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Edited Transcript of DRLCO.CO earnings conference call or presentation 5-Feb-20 9:00am GMT

Q4 2019 Maersk Drilling A/S Earnings Call

Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Maersk Drilling A/S earnings conference call or presentation Wednesday, February 5, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jesper Ridder Olsen

The Drilling Company of 1972 A/S - CFO

* Jørn Madsen

Maersk Drilling A/S - CEO

* Michael Harboe-Jorgensen

Maersk Drilling A/S - Head of IR

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Conference Call Participants

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* James Matthew Evans

Exane BNP Paribas, Research Division - Analyst of Oil and Gas

* James Thompson

JP Morgan Chase & Co, Research Division - Analyst

* Lillian Starke

Morgan Stanley, Research Division - Research Associate

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Presentation

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Michael Harboe-Jorgensen, Maersk Drilling A/S - Head of IR [1]

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Good morning, and welcome to Maersk Drilling's conference call for the full year 2019. My name is Michael Harboe-Jorgensen, Head of Investor Relations. Joining me on this morning's call, we have our Chief Executive Officer, Jørn Madsen; and our Chief Financial Officer, Jesper Ridder Olsen.

The annual report for 2019, along with supporting documents, including the presentation for this call and the fleet status report, have this morning been posted on our Investor Relations website. During this call, we will present our fourth quarter and full year performance, after which there will be a question-and-answer session. Please note that this conference call is being recorded and will be made available at our investor site afterwards.

Before handing over the word to Jørn, let us see to the formalities on Page 2. During the course of this call, executive management may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts. Such statements are based upon the current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. For further information on the risk factors, please see the annual report for 2019.

I will now turn the call over to Jørn.

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Jørn Madsen, Maersk Drilling A/S - CEO [2]

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Thank you, Michael, and good morning, everyone, and welcome to this call. With this presentation of the annual report for our first year as a listed company, I'm very pleased to say that Maersk Drilling delivered as promised in 2019.

We generated an EBITDA before special items of $415 million, in line with the guidance that we gave of $400 million. In 2019, we increased the number of days on contract by 5% compared to 2018 and our rate of performance remained strong with a financial uptime around 99%. The positive effect of more days on contract was, however, more than offset by the year-on-year decline in the average day rate of 18% mainly as a consequence of the anticipated expiry of legacy contracts.

If we move on to the capital expenditure in 2019, we spent $309 million, which is in line with our most recent guidance of $300 million. The capital expenditure were mainly driven by the completion of 9 5-yearly special periodical surveys. This is a large share of the fleet, which is why capital expenditure were significantly above $150 million, which we consider to be the normalized level of maintenance CapEx over the 5-yearly special periodic survey cycle.

After the high maintenance CapEx, the positive free cash flow was at $109 million. And we maintained a robust balance sheet, as reflected in our leverage of 2.6. This combination of positive free cash flow generation and strong balance sheet framed -- or sorry, frames the essence of our financial profile, namely positive cash flow generation at low risk.

If we turn to Page 4, we get an overview of the quarter-on-quarter development in 2019. As you can see, the revenue in Q4 increased to $305 million from $294 million in Q3. The increase in revenue was driven by a strong increase in the average day rates by 9% to $200,000 per day in fourth quarter of 2019 compared to $183,000 in the third quarter. Since the average day rates have been trending downwards since 2016 due to legacy contracts rolling off, it is now positive to see a breaking of this trend. The operational performance in the quarter remained strong with a financial uptime of 98.6%.

If we now turn to Page 5, we get a summary of the contracting performance since our last earnings call in November. In addition to the contracts already announced in the fourth quarter and discussed at our last conference call, the sixth-generation semisubmersible Maersk Discoverer was awarded a 3-well development contract with BP offshore Trinidad and Tobago. The contract has an estimated duration of 322 days and includes an option for 1 additional well.

The expected commencement of the contract is July 2020, following the completion of the rig's 5-yearly special periodic survey. And the estimated firm value of the contract is $78 million, which equals a day rate of $242,000, including a mobilization fee. We're pleased that BP is recognizing Maersk Drilling's qualities by re-signing the rig for this campaign following 6 years of successful operations in Egypt.

Next, the Maersk Valiant was awarded a 1-well contract with Noble Energy offshore Colombia with an estimated duration of 65 days. The firm value of the contract is approximately $18 million, which translates into a day rate of $280,000, including mobilization and demobilization as well as a premium for the use of the rig's managed pressure drilling system.

Finally, based on the conditional letter of award with Total previously announced in connection with our Q3 results, the Maersk Voyager was awarded contracts for a 3-well exploration drilling campaign in Angola and Namibia. The campaign commenced in January and is expected to run for 240 days with options for an additional 2 contracts -- or 2 wells.

The total firm value is $46 million, which translates into an average day rate for the campaign of $193,000, including a mobilization fee. In total, we signed new contracts and extensions with a total value of $270 million in the fourth quarter, meaning that we fully replaced our contract backlog, which stood at $2.1 billion at the end of the year. After the end of the fourth quarter, we've signed an additional 2 contracts and extensions with a total firm value of $40 million. First, under the alliance agreement, Aker BP awarded an extension to the low-emission CJ70 jack-up Maersk Integrator with a minimum contractual duration of 93 days. The firm value of the extension is $25.5 million, which equals a day rate of $275,000, excluding a potential performance bonus.

And for the sake of good order, I would like to emphasize that the contract does not include any options as opposed to originally communicated by us. With our strategic alliance agreement with BP -- Aker BP, we have a continuous open dialogue about upcoming prospect, which is why options are typically not part of the way we contract under the alliance agreement. And finally, I'm pleased to announce today that Repsol has exercised 1 of the 2 1-well priced options for the Maersk Valiant with an estimated duration of 70 days. The contract is expected to commence in August in direct continuation of the rig's current work scope in Mexico. As Repsol will not make use of the second 1-well option included in the original contract, the rig will mobilize to Colombia for its upcoming contract with Noble Energy, following the completion of the campaign in Mexico. Please do note that the contracts and extensions signed after the end of the fourth quarter are not included in our contract backlog of $2.1 billion.

Before moving over to our fleet deployment overview, I would like to highlight a couple of other changes in the fleet status report released this morning compared with the fleet status report from November last year. In December, Maersk Drilling received notification that Perenco would cancel the previously announced 3-well contract for the jack-up rig Maersk Resolute in the U.K. North Sea. The cancellation was due to the fact that the scope of Maersk Resolute previous contract was extended beyond the original schedule, causing delayed arrival for Perenco's drilling campaign. The duration of the 3-well contract with Perenco was estimated at 150 days.

Further and based on information from our subcontractor Aker Solutions, the onshore modification to the Maersk Inspirer are now scheduled to be completed in late Q2 2020. And as a result, Maersk Drilling now expects limited EBITDA contribution from Maersk Inspirer in 2020 due to this delay. The delay is obviously not satisfactory, but an advanced engineering project such as this is complicated with multiple vendors, which adds an element of uncertainty that we have to accept as part of our industry.

Now moving on to Page 6 for a summary of our contracting performance for the full year of 2019. In total, we signed 14 new contracts and 16 options and extensions in 2019. This added up to roughly the same number of additional contract days during 2019 compared with 2018. However, the total value of the new contract and extension was more than 60% higher than in 2018 with a total of $828 million signed during the year compared with $503 million in 2018. This means that we're replacing a greater share of our backlog with a 2019 book-to-bill ratio of 74% versus 39% in 2018. This is a great achievement and very satisfying development, being testament to a strong market position and good signs of a recovering market. However, as this number is still below 100%, our backlog at the end of 2019 was lower than at the end of 2018.

Now turning to Page 7 for a brief update of the operational performance in the year. The safety of people transcends commercial interest. And that is why I'm pleased to report a reduction in the frequency and severity of incidents in 2019. This is a movement in the right direction to reach our target of 0 serious incidents. The financial uptime remained high at 98.9% compared with 99.1% in 2018, which is remarkable when taking into account the 12 rig mobilization during 2019 as part of entering new contracts. Our continuous focus on operational excellence has driven a continued high customer satisfaction score of 6.5 out of 7 for the year of 2019. And needless to say, we are very proud of this measure and view it as a true testament to our customers' trust in Maersk Drilling's safe, reliable and efficient drilling operations.

Now turning to Page 8. I'd like to comment on the steps that we've taken in 2019 towards high-grading and focusing our rig fleet. As you probably well know, Maersk Drilling has always been focused on enhancing the quality of our fleet. And during 2019, a number of initiatives were introduced to reduce the energy consumption and CO2 emissions from our rigs. In May, we announced a hybrid low-emission upgrade of the Maersk Intrepid CJ70 jack-up. And in November, we announced a similar upgrade to the Intrepid sister, Maersk Integrator. These upgrades come in addition to a range of low-emission technologies that have been developed together with our customers to jointly reduce the carbon footprint of drilling campaigns.

With these initiatives, our CJ70 jack-ups are fronting the drive towards low-emission drilling and are well positioned to play into the low-emission agenda of our customers. Norway and the broader North Sea has been an incubator for our most advanced solutions. And we expect that these over time can be leveraged and offered to customers in other regions as the energy transition accelerates and increases the intensity for adoption of new low-emission technologies.

In addition to these upgrades, we have in 2019 high-graded and focused our fleet through the sale of 2 cold-stacked rigs. In June, we completed the sale of jack-up rig formerly known as Maersk Giant to LOTOS Petrobaltic Group. And further in December, we announced the sale of the jack-up formerly known as the Maersk Completer in a $38 million all-cash transaction. And as we enter into 2020, Maersk Drilling will remain focused on enhancing the quality of our fleet, driving operational excellence, thereby expanding our position as the go-to driller for harsh environment and ultra-deepwater drilling operations.

And turning to Page 9 for additional flavor on our good strategic progress. During 2019, we started to see the benefits of the Aker BP alliance, delivering average time reduction of 5% to 10% on the executed drilling campaigns. And even on one of the campaigns, the alliance delivered time saving of 36%. These results are testament to our ambition of helping our customers lower their total well cost to improve the economics and resilience of their projects. The strong outcomes resulted in bonus payments to Maersk Drilling.

And to further enhance our capacity to deliver end-to-end solution to our customers, we have integrated our Commercial, Technical and Operations functions into one combined Operations function with the ambition to create a seamless customer experience. The Operations function is further organized into a divisional structure with a North Sea division, comprising the harsh environment jack-ups capable of working in the most challenging environments in the North Sea, including the ultra-harsh Norwegian environment, and an International division, comprising all drillships and semisubmersible rigs designed to operate in benign and mid-deepwater environments. And also to drive internal efficiency, we established a centralized service center in Gdansk in Poland to provide services to the global organization.

Now following the update on our performance and strategic progress in 2019, I would like you to turn to Page 10 for an update on the key development in the markets in which we operate. Overall, global offshore rig utilization is continuing to increase as a result of the rising demand as well as further rationalizations on the supply side. And during 2019, we saw a broad-based increase in day rates across rig types and geographies.

When we look at our key markets in Norway, the marketed utilization was 100% throughout 2019. In the latter part of 2019, Maersk Drilling signed 3 contracts with day rates ranging between $275,000 and $330,000 per day, reflecting the tight balance of the Norwegian jack-up market. A significant numbers of discoveries are currently under evaluation in Norway. And these are expected to drive demand for jack-up rigs over the coming years. Given the declining average size of the discoveries in Norway, many of these are expected to be developed by a subsea tie-in solution to existing infrastructures. Maersk Drilling is ideally positioned for subsea development, given the unique capabilities of our large CJ70 jack-up rigs. And these advantages include reduced downtime caused by weather, improved equipment lifetime and optimized riser and BOP handling. Maersk Drilling is currently engaged in several direct negotiations with customers for opportunities for long-term duration, however, with the majority to commence in 2021.

If we turn to the broader North Sea market, primarily U.K. and Netherlands, the marketed utilization climbed above 90% during the fourth quarter of 2019 and averaged 87% through the year compared with 74% in 2018. The continued tightening of the North Sea jack-up market has supported a recovery in day rates from rates close to operating break-even levels in the beginning of the year to day rates above $100,000 per day for the higher-specification assets in the recent fixtures. And looking ahead, there are several opportunities in the North Sea commencing in 2020 and 2021 with both short- and long-term duration.

Turning to the International fleet segment. The marketed utilization averaged 79% in 2019 compared to 75% in 2018. Day rates in the floater segment continued to gradually improve during 2019 and appear to have stabilized at levels above $200,000 per day compared with $150,000 to $180,000 per day in the beginning of the last year. And as we've argued in our market commentary since our last -- our listing last year, recovery has been somewhat restrained due to many short-term contracts. But in the second half of 2019, we started to see several tenders and pre-tenders being issued for multiyear drilling campaigns. This bodes well for the future demand of floaters, which in combination with continued rationalizations on the supply side will help increase utilization in the segment.

And now we turn to Page 11. Our marketing efforts are clearly focused on securing high utilization on our rigs while we remain committed to disciplined bidding. I'll go through the pipeline of all our rigs -- and not go through the pipeline of all our rigs, but zoom in on a few ones, a few of them.

And let's start with Maersk Innovator. The rig is on contract until the middle of the year. The remaining option, which we showed in the last fleet status report, has lapsed. And we are now marketing the rig to other projects in the North Sea. If we move on to Maersk Interceptor, it will commence a 60-day contract with MOL in Norway in August. And as we've said in the Q2 conference call last year, there are limited opportunities in Norway with commencement in 2020. And we do not expect to contract the Maersk Interceptor for jobs before the MOL contract. Currently, we are looking at various opportunities to optimize the earnings profile of the rig in 2020, given the patchy deployment outlook.

Moving on to Maersk Intrepid, which is on firm contract with Equinor until August this year. We do see a high likelihood of continued employment after the end of the current contract. Regarding the Maersk Reacher, you will see that 2 6-month option have lapsed. And we are currently looking at a few opportunities, and it's not unlikely that the rig might be moved to the U.K. sector. As you will also see from the fleet deployment overview, there are some gaps for Maersk Resilient. But we do see good opportunities to close the gap between the 2 contracts with Petrobras and Serica commencing in March and October, respectively. And as mentioned, the contract for Resolute was called off, and the rig is now being marketed for other opportunities. As mentioned during the review of the market, most opportunities in the North Sea have commencement in the second half of 2020 and in 2021. And consequently, we expect some idle time for Maersk Resolute in the first half of 2020.

Moving on to the floaters. You will see we have a fairly good coverage in 2020. For Maersk Viking, which is currently working for POSCO in Southeast Asia, we're currently having discussion for a couple of opportunities which could add coverage in 2020. The 1-well option, which was part of the contract, is no longer applicable.

The review of the fleet deployment and commercial pipeline for our rigs concludes my prepared remarks. And I will now hand over to Jesper to give you some flavor on the numbers.

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Jesper Ridder Olsen, The Drilling Company of 1972 A/S - CFO [3]

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Thank you, Jørn, and also a good morning, and welcome on this call from me.

Turning to Page 12. You have a summary of our income statement. As you see, our revenue for the year was $1.2 billion, which, as expected, was lower than in 2018, mainly driven by the 18% lower average day rates that Jørn already mentioned. The lower average day rate was a result of the expiry of legacy contracts, which we highlighted already when we provided our guidance for 2019.

Our operating costs were 3% lower year-on-year. When taking into account the 5% increase in the number of contracted days, which Jørn mentioned, the average operating cost per day decreased by 8% compared with 2018. This is, among other things, a result of the many cost saving initiatives implemented in Maersk Drilling over the past years.

Looking at our SG&A. As expected, an increase to $87 million in '19 compared with $81 million in '18. That reflects the effect of our new functions added to the organization to support as a stand-alone listed company. Looking forward, we have, with our new life as a stand-alone offshore drilling company, in 2019 initiated a number of activities to further optimize our costs supporting the business, among others, through simplifying, standardizing and automating our existing processes and the way we work.

In our income statement, you see as a separate line item, we have this year shown the cost or rather the investment in innovation activities. The cost incurred amounted to $10 million in 2019 compared with $3 million in '18. That reflects our continued investment in new business models with the overall objective of reducing inefficiencies and costs and thereby delivering additional value to our customers. Our EBITDA before special items, as Jørn already mentioned, amounted to $415 million. And that is a delivery as promised compared to the guidance of $400 million.

Further down in the income statement. You see an accounting write-down of $34 million, which is related to the sale of the benign jack-up rig Maersk Completer. The sale of the rig closed in early January. And we will have a positive cash flow from the sale of $38 million in the first half of 2020.

Before turning to our segment results, let me give a brief introduction to our new structure and the new organizational setup reflected therein. You might have noticed that the segments are now named North Sea and International. Previously, they were named jack-up rigs and floaters. The only change is that the activities related to the benign jack-up rigs Maersk Convincer and then also the divested Completer are now reported under unallocated activities. That means that we have a pure North Sea jack-up segment and a pure International floater segment. Our comparative figures have been adjusted. And as you will see, no material impact on the numbers.

On Page 13, you see the financial summary of the North Sea segment, comprising our 13 North Sea jack-up rigs. The activity in '19 increased, as can be seen with the 8% increase in the number of contracted days compared with '18. Uptime remained high at 99.6%, demonstrating a continued strong operational performance. The positive impact of the higher activity as well as the strong operational performance was, however, more than offset by lower average day rates at $193,000 in '19 compared with $218,000 in '18. That corresponds to a decline of 11%.

This lower average day rate was a result of expiry of a 4-year legacy contract for Maersk Integrator, being replaced with a new contract at lower rates in the current market. In addition, Maersk Innovator was on contract for the first half of 2018 in Norway while it was on contract in the U.K. in '19. As a result of the lower average day rates, revenue declined year-over-year by 5% to $800 million. And we realized an EBITDA before special items of $385 million compared to $432 million in '18.

On the International segment, you see on Page 14 that the number of contracted days overall roughly unchanged from 2018. Financial uptime, which declined from 98.2% to 97.1% in '19, primarily due to unscheduled maintenance downtime related to Maersk Explorer. The most significant impact on the financial development compared to 2018 is the 25% lower average day rate, which was mainly a result of the expiry of the legacy contract for Maersk Voyager coming on a new contract at a significantly lower day rate. This led to revenue in the International segment of $395 million and with an EBITDA before special items of $28 million, both figures significantly below those realized in '18.

If we turn to Q4 and looking at, first, you see for the North Sea segment that the average day rates continued to increase for the second quarter in a row, now reaching $204,000 per day, up from $184,000 in the previous quarter. The positive effect was in the fourth quarter offset by lower contracted days primarily due to idle days for Maersk Resilient and Maersk Resolute. On the operational side, the performance was satisfying with 100% financial uptime.

Looking at the floater segment to the right on the slide. You see that revenue increased to $93 million driven by a combination of higher activity and higher day rates. The financial uptime was impacted by unscheduled maintenance downtime as mentioned on Maersk Explorer.

Looking at the 2 segments together. The most important takeaway from the quarterly analysis is that the average day rates in both segments, they have broken the downward trend we have seen in recent years. This means that the negative effect of legacy contracts running out is now more than offset by the positive effect from a recovering market with higher day rates.

Now please turn to Page 16 for a few details on our operating cash flow. As you see, we turned all our profitability into operating cash flows. With cash flow from operating activities of $420 million, our cash conversion was actually 105% in 2019. That was primarily driven by lower working capital. Despite our continued strong focus on cash flows, such levels above 100%, of course, cannot be sustained going forward.

If we continue with our cash flows and turn to Page 17. You see the bridge from our operating cash flow to our free cash flows. After investment cash flow of $311 million in '19, we generated an adjusted free cash flow of $109 million. When we include the proceeds from sale of activities and our net interest payments, the free cash flows amounted to positive $40 million. Here, it should be noted that we, in 2019, as Jørn also mentioned, had a significant maintenance program with 9 special periodic surveys. And of course, looking forward, that is not what we expect, normalized level, as Jørn mentioned, $150 million per year related to SPS's.

Turning to Page 18. We show the development in our cash balance, we said year-end 2019 amounted to $310 million. With addition of our $400 million revolving credit facility, we ended the year with a solid liquidity position with a total liquidity reserve of $710 million.

If we turn to Page 19 and we, in addition to our strong liquidity position, also look at our maturity profile, you see that we have a long profile with no material debt repayments before 2023. As we have mentioned throughout the year, this gives us a high degree of financial flexibility. And in addition to that, it also provides us with a relatively attractive funding costs, which averaged 5% in 2019. For 2020, we expect a similar level for our funding costs.

On Page 20, you see that at year-end '19, our net debt amounted to $1.1 billion. And that gave us a leverage ratio of 2.6, reflecting, again, our solid financial position.

Regarding our financial position and capital allocation, you see on Page 21 that we today announced a target leverage ratio of around 2.5. The capital allocation priorities are in line with what we have previously presented. The leverage target means that if the leverage ratio is below 2.5 over time and no attractive investment opportunities have been identified, we will seek to return capital to shareholders by means of either dividends and/or share buybacks. Looking at the year-end with a leverage of 2.6, we will, in line with the target leverage ratio as just mentioned, not propose any dividends based on the 2019 annual report. We will, of course, over the year continue to evaluate our capital allocation and depending on our financial performance and the priorities, as just discussed.

Before turning to our expectations for 2020, I would like to briefly go through our contract backlog, which you see on Page 22. Our backlog, of course, forms a strong basis for our expectations. And you see here that for 2020, we have secured around $1 billion of revenue, $477 million related to the North Sea segment and $513 million in the International segment. You also see the forward coverage for 2020 being 66% with 58% in the North Sea segment and 75% in the International segment, reflecting the many new contracts entered into in 2019.

The secured backlog and forward contract coverage for 2020, overall, on par with the levels we saw when we entered into 2019. However, the split between the 2 segments very different with more secured revenue for 2020 for our floaters than in the North Sea. This split is mainly a reflection of the rolling off of legacy contracts in the North Sea and then, as mentioned, a strong contract backlog secured during '19 for the International floaters.

This is then also reflected in our 2020 guidance sensitivity, which you see on Page 23, where we expect an EBITDA before special items of $400 million to $450 million. Our capital expenditures are expected to be between $150 million to $200 million mainly driven by 3 rigs coming in for SPS in the year as well as rolling maintenance on certain other units.

And with that, I will conclude my remarks for today, and I will turn the call over to Jørn for closing remarks.

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Jørn Madsen, Maersk Drilling A/S - CEO [4]

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Thank you, Jesper. And before we open the floor for questions, I would like to close with a few final remarks.

So looking back at 2019, I am very pleased that we continuously delivered as promised. During the year, we continued to see the signs of the market recovery with more days on contract. And in the fourth quarter, we also started to see an increase in the average realized day rates. With a strong contracting performance during the year, although the duration of new contracts still remains relatively short, we retain a good visibility into 2020. And combined with our free cash flow generation and strong balance sheets, this provides us with a continued high degree of financial flexibility.

And with this, we are now ready to take questions. So operator, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Lillian Starke, Morgan Stanley.

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Lillian Starke, Morgan Stanley, Research Division - Research Associate [2]

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I have just two questions. The first one is regarding the EBITDA guidance. I mean you're providing a range of $400 million to $450 million. But I was just wondering, is that range -- how much of it includes your current backlog, if that should be in the lower end of the range? Or is that range is fully just considering what you have in place at the moment?

And then the second question I had was on the working capital dynamics, which, as highlighted, you had the small inflow this year. If we look forward, and you mentioned maybe that cash conversion may not be maintained, how should we think about working capital and cash conversion into 2020?

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Jesper Ridder Olsen, The Drilling Company of 1972 A/S - CFO [3]

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Thank you for the two questions. If I start with the first question on our guidance, and you're right, as mentioned, we have secured backlog of revenue of $1 billion. And as we have set out in our backlog -- or in our outlook statement, there is a different split compared to 2019 with a higher coverage in our floater segment than in the North Sea. So where we have an uncontracted exposure, that is for the North Sea. And that is reflected in the guidance of the level between $400 million and $450 million.

And overall, as mentioned, when we enter into 2020, it is in line with what we entered into when we started 2019, noting the different split between the 2 segments. I think that's how much guidance I can give with this industry and I can say as the CFO, having the visibility and certainty, it gives a lot of comfort when coming into a year like that. However, we are also looking into still uncontracted exposure for our North Sea and that we have to close over the year. But that was on the EBITDA guidance.

For the cash conversion, as mentioned, the 105% cash conversion, that is not as sustainable. We have made a tremendous effort in 2019. And it is primarily coming from reduced trade receivables and working with that on the commercial side. Going forward, when looking into our working capital and also our tax payments of we have previously guided in between $25 million and $30 million in tax payments, we expect to have a cash conversion between 90% and 95%.

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Operator [4]

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At the moment, there are no further questions. (Operator Instructions) And we have another question. It is from James Thompson, JPMorgan.

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James Thompson, JP Morgan Chase & Co, Research Division - Analyst [5]

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I just wanted to -- I have a couple of questions, if I may, actually. Just in terms of the tendering activity and the outlook there, I mean it seems that obviously the North Sea business hasn't got a lot of activity in 2020 particularly. Is there any particular reason for that, do you think? Is this less exploration? Or is it -- or just what's driving that? And then similarly, thinking about that North Sea market, in terms of the stuff that's being bid for 2021 and onwards, is it longer duration? Are you noticing any changes in that regard? So that's my sort of first question around the North Sea bidding environment.

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Jørn Madsen, Maersk Drilling A/S - CEO [6]

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Yes. If we look at the tendering activity for 2020, and I think -- and you asked the question why is it up. Well, I -- first of all, what we see is that in the southern part of the North Sea, it's been with a fairly short duration, the contracts that we've seen and also contracts that other of our competitors have had. I think one of the reasons that the North Sea in general, and that includes the North Sea and Norway, that we see good activity is that this is an area where the break-even rates are actually at a point that is attractive. And it's also a well-regulated regime, where we see that the oil companies are interested in developing. And we see new money coming in from PE-backed companies. We see smaller players coming in.

And both the -- especially the U.K. and Norwegian -- or even more so the Norwegian regulations, do encourage also the smaller players to be present. So that might be one of the reasons why we see a lot of activity. Especially for 2021, when it looks to Norway, we just see that with the talks we have with our customers, that's where more longer-term work is on the rise. In the jack-up space that we're in, in Norway, we will see fields being developed where there's infrastructure available, which means that they typically also have shorter time before they mature and can get into to a point where we have to drill the well. So that's maybe what's driving that activity. Any other comments on that, Jesper?

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James Thompson, JP Morgan Chase & Co, Research Division - Analyst [7]

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And just a follow-up question or a separate question, I should say, is obviously in your sort of financial guidance, there's no dividend this year. You talk about maintaining liquidity for potential opportunities. Could you potentially talk a little bit about that? I mean the international market looks like you are well covered for this year in terms of what you've won, new pipeline that you've secured over the fourth quarter. Are there any particular gaps that are of interest to you in that arena?

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Jesper Ridder Olsen, The Drilling Company of 1972 A/S - CFO [8]

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If you look at specific on the 2020, as you mentioned rightfully, we are pretty well covered for our floater segment. Of course, we have Viking, if you look at that. And of course, we are looking at opportunities for that rig also for 2020. But for the floater segment, it is more for the longer term. We are pretty good covered for 2020. And as mentioned, when looking at the guidance, where we have uncontracted exposure, it is for our North Sea jack-up segment, where we have a coverage, as mentioned, going into the year of 58%.

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Operator [9]

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The next question is from James Evans, Exane BNP.

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James Matthew Evans, Exane BNP Paribas, Research Division - Analyst of Oil and Gas [10]

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It's James Evans from Exane. I've got a couple of questions. So I just want to dig a little bit more into Norway. I mean you obviously talked about some very good contract opportunities. And I'm sure you've done a lot of work on modeling bottom-up activity levels as you go out a couple of years. So just kind of wondering when you do that, what sort of longer-term, something in '21, '22, '23, sort of utilization levels are you thinking for things like the Norwegian jack-up rigs? And I guess related to that, I mean, obviously, rates are still robust but with maybe a little bit lower coverage. Are we likely to sort of see rates be heading sideways, do you think, for quite some time until there's better visibility? So that would be my first question.

And my second question, I just wanted to get the latest thoughts and an update on how you're viewing the M&A market. How active are discussions in the industry at the moment? Have your priorities changed? How confident are you of finding something that can -- you can add value to over the next 12 months or so?

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Jørn Madsen, Maersk Drilling A/S - CEO [11]

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Yes. First, let's turn to the question about Norway and utilization levels. Yes, as we indicate, for 2020, we do see that it may be shorter duration contracts than what we've seen in the past. Rate levels have been robust. We still have the option of taking our jack-ups to the U.K. in case there shouldn't be any work in the North or in the Norwegian part of the North Sea. And we've done that on several locations. And the rigs are then able to be top shelf on -- in the U.K. as opposed to our U.K. competitors, which are not able to enter the Norwegian Continental Shelf due to lack of consent to use the rigs there. So -- and if we look ahead, there seems to be, without going into a lot of details, a good level of comfort that the Norwegian market will sustain jack-up operations at the levels we had for quite some time. What that does to the rate levels, I will not speculate about that right here. It's probably something we have to discuss with the customers.

And then if we turn to the M&A market side of things, well, at our last call, I think it was or maybe it was at our half year, we indicated that the window for M&A seems to be open somewhat longer than what we expected when we got listed. I think that's still the case. We still see that quite a number of our competitors are in a situation where liquidity runway might be running out, still under pressure on the market cap and with a very, very high leverage. So we do expect the opportunities to come by. And as it is, and you all know that, when and if it happens, we will be out announcing it. But our focus will still remain around the areas we believe where we can make a difference, which means that it's high-end, technically complicated, operationally complicated, regulatory-high regimes. That's our focus area.

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James Matthew Evans, Exane BNP Paribas, Research Division - Analyst of Oil and Gas [12]

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Okay. I've got a follow-up question for Jesper, if that's okay. It was just about CapEx. I mean the guidance of $150 million to $200 million, slightly above your maintenance CapEx long term of $150 million. But you talk about 3 SPSs, I think, this year, which is maybe less than -- slightly less than average. So just wondered why the number was a bit higher. Is it a bit of conservatism? Is it things like the hybrid upgrades? Any additional color would be helpful.

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Jesper Ridder Olsen, The Drilling Company of 1972 A/S - CFO [13]

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Yes. And it's right when you take 3 and you take some of the numbers that we have been out disclosing previously, you come to a lower number. It is key to note, and we also highlight that in our annual report, that we have implemented a rolling maintenance program, meaning that you cannot take the specific number of SPSs and then just multiply with the average CapEx. There is a more rolling trend also, meaning that, for instance, we pushed forward the Voyager SPS into '19, but half of that CapEx, that will come into 2020. And that is more on the rolling basis, meaning that we have reduced the CapEx significantly by doing it on a rolling basis and fitting in it, where it commercially and operationally fit into our plans. So that's the reason why you cannot add it up directly with the 3 rigs. But overall, of course, the main CapEx for 2020, that will be for the 3 rigs, which you see that we have on SPS for 2020. But in addition to that, as mentioned, other CapEx related, too, to the rolling maintenance program.

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Operator [14]

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There are no further questions. So I would like to hand back to you, gentlemen, for some closing remarks.

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Jørn Madsen, Maersk Drilling A/S - CEO [15]

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Okay. So thank you for listening in, and thank you for your questions. And we will be looking forward to meeting some of you during the coming days, weeks and months out on the road. So have a nice day. Thank you, and thank you, operator, please.