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Edited Transcript of SDLP earnings conference call or presentation 21-Nov-19 3:30pm GMT

Q3 2019 Seadrill Partners LLC Earnings Call

London Jan 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Seadrill Partners LLC earnings conference call or presentation Thursday, November 21, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John T. Roche

Seadrill Partners LLC - CEO & Director

* Matt Lyne

Seadrill Limited - SVP of Commercial

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Conference Call Participants

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* Brian Hook

Barclays Capital PLC - Analyst

* Devon Xu

Wells Fargo Securities, LLC, Research Division - Analyst

* Mitchell Glynn

CVC Credit Partners SICAV-FIS S.A - Investment Director

* Paul Arzouian

Pretium Partners, LLC - Analyst

* Philipp Duffner

Aurelius Capital Management - Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to Seadrill Partners Q3 2019 Earnings Call. (Operators Instructions) Please note that this event is being recorded. I'd now like to turn the conference over to John Roche, CEO. Please go ahead.

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John T. Roche, Seadrill Partners LLC - CEO & Director [2]

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Thanks, Nick. Good afternoon, and welcome to the Seadrill Partners third quarter earnings call. I'm John Roche, Chief Executive of Seadrill Partners. And with me in the room today, we have Grant Creed, our CFO; and Matt Lyne, our Chief Commercial Officer.

I'd like to remind everyone that much of the discussion today will not be based on historical fact, but rather consist of forward-looking statements that are subject to uncertainty. Included on Page 2 of the presentation is a comprehensive list covering forward-looking statements. For additional information and to view our SEC filings, please visit our website at seadrillpartners.com.

Before we go into the quarterly results, I'd like to open with some remarks about our finances and the broader market backdrop. I'm quite certain that everyone on the call today recognizes that after the worst downturn in 25 years, the recovery has not met expectations. On top of this, the industry faces a wall of debt maturities over the next 5 years that present significant challenges to us all.

In the case of Seadrill Partners, we acted early in 2017 by deferring about $0.5 billion in near-term maturities. However, we now find ourselves with about $3 billion in debt scheduled to mature over the course of the next 15 months. This is a challenging situation, and we have been and continue to have a laser-like focus on. We've begun work with our advisers to address these debt maturities and likewise have commenced initial discussions with certain stakeholders in this regard.

Now while the market backdrop, both capital markets-wise and industry-wise, may present challenges to addressing our maturity profile, we believe that our stakeholders recognize the value in working with us to manage the situation while preserving value in the underlying business. We are aiming to work towards a solution that provides the flexibility we require to invest in our fleet, contract our assets in a value-maximizing manner and avoid recreating an overhang on the Seadrill brand with our customers. We will, of course, be updating the market as and when we have material information in relation to this progress.

In terms of the market, near-term activity for floaters is being driven predominantly by short-term well-based programs. Looking forward, there's been an increase in tenders for longer-term programs, especially in Africa and Brazil. We expect these programs to improve forward utilization and continue to deliver improved pricing.

There's continued bifurcation for high-specification assets, with utilization for 7th-generation drillships approaching 90% and 6th-generation drillships in the mid 80%. We believe our fleet is well positioned for these trends, and the pockets of strength in the high end of asset classes is a strong leading indicator.

Now turning to the third quarter performance. The fleet performed well with an average uptime of 95%, consistent with the prior quarter if the West Auriga downtime is excluded. We are pleased to report that the West Auriga returned to normal operations during the quarter. Revenues were about $185 million, slightly ahead of the second quarter result, mainly driven by a full quarter of operations for 2 units, 1 unit commencing a new contract and improved uptime.

Adjusted EBITDA of $90 million was in line with guidance and ahead of our second quarter result, mainly due to the top line movements and lower cost for idle units either while between contracts or while stacked. Current backlog stands at $512 million after adding about $85 million in the third quarter.

During the quarter, we entered into 2 contracts, and a contract for the West Vencedor was terminated for which we received a termination payment. The 2 new contracts are for the West Polaris, and the aggregate total contract value was $96 million. The unit's on rate in Gabon, and we expect the current work program to run until about the end of the year. The next job is in Southern Asia, which likely starts towards the end of Q1.

You'll also notice that on our fleet status, there have been some changes for the West Aquarius and the forward contract profile for that unit. While the option periods may not have been exercised, we are in dialogue with the customer on future work opportunities as well as marketing the unit for work in Eastern Canada and U.K. North Sea.

Turning now to the financial detail for the third quarter. In terms of volume, the increase is due to 2 units working for a full quarter, the West Aquarius and the West Capricorn, and 1 unit commencing operations, the West Polaris in Gabon. These are partially offset by idle time on the West Capella while between contracts and full quarter of idle time for the T-16.

In terms of day rates, the change reflects the West Capricorn moving from a legacy contract to spot work with LLOG in the Gulf of Mexico. The improvement in utilization is due to the West Auriga returning to normal operations. And lower costs were driven by idle time for the West Capella while between contracts and lower stacking costs for the West Leo and the T-16. These were partially offset by the West Aquarius working for a full quarter and the commencement of the West Polaris.

The other bar you see on the page reflects the sequential change in termination payments related to the West Capricorn in the second quarter, not being repeated, which was partially offset by the West Vencedor termination payment.

Turning to the other main movements on the P&L below EBITDA. The main changes were a gain on derivatives versus a loss last quarter and a change in tax expense through the release of an uncertain tax position in the second quarter not being repeated in the third. This, along with several other smaller movements, resulted in a net loss of around $54 million and around $24 million after taking out minority interests.

In relation to the uncertain tax position movements recently, the largest contributor was a UTP recognized in the fourth quarter of '18 relating to changes in U.S. tax legislation. Approximately $40 million of this UTP was released in the second quarter, and we expect to release about $27 million next quarter based on guidance received from the U.S. Department of Treasury after the conclusion of the third quarter.

Turning now to the main balance sheet movements. The decrease in current assets mainly reflects a decrease in cash primarily due to debt service and CapEx, which was partially offset by an increase in a mobilization asset. In terms of noncurrent assets, the decrease was primarily due to the normal amortization of our drilling units and favorable contract intangibles.

The increase in current liabilities was mainly due to the West Polaris facility becoming current. And in noncurrent liabilities, the decrease was due to normal quarterly amortization of our debt facilities and the West facility -- West Polaris facility becoming current. Equity declined sequentially, reflecting a net loss for the quarter.

Turning now to our outlook for the fourth quarter. Adjusted EBITDA is expected to be lower at around $80 million. This is primarily due to the West Capricorn and T-15 completing their contracts and the receipt of the West Vencedor termination fees in Q3 not being repeated. These are expected to be partially offset by a full quarter of operations for the West Capella and the West Polaris.

And this concludes our prepared remarks, and I'd like to open up the line for Q&A.

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Questions and Answers

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Operator [1]

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(Operators Instructions) First question comes from Devon Xu, Wells Fargo.

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Devon Xu, Wells Fargo Securities, LLC, Research Division - Analyst [2]

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I just was curious on if you guys could provide some color on initial thoughts on how to address the debt maturities or what -- how conversations have evolved there and then if there's any update on West Leo.

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John T. Roche, Seadrill Partners LLC - CEO & Director [3]

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Sure. Absolutely. Look, as I mentioned in my opening remarks, we have been working with our advisers. We've recently engaged with advisers representing certain stakeholders, and those discussions are progressing. We don't have anything material to update the market on as of yet, but of course, we'll do so as we progress.

I think the important thing here is to -- is look, whilst the market backdrop industry-wise and also capital markets-wise is challenging, I do think that there is a recognition from some of our key stakeholders of the quality of our fleet, of the forward contracting profile. This is quite an important point, not to disrupt the underlying business. The forward bid book looks good. And preserving the value and executing as many contracts we can is -- interests are aligned from the company and our key stakeholders.

In terms of the West Leo, you'll recall in the second quarter, we relocated her from the Canary Islands up to Norway. The reason I -- that stacking costs are lower in the quarter is primarily due to this move, hitting the run rate, obviously, once having a bit of upfront cost to get her there. We staffed many units up there.

I think when we talked about benefits of scale, you remember that Seadrill Partners is managed by -- its units are managed by Seadrill Limited. And the West Leo, along with several Seadrill Limited units, have been put in the same stacking location and reducing costs. So we probably reduced cost there to a run rate of around $10,000 a day, which is a great result and kind of speaks to only -- one of the benefits of having a scale when you can group assets together.

Of course, there's many other benefits of having these economies of scale, whether it be the spare parts pool, access to customers and also from a cost perspective, especially when working in remote locations. So this is just one of the aspects that has benefited us cost-wise in the quarter.

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Devon Xu, Wells Fargo Securities, LLC, Research Division - Analyst [4]

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Got it. I guess just a follow-up. Do any of the changes at Seadrill Limited -- or how are those changes impacting you initially?

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John T. Roche, Seadrill Partners LLC - CEO & Director [5]

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Well, they did just happen this morning. So over -- I think it's safe to say over the last couple of hours, there has been no impact. So look, we do have a separate Board, none of which was affected by the changes today. So I may just refer you to Seadrill Limited's remarks on the topic in terms of the expected impacts of those changes for them.

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Operator [6]

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Our next question comes from Brian Hook from Barclays.

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Brian Hook, Barclays Capital PLC - Analyst [7]

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Could you please speak to the market environment for -- the market environment in Canada and how we should think about the prospects for a new contract there for the Aquarius? And then if you did mobilize the rig to the North Sea, how much that might cost?

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John T. Roche, Seadrill Partners LLC - CEO & Director [8]

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Indeed. Well, we have our Chief Commercial Officer, Matt Lyne in the room. So perhaps it makes sense for Matt to field this one.

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Matt Lyne, Seadrill Limited - SVP of Commercial [9]

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So in Canada, as far as the market perspective goes, it was disappointing that we didn't see those options materialize, but that doesn't represent the end of road for us. So there are a few opportunities that exist. We're still hopeful that some of these wells may provide further opportunities that they're drilling currently.

As a follow-up to that, we always have to have a plan B. So we've taken measures to determine what the right time is and the right opportunities within the U.K. market to move the rig over. I would say, though, that we wouldn't do a speculative move. We would want something material in the books before we would commit to that, given the fact that Canada is a very inexpensive place to keep the rig during short-term idle periods between contracts.

So I think 2021 provides more opportunity in Canada. And then in 2022, you see a long-term opportunity with one specific operator that provides some interesting long-term backlog.

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Brian Hook, Barclays Capital PLC - Analyst [10]

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Got it. So if the -- it's a very rolled off contract in state in Canada. How should we think about the stacking cost for the rig during 2021?

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John T. Roche, Seadrill Partners LLC - CEO & Director [11]

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Well, Brian, I think a lot of that's going to depend on duration. And if it's a short period where it doesn't make sense to change the manning, you're going to run at a much higher run rate than, say, if it was half a year or greater.

But look, I think given the opportunities we see in this rig, you shouldn't expect it to go cold, right? So we're not talking about, call it, 10, 20 a day. You're probably talking about warm stacked in the 40 to 50 range, if we're talking about the 6-month time frame, and perhaps north of that if it's for a shorter period.

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Operator [12]

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Our next question comes from Philipp Duffner, Aurelius Capital.

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Philipp Duffner, Aurelius Capital Management - Analyst [13]

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On the tender rigs, there have been a number of reports of some tenders being outstanding in Thailand and Malaysia. I was just wondering, are you participating in those? And how do you see your chances of winning any contracts there?

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John T. Roche, Seadrill Partners LLC - CEO & Director [14]

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Yes. Matt, go ahead.

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Matt Lyne, Seadrill Limited - SVP of Commercial [15]

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So we are actively participating with T-15, T-16. Obviously, the Vencedor is a slightly different tender. It's a semi-submersible as opposed to a flat bottom hull, so a monohull. So its market is slightly different. So there are a number of really attractive long-term opportunities that exist back in Thailand. I don't want to go into too much detail given the competitive nature of the market.

But yes, I think they materialize sort of late 2020, 2021. And there are going to be -- we foresee a few spot opportunities. So if we could get those dots connected, we'd look to start the unit up early if the longer-term opportunity were to materialize. It's not as active as we'd like. But we have seen some short-term tenders come to market for less than a quarter's worth of work, and we do see a little bit of a pickup.

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John T. Roche, Seadrill Partners LLC - CEO & Director [16]

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And there's just one thing I'd add there, in particular, in the cases of the barges, the difference between warm and cold stack is not too much different. So we say we have cold stacked, but you're not going to -- you shouldn't expect to see large reactivation costs. And I think, as Matt alluded to, the lead times in Southeast Asia are short. So it's actively marketed. And whilst we may see some longer-term opportunities out on the horizon, obviously still looking for some of that short-term market.

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Philipp Duffner, Aurelius Capital Management - Analyst [17]

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Got it. And on the West Capricorn, how do you see the opportunity set there once it rolls off its current contract?

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Matt Lyne, Seadrill Limited - SVP of Commercial [18]

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So we are in dialogue with a number of customers in the area that it's currently working. That market is more spot-oriented. And we knew that when we decided to reactivate the rig and continue working after we finished our maiden contract. So I would say there's a general confidence level that you'll see a number of opportunities materialize in 2020. There may be a small gap when it finishes its current program. And we'll be able to update you as we go forward in those conversations.

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John T. Roche, Seadrill Partners LLC - CEO & Director [19]

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And Philipp, in relation to that gap, we're actually going to take the opportunity to complete the mooring units. You may recall, several quarters ago, we started that work. But work got in the way. We were never able to complete it.

So I think way back when we were looking at the Capricorn kind of earlier this year while I was working for BP, we said, okay, let's make this unit as attractive as possible. So we ended up putting MPD on her and completed that work, started the work on the mooring units and never got there. So we'll use -- again, same principle applies. We're going to try and make it as versatile as possible.

Strangely enough, that MP unit has -- MPD unit has since been transferred to another unit based on customer demand. It was a great investment we did, whether it's on the Capricorn or the Vela or what have you, given the lead times in that market and how attractive that equipment is to the customers. So I think we've invested in the right places for that unit. It's proved beneficial for the West Capricorn and others. And yes, as Matt pointed out, we'll continue to try and get her to work for 2020.

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Philipp Duffner, Aurelius Capital Management - Analyst [20]

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Got it. And if I could just ask one last question. Can you give any color on how things are looking for the Auriga and the Vela once the current contract ends with BP? Is there a chance that you might get an extension? How do you see that?

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Matt Lyne, Seadrill Limited - SVP of Commercial [21]

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Look, we are always hopeful in getting extensions with customers we cherish as much as BP. But I don't think that's something we could really get into great detail with right now. But look, both units are actively marketed. The preference would always be to keep them in the Gulf of Mexico because that provides the best economics for us, but there are a number of really attractive opportunities globally.

I guess I would point you to the fact, similar to what John raised on the Capricorn by adding mooring and flexibility to that unit given its capable hook load, it makes for an extremely desirable asset that can work for a number of different operators both in shallow and deepwater. We do see in some of the smaller IOCs that they have a need for a rig, both in DP mode and mooring mode. So by giving that extra flexibility, it improves our marketing prospects.

A similar type of situation exists for the Auriga and Vela. Both sit at the very high end of the market as far as -- a way they're technically built. The Vela, as John pointed to, has our third-generation MPD system installed on it. And both rigs have 2 BOPs. We're also looking at a few other upgrades that will continue to make it -- make them attractive units.

So given that, their hook load and their track record, I think it puts them in a prime position than when they're coming off late 2020 to pick up some of these longer-term opportunities that exist both in South America and some in Africa.

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Operator [22]

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(Operators Instructions) Our next question comes from Paul Arzouian from Pretium.

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Paul Arzouian, Pretium Partners, LLC - Analyst [23]

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I just want to know if you could give us a breakdown of the balances on the different tranches of debt at the end of the quarter.

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John T. Roche, Seadrill Partners LLC - CEO & Director [24]

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Sure. So on the -- do you have a paper version there? Thank you. So at the end of the third quarter, there was $2.6 billion on the term loan. On the West Vela facility, $161 million. West Polaris, $124 million. And about $41 million on the tender rig facility.

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Operator [25]

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Our next question comes from Mitchell Glynn, CVC.

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Mitchell Glynn, CVC Credit Partners SICAV-FIS S.A - Investment Director [26]

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Just following on from Vela and Auriga. Is there any relationship issues we should be aware of with regards to BP? Obviously, these rigs stayed at a very high level through the downturn. You didn't execute a headline day rate reduction for a tender extension. Has there been any repercussions as a result of that? And any reason why BP would not want to extend contracts with you on a relationship basis?

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Matt Lyne, Seadrill Limited - SVP of Commercial [27]

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I think the challenges with signing long-term contracts at the top of the market can put pressure on the relationship between the parties. I think with the -- with some of the stuff we've done with the rig and been able to be flexible moving across multiple developments for them has been beneficial to their program.

So I think there's definite interest between the parties to look to extend those rigs. But in today's day, IOCs have become a lot more agile with where they deploy their capital. And I think you'll find that they wait a little bit longer to commit to extensions when they know that a rig is sitting with them.

So I wouldn't necessarily take it as a bad sign that an extension hasn't been announced yet. I just think it's going to take a little bit more time for it to materialize. We're still a year ahead. And the Gulf of Mexico isn't necessarily past a year in lead time for contracting.

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John T. Roche, Seadrill Partners LLC - CEO & Director [28]

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And just one thing I'd add on that --.

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Mitchell Glynn, CVC Credit Partners SICAV-FIS S.A - Investment Director [29]

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Just to be (multiple speakers), is your relationship good or is your relationship bad or indifferent with BP?

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Matt Lyne, Seadrill Limited - SVP of Commercial [30]

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I think we have a strong relationship with BP. I think after 6 years of operating with them, you build a level of respect to that organization.

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Mitchell Glynn, CVC Credit Partners SICAV-FIS S.A - Investment Director [31]

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Sorry, I interrupted somebody from saying something then. Apologies.

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John T. Roche, Seadrill Partners LLC - CEO & Director [32]

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Thank you. That's very polite of you. What I was going to just bring up in particular are these 2 assets. And I'd echo Matt's comments, of course, look, BP is a value customer and a value relationship for us.

It's not all about extending in the Gulf of Mexico. I think the order book for these -- or the bid book rather for these 2 units is probably as strong as we've seen in the last -- well, I guess, lead times, we'll shut it down. But it is strong. And whether it be for opportunities in Brazil or East and West Africa, there's several opportunities for these units, especially for units of this class. I think the technical specs that Matt walked through just a few moments ago are important.

And when you look at the -- while the overall market may appear to have a degree of oversupply, when you dig down 1 or 2 levels and you look at the market utilization for assets of this type, it is tighter. And so customers want good assets. And so when we look at the forward order book, I think these are very -- or bid book, rather, we think both of these assets are very well placed in the market.

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Mitchell Glynn, CVC Credit Partners SICAV-FIS S.A - Investment Director [33]

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And just so my understanding is that bidding for 2020 work is kind of in the 250 per day rate, do you think the quality of these assets would command a premium to that to be locked down by a customer?

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Matt Lyne, Seadrill Limited - SVP of Commercial [34]

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I think you'll -- for optionality with equipment such as MPD, you can see in some areas that does command a premium, depends on the term. And given -- the spot market, we sometimes have to fight against a number of other competitors trying to fill gaps between opportunities. But given where they sit in their availability, you should see rates in the neighborhood of where you're talking.

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Operator [35]

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This concludes our question-and-answer session. I'd like to turn the conference back over to John Roche for any closing remarks. Please go ahead.

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John T. Roche, Seadrill Partners LLC - CEO & Director [36]

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Thanks, Nick, and thanks, everyone, for joining today. And this concludes Seadrill Partners' third quarter earnings call. Thank you.

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Operator [37]

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