Q2 2019 Earnings Call
Good day, everyone and welcome to Volaris plc second quarter 2019 financial results Conference call.
All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
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Please note today's event is being recorded.
And at this time I'd like to turn the conference call over to Mr., Nick Georgia Senior director of Investor Relations.
During the call.
Please go ahead Sir.
Welcome everyone to the <unk> second quarter 2019 conference call.
With me today are president and CEO , Tom Burke Executive Vice President and CFO John box.
And the other members of our executive management team.
We issued our press release, which is available on our website at Dolores Dot com.
Any comments, we make today about expectations are forward looking statements and are subject to risks and uncertainties.
Many factors could cause actual results to differ materially from our expectations.
Please refer to our press release and happy filings on our website that define forward looking statements and list risk factors and other events that could impact future results.
Also please note that the company undertakes no duty to update forward looking statements.
During this call, we will refer to GAAP and non-GAAP financial measures.
Please see the press release on our website for additional information and required reconciliation.
As a reminder, we issued our most recent fleet status report, which provides details on contracts across our rig fleet on July 25th.
An updated investor presentation is also available on our website.
Now, let me turn the call over to Tom Burke, President and CEO .
Thanks, Nick and good morning, everyone. Following on name change I'll leave this week, John and I are very pleased to be speaking to you today on all those quarterly conference call as Florida.
During our conference call in May I laid out for sure short term priorities for the company integration and synergy capture delivering value from our drilling balance sheets and liquidity unlawfully fleet management, which encompasses our contracting strategy.
In a moment I will review our progress on each of these priorities, but first I will briefly discuss our second quarter performance.
The second quarter 29 team was all those quotes out as a combined company following the close of all mature in April .
In terms of all financial results, we reported adjusted EBITDA of 59 million for the quarter back to them. The outlook, we provided in our first quarter conference call.
Well these results exceeded expectations. Some of this outperformance was due to the timing of contract drilling expenses that were originally anticipated to occur.
In the second quarter and are now expected to occur in the third quarter of 2019.
John will discuss our second quarter results and third quarter outlook in more detail later in the call.
Our financial results benefited from strong operational performance with 98% uptime across all floaters and 99% uptime across both Jackups.
Additionally, through the first half of 2019.
Our recordable incident rate was nearly 20% better than the industry average as measured by the International Association of drilling contractors.
These results are a testament to the continued focus on safety and efficiency from our offshore crews and onshore personnel.
I want to commend our employees for their professionalism and unwavering commitment over the past several months they've worked tirelessly to keep our rigs up and running and avoid distraction, but often arise Jordan a merger.
I also want to acknowledge everyone's hard work on the integration. So that we will achieve our targeted synergies and deliver on our commitments to create value from the merger.
On this note I will now update you on the first of our priorities.
Integration and synergy capture.
We recently reached 100 day milestone following the merger closing in April .
I'm pleased to report that the integration is moving forward as planned.
We have a detailed and robust integration plan and to date, we have completed more than half of all integration activities, including a major ERP confession.
The consolidation of offices and warehouses in Aberdeen, and Houston, and approximately 65% of all staffing reductions.
We are confident that we will achieve the targeted synergies of 165 million by the end of next year and will continue to look for opportunities to deliver additional synergies from the combination.
John will provide additional details on synergy realization in his commentary.
In conjunction with these integration integration.
And after thoughtful consideration review, we decided that renaming the company was the best way forward.
This decision was not taken lightly.
Our predecessor companies have storied history that span many years and we're extremely proud of what these organizations have accomplished over time.
But we believe that a new name is an important part of our evolution.
While remaining the company isn't obvious sign of change it is part of a more broad try ambition as we move forward at the larger more diverse organization.
We will continue to provide updates on this transition in the coming quarters, including the status of our integration and synergy capture.
Second priority is arrow drilling a 50 50 joint venture with Saudi Aramco as a reminder, this is a joint venture to own and operate Jackups in partnership with the largest customer a jackup in the world.
Which also secure the backlog proportion of our Jack up fleet grew at leasing structure.
And provide strong organic growth through our drillings new build program.
John will comment on Aero Drilling's financial results in a moment, but from an operational perspective, the arrow drilling team delivered safe and efficient operations in the second quarter with excellent operational uptime and safety performance.
Our drilling from lease fleet will expand as the best brands a modest Atg Super 116 me is in the process of commencing its maiden contract and the honesty is another Super 116, any rig is also expected to join the active fleet later this quarter.
The addition of these twos jackups will bring the number of leased rigs to arrow drilling from nine which will contribute to our 50% interest in arrow Drillings net earnings and increase the bat boat charter fees recognized as revenue by Valores.
On our prior conference call we mentioned.
First to arrow drilling new build rigs were expected to be awarded in May.
However, this has not occurred as I wrote drilling continues to have discussions with the shipyard related to certain aspects of red specifications and construction costs.
Well the older for these new builds has pushed to the right. We firmly believe that it is most important I read drilling to reach appropriate.
With the shipyard.
With respect to our product to your balance sheet management, we continue to proactively manage our capital structure to most effectively execute on our strategic priorities and maximize value for shareholders.
As Weve stated previously this entails managing our debt maturities and our cost of capital and reducing total debt.
After a thorough evaluation of the capital structure and market conditions, We recently launched a tender to repurchase debt at a meaningful discount.
We completed the tender in July we repurchased 952 million of senior notes at a 24% discount.
Interest payment for these notes were 52 million per year, and we realized 228 million of principal savings as a result of the transaction.
Our current capital structure provides us flexibility to further manage the balance sheet, including adding guaranteed all secured debt.
Given overall market conditions, and our near term debt maturities, we we view our revolving credit facility, which gives us access to approximately $1.7 billion of funding for the third quarter of 2022 as an important source of liquidity.
I'll now ask currency to detail is our approach to fleet management and contracting which are influenced by overall market conditions.
With respect to the market as you know we are navigating a protracted offshore sector recovery plan includes a significant amount of uncertainty and its timing and its magnitude.
Macro factors are largely supportive of growing demand for hydrocarbons.
With the global economy continued to expand although this growth is occurring at a slower pace today than in recent years.
In addition industry conditions are fairly positive with commodity prices remaining at levels that should be conducive for new offshore project investments.
We sure we saw evidence of this in the second quarter as the amounts of offshore rigs that were approved through final investment decisions or identify these were the highest for any quarter over the last six years. According to Bernstein research.
However.
While this is a good sign for future demand for offshore drilling rigs, we know that the lead time between if I might be on an offshore drilling rig beginning work on the project is measured in years, rather than months, particularly for deepwater projects.
Given supportive commodity prices the number of new floater contracts increased approximately 15% during the first half of 2019 as compared to the same period in 28 team, helping to push marketed utilization for the global floater feet up to roughly 80%.
However, despite spot utilization, increasing we still have not seen deepwater contract term lender with a six month average duration for new contracts and extensions in the first half of 29 team, which is in line with contract lengths over the prior period.
Since floats or contract lengths have remained relatively short term in duration day rates for new floater contracts continue to be competitive as offshore drillers bid to keep active rigs working.
Additionally, the number of tenders the future floater program has been relatively flat for the past several months and there remains a limited number of opportunities with meaningful.
But are expected to begin before year end 2020 .
With Flotek contract durations short and the number of future opportunities flat meaningful recovery in flow to day rates may be further out that many than many in the market are expecting.
What is positive low to day rates have moved off recent lows to levels that are now generating positive cash margins.
The number of new opportunities and the corresponding day rates have not progressed at the pace, we would have expected six months ago.
As a result outlook floats as the remainder of this year and the first half of 2020 has softened since we began the year.
Considering these conditions were taking additional steps to manage our floater fleet and reduce cash outlays.
First we mobilized the relo Rowan reliance from the us Gulf to the Canary Islands, where the rig will be warm stack alongside Ensco DS seven and vs six providing a significant reduction in daily cost.
Second we are in discussions with the shipyard to delay the delivery of new build Drillships Ensco DS 13, and DS 14, while we expect to delay these rigs beyond that currently scheduled delivery dates later this year and next year, we have the option to convert the final milestone payments to promissory notes that are due at year end 2022.
In terms of our floater contracting strategy, we will continue to take a portfolio approach, where we aim to increase near time utilization for certain assets and hold additional capacity off the market until we see day rates above the levels that justify additional flow to supply.
For example, we prioritize contracting the Rowan relentless, which is scheduled to come off contract in the fourth quarter and recently won a short term job with options that could extend the rigs contract period into 2020 , while electing to warm stack the Rowan reliance.
For our three vintage floating rigs that are older than 15 years of age all of which are scheduled to complete contracts in the next nine months, we will assess the call required to keep each rig competitive in the global fleet and if we do not see adequate returns and required invested capital we will move to divest the rigs from our fleet.
Moving to the Jackup market, while global marketed utilization is similar to floaters at approximately 8%.
The Jackup recovery things further along.
New Jackup contracts signed during the first half of 2019 or 25% higher than the first six months of 28 team.
Contract lengths for new fixtures have increased by two months on average over the same period to 14 months.
One or two month decrease in contract lengths may see minor on the face of it this coupled with the pickup in contracting activity has helped to drive a broad based although a modest increase in pricing for jackup rigs.
This is particularly evident for jackups capable of working in the most challenging environments, where spot utilization is above 95% and there as a result, we've seen day rates moving higher for these rigs from RF has a large fleet that can service the segments of the market with 14 units seven ultra harsh and seven harsh environment rigs.
Most of these assets are in the North Sea, where we have had some refund contracting success. We've added two years I'll turn to the Ensco 120, a harsh environment Jackup and this rig is now contracted until the middle of 2020 two.
We also won a two well contract for the Ensco 122 also a harsh harsh environment Jack up that will keep the rig utilized most of 2020 and a six month extension for the Rowan Gorilla, five and ultra harsh environment Jackup.
These contracts have options beyond that.
But could lead to substantial additional contracted days I would note that these options either price that meaningfully higher rates or unpriced and indicates our of the improving market dynamics.
We've seen improvements across all the major shallow water markets and utilization for modeling benign environment asset is approximately 80%.
With 25 of these multi benign units in our fleet 14, heavy GT Jackups and 11 strategy Jackup Laura has one of the leading fleets of modern benign environment Jackups.
Our global footprint enables us to service a wide range of customers shallow water requirements around the world as evidenced by our recent contracting success in West Africa, The Middle East, Australia and Central America.
With respect to our Jackup contracting strategy all of our marketed Jackups are either currently under contract scheduled to begin contracts.
So our focus is on bridging any gaps between contracts for these rigs were also monitoring pricing and other market conditions, and we will carefully evaluates reactivating jackups to meet customer demand when day rates just justify cost to return these rigs to our active fleet.
In closing, while certain aspects of the market recovery may be progressing slower than anticipated. We will continue to focus on key areas within our control, namely staying highly involved with arrow drillings development willing winning new contracts for our rigs with availability driving high levels of operation applying for our contracted fleet.
By accomplishing this we will best position the company to weather the cyclical nature of our industry participates in the unfolding offshore market recovery and maximize value for our shareholders.
I'll now turn the call over to John .
Thanks, Tom and good morning, everyone. In my prepared remarks today I will cover our second quarter 2019 financial results our outlook for third quarter 2019, Capex guidance for the remainder of the year and provide some high level commentary on Aero drilling.
I will also spend some time discussing our financial position and capital allocation in light of our recent debt tender.
And finally, I will provide an update on merger synergies and transaction costs.
As a reminder, we closed the merger on April 11.
Therefore, the second quarter 2019 results in our press release reflect legacy Ensco operations only for the first 10 days of the quarter and the combined company from April 11th onwards.
Because legacy and scale of the accounting acquirer in the merger.
Additionally, in conjunction with the organization for Lars rebranding you'll note we've attempted to simplify the categorization and naming within our rig fleet. The Jackup fleet is now subdivided into more logical categories in our fleet status report with rig names aligning to those categories. My comments on this call will reflect legacy rig names to ease the transition however, going forward. The updated rig names will be reflected in our investor materials.
Given that second quarter 2019 is our first reporting period as a combined company my commentary will compare actual results against guidance provided on our prior conference call.
Adjusted EBITDA for the quarter was $59 million compared to guidance of approximately $35 million.
This beat was driven by a variety of factors, including strong operational performance and disciplined expense management, which I will review in more detail. However, as Tom mentioned will also reflect a deferral of certain expenses into the third quarter, which will have an adverse impact on that quarter and effectively pull proportion of EBITDA forward into the second quarter.
Starting with the second quarter revenue of $584 million versus the guidance of $580 million. The revenue beat is primarily due to higher operational utilization across the fleet and more operating days for the Rowan, Norway and Rowan Viking.
Excluding transaction costs contract drilling expense was $489 million.
This is approximately $20 million lower than the prior conference call guidance, mainly due to the removal of an expected rig reactivation from our planned due to the transfer of a drilling contractor an active rig with availability and the deferral of mobilization cost and certain repair and maintenance costs into the third quarter.
Second quarter depreciation expense was $158 million, which was $7 million higher than guidance, primarily due to changes to the fair value of legacy rone assets.
As a reminder, the fair value estimates of the assets and liabilities acquired from legacy ROE are preliminary and May change as we finalize our vessels during the one year accounting measurement period.
Excluding transaction costs general and administrative expense of $33 million as of $2 million lower than our second quarter guidance due to disciplined cost management.
During the second quarter, we incurred approximately $60 million of merger related transaction costs, which are excluded from adjusted EBITDA and the adjusted loss per share presented in the press release.
Other income was $597 million for the second quarter, driven by a $713 million bargain purchase gain related to the merger transaction and partially offset by $118 million and net interest expense and $9 million with the consent solicitation fees and other related costs.
Finally tax expense was $33 million in line with the guidance, we provided on our prior conference call.
Now moving to our third quarter 2019 outlook, we're expecting to see a meaningful drop off in EBITDA due to a variety of factors, including contract roll off uncontracted time between contracts for repair and maintenance.
Mobilization and some seasonal gaps in utilization.
We expect total revenues will be approximately $545 million with the sequential quarter decline, primarily due to contract roll off across the floater fleet.
As Tom mentioned earlier, we see more uncertainty in the near term for the floater market, which May result in revenue and EBITDA that are substantially lower than sell side analyst estimates for the second half 2019 and full year 2020.
Our third quarter revenue outlook breaks down as <unk>.
$255 million to $260 million from our floater segment.
$220 million to $225 million from our Jackup segment, and approximately $65 million of other revenues, including $23 million of Reimbursable revenue from Arrow drilling.
$21 million of Arrow drilling lease revenue and $21 million related to to manage rigs in the us Gulf.
Excluding transaction costs, we anticipate that third quarter contract drilling expense will be approximately $505 million.
The sequential quarter increase is mostly due to a full quarter of operating costs for Drillships Ensco DS seven DS nine and 12.
Which commenced new contracts during the second quarter.
Along with a full quarter contribution from the legacy Rone fleet.
Mobilization costs for the Rowan reliance Ralph Coffman and wrote Norway.
Higher operating cost of the Rowan, Norway due to a change of operating location from Turkey to Norway.
The portion partial quarter of operations for Ensco 123, which is due to commence its maiden contract during the third quarter.
Well, we have a number of floaters that are expected to roll off contract in the third quarter, reducing costs from operating level to warm stack state can take 60 to 90 days to the gradual reduction in contract drilling expense does not correspond with immediate decline in revenue.
They are therefore, we would expect to see the benefit of these quarter corn cost reductions in the fourth quarter. When we anticipate total contract drilling expense will be below second quarter levels, excluding transaction costs, which were $489 million.
We expect depreciation expense will increase to approximately $163 million due to a full quarter of depreciation for legacy road assets, along with Ensco 123 best brands in earnest the joining the active fleet.
DNA expense, excluding transaction costs is expected to decline to approximately $31 million due to the realization of synergies.
Finally, we estimate the third quarter tax provision will be approximately $40 million inclusive of discrete tax expense related to the gain on debt extinguishment. Following our recently completed debt tender.
Let's move now to Aero drilling.
Our drilling of the 50 50, Nonconsolidated joint venture between Belarusian, Saudi Aramco, which owns and operates offshore drilling rigs for Saudi Aramco.
In total we expect our drillings 2019, EBITDA will be towards the upper half of the prior guidance range of 160 and $180 million for the full year.
Note that our SEC filings and press release tables present results from Arrow drilling from the merger date forward and will not include pre merger activity.
As of June Thirtyth.
Era drilling of seven assets with substantial contracted revenue backlog Polaris contributed five of the seven assets to era drilling in exchange for cash.
And 10 year shareholder note the bear interest at LIBOR plus 2%.
On an annual basis era Drillings board of directors will decide whether the interest on the shareholder notes either added to the press will learn bells or paid in cash.
As of June Thirtyth.
The balance of the shareholder notes is approximately $453 million.
As a reminder, era drilling has no external debt, which presents a future financing opportunity given that the company's rig fleet is fully contracted and as meaningful revenue backlog.
Moving now to our capital expenditure outlook for the second half of the year.
Excluding transaction costs and the final milestone payment for Ensco DS 13 capital expenditures for the remaining six months of 2019 are expected to be approximately $110 million.
A portion of these customer required upgrades are reimbursable.
We also anticipate $20 million of Capex, primarily for Newbuilds and recently delivered Jackup rigs.
Most of these costs are related to the startup and mobilization of Ensco 123, which is expected to commence at Canadian contract in the North Sea during the third quarter.
Our only remaining newbuild commitments are for Drillships, Ensco DS 13 and 14.
In light of Uncontracted rig days on many of our delivered drillships, coupled with an uncertain outlook for near term floater demand. We're in discussions with the shipyard to delay delivery of these rigs.
We do not delayed delivery of the rigs we have the option to finance the final milestone payments totaling $250 million plus accrued interest through a promissory note with the shipyard for the rigs.
The promissory note will bear interest at 5% per year with maturity at year end 2022.
Turning now to our financial position.
Since closing the merger financial management has been one of our main part priorities with a focus on managing debt maturities and cost of capital and reducing total debt.
During the first 60 days after closing our capital management actions were limited by the legacy Rowan 2025, senior notes, which contained a change in control provision with a double trigger mechanism granting holders a put option in the van to both the change in control and the downgrade by both Moody's and S&P within this time period.
Subsequently, we launched and recently completed a debt tender that reduced total debt by $952 million repurchasing debt that carried annual interest payments of $52 million and realizing $228 million principal savings at an average pretax discount of 24%.
Adjusted for the results of the debt tender pro forma liquidity as of June Thirtyth totaled $202.7 billion.
Including approximately 350 million of cash and short term investments and a $2.3 billion revolving credit facility, which steps down to approximately $1.7 billion from October 29 team through September 2022.
As a consequence of the debt tender, we have significantly reduced our available cash and equivalents and we anticipate that we will need to draw on the revolver as a source of funding under the current market conditions.
To this point, we have drawn $125 million on our revolving credit facility in advance of repaying our 2019 senior notes that mature today.
Given greater uncertainty on the near term outlook for the floater market, we view our revolving credit facility as an important source of available liquidity as we navigate the protracted deepwater recovery.
The key covenants under our revolving credit facility our.
Maintaining a total debt to capital ratio below 60%.
Providing guarantees from certain of our regarding subsidiaries such as these entities represents at least 80% of total net book value.
And having netbook value coverage from our marketed rig fleet that has at least 3.2 fivex the size of the facility.
Importantly, this revolver is unsecured and has no covenants based on operating cash flows will also maintain the flexibility to raise additional capital through asset sales and the issuance of guaranteed and secured debt.
In terms of our next steps, we will look to opportunistically raise additional capital to increase our available liquidity and address near term debt maturities.
It is important to note that we have the largest fleet of offshore drilling rigs in the world, which is comprised primarily of modern floaters and jackups with an unencumbered gross asset value of approximately $11 billion. According to third party research.
We believe that this fleet profile and our unsecured capital structure should provide us with access to capital and financial flexibility as we navigate the market cyclicality.
Finally, I will provide an update on synergies and transaction costs.
As Tom alluded to earlier, we are on track to achieve our annual expense synergies of approximately $165 million and we are evaluating additional opportunities with the potential to achieve synergies beyond this target.
In total these synergies are expected to result in approximately $1.1 billion of capitalized value.
More than 75% of the synergies are expected to be captured within one year of closing and we expect to reach full run rate synergies of $165 million by year end 2020.
Consistent with our prior guidance, we anticipate the cash transaction costs associated with the merger will total approximately $175 million related to employee severance costs legal and professional fees and other integration related costs.
These transaction cost estimates include costs incurred by legacy real in prior to closing as well as costs associated with our recent rebranding.
As of June Thirtyth, we have incurred total cash transaction cost of approximately $110 million with the majority of the remaining $65 million expected to be incurred in the second half of this year.
We will continue providing updates on our synergy achievement and transaction costs and subsequent conference calls.
In closing I want to reiterate that we will continue to proactively manage our capital structure to most effectively execute our strategic priorities and maximize value for shareholders.
We continue to evaluate options that will help us to achieve these objectives and remain focused on delivering our targeted synergies and actively managing our cost base, where we best position the company for the future.
Now I will turn the call back over to Nick.
Thanks, John .
Jamie at this time, please open the line for questions.
Ladies and gentlemen at this point, we'll open the lines for questions you would like to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone, we do ask that you. Please pick up your handset before pressing the keys.
So what you all your questions you May press star into.
Once again that is star and then one to ask a question.
Well pause momentarily to assemble the roster.
And our first question today comes from Ian Macpherson from Simmons. Please go ahead with your question.
Hey, good morning.
Afternoon. Thanks.
One thing we picked out of the fleet status was a few Jack Thats it has longer priced options.
Behind what we saw before.
Most significantly I think was this does anger that shows it has customer price options out through 2025 can you speak to.
The Genesis of those how recently, where they Don I think you said.
Broadly that you have escalating.
Options on some of these rigs, but is that something that.
It goes back in time or were they more these options were freshly price with.
Something closer to.
Market pricing expectations.
Hi, good morning, and I'd say this problem.
As far as up before the general tempo, all our contracting around jackups, particularly large jackups.
We are seeing.
Some good trends as far as.
If we have priced options that typically at rising rates.
All we have.
Yes option that may be options on contracts, which are mutually agreeable.
And also the auction so stressed a limited the customer needs to declare it all typically cutting.
Sooner in the drilling contract as opposed to later so generally.
Yes, all or positive respect for those.
What specific contract they were put in place some time ago.
Yes, that's one of the Master services agreement that we signed with excellent. Yeah. So we find out that was out and find a lot of service agreement with ethanol and those options were put in place.
And we are we're happy with where the cadence of mobile and how that cost.
Okay.
You John your working capital kind of cross your cash flow in the second quarter.
And I Wonder if you could provide some.
Perspective on your expectations for for that component for the rest of the year.
Yeah sure good morning, Ed.
It from morning from working capital standpoint.
Really this quarter there was a lot of moving pieces I guess is there typically are but this particular quarter. We had a lot of startups in Q2. So for example, the DS 12, the DS 70, 8500, a few jackups.
So typically your accounts receivable will swell when when that happens.
So we had we had.
That was one of the drivers and then we had other aspects such as some tax payments that hit in the in the second quarter.
Typically would accrue those that those there was just.
A bit more from a cash standpoint in Q2 than others and then there were some other mobilizations that were that were going on this quarter I would I would say those are probably the unique items this quarter that impacting working capital and I would expect that.
The next quarters.
It would be more normalized but for other.
Got it.
Movements of rigs are those type of things.
Okay, and John just to clarify you said your your merger costs are expected to be $65 million in the second half and I assume will probably a little bit heavier in Q3 and Q4 is that is that fair.
I think Thats fair, yes.
Great all right. Thanks, I'll pass it over.
Our next question comes from Cole Sullivan from Wells Fargo. Please go ahead with your question.
Hi, good morning.
On the.
The guidance for third quarter revenues can you help us walk through kind of the moving parts, there a little bit a little bit more and.
On and yes to the pull levers it sounds like.
Sounds like the utilization could be could be a little lower there.
Sure good morning.
From a from a kind of the abridged standpoint from Q2 to Q3.
What you see is that we do have some roll offs happening in Q3. So we've got the DS 485, a for the Dps one all roll off in July .
And the 5006 in in August and so a lot of that is early in the quarter and so thats that will contribute a meaningful part of that that drop off.
And then as I mentioned in the prepared remarks.
CDMI is going up because it does take some time for first to ramp down those crews to put them in a more.
Kind of form state, if you will and given that a lot of those roll offs or early in Q3, we will incur a lot of the cost of those rigs throughout the quarter.
And then you also have other startups that are occurring and so typically as you know we're going to ramp up the rigs to get ready to work and so we had some other startups.
Occur in the in the second quarter that.
From a from a third quarter standpoint that you are now going to recognize.
A full quarter CD any so those are the drillships the DS seven the DS nine the DS 12.
And we've also got some mobilizations, which I mentioned the reliance the Ralph coffin into in the Norway all.
Kind of impacting Q3, which is.
Which are all items that are adversely impacting the quarter.
Alright, thanks for the color there.
You said the the cost savings in the second quarter ended at around $80 million on a run rate basis can you help us kind of split that up between Gionee and Opex and then also can you help us think about how much of the cost savings.
How much additional cost savings is implied in the third quarter guidance.
Well in terms of where we're at today so from a from a run rate standpoint, the majority of that savings is impacting DNA at this point.
And it's all it's the majority of it is back office expenses as you'd expect.
In terms of kind of the ongoing guidance.
That that trend will continue going forward and you will see we as Tom mentioned and I mentioned, we are aggressively hitting the.
Working on reducing costs and so we're we're more focused on that part and diluted we'd expect that the Q3 numbers will continue to from a synergy standpoint go up.
More of that kind of in the near term.
All right. Thanks, I'll turn it back.
Our next question comes from Taylor Zurcher from Tudor Pickering Holt. Please go ahead with your question.
Hi, good morning, Thank you.
Tom maybe just start on some of your commentary on the floater market as it relates to pricing.
Clearly that the commentary you provided it sounds like a recovery in pricing is continually push out to the right and and so my question is.
If we could think about a futures curve for ultra deepwater pricing.
Could you help us understand what your viewpoint of that curve might look like might look like and then.
It is the inflection point higher really now 2021 event or is it Oh wait kind of 2020 event.
Hello, Good morning, So I think when we.
When you when I look at my comments.
Our prepared remarks.
What is what is clear is that we have seen a recovery.
Ultra deepwater and if we think back to 2016 2017 total utilization for floaters has come up from about 50% to about 66% and marketed utilization is coming from.
Less than 70% to over 80% today. So we're on a good trajectory off our improving.
Float.
Our utilization and as I mentioned in my prepared remarks, we have a significant number of five days.
So we are seeing flat to direct to physician utilization go up and correspondingly we have seen flow to pricing go up and flex pricing is up whereas I mentioned, we see some yes, we are.
Working against contracts, which are generating cash flow, which is which is good news and that wasn't the case on two years ago.
We're all sitting on a number of flow to contracts.
Which are there are a lot of floater contracts and I and the teams are very busy preparing.
Responding to tenders and frankly, it's very busy on the on the floating side.
But the length of the contracts are responding to.
Our offshore.
Then when we would like and so if we think about contracts that just starting between now and the end of 2020.
More than two thirds of them a less than one year in duration and so while utilization has gone up and we are seeing pricing momentum. The short term nature of these contracts fees that we wont see that much pricing momentum in the second half of 2019 or.
And the first half of all of 2020.
Hopefully were wrong, and we see more acceleration in pricing, but given the short term nature of what we're seeing.
A lot of.
A lot of the.
Competitors in the market are going to be focused on.
Getting this rig to work and then worried about the contract straight off direct and sort of keeping rigs that are working working.
Now as we think out past that in for the latter half of 2020 and into 2021, we expect to see some longer term work and we are seeing more longer term work every month more longer term contracts that pay us, but right now the majority of the contracts are less than.
One year in duration and so therefore, we won't see much pricing momentum in the short term.
Okay. That's helpful and maybe if we think about that your ultra deepwater fleet and clearly you've got a handful of.
Tier one floaters that will roll off in next several months and you've got to have these two warm stacked.
Hi Inn floaters.
If we think about the rig is like the DS four and DS six still still very capable rigs, but probably a.
A step down from from the bucket I, just talked about what sort of the the marketability outlook for for those two rigs moving forward.
Well it really depends on the application that the customers have so I would say that the PS four on the DS six.
You know the PS four for example is just finished a job in West Africa, and it's it's available right now, but it is a hot rig and customers are looking for full four assets, which have been walking recently, so it's not all doom and gloom on the on the light six generation rigs like the DS four because it's really about the customer's application if that if they are drilling.
If the if the needs of the of the reservoirs that drilling into.
Alright, very deep well, several very very high and work on that but thats not the not the rig that's needed but a lot of the applications at the S. Four is just fine as well as as being shutting the work it's just done in it.
In West Africa. There is no doubt customers are more focused on the high end rigs.
On the other Stepan generation rigs for the DS four its still an excellent rig and it's got its place in the market.
Okay, well, thanks for that I'll turn it back.
Thank you Carol.
Our next question comes from Kurt.
Hello, Howard from RBC. Please go ahead with your question.
Hey, good morning.
Hi, good morning, Kevin.
Appreciate the I appreciate the color and the update and perspective on on that dynamic to play in the market over overall.
Hey, maybe maybe Tom just in the dynamics of.
Hi, you outline the short duration and the churn if you will that's going to occur in the marketplace.
Yes, just curious you always say the pricing momentum or won't see much pricing momentum into the first half of 2020 would you suggest that the the pricing momentum is completely going to stall or or just from an upward dynamic its its going to maybe into along from here has been a baby maybe take a stair step.
Can you just maybe provide a little bit more context to that channel.
So it's hard it's I would I would say, it's more likely the latter I will see pricing improvements, but we certainly aren't going to see.
We would not we're not expecting to see a stat step up.
But we are we're not expecting it to store, but again.
We are seeing utilization go up we often rigs being re contracted we are seeing in.
South America.
Yes, more assets being put to work, so utilizations, improving and it will it continue to improve but the short cycle short and that some of the contracts will mean that.
So even though utilization is pushing up we're not expecting to see significantly increased pricing momentum. It doesn't mean, it's going to store, but it.
It doesn't feel like it's going to take a jump up.
Okay I appreciate that context Tom.
And in the end the dynamic of.
The guidance points that have been provided for.
The third quarter and initial outlook into maybe the fourth quarter from an operating cost standpoint.
Just kind of curious, though with a reduction in your debt.
Is that I guess thats going to map out to be what about.
Less than $100 million of interest expense for the second half of the year per quarter is that is that about right. If I were to kind of map that out.
That's that's about right. Yes. So we're our run rate is just around the 400 pro forma for the tender. So so roughly about 100 and just keep in mind Kurt.
That's on a book basis, the cash is a bit different and so third quarter for for US is typically higher cash interest expense.
But but but your numbers are in line.
Okay, and just wondering if you might be able to offer us.
Joe you provided the guidance or the.
Input for Arrow EBITDA for the full year.
What's the flow through in the current equity and earnings line.
For the year.
For Arrow.
Well for the year were and where we didnt provide any guidance for the year, but you can see Q2, and what I'd say is that you guys are highly contracted fleets. So there's there's a lot less variability than maybe the broader valores fleet.
And so if you look one of the interesting things here and I'll probably use this opportunity just kind of make a point on the via purchase accounting aspect of this but if you look at the equity earnings that flows through this quarter.
It's it's it's really it's a less it's about half a million dollars, but if you look at it I'll guide you there is a bit more detail. If you look at these footnote four in the 10-Q, but if you look without the amortization of the purchase accounting the equity interest is 8.4 million and so it's probably fair to look at that as kind of a more normalized run rate for the business.
But because we have to write that when when the merger happened we had a write up our investment and then amortize that.
We effectively knock off a lot of the the net interest the net income there due to purchase accounting, which is what you see flowing through on the income statement.
As proud as part of that's great. That's great color I really appreciate that all right I'll keep it there. Thank you guys.
Thanks.
Our next question comes from Greg Lewis from BTG. Please go ahead with your question.
Yes, hi, everybody. Thank you and good morning.
Hi, Greg.
Hi, John .
I think and I think in your prepared remarks, you mentioned about arrow and the potential financing opportunities around narrow any kind of color you could provide us around that.
Well certainly what we've said in the past Greg still remains true we thought.
Obviously, we are just just less than two years.
In Q.
Jami with arrow as far as operating.
We have.
Yeah right.
Highly contracted fleet.
We are right as I mentioned in my remarks, we're right in the middle of determining.
And you build project, which has slipped a little bit because of negotiations with the shipyard as well as.
The shipyards construction being pushed a bit to the right.
So things are going well with arrow as far as you know.
You know the capital structure.
We will.
Yeah once we understand.
The temporary when the timing of the new builds.
Then we have.
The Taliban.
What the right next step so.
One of the stair steps would be putting in it.
And revolving credit facility. Another one would be making sure we have the like construction financing for the Newbuilds on another one might be.
Bringing in some external debt.
So but until we actually.
Find the.
We have from a visibility on the new build program.
Rich, it's pretty much all the stops.
Changing the capital structure.
Okay, Great and then just one more for me you mentioned and you kind of I think you called out three of the ore floaters and then you kind of followed that up with comments around asset sales.
As we think about asset sales I mean, historically I mean I guess.
Yes, we have a name change, but historically ensco has been very good at kind of.
Renewing the fleet getting selling older assets, bringing in I mean, as we think about asset sales. It really should I be thinking should we be thinking about these as really just legacy noncore assets or do you think we can or do you see a scenario, where maybe we could even sell some of the more valuable higher end rigs just as you mentioned you have more.
Alter deepwater rigs than anyone else on the world.
Yeah, we would look at we would look at all avenues with respect to the rigs that I mentioned in the in the <unk>.
Prepared remarks.
I would say that we will evaluate those rigs we continue to evaluate them we have a very very.
Robust understanding all that need as far as upgrade special surveys et cetera. So we'll look at those rigs as they roll off contracts over the next nine months and then determine.
I bought the right rolled up for them.
And whether we should keep them in the fleet as a good opportunity for them or we should sell them and Youre correct.
No.
The company has sold on a lot of assets over the last 10 years.
With respect to sales of other rigs nothing is off the table, we will certainly look at.
What we believe the asset RWA.
And from a cash flow generation over time, and what we'll be able to get to them.
And nothing is is off the table.
Okay, Great and okay, guys at the end of Q1 and congratulations on the tender that was that was a really big deal for you guys. So thank you very much.
Thanks, so much thank you Greg.
Our next question comes from Chase Mulvehill from Bank of America. Please go ahead with your question.
Hey, Thanks, good morning.
So I guess I wanted to talk about the debt refi.
Maybe you talked a little bit about this earlier in the call, but often a little late but maybe could you provide any timing or or maybe the amount of refinancing that you expect to do on the debt side and then talk about maybe whether you you'd prefer do secured debt or preferred guarantee notes.
Yeah sure Jay So we actually haven't covered that much detail. So it'll all cover some new ground with with my comments, but in terms of just in the prepared remarks I did mention the fact that on top of the debt tender, which.
Your first on you know we did just repay the 2019 maturities that we have do today. So those are repaid and we did draw on our revolver to do that right now were drawn on the revolver to $125 million. So we are going to look at external funding sources to potentially continue to improve our liquidity and so those those funding sources could be.
Secured debt or guaranteed debt.
I mentioned that.
Right now we have it completely unsecured capital structure with gross asset value of $11 billion for third party.
We have a book capitalization of over $18 billion.
And for the even the prior question, we have the ability to monetize assets as well. So we're going to look at all funding sources, we have.
In the current environment to continue to bolster our liquidity to manage our way through the cycle and the current conditions.
Okay, all right and on the timing would you expect something to happen in the third quarter here.
Yes, Jason you know I think what you what you've seen is that we're going to continue to be opportunistic.
It's.
We're not going to rule anything off the table, but we're also not narrowing in I think will we continue to watch the market look for opportunities. We certainly have no need to rush out to the markets do anything we have ample liquidity at the moment. If you look at the liquidity. We have we still have the $2.3 billion on the credit facility with does tick down to 1.7 billion.
But with that that amount of liquidity.
We can be patient and wait for the appropriate market window.
Yes, all right that makes sense.
And on the Capex side.
You know.
Have you given any color around 2020 Capex are you care to provide any color, maybe we can kind of use the back half run rate.
Maybe as a starting point for 2020 is that is that a good starting point.
Well, we haven't provided 2020 guidance, just yet chase, but what what I would say is that.
You know weve effectively if you look at 2019 versus 2020, we were effectively pass their new build program moving forward.
We do have the DS 13 in the DS 14 that are outstanding I'm, putting those in a different bucket because we do have the ability to.
To roll that capex into a notes receivable, but barring those two rigs.
If you just look at kind of the kind of the.
The sustaining capex of the run rate kind of the base Capex that's.
That's something that we'll clearly have next year, but we haven't gone through our capital.
Kind of planning cycle, yet so we don't have any guidance for that.
Okay understood I'll turn it back over thanks John .
Thanks.
And our next question comes from Vebs Vaishnav from Howard Weil. Please go ahead with your question.
Hey, good morning, and thank you for taking my questions.
Can you talk about going forward with.
Just you have done and the debt how do we think about cash interest expense I think we touched a little bit about that.
And how to think about cash taxes and maintenance capex.
Sorry, just to clarify so cash interest expense cash taxes and was the last thing.
Maintenance Capex, what the pro forma company.
Okay.
Yes, if oh I'll start with the cash interest expense and I think you're looking for more of a run rate and so it as I mentioned, our cash interest right now pro forma for the tender art our debt.
Our I'll call it our unsecured bonds carried interest expense of roughly $400 million.
If we were to draw on the revolver for additional funding needs that will.
Add to that interest expense and so you saw that we shaved off about 52.
Million dollars from the tender that we just did from our bonds. However that will be partially offset by any revolver draw that we do so I mentioned, we just drew this week.
In order to pay down the 2020 maturities and so it's as you go forward the cash interest expense will be somewhat higher if we if we need for the drawn that revolver further.
And in the current environment.
With the.
The environment that we have today, we do anticipate that we're going to continue to be drawn on that revolver, which will increase that that cash interest expense.
On a cash taxes standpoint.
I don't know if we have a it's very hard to guide to it to run rate on that I think we could probably go through that a bit more detail offline. If you want to kind of understand how taxes work, but it really is a function of what jurisdictions were working in.
Timing of contracts.
And.
You know, we do make profits in certain jurisdictions, even though we were operating at a net loss today, our cash taxes.
Our our very much impacted by where we're working in the margins in different jurisdictions, which does change over time and so.
It's much harder to provide a kind of a run rate for that one but.
If you look at kind of the current quarters as are probably.
Fairly a fairly decent guidance to kind of the near term anyone near term being maybe the next quarter or two.
But it will very much be a function of our business mix and then there is just some base level taxes that we will be paying just based on our jurisdiction.
That we operated in our in our structure.
So I know that's not completely clear, but it's a Texas isn't is yes.
Understood variability just based on the operating profile.
And I guess maintenance Capex, how should we think about it. Thanks.
Yes, it's similar to what what I mentioned with with Chase I. We we don't really have guidance out there from a from a long term basis I would say that if you look at kind of where we're at between now and.
At the end of this current years capex cycle or at least the back half of the year.
That's that's probably good guidance for the end of it for the next that is the guidance for the next six months.
Next year, we're going to have our capital budgeting cycle later this year, where we'll look at 2020.
We we've completed the merger in the last last quarter. So it's it's something we need to get together and really do an assessment on the fleet on.
What the type of maintenance run rate, we really want to have as a pro forma fleet.
In the current environment and so it's it's probably premature to guide to it.
But but suffice to say that on an on a gross capex basis, we should be lower year over year, given that we don't have the same number of upgrades and enhancements that we had this year.
Barring the to the DS 13 in the D. S 14, which we can roll those into a promissory notes. So stay tuned what will I will provide a bit more guidance on that in the coming quarter.
Okay.
And as I think as we think about.
Debt markets. They can you say like what what bankers, telling you about how open the debt markets are you do on note on chicken pieces that as a good basis.
You know if it's hard to comment I think you can you can probably talk to your bankers.
And get the same input I mean, you can see where the bonds are trading clearly, it's it's a bit of a challenged market right now which is one of the reasons why we did the debt tender.
So it's a it was that the bonds have really traded off and so we were able to capture meaningful discount so mentioned, 24% discount.
So you can read through where our bonds are trading now the discount because they're out the yields that we purchased those bonds that is a bit of a proxy for for new issuance.
Obviously, there would be some.
Some variances in a new issuance then than where they are trading, but it's a it's very much market dependent and it could trade. So I don't change so I don't necessarily want to provide guidance out there but.
Using our you could look at the yield on our bonds as a proxy and clearly if we were to do anything that was senior to the current bonds. We would expect that those would would would trade at a premium to the to the current complex given a similar type of tenor.
But the market is challenged at the moment.
Got it. Thank you so thanks for taking my question.
Thank you.
And ladies and gentlemen, we've reached the end of today's question and answer session. At this time I'd like to turn the conference call back over to Nick for any closing remarks.
Thanks, Jamie and thank you to everyone on the call today for your interest in Belarus.
We look forward to speaking with you again, when we report third quarter 2019 results have a great rest of your day.
Ladies and gentlemen, the conference has now concluded we thank you for attending today's presentation. You may now disconnect your lines.