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Edited Transcript of DO earnings conference call or presentation 28-Oct-19 1:00pm GMT

Q3 2019 Diamond Offshore Drilling Inc Earnings Call

Houston Oct 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Diamond Offshore Drilling Inc earnings conference call or presentation Monday, October 28, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marc Gerard Rex Edwards

Diamond Offshore Drilling, Inc. - President, CEO & Director

* Ronald Woll

Diamond Offshore Drilling, Inc. - Executive VP & Chief Commercial Officer

* Samir Ali

Diamond Offshore Drilling, Inc. - VP of IR & Corporate Development

* Scott Lee Kornblau

Diamond Offshore Drilling, Inc. - Senior VP & CFO

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Conference Call Participants

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* Ian MacPherson

Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service

* John Booth Lowe

Citigroup Inc, Research Division - VP

* Kurt Kevin Hallead

RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research & Analyst

* Michael James Sabella

BofA Merrill Lynch, Research Division - Research Analyst

* Sean Christopher Meakim

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* Taylor Zurcher

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 Diamond Offshore Drilling, Inc. Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today Samir Ali. Thank you. Please go ahead, sir.

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Samir Ali, Diamond Offshore Drilling, Inc. - VP of IR & Corporate Development [2]

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Thank you, Chris. Good morning, everyone and thank you for joining us. With me on the call today are Marc Edwards, President and Chief Executive Officer; Ron Woll, Executive Vice President and Chief Commercial Officer; and Scott Kornblau, Senior Vice President and Chief Financial Officer.

Before we begin our remarks, I remind you that the information reported on this call speaks only as of today, and therefore, you are advised that time-sensitive information may no longer be accurate at any time of replay of this call. In addition, certain statements made during this call may be forward-looking in nature. Those statements are based on our current expectations and include known and unknown risks and uncertainties, many of which we are unable to predict or control that may cause our actual results or performance to differ materially from any future results or performance expressed or implied by these statements. These risk and uncertainties include the risk factors disclosed in our filings with the SEC included in our 10-K and 10-Q filings.

Further, we expressly disclaim any obligation to update or revise any forward-looking statements. Please refer to the disclosure regarding forward-looking statements incorporated in our press release issued earlier today. And please note that the contents of our call are covered by that disclosure. We will be referencing non-GAAP figures on our call today. Please take find the consideration to GAAP financials on our website.

And with that, I'll turn the call over to Marc.

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - President, CEO & Director [3]

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Thank you, Samir. Good morning, everyone, and thank you for joining us today. In the third quarter of 2019, Diamond Offshore had an adjusted loss per share of $0.67. This compared to an adjusted loss per share of $0.26 in the third quarter of 2018. The decline year-over-year was primarily driven by the Ocean BlackHawk and Ocean BlackHornet being off rate, while undertaking their special survey and technology upgrades in the third quarter of 2019. Additionally, the now sold Ocean Guardian was on rate in the third quarter of 2018. Partially offsetting the year-over-year decrease was the startup of 2 premier moored rigs, the Ocean Apex and the previously cold-stacked Ocean Endeavor.

I will start with an update on our strategy. We have previously communicated that we are focusing on the underserved and improving moored market, and today we are announcing new awards for the Ocean Apex and the Ocean Endeavor, 2 of our moored rigs that are amongst the most capable in the market. The Ocean Apex has been awarded over 300 days of work with Woodside at a rate that is close to double the trough seen for similar rigs in the Asia-Pac region. This rate exceeds recent dayrate fixtures that we have seen for sixth and seventh generation drillships and with the Apex having a lower operating cost compared to a drillship, this will lead to a higher margin. This new contract is also the fourth consecutive fixture that has seen an increase in dayrate for this rig. The Apex is now contracted through to the fourth quarter of 2021.

Further, Shell exercised a 2-well option for the Ocean Endeavor in the North Sea. This will keep the rig also working until the fourth quarter of 2021. When we look at forward FIDs awaiting sanction offshore, we're very comfortable with the pipeline of opportunities that the moored segment represents. Recall that the moored asset category primarily focuses on water depths between 400 feet and up to 2000 feet because of the limitations in the response time to disconnect from a wellhead in the event of a power failure on a DP asset.

Diamond is the only offshore driller that has been allocating capital to this water depths and as a result, we now have the most desirable moored asset fleet in the market. Furthermore, of the 125 floaters that have been scrapped, the vast majority were moored rigs. We now have 6 of the best 12 moored rigs in this asset class, which from a supply and demand perspective is balancing faster than all others.

The Ocean Onyx, another of our moored assets is soon to complete its upgrade in Singapore, whereupon it will mobilize over the new year to the Otway Basin in Australia. Its inaugural contract is with Beach Energy where we'll drill for gas to address shortfalls in supply in the local market. And staying with our moored fleet, early in the fourth quarter, the Ocean Monarch delivered a successful exploration well for Cooper, where it was moored to less than 200 feet in the very challenging harsh environment of South Australia. The rig is currently drilling an exploration well for Exxon after which, it will return to Singapore for additional enhancements in preparation for its 16-month contract in Myanmar commencing in the first quarter of 2020.

The second element of our strategy is to employ unique, innovative technologies that deliver superior performance and improved economics to both our clients and Diamond Offshore. Our most recent product launch was Stack-View service announced last quarter. This service applies 24/7 real-time monitoring, data visualization and advanced analytics to identify trends and detect anomalies in BOP performance, enabling Diamond to optimize our BOP maintenance program and potentially prevent subsea downtime.

This first of its kind service is now fully implemented and operational on all of our drillships. With this information -- implementation, we have assisted our Gulf of Mexico clients in obtaining regulatory approval to move from 14-day to 21-day testing of the subsea stack. This technology helps further drive efficiency gains and lowers the total cost of deepwater drilling.

As I've spoken to on previous calls, Diamond Offshore's seventh generation drillships are some of the most efficient in the industry and as a result, are all contracted through 2022 and beyond at dayrates that are materially higher than the current market. However, as they progress through their 5-year surveys, we are adding enhanced automation to the rig floor and will also be the first to adopt of a new technology to further improve tripping speed. These steps are being taken to ensure our drillships remain at the front of the deli line of desirability. We still see the sixth and seventh generation drillship market as challenged and believe that differentiation is enabled by the process efficiency we continue to deliver from these rigs.

According to an industry recognized third-party database, our drillships have drilled 3 of the 4 most cost-efficient wells in the Gulf of Mexico, and our backlog suggests that this differentiation is recognized by our clients.

So let me now say a few words on our CapEx. Our capital discipline is best demonstrated by the fact that we have scrapped over 25 assets during this past market downturn. And during this past quarter, we have elected to scrap yet another of our DP floaters, the Ocean Confidence. We have spent capital this past year only where it aligns with our new -- unique strategy. That is on further differentiating our ultra-deepwater drillships and enhancing our moored asset capabilities. As a result of this strategy, we now have the best moored fleet utilization amongst our peers. We are encouraged by recent tender data points, suggesting that a recovery in the moored market is well underway. And note that although the DP market remains challenged, dayrates have moved off a trough.

So with that, I will turn the call over to Scott to discuss the financials for the quarter, and then I'll have some closing remarks. Scott?

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Scott Lee Kornblau, Diamond Offshore Drilling, Inc. - Senior VP & CFO [4]

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Thanks, Marc, and good morning, everyone. As always, I'll give a little color on this past quarter's results and then I'll provide some guidance for the upcoming quarter. Earlier today, we reported a net loss of $95 million or negative $0.69 per share for the third quarter of 2019. On a normalized basis, adjusting for onetime asset sales, our net loss was $92 million or negative $0.67 per share. This compares to our second quarter 2019 normalized net loss of $136 million or negative $0.99 per share. The quarter-over-quarter change was primarily driven by fewer shipyard days in the third quarter compared to the second.

Now let's take a look at the quarter-over-quarter variances. First, contract drilling revenues of $242 million during the third quarter of 2019 were $35 million higher than the prior quarter, primarily due to 4 rigs operating most of the third quarter following extended shipyard stays. The Ocean BlackHawk operated for about 2 months of the third quarter compared to spending the entire second quarter in the shipyard undergoing a special survey and various upgrades focused around efficiency and automation. The Ocean Courage upon completing its 5-year special survey and upgrades in July worked for the remainder of the quarter compared to spending most of the second quarter off rate, while in the shipyard.

The Ocean Endeavor and Ocean Apex both operated the entire third quarter compared to each working for about half of the second quarter, after finishing up their shipyard days. The Endeavor completing its reactivation and upgrades and the Apex completing its 5-year survey and various upgrades. Partially offsetting these increases was the Ocean BlackHornet, spending about 2 months of the third quarter in a shipyard undergoing a survey and upgrade, similar to the Ocean BlackHawk compared to operating the entire second quarter.

Contract drilling expenses of $202 million were $23 million lower in the third quarter compared to the second quarter and were $3 million below the low end of the guidance range. Approximately $15 million of the quarter-over-quarter decrease is attributed to a net reduction of noncash amortization of previously deferred mobilization and contract preparation costs compared to the second quarter. As discussed on prior calls, U.S. GAAP accounting rules dictate that we amortize contract preparation and mobilization cost over the term of the initial contract after the mobe and shipyard stay. As the initial contract on the Ocean GreatWhite and Ocean Apex were relatively short, the amortization was accelerated and occurred mostly during the second quarter. The remainder of the quarter-over-quarter decrease is primarily related to fewer third quarter shipyard costs for the Ocean BlackHawk and Ocean Courage, partially offset by the third quarter shipyard costs for the Ocean BlackHornet. The slight beat to guidance is mostly attributed to the timing of shipyard cost for the Ocean BlackHornet.

Third quarter depreciation expense of $89 million and net interest expense of $30 million came within previous guidance. G&A expense of $19 million was $3 million higher than prior quarter guidance, primarily due to a third quarter adjustment. The loss on disposition of assets is a noncash charge related to equipment disposal during the third quarter. Wrapping up the third quarter results, our tax rate of 7% was within the guidance range given during the last call. And finally, during the quarter, we elected to reclassify the Ocean Confidence as held for sale, and will look to scrap the rig within the next 12 months.

With that, let me now provide some thoughts on the fourth quarter of 2019 but before I do, I will remind you to refer to our fleet status report, which was published earlier today for contract details as well as known and projected out of service time for the remainder of the year.

For the fourth quarter, we expect contract drilling revenue to remain relatively flat at between $235 million and $245 million. Revenue for the Ocean BlackHawk and Ocean Courage are expected to increase as both rigs should operate the entire fourth quarter compared to each operating for about 2 months during the third quarter after departing the shipyard.

Also during the fourth quarter, we expect to recognize $30 million from a previously negotiated gross margin commitment. If you recall, last year we entered into a $135 million agreement with a customer that could either be satisfied through the contracting of additional rigs or through payments at designated periods. The first designated period concludes at the end of this year, and we expect the $30 million obligation to be satisfied by payment.

Offsetting these expected increases is the Ocean BlackHornet spending the entire fourth quarter in a shipyard completing its upgrades and preparing for its 2-year campaign, which commences early next year compared to operating for about a month during the third quarter. Also, the Ocean GreatWhite and Ocean Apex will work part of the fourth quarter as their contracts conclude, compared to operating most of the third quarter.

Finally, the Ocean BlackRhino will take about 2 weeks of unpaid downtime to perform its 5-year survey.

We expect contract drilling expenses for the fourth quarter of 2019 to remain relatively flat at 195 and -- between $195 million and $205 million compared to $202 million in the third quarter, however, there are a few moving parts. Fourth quarter contract drilling expense will decrease as the majority of the noncash amortization of previously deferred costs roll off. Starting in the fourth quarter, the noncash amortization should stabilize at about $10 million per quarter. Offsetting this decrease is a full quarter of shipyard costs for the Ocean BlackHornet and the special survey cost for the Ocean BlackRhino. Also for the fourth quarter 2019, we expect G&A expense to come in at approximately $17 million and depreciation and net interest expense to remain relatively flat at $90 million and $30 million, respectively.

And finally, we anticipate our effective tax rate to be in the low single digits for the fourth quarter of 2019. Of course, the rate may fluctuate up or down, based on a variety of factors including but not limited to changes to the geographic mix of earnings as well as tax assessments, settlements or movements in exchange rates.

And with that, I'll turn it back to Marc.

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - President, CEO & Director [5]

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Thank you, Scott. We will continue to focus on providing innovative solutions and class-leading operational performance. Doing so to-date has allowed us to secure over 16 years of work across our fleet in the past 18 months and have delivered over $540 million in backlog year-to-date. This has been accomplished in what is still a challenged market and is a testimony to our differentiated strategy.

So now let's open it up for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Ian MacPherson with Simmons.

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Ian MacPherson, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [2]

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Marc, given your still pretty positive outlook on the market balances for moored, floaters of high quality and just wanted to get a refresh on the possibilities for mooring upgrades for the Courage or the Valor after they wrap up the work next year, if those studies have taken on more activity or if you're just still waiting to see more specific contract opportunities develop? Or if you think that, that might be proceeding at this point?

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - President, CEO & Director [3]

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So it still remains an option for us to put mooring on to the Courage and Valor. But at the same time, it (inaudible) us to take a look at the Brazilian market first and see what opportunities materialize there for the assets as they rank as DP assets. Now I think everyone is aware of what's been going on in Brazil. We've seen a number of tenders come to market recently for DP assets as well as moored assets. And I think if I could just address that moored asset market first, because of course, the data down there is public, but I think that one of the data points demonstrates that the moored assets category is coming back is a result of the tender -- recent tender we saw down there for moored assets. The number of assets that went into the tender was significantly less than the prior tenders down there earlier in the year but also I think what surprised some commentators was that dayrates have moved substantially up. Now having said that, I know a lot of people differentiate from a category perspective around the specific features of drillships, but having said that, Brazil is a market where it's probably different in that a DP semi can compete certainly in the piece of work against the drillship and Brazil specifically is one of the places where they accept a differentiation on a financial perspective. In other words, a DP semi can compete against a sixth generation or seventh generation drillship just by giving a discount. And that's accepted down there. So with that in mind and with the tenders that have recently come to market, we see that there is a possibility of these 2 rigs staying in Brazil moving forward, and we'll be participating in that. So once we know the outcome of that then we'll make our decision as to how much capital, if any, we put into these rigs.

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Ian MacPherson, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [4]

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Makes sense. If I could ask a quick follow-up from Scott. Could you comment on your CapEx guidance? I think we're looking at $200 million CapEx in the back half of this year. Is that still current or it was a little bit later than that in Q3 or less than half of that in Q3? Is that coming down or is it unchanged?

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Scott Lee Kornblau, Diamond Offshore Drilling, Inc. - Senior VP & CFO [5]

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No. We're going to keep our full year CapEx guidance at the $360 million to $380 million that we guided to a few quarters ago. You're right, Q3 doesn't extrapolate out to that but we knew Q4 would be the heavy spend quarter with we're finishing up the Onyx. One thing I will point out, Ian, is that we do guide to a cash CapEx number, not a GAAP-based accrual CapEx. So if some of the Onyx payments would be to the first week of January instead of the last week of December, we may come a little under but it will strictly just be a timing, and I'll just my 2020 CapEx guidance for that.

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Operator [6]

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And our next question comes from the line of Mike Sabella with Bank of America.

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Michael James Sabella, BofA Merrill Lynch, Research Division - Research Analyst [7]

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I was wondering, if we could kind of start with 2020 CapEx, and I know you guys have talked about it resetting lower and we just discussed potential for potential CapEx in Brazil. Is there any way you could help frame 2020 CapEx for us in kind of a range of potential outcomes given kind of growth potential?

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Scott Lee Kornblau, Diamond Offshore Drilling, Inc. - Senior VP & CFO [8]

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Mike, this is Scott. Not ready to give a number yet but I will tell you it will be lower, and I would say much lower than 2019. Our 2019 was a very heavy CapEx year for us and that was by design as we started investing into the fleet, from automations and other things that Marc has talked about. We had like 9 rigs in the yards at various times because we have special surveys and then these various upgrades. Now that most of that heavy lifting is done, we're ready go back to work. Right now we have 2 surveys scheduled for our shipyards stays for 2020 and that's when the second 2 black ships that we talked about some of the upgrades that we'll do on those similar to the first 2, and absent that just beyond normal maintenance CapEx with the wild card being Courage, Valor, and we'd have a decision on that I'd say in the next handful full of months. So all I'll tell you know is that it will be lower -- significantly lower and we'll give you some goalpost to shoot for next quarter.

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Michael James Sabella, BofA Merrill Lynch, Research Division - Research Analyst [9]

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Yes. That's helpful. And then another one follow-up for me. Scrapping at the Ocean Confidence, is there any cash to Diamond for that rig? And then as we think about those other 2 cold-stacked rigs, when do you all think you'd make a decision on what to do with those rigs and if you talked at all about how much capital you would think you need to reactivate them?

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Scott Lee Kornblau, Diamond Offshore Drilling, Inc. - Senior VP & CFO [10]

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Mike, this is Scott again. I'll take the confidence question. We have previously impaired that rig down to its scrapped value of $1 million. We don't expect the scrap value to deviate much from that.

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Ronald Woll, Diamond Offshore Drilling, Inc. - Executive VP & Chief Commercial Officer [11]

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This is Ron. On the second half of your question regarding the other 2 rigs that we have stacked, the Rover and the America, I would say that the path for them returning to service is really not clear, the market is not there. That's really not part of our go-forward plans. So I wouldn't think in terms of CapEx need. We've done the math but the market just isn't there to support that.

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Operator [12]

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And our next question comes from the line of J.B. Lowe with Citi.

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John Booth Lowe, Citigroup Inc, Research Division - VP [13]

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My first question is just about all the investments that you guys and your peers are also making in technology, given the new technology for tripping speed or what have you -- how is that playing out and effecting the kind of the bifurcation in the top end of the floater market? And you mentioned that the rates have come up the bottom here a little bit but how is that improving the technology on a subset of rigs really going to be able to drive that dayrates higher? How do you guys see that playing out over the next several quarters?

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Ronald Woll, Diamond Offshore Drilling, Inc. - Executive VP & Chief Commercial Officer [14]

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This is Ron. So from a standpoint of how our customers look at technology, I think it's a matter of really rigs that work and rigs that don't work. We've done a good job with our black ships earnings some rates what I think what we and many consider to be above the market rate, and I think much of that is tied back to our commitment to technology, thought leadership but also the crew, plus kind of rig interface. And so I think we've seen clients to-date, and we've shown some good results here, I think acknowledging where the investment in technology pays off because for them, they get a well drilled more efficiently, more safely and sort of a good well construction outcome. So we've seen that in the black ship in drillship space. We've also seen a more broadly with our Sim-Stack service, as we put that in place across many more rigs. That is something, which operators have also acknowledged as worth having on their programs. So for us, in this oversupplied market that we're in, as Marc referenced, it's probably come off a trough but still in the improving state not yet past tense improve. So while still improving, I think the commitment to technology and thought leadership really helps put rigs on contract compared to rigs that don't get there at all. And so in an oversupplied market, that's kind of one of the tools that we have in our toolkit to keep our fleet utilized and our stats bear that out. So we have a fully kind of utilized fleet today. So from that standpoint, I think the clients do acknowledge why that commitment to technology does matter.

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - President, CEO & Director [15]

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It's -- let me comment here and just explain about our differentiated strategy. So we've come in, we've put a number of new technologies that are unique to us on to our drillships. And as we spoke to earlier in my prepared remarks, all of our drillships are now contracted through 2022 and beyond. No other -- none of our peers can say that but beyond that, they contracted at a dayrate, which is significantly higher than recent data points suggests for drillships. So I think in the markets that we're targeting, we have proven that our differentiation can command a higher dayrate than it otherwise would. Now we're still challenged. The dayrate still need to move higher but from what we are doing, whether it's our on our drillships or our moored semis, we are at the forefront of pushing dayrates higher. We don't disclose dayrates but the dayrate that we've just been awarded in Australia for the Apex following an upgrade on that rig is higher than all clean dayrates that have been announced this year for drillships on a rig that has a lower operating cost. So I think that you've got to target those markets that are receptive for differentiated pricing. As I mentioned earlier, in the first question here, however, Brazil is a market where you can put a standard rig into that market and they will accept a dayrate discount from an efficiency perspective. So it's -- it depends -- you've got to be surgical into which markets you put these differentiated assets. You've got to put them into a market with the client understands the efficiency gains from differentiated portfolio.

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John Booth Lowe, Citigroup Inc, Research Division - VP [16]

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Okay. Great. It sounds like that Australia is one of those markets and you have a rig, the Monarch, which is moving out of that region into Myanmar. Is there an opportunity for another rig to go into Australia? I guess looking at the GreatWhite here we are running out contract pretty soon. I know it's in the U.K. but what's kind of outlook for that rig?

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Ronald Woll, Diamond Offshore Drilling, Inc. - Executive VP & Chief Commercial Officer [17]

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Yes, Ron again. So in terms of Australia, I don't think we have a grand plan to move many more rigs into Australia. We like where we are. Of course we've got the Onyx coming out here shortly for Beach, so we already kind of made our bet there. In terms of GreatWhite, I would not assume that we're going drag that rig back from the U.K. to Australia. That's a long trip, I think the GreatWhite's hunting ground, if you will, is well-placed there in the U.K. perhaps with half line in Canada. And she has done a good job for us, this year in the U.K. if you recall, we started 2019 the rig really had no resume. She hadn't drilled an [anger] since she came out of the shipyard in 2016. So for us, it was vitally important for her to start off strong and that is a promise that's now being kept. So she drilled now for just over 6 months for 2 clients, multiples wells, rig NPT, very favorable under 2.5% subsea NPT under 1.5%. So she has done a great job for clients in the back half of '19. And she really earned her harsh credentials having seen her way through several storms there in the U.K, comment to that geography. So I think the Greatwhite is in the right place, as Marc said, I think the market is improving not yet sort of fully recovered. So there's more work ahead I think the GreatWhite to work but we do expect to see her work through majority of 2020 going forward.

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Operator [18]

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And our next question comes from the line of Sean Meakin with JPMorgan.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [19]

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So Marc on the Ocean Apex, could you maybe talk a little more about how those types of negotiations look today when you're looking to tender rigs over a year out, your fleet mostly working at this point, just curious how that influences those types of negotiations? And can you maybe just elaborate a bit on the capital cost associated with the contract with the upgrades that you mentioned?

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - President, CEO & Director [20]

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So we've previously given guidance on the upgrade for the Apex itself. It was off-line capability and it was around $30 million.

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Scott Lee Kornblau, Diamond Offshore Drilling, Inc. - Senior VP & CFO [21]

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That's about right, $20 million to $30 million.

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - President, CEO & Director [22]

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So it does make the rig more -- certainly more efficient in that market and sought after. Yes we've been talking with clients about follow-on work for that rig and indeed, at a higher dayrate again. One of the things that we're finding somewhat of a headwind against us is its scheduling in that market. So the overlap of potential future work actually coincides with some of the work that we're contracted to do today. So it's a case of talking that through with our clients, but the rig remains very, very attractive in that region, and of course that's not the only one that we've got there. This is one of the reasons why we are bringing back the Ocean Onyx, significantly upgraded rig into that market. So as Ron earlier suggested, we're already bringing an extra rig back in there, but we're very, very comfortable with that market and with the moored assets that we've got.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [23]

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That's helpful. And I was curious, if we could get maybe an update on the current state of the LOI for Sea Lion, given FIDs just continues to slip to right. It looks like 2020 now is the current target. Can we maybe get a sense of how that fits into your strategy?

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Ronald Woll, Diamond Offshore Drilling, Inc. - Executive VP & Chief Commercial Officer [24]

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This is Ron. So I'll defer to the client for kind of their commentary on kind of their own program but broadly speaking, that program has been sort of known to the market for quite some time. It's been one of few what I've considered to be very sort of chunky development programs that are out there, they are few in number, easy to identify and name. I think this is a good case where I think there's operators who do have high hopes I think for markets to recover, and so that's why the program I think continues to move on. It's a fairly complex program as I think the operator will describe, there's a lot of moving parts to get right, to get that 1 kind of off the ground. So that's one that we are quite sort of keen on. We're very -- we have a good sort of view into it. We have good, I think, credentials with both that one operator but also I think the clients in general in the U.K. sector. And so that's a program that we certainly have an eye too. But I would say it also speaks to Marc's earlier comments, there are headwinds. And so the program is well-understood but for a variety of reasons, it's not an easy go to get FID across the line. I think that's a pretty common, I think, narrative that we're finding with clients. So they've got good programs, proven fields, resource that they would like to develop and extract. But candidly, if you look at the competing demand for capital our customers have, it's not always an easy one to get across. And so I think we are fortunate with many of our operators and clients -- they're relatively I think clear with us about how to think about expectations for programs and how to consider where they may fit into the schedule for us. But this is 1 that I think is a good example of why there's both promise in the future but also some strong headwinds that they keep good programs from coming to market easily. If you look at kind of big chunky programs that are out there, there's only a few to name. That's one of the bigger ones and what I like about where we are is our credentials with that 1 client and with the class of work is quite strong. It's a great piece of work in the moored space, and as Marc mentioned, that's an area we've invested quite a lot, but we have effort technology differentiation. So I think we are in a good place for that program but we'll just have to kind of watch and see how that plays out.

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Operator [25]

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And our next question comes from the line of Kurt Hallead with RBC.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research & Analyst [26]

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Thanks so much for that color. So Marc, it's pretty clear now that all the investment you guys made in these technologies is paying off for sure on the utilization front and as you see quite affectively on the dayrate front as well. So I'm just trying to maybe connect the dots here a little bit. When you think about return on capital and what these investments in technology ultimately mean on a through-cycle basis moving forward from here, Marc, comparison to contrast with the prior cycle dynamics, how much incremental return on capital maybe you could put it on a percentage basis or basis point or something? Give a sense as to what is the incremental return on capital you think you're going to be able to get for this upcoming cycle with all these technologies that you have employed -- deployed.

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - President, CEO & Director [27]

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Kurt, I'm not going to be drawn on giving you return on capital at this time. When the market is somewhat appear to be moving forward. But when we make these decisions, we look at the company as a whole. We look at how we allocate capital moving forward in terms of what is best shareholder value, and we also understand that ultimately this is a cyclical business. Now this cycle has been much longer and deeper than others first suggested it would be, and we are one of the first to pull up the drawbridge and start taking countermeasures to reduce cost and to limit investment. But at the same time, we've gone from a 44 fleet down to a fleet that is effectively 16 assets, and we need to make sure that those assets are assets that are very, very capable and are ready to take the opportunity when the market recovers because this is a cyclical market. One of the questions that I have been asked of late was what does it truly need for deep water to come back into the picture? Deepwater is not going away, it remains an important part of the supply stack for our clients. And what has extended this downturn, of course, is the non-OPEC production growth, which is surprised to the upside for a number of years. And where that has really come from is shale. And the question becomes is when is shale going to roll over? And there are some data points out there that suggest we are beginning to see the beginning of that. So when we do our scenario analysis, it's -- we believe that a recovery is coming, it's not coming in 2020, it will be 2021 or 2022. We have good liquidity, we have rigs that are working at dayrates that are above market rate and will be so moving into the future. And when we look at the returns that we make on our capital that we've done this year, we are very, very comfortable that the Endeavor, which we brought back from cold-stack, the Onyx, which we brought back from cold-stack have significant runways ahead of them in a moored market where are seeing dayrates recover substantially. Again in my prepared remarks, the work that we've just one in Australia on the Apex is about double the trough for moored assets in that region, and we have increased the dayrate for the fourth consecutive fixture in a row. The Onyx, when it goes down there, it's going to be working in the Otway Basin, drilling for gas to supply the local energy market in Eastern Australia, which we know is suffering from blackouts, et cetera. So when we make these decisions to bring assets back, we're very, very comfortable in the long-term success of those assets. We spoke about the Falkland Sea Lion earlier in the call. And again, we've got an LOI for the Endeavor for that work. So we're very, very comfortable, and when we bring these assets back, we have the work in place that will give us a good return on capital. But when you're asking for a specific number this moment in time, I don't think it's a benefit for us to put a number out there right now.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research & Analyst [28]

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That's all fair. I appreciate that incremental color. So maybe a follow-up question here for Scott. You indicated that CapEx will be down meaningfully in 2020 versus 2019. I think on the prior calls, you also indicated that you may have a need to kind of tap into that revolver but given how some things have evolved here, given the efficiency factors you have on your rigs and the low CapEx. I'm wondering your view on whether or not you get to point of positive free cash flow in 2020?

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Scott Lee Kornblau, Diamond Offshore Drilling, Inc. - Senior VP & CFO [29]

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Yes. Not -- when I made that comment last quarter, Kurt, that was with the visibility of where I kind of thought 2020 will play out and that really has not changed at this point. So I will reiterate, we will most likely hit the revolver during the first half of the year, timing still be -- to be determined based on working capital and some other items. But not at -- 2020, you will see us hit the revolver, and we will still have a balance outstanding more than likely at the end of '20.

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Operator [30]

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And our last question comes from the line of Taylor Zurcher with Tudor, Pickering, Holt and Co.

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [31]

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I appreciate all the color on the Apex pricing. First question is just on pricing for the moored asset category. Clearly, there is some pricing power in Australia. Could you just compare and contrast for us how pricing on a leading edge basis is looking for the moored asset in North Sea either on a daily gross margin basis relative to what you're seeing in Australia?

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Ronald Woll, Diamond Offshore Drilling, Inc. - Executive VP & Chief Commercial Officer [32]

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This is Ron, Taylor. Good morning. So what I'll say in U.K. sector is that in some way similar to Australia, we're seeing kind of each successive contract is priced better than the one before. So I think there's a shared expectation between both the offshore drillers as well as the operators. Over time those rate I think do kind of click forward at a higher level. I wouldn't describe this as dramatic but it is I think -- it is I think a fairly consistent trend over time. If you look at kind of where leading prices are today, how they are, what the expectations are for forward contracts and if you look back over the ark of time, in a short contrast of '17 and '18, you can definitely see the trend kind of up in that way. So the trend go the right way. I think the tricky part is what's the slope of that curve, right? How fast do those rates kind of recover? I think overall, the big picture I think in the moored asset class, I think the supply/demand picture is slightly better by comparison to the drillship space here. But I think the pricing power you have got to recognize has limits. It's not unlimited. And I think the market does keep those rates fairly in check. So the general trend is good, but I wouldn't call it dramatic. It's simply steady and improving.

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - President, CEO & Director [33]

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So let me just throw something in here for you, Taylor. The -- when we have looked at how we allocate our cash flow moving forward, one of the things that we studied was the dollar value of the deepwater FIDs available through 2025. And there are 190 DP floaters out there chasing work. There's 44 moored assets out there chasing work. And when you look at the dollar value of potential FLT on a per rig basis, the opportunity for moored assets is double that in terms of FID dollars than it is for DP assets. So that is why we're quite comfortable having allocated capital to our moored assets. And apart from the Courage and Valor, we're basically done now, as Scott has spoken to in terms of CapEx moving forward, but that somewhat explains our strategy.

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [34]

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Understood. That's helpful. And a follow up may be for Scott, on the revenue guidance for Q4. Is that $235 million to $245 million inclusive or exclusive of the gross margin commitment for DP?

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Scott Lee Kornblau, Diamond Offshore Drilling, Inc. - Senior VP & CFO [35]

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No. That's inclusive of the $30 million.

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Operator [36]

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That concludes today's question-and-answer session. Mr. Marc Edwards, please proceed.

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - President, CEO & Director [37]

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Thank you for participating in today's call, and we look forward to speaking to you all again at the next quarter.

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Operator [38]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.