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Edited Transcript of DO earnings conference call or presentation 10-Feb-20 2:00pm GMT

Q4 2019 Diamond Offshore Drilling Inc Earnings Call

Houston Feb 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Diamond Offshore Drilling Inc earnings conference call or presentation Monday, February 10, 2020 at 2:00:00pm 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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* Coleman Wayne Sullivan

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Connor Joseph Lynagh

Morgan Stanley, Research Division - Equity Analyst

* David Christopher Smith

Heikkinen Energy Advisors, LLC - Partner & Senior Oil Service Analyst

* Ian MacPherson

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

* James Carlyle West

Evercore ISI Institutional Equities, Research Division - Senior MD

* John Booth Lowe

Citigroup Inc, Research Division - VP

* Kurt Kevin Hallead

RBC Capital Markets, 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 Fourth 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, and 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're advised that time-sensitive information may no longer be accurate at the time of any 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 risks 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 find a reconciliation to GAAP financials on the website. And now 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 being on the call today.

In the fourth quarter of 2019, Diamond Offshore had an adjusted loss per share of $0.45. This compares to an adjusted loss per share of $0.42 in the fourth quarter of 2018. The slight decline year-over-year was primarily driven by the Ocean BlackHornet, undergoing its upgrades in the fourth quarter of 2019 compared to working in the fourth quarter of 2018. Partially offsetting this year-over-year decrease was the improved operational uptime on the remaining Blackships.

Today, I'll begin with the performance update of our fleet. I'm pleased to report that 2019 represented the safest year in Diamond Offshore's history. As I have said previously, the safety of our employees and the protection of the environment is, first and foremost, our highest priority, and our record performance in 2019 reflects this continued commitment.

And during the fourth quarter of 2019, we reached a new major milestone in that we achieved 100% revenue efficiency across our entire drillship fleet. Recording operating performance -- record operating performance was delivered on the back of the unique innovations we have introduced to the industry over the past years and to which I have previously spoken. This performance is why these assets have proven to be so desirable in what continues to be an oversupplied market. And as a result, all 4 drillships will transition to new term contracts in the coming years, the first of which will be the Ocean BlackHornet, which is shortly to commence its 2-year campaign with BP in the Gulf of Mexico following completion of its 5-year survey and rig floor automation upgrades.

As early adopters of a new technology to further automate the drilling process, our drillships will continue to be among the most advanced rigs in the market. The Ocean BlackLion will begin the same upgrades next month prior to commencing its 2-year campaign with BP in the second half of the year, also in the Gulf of Mexico.

Switching now to our moored assets, the Ocean Apex has recently returned to work for Woodside in Australia. This, in addition to a drilling campaign for BP, will keep the rig utilized until late 2021. The Ocean Monarch recently completed its program for Exxon in the Bass Strait and is currently mobilizing to Singapore, where it will spend approximately 3 weeks undergoing upgrades and contract preparations. Once complete, the rig will commence a 16-month campaign for POSCO International in Myanmar. And finally, in the coming weeks, following the completion of its extensive upgrade, the Ocean Onyx will depart from the shipyard in Singapore for the harsh environment theater of the Bass Strait to begin working on its drilling campaign for Beach Energy.

So turning to our fleet contracting activities during the fourth quarter of 2019. We secured an additional 12 months of work for the third-generation moored semi Ocean Patriot. This extension comes at a higher day rate than the legacy contract and adds over $50 million of additional backlog. Further, we have also been awarded an additional 2 wells on top of the original 18-well scope for the Woodside drillship program offshore Senegal.

So allow me to make a few comments on the market. It is clear that since the trough in 2016, dayrates have risen for all asset classes. However, upward pricing momentum remains slow due to ongoing rig capacity overhang, especially in the drillship market as well as the short-term nature of the awards. Nevertheless, we believe that our differentiated strategy has enabled us to price our assets at a premium within the market in both the drillship and moored semi markets.

Within this environment of depressed day rates, however, we are anticipating negative cash flow for 2020. And as Scott will discuss in greater detail, we will start to draw on our revolver in the coming months. 2019 was an unusually heavy CapEx year for Diamond as we focused on strategic upgrades for our most marketable rigs. We believe these investments will be beneficial to Diamond in the long run.

Moving forward, we will focus on preserving liquidity and limiting CapEx into 2020 and beyond. At this time, we will not reactivate the Ocean America or the Ocean Rover. Additionally, it is unlikely we will add mooring to the Ocean Courage and Ocean Valor. So with that, I will turn the call over to Scott, and then I will 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, Mark, and good morning, everyone. Earlier today, we reported a net loss of $75 million or negative $0.54 per share for the fourth quarter of 2019, which includes unfavorable tax adjustments related to Swiss tax reform. Excluding these items, our adjusted net loss for the fourth quarter was $63 million or negative $0.45 per share. This compares to our third quarter 2019 adjusted net loss of $93 million or negative $0.67 per share.

Let's now take a closer look at the quarter-over-quarter variances. First, contract drilling revenues of $259 million during the fourth quarter 2019 increased $16 million from the third quarter. The largest driver of the quarter-over-quarter increase relates to the fourth quarter receipt and recognition of $30 million, which is a portion of the previously negotiated $135 million margin commitment from one of our major customers.

As a reminder, the remaining $105 million of the commitment can be satisfied through the contracting of additional rigs or through payments at designated periods. The next commitment of $30 million concludes at the end of 2020, of which approximately $5 million is expected to be satisfied by the margin earned through a previously executed contract. Also contributing to the fourth quarter revenue increase [was a full quarter of] (added by company after the call) operations for the Ocean BlackHawk compared to the rig spending about a month of the third quarter completing a special survey and various upgrades focused around efficiency and automation. This increase was mostly offset by the Ocean BlackHornet moving into the shipyard at the same time the BlackHawk was leaving to begin its survey and similar upgrades compared to working most of the third quarter, also partially offsetting the revenue increase was the October completion of the Ocean GreatWhite's contract in the North Sea after working most of the third quarter.

Fourth quarter 2019 revenue was about $15 million higher than previous guidance. Part of the variance is attributed to the Ocean BlackRhino's planned fourth quarter special survey shifting into the first quarter of 2020 to accommodate ongoing operations. Also contributing to the variance was a fourth quarter customer reimbursement of previously withheld taxes related to a prior contract.

Lastly, as Marc discussed earlier, our Blackships continued to exceed expectations with 0 unpaid, unplanned downtime during the fourth quarter, which is positively reflected on our top line. Hats off to our operations team for this tremendous accomplishment.

Contract drilling expense of $200 million during the fourth quarter of 2019 was down slightly compared to the third quarter and was in the middle of the guidance range given during the last call. There were a few minor offsetting deviations from expectations, but nothing worth noting.

Depreciation of $92 million was slightly higher than guidance due to normal year-end adjustments.

Fourth quarter 2019 G&A expense of $16 million and net interest expense of $30 million both came in at previous guidance.

The fourth quarter 2019 income tax benefit of $6 million includes the recording of a $12 million deferred tax liability related to Swiss tax reform legislation enacted in 2019. Excluding this onetime noncash charge, our normalized effective tax rate was 22% for the quarter. The variance from guidance was primarily driven by a $13 million release of certain valuation allowances.

Full year 2019 capital expenditures of $326 million came in approximately $45 million less than the mid-range of the revised guidance of $360 million to $380 million given on our previous calls. As cautioned then, the timing of the spend for several of our large-dollar projects was fluid.

I will provide some color on the shift into 2020 when I give next year's CapEx guidance.

Before we get into first quarter guidance, let me provide a few comments relating to full year 2020. During 2020, we plan to undergo 2 special surveys. The first one is already complete as the Ocean BlackRhino spent about 2 weeks in January performing its survey. The Ocean BlackLion is scheduled to go into a shipyard in the latter half of the first quarter to conduct its survey and the automation upgrades Marc discussed earlier. Upon completion of the BlackLion's shipyard stay, which is estimated to be at the end of the second quarter, the rig will commence its 2-year contract in the Gulf of Mexico. Also, during 2020, the Ocean BlackRhino will go into a shipyard to perform similar upgrades to the other Blackships and prepare for its 2021 contract commencement in West Africa.

As of now, these are the only surveys and shipyard stays expected during 2020, but please be reminded that surveys and shipyard projects can either be pushed out or brought forward for a variety of reasons. I will update the timing in future quarters as necessary.

For 2020, we anticipate cash capital expenditures to be between $190 million and $210 million. This does not include any additional CapEx that may be required for the Ocean Courage and Ocean Valor on top of normal maintenance CapEx. Included in the guidance is approximately $45 million of CapEx previously expected to be spent in 2019 that has slipped into the first half of 2020, including approximately $15 million to complete the upgrade and reactivation of the Ocean Onyx. Also included in the 2020 guidance are the upgrades discussed earlier to the Ocean BlackRhino and Ocean BlackLion. And finally, approximately $30 million of the committed 2020 capital project will be reimbursed by customers over the course of their related contracts. This is in addition to the approximately $20 million of 2019 CapEx spend that will also be reimbursed.

So with that, let me provide some thoughts on the first quarter of 2020. But before I do, I will remind you to refer to our fleet status report, which was published earlier today for known and projected out-of-service time for the first quarter. We expect first quarter 2020 contract drilling revenues to come in between $205 million and $215 million. Most of the decrease from the fourth quarter is attributed to the non-repeating $30 million margin commitment discussed earlier. Also contributing to the decrease is fewer days on contract for the Ocean BlackLion as it begins its shipyard stay towards the end of the first quarter; the Ocean BlackRhino, which spent 2 weeks in January performing a special survey; the Ocean Monarch, which completed its contract at the end of January and will spend the remainder of the first quarter moving and preparing for its upcoming campaign in Myanmar; and the Ocean GreatWhite, which will be stacked the entire first quarter compared to working part of the fourth quarter of 2019. Partially offsetting the expected revenue decrease is the commencement of the Ocean BlackHornet's 2-year campaign during the first quarter 2020 compared to spending the entire fourth quarter in the shipyard. Also, the Ocean Valiant will get the benefit of working the entire first quarter under its current contract, which is at a higher dayrate than the previous contract it worked under during the fourth quarter of 2019.

We expect contract drilling expenses for the first quarter 2020 to come in below fourth quarter costs at between $185 million and $195 million. The biggest driver for the decrease is the deferral of mob and contract preparation costs for the Ocean Monarch prior to its upcoming campaign. We expect depreciation expense to increase to approximately $94 million for the first quarter of 2020, primarily due to the recent upgrades for the Ocean Onyx.

First quarter 2020 G&A and net interest expense are expected to remain relatively flat at $17 million and $30 million, respectively. And finally, we anticipate our effective tax rate to be in the low single digits for the first quarter of 2020. 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. Additionally, during the first half of 2020, we are expecting a cash refund of approximately $38 million related to prior year amended tax returns.

Before I hand it back to Marc, let me provide some thoughts on liquidity. We finished 2019 with $156 million of cash and nothing drawn on our revolver. However, we soon expect to start drawing on our revolver, likely in the second quarter, and we expect to be cash flow negative during 2020 and end the year with a drawn revolver balance. But now that the heavy CapEx spend is in the rearview mirror, our focus will remain on delivering top-notch performance, minimizing costs and preserving liquidity.

And with that, I will pass 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. Our differentiated strategy is keeping our marketed rigs contract in what is still a challenging environment. And with our proactive fleet investments soon to be complete, we will focus on improving our backlog, and we'll continue to drive further innovation and improvements to deliver best-in-class operating performance for our clients. So with that, let's open it up for 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 Sean Meakim with JP Morgan.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [2]

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So Marc, could you maybe just talk a little bit about the tendering and contracting momentum in the market. It's been pretty anemic the last few quarters, but meanwhile, there is a lot of activity and some projects moving forward. Can you maybe just help us calibrate how you expect to see some of that momentum offshore translate into a little more backlog growth as we go through 2020?

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

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Sure. I think one of the things we have seen that is helping us kind of map a path to the future is we've seen the number of licensing awards for offshore has increased for the third consecutive year. To include Africa, which, I think, saw the most significant decline this downturn. And as you know, we're participating in the growth of Africa. We've seen a recovery in offshore Brazil, be it off a very low trough. And the Australia -- Australasia region perhaps didn't decrease on a percentage term as much as other areas, that continues to show opportunity moving forward. And as you step back, you look at the number of subsea trees that have been awarded in the last 3 years. And of course, we're probably 3x higher in '19 than we were off the trough in 2016. So definitely, there is more activity coming to the market. I think one of the things that is perhaps frustrating for us is that the term in these contracts isn't as large as it needs to be to address utilization growing higher in the long run. But there's definitely more activity out there.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [4]

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I appreciate that. That all makes sense. Just checking on one rig, specifically, maybe you could just talk a little bit about your tendering strategy for the GreatWhite. U.K. still seems pretty sluggish. Are there other markets like Australia that you consider? Just how you think about how wide a net you cast in terms of next steps for a GreatWhite?

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Ronald Woll, Diamond Offshore Drilling, Inc. - Executive VP & Chief Commercial Officer [5]

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Sean, this is Ron. Good question. The logical place to go. The GreatWhite did well for us in '19 with her first 2 clients. She drilled well as our inaugural programs, we were quite pleased. And the interest in her from operators both was and remains strong for U.K., Canada and possibly Australia. That said, the 2020 U.K. floater market really did not fulfill the full promise expected a year ago. And several of the harsh environment programs that are best suited for her got pushed from the 2020 calendar into 2021. So as was referenced during the prepared remarks, it's unlikely that the GreatWhite will have some meaningful work in the immediate future for 2020.

And from our standpoint, I think it's part of a broader theme in the U.K. market, where we had expectations and intentions expressed by operators in early '19 did not fully mature during the course of the year. Now that said, I think the U.K. market, overall, for us is a healthy place for us to be. So we've got 3 rigs on long-term contracts, several years of backlog, and as Marc mentioned, more work for the Patriot recently. I think that although that market is, I think, recovering in the present tense, it hasn't recovered completely or evenly for that matter. And so from our standpoint, we've got to manage both our top and bottom line. So our plans for this year include looking to position her for good work in '21 as well as managing our costs here in '20. But Sean, I think if we're still in the U.K., Canada, and I'd keep probably Australia on the long list as well.

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Operator [6]

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And our next question comes from the line of Cole Sullivan with Wells Fargo.

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Coleman Wayne Sullivan, Wells Fargo Securities, LLC, Research Division - Senior Analyst [7]

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The Valor and Courage that you mentioned not expecting to do the mooring upgrades this year. What is the prospects for these kind of as they wrap up contracts this year?

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Ronald Woll, Diamond Offshore Drilling, Inc. - Executive VP & Chief Commercial Officer [8]

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This is Ron Woll again here. So good question. Glad you went there. So let's start with the Courage because she rolls off first. I think that makes more sense. The most important step to get the next work is to do a good job on the work we have today. So on that front, we're succeeding. So she's doing well operationally. We've got a pleased client, we've got some impressive subsea NPT on that front here, we've got Sim-Stack in place. A lot of good things going our way. Now building out on that success, we do intend to have her work further in Brazil. And as was mentioned in the remarks, we don't and plan -- we don't plan to convert her into a moore configuration. So we think of her in a DP lane in Brazil. There is work underway. I think we have good line of sight to more work ahead for the Courage in Brazil. In terms of the contracting kind of arc and process, we are where we wanted to be in February here of 2020, so that's in progress. But I should note that work is competitive, so it's not a gift to anyone. We have to earn that work, and we'll do so with a sharp eye on our CapEx. So although there's no headline to make today on that front, I think where we are, where we want to be, and I think we can speak to it more definitively on the next call.

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Coleman Wayne Sullivan, Wells Fargo Securities, LLC, Research Division - Senior Analyst [9]

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All right. Fair enough. On the BlackLion and Rhino this year, you mentioned the CapEx to expect in for the upgrades, any additional OpEx we should factor in for the survey side?

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

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Yes. So while the rig is in the yard, of course, we'll do this survey. And we've already done it on one of the rigs, and that -- actually, we were able to do offshore. That was just down a couple of weeks. That the expense for that will be nominal, and that was within the guidance that I gave. Thinking forward for the Lion, while it's in the yard, I mean, kind of what we've said in the past, the special survey runs in the range of $5 million. And just remember that we do expense surveys as opposed to capitalize them. So that will be included when I give guidance for the next quarter. But again, I wouldn't expect it to be anything unusual than you normally see on our surveys.

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Operator [11]

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And our next question comes from the line of James West with Evercore ISI.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [12]

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Marc, or maybe Ron too here, what do you guys think breaks the logjam here for dayrates. We've seen, obviously, rigs go -- you have some going to West Africa 300. We've seen 250 for other rigs, yet we got a contract last week or week before in the 150 in range in Mexico. What's the item is most holding up the dayrate momentum here? Is it behavior? Is it still just the utilization issue? What do you guys suspect is the thing we need to most hit the rabi term -- to most hit the dayrate inflection point?

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - President, CEO & Director [13]

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Yes. James, a good question. I think we're still struggling somewhat with significant oversupply. In other words, the supply/demand balance for, especially the drillships, for example, is working against us. Since the downturn started, there's been around 120 and 130 floaters retired. But if we look back into 2019, we only had around 6 floaters retired. So there's been a significant slowdown in attrition, and we definitely need more deepwater floaters to come out of the market and that has to include some of the drillships. We -- for example, we estimate that around 83 assets are currently stacked, of which 32 have been cold stacked for more than 2 years. And it's really difficult in this environment to see how those assets could come back into the market. So yes, I think you can take those 32 assets out of the supply/demand stack, but we need to see more attrition for dayrates to become more competitive. Now within that, there are niche markets, and that's one of the reasons why, as a company, we were specifically focused on allocating certain capital to our moored assets. And some of our more advanced moored assets were bidding prices that are higher than drillships are being bid at in this market today. So it depends which asset category you're specifically looking at.

We are very pleased, as I think many of you sell-side guys realized with our West Africa awards. We think that we were able to, through differentiation, show a performance level that has attracted a premium in the market. So if you look at all the awards in 2019, for a standard sixth-gen, seventh-generation drillship, I think you'll realize that some of our clients, more the -- the more sophisticated clients understand that there is a value in terms of contracting with Diamond's assets based on the performance record that we've shown here in the Gulf of Mexico, and that's something, of course, I've spoken to in our prior calls.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [14]

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Sure, but that was fair enough. And that's a good point, Marc. What would it take, I guess, in terms of rates here to pull some of your stacked assets back into the market?

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Ronald Woll, Diamond Offshore Drilling, Inc. - Executive VP & Chief Commercial Officer [15]

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This is Ron. From our standpoint, we don't yet see a lane where that sort of -- that's likely to happen. Just given, as Scott mentioned, the emphasis on sort of CapEx discipline, and you look at where rates are and even where -- if you move the movie forward by a few frames where rates might go, it's still hard to paint the lane where you see those stacked assets coming back. So I think, for now, we've got to think about them in their current state.

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - President, CEO & Director [16]

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To that extent, James, we need rates to move north for the assets that not only ourselves, but our peers also have in the market. We need those rates to significantly move further north. And as Ron says, right now, we do not see a lane to bring back those 2 stacked rigs that I spoke to previously in the inter call.

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Operator [17]

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And our next 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 [18]

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Congratulations on crushing it on the operations on the drillships in the fourth quarter.

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - President, CEO & Director [19]

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Thank you.

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Ian MacPherson, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [20]

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Yes. Yes, Marc. So the outlook for some of these rigs that have some exposure near term still sounds somewhat hedged, but on the GreatWhite, in particular, I've been thinking about -- well, I've been modeling that rig running at a fully-ready OpEx level. And if the outlook is -- that it might remain stacked longer, should we contemplate any reduction in the cost level of that rig that's either embedded already in your Q1 guidance? Or if it's not, maybe if that will taper down if the rig remains idle for a big portion of this year?

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Ronald Woll, Diamond Offshore Drilling, Inc. - Executive VP & Chief Commercial Officer [21]

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This is Ron. Good question, Ian. It makes a lot of sense. From our standpoint, given kind of our line of sight to the work ahead, I don't envision keeping her at sort of full, sort of battle stations for the balance of 2020. I think we should expect to take those costs down. We'll have to kind of work through the exact level, but I wouldn't keep that in your model at the full rates from a full cost standpoint.

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Scott Lee Kornblau, Diamond Offshore Drilling, Inc. - Senior VP & CFO [22]

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Ian, this is Scott. The only thing I would add to that is if we -- we will do everything we can, we will take crews down, but while the rig is operating, we're able to put fuel on the operator. While we have it, if we keep the rig fully warm and the thruster is going, that fuel costs is going to be on us. So that will offset some of the savings. It will still be a net-net lower, but just keep the fuel cost in mind.

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Ian MacPherson, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [23]

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Okay. My other question has been asked. I'll pass it over.

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Operator [24]

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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 [25]

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So when we think about the gross margin commitment that's remaining in 2020, how should we be thinking about that $25 million with respect to how it got paid out this year? Or should we be thinking that you all are trying to secure some work for the customer instead?

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Scott Lee Kornblau, Diamond Offshore Drilling, Inc. - Senior VP & CFO [26]

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Yes. Mike, this is Scott. So you know the rigs that we have available in 2020 and besides the 2 in Brazil, which Ron talked about, the hope to keep those in Brazil, it's really just the GreatWhite. So it's really just a path in 2020 for one rig. Right now, as I said in my comments, we do have an Apex program towards the end of the year with BP, and that's going to be roughly the $5 million. But absent that and absent any other work that we were able to put on for BP in 2020, we would expect the $25 million to be treated like the $30 million in '19. And we'd receive that as a cash payment in the fourth quarter.

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Michael James Sabella, BofA Merrill Lynch, Research Division - Research Analyst [27]

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Perfect. And then maybe kind of just walk us through M&A. You guys are still relatively positive moored semis. There's lots of drillships out there, realistically, you think that are available for sale. Can you just walk us through updated thinking on M&A in the industry? And how we should think about Diamond's position there?

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - President, CEO & Director [28]

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Yes. I think our focus today, as a company, is more on our liquidity and conservation of cash and taking us -- as we mentioned, or as I mentioned in my prepared remarks, we will be cash flow negative this year. And the focus that we have right now is how do we get back to a cash flow positive scenario. And we've got various strategies that we're looking at in the pipeline. But as of this moment in time, M&A is not one of those opportunities that we're currently looking at right now.

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Operator [29]

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

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [30]

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Scott, this one for you. As we think about cash flow in 2020, working capital has been a use of cash for almost all of 2019. Can you help us think about how we should model changes in working capital for 2020?

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Scott Lee Kornblau, Diamond Offshore Drilling, Inc. - Senior VP & CFO [31]

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Yes. So I'm not ready to give specific -- where we will end up towards '20. But as we said, we have $150 million of cash right now, and we do plan on ending the year with a drawn revolver balance. So obviously, that means we're going through that cash and there will be an amount on top of that, but it's just not quite ready to nail that down at this point for what the full year will look like.

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [32]

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Okay. Got it. And then for the BlackRhino, I realize that one's going to go into the shipyard for some upgrades at the end of the Hess program, and then it's going to have to move over to Senegal for that year of sort of contract gap that you have between the Hess and Woodside program. Should we assume that rigs effectively 0% utilized? Or is there any chance that there's some intermediary work you can pick up along the way?

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Ronald Woll, Diamond Offshore Drilling, Inc. - Executive VP & Chief Commercial Officer [33]

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Yes, this is Ron. Good question. It makes a lot of sense to us. So I would say that we have line of sight to some potential programs for the Rhino, that's a possibility. Nothing we're making news on today, but I would characterize the channel as active, and we'll have to just see how that works out going forward.

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Operator [34]

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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, Research Division - Co-Head of Global Energy Research & Analyst [35]

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So Marc, I have to say that you did peak my interest in the answer to one of the previous questions where you said you have a number of strategies that you're looking at to find a pathway to becoming free cash flow positive. Was hoping to kind of spoke that a little bit and see if you can add a little more color?

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - President, CEO & Director [36]

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Yes. I think, as always, the drive here is to make sure that in this kind of environment, we are focused on capital discipline moving forward, and how we can take the company back to free cash flow. It all starts with the macro environment. And I think, as we enter 2020, there are a number of things from a market dynamic perspective, which was, quite frankly, blowing a cold wind on our face. But some of the stuff that we've been looking at relates to how the global oil market will be challenged due to the weak fundamental balance that presents itself today. But I think the emphasis here is on the short term. And we believe that possibly 2020 presents an inflection point in the global market balance, primarily driven by non-OpEx supply growth.

If you look at what's happening in Brazil, if you look at Norway, I think that those increases will peter out this year. I think if we look at other non-OpEx growth, such as shale, I think that's definitely coming back down. I mean it's absolutely clear that shale production growth has started to slow for various reasons that are out there. And even the Gulf of Mexico, I think if you look at that, that will turn into a decline post-2020. And of course, Guyana, we don't really see Phase II lease come in until 2023. So we do see a potential rebalancing of oil supply post 2020, which is in sharp contrast for the last 3 years.

So I think it's how we position ourselves as a company moving forward into a potential new arena of supply and demand growth, and how we capitalize on that. And we're looking at various different options that we've got. So the main priority that we have right now is to control what we can control. And I think as we've already shown with 100% revenue uptime on our drillships in the last quarter, the technology innovation that we brought to this market around Sim-Stack, Stack-View et cetera, et cetera, pressure control by the hour. We've seen the results of that. And of course, we're rolling some of that technology down through the fleet to our moored assets. And as a result of that, we're giving a level of performance that our clients believe, from a value basis, is worthy of a premium. So as we drive all that together and prepare for a recovery in the market, I'm not going to get into specifics as to what those strategies may be other than that we've got a number of opportunities that we're looking at in order to address liquidity and position ourselves for a somewhat brighter future in 2021 and beyond.

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Kurt Kevin Hallead, RBC Capital Markets, Research Division - Co-Head of Global Energy Research & Analyst [37]

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Okay. Appreciate that. Now maybe a follow-up for Scott. You commented about having drawn the revolver for the year and having limited input for us on 2020 on working capital. So maybe just taking it to a very high level, what's the minimum cash balance that Diamond is generally comfortable with carrying on a quarter-on-quarter basis?

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Scott Lee Kornblau, Diamond Offshore Drilling, Inc. - Senior VP & CFO [38]

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Yes. Obviously, once we dip into the revolver, we're going to try to keep the cash balance as low as possible because with the revolver, obviously, we can ebb and flow and draw as we need it. I would say a general rule of thumb is penciling probably $50 million, but again, I could just kind of jump up and down depending on the needs for that day that we -- but that's probably a good something to pencil in.

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Kurt Kevin Hallead, RBC Capital Markets, Research Division - Co-Head of Global Energy Research & Analyst [39]

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And just one more thing for clarification. On the CapEx number, you threw out the $190 million to $210 million. And then you indicated that you had another $30 million of reimbursements that's going to be coming over the contract term. So that $30 million will get extended out, I'm assuming, through 2020, 2021, kind of 2022 time frame? Is that a good way to look at that $30 million reimbursable?

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Scott Lee Kornblau, Diamond Offshore Drilling, Inc. - Senior VP & CFO [40]

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So -- and that $30 million is made up of a few different contracts. As a general rule, we try and we push to get lump sum reimbursement as opposed to over. I would characterize most of that $30 million will be a lump sum. Now it may hit the end of '20, it may hit the beginning of '21, but our expectations, we'll see most of that as a lump sum. And also, the $20 million that I referred to for 2019, we have not received that yet, but our expectation is that will also, most of that be in a lump sum during 2020.

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Operator [41]

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Next question comes from the line of J.B. Lowe with Citi.

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John Booth Lowe, Citigroup Inc, Research Division - VP [42]

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Just a quick one for me. You've done a really good job of keeping your rigs contracted the next couple of years, and CapEx is coming down in 2020, but you're still going to be free cash flow negative this year. I'm just kind of wondering, and maybe this is a little bit too simplistic way we look at it. But what do you think that dayrates, on a percentage basis, would need to increase for you guys to get to that free cash flow breakeven level given the status of your current fleet?

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Scott Lee Kornblau, Diamond Offshore Drilling, Inc. - Senior VP & CFO [43]

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Yes. J.B., this is Scott. Higher. I mean, again, that's -- a lot of it, you're right, depends on utilization, and we can -- there is a path to being cash flow positive with a lower dayrate that you might think if the rigs continue to work. And I think that's a key -- a big key here that everybody's got to be mindful of is that the gaps are meaningful. And as you said, I think we've done a really good job. So not necessarily going to quantify it for you, but I will say that, as you look forward into the next few years, there is a path if dayrates get to a reasonable level, and it doesn't have to be to the peaks that we saw a handful of years ago. It can be something south of there, where we can still thrive and build cash.

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - President, CEO & Director [44]

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Yes. We know that number exactly. Of course...

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John Booth Lowe, Citigroup Inc, Research Division - VP [45]

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That's what I was hoping for.

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - President, CEO & Director [46]

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Yes. I mean that's just good governance. We know exactly what that number is. And we've got various scenario charts and analysis around that. But as Scott says, it's -- there is a path to positive free cash flow again, but it does need dayrates to increase across the industry. And the thing that we can do best here at Diamond Offshore, and as you mentioned, is to keep the assets that we've got utilized. And the Blackships, for example, the drillships have got visibility through to 2023. And as Ron kind of alluded to earlier in the conversation here, we're in conversations about filling some gaps in the schedule before they embark on term contracts. So yes, we're quite pleased with the opportunities that we've got for our current rigs. Obviously, the focus is on the Ocean GreatWhite. As we mentioned, it's going to be hard to get it working this year, but we do have visibility on to various opportunities into 2021. So yes, it's keep the rig -- the fleet working, keep it working at a premium based on a differentiated service and then keep an eye on continued rising rig rates. Because one thing that is not for debate is that rates for all asset classes have come off of a bottom. Now every once in a while, you'll see outliers to that, but we're very pleased with the way rates are moving, certainly for the moored assets, for the moored semis.

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Operator [47]

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And our next question comes from the line of Connor Lynagh with Morgan Stanley.

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Connor Joseph Lynagh, Morgan Stanley, Research Division - Equity Analyst [48]

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Yes. I think we've hit on this a number of ways. But I guess, just stepping back at a high level, if we think about the uses of cash in 2020, it occurs to me that some of these are sort of nonrecurring and there might be a path to better cash flows in 2021. Could you maybe help us think through what the large lumpy cash expenditures are currently in your budget that's driving the negative free cash flow expectation for 2020?

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Scott Lee Kornblau, Diamond Offshore Drilling, Inc. - Senior VP & CFO [49]

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Connor, it's Scott. So we -- as I mentioned, we do have second 2 Blackships, the Rhino and the Lion going into the yard. So of course, that's a double cash way, I mean, the cost for the CapEx and then, of course, the 0 on the revenue line. So a couple of that, we said that the GreatWhite is probably unlikely to work in 2020. There's another big 0 going across. And then we do have that gap in 2020 on the Rhino, we go into the shipyard. And then we do, at least, now have the stack time before we start the contract in '21 for Senegal. So I'd say those are really kind of the 3 big drivers that when you look at 2020, that we don't expect to see a repeat into '21. Let me fast forward a second into '21. Right now, we have 0 surveys planned, and we have 0 shipyard states planned right now. So even though 2020 CapEx came down quite a bit, my expectation, right now, absent any other news, is that 2020 -- 2021 CapEx will go down even from the 2020 levels.

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - President, CEO & Director [50]

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So just building on that, we don't see a scenario where we've got any more reactivation costs coming our way. We upgraded the Apex, we upgraded the Onyx, and we've upgraded the Endeavor, all ex-victory class rigs now that are at the top of the line of desirability. We showed last quarter that we've added term onto the Endeavor, we've got a good forward look at where the Apex is going, we're in conversations with with various clients about keeping the Onyx contracted beyond this initial term contract with various operators. So -- and then on the Blackships themselves, look, there is a significant number of drillships, six- and seven-generation drillships that are coming off the term in the next 12 months. There's plenty that are in the market that are available. But what we have successfully done is invested in these assets to make them amongst, if not, the best assets in the industry. And that's not just by having the biggest pulling capacity or, et cetera, et cetera. It's actually how is the processes that you have behind the steel to keep the rigs working like we have done. Let's labor on the fact that we have achieved 100% revenue uptime on our drillships in Q4. That's a huge achievement. But that does not go unnoticed amongst our clients. According to the Rushmore database, we have drilled the best 3 wells -- sorry, 3 of the best 4 wells that have ever been drilled in the Gulf of Mexico. Now they might not have the highest hookload, et cetera, et cetera; they might not have the highest displacement; they might not be the biggest, but they're certainly the best in the market. And if we can take this, learn these learnings from our drillships and put them onto our moored semis and other assets in the fleet, then that ensures that we keep working what we have available in the market. And from there then we can build that platform into improved cash flows moving forward.

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Connor Joseph Lynagh, Morgan Stanley, Research Division - Equity Analyst [51]

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Got it. And just to circle back, would you feel comfortable putting a dollar number to how much of a detriment some of these nonrecurring or transitory items in 2020 are in terms of cash?

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Scott Lee Kornblau, Diamond Offshore Drilling, Inc. - Senior VP & CFO [52]

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I would not. Now let me -- nice try to get me at the end of the call, where I might be a little loopy. I will say, though, that for the 2 ships that are going in, I mean, it should play out. Those 2 should somewhat mirror the Hawk and the Hornet that we saw in '19.

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Operator [53]

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And our last question comes from the line of David Smith with Heikkinen Energy Advisors.

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David Christopher Smith, Heikkinen Energy Advisors, LLC - Partner & Senior Oil Service Analyst [54]

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Not to be the dead horse, but looking at 2020 CapEx guidance, if we back out the $45 million that slipped from '19, it looks like $145 million last $165 million. Wondering if the low end of that is the good baseline for thinking about 21 CapEx?

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Scott Lee Kornblau, Diamond Offshore Drilling, Inc. - Senior VP & CFO [55]

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Well, and I'd also remind you -- you're right with the math you did. And then we have the Rhino and the Lion shipyard projects, which would not be repeating as well. So if you're trying to look for more of a level set maintenance CapEx for '21, that's probably another piece you need to take out, which starts getting, I would say, through a much lower triple-digit number.

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David Christopher Smith, Heikkinen Energy Advisors, LLC - Partner & Senior Oil Service Analyst [56]

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Appreciate it. Can I just -- given the contract coverage that you already have and kind of the visibility you have on lack of shipyard time in '21, and do you expect to be free cash flow positive in '21?

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Scott Lee Kornblau, Diamond Offshore Drilling, Inc. - Senior VP & CFO [57]

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I mean, the -- it's still going to be very dependent on what happens with the market. I mean if market conditions don't improve, I mean, it's very likely we will be negative cash flow beyond '20. If they do improve, there is a path for us to be cash flow positive. So market will dictate what the next few years will look like. But let me remind you that while we do have to deal with the market, we can't control that. Kind of looking forward of what else we have to worry about. We have done a good job taking care of our balance sheet, we have no maturities until the end of '23, so while we're dealing with the market dynamics, we don't have to worry about that noise. We have no new build deliveries, and we'll just continue to control what we can control, which is operations and reducing costs.

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - President, CEO & Director [58]

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And let's not forget that, certainly amongst our moored assets, we are pushing dayrates higher. The Patriot has just come off a contract. Well, as we announced this quarter, has got another 12 months of work at a dayrate that is higher than the previous contract. And this is a third-generation asset working in the U.K. sector of the North Sea, which is not quite seen the same recovery that we saw in prior years. So we are cautiously optimistic that dayrates will continue to rise. And we've been very clear on the call, we're not exactly stating how much higher they have to go to -- in order to get back to free -- positive free cash flow. But there are pathways that we see that would enable that. So I think that's as far as we're going to say during the content of this call.

So with that, I'd like to thank everyone for participating today, and we look forward to seeing you again next quarter.

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Operator [59]

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