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Edited Transcript of NE earnings conference call or presentation 1-Nov-18 1:00pm GMT

Q3 2018 Noble Corporation PLC Earnings Call

United Kingdom Nov 2, 2018 (Thomson StreetEvents) -- Edited Transcript of Noble Corporation PLC earnings conference call or presentation Thursday, November 1, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam C. Peakes

Noble Corporation plc - Senior VP, CFO & Treasurer

* Bernie G. Wolford

Noble Corporation plc - SVP of Operations

* Jeffrey L. Chastain

Noble Corporation plc - VP of IR & Corporate Communications

* Julie Johnson Robertson

Noble Corporation plc - Chairman of the Board, President & CEO

* Robert W. Eifler

Noble Corporation plc - VP and GM of Marketing & Contracts

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Conference Call Participants

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* Colin Michael Davies

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

* David Christopher Smith

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

* Gregory Robert Lewis

BTIG, LLC, Research Division - MD

* Jonathan R. Evans

SG Capital Management LLC - Research Analyst

* Kurt Kevin Hallead

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

* Madhav Sanwal

UBS Investment Bank, Research Division - Director and Equity Research Analyst

* Michael William Urban

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

* Radi Khalid Sultan

Crédit Suisse AG, 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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Good morning, my name is Devon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Noble Corporation Third Quarter 2018 Earnings Conference Call. (Operator Instructions).

I would now like to turn the call over to Jeff Chastain, Vice President of Investor Relations. Mr. Chastain, you may begin your conference.

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Jeffrey L. Chastain, Noble Corporation plc - VP of IR & Corporate Communications [2]

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Okay, thank you, Devon, and welcome, everyone, to the Noble Corporation's Third Quarter of 2018 Earnings Conference Call. We appreciate your interest in the company. A copy of Noble's earnings report was issued last evening along with all supporting statements and schedules. And you can find that on Noble's website. And again, that's noblecorp.com.

Before I the turn the call over to Julie, I'd like to remind everyone that we may make statements about our operations; opportunities; plans, operational or financial performance; the drilling business or other matters that are not historical facts; and are forward-looking statements that are subject to certain risks and uncertainties. Our filings with the U.S. Securities and Exchange Commission, which are posted on our websites, discuss the risks and uncertainties in our business and industry and the various factors that could keep outcomes of any forward-looking statements from being realized. And that includes the price of oil and gas, customer demand, operational and other risks. Our actual results could vary materially from these forward-looking statements, and Noble does not assume any obligation to update these statements. Also note that we are referencing non-GAAP financial measures in today's call. You'll find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure, and an associated reconciliation on the Noble website.

And finally, consistent with our quarterly disclosure practices, once our call has concluded, we will post our -- to our website a summary of the financial guidance covered on today's call. And that will review fourth quarter and full year of 2018 figures.

So with that, I'll now turn the call over to Julie Robertson, Chairman, President and Chief Executive of Noble.

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Julie Johnson Robertson, Noble Corporation plc - Chairman of the Board, President & CEO [3]

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Thank you, Jeff. Good morning, everyone, and welcome to our third quarter call. Your participation and continued interest and investment with Noble -- in Noble is greatly appreciated. Following my prepared remarks, Adam Peakes, our Senior Vice President and Chief Financial Officer will provide further details on our third quarter results and updated financial guidance for the remainder of 2018. Robert Eifler, our Vice President and General Manager of Contracts and Marketing, will update you on our fleet, including information on recent contract awards for several of our floating rigs and review of regional market opportunities. And Bernie Wolford, Senior Vice President of Operations will be available for further commentary when we open up the call for questions.

In addition to a review of our financial performance for the quarter, we want to bring you up-to-date on some encouraging developments at the company that we believe further support the view that a broadening industry recovery is underway. Specifically, I point to the progress noted in our latest financial report, the steady improvement in our active fleet count and the excellent regional distribution of our assets. Collectively, these improvements are expected to strengthen our competitive position as we approach 2019.

Our third quarter results showed another strong performance by the company. Total fleet operating days improved to 12% over the second quarter, which drove an 8% quarter-over-quarter increase in total revenues. Results for operating days and revenues extended a nice growth trend that has continued since the first quarter and both measures are now well-off the lows for 2018. Fleet downtime was higher in the quarter following some repair days for the standard-duty jackup, the Noble Joe Beall, which was largely responsible for downtime -- to our downtime figure rising above our expectations. However, for the year, total fleet downtime remains at an impressive 3%. Also, total operating cost was well within our expectations for the quarter, despite several rig reactivation programs and activities involving rig preparations ahead of contract commencements. Importantly, our safety results remained exemplary thanks to the dedication of our offshore workforce and onshore support team. As always, I want to offer my appreciation and gratitude to our global workforce for their commitment to Noble safety culture and customer focus.

On the marketing front, we have secured several contract awards since June, and I believe these awards provide convincing evidence of strengthening in offshore drilling business and demonstrate how Noble is realizing measurable gains from our operating strategy. During the third quarter, we disclosed a contract for the premium jackup Noble Sam Hartley for drilling assignment in the North Sea along with the program for the ultra-deepwater drillship, the Noble Tom Madden, for work offshore Guyana. In October, as disclosed in our monthly fleet status update, we reported contracts for the ultra-deepwater drillships Noble Don Taylor and the Noble Globetrotter II for work programs in the U.S. Gulf of Mexico and the Black Sea, respectively.

Finally, we can disclose this morning a drilling program for the ultra-deepwater drillship, the Noble Sam Croft, to be executed in the U.S. Gulf of Mexico. With this contract award, all 4 of our Hyundai-built, high-specification drillships are under contract. Together, these 5 contract awards have meaningfully altered the near-term available status of our fleet. Presently, our premium jackup fleet is fully committed while 8 of our 9 marketed floating units were under contract. More important, all of our premium jackups and an increasing number of our floating rigs will have a demonstrative performance record improving their competitive position as the offshore recovery continues.

Finally, I want to discuss our purchase of the newly constructed jackup rig, which we have named the Noble Johnny Whitsine. Several important factors combine to make this a superior opportunity. Given our long and successful operating history in the Middle East, where the rig will commence initial operations, we could see the demand for jackups increasing throughout the region. However, premium jackups such as our JU3000N flash rigs, and they are highly

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were prudent to be more rigged than required for the many of the planned-drilling programs. The Noble Johnny Whitstine CJ46 design is viewed as a fit-for-purpose solution that is capable of efficiently executing drilling programs in the Middle East well into the future. The combination of an attractive purchase price, seller financing and concurrent 3-year contract award presented compelling value. We closed the transaction in September and the rig is currently completing shipyard commissioning and customer upgrades ahead of the commencement of the 3-year-primary-term contract. We hold an option to purchase a second unit with a similar construct and compelling value. With the purchase of the Noble Johnny Whitstine, our jackup fleet has increased to 13 units, and we remain focused on identifying opportunity to expand our jackup improving rig fleets.

I'll now turn the call over to Adam.

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Adam C. Peakes, Noble Corporation plc - Senior VP, CFO & Treasurer [4]

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Thank you, Julie. Good morning, and welcome to everyone. Noble posted very solid results for the third quarter, extending the favorable trend that we have shown throughout 2018, supported by strengthening industry fundamentals and Noble's excellent fleet composition and position. Our third quarter performance demonstrated impressive growth in fleet operating days, higher contract drilling services revenue and an improving EBITDA profile. I'll begin today with comments on some third quarter financial highlights, including an explanation for variances as they relate to our third quarter guidance ranges for certain items on the P&L statement. I'll also provide some additional clarity on capital expenditures, including those related to our purchase in September of the new built jackup Noble Johnny Whitstine. And an update on our liquidity position and balance sheet. Then before turning the call over to Robert, we'll visit our guidance for full year 2018 and provide some thoughts on the fourth quarter.

For the third quarter, Noble reported a net loss attributable to the company of $82 million or $0.33 per diluted share. The reported results included discrete tax benefit of $25 million or $0.10 per diluted share. The result of a favorable adjustment to our deferred tax liabilities. Excluding the discrete tax item, Noble would have reported a third quarter net loss attributable to the company of $107 million or $0.43 per diluted share. We have included a non-GAAP supporting schedule with our press release, and the schedule can also be found on the Noble website at noblecorp.com. That schedule provides reconciliation of non-GAAP numbers to net loss attributable to Noble Corporation to income tax provision and to diluted earnings per share for the third quarter of 2018 and 2017.

Addressing our third quarter operating highlights, I'll begin with contract drilling services revenues, which increased 8% from the second quarter to $267 million and have improved 17% from our contract drilling revenues reported in the first quarter. The improvement of revenues was due primarily to higher total fleet operating days, which advanced 12% from the second quarter and were 31% better than the cyclical low seen in the first quarter. Higher activity among our premium jackups was a primary driver behind this growth with operating days up 18% and 46% from the second and first quarters, respectively. Improved second quarter performance on the jackups Noble Mick O'Brien, Noble Hans Deul and Noble Tom Prosser helped to drive jackup fleet utilization back above 90% for the quarter.

Third quarter revenues were partially offset by a modest increase in total fleet downtime to 5.2% from 2.1% in the preceding quarter. The increase was attributed to our service time to complete repairs on the standard jackup Noble Joe Beall. In the absence of this event, total downtime in the quarter would have been 1.8%. Contract drilling services cost in the quarter totaled $163 million or 8% above the preceding quarter, due largely to the improved fleet activity as well as rig reactivation programs and other costs associated with rig preparations in advance of contract commencements. These reactivation programs primarily involve the ultra-deepwater drillships: Noble Tom Madden, Noble Sam Croft and Noble Globetrotter II. Earnings before interest, taxes, depreciation and amortization, or EBITDA, improved in the third quarter to $92 million compared to $77 million in the preceding quarter. While our contract drilling margin of 39% was stable when compared to the previous quarter, the increase in EBITDA resulted primarily from the combination of increased revenues and lower-than-expected SG&A expense. With reference to variances from third quarter guidance, I want to clarify outcomes for SG&A expense and capital expenditures. SG&A expenses in the third quarter were slightly less than $15 million and well below our guidance of $20 million to $22 million and the second quarter result of $22 million. The favorable variance was due primarily to lower-than-anticipated professional fees.

Capital expenditures in the third quarter were $136 million, which included $94 million relating to the purchase of the new built jackup Noble Johnny Whitsine that the company acquired in late September. Approximately $34 million of the purchase price was paid with cash on hand and the balance of $60 million was seller financed with a 4-year term. Excluding the portion of the repurchase that was selling financed, capital expenditures for the third quarter would have been $76 million, or $42 million when all spending related to the Noble Johnny Whitstine is excluded. This adjusted total was in line with our quarterly guidance. A breakdown of the $42 million shows $29 million allocated to the fleet maintenance activities and $13 million to major projects and certain other activities. Capital expenditures included the Noble Clyde Boudreaux upgrade and reactivation, which was completed in August and reactivation programs for Noble Tom Madden, Noble Globetrotter II and Noble Sam Croft. The Tom Madden reactivation was completed in early October, and the rig commenced the first of 2 explorations wells earlier this week offshore Guyana. Commencement of operations on Globetrotter II is expected within next 2 weeks, while the recent award for the Sam Croft points to a first quarter 2019 start.

Robert will provide more details on the fleet in a moment. We ended the third quarter with total liquidity of $2.1 billion, down slightly from $2.2 billion at June 30. The decline resulted from a reduction in cash and equivalents, which ended the third quarter at $326 million compared to $411 million at June 30. The reduction in cash was due largely to the previously mentioned rig purchase and an increased use of cash due in part to rig reactivations.

Finally, total debt at September 30 of $3.9 billion compared to $3.8 billion at June 30. And included the addition of $60 million of seller-financed debt relating to the rig purchased.

Next, I'll update guidance for the full year of 2018 and include thoughts on the final quarter of the year. Our initial guidance for 2019 will be provided at the time of our review of fourth quarter and full year 2018 results. To begin, our assumption for total fleet downtime is maintained at 3%, which is consistent with our downtime experience over the first 9 months of 2018.

We're adjusting slightly full year contract drilling services cost to arrange a $620 million to $635 million compared to the previous range of $615 million to $620 million. The adjustment accounts for incremental reactivation programs. Client reimbursables are now expected to range from $25 million to $30 million compared to our previous range of $20 million to $25 million with the increase due primarily to a higher active rig count. The revised range of guidance results in the expectation for total operating cost in 2018 between $645 million and $665 million. Contract drilling services costs for the fourth quarter are expected to range between $169 million and $184 million compared to actual costs in the third quarter of $163 million. The higher range contemplates additional rig operating days and the cost related to 3 rig reactivations: The Noble Tom Madden, Noble Sam Croft and Noble Globetrotter II as well as cost associated with the Noble Johnny Whitstine as the new addition to our fleet progresses through rig commissioning and contract preparation.

Also in mid-October, the Noble -- the jackup Noble Sam Hartley commenced its recently awarded contract for operations in the North Sea contributing to the higher range of cost. We currently expect a 6% to 8% increase in fourth quarter total fleet operating days when compared to the previous quarter, continuing the positive trend seen throughout 2018. Costs associated with client reimbursables in the fourth quarter are expected to settle in a range of $3 million to $8 million.

DD&A expense for 2018 is expected to range from $484 million to $488 million compared to our previous guidance of $485 million to $495 million. The reduction in the range represents additional fine tuning of expense estimates following the rig retirements and valuation impairments recognized in the second quarter of 2018. For the fourth quarter, DD&A is expected to range from $112 million to $116 million compared to actual expense in the third quarter of $114 million. As a result of lower than expected expenses in the third quarter, we are reducing our full year guidance for SG&A expense to range between $75 million and $80 million, down from our previous guidance range of $83 million to $88 million.

Our SG&A expense for the fourth quarter is expected to total between $16 million and $21 million compared to actual expense of $15 million in the third quarter. Our guidance range for interest expense remains essentially unchanged for the full year at $299 million to $301 million while the range for this fourth quarter is $75 million to $77 million and compares to third quarter actual interest expense of $74 million.

Noncontrolling interest on our P&L representing the Bully I and Bully II 50-50 joint ventures with Shell are expected to total $5 million of expense in 2018 excluding the impact of the impairment charge for the Noble Bully I, which we recognized in the second quarter. We expect $2 million of expense from noncontrolling interest for the fourth quarter.

Capital expenditures for 2018 are being adjusted higher to $220 million. This accounts for the cash outlay of $34 million, relating to the Noble Johnny Whitstine while excluding the $60 million that is seller financed and payable in 4 years. Excluding the impact of the rig purchase, 2018 capital expenditures would total $185 million compared to our previous guidance of $150 million. The $35 million increase is largely attributable to contract driven expenditures as certain rigs prepare to commence to new programs and to expenditures associated with rig reactivations, including the acceleration of some spend for regulatory compliance. Fourth quarter expenditures are expected to range between $55 million and $60 million compared to $42 million in the third quarter reflecting the adjustment for the rig purchase. This guidance accounts for follow-through spending on our rig reactivation programs as well as the rig commissioning and contractual upgrades for the Noble Johnny Whitstine.

And finally, we continue to expect a 2018 tax benefit to Noble of 2% to 4%. Our guidance compares an effective tax rate in the third quarter of 8.8% adjusted for the $25 million discrete tax benefit. In closing, we remain encouraged by the steady improvement in our financial performance over the course of 2018. Total fleet operating days and revenues are well-off the lows seen in early 2018. Customer demand for premium rigs is increasing, and we continue to demonstrate strong execution through one of the industry's best and most efficient operational platforms. Also, our contract backlog, which totaled $2.5 billion at the close of the third quarter is once again benefiting from new contract awards. The signals suggesting we are in the early stages of the cyclical recovery are becoming more evident, and we expect these favorable trends to drive further financial improvement in the fourth quarter.

In addition, we are increasingly optimistic regarding prospects for 2019, as we experience a growing number of opportunities and benefit from our premium fleet and strong regional distribution.

I'll now turn the call over to Robert for further perspective on recent contract awards and additional details on the improving offshore market.

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Robert W. Eifler, Noble Corporation plc - VP and GM of Marketing & Contracts [5]

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Thank you, Adam, and good morning to everyone. Fundamentals in the offshore drilling industry continued to improve during the third quarter leading to what I believe is clear evidence of a broadening recovery. I'll speak to some of that evidence this morning as well as detail our recent contracting success in improving prospects for certain rigs in our fleet with near-term availability. Lastly, I'll provide an update on the opportunities in various global offshore regions. During the third quarter, it became increasingly evident that more customers were focused on floating rig needs.

Industry-wide tendering activity is on pace to outperform 2017 by 15% to 20%, and the global decline in backlog days per floating rig appears to have stabilized according to IHS. Although, contract durations remain short, crucially we anticipate that the last of the top-tier drillships under long-term warm stack will return to active status in the coming months, which could be a catalyst for pricing improvement. Noble was an active participant in this third quarters ramp-up in customer activity, which I'll cover in a moment.

Also, jackup activity, which has shown improvement all year remained strong in the third quarter with an expanding number of tenders outstanding across a broadening base of regions. Jackup demand remained especially strong in the Middle East and in the North Sea, where we have begun to see a gradual lengthening of contract durations. Industry-wide marketed utilization of the premium jackup fleet operating in the North Sea improved to 89% compared to 83%, 1 year ago. This building capacity constraint in the premium jackup sector continued to be supportive of higher day rates.

I now want to address some recent contract awards for our fleet beginning with our floating rigs. During our second quarter call, we noted a reactivation program on the ultra-deepwater drillship Noble Sam Croft was moving forward due a heightened level of confidence in securing a contract award for the rig.

In October, our expectations were realized with the award of a one-well program by W&T Offshore for work in the U.S. Gulf of Mexico. The drilling program is expected to commence in February 2019, with an estimated completion by the end of the first quarter. We are actively pursuing several follow-on opportunities and are confident that rig will find work following the W&T well.

The contract follows other recent awards for our ultra-deepwater drillships. In July, we announced the Noble Tom Madden had secured a firm 2-well program plus 3 option wells from ExxonMobil for exploration drilling offshore Guyana. The rig, which commenced the contract this week, is expected to stay busy into late 2018 and possibly longer should the option wells be exercised. The rig will join the Noble Bob Douglas, which has been drilling offshore Guyana since April 2018 under a 3-year program on ExxonMobil's Liza field development program.

Finally, in September, we secured a one-well program from Talos Energy for the Noble Don Taylor for work in the U.S. Gulf of Mexico. As we previously announced, the Don Taylor remains under contract to Shell until late February 2019 while collecting a day rate of $442,000, following Shell's decision to idle the rig prior to the end of its primary term contract. In addition to the Shell's idle day rate, the Taylor will collect a day rate for the alternative work with Talos, which began earlier this week. Following these 3 contract awards, and as Julie noted earlier, Noble now has all 4 of its Hyundai-built, high-specification drillships under contract for the first time since mid-2016. And the Croft, Madden and Taylor should benefit from an enhanced positioning as each rig establishes a near-term record of performance while competing for the numerous opportunities visible in 2019.

Additionally, with the reactivation of the Croft, we will have completed the 5-year special surveys as well as the 5-year BOP certifications on both BOPs on all 4 of the rigs making them available for uninterrupted service into 2023. Continuing with the discussion on our floating fleet, the drillship Noble Globetrotter II secured a one-well program plus an option well from Total for work in the Black Sea, where the rig has remained since the completion of its last assignment in January 2018. In addition to the day rate for the Black Sea assignment, the rig will be paid a previously agreed idle day rate by Shell of $185,000 through late December 2018. Thereafter, the day rates for the Globetrotter II will adjust to the higher of a floor rate of $275,000 or a rate to be determined by a market index.

Finally, the drillship Noble Bully II, which has remain warm stacked in 2018 will likely be kept warm into 2019, and we anticipate our joint venture partner Shell will return the unit to active status around mid-2019. The rig will continue to receive an idle day rate of $200,000 plus operating costs until further notice.

Shifting to our jackup fleet, the commentary remains very positive. All of our premium units are fully committed, and as Julie and Adam referenced earlier, we have opportunistically increased the fleet size and further penetrated an important region with the purchase of Noble Johnny Whitstine. The purchase increases our jackup fleet to 13 rigs, including our 2 standard duty units expected to be available later this month. In late October, the Noble Sam Hartley commenced a recently awarded 9-month contract for work in the North Sea resulting in the entire fleet of 12 delivered rigs deployed on active programs.

Our next available premium units are the Noble Hans Deul and Noble Tom Prosser in December, and the Noble Mick O'Brien in January. With these 3 units currently located in the North Sea, Asia-Pacific and Middle East, respectively, we are increasingly optimistic that follow-on programs can be secured in these attractive regions.

I now want to provide a review of regional market developments and opportunities beginning in the Western Hemisphere. The opportunity set in South America continues to impress with ample evidence in support of future rig needs. In Brazil, the focus remains on mounting interest in the free salt formation with both Petrobras and several international operators signaling the need for additional rig capacity. Currently, tenders are outstanding for multiple floating rigs, most with multi-year durations beginning in 2019. Also following the recent leasing rounds and presidential election, we anticipate that the momentum continues from both international majors and Petrobras. Both continued to establish large ownership positions in what remains' one of the world's most prolific hydrocarbon systems. In the Guyana basin, which includes Guyana, Suriname and French Guyana, we remain encouraged by the prospects for incremental rig demand in 2019 with further exploration of the region likely.

Following additional exploration success in 2018 offshore Guyana, the region's hydrocarbon opportunity continues to drive a high level of interest with participation from majors continuing to build. In the U.S. Gulf of Mexico, customer inquiries were higher in the third quarter compared to the second quarter, but opportunities were largely composed of short duration programs such as the one-well contracts secured by the Noble Sam Croft. The contracted rig count in the region has remained stable over the past year; however, the same period the supply has diminished to 36 rigs compared to 45 rigs in October 2017. The decline in supply is due in part to the relocation of highly capable units to other areas including the Noble Bob Douglas and Noble Tom Madden to Guyana and Noble Globetrotter I to Egypt.

Consequently, at the end of the third quarter, marketed utilization in the floating fleet remained above -- moved above 80% for this first time since 2016 with 25 rigs contracted compared to a marketed supply of 30. We are increasingly confident in the emergence of additional short-term programs in 2019 as the regions proven geology and established deepwater infrastructure support a number of lower cost drilling and production strategies. Also we believe recent operator activity in the region is an encouraging development with respect to future rig needs. In Mexico, earlier concerns driven by political change have largely dissipated and tenders have recently been issued with defined rig needs into 2022. We believe this demonstrate a growing level of confidence among the operators in the long-term attractiveness of the region. Also, in an effort to reverse the country's steep production decline, proposals are now in place that would designate additional capital for exploration and production initiatives, potentially leading to incremental rig needs.

I'll now shift my comments to the Eastern Hemisphere, beginning with the North Sea. The region continued to strengthen over the third quarter with 8 jackups having been awarded new contracts, including the 9-month program for our high-specification rig, the Noble Sam Hartley. The third quarter activity followed 6-contract awards over the second quarter. In addition, new tenders from customers emerged in recent weeks defining a gradual increase in average primary term, which is now up to 7 months compared to an approximately 4 months during the first quarter of 2018. We believe the region's improving fundamental backdrop will support further utilization improvement and rising day rates into 2019.

We are increasingly confident that our long history, strong operational execution and customer focus will lead to additional contract awards for our premium jackup fleet in the North Sea. In the Middle East, the marketed jackup utilization is approaching 80% with 129 jackups contracted against a total marketed supply in the region of 162 units. Currently, tenders outstanding potentially represent up to 70 rig years or more of visible demand, covering both incremental and replacement needs.

The majority of the requirements, which largely define commencement dates in 2019, address needs in Saudi Arabia and Qatar. Also, a more advanced rig specification is noted for a portion of the demand, which is highly supportive of Noble's fleet in growing presence in the region. In West Africa, prospects for incremental rig needs are subdued at the moment while plenty of idle rig capacity is present across the region. Both jackup and floating rig needs are visible in 2019, comprised primarily of short-term durations. However, we're hopeful that meaningful regulatory change will help drive demand in the region in the near and intermediate term in several of the more mature basins.

Finally, jackup demand in Asia-Pacific region is expected to improve in 2019 where we see demand offshore of Malaysia, Thailand, Vietnam and importantly, for Noble, Australia. The expectation for growth is supported by notable pickup in customer increase over the third quarter. A significant capacity and balance remains in the region, generally. However, in Australia, several jackup programs are visible with 2019 commencement dates, and the supply of jackups with Australian safety cases is limited. Rig selection for the opportunities in Australia is expected in the near term with the Noble Tom Prosser remaining one of the most capable and proven jackups in the region, and we are confident that the rig will be successful in finding follow-on work to its current program. Demand for floating units in the Asia-Pacific region is also expected to improve in 2019, especially offshore, Australia and Myanmar.

Outstanding tenders in these and other areas of the region are awaiting final rig selection. As you can see, incremental rig needs covering more jackup and floating units exist in more regions than we have seen in 4 years. This improved visibility along with a steady pace in new contract awards represents compelling evidence in support of progress in the offshore drilling cycle. This improvement started in the jackup sector where we have seen steady progress and tangible pricing improvement, especially for premium assets.

We now see the floating backlog decline per rig has flattened across floaters broadly and believe that the top-tier drillships, those with the attributes costumers most value, has tightened and will translate into pricing improvement in 2019. We believe all of this bodes well for next year where we see more contract opportunities likely across all of our regions of operations.

That concludes my comments, and I will turn the call back over to Julie.

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Julie Johnson Robertson, Noble Corporation plc - Chairman of the Board, President & CEO [6]

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Thank you, Robert. Noble has worked very hard to maintain a state of excellence and continue improvement in 3 areas: operational execution, financial discipline and strategic positioning. I believe our focus on these key factors along with our dedication to client satisfaction that comes from superior operational performance is producing more value that will become more apparent as industry fundamentals continue to improve.

Our strategy of operating a mix fleet of premium rigs has facilitated our ability to capture the early rewards provided by a recovering industry. As previously noted, our premium jackup fleet is currently fully committed, and there are strong indications for steady-to-higher demand going forward. Utilization of our floating fleet is on the rise with almost 90% of our marketed fleet now under contract. Also, our fleet is increasingly located in the offshore regions where customer demand is expected to increase with 85% of our jackups located in the North Sea and the Middle East, and nearly 70% of our floating units in the areas of the Western Hemisphere where they are accessible to some of the industry's most prolific and highly sought ultra-deepwater prospects. These includes areas of offshore Brazil, Mexico, and the Guyana basin.

Finally, and with regards to operational readiness, we believe our commitment to a defined process of continual maintenance and asset preservation through the cycle has positioned our premium rigs with the level of preparedness that supports faster and lower cost reactivations as well as smoother startups. For all the reasons, I have noted this morning, we enter 2019 with rising optimism, and we are confident in our ability to continue our long-term success in the offshore drilling industry. Noble is strategically positioned to address expanding customer needs, and we will continue to evaluate suitable acquisition targets that deliver compelling value.

Thank you, again, for your interest in Noble and I'll turn the call back over to Jeff.

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Jeffrey L. Chastain, Noble Corporation plc - VP of IR & Corporate Communications [7]

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Okay, thank you, Julie. Devon, we're ready to go ahead and begin the Q&A segment of the call. Would you please assemble the queue? Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Sasha Stanwell from UBS.

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Madhav Sanwal, UBS Investment Bank, Research Division - Director and Equity Research Analyst [2]

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Yes. So just to start off, if I could just ask a question about M&A, so it certainly seems to us that Noble has had a slight preference for jackups over floaters. I mean, I think it kind of makes sense just given what we've seen over the last couple of years but just as the outlook for floaters, specifically in terms of demand and then maybe day rates, starts to get better. I just want to understand how that might change?

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Julie Johnson Robertson, Noble Corporation plc - Chairman of the Board, President & CEO [3]

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Sasha, we are open to acquisitions of any type of -- both types of assets. As you know, we believe in our mixed fleet of assets, and we'll continue to pursue opportunities on both fronts. Granted, If we can here -- we're looking for the right things that fit our strategic design, our strategic outlook. And if they're accretive, and they will provide a good result for shareholders. We are open to floaters as well as jackups.

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Madhav Sanwal, UBS Investment Bank, Research Division - Director and Equity Research Analyst [4]

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Great, it's helpful. And just on the floating side, I think, the street has a lot of visibility just on the open demand, but something that there's less visibility on is just the direct negotiations that you guys are getting? So I just wanted to see if we can just get an update on how, maybe, the pace and the level of urgency in some of those direct negotiations has changed over the last -- let's say the last couple of months?

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Julie Johnson Robertson, Noble Corporation plc - Chairman of the Board, President & CEO [5]

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Okay, Robert -- I'm going to pass that to Robert to respond.

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Robert W. Eifler, Noble Corporation plc - VP and GM of Marketing & Contracts [6]

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Sure. So direct negotiations have always been a part of the contracting process. They dropped off essentially to 0 through the depths of the downturn. And we have seen a slight uptick here recently. Probably a few different drivers for that, importantly -- probably, independents starting to look to some of the drilling plans for 2019.

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Operator [7]

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Your next question comes from Sean Meakim with JPMorgan.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [8]

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So Julie now you have the Croft, the Madden, the Taylor all active obviously, very good to see. So I'd like to hear just maybe a little more in detail about how you plan to manage the tendering process, as you're trying to secure longer-term work for these rigs beyond those current contracts. It seems like maybe the Madden has the most options attached. Robert indicated, pricing improvement is expected in '19? I'm sure there is some debate among the investors about that. How do you balance the desire for term with rates that are still pretty anemic right now, but sounds like you're more optimist they could be on the rise. How do you plan to balance those different demands?

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Julie Johnson Robertson, Noble Corporation plc - Chairman of the Board, President & CEO [9]

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Sean, that's a question that we're all facing right now across the space. But we talk about that daily. We are not anxious to take terribly long term right now at the current rates, but we do think that rates will improve in 2019. I know there is a lot of debate about that, but we believe that they're moving in that direction. Obviously, there's not that many top-tier floating units that are still warm stacked, so we're getting things back to work. And I think with that, you'll start seeing some pricing pressures so increased, hopefully, day rates, but we're working hard on making sure that our contracting needs are going to meet our strategy and returns for shareholders. But we're careful about not going too long right now in anything and trying to look at options and maybe options that are priced against market conditions at the time that those options become available. Robert, do you want to add anything?

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Robert W. Eifler, Noble Corporation plc - VP and GM of Marketing & Contracts [10]

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No, I think that's just one of the things that we spend a lot of time evaluating here. And it's a balance, of course. And certainly as you get into late '19 and 2020, we have expectations that prevent us from accepting current market pricing on the -- in that timeframe.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [11]

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Okay. And then I was thinking about the new Whitstine rig, and that there is a sister rig that's available to you. What's the decision-making process on hitting the bid for that option? I guess, I'm thinking about, would you want to have a -- would you secure a contract in advance or something close to? I mean, effectively, are you able to market that rig now before you commit capital to it?

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Julie Johnson Robertson, Noble Corporation plc - Chairman of the Board, President & CEO [12]

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We are, and we, obviously, would much rather prefer to exercise that if we have contract in hand or at least a strong line of sight to a contract. But yes, we are able to market that rig, and we feel certain that that's an opportunity that we might have here going forward. But we certainly prefer to have a strong line of sight on something before we exercise that.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [13]

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And would the return hurdles look any different than for the first one?

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Julie Johnson Robertson, Noble Corporation plc - Chairman of the Board, President & CEO [14]

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No. The return hurdles like we said, the construct of the second unit is very similar to the first one. And it would not look any different.

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Operator [15]

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

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst [16]

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So I wanted to see if we can get a read on the magnitude and direction on leading-edge day rates for both the floater and jackup market. Obviously, a utilization activity has been increasing here and maybe give us a sense on the context, both kind of short duration programs and how that may compare or contrast to the leading-edge pricing demand for some programs that might start in late '19 or into 2020?

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Julie Johnson Robertson, Noble Corporation plc - Chairman of the Board, President & CEO [17]

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Okay, we'll turn that over to our resident expert, Mr. Eifler.

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Robert W. Eifler, Noble Corporation plc - VP and GM of Marketing & Contracts [18]

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Sure, okay. So I think separate that between jackups and floaters. On the jackup side, we've seen, in certain markets, a tightening throughout the year. And we have seen, I think probably the North Sea was leading -- it was a leading market there. And we've seen prices kick up, markedly, through the course of the year there. And we expect that to continue. I think it's important that there is a bifurcation right now between the more premium jackup segment and the more standard jackup segment. And we've spent a lot of time trying to target opportunities that use our jackups to kind of their full capacity. We're proud of what we've targeted. And we have seen some meaningful improvement through the rest of this year. For us, and you asked about later starts for us -- for -- starts out in 2019 and 2020 on the jackup side. We're watching the market closely, and we're a bit hesitant or having a more difficult time pricing out on that timeframe right now. I do think things will improve from here to there. On the floater side, I think, in the near term...

[Audio Gap]

we're still chasing utilization in the very near term. As I mentioned in the call, I think, at the top-tier of drillship segment you'll see some improvement in 2019 as that relatively small segment tightens. And I think that the whole space is having a lot of difficulty pricing 2020, 2021 and beyond. We certainly want to maintain dry powder for an improving market there.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst [19]

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Okay. Appreciate that color. And maybe, Julie, there has been a -- the reference to acquisitions and you mentioned you're open to both floaters and jackups. When you look at the -- and when your team looks at the rigs that are potentially available in the marketplace, is there a skew, maybe a near-term skew more toward jackups than floaters?

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Julie Johnson Robertson, Noble Corporation plc - Chairman of the Board, President & CEO [20]

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No, Kurt, there's really not, and we think that there is any number of compelling opportunities that are out and may be out there. And we look closely at all of them across the class of assets. So as long as assets that will fit into our strategy and will provide a return to shareholders, we are open to all.

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Operator [21]

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Your next question comes from the line of Jim Wicklund with Crédit Suisse.

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Radi Khalid Sultan, Crédit Suisse AG, Research Division - Research Analyst [22]

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This is actually Radi on for Jim. I want the follow-up on the direct negotiation conversation. I was wondering if you could speak to -- just at a high level, any key themes in your customer conversations whether a preference for fixed rates or with market mechanisms or an increase willingness to maybe take multi-year terms or maybe anything on the distribution of commercial risk. I mean, any color you can provide there will be helpful.

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Robert W. Eifler, Noble Corporation plc - VP and GM of Marketing & Contracts [23]

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So I think on the floater side, there is just -- there is not a ton of long-term out there. Certainly, those that have term or have visibility into programs that start, say 2020 or after, they're trying to lock in today's rates for sure, naturally. So I think that's one of the main components of some of the direct negotiations is trying to lock in some of that today. Jackup side in certain regions is actually is more supply driven where line of sight on the best or preferred available units is tightening in certain of the regions. And I think that's driving some of the conversations around. The work that starts in the out years.

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Radi Khalid Sultan, Crédit Suisse AG, Research Division - Research Analyst [24]

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And then my second question was actually on the Day and the Adkins. I mean those rigs have been idle for several years now, but they are 2 big and very capable semis, which just seems like there actually is demand for it in today's market. I'm wondering as you head into your 2019 budgeting process, what the marketing strategy and the outlook is for those 2 rigs? I mean, is it reasonable to assume that those 2 rigs come back in '19? Or is that more wishful thinking given where we stand today?

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Julie Johnson Robertson, Noble Corporation plc - Chairman of the Board, President & CEO [25]

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Radi, we have strong marketing prospects for those units. Like you said, they're good, big workhorse units that clients have always enjoyed operating. So we have big expectations for those units in the years to come. I'm going to ask Bernie to add to that.

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Bernie G. Wolford, Noble Corporation plc - SVP of Operations [26]

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Radi our focus there is -- starts with discipline. I mean, there's a significant amount of capital required to bring those 2 units back out. We have bid those on opportunities very recently and we'll continue to bid those rigs. But we're looking for opportunities that justify the commitment of capital to those units. They are great units. They are actually ideal for some areas in South America. And the tenders that are currently out there suit those rigs very well. But we're going to continue to view that with an eye towards capital discipline and ideal returns. And hold the dry powder while it still doesn't makes sense.

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Operator [27]

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Your 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 [28]

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Congrats on the Sam Croft contract. Robert, you obviously painted a pretty bullish picture as it relates to some of the visible tenders on the horizon, both on the floater and jackup side. On the floater side, I was hoping we get to, sort of, triangulate what, sort of, follow-on prospects you're most focused on for the Sam Croft? Would those be? And maybe the answer is everywhere, but the way you see it today is that rig most likely to find follow-on work in, sort of, the Gulf of Mexico/Brazil-Mexico region or is the opportunity you said really wider than that?

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Robert W. Eifler, Noble Corporation plc - VP and GM of Marketing & Contracts [29]

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Sure, so I'll first say that we had said before that we would only reactivate the rigs with line of sight into an improving market. And certainly, that's what we see here. So we're confident in the follow-on there. But essentially, everything we're looking at is in the Western Hemisphere.

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

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Okay, got it. And then second question, you guys continue to perform really well on the revenue side. I know you have some performance incentives or bonus and clauses in there for some of the Shell rigs. Question just on the rest of the fleet. Do you have that similar sort of mechanism in there for both the jackups and floaters and the rest of your fleet? And if so is -- are you realizing any bonus of revenues today or is that kind of a de minimis contribution right now?

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Robert W. Eifler, Noble Corporation plc - VP and GM of Marketing & Contracts [31]

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It's -- the rest of the fleet is a de minimis contribution. We do have a few pieces -- bonus pieces in a couple of contracts or we have had, but it's de minimis at this point.

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Operator [32]

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Your next 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 [33]

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Congratulations to your marketing team, it looks like over 100% utilization of the marketed drillships considering the 2 sublets that you'll capture extra rate on.

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Julie Johnson Robertson, Noble Corporation plc - Chairman of the Board, President & CEO [34]

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Thank you. Well, we're very proud of the marketing team as well. Thank you.

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David Christopher Smith, Heikkinen Energy Advisors, LLC - Partner & Senior Oil Service Analyst [35]

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Kind of the follow-up to the last question. I just noticed that the average drillship day rate went up think about $16,000 a day versus the prior quarter. Didn't see much change in the fleet status report, except for the Don Taylor going on standby in late August at a step down rate, so was hoping if you can provide some color on the drillship day rate increase?

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Robert W. Eifler, Noble Corporation plc - VP and GM of Marketing & Contracts [36]

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Yes, it's not -- that's not driven by -- it's not necessarily driven by near-term market improvements. That's really a timing issue related to some of our legacy contracts and the special idle periods. And as you mentioned, the sublets that fall in within those, it's really more of a calculation than it is representative of something that out of market that you don't know about.

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David Christopher Smith, Heikkinen Energy Advisors, LLC - Partner & Senior Oil Service Analyst [37]

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Appreciated. And the follow-up question, a couple of your peers that planned to merge with they had a pretty dominant share of the U.S. Gulf jackup market, at least the ILCs. I know your current jackup fleet is very well located. But looking at M&A opportunities, especially if you found terms similar to your recent purchase, would you contemplate returning to the U.S. Gulf jackup market?

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Julie Johnson Robertson, Noble Corporation plc - Chairman of the Board, President & CEO [38]

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Sure. Of course, we would. I mean, we're looking as we said earlier. We're looking for opportunities and we believe there's any number out there. Frankly, right now, we have customers who are asking us add to our fleet in order to bid on some of their jobs, in order to help them fill their needs because as you know we're very customer driven and focused organization. And if we can find opportunities that will help us profitably grow in a way that meets our customers' demands and shareholder returns then we're certainly open to that.

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Operator [39]

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Your next question comes from the line of Greg Lewis with BTIG.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD [40]

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Rob, in your prepared remarks, you kind of mentioned the pickup in demand for the higher-end rigs. I guess what I would say is you and everybody all the competitors have their own version of what sort of the premium rigs are yours are the 4 Hyundai rigs. Could you talk a little bit about how big you think that market is in terms of what does Noble view with those top rigs is it 30, is it 40s, is it 50. And then just in terms of -- the Croft is on a short-term contract. Just given that little -- that higher-end piece of the market, are we starting to see demand come in since there is a tightness for more longer-term contracts. Where now that some of these rigs are on these one-well contracts. The next contract is going to be something like 2 years plus.

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Robert W. Eifler, Noble Corporation plc - VP and GM of Marketing & Contracts [41]

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Sure. So let me -- first question first. So that -- what we define as top tier is equipped with 2 BOPs, 2.5 million pound hook load DP3 and dual derrick. We think that's a fair screen for kind of the top attributes of course there's others that you could throw in there, and as you mentioned, there's a lot of different ways to define it. That puts you around 50 rigs or so, and we think that's a fair way to look at the very top tier. I don't think that the next round tendering is going to go straight from this kind of short-term demand we're seeing directly into multi-year contracting and call it the mid-2019 period. I think we'll work through 2019 with a gradual increase in term.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD [42]

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Okay, great. And then it doesn't look like Petrobras has a couple multi-year contracts in the market, we'll see when they actually get signed. Was that something that Noble looked at? Or it doesn't look like you guys are actively engaged in that -- in those -- in that bidding?

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Robert W. Eifler, Noble Corporation plc - VP and GM of Marketing & Contracts [43]

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Sure. So yes, we are bidding with Petrobras. We entered Brazil in 1996. We've had up to 9 rigs. We've got a very long history there. With the Paragon move, we -- that -- our Noble's presence there stopped at the time as far as rigs. We maintained an office, and we have people down there. We're very much plugged into Brazil and are very comfortable operating down there. We also see a whole lot of opportunity there in 2019 and especially going into 2020. So yes, we're very much part of that market.

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Operator [44]

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Your next question comes from the line of Mike Urban from Seaport Global.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [45]

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So you talked about your optimism in Latin America and you just addressed Brazil. We have seen a bit of a pickup in the Mexican side of the Gulf of Mexico. The incoming administration there has said that they'll honor the existing leases and contracts. And so it feels like those recent contracts you've seen have been related to kind of that original -- those original bid rounds. Are your customers -- is there any caution there or sense of a pause there as Pemex and the regulatory environment gets sorted out under the new administration or is going to be full speed ahead?

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Julie Johnson Robertson, Noble Corporation plc - Chairman of the Board, President & CEO [46]

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I think they're moving full steam ahead. I mean, we are not seeing any hesitation on our customers' parts. I think that a lot of opportunities, but lease sales were very proliferative as you know down there. So I think they're all moving full steam ahead. Robert?

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Robert W. Eifler, Noble Corporation plc - VP and GM of Marketing & Contracts [47]

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Yes, I think generally there is an understanding that with production decline there, that regardless of administration improving production profile there is a must for the country. So I think a lot of people fall back on that and continue to believe that work is going to move forward and opportunities are going to continue to move forward for independents and majors.

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Operator [48]

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Your next question comes from the line of Jon Evans with SG Capital.

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Jonathan R. Evans, SG Capital Management LLC - Research Analyst [49]

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Can you just talk a little bit about, from the standpoint, your competitor that has a deal to build rigs, et cetera with Saudi in the joint venture? If that kicks slower than anticipated -- what's your assessment of kind of the Middle East and the demand then for jackups? Does it just accelerate even more in the Middle East because of that if those rigs are slower to be delivered than anticipated?

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Julie Johnson Robertson, Noble Corporation plc - Chairman of the Board, President & CEO [50]

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Well, I'll start out and then I'll ask Robert to comment. We believe that's a market that's not just open to that joint venture, but certainly for other participants as well. We have a great relationship with Saudi Aramco, and they have active tenders out currently. We believe any number of contractors are bidding on those, and we think they'll continue to have rig needs that we'll all be part of, in addition to the aero joint venture. But if the rig -- I really can't comment on if they're on course right now for those rigs to be delivered on the schedule they have set forth, but I'm not sure it will change anything. I think, Aramco wants competition in that market, and they'll continue to bring other players in.

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Robert W. Eifler, Noble Corporation plc - VP and GM of Marketing & Contracts [51]

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No, I think, if you see some delays there you'll Aramco simply bridging over to account for the delays with both the short-term contracts.

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Jonathan R. Evans, SG Capital Management LLC - Research Analyst [52]

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Great. And then just from the standpoint of the other jackup that you have the ability to buy and put on contract, et cetera? How would you fund that with the balance sheet? Just the same way that you did this, you'd just hit cash and have a deal with the financing? Or can you just talk a little bit about that?

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Julie Johnson Robertson, Noble Corporation plc - Chairman of the Board, President & CEO [53]

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It's very much the same as we did with the first one, but I'll ask Adam to expand on that.

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Adam C. Peakes, Noble Corporation plc - Senior VP, CFO & Treasurer [54]

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Yes, I mean, we're really excited about not only the one we announced, but the potential to execute on the second one from both a purchase price perspective but being able to plug it right into a contract. And then the financing piece is an important piece, so it's pretty modest cash out the door up front and then a very attractive 4-year sellar financing at a rate that is also very attractive. So we would think about that as the financing structure day 1, and then we'd figure out any other modifications we make to the balance sheet down the road.

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Operator [55]

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Your last question comes from the line of Colin Davies with Bernstein Research.

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Colin Michael Davies, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [56]

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I'm just curious around the Gulf of Mexico in particular. What the majors are doing there versus the independents? It seems interesting that a lot of these smaller well-to-well contracts are sort of independent lead? What are the majors saying to you about their programs and perhaps with the lens specifically into the Gulf of Mexico?

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Robert W. Eifler, Noble Corporation plc - VP and GM of Marketing & Contracts [57]

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Yes, sure. So I think everyone recognizes the Gulf as a low-cost operating region. Just driven primarily by existing infrastructure and general stability. A number of the majors who had taken a more portfolio approach to the rig contracting in the last upturn still have pretty significant portfolios of rigs. So I think given that, you probably hear a little bit less than you might otherwise expect because they've got rig capacity, and they've had that aligned for quite some time. There have been as I mentioned in the notes, there have been a little bit consolidation in some -- some changing hands of property and then some joint ventures in alignments that we think generally are a positive for the region, and we think through '19 and beyond, that you'll start to see some slight incremental upticks in activity, generally there.

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Colin Michael Davies, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [58]

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Yes, that's great. And just a quick -- a little bit more of strategic follow-up. The opportunity to get the jackup out of the yard of the seller financing with a contract to back it is fascinating. You obviously got the one more option on the next rig. But just more broadly as you scan the numerous new build projects and build rigs that are around the world and the market starts to strengthen? What further optionality do you have to expand that strategy? Or do you start to hit limits around, perhaps, the quality or spec of the rigs that are out there?

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Julie Johnson Robertson, Noble Corporation plc - Chairman of the Board, President & CEO [59]

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Well, Colin, as we mentioned earlier, we believe there are still a number of opportunities out there, and we're looking closely at all of them. And certainly, there will be yards that will have varying degrees of different types of assets, different capabilities, and we're going to look for ones that fit in well with our strategy. And ones that could provide a good return for our shareholders that we've said several times this morning. So yes, we looked closely to all of it. We obviously have a very robust engineering team, who can assess all the assets that are out there. And we're looking at all opportunities. We believe there is a lot of opportunities still remaining in the yards.

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Jeffrey L. Chastain, Noble Corporation plc - VP of IR & Corporate Communications [60]

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Okay. With that, we're going to close this morning's call. We appreciate everyone's participation and your continued interest. And we look forward to possibly speaking with you over the balance of the year. Devon, we appreciate your time in coordinating today's call. Good day, everyone.

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Operator [61]

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This concludes today's conference. You may now disconnect.