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Edited Transcript of PACD earnings conference call or presentation 8-May-20 3:00pm GMT

Q1 2020 Pacific Drilling SA Earnings Call

LUXEMBOURG May 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Pacific Drilling SA earnings conference call or presentation Friday, May 8, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bernie G. Wolford

Pacific Drilling S.A. - CEO & Director

* James Whelan Harris

Pacific Drilling S.A. - Senior VP & CFO

* Lisa Manget Buchanan

Pacific Drilling S.A. - Senior VP, General Counsel & Secretary

* Michael D. Acuff

Pacific Drilling S.A. - SVP of Commercial

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Conference Call Participants

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* Ceki Aluf Medina

Southpaw Asset Management, LP - Partner and MD

* Devon Xu;Wells Fargo;Investment Banking Analyst

* Patrick John Fitzgerald

Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst

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Presentation

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Operator [1]

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Hello. And welcome to Pacific Drilling's First Quarter 2020 Earnings Call. My name is Monique, and I'll be your coordinator for today's event. Please note this call is being recorded. (Operator Instructions)

I will now hand over to your host, Lisa Buchanan, Senior Vice President and General Counsel, to begin today's conference. Thank you.

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Lisa Manget Buchanan, Pacific Drilling S.A. - Senior VP, General Counsel & Secretary [2]

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Thank you, Monique. And welcome, everyone, to Pacific Drilling's First Quarter 2020 earnings call.

Before I turn the call over to Bernie, I'd like to remind everyone that any statements we make during this call that are not historical in nature are all forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally identifiable by the use of the words such as anticipate, believe, expect, project or other similar words and include any statements we may make concerning the future impact of the COVID-19 pandemic on our business, our future financial and operational performance, cash balances and earnings expectations, our future liquidity position and possible efforts to improve our liquidity position and our market outlook, including forecast of trends, future client contract opportunities and day rates. These statements are not guarantees of future performance, and our actual results could differ materially from any forward-looking statements made during this call due to a variety of factors, including those described in the Risk Factors section of our 2019 Form 10-K and other filings with the U.S. Securities and Exchange Commission, which you can find on our website at www.pacificdrilling.com. We will also be filing our first quarter 2020 Form 10-Q with the SEC later today, and you will be able to find that on our website as well.

You should also note that we use certain non-GAAP financial measures during this call. You will find the required supplemental disclosures for these measures, including the most directly comparable GAAP measure and associated reconciliation, in our earnings release, which is available on our website.

I will now turn the call over to Bernie Wolford, Chief Executive Officer of Pacific Drilling.

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Bernie G. Wolford, Pacific Drilling S.A. - CEO & Director [3]

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Thanks, Lisa, and good morning, everyone. Welcome to our first quarter 2020 earnings call. Joining me today, in addition to Lisa, are Jim Harris, our Chief Financial Officer; and Michael Acuff, Senior Vice President of Commercial. We are conducting this call remotely today as we continue to mitigate the risk of COVID-19 exposure through social distancing.

These are indeed extraordinary times. The coronavirus outbreak has caused disruptions of an unprecedented scale, impacting international economies, logistics, oil markets and, in fact, the entire global community. Our highest priority continues to be the health of our employees, partners and communities. We are addressing this through many mitigations, including work-from-home measures adopted mid-March, severe travel restrictions, isolation and quarantines as appropriate, disinfection, social distancing and coronavirus testing made available for our offshore crews. The Pacific Drilling team has responded in an unprecedented manner to manage risk and maintain business continuity. I want to specifically recognize the incredible dedication and commitment of our rig crews who overcame significant logistical, travel and safety challenges with extraordinary professionalism. In addition, our clients have been supportive and constructive as we have jointly responded to ensure crew safety and mitigate significant logistical challenges.

The outlook for our industry has turned decidedly downward owing to excess production and COVID-19-related demand disruption. This is evident in cuts to capital expenditure programs reported by our clients and numerous drilling program delays announced over the last 2 months. Extrapolating from these insights, we expect reduced demand for our services for the balance of 2020, next year and possibly beyond. We have taken a number of measures to significantly reduce our spending in light of reduced demand of our own contract opportunities while preserving our capacity for operational excellence. These measures will reduce our cash burn rate from May 2020 forwards and meaningfully extend our liquidity runway. In addition to these cost-cutting measures, we are actively considering longer-term strategic alternatives to maximize value for all of our stakeholders. As noted in our earnings release, we drew the full amount available under our $50 million revolving credit facility and finished the quarter with $274 million of unrestricted cash. Also, on April 1, we made our semiannual cash interest payment of $31.4 million.

I will now transition to a summary update of our drilling operations. Following the end of the quarter, the Pacific Khamsin completed work on Equinor's Monument discovery well and commenced work for Total in their South Platte field. The crew and leadership responded incredibly well to COVID-19-related challenges to safely and efficiently finish the Monument well.

The Sharav completed work for Chevron in early April and is now smart-stacked offshore Louisiana. This brings to an end a program spanning 5.5 years, where the Sharav performed as a benchmark rig, delivering Chevron's most challenging U.S. Gulf of Mexico wells.

The Bora completed work on the first deepwater well offshore Oman for ENI in early April. We subsequently moved the rig to a stacking location in Oman. There too, our crews performed with extraordinary professionalism to complete the program safely.

Also in April, we received a notice of force majeure from Petronas for the Santa Ana Mauritania P&A program. We demobilized the Las Palmas under a force majeure rate before transitioning 30 days later to an extended standby rate in anticipation of returning to Mauritania to complete the program later this year or early next. The Santa Ana team met all challenges and exceeded the expectations of many to efficiently and safely wind down this program.

Turning to the market for our fleet of sixth- and seventh-generation drillships. We have seen numerous announcements regarding project delays or cancellations and anticipate materially lower inbound opportunities over the balance of this year and next. Given the dislocations in the market, we are focusing our efforts on reducing costs in the near term while pursuing a limited set of opportunities that would be accretive to cash flow. Michael will cover the market and these opportunities in more detail shortly.

Following up on a previous announcement that our 2 subsidiaries involved in the Zonda dispute had filed an application for permission to appeal, we have not been notified of any decision by the High Court in London.

Looking at the broader market and the deepwater sector in particular, we have seen the beginning of several anticipated restructuring events and asset retirements and expect more over the balance of this year. In time, these will support progress towards a more balanced market. In the interim, we will continue to deliver top-tier drilling services and rationally compete for the work available while considering all strategic alternatives. In addition and importantly, we will continue to respond to the COVID-19 pandemic in a thoughtful manner to protect our employees and support broader community and governmental responses to restore economic activity.

With that, I will now turn the call over to Jim for a review of our first quarter results.

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James Whelan Harris, Pacific Drilling S.A. - Senior VP & CFO [4]

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Thank you, Bernie, and good morning. I will provide more details on our first quarter results and some updates on our outlook.

Pacific Drilling had 4 rigs operating in the first quarter for the first time in 4 years. And in February, we mobilized the Pacific Meltem from Las Palmas to the Gulf of Mexico in preparation for an anticipated longer-term contract beginning in the fourth quarter. Unfortunately, the crash in oil prices in early March from the severe impact of COVID-19 containment measures on global oil demand, coupled with the untimely Saudi-Russian increase in supply, resulted in the deferral of many projects, including this Meltem project.

What started as a very strong quarter for the company ended in very challenging circumstances. Those challenges notwithstanding, we achieved first quarter revenue of $89.4 million, at the high end of our guidance and up $56.3 million sequentially. In addition to the steady and reliable operation of the Pacific Sharav for Chevron in the Gulf of Mexico, the increase in revenue resulted from the Pacific Santa Ana operating for the full quarter with Petronas on a plug-and-abandonment program in Mauritania, the Pacific Khamsin operating for the full quarter with Equinor in the U.S. Gulf of Mexico, and the Pacific Bora drilling the first deepwater well offshore Oman for ENI. We achieved revenue efficiency in the quarter of 95.6% despite several technical challenges.

Our operating expenses in the first quarter of $86.5 million were lower than our guidance primarily due to lower rig direct operating expenses and lower reimbursable costs. On a sequential basis, our revenue increased 170% while our operating expenses were up only $23.2 million or 37% compared to the fourth quarter 2019. Our shore-based offices and operations support costs were $7 million for the first quarter, in line with our fourth quarter results. And G&A costs of $9.6 million were in line with our estimates.

Our adjusted EBITDA for the first quarter reached near breakeven levels of negative $1.8 million, about $7 million better than implied by our first quarter guidance, a significant sequential increase attributable to higher contracted days. This amount compares with negative $36.8 million of adjusted EBITDA for the fourth quarter 2019 when we had 3 vessels preparing to go to work.

Our operating cash flows for the quarter were -- I'm sorry, our operating cash outflow for the quarter was $46.7 million, mostly attributable to a working capital build as accounts receivable balances increased $36.4 million with 4 rigs working, and prepaid expenses were up $6.2 million. Capital expenditures for the first quarter were $5.9 million, at the low end of our guidance range, including $2.4 million for sustaining items and $3.5 million for the final installment on the managed pressure drilling system for the Pacific Khamsin installed last year. Excluding the working capital build, free cash flow for the first quarter was just under breakeven. On April 1, we did make the $31.4 million semiannual interest payment on our first lien bonds. In February 2020, we entered into a 3-year, $50 million revolving credit facility, which we fully drew in March to add to our cash reserves. We closed the first quarter with $274 million in unrestricted cash as compared to our December 31, 2019, balance of $278.6 million.

Given the severe global economic contraction, the collapse in oil prices and the resultant exploration and development budget reductions announced by our customers, the outlook for the offshore drilling industry as a whole has been negatively impacted. We've withdrawn our 2020 guidance for expenses and capital spending as we adjust our cost lower -- our cost base lower in anticipation of fewer rigs working for the balance of the year. While the E&P operators' budgets for offshore projects have not been eliminated, current economic conditions will inevitably lead to a decrease in demand for offshore drilling services. In response, we implemented across the board 10% to 12% salary reductions effective April 1. For the balance of the year, we expect our G&A, operations support and shore-based costs will be 35% lower on a run rate basis. We are also working diligently to find the most cost-effective locations and stacking configurations to minimize the carrying cost of idle vessels while preserving the overall value of our fleet. For the remainder of the year, we estimate capital expenditures of up to $8 million.

While we were confidently on a path towards achieving positive free cash flow by mid-2021 as recently as 2 months ago, current events have pushed that horizon out at least 2 years. And although we have significant liquidity runway in front of us, we are considering strategic options and working to best position the company for industry consolidation that we believe is inevitable. Our fleet of modern sixth- and seventh-generation, high-specification drillships represent compelling value in a future rationalized global rig fleet when the market eventually recovers.

And with that, I will turn the call over to Michael.

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Michael D. Acuff, Pacific Drilling S.A. - SVP of Commercial [5]

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Thank you, Jim, and good morning, everyone. On our last call, we stated that there was a significant amount of uncertainty regarding the impact that COVID-19 and the resulting international financial turmoil would have on the oil prices and the offshore drilling market. Now 8 weeks later, I can confidently say that there has been a severe impact on the commodity price and the drilling market.

Though our business continued to strengthen early in the first quarter with several positive trends developing for the high-specification drillship space, we saw a quick response by operators by mid-April as they announced deep capital investment cuts to their planned upstream budgets on the order of 25% to 30%. Approximately 1/3 of these reductions were directly related to the offshore drilling segment. We have subsequently seen 2020 exploration wells canceled and numerous deepwater projects delayed into 2021 and 2022. However, early indications are that most development programs previously sanctioned through FID will go forward. Of the 24 visible opportunities in early March, 14 have been delayed and 6 canceled. We don't expect to see new opportunities emerge for 2020 start dates with most programs being delayed into the first quarter of 2021 at the earliest.

The sixth- and seventh-generation drillship segment is currently at an effective marketed utilization of 86%, down from 91% at the time of our last call and expected to fall further throughout the remainder of the year as rigs roll off current contracts. To date, due to COVID-19 and the oil price decline, we have seen 12 early terminations or cancellations on the floating side of the business, including 5 high-spec drillships specifically. There have been an additional 3 drillships at least that have been put on an extended standby rate until further notice. There are currently 60 high-specification drillships on contracts with expectations that it will dip to a demand level of 50 rigs working by the end of 2020 or early 2021. Though on the last call we saw only 6 to 8 high-spec units available for work this year, that number has since jumped to 18, and we expect it to increase.

Now on the additional near-term supply, we have seen 5 drillship retirements and an additional 4 drillships identified for cold stacking since the beginning of 2020. These measures, plus similar actions from other contractors that are likely to materialize over the balance of the year, represent the first stages of a market reacting to the balance -- to balance the supply considering the significant reduction in demand.

Looking at the demand, since our last call in early March, we have received no new tenders compared to the previous period when we received 11 new tenders, representing 8.4 rig years of firm work with 6.8 years of associated options. We currently have 16 high-spec drillship opportunities in the procurement stage compared to 24 on the last call and with 1 scheduled for a 2020 start and 15 planned for a '21 start.

Turning to our fleet, the Pacific Khamsin recently completed drilling the Monument discovery well with Equinor in the U.S. Gulf of Mexico. The rig is now preparing to spud Total's South Platte exploration well, which will utilize the rig through September, to be followed by a third firm well with Equinor with an additional option remaining on the contract.

The Pacific Santa Ana is in standby mode in Las Palmas under an extended suspension rate of $104,000 per day, awaiting notification to resume the work on Phase 2 of the Petronas permanent abandonment program in the Chinguetti field. We currently don't have a firm date when the rig will return to operating mode, but we'll update you as soon as we are notified by Petronas.

Finally, the Pacific Sharav is currently stacked in the U.S. Gulf of Mexico with a reduced crew complement awaiting its return to work for the announced 2 firm well plus 1 option well contract with Murphy Mexico scheduled to begin in 4Q 2020.

Despite the limited incoming demand mentioned earlier, we are actively working 3 opportunities with 1 potentially starting in 2020 and the other 2 scheduled for first quarter and second quarter of 2021.

With that, I will now turn the call back over to Bernie.

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Bernie G. Wolford, Pacific Drilling S.A. - CEO & Director [6]

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Thanks, Michael. I want to reiterate my appreciation for the entire Pacific Drilling team. Their response to these unprecedented events and the measures taken to ensure the health and safety of our employees and partners have sustained our reputation for superior service delivery despite all challenges. I'd also like to thank all those on the call today for your interest in Pacific Drilling.

I will now hand the call back to the operator to open the call for any Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) All right, we have some questions submitted. Our first question comes from the line of Patrick Fitzgerald.

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Patrick John Fitzgerald, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [2]

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Yes. I have some modeling questions. I was assuming $30,000 a day for OpEx for smart-stacked rigs. But obviously, that was under the assumption that you're going to have 2. Now that you're going to have 5, did that change in your mind?

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Bernie G. Wolford, Pacific Drilling S.A. - CEO & Director [3]

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Patrick, this is Bernie. Thanks for your question. As we look at the rigs as they stand today, the rigs that are moored on anchor, specifically the Sharav and the Meltem, we're working at close to $40,000 a day for their cost, with costs expected to creep lower as we continue to implement cost saving measures. With regard to rigs in Las Palmas and other parts of the world, those costs per rig will be lower. We're currently working a couple of alternatives, the primary of which takes the Bora quayside in Oman and see those costs drop to $30,000 or below; and then the 3 rigs we have in Las Palmas taking advantage of the pod stack mode, where we have 1 rig which will typically run anywhere from $50,000 to $55,000 and then each additional satellite rig at about $8,000 per rig.

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Patrick John Fitzgerald, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [4]

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Okay. All right. That's helpful. And then in terms of your onshore ops maintenance, you said $7 million this last quarter. That's -- is that all in? And in terms of non-rig OpEx, and then do you expect that to go lower?

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Bernie G. Wolford, Pacific Drilling S.A. - CEO & Director [5]

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Sorry, Patrick, I'm not really clear on what your question is, if you're referring to our overhead expenses or something else?

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Patrick John Fitzgerald, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [6]

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Yes. No. Just within OpEx, some of that is onshore and maintenance. I was using $30 million a year previously. Do you think you can -- is that reasonable, first of all? And do you think you can lower that going forward?

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Bernie G. Wolford, Pacific Drilling S.A. - CEO & Director [7]

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Patrick, I would suggest that Jim and I will give you a call off-line and work through some of the numbers in our current results and talk to you through that specifically, if that's okay.

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Patrick John Fitzgerald, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [8]

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Okay. And then on the G&A line, where do you see that going?

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Bernie G. Wolford, Pacific Drilling S.A. - CEO & Director [9]

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It's headed materially lower. As Jim mentioned, our run rate cost for overhead should be 35% lower on a run rate basis from the current quarter.

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Patrick John Fitzgerald, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [10]

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All right. And then with the standby rate on the Santa Ana, does that cover your OpEx there?

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Bernie G. Wolford, Pacific Drilling S.A. - CEO & Director [11]

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Patrick, in view of giving consideration to other people on the call, we'll catch up with you after this call on those kind of questions.

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Operator [12]

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All right. Our next question comes from the line of Devon Xu.

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Devon Xu;Wells Fargo;Investment Banking Analyst, [13]

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I just wanted to ask what your view on liquidity by year-end 2020 was and maybe what you think either monthly or quarterly free cash flow burn number looks like in a steady state, 5 stacked and 1 standby rig environment.

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Bernie G. Wolford, Pacific Drilling S.A. - CEO & Director [14]

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Yes. Devon, thanks for the question. I'm going to hand that one off to Jim Harris and let him respond.

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James Whelan Harris, Pacific Drilling S.A. - Senior VP & CFO [15]

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So Devon, our cash balance today is about $250 million as we're -- even though we're almost halfway through the second quarter, so down about $25 million from where we ended the quarter even though we made that April 1 interest payment. So as we've collected these receivables, we've done a good job of being able to maintain that cash balance. Through the end of the year, our burn rate on a steady-state basis or outflow of cash, excluding interest, is about $25 million per quarter. I'd say on average, that can fluctuate based on working capital movements and -- but by the end of the year, as these cost saving measures are being implemented, there's some transition period. We think the cash balance that we have will be somewhere between $75 million and $100 million lower than what we have today.

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Operator [16]

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All right. We have one final question in the queue. (Operator Instructions) Our next question comes from the line of Ceki Medina.

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Ceki Aluf Medina, Southpaw Asset Management, LP - Partner and MD [17]

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Can you please remind us of the classing schedule of your rigs?

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Bernie G. Wolford, Pacific Drilling S.A. - CEO & Director [18]

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Sorry, what schedule were you referring to, Ceki?

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Ceki Aluf Medina, Southpaw Asset Management, LP - Partner and MD [19]

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The classing, the SPS.

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Bernie G. Wolford, Pacific Drilling S.A. - CEO & Director [20]

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Oh, SPS. Yes, sure. So generally, all of our rigs have now passed the first special survey required by ABS, and so we're in the period approaching the second special survey. So for the rigs delivered most early, that would be like Bora and Mistral with the 2010s for the time frame delivery, we're just coming into their second special. And for the rigs delivered later, they mature over the next 3 to 4 years. The second special survey costs are typically fairly low to very low generally because we maintain our assets in great condition, whether working or through the smart-stack program, and we have never allowed class to lapse on any of these vessels nor have we put any of the vessels in a layout class mode. The only significant expense we have in the second special survey is typically thruster expense. Specifically referring to that, we've already changed out the thrusters on the Santa Ana. And with condition monitoring, vibration analysis and other programs for rigs like the Khamsin, Bora and others, we've confirmed that our thrusters are in great shape and will not require near-term wholesale change-out. So we expect costs to be fairly low over the next 2 to 3 years with regard to special surveys.

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Ceki Aluf Medina, Southpaw Asset Management, LP - Partner and MD [21]

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Got it. Okay. Second, I appreciate you looking at consolidation in a favorable light. Given the circumstances, that's definitely the right way of going about it. Given that your next interest expense is going to be 6 months away, there is ample time to work things out with the different constituencies here. So I hope we come to an agreeable solution.

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Bernie G. Wolford, Pacific Drilling S.A. - CEO & Director [22]

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Thanks for your comments, Ceki.

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Operator [23]

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All right. Our next question comes from the line of [Justin Patterson].

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Unidentified Analyst, [24]

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Can you hear me?

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Bernie G. Wolford, Pacific Drilling S.A. - CEO & Director [25]

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Yes.

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Unidentified Analyst, [26]

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Just a quick -- yes, sorry, clarifying question for Jim. Jim, you mentioned that cash at end of year 2020 would be $75 million to $100 million lower than where you are now. Are you referring to the $250 million that you referenced in relation to Devon's question? Or are you talking about quarter end cash? I know it's sort of a difference of $25 million to $30 million, but I just want to make sure I get that right.

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James Whelan Harris, Pacific Drilling S.A. - Senior VP & CFO [27]

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No. Thank you, Justin. I was referring to our current cash balance of the $250 million.

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Unidentified Analyst, [28]

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Okay. Great. And then just second question, tagging on to that of Patrick. The Santa Ana, I think, is capturing a standby rate of $105,000 a day. Does that cover the OpEx of that rig at the rig level?

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Bernie G. Wolford, Pacific Drilling S.A. - CEO & Director [29]

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Yes. Justin, it does. It essentially covers all the OpEx as well as on our third-party commitments around the integrated services we were providing. So we anticipate that the standby rate will substantially cover all of our stacking and integrated services costs during this time frame.

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Operator [30]

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There are no further questions in the queue, so I'll hand you back over to your host.

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Bernie G. Wolford, Pacific Drilling S.A. - CEO & Director [31]

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[Steven], should we disconnect from this line and go on or soon?

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Unidentified Company Representative, [32]

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No. Bernie, she's going to close out. Monique?

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Operator [33]

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All right. I just wanted to leave room for any final remarks. If there are no final remarks, feel free to disconnect from the line. And hosts, please await further instruction.