oh.
And just as a follow up to that and again I think this relates to them.
Actually the <unk> bonds have called on.
At the moment it seems like the market is definitely pricing and some expectations about a new contract or a contract.
And option exercises or something like that for it for these rigs on with the new tax scheme in Norway as well starting to have an effect.
Do you have any update on on your discussions with with equity or if you've had any about the future of the Oh dos Reis on the NCS.
I'll take that one absolutely so.
Yes, we are constant dialogue with that with our customers and of course, Ecuador being one of the biggest.
But yes, so we were exploring various different things that we can do with those rigs.
They have been highly customized debt, we've recently gone through several a really meaningful upgrades on the technology side for those rigs. So Ecuador has invested in these rigs that are actually performing extremely well and actually reaping the benefits of those upgrades. So we remain very optimistic.
There will be an active part of the fleet certainly because.
On the demand seems to be there from <unk>, but also the <unk>.
Amongst the top performers and the Ecuador fleet. So so we're feeling pretty good about that.
Thank you guys I'll get back in the queue.
Alright. The next question is from Mike Sabella with Bank of America.
Hey, good morning, everyone.
So I guess one of the things I was hoping to touch on Jeremy you mentioned.
Earlier debt.
The outlook for day rates.
Yes.
Improving as we as.
As we head debt towards 2022 could you kind of give us an idea of what what improving means.
Is it kind of 250 ish later this year on into next year or is that still a little too optimistic kind of as we sort of start for recovery.
Yeah.
In our prepared remarks, I think it was.
We have one ultra deepwater drillship that we signed up for a $215000. We had the semi submersible in Trinidad on the D. D D. Three.
That was true.
2025, and $2 50, and so it's moving in the right direction on I think what I, what I'd kind of point back to is if you remember the close of 2019.
When we were really starting to build some momentum we signed about five fixtures at which which we announced in January.
2020, and all were in that mid 200 range I think the average around $2 50, maybe maybe a little bit more than we were seeing more momentum building.
As we entered the year and unfortunately, COVID-19 hit and just suck the wind out of our sales and so I think you could probably see a similar trajectory where as Rodney said there is some enthusiasm and some some market out there right now Gulf of Mexico, and elsewhere, where we can start to see.
The marketable supply of rigs get consumed pretty quickly and in.
And when that happens you can push day rates pretty quickly so right out on if you want to add more color to that but I mean.
I think mid twos to high twos is not unrealistic if the market can continue to altogether.
Yes, I think certainly that's the case in 2022.
I would.
Concur with that.
I think this is the point is.
Pay really close attention to those supply and demand chart and you see the opportunity there and to be quite honest I mean, our customers have spent the past several years tooling the business to be profitable at 40 or $50 a barrel in some cases, even lower.
With the commodity prices 60.
<unk> and <unk>.
You folks.
Predicting that theyre going to be in the seventy's by year end.
I think there's a there's some still very good money to be made by the operators. Even if we have a modest increase in the year and the day rates associated with that with the Florida. So yes, certainly mid twos to high twos are very possible.
And the next set 12 to 18 months.
Perfect. Thanks, and then.
Alright beaten beat on what's going on on the Gulf of Mexico to depth at this point, but as we think of.
Anchor in some of the some of the other long term contracts that are in place.
If it gets bad in the Gulf of Mexico.
Are you hearing anything from Chevron on that as anchor are expected to still be on time.
Relative to the previous schedule that was laid out.
The other long term contracts on the Gulf of Mexico, I mean is there any concern for any of those Brexit.
If the administration takes us.
More on star direction than what people are expecting.
Yes.
Theres no accounting so high.
Go ahead Joe.
Right good.
Okay.
I mean theres no accounting for.
An immediate left turn.
But certainly that's not the case I mean, what we've seen so far is actually an increased urgency for.
From a debt.
Customers to get on with it.
I think they.
If they could take the rigs earlier on Star Elliot I think he would.
I think the macro environment, so attractive just no debt.
Its worth pushing them on and certainly we talked to them all the time, but.
But.
On the technical details of where we are but also the kind of the larger political.
Environment and certainly the feedback we get from them is that the administration as a very keen to see improvements in ESG targets and those kind of things.
They're not about trying to shut down the economic engine in the Gulf of Mexico ways. So.
I would just summarize by saying we have not seen any yet.
Any drawbacks to that yet if anything we've seen more urgency from the customer so.
We appreciate that and obviously, we look to service that as best we possibly can.
Perfect. Thanks, everyone.
Alright, and we will take our final question from Sean Meakin with J P. Morgan.
Thank you good morning.
Good morning.
So.
You see better prospects for tenders in 'twenty. Two can you maybe just talk at a high level about how you'll approach contract duration. So in other words.
If supply demand dynamics to get more favorable as you expect.
Should we expect you to focus on shorter duration work does not lock in rates below where you see the market's headed or maybe what did you do a barbell approach where you try to lock in some longer term anchor contracts and then leave optionality for some others.
Yeah, I think I would say probably all of the above right.
Right Yeah.
You will right.
Yes, if you do the analysis on the fleet status report you can you kind of see that right. So we have a few that are locked in longer term. We will look at the asset specifically on which ones are super competitive or have special powers as it relate to think golf had whether they have features that perhaps are extremely rare in the industry. So I would say we do.
All of the above we do look to lock in a few.
But certainly we're not going to take our best assets on <unk>.
Tag they've upped the day rates that don't create meaningful EBITDA and we will keep those short.
Even if we do have a little bit of idle time between contracts, that's going to be worth it for the for the upside.
As we begin to see this thing improves so yes.
<unk> strategy for sure, but certainly on the on the better assets. We are we're not keen to tie them up for long periods of time at low rates.
No it would have gone to the scaling.
Year, one some day rate year, two at a higher day at your three at an even higher day rate. If we were going to do anything like that.
Right right that makes a lot of sense.
Maybe one more for Mark then just.
To follow up on how you see your remaining financing options.
Of clearing the liquidity runway is as you mentioned before it's perhaps worth noting your stock's up buyback.
Buybacks in the last four months does that change your.
Set of options at all from that perspective.
I think it enhances our options are.
One more potential true lot there we could look at equity linked we could look at equity.
Primary driver has been.
As you've seen in the past exchanges tenders open market repurchases.
We're going to look at all of that and whatever makes the most economic sense for our shareholders.
On a go after that.
Got it very good thank you.
And there are no further questions at this time Lexington, I'd like to turn the call back to you for any additional or closing remarks.
Thank you Sarah and thank you everyone for your participation on today's call. If you have further questions. Please feel free to contact me.
Look forward to talking with you again, when we report our first quarter 2021 results have a good day.
This concludes today's call. Thank you for your participation you may now disconnect.
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