Diamond Offshore Drilling Inc

NYSE:DO

Earnings Call Analysis

Positive Momentum and Management Confidence in Diamond Offshore

Looking back at the year 2023, it marked a significant phase for Diamond Offshore, recognized as a transformational period. The company celebrated one year since relisting on the New York Stock Exchange, bolstering its capital structure and securing $485 million in new contracts. The fleet executed five shipyard projects without compromising safety and efficiency, a testament to their industry-leading operational performance. Moving forward into 2024, Diamond Offshore has gathered an additional $362 million in contracts, boosting its backlog to an impressive $1.6 billion.

Operating Efficiency Amid Challenges

The company demonstrated resilience in the face of a setback with the GreatWhite, where an LMRP inadvertently separated and sank, leading to a recovery operation expected to last 90 to 100 days. Despite this, Diamond Offshore maintained a remarkable revenue efficiency of 95% across the fleet and outperformed its fourth-quarter financial guidance, setting a positive trajectory for improved financial performance in 2024.

Robust Market Indicators and Growth Prospects

The industry is riding an upcycle supported by favorable commodity prices, increased capital expenditure in upstream, and a forecasted 34% year-on-year growth in floater exploration wells. Analysts' predictions for a third consecutive year of over 300 Subsea 3 orders, culminating in a demand for rig years that bolsters Diamond Offshore's forecast, bode well for the company's future. Coupled with the points of vigor in the U.K. North Sea, characterized by rising demand and shrinking supply of rigs suitable for harsh environments, the market's direction appears promising.

Contractual Achievements and Revenue Streams

The company's proactive success in securing contracts, including the $362 million in new awards, with specific mentions of the BlackLion and Patriot contracts, underlines its strategic positioning for continuous work and impactful cash flow contributions through 2026. With a robust backlog and considerable rig capacity already contracted for 2024 and '25, the outlook for sustained revenue appears stable.

Financial Stability and Forward-Looking Guidance

After prudent capital structure refinancing, Diamond Offshore closed 2023 with healthy liquidity, having $124 million in unrestricted cash and a total liquidity of $422 million, including its credit facility. This financial stability contributes to the confidence in its operational and financial capacities. Despite expecting a slight decrease in revenue for 2024, attributed to the transition of managed rigs and scheduled shipyard upgrades, the company is set to benefit from higher day rates on several contracts, evidencing operational prowess and financial prudence.

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter 2023 Diamond Offshore Drilling Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would like now to turn the conference over to Kevin Bordosky, Senior Director of Investor Relations. Please go ahead.

[Kevin Bordosky, executive]

Thank you, Michelle. Good morning and afternoon to everyone, and thank you for joining us. With me on the call today are Bernie Wolford, President and Chief Executive Officer; and Dominic Savarino, Senior Vice President and Chief Financial Officer.

Before we begin our remarks, I remind you that information reported on this call speaks only as of today, and therefore, time-sensitive information may no longer be accurate at the time of any replay of this call. Some of the information referenced on our call today is included in a slide presentation that you can find in the Investor Relations section of our website under Calendar of Events.

In addition, certain statements made during this call may be forward-looking in nature. These statements are based on our current expectations and include known and unknown risks and uncertainties, many of which we are unable to predict or control. These risks and uncertainties may cause our actual results or performance to differ materially from any future results or performance expressed or implied by these statements. These risks and uncertainties include the risk factors disclosed in our 10-K and 10-Q filings with the SEC.

Further, we expressly disclaim any obligation to update or revise any forward-looking statements. Refer to the disclosure regarding forward-looking statements incorporated in our press release issued yesterday evening, and please note that the contents of our call today are covered by that disclosure.

In addition, please note that we will be referencing non-GAAP figures on our call today. You can find a reconciliation to GAAP financials in our press release issued yesterday.

And now I will turn the call over to Bernie.

[Bernie Wolford, executive]

Thank you, Kevin. Good day to everyone. Thank you for your interest in Diamond Offshore as we present our results for the fourth quarter of 2023.

2023 was a transformational year for Diamond Offshore. We marked our 1-year anniversary of relisting on the New York Stock Exchange, had measurable improvements in our capital structure, secured $485 million in new contract awards, and safely delivered 5 shipyard projects, all while delivering industry-leading operational excellence for our customers. The positive momentum continues in 2024 with the addition of another $362 million in new contracts, taking our total current backlog to approximately $1.6 billion.

Before addressing fourth quarter results and sharing some perspective on our markets, I would like to provide a high-level update on the previously reported GreatWhite incident. On February 1, while awaiting the weather with the well secure and the lower marine riser package, or LMRP, disconnected from the BOP, the LMRP and riser unintentionally separated from the rig at the slip joint tensioner ring and dropped to the seabed. No one was hurt, no pollution occurred, and there was no damage to subsea infrastructure. Work to recover the LMRP is progressing methodically to ensure a safe recovery while working within the weather constraints west of Shetlands. The LMRP is situated on the seabed, exposed above the mudline in an upright orientation. We have successfully unbolted the riser string from the LMRP and are prepared to lift the LMRP to the rig in the next winter window. We currently estimate the total repair period to be 90 to 100 days from the date of the incident. Dominic will provide additional information related to the estimated repair timing, cost and insurance coverage in his remarks. In the interim, I'd like to recognize the extraordinary work of our team in response to the incident and the quality of the ongoing collaboration with our clients and local authorities.

Turning to the fourth quarter, I'm pleased to report that our rig crews and operations support team delivered exceptional safety results and revenue efficiency of 95% across our fleet during the quarter. This achievement was particularly noteworthy as we commenced 4 contracts in the quarter, one in each of the regions in which we operate. Hats off to our teams for their steadfast commitment to planning and execution while never compromising on safety.

Our fourth quarter financial performance reflects the impact of having 4 of our marketed fleet of 10 rigs on higher market day rate contracts at quarter end. Total revenue and adjusted EBITDA for the quarter were $298 million and $72 million, respectively. These results were above our guidance for the quarter, primarily due to the Patriot working longer than previously anticipated, the deferral of certain contract preparation costs and earning a performance bonus for efficient and injury-free operations in Senegal. This [ beat ] in part reflects the impact of rigs moving to higher day rate contracts and sets the stage for improving financial performance in 2024 owing to fewer planned shipyard days, the BlackHawk and Courage having a full year of higher day rates, and the BlackLion and BlackRino moving to higher day rates in the third quarter.

Now let's turn to our view on the markets and opportunities for Diamond in 2024 and beyond. The upcycle in offshore drilling continues to be supported by strong commodity prices, robust upstream capital spending, and anticipated year-over-year growth in exploration drilling. Taken as a group, these indicators support our view of a longer-duration upcycle in deepwater drilling.

Let's look at some of the numbers in support of the longer duration upcycle. Exploration drilling can be considered a leading indicator and a precursor to future development programs, and analysts now forecast year-on-year growth in floater exploration wells of 34%. Subsea 3 orders are another leading indicator and 2024 forecasts predict the third year in a row with over 300 new 3s ordered. This level of order activity is the highest it's been since 2013, at a time when we had 115 more rigs in the market than we do today to execute the related drilling activity.

Putting Subsea 3 orders into perspective relative to the global marketed floater fleet, back in 2012 and 2013, the number of orders per marketed floater peaked at 1.5 and 1.8 3s ordered per marketed floater respectively. In comparison, in '22 and 2023, those numbers were 2.1 and 1.8, and the 2024 forecast stands at approximately 1.9. This would indicate 3 continuous years with numbers matching or exceeding the measures dating back 12 years. These trends sync well with Diamond's forecast for floater demand on a rig years basis. The forecast compound annual growth rate of rig years in demand from 2023 to 2026 by region are 7% for North America, 11% for South America, 10% from the North Sea, 7% for West Africa and 25% from Southeast Asia and Oceania.

Another key metric we track is the trailing 4 quarters tender activity on a rig years basis. It has been a bumpy road from a peak in 2012 of approximately 106 rig years of tender implied trailing demand to a cycle bottom of 28 in 2016 and a Covid bottom of 35 in 2020. The industry closed 2023 with 106 rig years of tender implied trailing demand, matching the number from 12 years ago.

Closer to home, we are currently tracking 51 opportunities representing 52 rig years of demand with commencement dates through 2025, of which roughly 61% are for DP rigs and 39% for moored rigs. The start date profile for these opportunities rises from a lull in Q2 2024 to a peak of 12 and 11 in Q4 '24 and Q1 2025, respectively. This data lends credence to the view that the second half of this year looks to be positive in terms of the number of expected fixtures and contract starts.

For Diamond specifically, the U.K. sector of the North Sea continues to develop as a bright spot with increasing demand in a region with shrinking harsh environment rig supply. Recent long-term commitments by operators in the region support our view that demand for plug and abandonment, or P&A, work is becoming more certain and exists in larger quantities than previously anticipated.

Additionally, green shoots of future drilling demand have emerged on the heels of the recent oil and gas licensing round where 27 licenses were awarded for areas that have the potential to be brought into production quickly.

Drilling options are exercised on the BlackHawk. We have 1 drillship, the BlackRhino, with availability late this year. We are currently pursuing 8 opportunities for the BlackRhino, all for work commencing following the conclusion of its contracting work is SPS and MPD upgrade.

In the context of these improving markets, we have been able to firm up [ an ] additional contract term for 2024 and build significant backlog commitments for 2025 and 2026. Year-to-date, we have secured $362 million in new contract awards, 1 for our seventh-generation drillship, The BlackLion, at a leading-edge rate and 1 for a more harsh environment semi to Patriot. The BlackLion contract will start in direct continuation of its current work without any gap between contracts and provide firm work through the third quarter of 2026. Under this new contract, the BlackLion will be positioned to generate approximately $115 million in annualized rig-level EBITDA and contribute significantly to our cash flow in the coming years. The Patriot contract is for a 60-day, 2-well P&A campaign that is set to commence this week, filling in some of the gap in its schedule before beginning its 3-year contract in early 2025.

On the back of our recent contract announcements, excluding cold stacked rigs, we have 87% of our 2024 capacity contracted, 91% if you include priced options. Looking further out, excluding cold stacked rigs, we now have 36% of our 2025 capacity and 30% of 2026 capacity contracted. If we include price options, the 2025 number goes from 36% to 59% with notable contracting opportunities on the BlackRhino, BlackHornet, Endeavor and Apex to further secure backlog.

For the last 20 months, we completed special periodical surveys, or SPSs, on 6 of our 10 actively marketed rigs with a further 2 rigs due in 2024 and 1 in 2025. Through the combination of reduced planned shipyard days, our recent backlog additions, our positive exposure to improving market conditions, we are providing materially improved EBITDA and cash flow visibility through 2026.

I will now turn the call over to Dominic before returning with some concluding remarks.

[Dominic Savarino, executive]

Thanks, Bernie, and good morning or afternoon to everyone. In my prepared remarks this morning, I'll provide a recap of our results for the fourth quarter, including some operational highlights and additional details on our recent contract awards, the estimated financial impact of the recent GreatWhite event and guidance for the first quarter and full year 2024.

For the fourth quarter, we reported a net loss of approximately $146 million or $1.42 per diluted share. The reported loss consisted of net income before tax of $29 million and noncash tax expense of $174 million. As discussed in prior quarters, the large tax expense in the quarter was the result of the reversal of the tax benefit recorded in prior quarters and the further normalization of our overall tax expense for the year.

The results for the fourth quarter included a reported adjusted EBITDA of $72 million, well in excess of our guidance for the quarter of $50 million to $60 million with the U.S. GAAP required deferral of approximately $8 billion of precontract commencement cost for the Courage and BlackHawk contributing to the favorable results. Our reported adjusted EBITDA for the quarter represents a significant increase compared to our adjusted EBITDA of $28 million reported in the third quarter. And this quarter-over-quarter increase was primarily a result of higher revenue reported in the fourth quarter.

Excluding reimbursable revenue, revenue for the fourth quarter was $280 million, slightly higher than our guidance for the quarter and up from $225 million in the prior quarter. This improvement was primarily a result of the BlackHawk commencing its contract in the Gulf of Mexico in early November after its SPS and MPT upgrade in the third quarter, Patriot being on contract for the entirety of the fourth quarter after being between contracts in the prior quarter, and the BlackRhino earning its largest performance bonus to date during the fourth quarter.

Contract drilling expense increased to $189 million for the quarter compared to $182 million for the prior quarter, primarily as a result of higher charter costs from one of our managed rigs and the accrual of the annual bonus expense related to the drillship's BOP service agreements, partially offset by the absence of costs associated with the Apex' shipyard period in the prior quarter.

Operating cash flow for the fourth quarter was $9 million with negative free cash flow of $22 million as compared to negative free cash flow of $48 million in the third quarter. The improvement in free cash flow was primarily a result of increased EBITDA and lower CapEx in the fourth quarter, offset by greater working capital used during the quarter as a result of commencing higher day rate contracts and the resulting higher accounts receivable at year-end.

For the full year 2023, we reported revenue, excluding reimbursable revenue, of $984 million and adjusted EBITDA of $158 million. OpEx for the full year was $132 million. After the successful execution of our capital structure refinancing in the third quarter, we exited 2023 with unrestricted cash and cash equivalents of $124 million and total liquidity of $422 million, including the undrawn balance of our revolving credit facility.

Expanding a bit more on the fourth quarter operational highlights, we had notable successes in each region in which we operate. In the Gulf of Mexico, the BlackHawk commenced its new contract in November at the start of the commencement window after undergoing its SPS and MPD upgrade. In West Africa, the BlackRhino earned performance bonuses in the quarter totaling $3.2 million, the ninth bonus achieved during the Senegal campaign. In the North Sea, the Patriot executed a P&A campaign for a customer over the course of the fourth quarter and into January of this year, being on contract almost twice as long as originally anticipated. In Australia, after coming out of the shipyard in the third quarter, the Apex successfully commenced a contract for a new customer during the fourth quarter at a higher day rate. In Brazil, after completing its prior 3-year contract with Petrobras in the third quarter, the Courage safely and timely completed its SPS and contract preparation activities and commenced its new 4-year contract with Petrobras in mid-December.

Turning now to the GreatWhite and our estimate of the financial implications of the unintentional release of the LMRP and riser, as Bernie noted, the GreatWhite is currently in the process of recovering the LMRP to the surface and is estimated to be back earning day rate by the end of April or early May. As a result, we currently estimate that we could be off rates for approximately 90 to 100 days, which could result in approximately a $24 million to $27 million reduction in revenue over the course of the first and second quarters. Our current estimate of incremental recovery costs and repairs and maintenance is approximately $20 million to $25 million, and our current estimate of replacement capital expenditures is approximately $12 million to $15 million. We anticipate that the incident will be covered by our hull and machinery insurance policy and that all incremental costs, less our $10 million deductible, should be reimbursable under the policy.

In addition, we maintained loss of hire insurance on the GreatWhite. After a 60-day waiting period, the loss of power hire insurance provides $150,000 per day, or up to 180 days, for each day of lost revenue as a result of a covered property loss claim. Based on our current expectations of being out of service for approximately 90 to 100 days, the loss of hire insurance may provide proceeds of approximately $4.5 million to $6 million.

Because the accounting treatment of insurance proceeds creates complexities in the reporting of financial results and because the actual financial impact of the GreatWhite incident is not yet known, we are presenting our initial guidance for 2024 results by excluding the estimated financial impact from the GreatWhite event. We believe that this normalized approach will provide more accurate and meaningful visibility into our expectations of our ongoing recurring operations without regard to this extraordinary isolated incident.

In addition to having a strong financial performance in the fourth quarter, we also had significant success in the quarter and early this year in booking new contracts, as Bernie mentioned. In the Gulf of Mexico, we enjoyed significant contract wins in the past month with the BlackLion executing a contract extension with its current customer with a duration of 2 years and a contract value of approximately $350 million. With this new contract, the BlackLion is now contracted through the third quarter of 2026. In addition, in the fourth quarter, the BlackRhino was awarded a contract in direct continuation of its Senegal campaign at a day rate in excess of $500,000 per day, the highest clean day rate awarded during this upcycle. These recent contract awards pushed the average day rate in our drillship backlog up to $408,000 per day.

Also during the quarter, the Patriot was awarded a contract valued at $240 million for a 35-well P&A campaign representing approximately 3 years of firm work expected to commence in early 2025, and up to 17 additional P&A wells subject to priced options that would add a fourth year of duration. Subsequent to year-end, the Patriot was also awarded a 2-well P&A campaign commencing later this week, filling in some of the gap before commencing its 3-year contract in 2025. The Patriot is also being considered for additional work later in 2024, evidence of the improving moored floater market in the North Sea.

Turning now to our normalized full year 2021 guidance, our $1.4 billion in backlog as of January 1, 2024, combined with our year-to-date 2024 contract awards of $362 million, gives us visibility to over $1.6 billion of firm work to be performed over the coming years and positions us extremely well in terms of contract coverage for 2024 with 91% of our available days, excluding cold stacked rigs, committed with firm contracts or priced options. Our 2024 revenue, excluding reimbursable revenue and excluding any estimated impact of the GreatWhite event, is currently expected to be between $940 million and $960 million. This expected level of revenue represents a slight decrease from the revenue we earned in 2023. This expected decrease is primarily due to the managed rigs transitioning back to their owner over the course of 2024 and our plans for the BlackRhino to spend [Technical Difficulty] time in the shipyard conducting its SPS and MPD upgrade later this year, partially offset by higher day rates for the BlackHawk, Courage, Apex and BlackLion during the year.

Our EBITDA guidance for 2024, again, excluding any impact of the GreatWhite incident, is currently expected to be between $230 million and $250 million, a more than 50% increase over 2023 EBITDA, largely driven by higher day rate contracts and increased EBITDA margins due to the return of the lower-margin managed rigs back to their owner. It is worth noting that our EBITDA guidance for 2024 includes approximately $20 million of noncash net amortization expense as required by U.S. GAAP accounting rules associated with the Courage and BlackHawk precommencement contract activities that occurred in 2023.

G&A expense for 2024 is expected to be between $72 million and $77 million. Net interest expense for the year is currently expected to be approximately $40 million to $45 million, and cash taxes are expected to be approximately $5 million to $10 million.

CapEx for 2024 is currently expected to be between $125 million and $135 million, excluding any CapEx resulting from the GreatWhite event or the potential reactivation of the Onyx, should it be successful in securing a long-term contract. Our estimated CapEx spend for 2024 includes the installation of MPD equipment and the SPS for the BlackRhino, the SPS for the BlackHornet as well as the BOP recertification for the Endeavor.

Taking a look at our guidance for the first quarter, again, excluding any impact of the GreatWhite incident, we currently expect revenue, excluding reimbursables, to be between $260 million and $270 million, EBITDA to be between $45 million and $55 million and CapEx to be between $38 million and $43 million. Our expectations for the first quarter of 2024 are lower than the fourth quarter of 2023 as a result of the Patriot being off-contract for a portion of the quarter and the amortization of precontract commencement costs for the Courage and BlackHawk. Despite this dip in Q1, our projected EBITDA results for the year are essentially equally weighted between the first half and second half of the year, and we expect our free cash flow in 2024 should be meaningfully greater than in 2023.

Beyond 2024, our visibility to estimated future earnings and cash flow is increasing as a result of our growing backlog at higher average day rates. In addition to our 91% contract coverage in 2024 for firm contracts and priced options, excluding cold stacked rigs, we have 59% and 30% of available days committed for 2025 and 2026, respectively. This level of contract coverage positions us extremely well for the next 3 years, yet still provides plenty of room for positive operational leverage as recontracting opportunities arise. And with the continued favorable fundamentals in the deepwater offshore industry, we are confident that we will be able to continue to secure meaningful day rate increases for our rigs as contracts roll over.

And finally, by the end of 2024, we expect our net leverage ratio and other requirements under our credit facility and bond indenture to be met, which would allow our Board to begin to consider the appropriate timing for a shareholder return program.

That concludes my prepared remarks. I will now hand it back to Bernie for some closing comments.

[Bernie Wolford, executive]

Thank you, Dominic. In the near term, our organization remains focused on the safe and timely restart of the GreatWhite. Looking further ahead, as the BlackLion rolls to its higher day rate in Q3, followed closely by adoption of the BlackHawk, we will have 5 out of our 9 active rigs on contracts at market rates. We are ideally positioned to capture further upside in the strengthening drillship market with the BlackRhino in late 2024 and the BlackHornet in early 2025. Similarly, the supply-demand picture for harsh environment semis bodes well for upside on the Endeavor, Apex and GreatWhite as we progress through 2025. In the interim, we are targeting several near-term opportunities for the Patriot that allow us to fill a portion of the gap in 2024 prior to its long-term campaign in 2025. These factors, combined with a notable decrease in planned shipyard days, position us to deliver growth in both EBITDA and cash flow while making significant progress in deleveraging our balance sheet.

We appreciate your interest in Diamond Offshore. I will now open the call for questions.

[Operator]

Thank you. [Operator Instructions] And the first question comes from Eddie Kim with Barclays.

[Eddie Kim, analyst]

So a very constructive market outlook you provided here. But I'm just curious if you've been surprised at the lack of contracting for the 10 or so seven-gen sidelined drillships. It seems like, until all or maybe most of these sideline rigs are absorbed, it might put a lid on day rate increases here in the medium term. So have you been surprised here? And if you had to guess, just based on the demand you're seeing, do you think maybe we could see 4 or 5 of these 10 sidelined rigs announce contracts by year end?

[Bernie Wolford, executive]

Thanks for the question, Eddie. I wouldn't say surprised. I mean, looking at our investor presentation, you'll sort of see the staggered impact of new contract awards we expect throughout the year. Clearly, we would have expected some contracts to be awarded earlier than they have been, particularly one opportunity in Petrobras that we thought would have been already awarded at this stage. I certainly expect those awards to come through in the very near future. Q1 is typically a quiet time of the year and not any different this year if you look back from a historical perspective.

As far as sidelined rigs returning to the market, I would expect, yes, that 5 to 6 of those do secure contracts by the time we reach the middle of this year, Eddie. I mean I think that's highly anticipated and would be what I would say is kind of right down the middle of the fairway in terms of our expectations.

[Eddie Kim, analyst]

So you [indiscernible] 5 to 6 maybe announced signed contracts by middle of this year, so in a couple of months?

[Bernie Wolford, executive]

Yes. By the middle of this year, so these are contracts that would have start dates Q3, Q4 and Q1 of '25. There's sort of a peak demand around that time period that -- and typically, you'll see the contracts announce 6 months before the actual start dates.

[Eddie Kim, analyst]

Got it. Got it. Thanks for clarifying that. And then my follow-up is just on the BlackRhino. You highlighted 8 potential opportunities for the rig. Could you see the rig mobilizing to outside West Africa or do you see the rig staying in West Africa at this point?

And secondly, after it comes off contract, it goes in for a 5-year SPS and an MPD upgrade. We've typically seen MPD being upgraded for a rig for a specific contract, but it seems like, in this case, it's voluntary or maybe a preemptive upgrade on your part. So, I just wanted to get your thoughts here on why you're choosing to add the MPD on this rig.

[Bernie Wolford, executive]

Eddie, we're currently tracking 4 opportunities that start in Q4 and 4 the start in Q1 of '25 for the Rhino. Those opportunities, some are in West Africa, some are in South America and some are in the U.S. So it's hard to handicap where the rig will be next in terms of the opportunities we're currently tracking. I wouldn't expect any gap in the rig schedule after completion of the SPS and MPD installation based on our market intelligence as we sit here today.

With regard to the MPD, it was a proactive decision to ensure that our 4 Black ships are and remain in the top 30 rigs on a worldwide basis from a technical specs perspective. I mean, MPD assures that you can bid on every opportunity that's out there and gives you a greater set of opportunities from which to secure work. And obviously, you can get some upside in terms of your rate for the MPD. But first and foremost, we look at it as a key to entry and ability to bid on every single tender that's out there [Technical Difficulty].

[Operator]

The next question comes from David Smith with Pickering Energy Partners.

[David Smith, analyst]

Congratulations on a solid quarter. I wanted to make sure I understood the '24 guidance. Y'all were pretty clear, but just making sure, excluding the GreatWhite impact, we should think about that guidance as if the GreatWhite had been working at its contracted rate with no interruptions?

[Dominic Savarino, executive]

Yes, that is correct. We will normalize our results for any impact that the downtime has or the insurance proceeds have as we report throughout the year. So, that is a correct assumption.

[David Smith, analyst]

I appreciate it. And for the -- on the financial impacts for the property insurance with the $10 million deductible, should we think about that as only applying to the $12 million to $15 million of replacement CapEx? Or would the recovery costs, I think estimated $20 million to $25 million, also apply to that policy?

[Bernie Wolford, executive]

All of those costs would be covered by the policy. So absent -- certainly, it's subject to the claim with the insurance company and what is covered, but the expectation is that all of that is potentially eligible to be recovered as part of the insurance policy.

[David Smith, analyst]

So, this could potentially, after insurance, be a net impact of maybe low $30 million range?

[Dominic Savarino, executive]

Right. Yes, right about that. By the time you factor in the loss of revenue, the potential loss of hire proceeds, as well as the $10 million deductible, it's right at $30 million. They start incurring...

[David Smith, analyst]

[indiscernible]

[Dominic Savarino, executive]

[indiscernible] 90 to 100 days.

[Operator]

The next question comes from Frederick Stein with Clarksons Securities.

[Fredrik Stene, analyst]

Hello, Bernie and team. I hope you are well and for me as well, good quarter. I wanted to follow up a bit on your fleet. You clearly have good coverage for '24. And I think your revenue guidance is a testament to that. It's quite a narrow range. So, I wanted to get a few details on how that range is being built up. Will it be dependent on what you, for example, are able to secure additional work on Patriot? Does it assume any impact of the Onyx? You know, you're marketing that. Or does it assume, for example, that the priced options on the BlackHawk and the Hawk and the GreatWhite that, in 2024, although minimal, will also be exercised? Any thinking or thoughts around how it can move from the low to the high end of that range would be very helpful.

[Bernie Wolford, executive]

I'll ask Dominic to comment on it. And I'll make some introductory comments first, Fredrik. Our current line of thinking is that we will secure additional work for the Patriot. We're actively pursuing 2 more probable than less opportunities right now for the Patriot for work in 2024 that will help us fill that gap. We don't anticipate filling 100% of the gap throughout the year. So, in part, the range reflects filling a portion of the gap.

As far as the priced option on the Hawk goes, our current expectation is that it's more likely than not that the client chooses to exercise the option. But obviously, that's speculation at this point in time. We would expect clarity on that in the first half of the year and have good visibility one way or the other on that.

And then with respect to the GreatWhite, we continue to anticipate that not only the firm work that's already committed for the GreatWhite but, at the tail end of the year, the last [indiscernible] additional options become exercised.

[Dominic Savarino, executive]

And to add to that, the Patriot is probably our biggest variable there. Certainly, we're optimistic that we'll be able to secure additional work for the Patriot. But given the fact that we've got a 2025 contract start, it's unlikely that we'll be able to release the crew or, otherwise, we'll have to maintain those costs. So, every dollar of revenue we're able to achieve there is going to be upside relative to what we considered in the forecast.

Adding the Onyx into the mix, in fact, that would most likely be a negative to the forecast because the opportunity for the Onyx is really -- would be something that would more likely begin in 2025, such that we have to reactivate the rig earlier than that and incur the cost, recrew, and deal with that CapEx in the second half of 2024 if that were to be the case. So the Onyx variable is certainly currently not considered, but if it were to be contracted, it would most likely be negative relative to 2024.

[Fredrik Stene, analyst]

That's very helpful. And you partially kind of answered my follow-up. On the Patriot, are you able to share, call it, how much of the gap you would expect in a sensible model, not 100%, but do you think 50%? 60%? 30%? 70%?

[Dominic Savarino, executive]

I'd say 40% to 50% of the gap we're hoping to cover. Particularly, in the summer months would be the likely time frame, so Q2 and Q3, more likely than Q4. But I think 50% from a modeling perspective is probably not too far off.

[Fredrik Stene, analyst]

That's very helpful. Finally, now that you refinanced, a new bond in place, lots of liquidity through [indiscernible] coverage on 2024 and coming into a period where some rigs have or rigs will be substantially repriced on the upside. Are you feeling or thinking actively about anything strategic? I know this is a recurring question in a way, but it's been quite quiet on the M&A front. Also, service sentiment in the equity market has been a bit off. But perhaps anything changed on your side in terms of thinking around consolidation where Diamond's place in that mix could be acquired, [ reacquired ], et cetera? Or are the M&A discussions dead for now?

[Bernie Wolford, executive]

Thanks for the question, Fredrik. It's an ever-recurring question, but a fair question nonetheless. At this point in time, our view is, with the strength of our backlog, with the strength of our balance sheet, we look to be a net acquirer, Fredrik, going forward.

[Fredrik Stene, analyst]

All right. Looking forward to follow you, as always.

[Operator]

[Operator Instructions] The next question comes from Noel Parks with Tuohy Brothers Investment Research.

[Noel Parks, analyst]

So, just a couple of things. One theme that has been coming up more frequently as companies have been reporting this quarter is it seems it's more consistent that various drillers are indeed seeing customers making that shift towards prioritizing the derisking of future rig rates to the point that some of them are maybe -- some of the larger ones are even -- it might be premature to call it doing speculative bidding, but just that the trend -- that trend does indeed seem to be materializing. And I recall it's something you saw hints of on the horizon. Is -- you're still seeing that to be the case? And anything anecdotally you can even point to that's reassuring on that front?

[Bernie Wolford, executive]

Thanks for the question, Noel. We continue to see client behavior that is consistent with the thesis that they're looking to derisk their future [indiscernible] [ upside ] exposure. We're seeing longer-term contracts come through the door. The ones we're looking at now average just over a year, but we're seeing numerous 3- to 5-year opportunities come through the door and certainly a fair share of 2-year opportunities -- all would lead me to believe that the thesis remains that, for the longer term, clients have significant development work. They know what they want to do, and they want to derisk those projects by securing firm day rates in the near term.

[Noel Parks, analyst]

Great. And of course, there is this keen interest by observers, the Street, about kind of like every contract and, of course, that desire to have them all decided and announced sooner rather than later, which, of course, is certainly every driller's interest as well. I was wondering. Are there -- just being realistic about some of the tensions of being at very high utilization, are there any sources of variability that could affect timing that people ought to have in mind, just to be realistic looking at the quarters ahead? And I'm thinking things -- even differences in lead time between getting a deal signed in Africa versus a private direct deal on the Gulf?

[Bernie Wolford, executive]

Noel, I want to make sure I understood your question. Are you asking, from a Diamond perspective, are we seeing the likelihood of a high variability in future commitments? Or was your question more broad? And could you maybe restate it to make sure I'm clear on your question?

[Noel Parks, analyst]

Sure. Just more broadly, there's just so much scrutiny on -- everyone's kind of hanging on seeing what the next contract announcement is pretty much for every driller. So I just am concerned that maybe people who haven't paid a lot of attention to the industry recently or are just catching up on what's going on in the current cycle have this worry, why isn't it happening faster? And just some of that, it seems to me, is probably not realistic considering that you're getting to such high utilization right now. So just anything to kind of give perspective on the pace of signings and why that certainly is consistent with what you'd expect these days.

[Bernie Wolford, executive]

Yes. I'll start by saying, as we finished the third quarter, the pace of signings was, for 2023, up to the end of the third quarter, was at a very high pace, unprecedented in modern times, I guess you would say. We continue to see the tenders out there. They're looking for commitments minimum of 6 months prior to the start of work and, in many -- in most cases, as much as 1 year and even more than a year before the actual commencement date.

I think what we're going through right now in Q1 is what I'm going to generally classify as noise relative to the longer-term trend. I think you're going to see some clients take advantage of uncertainty, if you want to call it that, securing 1 or 2 rigs at below-market rates. We've seen one interesting deal out there around a client securing partial ownership in an asset. We have 2 to 3 stranded assets out there that are very interested in getting into the market. And we have some people that may be interested in protecting the downside.

So, I think you'll see a few rates in what I would call the $300,000s for lower-spec rigs or stranded rigs. But I think, again, that's noise. If you look at the average of what I think you're going to see contract signs and executed at this year, I'm going to say it stays in the $450,000 to $490,000 range even with averaging in the lower day rate contracts that are out there and are likely to come through where people are just looking for term over price for what I would call a second-tier or sixth-generation single activity on 1 BOP asset.

Sorry. To add to that, Noel, it's sometimes longer-term contracts that operators are talking about take longer to negotiate. You want to make sure that, both on the drilling contractor side as well as on the operator side, that you get the liabilities right, you get the escalation factors right, you get the day rate right. So that could also be -- influence some of the timing as we're talking about longer term.

[Noel Parks, analyst]

Right. Absolutely.

[Operator]

At this time, I show no further questions. I would now like to turn the call back to Bernie Wolford, CEO, for closing remarks.

[Bernie Wolford, executive]

Thanks, all, for your participation in today's call. We look forward to speaking with you again next quarter, and have a great day. Goodbye.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect, and have a great day.