Noble Corp (Cayman Island)

NYSE:NE

Earnings Call Transcript 2018-Q1

[Operator]

Good morning. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Noble Corporation First Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

Thank you. Jeff Chastain, Vice President of Investor Relations, you may begin your conference.

[Jeffrey L. Chastain, Noble Corp. Plc]

Thank you, Jamie, and welcome, everyone, to Noble Corporation's first 2018 earnings call. We do appreciate your continued interest in the company. In case you missed it, a copy of our earnings report was issued last evening along with the various statements and supporting schedules, so you can find that if you didn't receive it as an email at noblecorp.com.

Before I turn the call over to Julie, I'd like to remind everyone that we may make statements about our operations, opportunities, plans, operational and financial performance, the drilling business, or other matters that are not historical facts and are forward-looking statements that are subject to certain risks and uncertainties.

Our filings with the U.S. Securities and Exchange Commission, which are posted on our website, discuss the risks and uncertainties in our business and industry and the various factors that could keep outcomes of any forward-looking statements from being realized, and this includes the price of oil and gas, customer demand, operational and other risks. Our actual results could differ materially from these forward-looking statements, and Noble does not assume any obligation to update these statements.

Also note we are referencing non-GAAP financial measures in the call today. You will find the required supplemental disclosure for these measures including the most directly comparable GAAP measure and an associated reconciliation on the Noble website.

And finally, consistent with our quarterly disclosure practices, once our call has concluded today, we will post to our website a summary of our financial guidance cover (00:02:13) which will include the second quarter and full-year 2018 figures.

So with that, I'll now turn the call over to Julie Robertson, Chairman, President and Chief Executive of Noble.

[Julie J. Robertson, Noble Corp. Plc]

Thank you, Jeff, and good morning, everyone. I'd like to welcome you to this review of Noble's first quarter 2018 results and we thank you for your continued interest in our company. We have a number of topics to cover this morning and several insights to offer you. So, let's get right to it.

In addition to Jeff, I'm joined on today's call by Adam Peakes, our Senior Vice President and Chief Financial Officer; Robert Eifler, our Vice President and General Manager of Marketing and Contracts; and Bernie Wolford, our Senior Vice President of Operations.

I will begin with the highlights of the quarter and a few important developments we want you to know about. Adam will follow with a more detailed financial discussion of the quarter and update our guidance for the year. Finally, Robert will tell you about some commercial progress we've made in recent weeks and he will offer a perspective on regional markets. I will then close with some final thoughts. And after that, we are able to respond to your questions.

Our first quarter showed strong operations performance. We were also able to provide enhanced visibility through well-timed financial transactions and successful commercial endeavors during and after the quarter's conclusion. Our fleet performance once again resulted in outstanding operational uptime of 98.8% or, stated another way, our downtime in the quarter was only 1.2% of operating days.

And as always, I want to recognize our crews and our leadership for their impressive safety performance they delivered yet again this quarter. Also contract drilling services cost declined 10% compared to the fourth quarter and also came in below our internal expectations. We achieved this result despite the challenges presented by the increased level of contract turnover and the cost incurred in keeping rigs ready to respond to new opportunities.

In our jackup fleet, we concluded contracts for five rigs during or just prior to the start of the quarter, driving down the jackup fleet utilization to 56%, the lowest level we have experienced during the industry downturn. However, we are confident that our jackup fleet utilization has troughed and will rise as we recapture operating days following the return of rigs to active service including most recently, the Noble Houston Colbert, Noble Hans Deul and Noble Tom Prosser which we'll talk more about in a moment.

When I speak of improved financial visibility, I'm referencing our $750 million senior notes offering and the concurrent tender offer completed in February. The transactions resulted in a sizable reduction in intermediate term debt maturities and, together with the December 2017 extension of our revolving credit facility, has provided a vastly improved liquidity runway extended to 2024. Adam will have more to say on this in a moment.

Finally, I want to bring you up to date on two recent contract awards in our jackup fleet that will result in improved contract coverage for the remainder of 2018 and into 2019. These are new contracts for the Noble Houston Colbert for operations in the North Sea and the contract for the Noble Mick O'Brien to address a new assignment offshore the State of Qatar. Robert will provide more details in each of these contracts during his remarks.

In our floating fleet, the upgrade and reactivation project to the semisubmersible, Noble Clyde Boudreaux, is progressing with the project expected to be completed by mid-May. Once completed, the rig will depart Singapore and mobilize to a drilling location offshore in Myanmar. The rig upgrades will establish the Boudreaux as one of the most advanced conventionally moored semisubmersibles in the world and it will be advantageously positioned to compete for an expanding number of opportunities where dynamic positioning is not an option, especially in Asia on the Pacific Rim.

In addition to a 16-point mooring system that allows the rig to withstand severe storm conditions, the project includes the commissioning of a second drill center giving the rig full dual drilling capability and significantly improved drilling efficiency. We expect the project to be completed under budget and for the rig to be on dayrate by June with several follow-on programs under undervaluation.

I will now turn the call over to Adam for a review of the first quarter and updated guidance for the year.

[Adam C. Peakes, Noble Corp. Plc]

Thank you, Julie, and welcome to all of you participating on today's call. I'll begin this morning with some comments on financial performance, an explanation of the variances from our first quarter guidance on certain line items of the P&L and a review of our capital spent. Before closing, I will update our guidance for 2018 including some insights relating to the second quarter. From our press release issued last evening, you know that Noble reported a loss attributable to the company for the first quarter of $142 million or $0.58 per diluted share on revenues of $235 million. We also recognize a net after-tax loss in the quarter of $7 million or $0.03 per diluted share resulting from the early retirement of certain senior notes.

Excluding the loss on retirement, our net loss in the quarter would have been $135 million or $0.55 per diluted share. For your convenience, a non-GAAP supporting schedule was included with our press release and can also be found on the Noble website at noblecorp.com. This schedule provides a reconciliation of non-GAAP numbers to net loss attributable to Noble Corporation as well as the income tax provision and diluted earnings per share for the first quarter of 2018 and 2017 and the fourth quarter of 2017.

Contract drilling services revenues in the quarter totaled $229 million compared to an adjusted $283 million in the fourth quarter of 2017 which excludes the previously disclosed payments totaling $38 million and relating to the recovery of certain contractual expenses and the fourth quarter settlement of a contract dispute. The 19% decline in revenues was primarily due to fewer total fleet operating days, which fell 22% in the quarter and was partially offset by further improvement in our operational uptime, which ended the quarter at a record 98.8%. The decline in operating days was driven primarily by our jackup fleet as the Noble Tom Prosser and Noble Hans Deul spent a quarter transitioning to new contracts that commenced in April and by the Noble Sam Hartley, which completed a job in late 2017 offshore Brunei. Also we cold stacked the standard jackups Noble David Tinsley and Noble Alan Hay following the completion of contracts in the Middle East, further reducing our operating days.

The decline in jackup days was partially offset by an increase in days for the Noble Regina Allen and the Noble Houston Colbert. As Julie noted, we expect our total fleet operating days to experience quarterly improvement for the remainder of 2018 with the commencement of recently awarded contracts. Robert will have more color on these contracts in a moment.

Contract drilling services cost in the first quarter totaled $137 million compared to $153 million in the fourth quarter. The decline was primarily due to the higher number of idle days in the jackup fleet and the corresponding reduction in crude costs as well as lower costs for the drillship Noble Globetrotter II which was warm stacked in the quarter following the January 2018 completion of a contract in the Black Sea.

When compared to our first quarter guidance of $145 million to $152 million, the favorable outcome was largely due to lower than expected rig startup and operations support costs and a higher amount of capitalized costs relating to the Noble Clyde Boudreaux upgrade and reactivation project. The project is expected to be completed in May and the rig will mobilize in Myanmar for an expected contract commencement in June. Daily cash operating costs offshore in Myanmar are estimated at approximately $80,000.

Finally, capital expenditures in the quarter were $38 million or approximately 20% under the midpoint of our guidance of $45 million to $50 million. And the favorable outcome was due largely to the timing of expenditures relating to the Noble Clyde Boudreaux project.

Before turning to a discussion of our updated guidance for 2018 and the second quarter, I want to comment on our liquidity position and balance sheet. As I noted during our previous conference call, the issuance of $750 million of senior unsecured guaranteed notes in January 2018 and the concurrent $750 million tender offer have resulted in a significant improvement to our liquidity runway. Following these transactions, we made a couple of additional moves to further enhance our financial flexibility. We used $192 million of cash on hand to repay what remained of our 2018 senior note maturity and took an early redemption on a residual amount relating to our 2019 note maturity.

As a result, our aggregate debt maturities before 2024 are now reduced to $201 million, down from $954 million or a reduction of 79% when compared to our maturity profile at the start of the year. In addition, our total debt has been reduced to approximately $3.9 billion. Total liquidity at March 31, remained strong at $2.3 billion and includes cash of $462 million and $1.8 billion of revolving credit with $1.5 billion of that revolving credit extended into early 2023. Our cash balance benefited from an $84.5 million U.S. federal income tax refund received in the first quarter.

I'll now update our guidance for the second quarter and full year 2018. We've continued to demonstrate excellent operational performance with impressive operational uptime across our working fleet. Therefore, we are reducing our fleet downtime assumption to 3.5% which remains well above our first quarter actual result of 1.2%. As I've noted previously, the guidance reflects the premium nature of our fleet as well as contemplated rig reactivations including that of the Noble Clyde Boudreaux and other possibilities as market opportunities develop.

Contract drilling services costs for the year are being lowered to a range of $615 million to $630 million compared to our previous range of $625 million to $640 million. The lower range reflects our favorable first quarter result yet maintains our previous assumptions relating to fleet mix, specifically a higher percentage of contribution from our floating fleet as the year progresses.

Client reimbursables remain in the range of $16 million to $20 million resulting in total operating costs in 2018 between $631 million and $650 million. Contract drilling services costs in the second quarter are expected to range between $150 million and $160 million compared to actual costs in the first quarter of $137 million. The 13% increase is driven by more operating days across the fleet, especially among our jackups and the commencement of operations on the Noble Clyde Boudreaux. Costs associated with client reimbursables are expected to fall in a range of $4 million to $5 million in the second quarter.

Due primarily to the change in the timing of expenditures, we are reducing DD&A expense guidance for the year slightly to a range of $515 million to $525 million from our previous range of $520 million to $535 million. We expect second quarter DD&A to range from $130 million to $135 million.

SG&A expense in 2018 is now expected to fall between $75 million and $80 million compared to our previous range of $73 million to $78 million. Professional fees remain a pacing item. Second quarter SG&A expenses are expected to total approximately $16 million to $20 million compared to $22 million in the first quarter. The decline is driven primarily by the first quarter accrual of a payment relating to the retirement of the company's previous CEO.

Interest expense is expected to range from $300 million to $305 million while the range for the second quarter is $75 million to $77 million, both ranges are unchanged from the previous guidance. Non-controlling interest on our P&L representing the Bully I and Bully II 50/50 joint ventures with Shell are expected to range from $4 million to $6 million of income to Noble in 2018, with an expected $1 million of income to Noble for the second quarter. Since our last call, we learned that the Noble Bully II is now expected to remain idle through 2018. The rig will receive a day rate during the idle period of $230,000, up from $200,000 previously and will remain warm stacked and an expected daily cost of approximately $40,000.

Capital expenditures in 2018 of $150 million are unchanged from our previous expectation. An estimated $45 million to $50 million of spending is expected for the second quarter compared to $38 million spent in the first quarter with the increase due to the revised timing of certain capital expenditures. Finally, following the implementation of provisions relating to U.S. tax reform, our effective tax rate for 2018 is being revised favorably to a range of 2% to 4% from our previous guidance of 4% to 6% and the improved expectation is due largely to a change in geographic mix of revenues.

I believe our first quarter performance and the list of achievements represent a strong start to 2018 for Noble. Operational execution remained outstanding in the quarter and with the expected improvement in fleet operating days over the remainder of 2018, quarterly revenue should build as new work begins and additional contracts are secured. We remain committed to continuous maintenance and asset preservation throughout the trough and we are now poised to economically reactivate several attractive jackup and floater assets in our premium fleet as industry activity warrants. Finally, our excellent liquidity runway provides valuable financial flexibility as we evaluate the appropriate strategies to drive growth and deliver value to our shareholders.

I'll now turn the call over to Robert for an overview of the offshore market and an update on the Noble fleet.

[Robert W. Eifler, Noble Corp. Plc]

Thank you, Adam, and good morning to everyone. This morning I'll begin with some comments on the improvement in industry activity, supported in part by Julie's introductory details regarding recent contract awards in our jackup fleet. Then, walk through our fleet availability and finish with some regional commentary. The mood in the industry today is decidedly more positive than even a quarter ago and this is especially true in the premium jackup segment. We have always believed in maintaining a mixed fleet and the benefits of this strategy are becoming clear as the premium jackup market transitions into full scale recovery.

Demand for the best assets is rising steadily and notably certain customers are pursuing long-term contracts while others are securing rig requirements with a year or more lead time. Contract visibility is improving and dayrates should follow. In certain regions and for niche customer requirements, dayrates have already improved from levels commonly experienced 6 months ago, especially for contract commencement dates in late 2018 or beyond.

While fixture activity in the deepwater space has developed more slowly this year than we had hoped, global liquids demand has remained strong; breakeven costs offshore are now largely below $50 per barrel; projects sanctions doubled 2017 over 2016; and we believe that we remain on the cusp of notable improvement in the segment.

For now, I want to bring you up to date on recent developments in the Noble fleet, including further details on contract awards and opportunities for our rigs in both the jackup and floating fleet with current or near-term availability. Earlier, Adam noted the first quarter decline in total fleet operating days which was driven by a jackup fleet where utilization declined to 56% reaching its lowest point during the cycle. However, previously awarded contracts for those rigs which were in transition for much or all of the quarter have had now commenced. These include the Noble Houston Colbert which began a program offshore the State of Qatar in early February and the Noble Hans Deul and Noble Tom Prosser with contract commencements offshore the North Sea and East Timor in mid and late April, respectively.

Our successful efforts in securing new contract awards are driving further improvement in jackup fleet operating days. These include an award for the Noble Houston Colbert which will relocate to the North Sea following the conclusion of its current assignment in the Middle East to execute an estimated 170-day program. The rig will receive a paid mobilization and will enter the North Sea equipped for year-round operations following a winterization program completed during the previous drilling campaign offshore Southern Argentina.

The Colbert is expected to remain under contract into the third quarter of 2019 and we are confident in finding follow-on work in the region. Also the Noble Mick O'Brien which has remained warm stacked since August 2017 has been awarded an estimated 220-day contract for work offshore the State of Qatar. The contract is expected to commence in June 2018 and should remain contracted into early 2019. The rig will be in a highly prospective region as expectations build for additional work scope including some multi-year opportunities. Keep in mind the Mick O'Brien can be reactivated at a cost below $5 million since it has been warm stacked under a rig preservation and maintenance protocol.

The North Sea and Middle East regions have accounted for the lion's share of incremental jackup demand over the first four months of 2018 and we remain encouraged with regard to our ability to benefit from future customer needs in both regions. As an example, prior to the delivery of Noble Sam Hartley in 2014, we improved the rigs' water depth rating following steps to reinforce its legs positioning the rig for more challenging drilling applications in the Central North Sea. The Hartley, which is the only high specification jackup in our fleet that is currently without a contract is warm stacked and we are highly confident in the near-term prospects for the rig.

Although our fleet of deepwater floaters have not enjoyed the same level of contract achievement as our jackups through the first four months of the year, we continue to evaluate a healthy number of opportunities in numerous regions around the world and find our fleet strongly positioned for a number of these prospects. In addition to the expected June commencement of operations on the Noble Clyde Boudreaux offshore Myanmar, we did recently secure another extension for the semisubmersible Noble Paul Romano in the U.S. Gulf of Mexico. The one-well program is now expected to keep the rig employed until mid-May.

The ultra-deepwater drillships, Noble Tom Madden and Noble Sam Croft, continue in warm stacked status. We remain focused on finding work for the rigs, which can be reactivated at an estimated cost of $10 million to $20 million each. The rigs are candidates for a number of opportunities in the Western Hemisphere so we remain optimistic about a reactivation of at least one of the units in 2018. The Madden and Croft are two of the most capable ultra-deepwater drillships in the industry and their advanced design and equipment configuration easily places them among the most marketable rigs of their class.

Among our other warm stacked floating rigs, the Noble Globetrotter II remains in the Black Sea with strong line of sight to impending needs in the region that could commence as early as the fourth quarter of 2018. The rig will continue to earn a dayrate of $185,000 per day into December. Finally and as we reported with our last Fleet Status Report, the pending return of the Noble Bully II to active status has been postponed. The new arrangement gives our client the option to keep the rig warm stacked through December 2018 at a dayrate of $230,000 per day.

Before I turn the call back over to Julie, I want to provide a regional review and some insights into the opportunities for offshore rig needs beginning in the Western Hemisphere in the U.S. Gulf of Mexico. In the U.S. Gulf, customer inquiries were higher during the first quarter when compared to the previous quarter. This supports our opinion of a modest increase in floating rig demand in 2018 accelerating into 2019. But most programs under evaluation currently are short term in nature. Idle floating capacity in the region remains a challenge with dayrates for floating rigs remaining largely unchanged for the remainder of the year. During the first quarter, two of our ultra-deepwater drillships relocated to other regions where they are now executing customer programs.

These relocations include the Noble Bob Douglas to Guyana and the Noble Globetrotter I to Egypt. Following these relocations, the marketed floating rig supply in the U.S. Gulf currently stands at 31 rigs with 23 rigs under contract. Mexico continues to represent one of the industry's most watched emerging hydrocarbon plays supported in part by early drilling successes along with the entrance of new international oil and gas companies following energy reform. Customer interest in the recent shallow and deepwater licensing realms has been impressive and demand for both shallow and deepwater rigs is becoming more visible.

Inquiries from customers are expanding with some deepwater drilling programs now expected to commence during the second half of 2018 with dayrate expectations remaining flat for now. We are encouraged by the opportunity profile in Mexico and believe our floating rig fleet and history in the country strongly position us to address emerging customer needs. South America holds multiple interest areas of interest with customer tenders and inquiries on the rise. These areas include Brazil, Guyana, French Guiana and Suriname. Incremental floating rig needs for each country are likely through 2019 as both majors and independents evaluate numerous programs in these highly prospective hydrocarbon basins.

Specific to Brazil where the marketed floating rig supply stands at 33 units with 24 units under contract, customer demand is building with potential needs for both the pre-salt and legacy fields, coupled with support from an improving and better defined regulatory framework. Further, pre- and post-salt bid rounds are scheduled for the second half of 2018 with strong customer interest expected. While Petrobras may continue to rationalize their fleet through 2018, we do anticipate a trough in the near to intermediate term and an improvement in their rig demand thereafter.

Turning to the Eastern Hemisphere and beginning with the North Sea. The heightened bidding activity experienced during the fourth quarter of 2017 has transitioned into numerous contract awards over the early months of 2018. Our outlook for the premium jackup sector remains encouraging as prospects are in place for continued improvement in 2018, tempered only by seasonal factors. While we believe excess jackup rig capacity will persist through 2018, we could witness a turning point in 2019 driven in part by fleet attrition and developing customer preferences for the most efficient assets. We are already experiencing an improvement in leading-edge dayrates for premium jackups.

In West Africa, the market has been slightly more active on the floating side with a modest pickup in customer increase for programs in several areas, including Ghana and Equatorial Guinea. However, an unfavorable contract roll-off schedule in the region is likely to mute any meaningful progress for the remainder of 2018. It is encouraging to note several long-term opportunities in the region for deepwater rigs. A similar theme is present in the Mediterranean Sea with greater customer interest noted in the deepwater sector, but short-term contract durations for most of the opportunities. Higher jackup demand remains likely in the Middle East with steady tendering activity and numerous opportunities defining multi-year durations.

Following recent announcements by other drillers regarding contract assignments in Saudi Arabia, we see further multiple rig needs for areas such as Kuwait, Qatar and the UAE, driving incremental demand in the region. Although modest dayrate improvement is possible, we currently expect the improvement to be limited due in part to lingering excess capacity. Also, we are witnessing an important transition in customer sentiment in the region towards a preference for more modern units which we view as strong support of our strategy of a premium fleet.

Finally, in the Far East and Oceania, tendering activity and customer inquiry levels remained healthy, but delays with many of these pending awards would not be surprising, especially for programs offshore Malaysia where elections are to conclude in May. The jackup sector has experienced utilization pressure in recent months as rigs rolled off contract in late 2017 with no immediate follow-on assignment. On a positive note, we have seen a growing regional interest across this vast geography from certain majors and independents, and this bodes well for future rig demand. On the floating side of our fleet, the Noble Clyde Boudreaux is preparing to commence the Myanmar work with a number of opportunities for follow-on contracts.

In summary, we believe the essential factors that have traditionally driven improved offshore spending are coming into place, including sustained crude pricing and compelling offshore project economics. As I mentioned previously, forward indicators are decidedly positive. With these factors in place, offshore industry is beginning to display steady signs of progress with a number of positive trends taking shape.

These encouraging movements are most pronounced in the jackup market as customer increasingly transition to firm contracts. Also, we note customer demand continues to manifest itself as we engage in more discussions on the subject of 2019 rig needs, with improving dayrates more apparent. Equally impressive, premium rig capabilities and a successful performance history is driving improved contract visibility with some currently committed jackup rigs securing contracts and direct continuation from new parties. We remain confident that improved customer demand, which has started to show, will accelerate over the intermediate term with the higher demand supported by an increase in new field developments, a return to exploration and a need to replenish reserves.

That concludes my comments and I'll now turn the call back over to Julie.

[Julie J. Robertson, Noble Corp. Plc]

Thank you, Robert. I believe the comments this morning from Adam and Robert clearly support two important themes. First, Noble continues to demonstrate excellent operational, commercial and financial performance. Second, as the offshore industry exhibits improvement, Noble is well-positioned to capture the emerging needs of customers. Our diverse fleet consisting predominantly of premium jackups and floating rigs places us in an excellent position to capitalize on both shallow and deepwater opportunities.

In addition, because much of our jackup fleet is located in regions with expanding prospects where we have a distinguished history including the North Sea and the Middle East, we are poised to serve a broad list of customers in this early phase of the cyclical recovery. The two new contract awards that Robert told you about earlier have improved our 12-month contract coverage for our jackup fleet to just under 60% compared to 53% at the start of the year with further improvements likely.

Currently, 9 of our 10 premium jackups are under contract and we believe a fully committed premium jackup fleet is probable in the near term. Although we have yet to experience this favorable contracting trend in our ultra-deepwater fleet, we are encouraged by the number of projects under evaluation and believe our rigs are located in and around regions with prospects for increasing demand. You should know that reinforcing Noble's strong competitive position in the offshore drilling industry remains of paramount importance to our management team. Our efforts begin with improving upon our already excellent operational performance while delivering outstanding service to our customers in a safe and efficient manner.

Also, in light of the improving market dynamics highlighted on our call this morning, it includes a shift in approach as evidenced by transitioning of our contracting strategy from a focus on utilization to one aimed at optimizing commercial terms, especially as it pertains to our jackup fleet. We continuously evaluate opportunities to grow our total fleet and presently maintain a favorable disposition to premium jackups given the growth in customer demand and the likelihood that our 10 premium rigs will be fully committed in the short term. Finally, we continue to evaluate ways to improve our balance sheet which includes managing debt as it makes financial sense.

Thank you again for your participation this morning and your continued interest in and support of Noble. Now, I'll turn the call back over Jeff.

[Jeffrey L. Chastain, Noble Corp. Plc]

Okay. Thank you, Julie. Jamie, let's go ahead and begin the question-and-answer segment. So, if you would assemble the queue and give us our first caller, please.

[Operator]

Thank you. And your first question comes from Angie Sedita with UBS. Your line is open. Angie Sedita, your line is open.

[Angie Sedita, UBS Securities LLC]

Good morning, Julie.

[Julie J. Robertson, Noble Corp. Plc]

Good morning, Angie. How are you?

[Angie Sedita, UBS Securities LLC]

Good. Good. How are you?

[Julie J. Robertson, Noble Corp. Plc]

Well. Thank you.

[Angie Sedita, UBS Securities LLC]

Good. So, Julie, on the M&A side, your thoughts – I'd like to hear your thoughts on M&A as far as do you think it's important for the industry to see further consolidation? Do you think there is a value in being a larger company and your thoughts on how Noble plays a role in that?

[Julie J. Robertson, Noble Corp. Plc]

Okay. Angie, we have always thought, as you know, that consolidation is important in this space and we continue to believe that. I still continue to believe that as we're coming out of this cycle, we'll see more M&A activity. We're certainly looking at it on all fronts and all opportunities that are out there. Obviously, we will keep with our program that we have in place now of premium assets, we would do nothing to dilute that. We're obviously looking for ways to improve our balance sheet through opportunities. We would look at company acquisitions as long as the value is provided and there is excellent potential there with some backlog and some runway space available. One-off rig acquisitions if we found – have jobs that we could match those with, they could immediately put them into, we would certainly be open to that as long as again there is value attached to that. But we're very open to M&A on all fronts and firmly believe that it's important to the drilling business.

[Angie Sedita, UBS Securities LLC]

Okay. Thank you. That's helpful. And then maybe something more a little bit broader. How do you think about Noble and how your view of Noble is going forward, right? As you think about how the company has been run in the past, targets that you think are important that should stay in place, that have always been there and things that or targets that could change going forward or how you view the company maybe slightly different than what's been done in the past?

[Julie J. Robertson, Noble Corp. Plc]

Okay. I think we've always had a good plan in place and we really continue to do that. Obviously our balance sheet is critical to us. We have more debt on the balance sheet now than we've had before and certainly would like to make improvements there which we continue to work on. We're very comfortable with our runway and our liquidity position right now. We think we feel very strong in that regard. But clearly that's an area that we would like to focus.

In terms of our operational performance and capabilities, I think that we're clicking on all cylinders in that regard that's obviously been something that's been important to this company over the long haul. Our customer service and responding to customer demand remains at the forefront as does our commitment to safety and environmental efficiency. So, in terms of anything that we're going to change, I think that our game plan remains in place. We're very focused on – we'd like to grow the company if the opportunities present themselves. We think we're at a position where we could certainly maintain going forward but we would like to grow where there's good opportunities for that, no doubt.

But again I think we have – we're working well operationally. It'd be hard to imagine how we could be working better. Safety performance is paramount as you know here and we continue to work toward all that. We have great customer relationships which we continue to maintain and continue to develop and we'll look to ways to improve those and expand into areas where we have not been working most recently, but other than that our game plan continues to service customers and provide a great return for shareholders.

[Angie Sedita, UBS Securities LLC]

Thanks, great. If I could slip one more and maybe for Robert on Mexico, certainly a surprise to see it moving so quickly. Maybe you could give if you have any thoughts any context on how many jackups and floaters potentially could be moving into the region in the next 12 – well let's say 12 months.

[Robert W. Eifler, Noble Corp. Plc]

Sure. So, I'd say on the jackup side, it's a little less clear and I think we're probably a little less bullish than we are on the floater side. There are a number of local contractors there that have some existing jackup supply in shipyards and in the country, and it's a little unclear where the supply stands there. As you know we don't have any jackups in the Western Hemisphere right now so I wouldn't necessarily call that region strategic today despite our past there. On the floater side we see five or six near-term opportunities granted most of those are shorter in nature, but those are late 2018 early 2019 opportunities and we're well aware of some successes from previous bidding rounds that are going to lead to demand on top of what I've just mentioned and we think that's probably a 2019 event.

[Angie Sedita, UBS Securities LLC]

Great. Thanks. I'll turn it over.

[Julie J. Robertson, Noble Corp. Plc]

Thank you, Angie.

[Operator]

Your next question comes from Jim Wicklund with Credit Suisse. Your line is open.

[James Wicklund, Credit Suisse Securities (NYSE:USA) LLC]

Good morning, guys.

[Julie J. Robertson, Noble Corp. Plc]

Good morning, Jim.

[James Wicklund, Credit Suisse Securities (NYSE:USA) LLC]

In terms of contracting, I know that in the past, jackups have been contracted more on a well to well basis than term and deepwater rigs have been contracted historically more on term and now we're starting to see, instead of getting a two-year contract you get 14 wells, and we just estimate how long that's going to take in terms of backlog. Can you talk about how that is looking today in the tenders you're getting for the – or the increase you're getting on the deepwater rigs? Are they for a one- or two- or three-year term or are they for two or three or four wells as opposed? And is the jackup market changing any in that?

[Julie J. Robertson, Noble Corp. Plc]

Jim, I'll give a brief answer, and then ask Robert to give a more fulsome one. Yes, you're exactly right. The way we've seen it happen in the past is not how it's happening now. But yes, the deepwater inquiries that we're getting are still certainly not for long – for terribly long-term commitments and they do come in both, you're right, in terms of days and in terms of wells. We're still seeing a mix of that. It is starting to get a little more term conversations on some, but not what we've seen in the past certainly. I'll ask Robert to fill in more detail on that.

[Robert W. Eifler, Noble Corp. Plc]

Okay. I'll add to the floater comment and just say that obviously customers are continuing to get a little more comfortable with long cycle investment and I think a part of that process is contracting to specific AFEs. And so I think that kind of leads to obviously the well to well contracts. I think also we all know there's an efficiency dynamic playing out right now and contracting term into an improving efficiency dynamic is maybe a little bit scary for customers as well.

So, as the industry figures all of that out and as customers get more comfortable with of long cycle investment, I think you'll see more long-term contracts in the coming months. And then as you know that there are a few out there today.

On the jackup side, I think we've made it pretty clear in the comments that we see improvement there, especially in the premium asset. And I think you're seeing specifically NOCs who have certain kind of a different approach to budget trying to lock in the rigs they want now for term. And so, I think you're seeing where you do typically see well to well there. We've seen term contracts before with NOCs and I think you're seeing people move towards term contracts to capture current market dayrates.

[James Wicklund, Credit Suisse Securities (NYSE:USA) LLC]

So, they're kind of reversing between the two versus history and it was really the efficiency in the deepwater that has been more concerned when companies announce how quickly now they're drilling wells that you just set a higher and higher bar.

And that leads me on to my follow-up if I could. In terms of performance bonuses, I mean the faster you drill, the tighter your customer is going to make that performance bonus. And we've seen them a lot in deepwater, we haven't seen them as much as in jackups. But can you talk about where performance bonuses are in the two relative segments? And where you expect those to go over the next couple of years? Because your drilling against an AFE that you didn't set? And so, it just strikes me as difficult sometimes to try and perform on something that you didn't set the general parameters on. And I'm just wondering how that's evolving really?

[Julie J. Robertson, Noble Corp. Plc]

Jim, yes, we agree with that. Certainly, the efficiencies the operators have implemented in their side of the business along with the improved capabilities that we have with excellent assets. You're right. We're drilling in much, much quicker times now and drillers are now drilling themselves out of jobs more rapidly than we used to. I'll ask Rob to talk about the performance.

[Robert W. Eifler, Noble Corp. Plc]

Yes, Jim. I think I'll just say there is a lot of talk about that in the industry and I think it's best characterized, as you framed your question, in a lot of talk but not a lot of answers so far. So, we spend a lot of time thinking about it internally. We speak with customers regularly about it. Clearly, bonuses are not new to the industry. We have bonuses in our – some of our Shell contracts and we've had them on some jackup contracts very recently as well.

I do think the industry is headed or would like to be headed past bonuses and into more performance-based contracts and I think that we're not – I don't think the answer is obvious just yet. So, there's a lot of talk on how we can leverage big data, integration on performance and all that's still right now kind of being developed in the industry, obviously looking at land for example but with a completely different business model offshore. I think everyone is sort of proceeding cautiously in their thinking there.

[James Wicklund, Credit Suisse Securities (NYSE:USA) LLC]

Okay. That's helpful. I appreciate it. Thank you very much.

[Julie J. Robertson, Noble Corp. Plc]

Thank you, Jim.

[Operator]

Your next question comes from Haithum Nokta with Clarksons Platou Securities. Your line is open.

[Haithum Nokta, Clarksons Platou Securities, Inc.]

Hi. Good morning.

[Julie J. Robertson, Noble Corp. Plc]

Good morning, Haithum.

[Haithum Nokta, Clarksons Platou Securities, Inc.]

Hey, Robert, you mentioned pickup in rates (00:40:59) is that primarily just in the North Sea or you're seeing that in other regions? And as you think about bifurcation in jackup market, is it, call it, North Sea versus harsh versus benign or do you see along the different lines?

[Robert W. Eifler, Noble Corp. Plc]

Haithum, good morning. So, the increase in rates, I think North Sea would be the best example of where we're seeing some improvement, but also in some of the more niche opportunities that need either a high hook load or long leg length or something a little bit beyond just the standard – even newly built but more standard specification jackups.

Now on the bifurcation question, I think it's very similar answer. Certainly, the North Sea and North Sea capable rigs are kind of where we're most focused right now. Our JU-2000 and JU-3000 class has performed very well in that region despite being located around the world right now. But also I think a lot of customers are coming to the realization on the efficiency provided by these units. And so, while I'll stop short of bifurcation by benign environment, I would say that some of the bigger units, and our JU-3000, JU-2000s are no exception, offer a level of efficiency that the industry is still learning and figuring out. And I think in certain regions outside of the North Sea, customers are starting to show strong preference for those more efficient units.

[Haithum Nokta, Clarksons Platou Securities, Inc.]

Great. And a lot of your positivity has been directed a bit more towards the jackup market, but as you think about I guess how the floater market is evolving right now, can you give me maybe some specifics about how you're seeing call it the ultra-deepwater market versus call it the moored market like you're seeing in Southeast Asia for Clyde Boudreaux. Is ultra-deepwater still not getting there kind of from what you're seeing? Or is that part of the one-year lead time that you mentioned that's becoming interesting?

[Robert W. Eifler, Noble Corp. Plc]

So, they are two different markets. I would characterize the moored market as more niche today because so many of those units were cold stacked during the downturn. As Julie mentioned in her comments, we think the ones that we have currently drilling, preparing for drilling compete well based on their operating history and certain of their drilling characteristics. The mid-water – so the moored segment targets a water depth that can't really be accessed by the ultra – by DP fleet (00:43:51) and that happens to be in areas of the world that have a lot of infrastructure and kind of in the current phase of the market people are doing a lot of infill drilling and redevelopment and that plays out well with the proximity of infrastructure. So, we think that's a good trend right now.

On the ultra-deepwater side, I think the comments in the prepared comments characterize our view. We see utilization improvement accelerating from here, but we are not to the point today of dayrate improvement. I think the first step is improvement on those assets that are the top most marketable assets in the world of which our Hyundai units certainly qualify and timing is difficult to predict but we see it coming.

[Haithum Nokta, Clarksons Platou Securities, Inc.]

Appreciate that. I'll turn it back.

[Julie J. Robertson, Noble Corp. Plc]

Thank you, Haithum.

[Operator]

Your next question comes from Ian Macpherson with Simmons. Your line is open.

[Ian Macpherson, Simmons & Company]

Hey. Good morning. I should add, nice quarter by the way.

[Julie J. Robertson, Noble Corp. Plc]

Thank you, Ian.

[Ian Macpherson, Simmons & Company]

I wanted to ask about the competitive structure right now. It's a little weird because there are still several significant customers that are mid-bankruptcy or not yet entered bankruptcy that will be and I wonder what their presence is (00:45:22) in the bidding environment. And also there's one big jackup contractor with tons of high-spec rigs, modern rigs, not much operating history. So, between the two of them it just seems there's a lot of sort of questionable competition that's difficult for us to assess and maybe you could shed some light on their participation and relevance in the market today and how you see it unfolding in the quarters ahead, it's hopefully moving towards more of a demand recovery.

[Julie J. Robertson, Noble Corp. Plc]

Okay. Ian, Robert is going to be the best one to talk to you about the bids we're getting from the operators that you were referring to. So, we'll let him answer that.

[Robert W. Eifler, Noble Corp. Plc]

Okay. Let me just clarify, you did say customers, Ian, but were you asking about contractors. I think the...

[Ian Macpherson, Simmons & Company]

No, sorry, contractors. Sorry if I misspoke. I mean contractors.

[Robert W. Eifler, Noble Corp. Plc]

Sure. So, I think our customer base right now is still really hesitant to reach out into contractors that they're really not entirely certain of the financial future. You're right, as these companies emerge from Chapter 11, they do come back into the competitive landscape to a greater degree. I do think also and we've said it before that during this downturn, there is a number of stalwart names of which we're certainly one of them, and that customers certainly have shown a propensity to choose the names they've used previously know and trust.

On the jackup side, I think that dynamic plays out in a couple of different ways. Yes, there will be some more competition out there as customers get used to the new name in the space. But at the same time, we've accelerated attrition tremendously and I think the attrition story on the jackup story is really one of the crucial factors moving forward.

So, we're comfortable with where we compete in the market. We're seeing a whole lot of interest from customers and we're looking at hopefully a fully utilized jackup fleet in the near-term and more comfortable going forward.

[Ian Macpherson, Simmons & Company]

Thanks, Robert. You also alluded to more, even beyond the recent Saudi fixtures, there's more multi-year term opportunities for some other Middle Eastern NOCs going forward. And I wonder if you could talk to your appetite for more contract wins at today's dayrates which are pretty suppressed and how important it is for you or for any sort of sensible contractor to be close to 10 (00:47:59) on those bids or if you're getting more confident that you think that you can be able to (00:48:02) as you approach those versus other more of a spot approach to the jackup market in 2019?

[Julie J. Robertson, Noble Corp. Plc]

Ian, as you would guess we have those discussions every day internally and we're looking at that hard right now. Obviously, we think the rates are increasing so we're a little reluctant to go along on the rates as they are today. But certainly, we have always believed in a layered structure to our contracting strategy. So, we'll go long on some, but I'll ask Robert to add some color.

[Robert W. Eifler, Noble Corp. Plc]

I think the conversations that we're having today certainly include some dayrate improvement if we're talking about term. And so, as Julie mentioned managing term on this is really one of the most difficult parts of our jobs right now. But certainly, for term contracts, we're looking for rate improvement through the course of these contracts.

[Ian Macpherson, Simmons & Company]

Okay. Well, thanks.

[Julie J. Robertson, Noble Corp. Plc]

Thank you, Ian.

[Operator]

Your next question comes from Colin Davies with Bernstein. Your line is open.

[Colin Davies, Sanford C. Bernstein & Co. LLC]

Thank you. Good morning.

[Julie J. Robertson, Noble Corp. Plc]

Good morning, Colin.

[Colin Davies, Sanford C. Bernstein & Co. LLC]

Good morning. Just thinking about the contracts on the jackup side, on the premium jackup side. Very interesting the customers seem to be wanting now to lock – try and lock-in activity quite a ways in advance 2019, interesting that you have a paid mobilization as well in the Middle East to the North Sea. In terms of pricing now, in order to get that capacity locked-in in 2019, are we talking just moderate moves up in a single-digit percentages or are we are nicely into the double-digits by this point?

[Julie J. Robertson, Noble Corp. Plc]

We're seeing modest increases in mostly across the board. We have in – obviously the North Sea market as you mentioned is tightening more than others. Middle East, we're seeing a little more tightening there than we have in the past, but certainly not across the board into the double-digits yet but we are seeing a nice trend. Robert, do you want to add?

[Robert W. Eifler, Noble Corp. Plc]

Yes. I'd say I think this is not Noble-specific. It's our belief that kind of throughout the industry there are a number of contracts that are being announced now or in final stages of negotiation that have been under discussion for quite some time. So, I think you're going to see a mixture of double-digit plus improvements mixed with some more legacy rates because this market's moving quickly. No one is disclosing rates, it's a little difficult to know where everything stands, but certainly there are certain places where improvement is at the high end of the range, you mentioned.

[Colin Davies, Sanford C. Bernstein & Co. LLC]

That's great. And just as a follow-up, can you talk a little bit about go-forward strategy with the Madden and Croft which are obviously been warm stacked now for quite some time? But obviously with the interest coming in Mexico, more exploration-orientated work, probably shorter term type work, is there a sort of tactical imperative now to try and get those rigs out working and try and piece together perhaps pieces of separate exploration work that can be strong together?

[Julie J. Robertson, Noble Corp. Plc]

Colin, we're very focused on getting those assets out as we have been and we feel right now that there are some very positive indications that that will be happening in the not too distant future. They have been warm stacked for a while, they have been incredibly well-maintained. As you know we've talked in the past about what it would take to get those rigs out and it's not a huge amount, it's $10 million to $20 million; $10 million on the lower end for the Tom Madden, and a little bit higher than that on the Croft. But those rigs we have people looking at both of those rigs right now opportunities for those rigs certainly Mexico, the exploration work that will be going on there will be great locations for those rigs.

So, we have a lot of opportunities that we're looking at right now and I'll ask anybody on the team to add anything they'd like to. No? Okay. We're excited about the opportunity for those right now. Thanks.

[Colin Davies, Sanford C. Bernstein & Co. LLC]

Thank you, Julie. Thanks.

[Julie J. Robertson, Noble Corp. Plc]

Thank you, Colin.

[Operator]

Your next question comes from Sanjay Aiyar with Coherence Capital. Your line is open.

[Sanjay Aiyar, Coherence Capital Partners LLC]

Hi. Thanks for taking my question. Just back to potential M&A, how do you think you would finance an (00:52:45) M&A, would it be equity or would you potentially tap some of the guarantee notes that you have or any thoughts?

[Julie J. Robertson, Noble Corp. Plc]

Sanjay, I think it would be any combination thereof and we obviously – we're looking – if we're looking at M&A, we would be looking at what best serves our shareholders and how that would be structured the best for the deal. But we're open. We're not opposed to any combination. That's it. I'll ask Adam to expand further on that.

[Adam C. Peakes, Noble Corp. Plc]

Yes. Just on how we would finance it, I would say, look, we're not opposed to using cash in an M&A context depending on the size and what it takes to get the deal done or seller preference. We do have significant capacity either through additional guaranteed notes or even notes that would be senior to that. So, very case-specific, but I think the punch line is we would look to delever as part of that growth and so we're not looking to use cash unnecessarily putting any more strain on the balance sheet. We would look for opportunities to equitize as part of that growth strategy.

[Sanjay Aiyar, Coherence Capital Partners LLC]

Understood. So, when you said deleverage, do you mean it would be at multiples that would be deleveraging upon purchase or long-term growth you see potential to delever?

[Adam C. Peakes, Noble Corp. Plc]

Well, I guess there's lots of ways to do it. I would say we're not looking to take on additional leverage day one. And so, if we were going to do something we would want to have the pro forma balance sheet be stronger than it is today on any of the debt metrics we have. We're not so focused on it that if there's a story or if there's a reason that that happens over time, I think we're open minded to that. But what we're not looking to do is put incremental leverage on the business and look to pick off assets or a company at the bottom of the cycle by using cash and taking on additional risk on the balance sheet.

[Sanjay Aiyar, Coherence Capital Partners LLC]

Understood. And just to remind us, how much capacity do you have senior to the guaranteed notes.

[Adam C. Peakes, Noble Corp. Plc]

$750 million.

[Sanjay Aiyar, Coherence Capital Partners LLC]

Thanks. That's it for me.

[Julie J. Robertson, Noble Corp. Plc]

Thank you, Sanjay.

[Jeffrey L. Chastain, Noble Corp. Plc]

Okay. Jamie, that looks to be all of the questions on this quarter's call. So, I'm going to go ahead and close. I'd like to thank everybody for their participation today and your continued interest in Noble. Jamie, we appreciate your time and coordinating of today's call.

Good day, everyone.

[Operator]

This concludes today's conference call. You may now disconnect.