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Edited Transcript of ESV earnings conference call or presentation 26-Oct-17 3:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 Ensco PLC Earnings Call

London Oct 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Ensco PLC earnings conference call or presentation Thursday, October 26, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carl G. Trowell

Ensco plc - CEO, President & Director

* Jonathan H. Baksht

Ensco plc - Senior VP & CFO

* Nick Georgas

Ensco plc - Director of IR and Communications

* Patrick Carey Lowe

Ensco plc - COO and EVP

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Conference Call Participants

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* Colin Michael Davies

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Gregory Robert Lewis

Crédit Suisse AG, Research Division - Senior Research Analyst

* Haithum Mostafa Nokta

Clarksons Platou Securities, Inc., Research Division - Associate

* John Booth Lowe

BofA Merrill Lynch, Research Division - VP and Research Analyst

* Kay Hoh

Evercore ISI, Research Division - Research Analyst

* Praveen Narra

Raymond James & Associates, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to Ensco plc's Third Quarter 2017 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

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

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Nick Georgas, Ensco plc - Director of IR and Communications [2]

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Welcome, everyone, to Ensco's Third Quarter 2017 Conference Call.

With me today are Carl Trowell, CEO; Carey Lowe, our Chief Operating Officer; Jon Baksht, CFO; as well as other members of our executive management team.

We issued our earnings release, which is available on our website at enscoplc.com.

Any comments we make about expectations are forward-looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially.

Please refer to our earnings release and SEC filings on our website that define forward-looking statements and list risk factors and other events that could impact future results. Also, please note that the company undertakes no duty to update forward-looking statements.

During this call, we will refer to GAAP and non-GAAP financial measures. Please see the earnings release on our website for additional information.

As a reminder, we issued our most recent Fleet Status Report on October 19. An updated investor presentation is also available on our website.

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

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Carl G. Trowell, Ensco plc - CEO, President & Director [3]

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Thanks, Nick, and good morning, everyone. Before Carey takes us through recent contract awards and Jon gives us an overview of our financial results, I will discuss the Atwood acquisition, third quarter highlights, make some comments on the state of the offshore drilling market.

Starting with our acquisition of Atwood. We are very pleased that our shareholders approved the deal earlier this month, and we successfully completed the transaction on October 6.

As a result of the acquisition, we have significantly enhanced our fleet capabilities with the addition of 11 high-quality rigs at bottom-of-cycle prices. By acquiring 4 best-in-class drillships and 2 versatile semisubmersibles, we solidify our position in the highest specification ultra-deepwater segment of the market.

This acquisition was an important step forward for the company as it strengthens our fleet and enables us to better meet our customers' drilling requirements. Customers have recently demonstrated a preference for high-specification assets that provide efficiencies which help to lower their offshore project costs, and we expect that this trend will continue in the future.

Furthermore, by acquiring Atwood at a pivotal time in the market cycle, we have purchased high-quality assets at compelling prices as values for the high-specification assets are at a critical inflection point. When combined with significant expected synergies from the transaction, we believe this acquisition will generate meaningful long-term value for our shareholders.

Importantly, the acquisition also preserves Ensco's financial flexibility. And with pro forma liquidity of $2.9 billion, we have the ability to continue opportunistically investing to drive long-term shareholder value. Our liquidity position was bolstered by the recent extension of our revolving credit facility for 2 years to September 2022. This extension was obtained on an unsecured basis, which gives us an even greater financial flexibility over the next 5 years. We will continue proactively managing our balance sheet to improve our competitive positioning through the cycle.

With the acquisition now complete, our focus has shifted to integration, and I'm happy to report that this is moving forward as expected. We formed an integration team with representation from 17 functional areas several months ago. And a detailed work plan was developed to ensure we have a smooth transition. To date, we have made significant progress on this work plan, and we expect to have more than 80% of integration activities completed by early next year.

In addition to integrating our operational systems and procedures, an important part of our ongoing success will be delivering on our expected synergies. To this end, we remain on track to achieve targeted synergies of $60 million in 2018 and $80 million annually beginning in 2019.

While we have some more work ahead of us to complete the integration, we are off to a strong start. And I would like to take this opportunity to thank our employees who have worked hard to make this possible.

Following integration, our focus will shift to 3 strategic areas. The first is a thorough review of our pro forma rig fleet as we continue positioning Ensco for the future. The second is a greater focus on processes, systems and technologies to continue increasing the efficiency of our rigs and lowering cost for our customers. And finally, we will increase our research and development efforts so that we further improve the drilling process and provide differentiated drilling solutions to customers.

More specifically, we will target technologies and enhancements that can be retrofitted to our existing rig fleet. In terms of marketing, winning new contracts for ENSCO DS-9 and the newly acquired Atwood floaters will be our first priority as we look to bridge these high-specification assets to improved market conditions.

Additionally, we do not plan to market our preservation stacked floaters until we see a material improvement in market conditions and pricing.

Moving now to third quarter results. Revenues and contract drilling expense were better than the outlook we provided on our last earnings conference call. Higher levels of operational efficiency, including 99.6% operational utilization for our floater fleet, coupled with disciplined cost management drove these results. Most importantly, our safety performance continues to be extremely strong. We remain ahead of last year's record performance, and we have improved our total recordable incident rate by more than 25% as compared to a year ago.

We continue to leverage our operating and safety track record, diverse rig fleet and strong financial position to win new work for our rigs. We announced several new contracts during the quarter, including contracts for drillships ENSCO DS-4, DS-7 and DS-10, which are expected to keep these rigs working for the majority of 2018.

We also completed the reactivation of ENSCO DS-4 on time and on budget. Since its reactivation, the rig has delivered outstanding performance, with operational utilization of 100%. And it has completed its initial wells ahead of the customers' drilling curve and under budget.

These results have given us greater confidence in the preservation stacking process and our ability to return rigs to the active fleet that can deliver the highest levels of uptime to customers when market conditions can support additional supply.

Looking now at the overall market, opportunities for new work continue to emerge. Shallow water activity has increased and jackup utilization has stabilized. The number of new floater contracts has increased sequentially over each of the past 5 quarters. Customers are also beginning to contract rigs for longer term to take advantage of the low day rate environment. While increased customer activity is a positive development, the structural oversupply in the offshore drilling sector persists and market conditions remain extremely competitive. Higher levels of customer demand and a further reduction in the number of offshore rigs are needed for utilization to reach a level where material pricing power returns.

These market dynamics are consistent with our expectations that the recovery will be gradual with different segments of the market recovering more quickly than others. While the short-term dynamics are challenging, we believe we are in a different part of the cycle. New project sanctioning year-to-date is nearly double the number of new projects approved during 2016, providing a pipeline for offshore work in the years ahead.

Customers have shown considerable interest in recent lease sales offshore Brazil and Mexico, which will help to increase the number of future offshore projects.

Based on our conversation with customers, we are increasingly of the view that current levels of exploration and production spending are not sustainable, and a meaningful increase in offshore drilling is required to offset decline rates and prevent a shortfall in the global oil supply as we approach the next decade.

Additionally, we believe that the real global supply of offshore drilling rigs will be smaller than anticipated as many older, less capable rigs are retired. We expect active, high-specification rigs that create efficiencies for customers' well programs and are operated by established drillers with enhanced operational and safety systems will be the most in demand assets as the market recovers.

As utilization for this subset of global supply improves, we believe these rigs will be the first to enjoy increased pricing power. Therefore, we continue to focus on increasing utilization for our most capable rigs to bridge these assets to better market conditions, so we are best positioned to capitalize during the recovery.

Our ability to offer customers a global fleet of the highest specification assets that are operated by outstanding crews and use proven operational and safety management systems sets Ensco up for future success and solidifies our position as a key service provider to offshore customers globally.

Now I'll turn the call over to Carey.

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Patrick Carey Lowe, Ensco plc - COO and EVP [4]

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Thanks, Carl. During the third quarter, our offshore crews and onshore personnel continued delivering the highest levels of service quality and operational excellence to our customers. Their dedication to operating rigs safely and efficiently is evident in the continued improvements in our safety metrics and uptime.

These outstanding results are the product of multiyear investments in technology and innovation and enhanced safety systems and processes on our rigs.

Having an established safety culture and consistently delivering safe operations improves our ability to win new contracts in a competitive environment. As we integrate our newly acquired rigs with Ensco's operating systems and processes, we remain focused on our core values, particularly safety and operational excellence.

In terms of contracting, Ensco continues to rank first among all offshore drillers in new contracts awarded year-to-date, capturing more than 20% of total rig years awarded industry-wide, representing almost double the number of rig years awarded to the nearest competitor. We won 4 drillship contracts during the third quarter alone. The most recent of which will see ENSCO DS-7 drill 2 wells and complete 4 production wells at the Leviathan field in the Mediterranean Sea. This contract is expected to commence in March 2018 with the initial well program expected to run until the end of next year, followed by customer options that if fully exercised would extend the contract into 2020.

As mentioned on our second quarter earnings call, we secured longer-term contracts offshore West Africa for ENSCO DS-4 and DS-10. And ENSCO DS-4 recently commenced its 2-year contract offshore Nigeria. This was an important operational milestone as DS-4 is the first preservation stacked floater we have returned to the active fleet, and the rig has delivered outstanding performance to our customer.

Last month, we accepted delivery of ENSCO DS-10 from the shipyard. And the rig is now undergoing contract preparations in Singapore before mobilizing to Nigeria to commence its maiden contract early next year.

In addition, the newly acquired ENSCO DS-12 was awarded a 1-well contract offshore Mauritania and Senegal in direct continuation of the well in progress. This is expected to keep the rig under contract until March 2018 and includes 6 1-well options that if exercised could extend the contract into second quarter 2019.

We are actively marketing 2 uncontracted drillships, ENSCO DS-9 and DS-11, and there are a number of opportunities currently in the market for which these rigs are well suited. Our drillships are among the most technologically advanced in the global fleet and are equipped with many features that create efficiencies for customers, positioning these rigs to outperform the competition during the market recovery given customers' preference for high-specification assets.

Continuing with our floaters, we have also strengthened our fleet with the addition of ultra-deepwater semisubmersibles ENSCO DPS-1 and ENSCO MS-1. Both rigs have a long-standing reputation in Australia and each has a contract beginning in the market early next year. In the U.S. Gulf of Mexico, ENSCO 8505 received a letter of award for a 1-well program with 3 option wells that if exercised could keep the rig working for the majority of 2018.

ENSCO 8505 is 1 of 3 8500 Series rigs outfitted with a more DP configuration. This configuration offers customers the versatility of drilling in both shallow and deepwater, along with the capabilities of a sixth generation drilling package.

Turning to our shallow water jackup fleet. We secured new work or contract extensions in several regions since our last earnings conference call. In the U.S. Gulf of Mexico, ENSCO 75 was awarded 2 short-term contracts and ENSCO 68 won a 2-well contract that is expected to start in November.

In Southeast Asia, ENSCO 67 had its contract offshore Indonesia extended by 1 year to December 2018. And ENSCO 115 had its contract offshore Thailand extended by 4 months to August 2018. ENSCO 109 also received a 1-year contract extension offshore Angola. As part of this extension, the rig will be on a standby rate for approximately 5 months beginning in mid-October 2017, followed by a 30-day special periodic survey before returning to work from April 2018 through July 2019.

In the North Sea, ENSCO 72 and ENSCO 101 each received contract extensions, and there are additional options that could extend both rigs into late 2018. Finally, ENSCO 52, which was previously classified as held-for-sale was sold for scrap value.

Moving to the global rig market. The number of new floater contract awards during the quarter has doubled as compared to the year-ago period. Tenders and inquiries, a leading indicator for new contract awards for shallow water work, have continued their recent upward trend versus a year ago. Project sanctioning has also increased, with 20 offshore projects reaching final investment decision year-to-date compared to just 11 during 2016.

Furthermore, a number of major international oil companies participated in Brazil's recent pre-salt bidding round. And with further licensing rounds imminent, we anticipate an increased number of deepwater projects in this critical offshore market in the future.

On the supply side of the market, we saw 16 floaters retired during the third quarter. The largest number of floater retirements in a single quarter since the beginning of the downturn. We expect this trend to continue as offshore drillers recognize that older stacked rigs are unlikely to return to the marketed supply, either because they cannot compete with modern, high-specification assets or because reactivation costs may be prohibitive given the current day rate environment.

We identify another 55 floaters that are retirement candidates, including rigs that are over 30 years of age that are currently idle or due to roll off contract through 2018. As a frame of reference, this is more than 20% of the global supply on the water today. These retirement candidates exceed the number of newbuild rigs we expect will enter the marketed supply over the same period and could lead to further contraction in the global fleet over the next 18 months. While only 33 competitive jackups had been retired since the beginning of the downturn, we believe more of this attrition is occurring silently as companies do not have the same incentives to announce jackup retirements as they do with floaters given their lower stacking costs.

We expect that deliveries of uncontracted newbuilds will continue to be delayed until customer demand increases further, resulting in a decline in the effective global jackup supply during 2018.

In closing, Ensco continues to consistently deliver at the highest levels of service quality and operational excellence to our customers. This performance has helped Ensco to win significantly more work than any of our competitors during the year-to-date. We remain focused on partnering with customers to improve the drilling process and create efficiencies for their offshore projects, which will help us to remain the offshore driller of choice among customers and improve Ensco's ability to win more work as customer demand increases.

Now I'll turn it over to Jon.

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Jonathan H. Baksht, Ensco plc - Senior VP & CFO [5]

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Thanks, Carey. Today, I'll cover third quarter 2017 financial results, our outlook for the fourth quarter, a summary of our financial position and an update on the Atwood integration and our synergy targets.

Starting with the third quarter results versus prior year, we reported a loss of $0.08 per share compared to earnings per share of $0.28 in the year-ago period. As detailed in our press release, several items influenced these comparisons, including $6 million of transaction costs related to the Atwood acquisition that are included in third quarter 2017 G&A, $3 million of discrete tax expense in the third quarter 2017 tax provision, an $18 million gain included in third quarter 2016 other income related to the repurchase of senior notes at a discount, $6 million of other discrete tax items that reduced the third quarter 2016 tax provision and $4 million of severance and other restructuring costs in third quarter 2016 contract drilling expense. Excluding these items, an adjusted loss of $0.05 per share compared to adjusted earnings of $0.21 per share a year ago.

Total third quarter revenue was $460 million versus $548 million last year. In the floater segment, revenue was $292 million compared to $319 million in third quarter 2016, due primarily to a decline in reported utilization to 46% from 48% a year ago, and a decrease in the average day rate to $334,000 from $353,000 last year. Operational utilization for the floater segment, which adjusts for uncontracted days and planned downtime, was exceptionally strong at 99.6%, up from 98.9% a year ago.

In the jackup segment, revenue was $153 million compared to $214 million a year ago due to fewer rig operating days and a decline in average day rate to $88,000 from $109,000 in third quarter 2016. While the total number of rig operating days declined, reported utilization increased by 5 percentage points to 60% due to the scrapping of several jackups over the past year. Operational utilization for the jackup fleet was 99.3%, a modest improvement from 98.9% a year ago.

Total contract drilling expense declined to $286 million in third quarter 2017 from $298 million a year ago as savings from more efficient stacking of rigs, fleet rationalization and lower support costs more than offset higher contract preparation costs.

Third quarter depreciation expense of $108 million was consistent with the year-ago period. General and administration expense increased to $30 million in third quarter 2017 from $25 million a year ago due to transaction costs for the acquisition of Atwood.

Interest expense was $48 million, net of $25 million of interest that was capitalized, compared to interest expense of $53 million in third quarter 2016, net of $12 million of interest that was capitalized.

As mentioned previously, third quarter 2016 other income included an $18 million gain on the repurchase of senior notes at a discount.

Tax expense increased to $23 million in third quarter 2017 from a $4 million tax benefit a year ago. The third quarter 2017 tax provision included $3 million discrete tax expense compared to $6 million of other discrete tax benefit in the third quarter 2016 tax provision. In periods of declining profitability, the allocation of estimated full year tax expense across quarters may differ from prior years, which could result in varying income tax rates when comparing results year-over-year.

Now let's compare third quarter 2017 to second quarter 2017 sequentially. Revenue increased by $3 million primarily due to ENSCO DS-4 and DS-7 commencing contracts offshore West Africa as well as 4 jackups starting new contracts. This was partially offset by several other jackups rolling off contract.

These items contributed to an increase in the average day rate to $165,000 from $156,000 and a 1 percentage point decline in utilization to 55%. Third quarter revenues were higher than our prior conference call guidance due to outstanding operational utilization and more operating days for our jackups as several contracts were extended. Contract drilling expense declined $6 million sequentially, primarily due to a $10 million settlement of a customer dispute during the second quarter.

Contract drilling expense for third quarter 2017 was lower than the prior guidance range of $295 million and $305 million due in part to the deferral of approximately $8 million of contract preparation costs to the fourth quarter as well as disciplined expense management that included lower cost to complete maintenance projects and surveys and lower daily operating expenses.

Depreciation and G&A expense adjusted for transaction costs were in line with the prior quarter. Other expense declined by $13 million, primarily due to increased capitalized interest associated with construction cost for ENSCO DS-10 in preparation for its maiden contract.

Moving to our outlook for fourth quarter 2017, which will include results from Atwood. We anticipate that revenue will decline by approximately 3% from third quarter levels of $460 million, primarily due to ENSCO DS-7 completing its contract during the fourth quarter and ENSCO 109 moving to a standby rate for the majority of the quarter. This will be partially offset by an estimated $22 million of revenue from the newly acquired Atwood rigs, which is net of intangible asset amortization of $16 million. Under purchase accounting rules, drilling contracts are measured at fair value based on market rates at the date of acquisition. Since we acquired drilling contracts that are above current market rates, we established a contract intangible asset that will be amortized against revenue over the remaining term of these contracts. Excluding this noncash amortization, day rate revenue for the former Atwood rigs is expected to total approximately $38 million during the fourth quarter.

We expect the fourth quarter contract drilling expense will be approximately $335 million. Previously, we provided fourth quarter contract drilling expense guidance for stand-alone ENSCO of $275 million to $280 million. As I mentioned earlier, $8 million of contract preparation costs have moved from the third quarter into the fourth quarter. The remaining difference between our prior guidance and our new outlook is the addition of Atwood.

Excluding transaction costs related to the acquisition of Atwood, G&A expense is expected to be $30 million. Note that this includes approximately $5 million of corporate support cost from Atwood that we expect to largely run off by third quarter 2018.

We now anticipate total transaction cost of $102 million inclusive of severance cost, professional fees and lease termination expenses. The timing of these costs breakdown as follows: $10 million of costs were incurred by ENSCO in the second and third quarters of 2017, $22 million was incurred by Atwood upon closing, an estimated $60 million of costs are expected during the fourth quarter and the remaining $10 million is anticipated during the first half of 2018.

We expect that interest expense will increase to approximately $58 million from $48 million in the third quarter primarily due to lower capitalized interest.

Finally, we anticipate the fourth quarter tax provision will be approximately $15 million. As mentioned on prior conference calls, we are likely to incur income tax expense even in periods where we operate at a loss.

Turning now to a summary of our financial position. Following the completion of the Atwood acquisition on October 6, we repaid $1.3 billion of Atwood debt using Atwood's cash balance of $445 million and a portion of Ensco's cash balance. In conjunction with the acquisition, we were able to extend our revolving credit facility by 2 years to September 2022 on an unsecured basis, which will provide additional liquidity and financial flexibility over the next 5 years and demonstrates the support of our banking group.

Under the amendment, we have borrowing capacity of $2 billion through September 2019 and $1.2 billion from October 2019 through September 2022. Our key revolver covenants include, maintaining a total debt-to-capital ratio below 60%, providing guarantees from certain of our rig-owning subsidiaries, such that these entities represent at least 85% of total net book value and that the net book value of our marketed rigs is at least 3x the size of the revolver facility. Limitations on future dividend increases and uses of cash when the facility has been drawn upon and other customary restrictions designed to prevent the hoarding of cash while facility borrowings are outstanding. Importantly, the revolver has no covenants based on operating cash flows, and we maintain the flexibility to raise additional capital through asset sales and a secured debt basket of $750 million.

Furthermore, the guarantees I just mentioned do not limit any asset from being used as collateral in any potential secured debt facility. Following these actions, our pro forma liquidity is $2.9 billion, including approximately $900 million of cash and the $2 billion revolving credit facility.

In addition to this liquidity, we have $3.2 billion of contracted revenue backlog, to which we have added more than $600 million year-to-date. Our pro forma net debt is approximately $3.8 billion, and we have a net debt-to-capital ratio of 30%. In terms of debt maturities, we have less than $1 billion of principal that is due before 2024.

Moving to our capital expenditure outlook. We expect total CapEx for fourth quarter 2017 will be approximately $150 million, $7 million of which is capitalized interest. This outlook includes $60 million of new rig construction costs, primarily for ENSCO DS-10 and ENSCO 123 and an estimated $55 million related to rig enhancements and minor upgrades.

As we look beyond 2017, our many newbuild capital commitments are as follows: the final milestone payment of $215 million for jackup ENSCO 123 is due upon delivery, which is scheduled for first quarter 2018.

Drillships ENSCO DS-13 and DS-14 are scheduled for delivery in 2019 and 2020, respectively. The remaining milestone payments for these drillships bear interest at 4.5% per year, which accrues during the holding period until delivery. Upon delivery, the final milestone payment, totaling approximately $250 million, along with accrued interest charges may be converted into a promissory note bearing interest at 5% per year with a December 30, 2022 maturity.

In light of our strong liquidity position, we believe that our debt maturities and capital expenditures are manageable and that we maintain financial flexibility as the market recovers. We will continue proactively managing our debt maturities, capital expenditures and cost base to best position Ensco as we navigate the market cycle.

Finally, I'll provide additional details on our synergy targets. As we planned for integration and evaluated the organizational structure of the combined company, we gain comfort around our ability to achieve meaningful synergies. Given this analysis, we increase these targets to $60 million of expected synergies during 2018 and annual run rate synergies of $80 million beginning in 2019. Atwood's onshore support costs total approximately $85 million on an annual basis, including $50 million of G&A expense and another $35 million of costs classified as contract drilling expense. We expect that Ensco's corporate function will support the additional Atwood rigs at minimal incremental cost, and we estimate G&A synergies of approximately $45 million primarily due to the reduction of shore-based headcount and consolidation of offices.

Within contract drilling expense, targeted synergies are approximately $25 million. These savings will be achieved by rationalizing certain support functions, including engineering, supply chain and asset management, along with onshore support costs incurred in field offices that directly support operations. The remaining $10 million of expected synergies will come from lower insurance costs and the use of Ensco's virtual inventory system. These synergy targets are achievable and we are on track to realize these benefits according to our plan. There may be other operational and fleet management synergies that lead to improved utilization in the future, but these benefits have not been included in our synergy targets.

Before I hand the call back over, I want to reiterate how pleased we are that Ensco shareholders approved the acquisition of Atwood as this was an important step in Ensco's progression as a leading offshore driller.

With Atwood's high-specification assets in our fleet, we improve our ability to meet increasing customer demand and strengthen our competitive position, which coupled with significant expected synergies will generate meaningful long-term value for our shareholders.

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We also recognize the strength of our rig fleet following the acquisition and because of this our financial...

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Operator [6]

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(Operator Instructions)

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Carl G. Trowell, Ensco plc - CEO, President & Director [7]

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I think we lost connectivity there through. So I think what we're going to do is Jon was just finally wrapping up. So I think what we'll do is just loop back on the final end of Jon's preprepared comments and then we'll go to Q&A.

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Jonathan H. Baksht, Ensco plc - Senior VP & CFO [8]

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Just to pick up, our banking group also recognized the strength of our rig fleet following the acquisition. And because of this, we were able to extend our revolving credit facility into 2022 and increase our financial flexibility over the next 5 years. We continue to have one of the strongest liquidity positions in the offshore drilling sector, with no debt maturities until second quarter 2019 and less than $1 billion of debt maturing through 2023, providing a competitive advantage during the market recovery.

Moving forward, we will remain highly selective as we evaluate opportunities to improve Ensco's competitive position with a focus on achieving the highest returns for our shareholders.

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

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Nick Georgas, Ensco plc - Director of IR and Communications [9]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Greg Lewis with Crédit Suisse.

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Gregory Robert Lewis, Crédit Suisse AG, Research Division - Senior Research Analyst [2]

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Carl, I guess, first, congratulations on completing the acquisition of Atwood. I think that positions the fleet pretty nicely. But just when you started off, you mentioned your liquidity road map and you talked about potentially additional opportunistic investing. As there's been some M&A in the space now not only by you, but by some other players, just as you think about the road map forward in the M&A space, should we expect -- is there the potential for the acceleration or more M&A? Or is it kind of -- as we think about Ensco, should we be thinking more about, hey, there might be a good asset here or there that really complements our fleet and that we'd be interested in or could we be thinking about other potential M&A?

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Carl G. Trowell, Ensco plc - CEO, President & Director [3]

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Well, Greg, it's probably a bit premature to start talking about further M&A whilst we're still driving through the synergies and integration from the Atwood acquisition. And we're extremely focused on making sure that we deliver the value that we believe we're going to get from that acquisition. I think it's worth saying that by the Atwood acquisition, we have significantly upgraded and uplifted our fleet. And that was a major strategic goal for us as we went through this cycle. And we believe we've done that at bottom-of-cycle pricing. So if we do nothing else, then we will have made a material step forward. Now on the broad commentary, and I think we've said this repeatedly. We still believe that consolidation within the offshore drilling sector is required and will be good for the sector as a whole. We would -- I think we have the liquidity to be able to look at things opportunistically. And I think that's why maintaining strong liquidity, managing our balance sheet will still be a focus going forward to make sure that we at least have that option. But I think post-Atwood, we would be looking at M&A through a slightly different lens and looking at it in a much more kind of individualistic case-by-case basis.

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Gregory Robert Lewis, Crédit Suisse AG, Research Division - Senior Research Analyst [4]

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Okay. Great. And then just, Jon, just a couple of questions on the balance sheet. I mean, clearly, as we look at -- congratulations, you got the revolver in place. As we look ahead, you have a couple of maturities in '19 and '20. That being said, the bond markets look to be open. So as we think about positioning, is there -- could there be appetite for Ensco to really push out its maturity schedule and really create an even bigger runway than you already have? Or is it just, hey, these are manageable maturities and we're just going to start packing those down?

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Jonathan H. Baksht, Ensco plc - Senior VP & CFO [5]

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Yes, Greg, thanks for the question. And just to start, we agree, we're very happy with the bank support on the revolver extension. I think it does provide us with a tremendous amount of financial flexibility through 2022. As I mentioned in the prepared remarks, we -- we do have now one of the longest kind of runways, if you will, in the space and specifically on the facility. And so we do have flexibility. And we -- I think we continue to monitor the markets as you pointed out. There are some constructive elements in the credit markets currently. But we are -- we have the flexibility and the optionality at this point that we're not bound to do anything because we do feel that with the liquidity position we have today, we're in a strong position. So we'll continue to watch the markets and go from there.

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Carl G. Trowell, Ensco plc - CEO, President & Director [6]

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Yes, I would add a little bit, Greg. I think the balance sheet that we now have post-Atwood, I think you should view that, that isn't frozen in time and that we will continue to look at ways to manage our balance sheet and our liquidity. We still have a number of levers that we could pull. And you've alluded to one of them, which is doing further liability management on our '19, '20 and '21. So without ever guiding, so that's what we're going to do. I think you'll have seen from how we've managed the balance sheet over the last 2, 3 years that we have been aligned to opportunities when they've developed. And we've been agile enough to move. And we've put balance sheet flexibility and runway quite high on our priority list. And I don't think -- I think you should assume that we will continue that approach.

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Operator [7]

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

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Haithum Mostafa Nokta, Clarksons Platou Securities, Inc., Research Division - Associate [8]

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I wanted to ask Carl, I mean, at the Analyst Day in September, you talked quite a bit about your positioning for the contracts in the future, which will include kind of elements of performance, performance risk. And can you just -- since there's a bigger forum here, can you just talk a little bit more about that? And kind of in line with that, do you see yourself making any kind of external investments to kind of meet that challenge?

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Carl G. Trowell, Ensco plc - CEO, President & Director [9]

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So I'll maybe reiterate a couple of comments I made on previous investor events. So I think to understand this is to go back and have a look at how we think the broader market is going to evolve. In our view, this downturn is going to be significant enough that it's going to reconfigure the offshore sector. We're already seeing that happening. We're going to see companies that existed 3 years ago not existing. We're going to see acquisitions between companies, combinations. And we're seeing new companies that didn't exist emerge and new ownership structures emerging. And in that sector and what we think is going to happen is that there is going to be effectively a Tier 1 and a Tier 2 drilling contractor emerge from that. We clearly see ourselves as a Tier 1 contractor. And by that what we mean is that, we intend to be working in close partnership with our major customer base, where we're offering more than just simply renting steel and a crew for whatever the prevailing day rate is, that we are working with them to improve the efficiency of offshore drilling and the cost of wells offshore. And that means 2 key things. It means that we are going to be looking to invest R&E, as I said in my prepared statement into helping improve the drilling process. And we are going to be looking on the back of that based off the investments we're making in technology, in process and systems to see if there are alternative contracting models that we can offer that may include incentives for performance and may include also the integration of other services on our rig, either stand-alone or in partnership with some of the service providers. And so we're pursuing all of those. And I think in my preprepared comments, I drew some reference to this in the fact that now post the Atwood transaction, where we've, I think, taken a big step forward in uplifting the fleet. We're going to put on our kind of -- in the hierarchy of where we will deploy capital, we're going to put a little bit more emphasis on to these areas of research, engineering and innovation as we go forward. I don't know whether I answered your question directly or whether you have something specific you want to dive into.

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Haithum Mostafa Nokta, Clarksons Platou Securities, Inc., Research Division - Associate [10]

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No, that's fair enough. And then I did want to ask maybe about the silent attrition that you talk about in the jackup market. Do you think of that as just kind of affecting older rigs or is it rigs that haven't worked in a particularly long time? Or is it a region-specific kind of thing? It seems -- it just seems like there's a lot of supply that -- is there on the numbers, but doesn't necessarily show up to every tender. So that would be interesting to kind of get your perspective there.

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Carl G. Trowell, Ensco plc - CEO, President & Director [11]

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I think, as we've said before, there's a very different profile between the floater market and the jackup market. And there's a lot less incentive to necessarily report attrition on the jackup segment. But first of all, there are just a lot of older rigs there that are just not competitive any more. And once they have been gone idle, have been stacked out, I think that they are going to quietly be removed from the global marketed fleet. There's then another tranche of rigs, which are -- those which are not necessarily 35 years old or plus, but are just less capable, but in the hands of drilling contractors who just don't have the liquidity or the cash to be able to return them back to the competitive fleet. And I think those will also struggle to come back in the next couple of years. And once they've been stacked out for 3, 4 years without any great investment been put in, preservation stacking them or maintaining them, then they become even more increasingly difficult to bring back. So for those -- I think there's 2 -- so to reiterate, there's 2 key things that's driving that silent attrition in the jackup market. The first is just the age of some of the rigs that are now being put dockside. And the second is the lack of cash and the increased focus on cash across the -- all of the operators. And so I think that's what's going to drive it. The other bit from a big picture point of view is that, I think if you go back a year or 2, there was a fear that there was this tidal wave of new deliveries coming from the jackup market, particularly when you looked at all of the rigs that had been built or were potentially been built in Asia. I think the reality of that is that we've shown is that not all those rigs that have nominally been built in Asia will necessarily reach the market. Some of them and a fair number will. But it's going to be more like a wholesale replacement of a lot of the old jackup fleet over many years, probably a 3- to 5-year cycle rather than they're all arriving in one big wave. So I think that's probably the way to view it.

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Operator [12]

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The next question comes from J.B. Lowe with Bank of America Merrill Lynch.

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John Booth Lowe, BofA Merrill Lynch, Research Division - VP and Research Analyst [13]

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Jon, I was just wondering, Jon, if you could give me some clarification on the guidance. I'm sorry if I missed this, but you were guiding to a 3% revenue decline in Q4. Is that exclusive of the $38 million that you are assuming from the Atwood rigs? So it would be more -- so we're still going to see an increase quarter-on-quarter?

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Jonathan H. Baksht, Ensco plc - Senior VP & CFO [14]

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No. The guidance, actually -- so let me just be clear a little bit. So I mentioned a couple of numbers as it relates to Atwood. So as part of guidance, there's $22 million that is included in that guidance of 3% off of the $460 million. There's a delta between the $22 million and the $38 million. The $16 million there is just intangible asset amortization, which is just part of purchase accounting. And so the cash we'll receive from that contract -- or I'm sorry, the cash we should receive from the Atwood rigs is $38 million. What we'll be able to recognize as revenue on the income statement is going to be $22 million. And the $22 million is included within the fourth quarter guidance.

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John Booth Lowe, BofA Merrill Lynch, Research Division - VP and Research Analyst [15]

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Okay. Great. And then -- yes, yes, that's clear. And then $335 million OpEx and $30 million SG&A. I think that's what you said.

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Jonathan H. Baksht, Ensco plc - Senior VP & CFO [16]

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Correct. And that's all the pro forma inclusive of Atwood.

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Carl G. Trowell, Ensco plc - CEO, President & Director [17]

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And just to be clear, J.B., the falloff in that revenue is driven primarily by 2 contract changes. The first is the DS-7 is coming off contract and should complete its contract during the fourth quarter and will go into preparation for its next contract, but won't be revenue earning. And then the other is the ENSCO 109 is going to move on to a standby rate before it moves on to an extended contract next year. And that -- those 2 contracts are what are driving that initial falloff. And they're offset then by the extra revenue that we will recognize from Atwood.

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John Booth Lowe, BofA Merrill Lynch, Research Division - VP and Research Analyst [18]

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Okay. That's very clear. And I guess just, Carl. You kind of alluded to it in answering the last question. But in terms of the uncontracted jackup newbuilds that are kind of sitting in yards kind of being delivered not all in one wave. We have seen a couple, I guess. For example, Borr just bought a bunch that they're going to accelerate the delivery of those. Has that changed your view in terms of that supply coming to the market at all? Or is that just kind of part and parcel in what you guys are looking at?

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Carl G. Trowell, Ensco plc - CEO, President & Director [19]

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No, that's part and parcel. To give you some insight into that, we've been on a couple of times now and sent our engineering and asset management teams around all of the yards in China and Asia to actually lay hands on all of the rigs. And we have our own view there of the subset. There is a subset of those rigs that we think will eventually come to market. And the ones that Borr have acquired fall into that group. So we always anticipated that at some point those rigs would come out. So it doesn't change our view. And then just the other comment is that, it will take time for Borr to put those rigs to work. So there will also be a drip feeding in of those rigs into the market consistent with, I think, the view that I laid out earlier.

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Operator [20]

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The next question comes from Samantha Hoh with Evercore ISI.

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Kay Hoh, Evercore ISI, Research Division - Research Analyst [21]

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I wanted to echo the congrats on executing on the Atwood deal. But actually, so my question really has to do with just discussions around floater contracting. We've noticed a lot of the same trends, Carl, that there's a good stream of open tenders and also that the duration for some of these contracts have kind of improved a little bit. And I was just wondering if you could help us understand how the discussion around the day rates go, for contracts that are 1 to 2 wells versus longer duration. And then, how do you incorporate pricing on day rate for options with the view that the market could be tightening, like 18 months out.

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Carl G. Trowell, Ensco plc - CEO, President & Director [22]

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Okay. Well, the first is just to reiterate that we have seen an increase in quarter-on-quarter on the number of -- both contract awards, but also the number of tenders and the number of inquiries we've got coming in. It hasn't changed from our previous commentary, which is that we yet -- as yet, we haven't seen enough new tenders or new awards derived from those tenders to offset the number of rigs that are coming off contract through Q4 or maybe beginning of Q1. So we haven't yet seen a turn in utilization on the floater fleets, global floater fleets, which I think we have seen now on the jackup fleet globally. But we do anticipate, if the trend -- if the oil price stays up in the range that it has been and that we see the number of inbound inquiries continue, then I think we would be looking for that to happen mid/late to next year. Now in that context, we are still seeing very fierce competitive environment, particularly in the floaters. And as I said in the -- in my prepared statement, that the oversupply of floaters still is making a very competitive environment and pricing is currently unsustainable. I think without giving away our full marketing approach, we are still -- we have 2 drillships primarily that we're looking to market. And they're client-facing. That would be DS-11, the ex-Atwood rig and DS-9. And I think we would be very competitive about putting those rigs to work in a contract that might be for the next 12 to 24 months, but we'll be much more careful about longer term than that and how you deal with the price -- any kind of pricing options or escalations afterwards. And on most of the contracts that we have won recently, the ones that we announced earlier this year for the drillships, we have -- anything that goes out past the kind of 18-, 24-month period, we do have either inbuilt escalations or we have options which are at elevated pricing. And I think we'd still likely pursue that approach. The other thing that we have been doing is running a portfolio approach by which we're prepared to put a few -- some rigs away at lower day rates, but not all. And we will hold back some capacity for a higher price environment and not have everything locked away at lower pricing. And that's also why we've been very clear in stating that post the acquisition, we have no intention of bringing out any of our floaters which are currently in preservation stack until we see a materially better market.

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Kay Hoh, Evercore ISI, Research Division - Research Analyst [23]

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Okay. That's great. I was also curious in terms of just the offshore FID projects. Like the list of projects that I'm tracking for -- potentially for 2018 approval just seems to keep growing. And I'm just wondering if you guys have seen any change in terms of the cycle times for these projects being shortened. I know one of the equipment providers had mentioned today that it's kind of gone from like, what, 3 years to within 2 years now. And I'm just kind of wondering if you guys are having the same sort of conversations with your customers who might be looking to advance projects that they are -- that they've been working on?

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Carl G. Trowell, Ensco plc - CEO, President & Director [24]

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I'm not sure there's a consistent trend. I do think that the overall cycle time has been brought down across the whole of the offshore sector, but it is quite project-specific, and it depends on the intricacies and the type of project and how many wells are going to be drilled. And particularly what tends to drive the cycle time is the scale of the infrastructure rather than the drilling. So do they require large infrastructure platforms, pipelines, infrastructure to tie the production into is what in most offshore projects is what is the long lead time items. And what we have seen is an increase in the number of projects being either planned or getting ready for FID that are a lot shorter cycle time and don't require full cycle investment as in that they are subsea tiebacks to existing infrastructure or wells around existing known fields, things like that. And we're also seeing some -- a little bit of elasticity in the sense that we're seeing customers want to move to take advantage of current pricing, both rigs and for offshore oilfield services, to drill exploration, appraisal and build infill well outside of the bigger FID projects that you're probably tracking. What I'll also add is, that's true for the deepwater, but in the shallow water, we're seeing a lot of -- a lot of the projects we're seeing are people returning to existing fields and existing platforms to add additional producing wells or work over wells that are already there. And those don't go through and don't show on the normal FID sort of planning cycle or database.

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Operator [25]

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The next question comes from Praveen Narra with Raymond James.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [26]

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Carl, you mentioned that we're done with -- until the market recovers a little bit more -- taking rigs out of cold stack. I was just curious, are we at the point in the cycle where it's unlikely that floaters that roll off contract will be put into preservation stacking mode? Or will we still continue to see that occurring?

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Carl G. Trowell, Ensco plc - CEO, President & Director [27]

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I think that very much depends on the age and capability of the rigs. As we've said in the preprepared comments and in Carey's section, there are actually quite a significant number of aged floaters that are beginning to come off contract within the next few quarters. We identify at least 55 that are retirement candidates that are over 30 years of age that are either currently idle or about to come off contract through 2018. And I think for those, that segment of the market, there's -- a significant number of them are probably going to move to stack or direct scrap, just due to the fact that the cost that will be required to put them back on an additional contract or the fact that they're just utterly uncompetitive in the marketplace. The newer rigs, the higher-capacity rigs, I think people are going to begin -- are going to try and keep them warm or semi-warm stacked. And that as you've seen probably from some of our highlights, but also what you've seen from other companies in the sector is that we've moved from an environment a year or 2 ago where we were seeing the early termination of contracts to now where we're beginning to see well by well extensions of existing contracts become more common. So we may see more of that as well.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [28]

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Okay. Perfect. And then I guess just back to the performance-based contracting a bit. In terms of the types of customers that are accepting or pushing this, the performance-based nontraditional contracts, is there a type of customer that's doing that? Or is it kind of across the board? You're seeing everybody interested in taking on a different contract structure.

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Carl G. Trowell, Ensco plc - CEO, President & Director [29]

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I'll let Carey answer first, then maybe I'll add a little bit extra.

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Patrick Carey Lowe, Ensco plc - COO and EVP [30]

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Yes, this is Carey. I don't think you can attribute it to any one type of customer. We have performance-based contracts with small independents and also with some of the larger IOCs. And these range from nitpicker or with AFE type of performance to also providing some additional services and in some cases performing some services that were traditionally would have been done by the oil company or decommissioning crew on a platform and so on. So performance-based contracts are not unique to any particular client.

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Carl G. Trowell, Ensco plc - CEO, President & Director [31]

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Yes. I think what I'd add is that it's primarily the IOCs and the independent E&Ps, not so much the NOCs. Although we do know of a few of the offshore NOCs that are looking at or considering doing things like some turnkey or modified turnkey contracts in the future. And so we will look at that and track that very carefully. And of course, that's something that we would probably want to participate on if the risk balance made sense.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [32]

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I guess I can and you can turn it away certainly if necessary. But today, can you say how many of your contracts are what you would consider to be a bit nontraditional?

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Carl G. Trowell, Ensco plc - CEO, President & Director [33]

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Yes, working now on...

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Patrick Carey Lowe, Ensco plc - COO and EVP [34]

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5 to 10.

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Carl G. Trowell, Ensco plc - CEO, President & Director [35]

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5 to 10 at any one time. And I think what's important to add -- what's probably important to add on the back of that is that as we go forward, we're in no way saying that every single contract we do would be performance-based or would be integration with the services. I think it will be very much a case of offering different types of model to different clients. And just an important subset will be performance or integrated contract. But what we do see now is an increasing pull from some of the customers, particularly some of the IOCs who are looking at 2 things. They're looking at working with a smaller set of service providers to help them be closer integrated with what they're trying to do to drive down their offshore cost. And secondly, looking to see if the drilling contractor will take on the management of additional services that can help the overall performance of the well.

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Patrick Carey Lowe, Ensco plc - COO and EVP [36]

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And I just might add that in cases where we feel like additional services or performance contracts would be interesting, and it's not been proposed or suggested by the client, we might also suggest it to the client and offer it ourselves.

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Operator [37]

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The next question comes from Colin Davies with Bernstein.

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Colin Michael Davies, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [38]

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So just in terms of next steps, you had alluded to a portfolio review. And I think previously you had talked about taking a hard look at some of the jackup portfolio with the combined assets. Can you perhaps give us a little bit more color on the status of that and where you go from here? I'm particularly interested in the sort of elaboration of the marketing strategy. You had mentioned focusing on the DS-9, DS-11. But perhaps, what are you thinking in terms of the 8500s in the Gulf of Mexico, for example, and then across into the jackup portfolio?

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Carl G. Trowell, Ensco plc - CEO, President & Director [39]

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Okay. Well, I think the first one is that review is ongoing now as we speak. And it's been informed by the fact that we're now actually physically on all of the Atwood rigs. So we now have a much more firsthand information. And we're going through our own verification of the estimates that we had for the conditions of the rigs. And those rigs that are currently not working, what is required to put them back to work? I will just add maybe a little bit of color which wasn't in your question, but I did see some market commentary around this, which is probably something I'll proactively take. Which is there was some commentary that we had actually stacked, cold stacked out some of the Atwood jackups because that was how it was noted in our current Fleet Status Report. The actual -- we, just to be clear, we have not cold stacked them. All we've done is in our Fleet Status Report is put something that we think more accurately reflects what state those rigs are currently in rather than us taking them from being warm stacked and moving them to cold. What we're currently doing at the moment is doing our full assessment of exactly the readiness of each of those rigs to go back. And you may see, as we go forward on our next Fleet Status Report, that some of those positions change depending on what we ascertain from that assessment in our portfolio review. So what we are doing is, we look -- sorry, sorry.

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Colin Michael Davies, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [40]

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No, go ahead, go ahead, sorry.

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Carl G. Trowell, Ensco plc - CEO, President & Director [41]

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Okay. So what we are doing in the review of the fleet is we are looking first and foremost at which -- in the combined jackup fleet and in what sequence do we want to start bringing back rigs and in what geographies and versus our current marketed fleet. Because I think in the jackup market, we feel that unless there's another material downturn in oil prices and sentiment, I think we do feel we are in a recovering market there. And I think for us now, a lot more of our decision process is around the right sequence and right -- to bring back rigs at what pace and what investment are we prepared to make to do that based around cash outlay and the returns we expect. So I think that's where we are with the jackups and a lot of the assessment regarding that. What we will also look at is maybe looking at now rationalizing that fleet a little bit either by selling some assets or scrapping some of our aged assets there and depending on the outcome of the review. And I don't want to preempt that. On the floater side, I think we've already made one key decision post-Atwood, which is that we will not be bringing back the preservation stacked floaters. And that includes the ones that we -- the 3 that we have -- the 4 that we have stacked in the Gulf of Mexico. So we will keep those for the moment stacked, which means that the 3 8500s that we have now marketed will remain the only ones that we keep out in the market. And then on the drillships, as we said, our 2 main market-facing drillships now will be DS-9 and DS-11.

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Colin Michael Davies, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [42]

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That's extremely helpful. And then just one follow-up then on the sort of interesting dialogue we've had on performance-based contracts. Just wanted to try and get a sense of really where this dialogue is being led from. I mean, to what extent are you guys as owners of the key rig asset, if you like, pushing that dialogue? To what extent is it being pulled by the IOCs or other oil companies? And to what extent are the leading service companies trying to propagate some of that thought?

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Carl G. Trowell, Ensco plc - CEO, President & Director [43]

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I think there's a little bit from all 3 of those directions. I think certainly, for a company like ours, with our performance levels and our confidence in our own management systems, I think when we -- we are looking to do this. In the current market environment, of course, I think what we're prepared -- what we're really trying to do is find ways to get extra and additional revenue return from a contract. So we are in some cases proposing alternatives as a way to kind of offset some of the pricing. And a lot of that is, if you don't want that to just be sort of wishful thinking or risk taking, you need to have done a couple of things. You need to have a certain degree -- you need to have a certain amount of control over certain elements of the contract and you need to have confidence in your own ability to deliver that. But it's also why we're now continuing to make investment in a lot of the technology and innovation and process and systems because what that does, it builds the platform from which you can enter these contracts and maybe take it another step further in taking some risk, but you're doing it from an engineered calculated point.

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Colin Michael Davies, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [44]

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And would that include, I mean, I think you said earlier, just full turnkey or is that a step too far for Ensco?

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Carl G. Trowell, Ensco plc - CEO, President & Director [45]

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I think full turnkey can only really be in shallow water jackup markets in certain environments and certain well sites. And there's a huge difference between a turnkey, a modified turnkey or something -- or a section turnkey. And I think it's actually a very small subset of the offshore drilling could be or should be done under a turnkey model. A lot of people have lost a lot of money doing that in the past.

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Colin Michael Davies, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [46]

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Yes. That's why I asked the question.

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Carl G. Trowell, Ensco plc - CEO, President & Director [47]

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Yes. So I think that may be the old one now and again. But I think what we should be viewing is, there might be a move towards different types of contracting model, but not moving to that type of level. It would be taking some form of performance-based incentive or reward and it would be looking at integrating additional services into the contract that the rig contractor runs or in alliance with a service company.

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Operator [48]

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

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Nick Georgas, Ensco plc - Director of IR and Communications [49]

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Thank you, everyone, for your participation on today's call. We look forward to speaking with you again when we report our fourth quarter 2017 results. Have a great day.

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Operator [50]

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