Valaris Ltd

NYSE:VAL

Earnings Call Transcript 2018-Q1

[Operator]

Good day, everyone, and welcome to Ensco plc's First Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I will now turn the call over to Mr. Nick Georgas, Director of Investor Relations, who will moderate the call. Please go ahead, sir.

[Nick Georgas, Ensco Plc]

Welcome, everyone, to Ensco's first quarter 2018 conference call. With me today are Carl Trowell, CEO; Carey Lowe, our Chief Operating Officer; Jon Baksht, CFO; as well as other members of our executive management team. We issued our earnings release which is available on our website at enscoplc.com.

Any comments we make about expectations are forward-looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially from our expectations. Please refer to our earnings release and SEC filings on our website that define forward-looking statements and list risk factors and other events that could impact future results. Also, please note that the company undertakes no duty to update forward-looking statements.

During this call, we will refer to GAAP and non-GAAP financial measures. Please see the earnings release on our website for additional information. As a reminder, we issued our most recent Fleet Status Report on April 23. An updated investor presentation is also available on our website.

Now, let me turn the call over to Carl Trowell, CEO and President.

[Carl Trowell, Ensco Plc]

Thanks, Nick, and good morning, everyone. I will begin today's call by highlighting some of our first quarter achievements before providing an update on our fleet restructuring and current market conditions. Carey will then discuss our recent contract awards, and Jon will conclude our prepared remarks with an overview of our financial results and outlook.

In terms of our first quarter performance, strong operational and safety results led to revenues and contract drilling expense in line with our prior conference call guidance. We achieved operational utilization of 99%, continuing the momentum we built over the past two years by converting nearly all of our contracted backlog into revenue. Our offshore crews and onshore employees remain focused on making our rigs safer, and first quarter safety metrics were in line with company record levels.

During the industry downturn, we've made a step-change improvement in our operational and safety performance. And these results helped us to win recent contracts that will improve future utilization for several rigs. As Carey will expand upon in a moment, most of these contracts and success has been for shorter-term work. However, we recently finalized three-year contracts with Saudi Aramco for three of our jackups. We are currently preparing these rigs to start work later this year. And with these awards, all of our marketed jackups will either be working or expected to begin contracts in 2018.

In addition to winning work for our rigs, we continue to improve our financial position as we navigate the market cycle. Earlier this year, we issued $1 billion of senior notes and completed a tender and redemption that reduced our nearest-term maturities by approximately $650 million. More recently, we repurchased $71 million of 2020 maturities and now have just $236 million of debt maturing over the next six years. Coupled with $2.9 billion of liquidity on March 31, including approximately $900 million of cash and short-term investments, we now have even greater financial flexibility to capitalize on opportunities during the unfolding offshore recovery.

As the offshore sector recovers, we expect the asset capabilities will play a critical role in winning new contracts. Customers have recently demonstrated a clear preference for modern, high-specification rigs that will help them to more efficiently complete their well programs. We anticipate that these dynamics will continue going forward and have made a great deal of progress restructuring our fleet to best respond to future customer needs.

Since 2013, we have added eight newbuild rigs to our fleet to offer customers the most advanced drilling capabilities, and in some cases, patented technology for their offshore projects in both shallow and deepwater. This includes our latest newbuild delivery, the ultra-deepwater drillship, ENSCO DS-10, which recently commenced its maiden contract offshore Nigeria on a major development for a customer.

The rig was awarded this contract in a very competitive tender process. And its technical capabilities as well as our track record of successfully starting up newbuilds helped to differentiate the rig from the competition. We acquired 11 high-specification rigs with our recent purchase of Atwood. This was an important step in improving our fleet quality since we added four best-in-class drillships with dual 2.5-million pound hookload derricks, two 7-Ram BOPs and other technical specifications that provide increased drilling efficiencies.

As we evaluate customer demand for deepwater projects that begin in the next 18 months, we see nearly 20 opportunities for more than 15 total rig years where high-specification rigs, like the acquired Atwood drillships, are best positioned to win contracts. There are 33 best-in-class drillships in the global supply with Ensco owning six of these rigs. To-date, 25 of these drillships have been delivered and 18 are currently under contract. With only seven of these rigs completing contracts by the end of 2019 and the number of opportunities over the next 18 months that I've just highlighted, we expect that utilization for this segment of the floater market will be the next to tighten.

In addition to newbuilds and acquired rigs, we have also enhanced our fleet through selective organic investments in assets to improve their marketability. To this end, the addition of a second BOP and managed pressure drilling capabilities to drillship ENSCO DS-7 were instrumental in the rig winning a new contract that started earlier this month. Furthermore, augmenting jackups ENSCO 140 and ENSCO 141, with offline pipe handling will improve their competitiveness and strengthen our shallow-water service offering in the Middle East going forward.

Finally, our fleet restructuring has also included the removal of older, less capable assets from the fleet. We recently sold ENSCO 7500, ENSCO 81, and ENSCO 82 for scrap, and announced plans to retire ENSCO 5005. We now expect to divest ENSCO 6001 following the completion of its contract later this quarter. In total, we have removed 30 rigs from our fleet over the past several years, and we'll continue to carefully assess the fleet for future retirement candidates.

The addition of high-specification rigs, disciplined investment in core assets and the retirement of non-core assets has collectively transformed our fleet, significantly improving our ability to meet future customer demand with the newest, most technically capable assets in both shallow and deepwater markets.

Following these actions, we have 40 rigs that are either a sixth generation or better floater or a modern jackup, double the number of these rigs in our fleet in 2013. We believe this core fleet of high-specification assets gives us leverage to the early stages of the offshore recovery and can generate meaningful EBITDA in more normalized market conditions, providing even greater liquidity and capital management flexibility in the future.

Moving to the broader market conditions, we have seen increased optimism in the offshore sector with Brent crude prices recently moving above $70 per barrel. However, spot pricing is less important to customers than sustained pricing at higher levels. And we believe that six straight months of Brent prices above $60 per barrel has been a more important driver of increasing demand for offshore drilling rigs.

The reasons for this are twofold. First, for the first time since the downturn began, sustained higher oil prices are helping customers generate excess cash that can be deployed towards investments in future production. And second, it gives customers increasing confidence that offshore projects, which tend to be longer cycle in nature than onshore investments, will generate compelling returns over time.

Currently, increased customer activity is most visible for programs in shallow water, which has led to improving utilization for the global jackup fleet. We expect this trend will continue as we anticipate several multi-year contracts will be awarded in the Middle East in the coming months, which are incremental to the three contracts for our jackups that I mentioned earlier, as well as further supply contraction due to rig retirements.

While the jackup market is showing visible signs of improvement, the floater market is less clear as utilization is still in the process of bottoming. Several rigs are expected to complete contracts later this year without follow-on work, particularly in Brazil which will put pressure on floater utilization. Since our last conference call, we have seen a slower pace to floater contracting than anticipated, and work that was expected to begin in the back half of this year has pushed into next year.

Conversely, we are seeing more deepwater opportunities in 2019 firming up than expected, as operators begin to address potential production shortfalls after years of under-investment in offshore exploration and development. During the first quarter, seven offshore projects reached final investment decision approval in line with 2017 sanctioning levels that saw a total of 29 offshore projects approved. Two recent discoveries in the Gulf of Mexico may be among the region's most significant in the last decade according to their operators and serve to underscore the production potential the offshore exploration can provide.

Our March lease sale in the U.S. Gulf saw a rebound in operator participation as well as the number of bids, offering further evidence of attractiveness of offshore investment in this basin. Recent lease rounds in Brazil and Mexico have also drawn significant interest from major IOC customers. Over the past year and a half, a total of 34 deepwater exploration blocks have been awarded in Brazil with the most recent around capturing a record $2.4 billion in signature bonuses.

In Mexico, international operators have committed to drill a total of 31 offshore exploration wells following the country's first lease rounds. Given these investments by many of the largest offshore customers, we expect both Brazil and Mexico will see an increasing number of new projects startups in 2019 and beyond. Whilst we see signs of a recovery, we expect it will be protracted and faced with different segments in the market improving at different times and increased utilization leading to higher day rates.

If this process plays out, we remain focused on winning new work for our high-specification rigs to bridge these assets to better market conditions, so we are well positioned to benefit financially as utilization and day rates improve.

Now, I'll turn the call over to Carey.

[P. Carey Lowe, Ensco Plc]

Thanks, Carl. We continue to leverage our track record of safe and efficient operations along with strong customer relationships around the world to a new contracts or extensions for our rigs. While the majority of this new work has been shorter term in nature, we recently signed three-year contracts for ENSCO 108, ENSCO 140 and ENSCO 141 that are expected to commence offshore Saudi Arabia later this year. ENSCO 140 and ENSCO 141 are currently undergoing preparations in anticipation of starting contracts in the second and third quarter respectively.

ENSCO 108 will be mobilizing to the region from Singapore shortly and it is expected to start its contract during the fourth quarter. As a result, we now expect to have an 11 jackups working in the region, expanding our presence in the largest shallow-water market with the addition of three high-specification jackups to our operating fleet.

The Middle East has been the most resilient offshore market over the past several years. And while conditions remain very competitive, we expect to see additional contract awards in the region that will help to absorb idle jackup capacity from the global fleet.

Moving to the North Sea, a recent pickup in customer interest for shallow-water rigs has led to new contracts and extensions for our rigs in the region. ENSCO 72 secured a seven-well contract and is now committed for most of this year. ENSCO 101 had its contract drilling program extended by three wells and one another short-term contract which combined should keep the rig busy into 2019.

While we have a few rigs in the North Sea with availability in the second half of the year, we see several opportunities to reduce these un-contracted rig days. We believe that our high-specification jackups in the market, ENSCO 121 and ENSCO 122, are best positioned to win additional work.

The Gulf of Mexico has been a very active region for us, where we won a total of 13 new contracts and extensions year-to-date, adding backlog to all of our rigs with 2018 availability. ENSCO 68 was recently awarded two contracts for a total of five wells. ENSCO 8505 won two contracts for a combined three wells and ENSCO 8503 was contracted for two wells. While short term in nature, these new contracts have helped us to improve expected utilization for our active rigs in the region despite competitive market conditions.

In fact, ENSCO 8503 and ENSCO 8505 had been particularly successful in securing work in the Gulf of Mexico during the industry downturn. While competing against 30 marketed floaters, these two ENSCO 8500 Series rigs have won roughly 40% of new contracts in the region since mid-2014. Notably, ENSCO 8503 was selected to execute the first exploration well drilled by the private sector, offshore Mexico, which resulted in a world-class discovery, beating out several other rigs to win this work.

These results speak to the versatility of these assets which can operate and dynamically position or moored loads. Their technical capabilities include six generation drilling packages and strong operational performance that customers have come to expect from our ENSCO 8500 Series rigs.

As we look forward, we believe these rigs are well positioned to continue winning an outsized share of work in the region.

Moving to the Asia-Pacific market, a force majeure event was declared on the project ENSCO 8504 was scheduled to commence offshore Vietnam early this month, and the customer has terminated our contract. As a result, we are bidding the rig into several opportunities that we believe it is well suited for, given its ability to operate and dynamically positioned or moor mode along with its strong operational track record. While market conditions in the offshore sector remained challenging, 2018 marks an important point in the recovery process. We see signs that a gradual improvement is underway and leading indicators such as final investment decision approvals and tenders and inquiries support our view that a phased recovery has begun.

With respect to the supply side of the equation, offshore drillers continue to rationalize their fleets with more than 100 floaters and 60-plus jackups retired during the industry downturn. We expect this trend will continue and have identified another roughly 60 floaters and 180 jackups as retirement candidates.

We continue to do our part to help these efforts with the recent scrapping of one semisubmersible and two jackups along with our plans to retire two additional semis. While we closely monitor the progress of the offshore drilling market recovery, we are focused on improving things that are within our control, namely maximizing operational and safety performance and investing in innovation and technology that help our customers improve the efficiency of their well programs. We believe this approach will strengthen our competitiveness going forward, and benefit us regardless of market conditions.

Now, I'll turn it over to Jon.

[Jonathan Baksht, Ensco Plc]

Thanks, Carey. Today, I'll cover first quarter 2018 financial results, our outlook for the second quarter and capital expenditures and the summary of our financial position. We closed the Atwood acquisition during fourth quarter 2017, and first quarter 2018 was the second quarter that is reflective of the combined company. As a result, my first quarter 2018 commentary will focus on comparisons to fourth quarter 2017 sequentially.

A detailed comparison to the year-ago period can be found in the earnings press release posted to our website and our Form 10-Q filed earlier this morning. We reported a net loss of $140 million or $0.32 per share in first quarter 2018, compared to a net loss of $207 million or $0.49 per share in fourth quarter 2017.

Total first quarter revenue was $417 million versus $454 million in the prior quarter, in line with our guidance of an 8% decline on a sequential basis.

In the Floaters segment, revenue declined to $259 million from $303 million last quarter, as the average day rate declined 14% to $263,000. Utilization was unchanged at 44%. Operational utilization for the Floaters segment, which adjusts for uncontracted days and planned downtime, was 99%, a 2 percentage point improvement from fourth quarter of 2017.

In the Jackups segment, revenue was $143 million compared to $137 million in the prior quarter, as reported utilization increased to 61% from 54% and six jackups started contracts in the first quarter 2018, reinforcing the improving shallow-water dynamics Carl had referenced earlier.

The 7 percentage point increase in utilization was partially offset by a modest decline in the average day rate to $74,000 from $76,000 last quarter. Operational utilization for the jackup fleet was 99%, up from 98% in the fourth quarter 2017. Revenue from the acquired Atwood rigs in the first quarter 2018 was $26 million and is reported net of contract intangible asset amortization of $2 million. This compared to $23 million of revenue from legacy Atwood rigs net of $16 million of contract intangible asset amortization during fourth quarter 2017.

Contract intangible asset amortization declined quarter-to-quarter primarily due to ENSCO DS-12 which completed its original contract term with its current customer during the fourth quarter and subsequently moved to day rate reflective of current market rates. Additional information on contract intangible amortization can be found in the Form 10-Q we filed earlier today.

Excluding integration-related transaction costs, total contract drilling expense declined to $318 million in first quarter 2018, better than guidance of approximately $320 million and down $10 million in the prior quarter due to lower scheduled repairs and reactivation costs.

First quarter depreciation expense declined to $115 million from $120 million due to lower depreciation for assets that incurred impairment charges during fourth quarter 2017. Adjusted to exclude transaction costs, general and administrative expense decreased to $27 million from $29 million in the prior quarter primarily due to the timely realization of synergies from the Atwood acquisition.

Transaction costs were $9 million in first quarter 2018, compared to $49 million in the prior quarter, as the majority of these costs were recognized upon closing in October 2017. Interest expense increased by $8 million due to the issuance of new senior notes in first quarter 2018 and higher commitment fees on our revolving credit facility.

Other expense was $8 million compared to other income of $141 million in the prior quarter. The sequential comparison was impacted by a $19-million loss on debt repurchases and a $17-million bargain purchase gain adjustment for the Atwood acquisition in the first quarter 2018. Under purchase accounting rules, provisional fair value estimates of assets and liabilities acquired may be adjusted during a one-year measurement period under certain circumstances. The increase in the bargain purchase gain is primarily related to acquired inventory and equipment. This subsequent adjustment is in an addition to the $140 million bargain purchase gain on the Atwood acquisition recognized in fourth quarter 2017 results.

Tax expense decreased to $18 million in first quarter 2018 from $42 million in the prior quarter, primarily due to discrete tax items associated with the enactment of U.S. tax reform legislation in fourth quarter 2017. Adjusted EBITDA for the first quarter 2018 was $55 million, compared to an adjusted EBITDA in fourth quarter 2017 of $93 million. A reconciliation of net loss to adjusted EBITDA is presented in our earnings press release.

Moving to our outlook for second quarter 2018, we expect revenue to increase by approximately 6% from first quarter levels of $417 million, primarily due to contract startups for ENSCO DS-10, ENSCO DS-7, and ENSCO MS-1, as well as a full quarter revenue for ENSCO DPS-1, which will be partially offset by ENSCO DS-6, which completed its contract during the first quarter.

Excluding $5 million of transaction costs, we anticipate that second quarter contract drilling expense will be approximately $340 million, an increase of approximately $20 million from first quarter 2018 due to higher expected fleet utilization and mobilization costs. We expect depreciation expense will increase by approximately $6 million to $121 million with the addition of ENSCO DS-10 to the active fleet.

G&A expense is expected to decline to $26 million in the second quarter from $27 million in the prior quarter primarily due to the realization of synergies from the Atwood acquisition. Interest expense is expected to increase by approximately $10 million due to lower capitalized interest following the startup of ENSCO DS-10 and a full quarter of higher interest from new senior notes issued earlier this year.

Finally, we anticipate the second quarter tax provision will be approximately $30 million, which is higher than our first quarter tax expense primarily due to discrete items. While our tax provision is expected to increase on a sequential quarter basis, we continue analyzing the recent changes in U.S tax law to ensure we are as efficient as possible in this regard.

Moving to our capital expenditure outlook. First quarter CapEx totaled $269 million and included a $207 million payment to the shipyard for ENSCO 123. We have delayed delivery of this rig until first quarter 2019, as we install and pilot patented technologies on the rig while it remains in the shipyard. Our outlook for remaining 2018 capital expenditure is approximately $205 million and consists of newbuild construction costs, minor rig enhancements and upgrades, and $15 million of capitalized interest.

Beyond 2018, our only remaining significant capital commitments are for newbuild ENSCO DS-13 and ENSCO DS-14, which total approximately $250 million excluding interest and holding costs. These rigs are scheduled for delivery in 2019 and 2020 respectively, but we have the option to defer payment until December 2022. If we were to elect to pay for these two drillships using the financing option, payment to the shipyard including accrued interest for both the rigs would be $316 million.

Turning now to a summary of our financial position. Following our opportunistic debt raise and the repurchase of $722 million of our nearest-term maturities, we now have just $236 million of debt maturing before 2024. At the end of first quarter 2018, liquidity totaled $2.9 billion including approximately $900 million of cash and short-term investments and a fully available $2 billion revolving credit facility.

Under our credit facility, we have borrowing capacity of $2 billion through September, 2019, $1.3 billion from October, 2019 to September, 2020, and $1.2 billion from October, 2020 to September, 2022. Importantly, the revolver has no covenants based on operating cash flows and we maintain the flexibility to raise additional capital through asset sales and a secured debt basket of $750 million. In addition to this liquidity, we have $2.7 billion of contracted revenue backlog. Our net debt is approximately $4.1 billion, and we have a net debt-to-capital ratio of 32%.

Since the beginning of the downturn, we completed several transactions that have helped to increase our liquidity and reduce our nearest-term maturities, significantly extending our financial runway and giving us a competitive advantage as we move forward.

We will continue to actively manage our rig fleet, working to win new contracts while carefully managing our cost base and financial liabilities, so we are well positioned to act opportunistically during the market recovery to create meaningful long-term value for our investors.

Now, I'll turn the call back over to Nick.

[Nick Georgas, Ensco Plc]

Thanks, Jon. Gary, at this time, please open the line for questions.

[Operator]

We will now begin the question-and-answer session The first question comes from James West with Evercore ISI. Please go ahead.

[James West, Evercore ISI]

Hey, good morning, guys.

[Carl Trowell, Ensco Plc]

Good morning, James.

[P. Carey Lowe, Ensco Plc]

Good morning.

[James West, Evercore ISI]

Carl, I was particularly interested in your comments around ultra-high spec drillships. We've seen already what's happened with harsh environment floaters and that tightened in that market. And I think you make a very good point that there's very few of these rigs actually available yet there is a lot of customers looking for these types of rigs because they're 30% more efficient than I can say (00:28:45) the standard sixth generation rig. So, could you maybe comment on kind of your contracting strategy around these assets? I mean, I would assume you're not willing to take multi-year contracts unless there's a significant increase in rates right now because 2019 looks like it's going to start to turn to a little bit of a frenzy.

[Carl Trowell, Ensco Plc]

Yeah. James, I'm not sure whether frenzy is the word I'd use at this point. But I think if you go back to some of the comments we made in the pre-prepared statement, I think since our last call even, we've seen increasing number of tenders, awards and inquiries and negotiations for startups in 2019; and whereas in the shallow water, that's just continuing the current trend. It's becoming more noticeable for the floaters, and a lot of those tender inquiries particularly around the Golden Triangle area, Brazil, now with the new area and frontier that's opened up in northern South America, plus on the African side, most of those tenders are coming out for the various high-spec drillships that we mentioned.

[James West, Evercore ISI]

Right. Right.

[Carl Trowell, Ensco Plc]

And actually now, for the first time, what we've started to see is a balanced position start to arrive where you can see scenarios where the number of tenders demanding that type of rig versus the number of free rigs is beginning to tighten up.

So, it's new and therefore any change in bidding strategy hasn't happened yet because we've still be looking to make where we (00:30:25) bridge assets through. And I think we will still do what we've been doing which is to run a little bit of a portfolio approach which is to make sure that we do have rigs working. We will look on longer-term contracts to see that there is some upside in the out-years if that's possible. But we will – I think we'll still continue to bid to win work for our key market-facing rigs at this point. But remembering that we do have swing capacity to bring into the market, we still have the option to pull out ENSCO DS-13 and ENSCO DS14 from the shipyard when we want or accelerated. So, I think we can still afford to bid a few contracts somewhat aggressively to get them into work whilst having swing capacity to bring in.

[James West, Evercore ISI]

Okay.

[Carl Trowell, Ensco Plc]

But I think that the overall approach towards bidding now is probably going to change a little bit with effect to the highest end floaters.

[James West, Evercore ISI]

Right, right. Makes sense. Okay. And could you remind me your strategy around kind of performance-based metrics in these contracts, particularly with the highest end rigs because they are showing at least pretty advanced efficiency versus standard rigs?

[Carl Trowell, Ensco Plc]

Yeah, so where possible, we are – but we want to be prepared and actually we have negotiated to have some upside around performance, particularly key performance around well delivery, flat times and things like that, where these rigs are particularly good, delivering the higher efficiency on projects. What I would add though as well, James, is that the overall efficiency of the offshore industry has improved quite drastically during this downturn...

[James West, Evercore ISI]

Sure.

[Carl Trowell, Ensco Plc]

...and we're seeing quite substantial improvements across most high-end floaters. But again, it's also why we still think that the retirements are going to happen on these older generation and less capable rigs even some that are quite modern, and...

[James West, Evercore ISI]

Right.

[Carl Trowell, Ensco Plc]

...I think a good case in point here is our ENSCO 6001 semi that we've just decided to retire. I mean that is a rig which as soon as it came off contract was unlikely to be competitive in a lot of places around the world. The future CapEx investment to even get it up into the lower rank of the floaters was sufficiently high where it didn't make sense. And so, we've just decided to move it straight to scrap once it's finished its contract.

And I think you're going to see a lot more rigs like that dropping out because of the preference for these higher capacity, more efficient rigs to bid because the whole offshore industry has moved during this downturn to basically lower cost and be more efficient.

[James West, Evercore ISI]

Right. And we totally agree. All right. Thanks, Carl.

[Carl Trowell, Ensco Plc]

Thanks, James.

[Operator]

The next question comes from Ian Macpherson with Simmons. Please go ahead.

[Ian Macpherson, Simmons & Company]

Hi. Thanks. I wanted to ask first about the three-year jackup contracts in Saudi. I assume those are fixed rate contracts without any variability or incentives, et cetera, in the day rate structure and whether you can compare and contrast what leading edge cash margins look like for high-spec jackups compared to high-spec drillships at this stage of the cycle.

[Carl Trowell, Ensco Plc]

Yeah. Ian, so without getting into all of the details of the contracts which we usually don't, I think everyone is pretty aware of the nature of the Saudi contracts. So, they are fixed rate for the term. They are cash generative with good cash margin once the rigs are in country.

What has happened on your second part of the question is that although jackup pricing has been extremely competitive and we still see some pretty competitive and aggressive bids even though utilization is turning, jackup – at a broad level, jackup pricing has bottomed out at cash generating margins and is actually bottomed out higher at a relative higher point than floaters.

And I think whilst we still see a few very competitive bids in the few places, Asia is somewhere I'd call out, in other parts of the world, we are beginning to see prices bottom and if not move up a little bit. And the higher-spec, more modern jackups are the ones where we're seeing that. And we are testing pricing in a few key markets now on the upward side for those higher-spec, higher – harsher or higher-capacity jackups.

[Ian Macpherson, Simmons & Company]

That's really helpful. Thanks, Carl. What about the ENSCO 8504, now that (35:32) has been suspended? Are there other opportunities for that rig this year or will you consider warm stacking it? Or what's your prognosis there?

[Carl Trowell, Ensco Plc]

I'll maybe make the first comment, and then Carey can add anything if he wants. So, that's a classic good news-bad news story. I think we were extremely pleased because I think the award of that contract showed the competitiveness of the ENSCO 8504 in the Asia region and has added to our view that the – those rigs in a moored – in a combined moored/DP mode are very versatile and attractive rig for a lot of work programs, particularly around current infrastructure or current basins. So, we were really pleased with Atwood and to put – to be able to show the competitiveness of the rig. But of course, due to issues beyond us and the customers' control, force majeure was called on the whole – a whole development. And so, now we will be marketing that rig into other opportunities in Asia. We see quite a few – we see quite a lot that are very suitable to that rig. The key question is timing. And at this point, I'm not sure whether it will be in 2018 or not. But I think we would fully expect it to be working by the time we get into 2019 based on the opportunities we're bidding it into. And we will keep it warm, ready to go, ready to bid, because we think it's very well placed for a number of opportunities in Asia.

[P. Carey Lowe, Ensco Plc]

I don't have anything to add.

[Ian Macpherson, Simmons & Company]

Very good. All right. Well, thanks, guys.

[Operator]

The next question comes from Haithum Nokta with Clarksons Platou Securities. Please go ahead.

[Haithum Nokta, Clarksons Platou Securities, Inc.]

Hi. Good morning.

[Carl Trowell, Ensco Plc]

Good morning, Haithum.

[Haithum Nokta, Clarksons Platou Securities, Inc.]

Carl, I wanted to dig in a little bit more here on the comment about the high-spec drillships, you said 20 opportunities compared to, I think it was 7, that are going to be available by the end of 2019. Would you describe these rigs as basically 2.5-million pound derrick rigs or dual BOPs? And I'm curious also what's the nature of – I guess these opportunities are – a fair bit of them from tenders or are they a bit more kind of just fillers or kind of just trying to assess how you look at that number?

[Carl Trowell, Ensco Plc]

So, Haithum, firstly, yes, the key specifications that a lot of these are referring to is 2.5-million pound derrick, two 7-Ram BOP type rig. So, the equivalent of our ENSCO DS-9 through to ENSCO DS 14 rigs, which is why we think that that sub-segment lease will tighten first. We're not putting any particular tight guidance on when, but we see that being – those rigs being very much in demand and primary rigs for those contracts.

A lot of the ones that we – the ones that we have referenced are tenders, known tenders that are either in-house or imminently about to arrive. On top of that, we also know of a few other projects that customers are thinking about doing in that timeframe. We also have one or two where there are direct negotiations ongoing for extensions or future wells. So, that's why we pulled out a little bit.

[Haithum Nokta, Clarksons Platou Securities, Inc.]

It's very encouraging. It seems like it's been a while since we've gotten some good news on that front. Glad to hear. Then, you also kind of mentioned that you're testing driving pricing in select markets, and I think that was on the jackup side. You've been – your last fleet status report had a lot of new contracts in the Gulf of Mexico and North Sea, are those kind of areas where you'd say day rates are improving? Obviously, Southeast Asia seems extremely competitive as does Middle East. But those two seem like areas that could – I guess are far away from incremental supply.

[Carl Trowell, Ensco Plc]

Yeah, without guiding too much to exactly where we're testing it, I think for a little bit, the Gulf of Mexico plus what will be coming in Mexico itself and the North Sea are areas where I think the future demand for the jackups is beginning to justify market pricing moving earlier than some of the other areas, and particularly for the higher capacity or harsh jackups.

[Haithum Nokta, Clarksons Platou Securities, Inc.]

Great, thanks. I'll turn it back.

[Carl Trowell, Ensco Plc]

Thank you.

[Operator]

The next question comes from Ryan Pfingst with B. Riley FBR. Please go ahead.

[Ryan Pfingst, B. Riley FBR, Inc.]

Hey, good morning, guys.

[Carl Trowell, Ensco Plc]

Good morning.

[P. Carey Lowe, Ensco Plc]

Good morning.

[Ryan Pfingst, B. Riley FBR, Inc.]

I know you guys just came off the back of the Atwood acquisition, but with regards to M&A, given that we should still see more consolidation in the market, would you say that you or any of your competitors are feeling pressure to get acquisitions done as the price of oil just continues to rise?

[Carl Trowell, Ensco Plc]

No. I mean I wouldn't say pressure. I think, broadly speaking, we've said for a while that we felt that – this was a market segment that would benefit from further consolidation. I still think that is true. Some of the pressures that a lot of the companies out there are feeling still exists. And the timing of this recovery, the pace with which it will happen is not going to save some of the companies that have already reached a kind of distress point. And to have a smaller number of larger international drilling companies, I think, would benefit the clients, would benefit the investment community and the industry as a whole.

So, we still support the view that the consolidation will be good. And I think there's still time for it to play out, but that's not making any specific comment to our role in that. I think we decided to move quite early in the cycle around an asset class that we were very, very interested in at a key timing as far as asset prices when I think we've seen asset prices inflect and stand and expectations inflect on those company valuations (42:30). And I think that the – from our own point of view that we feel pleased that we have done the Atwood acquisition. It has made a material difference to our fleet quality. So therefore, we're not sitting here today feeling that we have to chase any one particular thing or are forced to do further M&A. And I can't speak on behalf of – the view point from some of our peer group competitors, but it would not surprise me if there is further M&A over the next sort of 18, 24 months.

[Ryan Pfingst, B. Riley FBR, Inc.]

Makes sense. Thanks, guys.

[Operator]

The next question comes from Colin Davies with Bernstein. Please go ahead.

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

Hello. Good morning. I was wondering if you can give us a little bit more color on the ENSCO DS-8 situation and perhaps your preference of how that might get resolved, particularly bearing in mind your comments earlier around the relative fleet quality of the ENSCO DS-9 through ENSCO DS-14. Generally, would you prefer to take the termination or prefer to keep it active with a kind of blended mixed then type strategy?

[Carl Trowell, Ensco Plc]

Colin, thanks for the question because I can tell just from the way you've asked it plus some of the commentary we've seen over the last day or two that described it a confusion as to where we sit on the ENSCO DS-8.

So, just to remind everyone that we called that out in January because we were in the market with our bond offering and we felt we needed to disclose it at that point. But the reality of that situation is that as of today, we have concluded negotiations and discussions with the customer. And we explored various options around blend and extend, extension and various things. And due to a variety of reasons, the net outcome is that the rig is just going to continue as is on the current contract. So, according to the current day rate. And we are just in the process of finalizing and agreeing an amendment to the contract.

So, it's not all absolutely signed off and sealed yet. But that amendment is not on any of the major terms of the contract. It's actually just to largely adjust and modify some of the peripherals of the contract and actually to reflect some of the practices that we have been doing over the last few years. And primarily, it's to adjust the bonus system we have around the contract to reflect what the client values going forward. So, bar something really unexpected, it's going to be business as usual for the ENSCO DS-8.

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

That's good news. Very good news. And then, just a sort of peripheral question. I suspect the answer is no, but given all the commentary around labor cost inflation in the U.S. industry just generally, are there any categories of the labor pool that you're starting to see some upward pressure on?

[Carl Trowell, Ensco Plc]

No, not for us yet. Most of commentary around that is largely for the onshore. We haven't seen that yet. But then again, we haven't seen a rapid pickup in the number of rigs, so it's not hitting us at this point either in the U.S. or worldwide.

We have a couple of geographies where local content requirement mean that it's a bit more challenging to get certain labor particularly when multiple rigs are starting at the same time or the industry is getting back to work again. But broadly, no, it's not affecting us.

Down the line, we could see that. If suddenly, if you take the Gulf of Mexico, for example, we started to see a material pickup in the number of rigs working there, maybe Mexico starting up at the same time, that could happen but we're not there yet.

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

That makes sense. Thanks very much. I'll turn it back.

[Operator]

Showing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Nick Georgas for any closing remarks.

[Nick Georgas, Ensco Plc]

Great. Thank you, Gary. And thank you, everyone, for your participation on today's call. We look forward to speaking with you again when we report our second quarter 2018 results. Have a great day.

[Operator]

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