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Edited Transcript of NE earnings conference call or presentation 2-Aug-19 1:00pm GMT

Q2 2019 Noble Corporation PLC Earnings Call

United Kingdom Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Noble Corporation PLC earnings conference call or presentation Friday, August 2, 2019 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

* 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 - SVP of Marketing & Contracts

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Conference Call Participants

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* Ian MacPherson

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

* Jonathan R. Evans

SG Capital Management LLC - Research Analyst & Portfolio Manager

* Kurt Kevin Hallead

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

* Michael James Sabella

BofA Merrill Lynch, Research Division - Research Analyst

* Sean Christopher Meakim

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

* Taylor Zurcher

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

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Presentation

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Operator [1]

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Good morning, my name is Natalie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Noble Corporation Second Quarter 2019 Results Conference Call. (Operator Instructions) Thank you.

Jeff Chastain, Noble Corporation Vice President of Investor Relations, please go ahead, sir.

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

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Okay, thank you Natalie, and welcome, everyone, to the Noble Corporation second quarter 2019 earnings call. We appreciate your interest in the company, and in case you missed it, the copy of Noble's report issued last evening, along with all the supporting statements and schedules, can be found on our website, and that's noblecorp.com.

Before I 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 website, 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 these include the price of oil and gas, customer demand, operational and other risks. Our actual results could differ materially from these forward-looking statements, and Noble does not assume any obligation to update these statements.

Also, note we are referencing non-GAAP financial measures on the call this morning. You will find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation, on our website.

And finally, consistent with our quarterly disclosure practices, once our call has concluded, we will post on our website a summary of the financial guidance provided this morning, which will cover third quarter and full-year 2019 figures.

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, ladies and gentlemen, and welcome to our review of Noble Corporation's second quarter 2019 results. I appreciate your participation in today's call, and your continued interest in Noble.

Joining me today, in addition to Jeff, are Adam Peakes, our senior vice president and chief financial officer, and Robert Eifler, our senior vice president of marketing and contracts. Also here for the call today is Barry Smith, who joined Noble two months ago as senior vice president of operations. Barry has already proven to be a very affected [sic] and valuable member of the management team, and we are delighted to have him here with us.

In yesterday's earnings release, we reported second quarter EBITDA of $92 million on contract drilling revenues of $275 million. Our operational performance for the quarter was outstanding, leading to these solid results. We are encouraged by a number of markers in the business, as the recovery in the offshore market becomes increasingly apparent.

Total fleet operating days improved 13% from first to second quarter, due to higher activity across our asset classes, as we continue to benefit from the excellent placement of our global rig fleet, which has led to contract awards and extensions.

Utilization of our jackup fleet rose to 98% in the second quarter, up from 93% in the first quarter, while utilization of our nine active floating rigs, excluding the three cold stacked units, grew to 89%, up from 80% in the prior quarter.

For the first half of this year, total fleet operating days were 32% better than the same period in 2018, and we secured a little over $300 million in contract awards over the 6 month period. The awards, which contributed to our backlog of $2.1 billion at June 30, removed more than -- were more than twice the total of contract awards during the first six months of 2018.

In regard to HSE, we completed another quarter of solid performance in all areas and are grateful to the employees for their continued focus and commitment to our programs and initiatives, as well as those of out customers. During the quarter, we deployed our new, Noble-owned managed pressure drilling system for the first time, as the Noble Globetrotter 2 executed a drilling program in the Black Sea. We are encouraged by the expanding use of MPD technology and the growing list of opportunities that could lead to further deployments in the near future.

I would like to offer some perspective relating to the Paragon litigation and the charge we took this quarter. It has been almost 5 years since Noble completed the spinoff of its standard-duty fleet to create Paragon Offshore. Since May 2017, when the litigation trust for the purpose of pursuing claims against Noble was created, we have received many questions regarding the status of this matter, and we appreciate the importance of keeping you informed to the extent we can, and know you can respect the sensitivity that goes along with the litigation matters.

First, our view of the merits of the case have not changed. Having said that, I would also remind you that we have consistently maintained that we would be willing to settle before going to trial, if that could be accomplished on reasonable terms. There are a number of important reasons why we would consider a reasonable settlement. These include the complex factual issues, the uncertainty and risk associated with this type of litigation, the time commitment and distraction of our organization, the potential effect of the ongoing litigation and uncertainty on our business, and the substantial expense incurred in litigating the claims through a trial. We continually assess potential outcomes, including the likelihood that the matter is resolved prior to trial. We also remain in contact with the litigation trust. In accordance with all applicable standing -- accounting standards and the judgements that those standards require, we recorded a $100 million charge this quarter as G&A expense. We will continue to assess the matter as it progresses.

Furthermore, recognition of the charge in our financial statements does not suggest a pretrial settlement is imminent, nor does it suggest that Noble has a diminished view with regard to our ability to present a compelling defense to the claims brought by the Paragon litigation trust, and we will defend ourselves vigorously. As we have stated from the beginning, we believe Paragon Offshore, at the time of the spinoff in August 2014, was properly funded and solvent, and had appropriate liquidity that the claims brought by the litigation trust are without merit.

Like many industry participants, Paragon was hit unexpectedly by the downturn that has greatly affected the entire industry and persists to this day. Since this remains a matter of litigation, our ability to comment further is restricted, and we thank you in advance for your understanding of the limitations on our ability to comment.

Finally, as we disclosed earlier this week, we concluded another step in support of our long-term financial strategy with the execution of an amendment to the company's 2017 credit facility. This amendment, which was strongly supported by our bank group, provides Noble increased financial flexibility through the facilities maturity in January of 2023. For additional details on the amended facility, as well as a more in-depth review of our second quarter financial performance and an update on guidance, I'll now turn the call over to Adam.

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

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Thank you, Julie. Good morning, and welcome to everyone. As disclosed yesterday evening, Noble reported a net loss attributable to the company for the second quarter of 2019 of $152 million, or $0.61 per diluted share on total revenues of $293 million. The reported result included a net gain totaling $34 million, or $0.13 per diluted share, relating to the release of previously reserved tax positions following the settlement of the company's U.S. tax returns for the years ending December 31, 2010 and 2011. Also, as Julie discussed earlier, reported results included the recognition of a charge totaling $100 million, or $0.40 per diluted share, relating to the Paragon Offshore litigation. Excluding these two items, the company would have reported a second quarter net loss attributable to Noble of $86 million, or $0.34 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.

I now want to provide additional insights into second quarter performance and highlight some of the items that fell outside of the range of guidance we provided during our last conference call in early May. Contract Drilling Services revenues in the second quarter totaled $275 million, and were slightly better than revenues in the previous quarter of $271 million. The improvement was due in part to higher daily revenues on the drill ship Noble Globetrotter 2, which utilized a Noble-owned MPD system while executing a well construction program in the Black Sea. The rig's effective day rate, inclusive of the revenue associated with the MPD deployment, was approximately $398,000 in the second quarter. In addition, revenues in the quarter were favorably impacted by a 13% pick-up in total fleet operating days, which drove total fleet utilization to 82%, up from 76% in the first quarter.

Increased operating days were recorded on the drill ship Noble Sam Croft and the jackup's Noble Tom Prosser, as well as the Noble Johnny Whitstine, which commenced operations in late April, following the completion of client-requested upgrades and mobilization of the rig to the Middle East. These events were partially offset by a decline in average daily revenues, due largely to the completion of a legacy contract on the drill ship Noble Don Taylor in February.

Second quarter revenues were 6% better than our guided range of $255 million to $265 million, due primarily to the postponement of scheduled downtime for regulatory inspections on the jackup Noble Scott Marks and Noble Roger Lewis, which will now be completed in the third quarter. Also, revenues were favorably impacted by contract extensions on the Noble Don Taylor, Noble Sam Croft, and Noble Clyde Boudreaux.

Contract drilling services costs, total of $169 million in the second quarter, 2% below first quarter costs of $172 million, and 6% better than the midpoint of our range of guidance, which was $175 million to $185 million. Lower repair maintenance expenses, driven in part by the postponement of the regulatory inspections on the Scott Marks and Roger Lewis, as well as the reduction in other rig costs, contributed to the better outcome.

Higher average daily revenues for the Noble Globetrotter 2, combined with the lower contract drilling services costs, resulted in a second quarter contract drilling services margin of 39%, up from 37% in the previous quarter, while second quarter adjusted EBITDA totaled $92 million, up from $86 million in the previous quarter.

Interest expense in the second quarter totaled $69 million, compared to $70 million in the first quarter. This total was below our expected range of $71 million to $75 million, due primarily to assumptions around the timing and ultimate need to utilize our credit facility during the quarter.

Capital expenditures for the second quarter totaled $64 million, and were comprised of the following: $27 million of sustaining capital; $35 million relating to major projects, which included rig reactivations and the purchase subsea capital spares; and the$2 million of capitalized interest; the second quarter result compared to capital spending of $83 million in the first quarter; and an expected second quarter spending level of $90 million. Referring to our guidance for the quarter, the lower-than-expected result was driven primarily by the timing of expenditures relating to the jackups Noble Joe Knight and Noble Johnny Whitstine.

I now want to comment and provide some additional color on the recent amendment to our credit facility. In summarizing the amended facility, the most significant change is the elimination of the 55% debt to total capitalization covenant, and replacing it with a covenant that limits the amount of senior guaranteed debt to EBITDA. The new ratio is currently set at a maximum level of 4x, where it remains through year-end 2020, declining to 3.5x for the year 2021, and settling at 3x from 2022 until the facility matures in January of 2023. Also, there is a covenant limiting total borrowing on the facility to no more than 15% of consolidated net tangible assets, less other secured debt.

Total commitments under the amended 2017 facility were reduced to $1.3 billion, compared to $1.5 billion previously. However, we expect 2019 to be the low point for annual EBITDA generation, as we model our business for the next several years. Therefore, we feel very good about the improved access to the facility going forward.

Under the amended facility, total pro forma liquidity at June 30, 2019, was $1.4 billion, consisting of $154 million of cash and cash equivalents, and availability under the amended 2017 credit facility of $1.25 billion.

I'll now provide updated financial guidance, covering both the third quarter and the remainder of 2019. We are maintaining a fleet uptime factor of 96% in 2019. Through June 30th, 2019, our total fleet uptime of 97% remained ahead of our guidance. However, the increased activity and the corresponding jump in fleet operating days, combined with the mix and sophistication of our fleet, justifies a reasonable allowance.

We are once again raising our guidance for contract drilling services revenues in 2019 to a range of $1.07 billion to $1.09 billion, compared to our previous range of $1.04 billion to $1.07 billion. The increase is largely due to several contract extensions, leading to additional days in services.

Revenues in 2019 from client reimbursables are revised higher to a range of $45 million to $55 million, compared to our previous range of $35 million to $45 million. The adjustment is driven by requests from customers for certain rig modifications.

In the third quarter of 2019, contract drilling services revenues are expected to range from $245 million to $255 million, compared to $275 million in the second quarter of 2019. Our guidance reflects lower average daily revenues from the Noble Globetrotter 2 in the absence of a premium day rate for the use of the MPD capability. The guidance also reflects the Globetrotter 2 earning a reduced day rate equal to 80% of its floor day rate of $275,000 during the estimated 75-day period the rig is in transit to the U.S. Gulf of Mexico and in the shipyard, receiving customer-requested upgrades.

Our guidance also reflects expected out-of-service days for the Noble Don Taylor and Noble Sam Croft, as both rigs prepare for their relocations to Guyana and Suriname, respectively. Finally, we expect out-of-service days totaling an estimated 30 days for the Noble Scott Marks and 10 days for the Noble Roger Lewis, as both units complete regulatory programs that were delayed from the second quarter. And the Noble Houston Colbert will experience no operating days in the quarter, due to its relocation to the North Sea and shipyard work ahead of the commencement of a drilling program later this year.

Revenues from client reimbursables are expected to be in a range of $8 million to $12 million in the third quarter. Guidance for contract drilling services costs for 2019 are lowered slightly from our previous update to a range of $710 million to $725 million. Client reimbursables for 2019 are now expected to range from $35 million to $45 million, up from our previous range of $25 million to $30 million -- $35 million. Given the adjustment for reimbursable revenues noted earlier, our margin for this activity remains unchanged.

For the third quarter of 2019, contract drilling services costs are expected to range between $185 million and $193 million, compared to actual results of $169 million in the second quarter of 2019. The higher costs are due to increased repair and maintenance expenses associated with the Noble Globetrotter 2, following the rig's relocation to the U.S. Gulf of Mexico. Also, we expect to experience costs associated with the lead-up to the commencement of operations on the Noble Joe Knight, repair maintenance expenses for the Houston Colbert while in the shipyard, and mobilization expenses relating to the relocation of the Noble Don Taylor and Noble Sam Croft to Guyana and Suriname respectively. Costs associated with client reimbursables in the third quarter are expected to range from $5 million to $10 million.

DD&A guidance for 2019 is unchanged, at a range of $445 million to $460 million. We are also maintaining our range for the third quarter at $110 to $115, compared to actual expense in the second quarter of $111 million.

SG&A expense for 2019, excluding the $100 million charge associated with the Paragon litigation, remains at $65 million to $75 million, with our range of guidance for the third quarter consistent with Q2 guidance levels of $16 million to $20 million. This compares to adjusted expense in the second quarter of $16 million.

Interest expense for 2019 is being lowered to a range of $275 million to $280 million, compared to our previous range of $290 million to $296 million. The revised range is net of an estimated $8 million in capitalized interest relating to projects for the Noble Johnny Whitstine and Noble Joe Knight. Interest expense for the third quarter is reduced to a range of $65 million to $70 million, net of an expected $2 million in capitalized interest. The revised range compares to a previous range of $71 million to $75 million and the actual expense in the second quarter of $69 million.

Non-controlling interest on our P&L representing the Bully I and Bully II, 50/50 joint ventures with Shell, are now expected to range from $13 million to $15 million of expense in 2019, compared to the previous guided range of $8 million to $12 million. The increase, which represents higher joint venture profitability, is due to a reduction in projected operating costs, especially on the Bully II. We expect expense from non-controlling interest of $3 million to $4 million in the third quarter, compared to actual expense of $3 million in the second quarter.

Turning to capital expenditures, our guidance for 2019 remains at $250 million. The major components of capital spend include $90 million for sustaining capital, $122 million for major projects, including reactivations and subsea spares, $30 million relating to the purchase of the Noble Joe Knight, and $8 million relating to capitalized interest. Capital expenditures for the third quarter are expected to total $67 million, compared to $64 million in the second quarter, with the higher spend due in part to an increased pay suspend on the Noble Joe Knight as the contract commencement nears, plus higher client-requested rig modifications. The third quarter total includes spending of $28 million for sustaining capital, $37 million for major projects, and $2 million for capitalized interest.

Finally, our full-year 2019 effective tax benefit is expected to settle in the mid to high single digits. The eventual outcome is highly influenced by the geographic mix of revenues. Estimated cash taxes to be paid in 2019 remain at $20 million and relate entirely to our international operations.

As I conclude this morning, I remain encouraged by the steady progress demonstrated by our company over the first 6 months of 2019. EBITDA is running ahead of our expectations at the beginning of 2019, and is now on pace to reach or exceed $300 million for the year, as our latest guidance suggests. When compared to the second quarter, operating days in the third quarter are expected to experience a decline of approximately 8%, as we transition several rigs to new contracts. As you will see from our updated full-year 2019 guidance, we are confident that the fourth quarter will show increased activity and a nice financial improvement quarter over quarter, as these rigs return back to work post-relocations. This temporary disruption in what has been a steady trend of improving fleet utilization is supportive of our strategic imitative to align our premium fleet with key regions that offer exceptional long-term opportunity.

I'll now turn the call over to Robert for discussion on the offshore drilling environment.

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

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Thank you, Adam. Good morning, and welcome to everyone on the call. Since our last call in May, the offshore industry has continued to display evidence of a broadening industry recovery. There's no better indication of improvement than rigs returning to work, and the working rig count has increased by 9% in the floating sector and 6% in the jackup sector since the start of the second quarter. Both jackup and floating fleet utilization measures are as high as we have seen in 4 years, and customer inquiries hint at a further improved 2020.

In the jackup sector, stronger activity is apparent in an expanding number of regions, as Southeast Asia, Australia, and Mexico join the early moving North Sea and Middle East in full-scale recovery. Rate improvement is no longer isolated to select regions, but rather, is taking hold globally for premium and high spec units.

The floating sector is also recovering. While the pace of improvement is different than that of the jackup segment, we recognize a number of supportive developments, not the least of which is rate improvement for the most modern drill ships. There's a growing interest among customers to gain ownership in new, emerging plays, such as those in Guyana and Suriname, and we anticipate an improved global offshore spin year over year, with an upward trend generally into the future.

Offshore Mexico and Brazil, operators who have recently acquired highly prospective acreage positions, are beginning to complete initial evaluation, with priority drilling prospects identified, government approvals received, and early rig inquiries issued. Finally, the number of deep water exploration wells drilled in 2019 is on track for a 25% improvement over last year. The importance of this renewed focus on deep water exploration can't be underestimated and has already produced 10 announced discoveries through the first half of 2019. Each of these developments is a strong indicator of a continuing transition in customer interest to the offshore sector, which we believe will ultimately result in additional rig demand.

Addressing the status of the Noble fleet, I'm particularly encouraged by the level of contract coverage we have achieved for 2019, and more importantly, by the increasing level of coverage over the next 12 months. Of the available days remaining in 2019, 80% of our floating fleet, and 86% of our jackup fleet are under contract as of June 30, excluding cold stacked rigs. As we look forward to the 12 months ending June 30, 2020, 74% of the available days are contracted, including 76% of the floating days and 73% of our jackup days, again, excluding cold stacked rigs.

Our excellent contract coverage reflects our efforts to optimize the regional placement of our fleet, prioritizing areas with geologic opportunity and matching our rigs' capabilities with our clients' technical requirements. As Adam noted earlier, there are several rigs moving to new regions over the third quarter, as we continue this effort to improve rig placement. These moves include the Noble Don Taylor and the Noble Sam Croft, which are relocating to Guyana and Suriname respectively, to execute drilling programs in two locations where customer interest continues to build, as impressive resource potential becomes better understood. As rigs depart the U.S. Gulf of Mexico, the Noble Globetrotter I and Noble Globetrotter II will complete mobilizations into the region and have, or will soon, begin drilling operations.

In the Eastern Hemisphere, the jackup Noble Houston Colbert is currently in the process of relocating to the North Sea, where it is scheduled to commence a contract later this year, following the completion of a maintenance program. Also, in August, the new jackup Noble Joe Knight will begin its transit to the Middle East to begin a 3-year drilling assignment, which we expect to commence by the end of the third quarter.

As we consider contract opportunities for the floating and jackup rigs with availability by mid-2020, we remain confident that our rig placement, premium capabilities, and proven performance history position us well to compete for new work. The drill ship Noble Sam Croft is expected to complete its first well offshore Suriname in November 2019, and the drilling program there includes three additional one-well options, which could extend the rig into the first half of 2020. Opportunities in the Western Hemisphere continue to increase, and regions such as the Guyana-Suriname Basin, Brazil, and the Gulf of Mexico are expected to present excellent prospects for the rig.

In Southeast Asia, the current contract for the semi-submersible Noble Clyde Boudreaux is expected to keep the rig active into late April -- into April of 2020. We are evaluating numerous client requirements for conventionally more semi-submersibles in Southeast Asia and Australia, and believe the rig is advantageously placed for several of these programs. We expect our clients to commit to rigs for these programs during the second half of this year.

The semi-submersible Noble Paul Romano remains warm-stacked in the U.S. Gulf of Mexico. The rig continues to be considered for certain programs requiring conventional mooring. However, at present, we do not anticipate the rig will return to work before 2020.

Across our jackup fleet, seven of our premium rigs are expected to complete contracts by mid-2020. In October, the Noble Mick O'Brien is due to complete work offshore Qatar. Open demand in the Middle East continues to emerge, including in Qatar, and we are evaluating these opportunities, as well as those in other regions, as we look to match the rig's advanced capabilities with client needs.

In the North Sea, the Noble Hans Deul, the Noble Sam Turner, Noble Sam Harley, and Noble Houston Colbert are expected to be available between December of 2019 in the case of the Deul, and March to April 2020 for the three other rigs. The Noble Hans Deul contract includes a priced option that, if exercised, would keep the rig contracted until the second quarter of 2020. With the exception of some seasonal sluggishness during the winter months, we believe opportunities in the North Sea will remain plentiful, especially for premium rigs, and are increasingly confident that each rig will secure additional work at day rates well ahead of their current rates.

In Australia, the Noble Tom Prosser, which is currently due to complete a series of contracts by April 2020, is the most advanced jackup in the region, with rapidly expanding demand. Finally, the Noble Regina Allen is expected to finish P&A work offshore Eastern Canada by May 2020. We are marketing this premium unit in a number of regions globally.

I now want to review regional market developments and opportunities, beginning in the Western Hemisphere. In the U.S. Gulf of Mexico, utilization of the industry's floating fleet, excluding cold stacked units, ended the second quarter at 89%, compared to 80% in the first quarter. The improvement reflects a noticeable increase in exploration and appraisal activities, especially among independents, as well as the return of the Noble Globetrotter I, which will carry out a long-term program in the region. Since the close of the second quarter, the number of contracted rigs in the region has further improved, with industry utilization of the floating fleet rising to better than 90%. The tighter rig capacity has led to improved commercial terms, with spot market day rates for recent contract awards more than 40% ahead of those in late 2018. We believe the majority of rig needs have been secured for the remainder of 2019, with near-term customer demand expected to address programs commencing in 2020.

The intermediate term outlook for Mexico is improving, with several international operators finalizing plans to explore recently awarded deep water acreage. Although these plans define program commencement dates in 2020 and 2021, some limited deep water drilling is expected to commence by late 2019. As the second quarter concluded, only two floating rigs were active in Mexican waters, and we expect this number to rise to six or more during 2020.

With regard to Pemex, a focus on existing shallow water fields has resulted in several tenders for the provision of jackups. Local service providers have so far collected the majority of the awards, but due to the shortage of Mexican-owned rigs, some capacity is likely to be sourced from outside of Mexico. Should all 15 awards be executed, the number of contracted jackups could reach 38 by the end of this year, up from 20 at the end of the second quarter.

In South America, the rig count offshore Brazil is poised to rise for the first time in several years, with tenders outstanding from both Petrobras and the international oil companies. Including the recent contract awards, Petrobras is expected to increase its rig count to 20 by the end of 2019, while additional rig needs are likely into 2020 and beyond. IOCs could absorb an incremental two to five floated over the intermediate term, as exploration and appraisal activities begin on acreage awarded under the fourth and fifth pre-salt bid rounds. Three additional lease rounds are scheduled for the second half of 2019, which is expected to drive additional IOC interest.

Also, the Guyana-Suriname Basin, with its impressive resource potential, continues to draw customer interest, as evidenced by recent farm-in transactions. A total of five rigs, including the three Noble ultra-deep water drill ships, are expected to be in operation offshore Guyana by the end of 2019, compared to three rigs as the year began. Additional rig needs offshore Guyana are increasingly likely over time, as well as offshore Suriname, where further exploration is set to commence during the third quarter, led by the Noble Sam Croft.

Turning to the Eastern Hemisphere, North Sea jackup demand remained steady through the second quarter and is likely to remain stable, as several rigs benefitted from additional days under contract following the exercise of option wells. This added time could keep several working units active through the seasonal lull.

In the Middle East, more than 24 rig years were awarded to jackups over the second quarter, while an estimated 24 additional years are currently under evaluation. The impressive amount of regional activity follows the award of 48 rig years of work to jackups during the first quarter of 2019.

Active fleet utilization, excluding cold stacked units, has improved to 85% and is providing support for day rates, which have been improving through the year. Incremental demand for rig needs in late 2019 and beyond continue to surface in the region.

Activity along Africa and the eastern Med remains muted. Along West Africa, jackup rig demand is expected to improve modestly, as we evaluate opportunities into 2020. The same is true for floating rigs, with limited rig needs in locations such as Angola and Senegal, as well as along the east side of the continent, offshore Mozambique and Kenya. The floating sector continues to be hindered by significant idle capacity in the region. In the eastern Med and Black Sea, incremental drilling programs are expected to be limited for the immediate future, with ample rig capacity in place to address any incremental needs.

Finally, a broadening of the industry recovery is apparent in the Far East and Oceana, where 24 contract awards covering both jackup and floater rig needs were secured in the second quarter. Jackup rig demand in Southeast Asia is expected to improve over the remainder of 2019, and international drilling contractors should benefit, since the fleets owned by local service providers are now fully committed. This important regional development is expected to support higher day rates. Also, open demand remains visible for work programs offshore Australia, with many of these developing opportunities defining contract terms that extend into 2021. Our high specification jackup Noble Tom Prosser, which is currently committed into mid-2020, is advantageously placed in the region, with a premium equipment configuration and an outstanding performance history.

In closing, industry metrics continue to signal a state of gradual recovery. Jackup and floating fleet utilization, when adjusted to exclude cold stacked capacity, each exceeded 80% in June for the first time since September of 2015. And unlike earlier this year, when industry recovery was apparent in isolated regions, we are now witnessing a broadening event, as the majority of regions mentioned this morning are experiencing fundamental supply/demand improvement. Coinciding with this industry recovery, our sound marketing strategy is delivering the intended results, as evidenced by our excellent contract cover, exposure to key regions of strength, and robust customer base.

Thank you, and I look forward to providing an update on further progress in October. I'll now turn the call back 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, gentlemen. As we work through the year, I continue to be pleased with Noble's competitive position, including our fleet distribution, our technical leadership, and our financial flexibility, all of which serve as essential factors for establishing our strength through the cycle. Our premium jackup and floating rigs are located in regions that hold exceptional promise, promising both proven and emerging resource potential that drives strong customer demand, these regions, including the North Sea, Middle East, and Australia, areas where more than 90% of our jackups currently or will shortly reside. Almost 80% of our active floating rigs will be soon be [sic] located in Western Hemisphere regions that, as Robert noted previously, offer exceptional growth prospects, including the Gulf of Mexico, Guyana, and Suriname.

We continue to implement new technologies as they evolve and develop into sound operating practices. These advances are proving to create efficiencies in areas around automated machines controls, reduction in human interfaces with machinery, and standardized processes to provide consistently sustainable technical limit capabilities and an even safer environment for our operations teams. While we are just beginning to see the benefits of this young technology, it is anticipated that there will be advantages gained in terms of offshore well design and development, ensuring that we continue to meet and exceed our customers' drilling programs.

We maintain our core focus on financial discipline, which is essential for longevity in a cyclical business. A steady de-leveraging of the balance sheet and ensuring a solid liquidity runway remain our key financial objectives.

I would also like to note that, effective with the fleet status report scheduled for September 9, we will be providing day rates on a go-forward basis, unless restricted by our customers, in order to promote greater transparency and provide insight to our commercial progress.

In closing, we continue to execute well on all of the things within our control, and as always, I want to thank all of the employees for Noble for their continued support and commitment to our company. While we feel that we have moved off bottom and are clearly entering into what will prove to be an important recovery period, it has been a long and challenging downturn, and the Noble team members have remained focused on always doing the right thing, and I am so grateful for their loyalty and dedication.

I'll now 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, Julie, thank you. Natalie, we're ready to go ahead and begin the question-and-answer segment of the call, so if you'll assemble the queue, we'll take our first question and ask all of those in the queue to limit themselves to one question and a follow-up, please. Natalie, go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Ian MacPherson of Simmons.

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

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Great quarter, and very pleased to hear that the day rate transparency is coming back. We agree that will help us, but will help you commercially as well, so looking forward to that.

I wanted to ask a question on Guyana-Suriname, Julie, you or Robert. Just given the multiyear visibility there and the increasing evidence that day rates are moving higher, has the conversation there begun to evolve towards more of a mutually acceptable view on long-term contracting, or do you think that this will continue to play out incrementally with your key customer and the other customers that may be adding rigs to the region over the next 5 years?

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

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Well, Ian, first of all, thank you, and thank you for participating this morning. We are in dialogues, obviously, with our main customer in that region, and we do think that it is moving to a more mutually beneficial relationship. We are certainly working on that with them right now, and we think we'll have something to release fairly shortly. But until then, we don't have a lot more to add. I'll ask Robert to comment, but yes, that region is definitely firming up and we're very excited about the future there.

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Robert W. Eifler, Noble Corporation plc - SVP of Marketing & Contracts [4]

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My only comment would be that, you know, the drilling plans down there change regularly, and the known resources also continue to change as they make more and more discoveries. So it's a dynamic environment, but all hugely positive for the industry, especially for the customers participating in that region.

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Ian MacPherson, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [5]

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Okay, well we'll stay tuned on that. I also wanted to ask about the Tom Prosser because you seemed to shine a particular light on that rig in the prepared remarks. I sort of infer that maybe that is a rig that has the capability to set a new higher mark in the market for pricing when its opportunity comes. But you do have option wells that look like they could occupy a good bit of next year, so what are you contemplating with regard to when that rig could reprice beyond its options and establish, hopefully, a higher day rate level for the top end in that region?

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

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You know, I will tell you that that rig has an incredible reputation in that market, and we're hearing feedback on that daily. But I'll certainly ask -- I'll let Robert respond to your question, but that's going very well in Australia.

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Robert W. Eifler, Noble Corporation plc - SVP of Marketing & Contracts [7]

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So as Julie mentioned, the performance is good down there. We are not quite ready to talk about repricing there. We are certainly in a number of conversations. As you know, that region is somewhat isolated and with limited supply, and it's hard to ramp up supply quickly there because of the safety case regulations in the country. So we are talking to a number of different customers about extended programs for work that runs all the way out into 2022. None of that's final, but there is a great deal of visibility, you know, for quite some time to come there, and as we mentioned as well, likely that that region supports another jackup at some point, as well. I wish I had more color for you; we're just a little bit early in some of the conversations there.

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Ian MacPherson, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [8]

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No, that's fine. We'll see the coming fleet status reports with greater visibility. Thanks, I'll pass it over.

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Operator [9]

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

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [10]

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So I wanted to kind of focus on sizing up the Western Hemisphere. You mentioned momentum is building in a lot of the different markets. You've done very well in the Guyana-Suriname Basin, obviously. I think you sized the Mexican side of the Gulf of Mexico as maybe four incremental rigs in 2020. Brazil should see more rigs between Petrobras and the IOCs. Could you maybe just kind of help us size what, on the floating side, what activity could look like in '20 over '19 just in the Western Hemisphere? If we take all that together, what's the incremental opportunity year over year in '20?

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Robert W. Eifler, Noble Corporation plc - SVP of Marketing & Contracts [11]

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Sure, so I mentioned in the transcript piece four rigs in Mexico. I think that number -- four incremental rigs, excuse me. I think that's a fairly safe number, based on what we see today. There are deadlines for drilling there, and we hear a lot of positivity about moving forward on existing timelines there. That number could be a bit higher. It depends on timing, and it depends -- you know, a lot of this exploration work, and so it's short term in nature. So if some of that exploration work is strung together, then we see the number coming in kind of at the incremental four that we mentioned. If some of those end up overlapping for whatever reason, due to individual customer preferences, that number could actually tick higher for a period of time in the country.

Down in Brazil, Petrobras is going to run up to 20 rigs this year, as we mentioned. We think that, for sure, their fleet will grow larger than that, and we think that we see some of that in 2020, you know, 5 to 10 incremental units. It's really difficult to say at this point. You know, getting to 20 where announced supply today took a bit longer than anyone was anticipating there, and so ramping up further from there, timing is difficult to predict, but we do see an additional ramp-up, including probably some seventh-gen usage there, and that's just with Petrobras. On the IOC side, we mentioned two to five rigs, and we think that all of those will be leaning heavily towards seventh-gen rigs.

And in between Mexico and Brazil, a little more difficult to say. We commented earlier already on Guyana-Suriname, but there is a number -- there are a number of exploration wells planned for late this year and early next year, so I think that follow-on from that is probably more of a 2021 event. But I also think there's the potential for some additional exploration work to come -- to become visible between now and 2020, both on the floating side and the jackup side in that Caribbean region.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [12]

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And I think -- I appreciate all that detail, and I think -- but the U.S. Gulf of Mexico was a notable omission there. How does that factor in?

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Robert W. Eifler, Noble Corporation plc - SVP of Marketing & Contracts [13]

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So we've seen a ramp-up among independents for quite some time now. The majors have essentially had their rig fleet in place. But decent exploration success recently, and we're encouraged I think by the talk we hear on the street about relatively high usage among the independents planned for 2020. So as you know, their plans tend to be a bit more fluid than some of the majors, but certainly we're hearing some encouraging news about extending current contracts and potentially bringing on an incremental rig or two.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [14]

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All right, thank you for that. And then, just you know, with 2020 utilization across your floaters getting close to 80%, just how are you approaching the potential to reactivate any of the cold stacked units, and do the work programs out there support that type of effort, at least in terms of consideration? And just, the viability of that type of approach in terms of capital deployment next year.

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Julie Johnson Robertson, Noble Corporation plc - Chairman of the Board, President & CEO [15]

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Sean, as we always have, we're going to continue to show a great deal of discipline around reactivations. Obviously, if there's something out there, and you know, we continue to believe that there will be, that will allow us to reactivate any of our cold stacked units, we are anxious to do that. But we're not going to do it until, you know, the contract will reward us for the investment put into the unit and to get a good return for stakeholders. So you know, we're anxious to get to that point, but we're not there yet, and we will certainly be very prudent in how we approach that.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [16]

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Fair enough. Thank you for that feedback, Julie.

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Operator [17]

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Our next question comes from the line of Taylor Zurcher of Tudor, Pickering and Holt.

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [18]

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I wanted to just follow up on one of the prior questions. Robert, I think you said the ISEs in Brazil, that you see visible demand for two to five more rigs, all seven-gens, and then four in Mexico. When we look at the same ISEs that are demanding those rigs, I mean, a lot of them already have seven-gen rigs under long-term contract, and so I'm curious, for that incremental activity you see -- well, for the activity you see, is it truly incremental, or do you think there's a piece of that that will come from just rigs that are currently on long-term contract transitioning between geo markets?

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Robert W. Eifler, Noble Corporation plc - SVP of Marketing & Contracts [19]

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Yes, fair question. One of the most difficult, you know, conditions in our industry right now is the short-term nature of all of the ultra-deep water work, as you well know. Terms are increasing. I think we've seen, on average months awarded, a slight uptick quarter on quarter for a bit of time now. But still, compared to the normal cycle of ultra-deep water contracting, terms remain short, and there are a great deal of rollovers for the rest of this year and into 2020. So when I say incremental, I'm talking about new programs coming on.

You know, it's difficult to predict exactly who's going to extend and who's not because of all the rollovers. But as I mentioned earlier, we are getting great feedback from a number of different customers about their intentions to extend on rigs right now, and I think a lot of those conversations, not necessarily just with us, but also, in large part with our competitors, are kept to direct negotiations right now. And we hear a lot of talk about direct negotiations existing, and I think a lot of that relates to continuing capacity on these rollovers.

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [20]

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Okay, thanks, and a follow-up on the jackup side. You talked in the script about Southeast Asia and Mexico now being in full recovery as well. Your fleet today is essentially all in the Middle East and in the North Sea, and so just curious if you could kind of compare and contrast the -- or give us some color on where cash margins for Mexico and Southeast Asia shake out relative to the two markets you're primarily in today. And then for Mexico, I tend to think of some of the Pemex work, that the [TNC] there being a bit more onerous, so just curious if that's the type of work that you'd be interested in bidding on moving forward.

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Robert W. Eifler, Noble Corporation plc - SVP of Marketing & Contracts [21]

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Yes, so margins in Southeast Asia are roughly equivalent, I think, to the Middle East, maybe a slight tick down. Mexico, a more difficult story on the margin side because there are a number of different ways that Pemex contracts down there in terms of the fleet that's provided with the rig. And we don't have a ton of detail yet on these 15 tenders that have come out in that region. So you know, when we were in Mexico before, we made great margins in that country, and we were the largest drilling contractor there.

The [TNCs] you mentioned are true. They have some constitutional rights there that some have found, I guess, to represent some risk in the past. We've been comfortable with it. I did not mention Mexico earlier in the context of being a region that we are overly likely to bring a jackup into, but I do think it's an important component of the supply/demand equation going forward.

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [22]

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Understood. I appreciated the responses. I'll turn it back.

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Operator [23]

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Our next question comes from the line of Kurt Hallead from RBC.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst [24]

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Hey, did Julie, you know, you guys, back at your analyst dinner at the end of June provided a little sensitivity table around, you know, the required day rates for jackups and floaters needed to kind of get you to a cash flow positive dynamic. I was wondering if you'd just give us an update on how some of the discussions are going, maybe, in the marketplace, how much conviction you guys have in the prospect of leading-edge rates kind of getting you to those, you know, 300,000-plus kind of rates for floaters as you get into the second half of '20 and into '21. Any insights on that would be really helpful.

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

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Okay. You know, we've said all along that we've -- looking to the latter part of 2020. I know some people were thinking it might happen earlier than that, but we're continuing on what we thought all along, that toward the end of 2020, or the second half of 2020, is when things will hopefully start to pick up. You know, all the numbers that Robert read through in his remarks this morning certainly show how tight the market is becoming, and so that's obviously going to lead to that. But we're feeling very good. I mean, the numbers that we put up on the chart that you're referring to, we thought were very much within reason and within our grasp, certainly within that timeframe.

So we're still feeling, you know, positive. I know there's been a little pullback, perhaps, in sentiment on the part of some of our peers, but we're still feeling -- but we've never been quite as bullish as they were, and we're still feeling very positive.

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

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Okay, great; appreciate that. And maybe just in the context, then, as you think about the cash flow generation on a go-forward basis, you know, do you expect or anticipate that you could potentially get to a free cash flow positive level as you exit 2020? Is that a feasible dynamic?

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Julie Johnson Robertson, Noble Corporation plc - Chairman of the Board, President & CEO [27]

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Kurt, that certainly is our objective. I think that's going to be a real stretch. But it certainly is our -- you know, getting back to free cash flow positive is clearly first and foremost on our radar. And we're pushing for that, but I think it's going to be a bit of a push, but we're working on it.

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Operator [28]

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

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Michael James Sabella, BofA Merrill Lynch, Research Division - Research Analyst [29]

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I was hoping we could just, Adam, go back to the discussion on the covenant.

So does -- given the fact that the revolver kind of takes up most of the availability where EBITDA is today, does that mean next steps here are probably to go back to the priority guaranteed market, and if so, could we get some detail around this timing or size, current dynamics in that market?

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Adam C. Peakes, Noble Corporation plc - Senior VP & CFO [30]

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Yes, look, I mean, our financing plans are not to continue to live off the revolver, and so I think we're fortunate that we've got a larger revolver for a company our size, and I think we're very comfortable at $1.3 billion in the amended facility. We've got lots of headroom there to give people comfort on the liquidity picture going forward.

That being said, we're absolutely going to look for opportunities to term out any revolver draws, and priority guaranteed market could be one that we use. I mean, we've got several different options and different levels that we can finance at, and I think we're going to monitor the markets closely and figure out what's the most attractive alternative. But you know, if the markets are there in the second half of this year, as conditions in our industry improve, we're absolutely going to be opportunistic.

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Michael James Sabella, BofA Merrill Lynch, Research Division - Research Analyst [31]

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Great, thanks. And then, if we could just kind of talk about the cost guide, and it looks like 4Q is still expected to be running a little higher than where it's been in the first half. Should we be thinking about 4Q as a good run rate heading into 2020, or are there still kind of some one-time things in there that are playing with that number?

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Adam C. Peakes, Noble Corporation plc - Senior VP & CFO [32]

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Well, I don't think we want to be in a position yet where we're providing guidance beyond what's implied in our fourth quarter. We're in the early stages of our budgeting process for 2020. However, I will say that fourth quarter will be the beginning of a -- you know, most all of our rigs being active, and so that cost structure, consistent with the high utilization of our fleet, is not a bad place to start.

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Operator [33]

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And our next question comes from the line of John Evans of SG Capital.

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Jonathan R. Evans, SG Capital Management LLC - Research Analyst & Portfolio Manager [34]

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Yes, your competitor yesterday talked about their deal with Saudi from the standpoint of their joint venture, that they pushed out two of the rigs that they were supposed to already have ordered, et cetera. And I was just hoping maybe you could give us any kind of update on the dynamic in the Middle East for jackups. Are those push-outs making the nearer-term market tighter, or do you see any opportunity for rates to move up or more incremental demand because of those push-outs and new builds?

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Robert W. Eifler, Noble Corporation plc - SVP of Marketing & Contracts [35]

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No, I don't think that that dynamic changes very much at all, frankly. I think the more important dynamic to think about in the Middle East right now is that fact that, of the 190-odd jackups there, 50% of them are over 30 years old. And you're seeing some of the -- not only the largest consumer of jackups in the world with Aramco, but also several other major consumers in the region show a clear preference to more modern units, and that's a new development. As some of these older rigs roll, and you're already seeing this is Saudi, and you're hearing rumors about it elsewhere in the Middle East, as these older rigs roll, I think you'll see replacement of those with more modern rigs. And when you look at the broad supply/demand on the jackup space, that's going to be a big driver towards utilization on the premium and high-spec units.

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Jeffrey L. Chastain, Noble Corporation plc - VP of IR & Corporate Communications [36]

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Okay, Natalie, I think we're going to go ahead and close the call. We appreciate everyone's participation this morning, and Natalie, your coordination of the call today. Good day, everyone.

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Operator [37]

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This concludes today's conference call. You may now disconnect. Have a great day.