Noble Corp (Cayman Island)

NYSE:NE

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Noble Corporation Second 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. I would now like to turn the call over to Jeff Chastain, Vice President, Investor Relations. Jeff, you may begin.

[Jeffrey L. Chastain, Noble Corp. Plc]

Thank you, Julie, and welcome, everyone, to Noble Corporation second quarter 2018 conference call. We appreciate your interest in the company. And, in case you missed it, a copy of Noble's earnings report issued last evening, along with all the supporting statements and schedules, can be found on the Noble website and, again, that's 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 or 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. These include 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 our website. And consistent with our quarterly disclosure practices, once our call has concluded, we will post on our website a summary of the financial guidance covered on today's call, which will cover third quarter and full-year 2018 figures.

One final update. Since our comments today will include a review of our fleet, we will not issue a fleet status report on August the 9th as we had previously noted. We will plan to issue our next fleet update on September the 4th.

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. I'd also like to welcome each of you to our review of our second quarter results. Thank you for joining us this morning, and we appreciate your continued interest in Noble.

There have been a number of positive developments at Noble since we last spoke, and our optimism is building as we evaluate prospects in the offshore business environment through the second half of 2018 and into 2019. Numerous contract awards, higher activity in our jackup fleet, expanding commercial prospects, rig reactivation opportunities and excellent operational performance are some of the topics we will review this morning.

But, first, I want to introduce the members of our management team joining me on today's call. In addition to Jeff, I'm joined 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.

Following my opening comments, Adam will review the second quarter results and update our guidance for the remainder of 2018. Robert will follow it with a discussion of the Noble fleet and regional market opportunities. And I will then close with some final thoughts before we open the call to your questions.

As reported, our second quarter results included a non-cash impairment charge of $793 million. This charge was a result of a detailed review of our fleet, testing a number of assumptions, including rig capability and earnings potential. The review, which resulted in the retirement of three units, represents a proactive approach to addressing operating expenses and driving further efficiencies, while focusing on those rigs in our fleet with the highest potential for future success. Adam will provide a more complete discussion of this charge in his remarks.

From an operating perspective, second quarter results extended the sound performance of past quarters. Operational uptime remained strong at 98% which was once again ahead of our expectations. Also, contract drilling services cost ended the quarter at the low end of our expected range, despite a 17% growth in operating days.

Our contract drilling margin of just under 40%, when compared to the first quarter, remained at a healthy level as it has through much of this prolonged business downturn. Our contract backlog, which stood at $2.6 billion at June 30, has helped sustain margins with added support from an intense focus on cost management. I am very proud of the consistency of our operational execution. And, as always, I want to recognize our global rig crews for their commitment to safe and efficient operations.

I'm equally proud of our marketing efforts and the numerous commercial successes since the year began. A 17% increase in total fleet operating days when compared to the first quarter followed the commencement of recent contract awards for the premium jackups, Noble Hans Deul, Noble Houston Colbert, Noble Tom Prosser, and Noble Mick O'Brien. Specific to our jackup fleet, operating days improved 23% quarter-over-quarter, and we anticipate additional growth through the remainder of 2018.

In fact, we have secured additional awards since the close of the quarter, including a contract for the Noble Sam Hartley and a contract extension for the Noble Sam Turner. Following these awards, Noble has all 10 of its premium jackups committed to contracts with no contract days available before late 2018. Looking forward 12 months, 79% of the available operating days associated with our 10 premium jackups are now committed to contracts, as compared to 56% at the beginning of this year.

We have also seen recent commercial success with our floating fleet. As we discussed in our press release, the ultra-deepwater drillship, Noble Tom Madden, was recently awarded two well program with three optional wells for exploration drilling offshore Guyana. The contract is expected to commence in October when the Madden will join the Noble Bob Douglas which has performed at an exceptional level since commencing operations last April offshore Guyana.

The award expands our relationship with ExxonMobil, while further diversifying our revenue base and establishes Noble as the primary offshore service provider in one of the world's premier exploration and development programs. Congratulations to our global Marketing and Contracts and operations teams for an outstanding effort.

Before I turn the call over to Adam, I want to provide a quick review of the Noble Clyde Boudreaux upgrade and reactivation project. The rig shipyard departure was delayed in the second quarter as we worked to condition the secondary wood floor and associated drilling equipment. The rig departed Singapore on July 27 and we expected to commence operations offshore Myanmar by the end of August.

With this upgrade to full drilling capability, the Noble Clyde Boudreaux is poised to deliver to our customer even greater efficiency, and remains one of the industry's most advanced semi-submersible rigs with conventional mooring capability. We believe it is advantageously positioned for several drilling programs under review.

We believe that for the balance of 2018 current trends indicate improvement from the second quarter. And we believe you will see this in higher operating days in our jackups and floating fleets once operations commence on the Noble Clyde Boudreaux, Noble Sam Hartley and the Noble Tom Madden.

For more details on this and other financial performance matters, I'll now turn the call over to Adam.

[Adam C. Peakes, Noble Corp. Plc]

Thank you, Julie. Good morning and welcome to everyone. I'll begin today by hitting the financial highlights in the second quarter. I will also explain any variances from the guidance offered in May, address capital spending in the quarter, as well as provide an update on our liquidity position and balance sheet. Before closing, I'll revisit our guidance for 2018 and provide some thoughts on the third quarter.

For the second quarter, Noble reported a net loss attributable to the company of $628 million or $2.55 per diluted share. Included in the reported figures was a non-cash pre-tax charge totaling $793 million or $2.06 per diluted share, relating to the impairment of three rigs and certain capital spares. During the second quarter, we performed a detailed review of our rig fleet with a specific focus on stacked units.

As part of this review, we evaluated assumptions for these units pertaining to, among other things, projected stacking periods, reactivation costs, and rig marketability in light of current and projected market conditions. Following this review, we decided partial impairments on the drillship, Bully, Noble Bully I and semisubmersible Paul Romano, were appropriate, along with the full impairment of the semisubmersible Noble Dave Beard.

With regard to the Beard, the rig has been retired from service. In addition, we have decided to retire the Noble Amos Runner and the Noble Alan Hay, both of which were fully impaired previously. Recall that the Noble Bully I is part of our joint venture with Shell, owned equally by each partner. Therefore, a portion of the impairment charge associated with the Bully joint venture was reflected as income to Noble in the noncontrolling interests line on our P&L, resulting in an impairment charge net of noncontrolling interests and tax of $507 million.

Without the impairments, Noble would have reported a second quarter net loss attributable to the company of $121 million or $0.49 per diluted share. Following the retirement of the Beard, Runner and Hay and the sale in May of the standard duty jackup, Noble David Tinsley, the Noble fleet now stands at 24 rigs comprised of 12 floating and 12 jackup rigs.

We included a non-GAAP supporting schedule with our press release and the schedule can also be found on the Noble website at noblecorp.com. That schedule provides a reconciliation of non-GAAP numbers to net loss attributable to Noble Corporation to income tax provision, and to diluted earnings per share for the second quarter of 2018 and 2017 and the first quarter of 2018.

Turning to operating results, a noteworthy highlight from the second quarter was the 17% improvement in total fleet operating days when compared to the first quarter. The improvement was driven largely by our jackup fleet where operating days increased 23%, driving jackup utilization in the quarter to 70%, up from a low of 56% in the previous quarter.

Several rigs contributed to the build in activity, which was driven by a definitive step-up in client demand, especially in the North Sea and Middle East regions. These rigs included the Noble Hans Deul, Noble Houston Colbert, Noble Tom Prosser and Noble Mick O'Brien. The favorable trend in fleet operating days pushed contract drilling revenues in the quarter to $248 million, up 8% from first quarter revenues of $229 million.

We currently expect this favorable trend in operating days to continue through the second half of the year, leading to growing quarterly revenues. Contract drilling services cost in the second quarter totaled $151 million or an 11% increase when compared to $137 million in the first quarter. The outcome, which was toward the bottom of our guided range, reflected the increased jackup activity, costs associated with the Noble Clyde Boudreaux upgrade and reactivation project, and a full quarter of operations on the drillship Noble Bob Douglas offshore Guyana. Partially offsetting the rise in contract drilling services costs were completions of contracts on the Noble Globetrotter II and the Noble Paul Romano.

SG&A expenses in the second quarter totaled $22 million, in line with the first quarter, but above our guidance for the second quarter. Several items contributed to the higher SG&A totals in Q2, including the write-off of leasehold improvements and professional fees.

Capital expenditures in the second quarter of $47 million were in line with our guided range and were approximately $9 million higher than the first quarter. The second quarter spend largely reflected fleet maintenance programs, the purchase of the previously announced MPD system, and the continuation of the Noble Clyde Boudreaux project.

Finally, total liquidity at June 30 was $2.2 billion comprised of cash and equivalents of $411 million and availability under revolving credit facilities of $1.8 billion. There were no draws against these facilities.

Our total debt at June 30 of $3.8 billion was unchanged from the first quarter. Following our debt refinancing transactions in January, aggregate debt maturities up to 2024 have been reduced to $201 million with our next debt maturity of approximately $66 million due in 2020.

I now want to update our financial guidance as it relates to the 12 months of 2018 and provide our thoughts for the third quarter. I'll begin with fleet downtime. We've had exceptional fleet performance in the first half of 2018 with average total downtime across our floating and jackup rigs of just 2% or, stated another way, operational uptime of 98%.

In light of the strong results, which compared to a guided range for total downtime of 3.5% to 4%, we're adjusting lower our full-year guidance to 3%. The revised level is a conservative measure when compared to actual results. We believe this is appropriate given rig reactivations and the expected rise in fleet operating days over the second half of the year.

Contract drilling services cost guidance for 2018 of $615 million to $630 million remains unchanged from our previous guidance in May. A changing fleet mix as the year progresses was contemplated, so there is no need to adjust our thinking around the reactivation of the Clyde Boudreaux and Tom Madden. With the growth in our contracted rig count, client reimbursables are expected to range from $20 million to $25 million compared to our previous range of $16 million to $20 million. This results in an expectation for total operating costs in 2018 between $635 million and $655 million.

We expect contract drilling services cost for the third quarter to range between $160 million and $170 million compared to actual costs in the second quarter of $151 million. The high range is due to an expected 10% to 12% increase in total fleet operating days, including the expected August commencement of operations for the Noble Clyde Boudreaux.

Also, we expect to incur higher expenses for the Noble Sam Croft and Noble Globetrotter II as we elevate maintenance and other reactivation procedures in response to improving opportunities and the increased likelihood of these rigs returning to work in the near-term. These items are partially offset by the previously noted rig retirements and the Noble Paul Romano which is likely to be idle through the third quarter.

Costs associated with client reimbursables are expected to fall in a range of $5 million to $7 million in the third quarter. Due largely to the rig retirements and our impairment actions in the second quarter, we are lowering our DD&A expense guides for 2018 to a range of $485 million to $495 million compared to our previous guidance of $515 million to $525 million.

For the third quarter, DD&A is expected to range from $115 million to $120 million compared to actual expense in the second quarter of $130 million. SG&A expense for the year is expected to range between $83 million and $88 million. This slight increase from our previous guidance of $75 million to $80 million is driven largely by our actual spend to the second quarter and higher professional fees. SG&A is expected to total between $20 million and $22 million in the third quarter, compared to $22 million of expense in the second quarter.

There is no change in guidance for interest expense. Our full-year 2018 range remains $300 million to $305 million, while the range for the third quarter is $75 million to $77 million, largely consistent with second quarter actual results of $74 million. Noncontrolling interests 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.

The range represents no change from our previous guidance and excludes the second quarter non-cash impairment charge associated with the Bully joint venture which was reflected in second quarter noncontrolling interests' line. With regard to the JV, we expect $1 million of income to Noble for the third quarter. Our capital expenditures for 2018 remain unchanged from previous guidance at $150 million with third quarter expenditures expected to range from $40 million to $45 million compared to $47 million in the second quarter.

The decrease reflects lower spending on the Noble Clyde Boudreaux project partially offset by incremental rig reactivation efforts. And, finally, our effective tax rate for 2018 is expected to result in a benefit to Noble of 2% to 4%. The expectation is consistent with our second quarter tax outcome of a benefit of 4.2%, inclusive of discrete items, which includes the impairment charge.

To sum things up, I view the path forward with an increasing degree of optimism. Our total fleet operating days are on the rise providing support for further revenue improvement over the back half of 2018. As Robert will address in more detail, our premium fleet is advantageously placed in regions where incremental rig demand over the near-term is increasingly likely.

Also, our operational uptime remains among the best in our industry and we continue to demonstrate cost discipline and high fleet efficiency. I look forward to discussing further progress on our operational, commercial, and financial fronts in November.

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. Offshore drilling industry metrics continue to improve through the second quarter and we anticipate further gains over the remainder of 2018 and into 2019. The improvement has been clear for some months in the jackup market in concrete evidence that the floating rig market is gaining traction and continues to build.

This morning, I'll bring you up to date by referencing some of this evidence, then cover a few details relating to recent contract awards and other developments in the Noble fleet and end with some thoughts on regional activity and opportunities. We reported on our last conference call in May that the premium jackup market was in transition to full scale recovery mode. There is now little doubt that this is the case. And, more importantly, visibility for premium jackups is expanding into 2019 and beyond and pricing is improving in certain markets.

Utilization figures for premium jackups have steadily advanced to a level that supports rate improvement. According to IHS/Petrodata, total utilization of the industry's premium jackups is currently 85%. And when a small number of cold stack units is excluded, marketed utilization recently reached an impressive 90%. These utilization measures were 76% and 80%, respectively, at the end of March 2018. As utilization has improved so too have dayrates. While this improvement is somewhat tempered by certain of the premium fleet being underemployed or facing competition from rigs of lesser specification, we do believe that utilization in rates for premium units are on an upward trajectory generally.

We are glad to see our thesis on the premium jackup market play out and maintain our view of the benefits of a mixed fleet. In the floating rig sector, evidence of improving fundamentals continues to mount. Utilization has ticked higher. Attrition continues at a steady pace. FIDs are expected to double this year over last, and early customer CapEx estimates predict higher spending than in previous years.

In particular, customers have shown a preference for contracting the best floating rigs such as our HHI class vessels. In addition to the increasing contracted floating rigs from 148 to 152 quarter-over-quarter, the utilization improvement is driven by a steady fleet level of fleet attrition with 113 rig retirements since mid-2014 or approximately 35% of the total supply. This includes 14 retirements thus far in 2018.

We believe customers are signaling a willingness to go ahead and secure their preferred floating units for their programs. There are presently over 50 public tenders outstanding for floating rigs and customers have their eye on contracting the best available units. We expect demand for these premium units to improve going into 2019.

Now, I want to discuss how these positive trends in the jackup and floating markets are translating into contract awards for Noble. Since late 2017, we have been awarded contracts for 7 of our 10 premium jackups, adding almost 1,900 days of contract coverage and just shy of $160 million in backlog. Following earlier awards for the Noble Hans Deul, Noble Houston Colbert in the North Sea, the Noble Mick O'Brien in the Middle East and the Noble Tom Prosser offshore East Timor, we were recently awarded contracts for the Noble Sam Hartley, Noble Sam Turner and Noble Regina Allen. These three awards were disclosed previously in our July fleet status update but warrant additional comment.

The Noble Sam Hartley was awarded a nine-month primary term program with Total for work in the North Sea. The contract includes two nine-month options that provide dayrate escalation. After completing a drilling campaign offshore Brunei in late 2017, the Hartley is currently en route to Europe where we expect the rig to commence the Total program by October 2018 and remain under contract until mid-2019.

Also, the Noble Sam Turner received an 18-month extension from Total for continued operations in the North Sea. The extension will commence later this month and keeps the Turner under contract into the first quarter of 2020. And, finally, the Noble Regina Allen was awarded a five-well estimated 120-day contract by Encana for work offshore Eastern Canada, where the rig is currently assigned to the Sable Island decommissioning project. The program with ExxonMobil is expected to conclude in November 2019, and the Encana assignment should commence in January 2020 and keep the Allen employed into May 2020.

Following this string of seven contracting successes and, as Julie stated earlier, all 10 of our premium jackups are now fully committed into late 2018 with our next availability in December 2018. We are actively engaged in multiple discussions for each of the units, and are optimistic of securing new programs. We are pleased with the current balance between our contracting success to-date and the exposure we still have to a rising dayrate market. Once the Noble Sam Hartley commences its new contract with Total, 10 of our 12 jackup rigs will be located in either the North Sea or the Middle East, two regions that we believe hold a great deal of near-term potential.

In our floating fleet, we are very pleased to have secured the award for the Noble Tom Madden with ExxonMobil. The Madden is expected to depart the U.S. Gulf of Mexico by mid-September and begin the firm two-well exploration program offshore Guyana on mid-October. We are thrilled to have been selected by Exxon and are proud of our expanding role in such an exciting and prolific offshore project.

Already working on the development, the Noble Bob Douglas has performed exceptionally since arriving in Guyana, drilling one well and six top-hole sections, all ahead of plan. Noble has aggressively pursued development and hire of Guyanese nationals currently providing employment to 25 Guyanese directly as rig crews, plus another 32 via catering service contracts and numerous others through a variety of third-party service contracts.

With the Madden once again active, the rig will be advantageously positioned for follow-on work in the region. As for other rigs in the Noble fleet, the Noble Sam Croft remains warm stacked in the U.S. Gulf with several opportunities under evaluation in the Western Hemisphere. Also, the semisubmersible Noble Paul Romano completed a contract in mid-May and is currently warm stacked in the U.S. Gulf.

During this idle period, we are completing certain maintenance and regulatory procedures, while continuing to evaluate several opportunities in the Gulf of Mexico. We believe the rig's recent record performance, along with its conventional mooring capabilities, are attractive selling points that could lead to additional work over the near to intermediate-term.

I now want to provide a regional status update and highlight significant areas of opportunity. I'll begin in the Western Hemisphere and the U.S. Gulf of Mexico. In the U.S. Gulf, customer inquiries and contract awards were below those experienced in the first quarter. We witnessed several encouraging exploration wells in the region, but incremental rig demand has remained modest and short-term in nature. As a result, we expect dayrates to remain flat going into 2019.

Later this month, on August 15, the Bureau of Ocean Energy Management will hold its second lease sale of 2018, including all available unleased areas in federal waters of the Gulf of Mexico. We continue to believe the region holds excellent opportunity with proven resource potential, established infrastructure, a stable business climate and ample skilled labor. The marketed floating rig supply in the U.S. Gulf currently stands at 30 rigs with 24 rigs under contract.

In Mexico, inquiries were flat compared to the first quarter as industry participants turn their attention to politics in the July presidential election. An environment of uncertainty exists as operators wait to see how the new government will approach permitting and other regulatory matters. Although a scheduled bid round covering onshore blocks has been delayed until 2019, we remain hopeful that recently approved offshore programs will proceed with minimal delay. Mexico is an area of high interest and potential, and we are continuing discussions with numerous customers possessing work programs in 2018 and beyond.

South America remains a significant area of focus in the Western Hemisphere. In Brazil, where the marketed floating rig supplies stands at 26 units with 21 under contract, the pre-salt opportunity is attracting a high level of interest from Petrobras, as well as from a number of IOCs. We expect high interest in the pre-salt bidding round scheduled for September 2018, and the area is poised for an increase in opportunities with IOCs on the back of previous bid round activity. At present, we are tracking eight open tenders with commencement dates in 2019, of which several have multi-year primary terms.

Petrobras is actively revamping their rig fleet, and we continue to anticipate that this will be a key deepwater region going forward. Exploration success continues offshore Guyana with ExxonMobil recently announcing its eighth discovery. At present, no fewer than 10 operators hold interests in box (27:49) offshore Guyana, which supports the likelihood for further rig demand. Elsewhere in the region, exploration wells in Suriname and French Guiana are likely to be drilled in 2019, and we expect incremental rig demand next year.

Moving to the Eastern Hemisphere, the North Sea jackup market had another excellent quarter with several new contract announcements, including three for Noble. We currently anticipate jackup utilization to climb in the region through 2019. Customers are showing a preference for premium units over the standard duty rig. This includes our JU-3000N design where two recent contracts in the region were awarded by repeat JU-3000 users.

Robust jackup rig demand over the second quarter continued in the Middle East, and the trend is likely to continue into 2019. Rig demand is expected to be driven by needs in Saudi Arabia and Kuwait which, together, could represent 10 rig years or more of incremental work and in Qatar, where the Noble Mick O'Brien started a 240-day program in June. These numerous opportunities, which come with attractive durations in many instances, have enticed certain rigs to mobilize on speculation from outside of the region, keeping marketed utilization constant in the quarter at approximately 75%.

The influx of jackups, along with the healthy supply of standard duty rigs, has resulted in only modest dayrate improvement at present. Tender activity along West Africa has improved, but remains limited. With few exceptions, most opportunities are of a short-term duration with preferred start dates in 2019 and later. Rig demand is expected to increase in 2019, but with plenty of idle floating capacity in the region, a floating rig in balance is expected to remain for now.

In the Black Sea, our drillship, Noble Globetrotter II, is expected to return to work later this year to address the drilling assignment offshore Bulgaria. In addition to a dayrate for the anticipated assignment in the Black Sea, the rig's idle day rate of $185,000 per day will be paid through the end of 2018, at which time it will move to a dayrate based on a market index or a floor dayrate of $275,000 per day, whichever is higher.

Finally, in the Far East and Oceania, activity remains strong with numerous jackup tenders outstanding and additional tenders possible over the near to intermediate-term. This is especially the case offshore Australia, where our high-specification jackup, Noble Tom Prosser, is expected to complete a program offshore East Timor by year-end. The rig, which is one of the most technically advanced jackups in the region, is well-positioned for follow-on work.

We have seen good demand in Australia and anticipate improving jackup demand across the region generally. The market for floating rigs remains competitive but with opportunities. The Noble Clyde Boudreaux is expected to begin an estimated 220-day program offshore Myanmar later this month. Given the rig's enhanced capabilities, we are encouraged by the prospects for follow-on work.

In summary, the premium jackup market is gaining pricing momentum and the fundamentals are in place for improvement in the floating sector. History has shown that the jackup market is typically a first-mover as the offshore industry transitions into a cyclical recovery. Clearly, the premium jackup market has bottomed. And as we watch the opportunity set for floaters grow, we remain confident that we are on the cusp of visibility into a floater recovery.

Worldwide hydrocarbon demand has remained strong. Commodity pricing has been stable recently. Many of our customers' projects breakeven at level substantially below current oil prices and the results of past years of underinvestment in reserve replacement are set to take effect in the coming years. If these factors hold true, we believe that improved investment offshore, including in the deepwater, is both a necessity and an eventuality.

That concludes my comments, and I will now turn the call back over to Julie.

[Julie J. Robertson, Noble Corp. Plc]

Okay. Thank you, Robert. Seven months ago, as we concluded 2017, our expectations for market recovery in 2018 were modest. If you'll recall, we had stated on several occasions in 2017, customer discussions and tendering activity were on the rise, especially in the jackup market. We expressed confidence that some of these discussions and tenders would conclude with contract awards. Over the ensuing seven months, our modest expectations have been exceeded.

Tender activities continue to grow, fleet utilization metrics are on the rise as more rigs return to work, some with multiyear contracts; and dayrate improvement is beginning to occur in certain regions. Although the market improvement is more pronounced in the jackup sector, we believe the evidence is building that supports a strengthening in the floating rig sector as well. These factors are the basis for our growing optimism about the near and intermediate-term that I mentioned in my opening comments.

We believe the industry dynamics that have taken shape in recent months are those that have traditionally served as catalyst for customer spending. These include higher sustained crude oil prices that enhance project economics and lead to increased project sanctioning, geologic success, and greater access to both new and proven basins. Accelerated tendering activity and contract wins are the eventual rewards of a revitalized market, and both are increasingly in evidence today.

For many reasons, Noble continues to benefit from a sound competitive industry position. We are confident in our strategy of operating a mixed fleet of floating and jackup rigs equipped with the best technical features. We believe execution of this strategy has placed us in a position to capture new opportunities that will emerge over the early days of industry recovery.

In addition, our fleet is strategically located in regions providing strong line-of-sight to new drilling programs such as the North Sea, Middle East, and several locations in the Western Hemisphere. Noble has consistently demonstrated top tier operating performance in our industry with excellent operational uptime, strong cost management and industry-leading operating margins, and all this while maintaining excellent safety performance.

Furthermore, we believe our premium idle rigs, as evidenced by the Noble Tom Madden, are well-positioned to officially return to active status because of our dedication to continuous maintenance and asset preservation throughout the cycle. Finally, our financial discipline, together with sound and well-timed execution, give us the financial flexibility to act as we evaluate new opportunities and value-enhancing strategies for growth. For the reasons mentioned to you this morning, Noble is poised to benefit from the industry improvement for which we have all been waiting.

Thank you again for your interest in Noble, and I'll now turn the call back over to Jeff.

[Jeffrey L. Chastain, Noble Corp. Plc]

Okay. Thank you. Julie, we're now ready to begin the question-and-answer segment of the call. We will plan to take as many calls as possible up to the top of the hour and would appreciate everyone limiting themselves to a question and a follow-up. So, Julie, go ahead with the first question, please.

[Operator]

Your first question comes from James West with Evercore ISI. Please go ahead.

[James West, Evercore ISI]

Hey. Good morning, everyone.

[Julie J. Robertson, Noble Corp. Plc]

Good morning, James.

[James West, Evercore ISI]

Julie or Robert, the jackup business has seen a really nice utilization pick up here. I know you're starting to see some dayrate traction, but it's fairly modest so far. With this 85% high-spec utilization number right now, when do you think you can really start to test the market to get much more significant dayrate traction?

[Julie J. Robertson, Noble Corp. Plc]

James, we are seeing certainly an improvement in that, as you noted. And with the utilization creeping up like it has been, we think we're going to see that actually very soon. Robert, do you want to...

[Robert W. Eifler, Noble Corp. Plc]

Yeah. Sure. I think we mentioned certain markets, of course. We're saying most people know. And I think, importantly, we're talking about where we've put the rigs to, as we've said, previously their highest and best use, where they're really being used to their maximum capacity by the customer. I think that we're already seeing fairly significant dayrate improvement on the order of 40% and actually higher than that potentially for some of the more out-years' work. So, I think we're there in those instances where the jackups are being used to their best use.

[James West, Evercore ISI]

Okay. And then on the floater side, some of your competition has signaled that the bidding activity in the, kind of, call it the out-years, 2020, 2021, that your competition and perhaps you guys as well are starting to bid dayrates that are really 2x to 3x higher than dayrates currently are for, say, standard floaters take up the harsh environment for a minute, kind of like the markets are already inflicted. Is that consistent with what your strategy is and also what you noticed into the market?

[Julie J. Robertson, Noble Corp. Plc]

James, I'll let Robert answer that. We're not seeing quite what the levels that have been discussed on at least one that I recall during this earnings season. But, certainly, as we look into 2019, we certainly see utilization and rates picking up. Robert, do you want to...

[Robert W. Eifler, Noble Corp. Plc]

Yeah. I think so a couple ways to think about it. There's a couple markers out there that indicate and you referenced them that indicate where expectations are out in the 2020 and 2021 timeframe. I'd say a couple of quarters ago, we mentioned that we were essentially willing to take or at least consider some long-term work at current market levels. I think a big change today is that we would be a lot more hesitant today to look at current market levels out into the time frames you've mentioned. So, there are really limited opportunities visible today out in that timeframe. But, certainly, we're taking a more conservative approach to how we would bid in the out-years.

[James West, Evercore ISI]

Okay. Fair enough. Thanks, guys.

[Julie J. Robertson, Noble Corp. Plc]

Thanks, James.

[Operator]

Sean Meakim with JPMorgan. Please go ahead. Your line is open.

[Sean C. Meakim, JPMorgan Securities LLC]

Thank you. Good morning.

[Julie J. Robertson, Noble Corp. Plc]

Good morning, Sean.

[Sean C. Meakim, JPMorgan Securities LLC]

So, congrats on the contract with Exxon for the Tom Madden. I was hoping you can maybe give us a little more detail there. Could you talk about the competitive dynamics for that tendering process? Maybe to what extent the Bob Douglas experience helped you there? And maybe just a little bit about how you think about that structure, the two wells with the three options, any pricing leverage embedded in that? A little more detail there would be very helpful.

[Julie J. Robertson, Noble Corp. Plc]

Okay. First, thank you for your congratulations. We're obviously very excited about the contract. I'll make a few comments and ask the others to add some color. Clearly, the Bob Douglas contract was helpful in that. Our performance as Exxon will attest has been exceptional. That rig has performed exceptionally well for them. In Robert's comments, he talked about our embracing the Guyanese workforce and what we have done there, that is very important to us as it is to ExxonMobil. And the Tom Madden had a great reputation before it was warm-stacked. ExxonMobil knows these HHI ships very well. They've been very pleased with the performance. So, yes, it's always a competitive market right now because a lot of people have very capable assets idled. We're thrilled with the opportunity. I'll ask Robert or Bernie to...

[Robert W. Eifler, Noble Corp. Plc]

Sure. And just on the structure, so it's two plus three as we mentioned. There is a potential for some slight dayrate improvement through the course of that. And then, it's really short-term work in nature, so.

[Sean C. Meakim, JPMorgan Securities LLC]

Okay. Thank you for that. And then, just maybe, more broadly, thinking about your tendering strategy for the idle rigs that you have in the Gulf, we talked about this a little bit, but maybe more specifically how you're prioritizing trying to secure additional term versus maintaining flexibility on rates on these smaller well contracts? And does that change as you think about different types of assets, so if you're comparing the Croft versus the Paul Romano? I'm just curious how you think about balancing those different demands.

[Julie J. Robertson, Noble Corp. Plc]

Sean, that's a good question. The marketing team is working as I call it a jigsaw puzzle every day of trying to piece work together, and they've done a great job at this. But, obviously, there's different jobs for different assets in our fleet, which is why we love our mixed asset fleet, but I'll ask Robert to comment further.

[Robert W. Eifler, Noble Corp. Plc]

Sure. So, on the Sam Croft, it's mostly predominantly short-term work that's available to the rig right now. We kept them warm-stacked for a reason, so that we could continue to bid that work. And our view has only changed in what I mentioned earlier as to our appetite for taking on long-term low dayrates there. But in terms of short-term, we're still chasing what you see out there is available. And the same holds true for the Paul Romano. We're tracking a number of different opportunities, some of it's longer-term, a great deal of it's shorter-term. That rig remains warm and ready. And we can reactivate it relatively quickly. I think from there into the Danny Adkins and Jim Day which were cold-stacked we're looking at requiring a bit more term to justify reactivations there.

[Sean C. Meakim, JPMorgan Securities LLC]

Okay. Fair enough. Thank you.

[Julie J. Robertson, Noble Corp. Plc]

Thank you, Sean.

[Operator]

Ian Macpherson with Simmons. Please go ahead. Your line is open.

[Ian Macpherson, Simmons & Company International]

Hey. Thanks. Good morning.

[Julie J. Robertson, Noble Corp. Plc]

Good morning, Ian.

[Ian Macpherson, Simmons & Company International]

Hi, Julie. Could you or Robert remind us of how the index mechanism for the Globetrotter II works if it's based on the leading-edge index or a current market average index, and whether or not any upside to the $275,000 floor could be in play as it starts in January?

[Robert W. Eifler, Noble Corp. Plc]

Sure. So it's a leading-edge index.

[Ian Macpherson, Simmons & Company International]

That answers it. Thanks. And then, Adam, it looks like Bully I was the biggest piece of the impairments. And I wonder if you could illuminate a little bit why it looks like Bully I was substantially impaired whereas rigs like Jim Day and Danny Adkins weren't touched. What's the difference between one cold-stacked rig and another one?

[Adam C. Peakes, Noble Corp. Plc]

Yeah. I'll tell you. I will make a couple comments and I'll turn it over to Bernie or Robert to talk about the comparison and kind of the market abilities we think about one rig versus the other. But you're exactly right, Ian. I mean we did make the decision there on the impairment. I think as we outlined in our prepared remarks, we look at our fleet regularly but we did with particular rigger in the second quarter and thought about the market and how competitive the various assets were.

And when that means they are likely to go back to work and the other key variable in that equation is what's the reactivation expense. And I think that is driven by what the data is when it comes back. But the reactivation expense on the Bully I is significant. And so given that series of facts and the cost to reactivate that rig, we thought the impairment was appropriate. I'll turn it over to my colleagues to comment and compare and contrast a bit the assets themselves.

[Bernie G. Wolford, Noble Corp. Plc]

Ian, just real quick. When we looked at the Bully I, we looked at the peer class of drillships and the Bully I stacks up at the lower end of the tiers that we've all identified in the industry. It's kind of a tier 5 rig in that class of ultra-deepwater drillship. That's due to water depth limitations, variable deck load, hook load, and quarters capacity, as well as DP2 classification. When we look at the Jim Day and Danny Adkins against their peers, they stack up really well. They are very large rigs, very capable rigs, very able to operate in high current environments with a large variable deck load. And so those are kind of our guiding thoughts going into that decision-making process.

[Robert W. Eifler, Noble Corp. Plc]

Yeah, and I guess, Ian, I would just add one other thing. When we think about our rigs and we try and be very candid in our assessment of those and we, like, so many in our industry have kind of a core strength list of all the rigs globally. Bernie mentioned where we see the Bully's fitting in that lineup. But the Globetrotters we think are excellent rigs and the HHIs. We've talked at length about how competitive and really kind of top of the heap they are. So, I think it's just a recognition of where they sit in the pecking order.

[Ian Macpherson, Simmons & Company International]

Got it. That's helpful. Thanks, everybody.

[Julie J. Robertson, Noble Corp. Plc]

Thanks, Ian.

[Operator]

Jim Wicklund with Credit Suisse. Please go ahead. Your line is open.

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

Good morning, guys. I may have missed it but what was the rate for the Madden? I mean, I can't think of a more fragment (45:33) question that hasn't been asked and what...

[Julie J. Robertson, Noble Corp. Plc]

Good morning, Jim.

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

Good morning.

[Julie J. Robertson, Noble Corp. Plc]

Obviously, we're not disclosing the rates on the (45:43).

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

I noticed that. It was obvious from the exception. But is there any – and I'm sure that your client doesn't like you discussing such things, but it was a competitive market. Can you give us some idea of generally where the rate is versus, I don't know, a year or two ago, or last week, or just something to hold on to?

[Julie J. Robertson, Noble Corp. Plc]

We'll say that the rate is very much in line with the Noble Bob Douglas. How's that?

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

And you haven't told us what the Bob Douglas gets either, have you?

[Julie J. Robertson, Noble Corp. Plc]

Okay. I'll ask – we'll have Robert provide some color on where it could go...

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

Color would be great, Robert. Thank you. Thank you.

[Robert W. Eifler, Noble Corp. Plc]

So, I think the way to think about it is that we haven't seen leading edge dayrates move in quite some time. And, frankly, we don't expect them to move in the near-term through the rest of 2018. So, it's competitive with current market rates.

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

That's what I needed, Robert. I appreciate that very much. Thanks. My follow-up, if I could, you mentioned MPD systems and I know that they're all the rage these days and they're being put into tenders. Can you talk about how many of your rigs you're putting MPD systems on? And are we just doing floaters? And if we are doing jackups, where is the timing of that with required tenders and all? What's the outlook for MPD systems for jackups as well?

[Julie J. Robertson, Noble Corp. Plc]

Jim, we just had one on order right now. I'll have Bernie add some color to this. You're right. They are all the rage right now, but you don't need them for all drilling activities, clearly. Our HHI ships are the assets that we are, first, looking to put them on and we're certainly considering internally additional units. So I'll ask Bernie to add some over that.

[Bernie G. Wolford, Noble Corp. Plc]

So we've developed a system for both the HHIs and the Globetrotters. So six rigs in the fleet where we would be ready to install the MPD system using the same exact MPD system. So due to the modular design of that MPD system, it's fairly straightforward to install it. We have done all the 3D laser surveys, and we're installing the piping now to be prepared to do that.

In terms of jackups, we have consistently used MPD on the Noble Hans Deul now for three-plus, going on four years. And we certainly see further opportunities in that market as well, particularly for these high-spec jackups where that is an ideal application of that technology.

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

Okay. That's very helpful. Thanks, sir. Thanks, guys. I appreciate it.

[Julie J. Robertson, Noble Corp. Plc]

Thanks, Jim.

[Operator]

Kurt Hallead with RBC. Please go ahead. Your line is open.

[Kurt Hallead, RBC Capital Markets LLC]

Hey. Good morning. How's everybody?

[Julie J. Robertson, Noble Corp. Plc]

Good morning, Kurt.

[Kurt Hallead, RBC Capital Markets LLC]

Good morning. So I was hoping we can get some insights as to when you think about the rigs that you currently have stacked, the opportunities to potentially bring them back to work. I know that you take into account not only the initial contract term, but the follow-on work that you expect. When you think about the return dynamics and the investment needed, how much of that investment are you looking to recover on the initial term of the contract? If you could give us some color on that, it would be helpful.

[Adam C. Peakes, Noble Corp. Plc]

Yeah, Kurt. This is Adam. I would say – unfortunately, it's not a very satisfying answer, but it depends. We strategically made the decision around the Madden and the Croft to keep them in a warm-stacked posture, so we could very quickly but also very inexpensively bring them back out as opportunities arose. And I think that's paying dividends as evidenced by the Madden going to work for Exxon, and we would think about the Croft in much the same way.

So as we think about the next rigs to go to work, be it the Croft or be it the Romano going back, there are opportunities out there and we can be nimble and inexpensive in getting those back out. So on those, it's not so much a payback question as it is what's the market look like and is there – if the first opportunity is short-term in nature, what's the follow on work look like.

As we look at other rigs in the fleet, a middle ground I would suggest to you would be something like a Clyde Boudreaux where we think that rig has some very interesting capabilities and think it has a really good profile for work over the next several years. The total spend, including some of the upgrades, was almost $30 million. And we've consistently been clear. This first contract does not pay all of that back, but we're comfortable making that bet just given the opportunity set after this initial contract.

As you go farther down the scale and you get to spends that are in excess of the Boudreaux spend, I think, there, we'd be less inclined at this point to make a speculative bet and hope there's a bunch of follow-on work. As Robert said, I think as it relates to Danny Adkins and some of their cold-stack, we would want to see some meaningful payback in conjunction with the first contract.

[Kurt Hallead, RBC Capital Markets LLC]

Okay. That's very helpful. So then in the context, just circling back around to the Bully I, right, with the significant impairment you say that you're kind of tier 5 relative to its peer-group type of asset. I mean it looks less and less likely that that rig will see the light of day again. That's my view. That's my reading between the tea leaves but what do you think I'm missing in that assessment and what keeps that rig from being totally scrapped?

[Julie J. Robertson, Noble Corp. Plc]

We're not looking at it internally like that at all. We do not see that rig as necessarily being scrapped. The impairment we took on it was for reasons that Adam's already stated, but we don't see it as the fact that that's not an asset that will not see future work. As Adam and Robert have already talked about, it's just a matter of if the investment is – what is the investment going into that rig and what are the dayrates going to be and how fast can we earn some of that back. Adam, do you want to add?

[Adam C. Peakes, Noble Corp. Plc]

No. I think the only thing I would add is, I think, we've shown the discipline of retiring rigs if we have that belief, and that's not the statement we're making around the Bully. I mean it is 50%/50% owned between us and Shell. We actively work together to figure out what opportunities are there for it. I think it's really a recognition that it's not likely to go back in the real near-term, but we're not saying that that's not going to come back at all.

[Kurt Hallead, RBC Capital Markets LLC]

Got it. Appreciate it. Thank you.

[Julie J. Robertson, Noble Corp. Plc]

Thank you, Kurt.

[Operator]

Mike Urban with Seaport Global. Please go ahead. Your line is open.

[Mike Urban, Seaport Global Securities LLC]

Thanks. Good morning.

[Julie J. Robertson, Noble Corp. Plc]

Good morning, Mike.

[Mike Urban, Seaport Global Securities LLC]

So I think, for the Western Hemisphere, there is a lot of hope that you'd see some incremental demand coming from both Mexico and Brazil and hopefully tighten up that market. You already spoke to Mexico potentially pushing out because of the election. As you talk to your customers about that market, are they going to need to see more certainty around what might happen? I mean, the incoming President has talked about potentially revisiting some of the reforms. Indeed more certainty around that or is there enough momentum around that to at least get some incremental rig demand in that market?

[Julie J. Robertson, Noble Corp. Plc]

Go ahead.

[Robert W. Eifler, Noble Corp. Plc]

Yeah. Mike, this is Robert. So I think for the work that's known and out there right now which does represent some incremental demand of at least potentially a few rigs, I think, those customers are very hopeful that permitting will move forward. And I think the administration has at least stated that they'll allow permitting to go forward, assuming they don't find any evidence of fraud, et cetera.

So I think those that were planning to drill and are just waiting on permitting are working very hard to move forward with that. And our current expectation is that they'll be successful with that and that we will see some rig demand. I think it gets – probably there's a bit more of a question mark when it comes to future bidding rounds, et cetera. But for the stuff that's visible today, our expectation is that it moves forward.

[Mike Urban, Seaport Global Securities LLC]

Okay. That's helpful. And then, in Brazil, it seems like there's a little bit more visibility in the next kind of – bid round is a little more firm it seems, but significant political uncertainty there as well. I guess similar dynamic there or similar question for that market. Are you seeing or hearing customers kind of maybe take a step back or become a little more cautious with respect to potentially adding rigs given the political uncertainty in Brazil?

[Robert W. Eifler, Noble Corp. Plc]

Yeah. So I think we have seen a few programs pushed to the right there to be fair on the IOC side. Petrobras is active. They've got a number of outstanding tenders. As you know, they are really looking at their fleet and probably high-grading a great deal of their fleet there. So, I think there's some opportunity. And I also think there's some driving factors behind all that out with some of the political concerns. But there is falling production in the country and increasing decline rates in the Campos, et cetera, driving some of that.

So, I think underlying everything is a need really to continue drilling down there and I think that's helpful when you think about it in that context. So we'll have to see. There's a lot of excitement on the pre-salt round, a fair amount of anticipation or I guess everyone's waiting to see what happens on the presidential election. But I think very consistently people consider that to be a very, very high-opportunity region both from a Petrobras perspective obviously but also IOCs continue to cite that as an exciting and growth region.

[Mike Urban, Seaport Global Securities LLC]

Okay. Great. Thank you.

[Jeffrey L. Chastain, Noble Corp. Plc]

Julie, let's take one more question. And those of you that will be left in the queue this morning, I'll be reaching out to you.

[Operator]

Edward Muztafago with Société Générale. Please go ahead. Your line is open.

[Edward Charles Muztafago, SG Americas Securities LLC]

Hi, guys. Thanks for squeezing me in there. Wondering if you could talk a little bit to rig reactivations just for the industry in general and thinking specifically on the high-spec side. You highlighted how you've taken some proactive efforts to keep the Madden and your other rigs in sort of top condition to come back out to work. But there's definitely some smaller players who've gone through some financial restructuring, et cetera. Do you think that the pool of reactivatable or near-term reactivatable assets is reasonably small and maybe we can see a bit quicker uplift in dayrates for the really high-spec rigs and perhaps what the market's thinking?

[Julie J. Robertson, Noble Corp. Plc]

Edward, I think that as people start to look at reactivating rigs, I think, everybody's going to have to come to a day of reckoning when they get serious about what's really going to take to bring those rigs back up. Like we've said on the Madden and the Croft, it's going to be a minimal amount to bring those back as we preserve them incredibly well.

I don't think that's going to be the case on all rigs. It certainly will – internally, we'll spend more than that when we bring the Danny Adkins back out for the right job. But I think across the board, I think, everybody's going to be surprised, in my opinion, as to how many rigs really reactivate at the end of the day, because I think people just – the number to bring it back up can be tough. Robert, do you want to?

<: No. I think part of the key to your question there is the high-end nature of – so, I think, the field is somewhat – well, it's very limited at the very highest end of the drillship market. There are a few cold-stacked rigs and there are a few that are still in the yards there. So, there's going to be some supply pressure. And that's why we don't anticipate real near-term dayrate improvement.

But, generally speaking, the supply at the very highest end of the market is very limited. And if and when we see the utilization improvement that we believe we'll see, I think, you'll see that very high end go fairly quickly. And I think as that starts to constrain, relatively quickly you'll see an improvement in dayrates among that very highest end.

[Jeffrey L. Chastain, Noble Corp. Plc]

Okay. With that, I think, we will go ahead and close out the call today. We appreciate everyone's participation and your continued interest in Noble. Julie, we appreciate your time and coordinating today the call. Good day, everyone.

[Operator]

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