Seadrill Ltd

NYSE:SDRL

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, and welcome to the Seadrill Third Quarter 2018 Earnings Conference Call.

[Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to John Roche, Vice President, Investor Relations. Please go ahead.

[John Roche, executive]

Thanks, and good afternoon, everyone. Thank you all for joining Seadrill's Third Quarter Earnings Conference Call.

Before we do kick off, I'd like to remind everyone that much of the discussion today will not be based on -- is based -- on historical fact but rather consist of forward-looking statements that are subject to uncertainty. Included on Page 2 of the presentation is a comprehensive list covering forward-looking statements. For additional information and to review our SEC filings, please visit our website at seadrill.com.

Now moving on to the agenda. On the call today, you'll hear from Anton Dibowitz, our CEO; and Mark Morris, our CFO, in our prepared remarks. And in the room with us for Q&A are Matt Lyne, our Chief Commercial Officer; and Leif Nelson, our Chief Operating Officer. Anton will cover off the highlights for the quarter and provide you all with our views on the market, the shape of the recovery and how we're positioned for it. Mark will then provide an overview of our reorganization and how it has impacted the presentation of our financial statements and the financial performance for the quarter. We'll then open up the line to take some questions from you all.

And with that, I'd like to turn over the call to Anton.

Anton?

[Anton Dibowitz, executive]

Thank you, John, and very good day to everyone on the call.

Before I go into the highlights for the quarter and our thoughts for the future, given that this is our first earnings call in over a year, I'd like to very briefly talk about where we've been. Since we last addressed you all, we've made great strides in positioning our company for the future. The path was long and paved with difficult decisions, but we made it through with our premium fleet intact and now the capital structure that affords us the ability to capitalize on the recovery. The end result of this challenging process is a recapitalized balance sheet with financial flexibility supported by significant liquidity position, no near-term maturities or amortization and little covenant risk. Our operational focus never wavered, and we continued to contract our efforts throughout the process. Our customers saw our restructuring for the financial exercise that it was, and we have now emerged in a much stronger position.

Before I expand on our view of the recovery, I want to first take you through some of the key performance metrics and commercial successes for the third quarter.

Operationally, we never took our eye off the ball through the restructuring, and the same holds true today. We continue to implement technology in our rigs to facilitate improved asset integrity, operational performance and safety, but it is the dedicated and focused personnel, both onshore and offshore, and their ability to harness those technologies that are driving the high levels of performance you see. As a result, we had another strong operational quarter, posting uptime of 98% with no significant downtime incidents. And if not more importantly, our key safety metrics continued to lead our peer group of offshore drillers. Although it would be nice to have more rigs working, we are comfortable with our current level of utilization when we consider today's dayrates. The financial flexibility we have built allows us to make disciplined contracting decisions and to hold back supply until dayrates improve. We are focused on maximizing the utilization of our marketed fleet and minimizing spend on assets that are cold stacked until contract economics justify reactivating them.

With that backdrop, let's have a look at new business over the last several months. Since the end of the second quarter, we signed almost $300 million in new business, made up of new contracts, exercised options and extensions to existing contracts, and I'd like to highlight a few of those. When looking at floaters, I'm going to talk about 3 contracts. First, the West Hercules contract with Equinor provides another solid data point for the harsh environment market, with dayrates continuing to hold strong with contracts between $275,000 and $300,000 a day. The Hercules has been contracted as Equinor's exploration rig, and we look forward to continuing our long relationship with them with this asset.

Second, the recent signing of a new contract for West Carina is our third deepwater floater contract with Petronas in the last year. Asia represents one of the bright spots we see in the floater market where customers are willing to compensate contractors for high-specification units such as the Carina, which is equipped with our third-generation MPD system. And third, the contract expansion for the Sevan Louisiana with Walter Oil & Gas further positions this unique asset class to compete in the mid-water market. The rig's cylindrical design allows the rig to effectively work in waters as shallow as 850 feet in dynamic positioning mode, saving the customer time and money and lowering risk around existing infrastructure where more rigs have traditionally been used.

We've also had success in the quarter with our jack-up fleet. 2 items I'd like to highlight in this segment are, first, an extension on the West Cressida for Ophir for their development program, which will keep the rig busy into 2020, indicating a return in demand for the jack-up market. And second, in Qatar, we signed a contract with GDI to work for Qatar gas. The partnership with GDI provides a competitive advantage in an exciting market with potential for significant growth in the coming years.

Overall, these contracts are reflective of the underlying trends we are seeing in the market and our strategy. It's all about the right contract economics and how they position us for what we see coming as the recovery takes hold.

I'm not going to spend a lot of time talking about macroeconomic indicators, as I'm sure you've heard ad nauseam about GDP growth and the fact that demand for energy continues unabated. The fact of the matter is the fundamental outlook for our business is improving. After many years of underspending, our customers are facing the inevitability of what follows: the need to replace production. The recent volatility in oil prices has little bearing on how the vast majority of our customers invest. Their time horizon is much longer. Even at today's oil prices, the offshore barrel is profitable for our customers, competitive with other sources of supply and needed to meet global demand requirements. In addition to the positive upstream backdrop, the drilling industry has seen continued scrapping activity and consolidation. These are trends that are supportive of improving forward pricing levels. This is certainly reflected in the activity we're seeing today and expect to see more of based on the conversations we are having with our customers.

Stated simply, rates in the harsh environment have recovered to the high 200s, and we expect these to go higher. Rate for benign ultra-deepwater floaters are in the mid to high 100s for '19, and we expect to be contracting significantly higher than this level in 2020. And in the premium benign jack-up market, we see a significant increase in demand levels and this is driving increased pricing.

In closing. We spent a considerable amount of time and effort to recapitalize our business and create financial flexibility. Our young, modern fleet is made up of the rigs that customers want. We're comfortable with our current fleet utilization levels because we firmly believe that higher dayrates are coming, and we will be disciplined in how and where we deploy our capital and continue to have a laser focus on cost. Our continued focus on cost efficiency and the best people in the business is a powerful combination that puts us in the prime position to capitalize on the recovery.

I will say that, reading the analyst reports this morning, it appears that many of you feel that this is a comeback for us. From a quarterly reporting standpoint, that may be true, but in reality it couldn't be further from the truth. We've been here for years. We continued to execute our core business while we restructured our balance sheet. We look forward to being here for many years to come and making this the most successful and profitable driller in the industry.

Now I'd like to turn over to Mark to take us through the Q3 financials.

[Mark Morris, executive]

Thank you, Anton. Well, good morning and good afternoon, wherever you are.

As you heard, it's been an eventful quarter with us -- for us, having emerged from Chapter 11 on the 2nd of July, applied reorganization and fresh-start accounting and having relisted on the Oslo Stock Exchange while maintaining a continued listing on the New York Stock Exchange. I don't want to spend a lot of time talking about fresh-start accounting. However, it is just worth highlighting a couple of key points to understand what it is and what it does.

Fresh start effectively treats us like a brand-new company. Our assets and liabilities have been fair valued in line with the distributable value approved by the U.S. bankruptcy court, which is an asset value of about $11 billion. It creates adjustments to our assets and liabilities that have a one-off impact at the point of emergence as well as adjustments that will have a recurring impact to future quarters. All of these adjustments are noncash items. All of this is covered in a huge amount of detail in the 6-K and F-1 documents, which I do not propose to go through here other than to say it is a complex and technical area. We've included for reference the main recurring adjustments as an appendix to the press release so these can be factored into your models. These will arise through the OpEx, interest expense and investments in associated company lines going forward. Importantly, revenue and EBITDA figures will not be affected by any fresh-start adjustments.

The key takeaway here, though, for our first quarter post emergence is that there are no comparables, so this is our first clean quarter.

So now turning to the financials.

Of our 35 rigs, 16 were working on average throughout the quarter: 7 floaters at an average dayrate of $240,000 per day with 97% uptime and 9 jack-ups at an average dayrate of $98,000 per day with 98% uptime. It was a strong quarter operationally for us. With regard to our reported OpEx and G&A, it is worth reminding everyone that in addition to the 35 rigs we own and consolidate in our accounts, we also manage 11 rigs for Seadrill Partners, 5 rigs for SeaMex and 2 rigs for Northern Drilling. The management of our partners' rigs incurs both OpEx and G&A-related expenditure, which is included in our reported figures. These related costs are charged out on a cost-plus basis to our partners and recognized in other revenues.

Our reported G&A for the quarter of $31 million includes $14 million that has been charged to our partners, so the G&A that relates directly to the management for the 35 rigs we own and consolidate is $17 million. G&A for the quarter is a little lower than our expected run rate, reflecting a change to certain accruals following the completion of the restructuring. Going forward, we expect reported G&A to be around $150 million per year, of which approximately 30% to 35% will be recovered from our partners. Similarly, reported OpEx for the quarter of $162 million includes $7.5 million related to rigs we manage.

We continue to focus relentlessly on cost reduction, and we've made significant progress in reducing OpEx and G&A over the last few years. Our average daily running cost is approximately $120,000 per day for benign floaters and $40,000 per day for benign jack-ups. For our cold stacked units, daily costs are around $10,000 and $4,000, respectively.

Moving on to the balance sheet.

Most of it is self-explanatory following the reorganization and fresh-start adjustments and the $1.1 billion of fresh capital that came in as part of the broader restructuring. Total cash stood at $2.1 billion at the quarter end and includes $560 million of restricted cash.

Just pulling out a few key items here. Restricted cash of $560 million comprises of $126 million of West Rigel proceeds that have subsequently been used to redeem the new secured notes at par; $227 million of escrowed collateral for the new secured notes, which was part of the restructuring agreement; a $56 million loan repayment from Sapura Energy, which is pledged as security to the new secured notes; and $102 million of cash back in certain guarantee and letter of credit facilities. Drilling units and investments in associated companies both reflect fresh start movements, which have seen their carrying values reduce by circa $5.7 billion and $670 million, respectively. Again, there's plenty of details in the 6-K.

Amounts due from related parties primarily relate to $390 million of loans to SeaMex; around $200 million of receivables from Seadrill Partners, mainly comprised of trading balances and adjustment to the -- for the West Vela earnout previously not on the balance sheet but now included as part of fresh start. $100 million relates to loans to the Seabras joint venture. And a $47 million loan to Archer.

Lastly, in relation to the current debt of $165 million, this relates to 2 components: the West Rigel proceeds that we were holding in Q3 for redemption of the new secured notes that occurred in Q4, which is a one-off; and the annual paydown of Ship Finance bank debt facilities, which we consolidate on our balance sheet and as variable-interest entities, representing the 3 rigs we have on lease from Ship Finance.

So we've talked on the previous slide about the $2.1 billion of cash. Now let's just recap on our capital structure following emergence.

Our $5.7 billion of bank loans mature between 2022 and 2024. And there is no amortization until 2020 and potentially until 2021 if we elect to use the $500 million amortization and conversion election facility. Our $880 million of new secured notes mature in 2025 and comprise of 4% cash interest and 8% PIK. We have a number of redemption mechanisms included in the indenture, which allow us to retire the notes via asset sales that have been pledged to security for the new secured notes or by raising capital at Seadrill Limited, and you will have seen that we have already redeemed $126 million of the new secured notes already.

Retiring the new secured notes will be a high priority for us going forward. While there is no bank debt amortization on maturities, we do have 3 rigs on lease from Ship Finance Limited. These leases are accounted for as variable-interest entities and the debt of $713 million is consolidated on our balance sheet. As part of the restructuring, we've negotiated a limited set of financial covenants to ensure we have adequate flexibility through the recovery. We have 1 covenant until 2021, which is the minimum liquidity covenant. Thereafter, we have an additional 2 covenants that come into effect in 2021, being net leverage and debt service cover ratio. Lastly, our exposure to interest rates is limited through the purchase of interest rate caps that were taken out in Q2. We're about 80% hedged to the protected rate of 2.87%. The interest rate caps extend out to 2023.

It's just worth reminding everyone that in addition to owning and operating our 35 rigs, we have 4 other significant investments that are not consolidated which are recognized in marketable securities and investments in associated companies. These are Seadrill Partners, in which we effectively own a 65% economic interest through our various investment holdings; SeaMex, which is a 50-50 joint venture with our partner Fintech; Seabras Sapura, which is a 50-50 joint venture with our partner Sapura Energy; and lastly, Archer, in which we hold a 16% equity interest. You can read the details for yourselves, but it's worth noting the combined backlog, contract terms, EBITDA, debt and cash held at these entities alongside our respective interests in them. We believe these represent material value for us going forward.

Since the end of the third quarter, we've completed a mandatory par redemption of approximately $126 million of our new secured notes related to the West Rigel proceeds. We also launched a $56 million mandatory offer at 103 related to the proceeds received from a maturing loan to Sapura Energy. On expiry, approximately $150,000 was tendered in total, owing mainly to the fact that the notes were trading above 103.

We've completed an agreement that extinguished $486 million of guarantees related to our joint venture Seabras Sapura. In return for extinguishing the guarantees, the lenders received a prepayment from the joint venture; cross collateralization of the relevant facilities; and an increase in margin; and a consent fee, again paid for by the joint venture. Finally, we also received $35 million as a partial repayment of shareholder loans provided to Seabras Sapura.

And now turning to our guidance for the fourth quarter. EBITDA is expected to be slightly lower for Q4. This primarily relates to G&A returning to more normalized levels for Q4, which will be slightly higher than Q3 due to certain one-off changes to related restructuring accruals not being repeated.

So to summarize. It's great to be back reporting quarters on a regular basis. Our restructuring has given us the opportunity to recapitalize the balance sheet and provide financial flexibility while we wait for the recovery. We believe our large modern fleet and proven operational track record positions us well with our customers, and our continuing focus on cost reduction will help ensure we remain competitive. We believe there is also significant value in our nonconsolidated investments. And finally, as Anton said, we are not going to get drawn into contracting long term in a relatively low dayrate environment and we have a premium fleet and financial flexibility. We will be patient so we can take the right deals.

And with that, I will turn over to John to start the Q&A.

[John Roche, executive]

Thanks, Mark.

While we assemble the queue for questions, I'd just like to request, if there's any technical accounting or model-oriented questions, that we take those offline. Happy to spend as much time as required with you all to help you understand that.

And with that, I will turn over to the operator to take our first question.

[Operator]

[Operator Instructions] The first question will come from Mike Urban of Seaport Global.

[Michael Urban, analyst]

So as you've been going through the restructuring process, you've seen quite a bit of consolidation in the broader space. How do you see yourselves going forward? Is it mostly executing on the business and now that you've got a better balance sheet and liquidity profile? Or is there an opportunity to participate in the consolidation that's been going on?

[Anton Dibowitz, executive]

Thanks for the question, Mike. Well, first off, I'll say consolidation is great for the industry, and we welcome it, whether it's done by us or done by others. Having fewer, more rational players in the business makes for a better business for everybody. It increases contracting discipline amongst the players that are there. Generally, when M&A happens, it gives people a license to execute scrapping that needs to take place, that needs to continue to take place. Obviously, we're not going to lay our cards on where we see ourselves in that space, but I think if you can look at our history and DNA as a company, you'll see that we very seldom sat on our hands. We have a very active anchor shareholder. And if a -- if the right opportunity is there, we will certainly take part in it, but for us, M&A is not the necessity that it has been for some other players in the industry. We've always had a young premium fleet and rigs that customers prefer. For us, it's about if the right value is there and the right deal can be achieved and fits in with our fleet and our strategy, we'll do that, but we certainly don't feel the necessity to do M&A to improve our fleet or to improve our composition. I think others are more driven by that metric. For us, it's really about the right opportunity and whether it makes sense. So we're open to it but not a necessity, I guess, in summary.

[Michael Urban, analyst]

Okay. Makes sense. And then from a market perspective, historically, you've had a very strong presence in both of the major markets in Latin America and Brazil and Mexico and continue to. With the political changes there, how do you see the landscape unfolding, especially as it pertains to foreign operators? I mean, obviously, Petrobras and Pemex will continue to be active in their respective markets, but are you seeing any caution or hesitancy to move forward or maybe at least take a bit of a wait and see in either or both of those markets given the political changes there?

[Anton Dibowitz, executive]

Yes. I mean geopolitics and changing in governments is obviously something that we look at very intently in executing our business. A pretty business-forward government in Brazil, and I think that's good for that future market. The addition of the IOCs to Brazil in a large way is certainly going to help drive that market in the absence of Petrobras driving itself. It certainly adds to that market. Mexico, we have long-term contracts there. So I think we're just going to have to see how the administration plays out. And then one thing that is true in Mexico is Pemex needs to replace production and replace reserves. We've had a great relationship with Pemex since we've been there in the last 7, 8 years, and we expect that to continue. And we have presence. We have exposure. We have experience in that market. And we look forward to continuing to be active in that market going forward.

[Operator]

[Operator Instructions] The next question comes from Greg Lewis of BTIG.

[Gregory Lewis, analyst]

I guess I'd like to talk a little bit about how you're thinking about capital allocation. I mean, clearly, the focus seems like it's paying down the new senior secured notes, but on the flip side of that, you still have -- as you mentioned, you have a lot of rigs -- good rigs working but you also have a lot of good rigs on the sidelines. And I'm just trying to understand how you've kind of looked down your fleet -- or more on the nonworking rigs, how we should think about some of these rigs being reactivated and sort of what types of cost we should be thinking about. Any kind of color around that you can provide would be super helpful.

[Anton Dibowitz, executive]

Sure. I'll give you the headline and then maybe a little bit of color behind that. We will not reactivate rigs purely on speculation until the market justifies it. We're comfortable with the rigs we have working. We have significant presence in all the major markets that we're in. We're very focused on keeping the utilization on our rigs that we have out and active in the market where it is, but part of having the financial flexibility that we have is about having forward capital discipline with where we deploy that capital going forward. And it doesn't make sense for us to spend significant amounts of capital to reactivate rigs on speculation without any visibility of work or to reactivate rigs and bring them into a market that the cost of bringing the rig back into the market doesn't justify. So we look at each contract based on its own merits, what sort of term, what sort of dayrate, what it's going to cost to reactivate the rig, whether an SPS is required, but until we see the dayrates or a commercial opportunity that makes sense for us to bring a rig back into the market, we are going to err on the side of being capital disciplined for our cold stacked rigs.

[Gregory Lewis, analyst]

Okay, great. And then just one other one for me. During the restructuring process, there were a couple jack-ups that the company decided to part with, sell, get a good price. I guess, since then, we've seen actually more improvement in asset values for -- I guess, for jack-up rigs at this point, so as we think about potential -- you mentioned potential opportunities. Could we also see Seadrill potentially be willing to sell with -- some more assets as kind of we see some improvements in the market to sort of speed up the deleveraging process?

[Anton Dibowitz, executive]

Well, the one thing we don't do is fall in love with our assets. And I will say, well, that's why we don't name them after members of management or directors, because that makes them harder to sell. And I think you can't do that. So if you look at those 3 jack-ups that we divested, I mean, we have made a core part of our strategy being a young and premium asset provider. Of those rigs that we sold, even though our fleet on the whole is young and premium, they were on the older end of our jack-up fleet. A couple of those units had not worked for a period of time. And it was an opportunistic deal for us at the time to divest those assets. I wouldn't read too much into it. We will continue to be opportunistic on either the sell side or even on the purchase side where it makes sense.

[Operator]

The next question is from Patrick Fitzgerald of Baird.

[Patrick John Fitzgerald, analyst]

Are all of your rigs without contracts cold stacked? Or are any of them warm stacked?

[Anton Dibowitz, executive]

It depends in what time frame you're looking at. I mean the numbers that are in the quarter was at the end of that quarter. So on the jack-up side, we had 1 rig that was warm stacked. On the floater side, there were 4. A couple of those rigs, I think, you can expect to go back to work. 1 of those rigs, the West Eclipse, is currently undergoing the process of having a mooring system installed in it. So it's considered warm stacked but it's actually in the yard undergoing an upgrade process. So I think that covers it. Did I answer your question?

[Patrick John Fitzgerald, analyst]

Yes, yes. So what are your options with the newbuild jack-ups at this point?

[Anton Dibowitz, executive]

So the newbuild jack-ups that we have, it is, I will say, a complicated process, but look, I'd think about it this way. Those rigs were contracted in special-purpose vehicles, in entities that have direct relationship with the yard. There are no parent company guarantees back to Seadrill Limited with -- associated with those rigs. So some of them have been delivered or missed their delivery date, and we're in a discussion with the yard about what we do with them. So we view them as optionality for us. There is no -- although we carry it in the notes, there is no liability for us back to Seadrill Limited other than the initial down payments we made to build those rigs. And we'll continue the constructive discussions we have with Dalian about how we resolve those rigs going forward. But I would view it as an option for us, and that's how you can think about it.

[Patrick John Fitzgerald, analyst]

Okay. You talked about accelerated payments with respect to your new 12% secured notes. Those are callable in 2021. What kind of accelerated payments can you make?

[Mark Morris, executive]

Well, just to be clear, the note matures in 2025 and it carries interest both PIK and cash. The PIK eventually accumulates and becomes more NSNs, but the redemption mechanisms really are threefold. Obviously, there's a make whole, which obviously isn't very attractive to us. There is a provision or an equity [ floor ] effectively that allows us through the raising of capital, either equity or debt, in Seadrill Limited to take off a large part of the NSNs. And then the other way in which we can do that is through mandatory par -- mandatory offers from various assets that were pledged to security for the new secured notes. And of course, you've seen that [ fill ] already in part both with the West Rigel proceeds that we used to redeem $126 million of the new secured notes and a mandatory offer that we have to make in relation to a maturing loan that was repaid back to us from Sapura Energy. And there we have to make an offer at 103. And obviously, generally that will be tendered for acceptance if it's below and not if it's above. And at the time, it was above. After that, we have an ability to call half of that amount on the NSNs. So there's various mechanisms in which we can take down the NSNs either by realizing cash -- or proceeds, held proceeds, from the sale of pledged assets or through raising capital at Seadrill Limited.

[Operator]

The next question is from Michael Alsford of Citi.

[Michael Alsford, analyst]

I've just got a couple of specific questions around '19. So could you give maybe a bit of guidance on where you actually see CapEx for the group for '19, I guess, sort of conscious around sort of what maintenance spend will be but also on the other sort of investments you're needing to make into the fleet? And then just secondly, around tax. Clearly, you're sort of not making much in the way of net profit, but I'm just wondering whether there is obviously tax to pay as you're heading into '19 sort of on an underlying basis.

[Mark Morris, executive]

Well, I mean, we don't break out CapEx as we look forward into each year. And in -- with regard to tax, I mean, look, we pay -- our cash taxes are paid where we operate, effectively. And of course, they will move from year to year, depending on where we are operational, but -- and of course, it reflects generally where we're making profit and the basis of which tax is paid. I mean sometimes it can be deemed profit. Or it can be actual profits and, of course, also customs and other taxes that we pay. But I think, at this stage, trying to give you guidance for '19 is pretty difficult. I'm sorry I can't be more helpful on that particular question, yes.

[Michael Alsford, analyst]

Okay. So maybe if I can ask a follow-up then, yes, around sort of rates, and you're obviously talking about sort of a firming up of some of the rates versus the harsh environment rigs. But I don't know. Can you give us sense as to the direction or pace at which you think the rates will recover? Are we sort of talking about a multiyear recovery? Or should we think about it as a sort of, end of '19, that's when you're starting to see some reasonable tightness in some of the rigs, some classifications within the market?

[Anton Dibowitz, executive]

Well, I think what we can say and as I said in my prepared remarks was we already are starting to see tightening in rates. It is difficult to predict, to know, to prognosticate about the precise shape of a recovery or generally turn out to be liars. So all right, it's not -- we're reluctant to get into speculation about exactly the shape of the recovery. What we do know is that the fundamentals are there and the signposts are there for a recovering market. If you wind back 6 months ago kind of in the benign ultra-deepwater market, the prevailing rates were, say, closer to 100 than they were to 150. And what we are already seeing as we saw with the Carina is, for the right specification of units in the right market that a customer wants, that the rates are closer to 200 than they are to 100. We expect that trends to continue through '19. Utilization levels in all the markets are picking up. Marketed utilization in across the global fleet is in the mid-70s in the floater side and trending upwards. And if contractors remain disciplined, and consolidation is helping that -- and we're certainly going to play our part in being disciplined and not speculatively reactivating rigs. And I certainly hear others on their conference calls saying that they're going to be disciplined in doing that. And I think you can see -- you can expect to see additional tightness in the market. Obviously, it has to do with contractor behavior and also the continuing need for operators to put the rigs back to work, but I think -- I don't think it's going to be -- '19 is going to continue to be -- given the timing, the lead time between when contracts are -- when rigs are contracted, especially on the deepwater side, and when they actually go to work, '19 is going to be a challenging year for a lot of people in the market. And we're going to remain disciplined in that, but the dayrates are certainly heading the right direction. They're already solid in the harsh environment market and we continue to -- we expect that to continue. And there's a kind of a more broad-based general recovery in the jack-up market really driven by a significant increase in demand driven from the Middle East.

[Operator]

The next question is from Renaud Saleur of Anaconda Investments.

[Renaud Saleur, analyst]

I was wondering when you expect the recovery in the ultra-deepwater dayrates. We've seen that most of your competitors and yourselves have done a significant effort and improvement in OpEx; and that the average dayrate is probably -- for Transocean, probably for you is about $230,000 a day; that we need to see evidence of a recovery in the current dayrates, especially in ultra-deepwater. Do you think it's for the first half of '19, second half of '19? And to follow up on this and on your debt, which is at a 13% yield to call in 2025, do you think you may be able to generate enough free cash flow by 2021 to be in a position or not to exercise the call?

[Anton Dibowitz, executive]

I'll handle the first one because I think it's very similar to the last caller. We are seeing increasing utilization levels in ultra-deepwater; rates pushing towards $200,000 a day, which is already a significant step-up from where they were 6 months ago. I mean we're certainly bidding higher in the second half of '19 and into '20, significantly higher. And even though given that we're bidding those dayrates, we're still having constructive discussions with customers at those rates. So I think that's the key indication for us on where the market is going.

[Mark Morris, executive]

So I think, just to try and tie out your last part of your question, Renaud. Obviously, we sort of triangulate around 3 things: where dayrates are going, i.e. the speed of the recovery; the ability to reactivate rigs and spend upfront costs in order to generate more EBITDA and revenue; and preservation of liquidity while we wait for the recovery. And that is something we look at very carefully because we know that we have to balance carefully the need to bring rigs out at the right time to generate off the improving dayrates, so when dayrates have improved. But as we sit here today, I think we are comfortable. And of course, against the background of looking at the NSNs, the 12% notes, you're also aware that obviously, if we -- we have other ways in which we can retire those particular notes. But affordability versus economics is a trade we look at while we wait for the recovery, and that's the position that we're taking and adopting. And as we sit here today, we are confident with the various tools that we have at our disposal and other things that we can do, that we should see the recovery before obviously we get to -- out into the longer grass as it were.

[Renaud Saleur, analyst]

Just a final one. On harsh environment, you're about $300,000 a day. I guess harsh environment was more, in 2014, around $700,000 a day. Do you expect to go back somewhere in the middle? What extra potential do you see on harsh environment rates?

[Anton Dibowitz, executive]

I don't want to get to, again, prognosticating about where they could go. I think what we'd say is we're at the bottom of most markets and coming off heading towards mid-cycle. I think the harsh environment market is certainly leading that. And I think you need to look at reinvestment or newbuild economics to look at the potential of where dayrates in any of the markets, including harsh environment, could be going. It's still an expensive proposition to build a high-specification unit and especially so in the harsh environment. And with continued tightening of demand, ultimately and in the long run, dayrates should trends towards reinvestment economics.

[Renaud Saleur, analyst]

Just a final one. You said your average OpEx is $130,000 a day on floaters. Is it $130,000 for harsh environment as well?

[Anton Dibowitz, executive]

$120,000, I think, was our average. And obviously, that is an average across the fleet. And there is quite -- that's a blended rate across the fleet. I mean it changes by jurisdiction, especially the cost differential between Norway where you're carrying an extra crew versus other parts of the world, depending on how much crew, regulation. So north of that in Norway, south of that in some other places. So that is the average across [ the fleet ].

[Renaud Saleur, analyst]

[indiscernible] on harsh environment.

[Anton Dibowitz, executive]

Well, even harsh environment. U.K. is harsh environment and is lower than Norway, as is East Coast Canada. So...

[Renaud Saleur, analyst]

No, no, I understand that, but given that you make $300,000 a day on harsh environment, is -- does it mean that you may be at $170,000 operating cash flow already on harsh environment?

[Mark Morris, executive]

I mean, look, we're not going to break out various geographical legs and subcategories of our floater fleet. I mean we're providing an average. And within that, there is a range. And I think it's fair to say that the harsh environment in Norway is a -- at the higher end of the spectrum of costs. And harsh environment generally is higher, but U.K. and Canada are lower than Norway.

[Operator]

The next question is from Piotr Ossowicz of Ironshield Capital.

[Piotr Ossowicz, analyst]

I understand that it may be a bit too early to give CapEx and tax guidance for 2019, but can you give us a bit more color on where should we expect cash flow and cash position moving in Q4 regarding CapEx, tax, working capital and the other components?

[Mark Morris, executive]

I mean, look, we've given the guidance that we've given. I mean I think there's plenty of our competitors that give no guidance at all. But it's coming out from someone who's been sort of silent for a year as we've gone through the restructuring. Obviously, the only guidance we're giving is 2 pieces that I've given, one on EBITDA and one where we are on G&A for the year or the run rate for the year, but I don't think we're going to be staked out in the sun on individual items. There's obviously lots of moving parts. And we'll guide around certain figures.

[Piotr Ossowicz, analyst]

All right, but overall and obviously subject to the partial repayment of the bonds, I mean, should we expect CapEx to stay broadly flat from September to December?

[Mark Morris, executive]

From September to December...

[Unknown Executive]

Yes...

[Piotr Ossowicz, analyst]

Yes. [indiscernible]...

[Mark Morris, executive]

[indiscernible] you're talking about Q4.

[Piotr Ossowicz, analyst]

Yes.

[Anton Dibowitz, executive]

Yes, yes...

[Mark Morris, executive]

Yes. It should be broadly flat.

[Anton Dibowitz, executive]

Broadly flat.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to John Roche for any closing remarks.

[John Roche, executive]

Thank you. And thanks, everyone, for joining us on our Q3 Earnings Call. And this concludes our call. Thanks again, everyone.

[Anton Dibowitz, executive]

Thanks, everyone.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.