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Ensco PLC (ESV) Q2 2019 Earnings Call Transcript

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Ensco PLC (NYSE: ESV)
Q2 2019 Earnings Call
Aug 1, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to Valaris plc Second Quarter 2019 Financial Results Conference Call. [Operator Instructions]. And at this time, I'd like to turn the conference call over to Mr. Nick Georgas, Senior Director of Investor Relations, who will moderate the call. Please go ahead, sir.

Nick Georgas -- Senior Director of Investor Relations

Welcome everyone to the Valaris Second Quarter 2019 Conference Call. With me today are President and CEO, Tom Burke; Executive Vice President and CFO, Jon Baksht, and other members of our executive management team. We issued our press release, which is available on our website at valaris.com.

Any comments we make today about expectations are forward-looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially from our expectations. Please refer to our press release and SEC filings on our website that define forward-looking statements and list risk factors and other events that could impact future results.

Also, please note that the company undertakes no duty to update forward-looking statements. During this call, we will refer to GAAP and non-GAAP financial measures. Please see the press release on our website for additional information and required reconciliations. As a reminder, we issued our most recent Fleet Status Report, which provides details on contracts across our rig fleet, on July 25. An updated investor presentation is also available on our website.

Now let me turn the call over to Tom Burke, President and CEO.

Thomas P. Burke -- President, President and Chief Executive Officer

Thanks, Nick, and good morning, everyone. Following our name change earlier this week, Jon and I are very pleased to be speaking to you today on our first quarterly conference call as Valaris. During our conference call in May, I laid out 4 short-term priorities for the company: Integration and synergy capture; delivering value from our drilling; balance sheet and liquidity; and lastly, fleet management, which encompasses our contracting strategy. In a moment, I'll review our progress on each of these priorities, but first I'll briefly discuss our second quarter performance.

The second quarter 2019 was our first quarter as a combined company following the close of our merger in April. In terms of our financial results, we reported adjusted EBITDA of $59 million for the quarter, better than the outlook we provided in our first quarter conference call. While these results exceeded expectations, some of this outperformance was due to the timing of contract drilling expenses that were originally anticipated to occur in the second quarter and are now expected to occur in the third quarter of 2019.

Jon will discuss our second quarter results and third quarter outlook in more detail later in the call. Our financial results benefited from strong operational performance with 98% uptime across our floaters and 99% uptime across our jackups. Additionally, through the first half of 2019, our reportable incident rate was nearly 20% better than the industry average as measured by the International Association of Drilling Contractors. These results are a testament to the continued focus on safety and efficiency from our offshore crews and onshore personnel.

I want to commend our employees for their professionalism and unwavering commitment over the past several months, as they worked tirelessly to keep our rigs up and running and avoid distractions that often arise during a merger. I also want to acknowledge everyone's hard work on the integration so that we will achieve our targeted synergies and deliver on our commitments to create value from the merger. On this note, I will now update you on the first of our priorities, integration and synergy capture. We recently reached the 100-day milestone following the merger closing in April, and I'm pleased to report that the integration is moving forward as planned.

We have a detailed and robust integration plan. And to date, we have completed more than half of all of our integration activities, including a major ERP conversion, the consolidation of offices and warehouses in Aberdeen and Houston and approximately 65% of our staffing reductions. We are confident that we will achieve the targeted synergies of $165 million by the end of next year and are continuing to look for opportunities to deliver additional synergies from the combination. Jon will provide additional details on synergy realization in his commentary. In conjunction with these integration efforts and after thoughtful consideration and review, we decided that renaming the company was the best way forward.

This decision was not taken lightly. Our predecessor companies have storied history that span many years and we are extremely proud of what these organizations have accomplished over time. But we believe that a new name is an important part of our evolution. While renaming the company is an obvious sign of change, it is part of a more broad transition as we move forward as a larger, more diverse organization. We'll continue to provide updates on this transition in the coming quarters, including the status of our integration efforts and synergy capture.

Second priority is ARO Drilling, our 50-50 joint venture with Saudi Aramco. As a reminder, this is a joint venture to own and operate jackups in partnership with the largest customer for jackups in the world, which also secures backlog proportion of our jackup fleets through a leasing structure and provide strong organic growth through ARO Drilling's new build program. John will comment on ARO Drilling's financial results in a moment, but from an operational perspective, the ARO Drilling team delivered safe and efficient operations in the second quarter with excellent operational uptime and safety performance.

ARO Drilling from leased fleet will expand as the Bess Brants' modern standard duty Super 116E is in the process of commencing its maiden contract, and the Earnest Dees, another Super 116E rig, is also expected to join the active fleet later this quarter. The addition of these two jackups will bring the number of leased rigs to ARO Drilling to 9, which will contribute to our 50% interest in ARO Drilling's net earnings and increase the bareboat charter fees recognized as revenue by Valaris. On our prior conference call, we mentioned that the first two ARO Drilling newbuild rigs were expected to be ordered in May.

However, this has not occurred as ARO Drilling continues to have discussions with the shipyard related to certain aspects of rig specifications and construction costs. While the order for these newbuilds has pushed to the right, we firmly believe that it is most important for ARO Drilling to reach appropriate terms with the shipyard. With respect to our priority of balance sheet management, we continue to proactively manage our capital structure to most effectively execute on our strategic priorities and maximize value for shareholders. As we've stated previously, this entails managing our debt maturities and our cost of capital and reducing total debt.

After a thorough evaluation of the capital structure and market conditions, we've recently launched a tender to repurchase debt at a meaningful discount. We completed the tender in July. We repurchased $952 million of senior notes at a 24% discount. Interest payments for these notes were $52 million per year and we realized $228 million of principal savings as a result of the transaction. Our current capital structure provides us flexibility to further manage the balance sheet, including adding guaranteed or secured debt. Given overall market conditions and our near-term debt maturities, we view our revolving credit facility, which gives us access to approximately $1.7 billion of funding through the third quarter of 2022, as an important source of liquidity.

Our last priority to detail is our approach to fleet management and contracting, which are influenced by overall market conditions. With respect to the market, as you know, we are navigating a protracted offshore sector recovery that includes a significant amount of uncertainty in its timing and its magnitude. Macro factors are largely supported of growing demand for hydrocarbons with the global economy continuing to expand, although this growth is occurring at a slower pace today than in recent years. In addition, industry conditions are fairly positive with commodity prices remaining at levels that should be conducive for new offshore project investments.

We saw evidence of this in the second quarter as the amount of offshore reserves that were approved through final investment decisions, or FIDs, were the highest for any quarter over the last 6 years according to Bernstein research. However, while this is a good sign for future demand for offshore drilling rigs, we know that the lead time between FID and an offshore drilling rig beginning work on a project is measured in years, rather than months, particularly for deepwater projects. Given supportive commodity prices, the number of new floater contracts increased approximately 15% during the first half of 2019 as compared to the same period in 2018, helping to push marketed utilization for the global floater fleet up to roughly 80%.

However, despite spot utilization increasing, we still have not seen deepwater contract terms lengthen, with a 6-month average duration for new contracts and extensions in the first half of 2019, which is in line with contract lengths over the prior period. Since floater contract lengths have remained relatively short term in duration, day rates for new floater contracts continue to be competitive as offshore drillers bid to keep active rigs working. Additionally, the number of tenders for future floater program has been relatively flat for the past several months and there remains a limited number of opportunities with meaningful term that are expected to begin before year-end 2020.

With floater contract duration short and the number of future opportunities flat, meaningful recovery in floater day rates may be further out than many in the market are expecting. While it is positive that floater day rates have moved up recent loads to levels that are now generating positive cash margins, the number of new opportunities and the corresponding day rates have not progressed at the pace we would have expected 6 months ago. As a result, our outlook for floaters for the remainder of this year and the first half of 2020 has softened since we began the year.

Considering these conditions, we're taking additional steps to manage our floater fleet and reduce cash outlays. First, we mobilize the Rowan Reliance from U.S. Gulf to the Canary Islands where the rig will be warm-stacked alongside ENSCO DS-7 and DS-6, providing a significant reduction in daily costs. Second, we are in discussions with the shipyard to delay the delivery of newbuild drillships, ENSCO DS-13 and DS-14. While we expect to delay these rigs beyond their currently scheduled delivery dates later this year and next year, we have the option to convert the final milestone payments to promissory notes that are due at year-end 2022.

In terms of our floater contracting strategy, we will continue to take a portfolio approach where we aim to increase near-term utilization for certain assets and hold additional capacity off the market until we see day rates advance to levels that justify additional floater supply. For example, we prioritize contracting the Rowan Relentless, which is scheduled to come off contract in the fourth quarter and recently won a short-term job with auctions that could expand the rig's contract period into 2020, while electing to warm-stack the Rowan Reliance.

For our 3 vintage floating rigs that are older than 15 years of age, all of which are scheduled to complete contracts in the next 9 months, we will assess the costs required to keep each rig competitive in the global fleet, and if we do not see adequate returns on required invested capital, we will move to diverse the rigs from our fleet. Moving to the jackup market, while global marketed utilization is similar to floaters at approximately 80%, the jackup recovery seems further along. New jackup contracts signed during the first half of 2019 were 25% higher than the first 6 months of 2018. Contract lengths for new fixtures have increased by 2 months on the average over the same period to 14 months.

While a 2-month increase in contract lengths may seem minor on the face of it, this, coupled with the pickup in contracting activity, has helped to drive a broad-based, although modest, increase in pricing for jackup rigs. This is particularly evident for jackups capable of working in the most challenging environments where spot utilization is above 95%. And as a result, we've seen day rates moving higher for these rigs. Valaris has a large fleet that can service this segment of the market with 14 units, 7 ultra harsh and 7 harsh environment rigs. Most of these assets are in the North Sea where we have had some recent contracting success.

We've added 2 years of term to the ENSCO 120, a harsh environment jackup, and this rig is now contracted until the middle of 2022. We also won a 2-well contract for the ENSCO 122, also a harsh environment jackup, that will keep the rig utilized for most of 2020, and a 6-month extension for the Rowan Gorilla V, an ultra harsh environment jackup. These contracts have options beyond their firm terms that could lead to substantial additional contracted days. I would note that these options are either priced at meaningfully higher rates or unpriced, an indicator of the improving market dynamics.

We've seen improvements across other major shallow water markets and utilization of modern benign environment asset at approximately 80%. With 25 of these modern benign units in our fleet, 14 heavy duty jackups and 11 standard duty jackups, Valaris has one of the leading fleets of modern benign environment jackups. Our global footprint enables us to service a wide range of customers' shallow water requirements around the world as evidenced by our recent contracting success in West Africa, the Middle East, Australia and Central America.

With respect to our jackup contracting strategy, all of our marketed jackups are either currently under contract or scheduled to begin contracts. So our focus is on bridging any gaps between contracts for these rigs. We're also monitoring pricing and other market conditions, and we will carefully evaluate reactivating jackups to meet customer demand when day rates justify cost to return these rigs to our active fleet.

In closing, while certain aspects of the market recovery may be progressing slower than anticipated, we will continue to focus on key areas within our control, namely staying highly involved with ARO Drilling's development, winning new contracts for our rigs with availability, driving high levels of operation uptime for our contracted fleet, managing our balance sheet and delivering our targeted merger synergies. By accomplishing this, we will best position the company to lever the cyclical nature of our industry, participate in the unfolding offshore market recovery and maximize value for our shareholders.

I'll now turn the call over to Jon.

Jonathan Baksht -- Executive Vice President and Chief Financial Officer

Thanks, Tom, and good morning, everyone. In my prepared remarks today, I will cover our second quarter 2019 financial results, our outlook for third quarter 2019, capex guidance for the remainder of the year and provide some high-level commentary on ARO Drilling. I will also spend some time discussing our financial position and capital allocation in light of our recent debt tender. And finally, I'll provide an update on merger synergies and transaction costs.

As a reminder, we closed the merger on April 11. Therefore, the second quarter 2019 results in our press release reflect legacy Ensco operations only for the first 10 days of the quarter and the combined company from April 11 onwards. This is because legacy Ensco was the accounting acquirer in the merger. Additionally, in conjunction with the organization's Valaris rebranding, we've attempted to simplify the categorization and naming within our rig fleet.

The jackups fleet is now subdivided into more logical categories in our Fleet Status Report with rig names aligning to those categories. My comments on this call will reflect legacy rig names to ease the transition. However, going forward, the updated rig names will be reflected in our investor materials. Given that second quarter 2019 is our first reporting period as a combined company, my commentary will compare actual results against guidance provided on our prior conference call. Adjusted EBITDA for the quarter was $59 million compared to guidance of approximately $35 million.

This was driven by a variety of factors, including strong operational performance and disciplined expense management, which I'll review in more detail. However, as Tom mentioned, it will also reflect the deferral of certain expenses into the third quarter, which will have an adverse impact on that quarter and effectively pull the portion of EBITDA forward into the second quarter. Starting with the second quarter revenue of $584 million versus the guidance of $580 million, the revenue beat is primarily due to higher operational utilization across the fleet and more operating days for the Rowan Norway and Rowan Viking.

Excluding transaction costs, contract drilling expense was $489 million. This was approximately $20 million lower than the prior conference call guidance mainly due to the removal of an expected rig reactivation from our plan due to the transfer of a drilling contract to an active rig with availability and the deferral of mobilization costs and certain repair and maintenance costs into the third quarter. Second quarter depreciation expense was $158 million, which was $7 million higher than guidance, primarily due to changes in the fair value of legacy Rowan assets.

As a reminder, the fair value estimates of the assets and liabilities acquired from legacy Rowan are preliminary, may change as we finalize those estimates during the 1-year accounting measurement period. Excluding transaction costs, general and administrative expense was $33 million. This is $2 million lower than our second quarter guidance due to disciplined cost management. During the second quarter, we incurred approximately $60 million of merger-related transaction costs, which are excluded from adjusted EBITDA and the adjusted loss per share presented in the press release.

Other income was $597 million for the second quarter, driven by $713 million bargain purchase gain related to the merger transaction and partially offset by $118 million of net interest expense and $9 million of consent solicitation fees and other related costs. Finally, tax expense of $33 million, in line with the guidance we provided on our prior conference call. Now moving to our third quarter 2019 outlook. We are expecting to see a meaningful drop-off in EBITDA due to a variety of factors, including contract roll offs, uncontracted time between contracts for repair and maintenance, mobilizations and some seasonal gaps in utilization.

We expect total revenues will be approximately $545 million with the sequential quarter decline primarily due to contract roll offs across the floater fleet. As Tom mentioned earlier, we see more uncertainty in the near term for the floater market, which may result in revenue and EBITDA that are substantially lower in the sell-side analyst estimates for the second half of 2019 and full year 2020. Our third quarter revenue outlook breaks down as $255 million to $260 million from our floater segment; $220 million to $225 million from our jackup segment; and approximately $65 million of other revenues, including $23 million of reimbursable revenue from ARO Drilling, $21 million of ARO Drilling lease revenue and $21 million related to 2 managed rigs in the U.S. Gulf.

Excluding transaction costs, we anticipate the third quarter contract drilling expense will be approximately $505 million. The sequential quarter increase is mostly due to a full quarter of operating cost for drillships ENSCO DS-7, DS-9 and DS-12, which commenced new contracts during the second quarter, along with the fourth quarter contribution from the legacy Rowan fleet; mobilization costs for the Rowan Reliance, Ralph Coffman and Rowan Norway; higher operating costs for the Rowan way due to its change of operating location from Turkey to Norway; and a partial quarter of operations for ENSCO 123, which is due to commence its maiden contract during the third quarter.

While we have a number of floaters that are expected to roll off contract in the third quarter, reducing cost from operating levels to a warm-stack state can take 60 to 90 days. So the gradual reduction in contract drilling expense does not correspond to immediate decline in revenue. Therefore, we would expect to see the benefit of these total cost reductions in the fourth quarter, when we anticipate total contract drilling expense will be below second quarter levels, excluding transaction costs, which were $489 million. We expect depreciation expense will increase to approximately $163 million due to a full quarter of depreciation for legacy Rowan assets along with ENSCO 123, Bess Brants and Earnest Dees joining the active fleet.

G&A expense, excluding transaction costs, is expected to decline to approximately $31 million due to the realization of synergies. Finally, we estimate the third quarter tax provision will be approximately $40 million inclusive of discrete tax expense related to the gain on debt extinguishment following our recently completed debt tender. Let's move now to ARO Drilling. ARO Drilling is a 50-50 nonconsolidated joint venture between Valaris and Saudi Aramco, which owns and operates offshore drilling rigs for Saudi Aramco. In total, we expect ARO Drilling's 2019 EBITDA will be toward the upper half of the prior guidance range of $160 million and $180 million for the full year.

Note that our SEC filings and press release tables present results from ARO Drilling from the merger date forward and will not include premerger activity. As of June 30, ARO Drilling owned 7 assets with substantial contracted revenue backlog. Valaris contributed 5 of these 7 assets to ARO Drilling in exchange for cash and 10-year shareholder notes that bear interest at LIBOR plus 2%. On an annual basis, ARO Drilling's Board of Directors will decide whether the interest on the shareholder notes is either added to the principal loan balance or paid in cash. As of June 30, the balance of these shareholder notes is approximately $453 million.

As a reminder, ARO Drilling has no external debt, which presents a future financing opportunity given that the company's rig fleet is fully contacted and has meaningful revenue backlog. Moving out to our capital expenditure outlook for the second half of the year. Excluding transaction costs and the final milestone payment for ENSCO DS-13, capital expenditures through the remaining 6 months of 2019 are expected to be approximately $110 million. This includes approximately $90 million of costs for minor rig enhancements and upgrades including Schedule G upgrades on the Bess Brants and Earnest Dees, and the addition of a fully automated drill floor on the Rowan Stavanger.

A portion of these customer-required upgrades are reimbursable. We also anticipate $20 million of capex, primarily for newbuild and recently delivered jackup rigs. Most of these costs are related to the start-up and mobilization of ENSCO 123, which is expected to commence its maiden contract in the North Sea during the third quarter. Our only remaining newbuild commitments are for drillships ENSCO DS-13 and DS-14. In light of uncontracted rig days on many of our delivered drillships, coupled with an uncertain outlook for near-term floater demand, we're in discussions with the shipyard to delay delivery of these rigs.

If we do not delay delivery of the rigs, we have the option to finance the final milestone payments totaling $250 million plus accrued interest through a promissory note with the shipyard for the rigs. The promissory note would bear interest at 5% per year with maturity at year-end 2022. Turning now to our financial position. Since closing the merger, financial management has been one of our main priorities with the focus on managing debt maturities and cost of capital and reducing total debt.

During the first 60 days after closing, our capital management actions were limited by the legacy Rowan 2025 senior notes, which contained a change in the control provision with a double trigger mechanism granting holders a put option in the event of both a change in control and the downgrade by both Moody's and S&P within this time period. Subsequently, we launched and recently completed a debt tender that reduced total debt by $952 million, repurchasing debt that carried annual interest payments of $52 million and realizing $228 million of principal savings at an average pre-tax discount of 24%.

Adjusted for the results of the debt tender, pro forma liquidity as of June 30 totaled $2.7 billion, including approximately $350 million of cash in short-term investments and a $2.3 billion revolving credit facility, which steps down to approximately $1.7 billion from October 2019 to September 2022. As a consequence of the debt tender, we have significantly reduced our available cash and equivalents, and we anticipate that we will need to draw on the revolver as a source of funding under the current market conditions. To this point, we have drawn $125 million on our revolving credit facility in advance of repaying our 2019 senior notes that mature today.

Given greater uncertainty on the near-term outlook for the floater market, we view our revolving credit facility as an important source of available liquidity as we navigate the protracted deepwater recovery. The key covenants in our revolving credit facility are maintaining a total debt-to-capital ratio below 60%, providing guarantees from some of our rig owning subsidiaries such that these entities represent at least 80% of total net book value and having net book value coverage from our marketed rig fleet that is at least 3.25x the size of the facility. Importantly, this revolver is unsecured and has no covenants based on operating cash flows.

We also maintain the flexibility to raise additional capital through asset sales and the issuance of guarantee to the unsecured debt. In terms of our next steps, we will look to opportunistically raise additional capital to increase our available liquidity and address near-term debt maturities. It is important to note that we have the largest fleet of offshore drilling rigs in the world, which is comprised primarily of modern floaters and jackups, with an unencumbered gross asset value of approximately $11 billion according to third-party research.

We believe that this fleet profile and our unsecured capital structure should provide us with access to capital and financial flexibility as we navigate the market cyclicality. Finally, I'll provide an update on synergies and transaction costs. As Tom alluded to earlier, we are on track to achieve our annual expense synergies of approximately $165 million and we are evaluating additional opportunities with a potential to achieve synergies beyond this target. In total, these synergies are expected to result in approximately $1.1 billion of capitalized value.

More than 75% of these synergies are expected to be captured within 1 year of closing. And we expect to reach full run rate synergies of $165 million by year-end 2020. As of June 30, we had reached run rates synergies of $80 million, which will benefit contract drilling and G&A expense going forward. Consistent with our prior guidance, we anticipate the cash transaction cost associated with the merger will total approximately $175 million related to employee severance costs, legal and professional fees and other integration-related costs. These transaction cost estimates include cost incurred by legacy Rowan prior to closing as well as cost associated with our recent rebranding.

As of June 30, we have incurred total cash transaction cost of approximately $110 million, with majority of the remaining $65 million expected to be incurred in the second half of this year. We may also incur certain noncash charges as a result of the merger such as approximately $3 million of lease impairment charges incurred in our second quarter results. We will continue providing updates on our synergy achievement and transaction costs in subsequent conference calls.

In closing, I want to reiterate that we will continue to proactively manage our capital structure, to most effectively execute our strategic priorities and maximize value for shareholders. We continue to evaluate options that will help us to achieve these objectives and remain focused on delivering our targeted synergies and actively managing our cost base so we best position the company for the future. Now I'll turn the call back over to Nick.

Nick Georgas -- Senior Director of Investor Relations

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

Questions and Answers:

Operator

[Operator Instructions] And our first question today comes from Ian McPherson from Simmons. Please go ahead with your question.

Ian McPherson -- Simmons -- Analyst

Hey good morning afternoon. Thanks Tom, one thing we picked out of the fleet status was a few jackups that have longer priced options behind what we saw before, most significantly, I think, was the Stavanger that shows it has customer price options out through 2025. Can you speak to the genesis of those? How recently were they done? I think you said broadly that you have escalating options on some of these rigs, but is that something that goes back in time or were they more -- these options more freshly priced with something closer to market pricing expectations?

Thomas P. Burke -- President, President and Chief Executive Officer

Ian, I'd say this -- Ian, as far as sort of general tempo of contracting around jackups, particularly the last jackups, we are seeing some good trends as far as -- if we have priced options typically at rising rates or we have option -- may be options on contracts which are mutually agreeable, and also the option, sort of strike date when the customer needs to declare it are typically coming sooner in the drilling contract as opposed to later. So generally, all positive. With respect to those, that specific contract, they were put in place some time ago.

Jonathan Baksht -- Executive Vice President and Chief Financial Officer

Yes. And they are part of the master services agreement we signed with F&O.

Thomas P. Burke -- President, President and Chief Executive Officer

Yes. So we signed a master service agreement with F&O, and these options were put in place. And we are happy with the cadence of them and how that priced.

Ian McPherson -- Simmons -- Analyst

Okay. I wanted to ask a follow-up of you Jon. Your working capital kind of crushed your cash flow in the second quarter, and I wonder if you could provide some perspective on your expectations for that component for the rest of the year?

Jonathan Baksht -- Executive Vice President and Chief Financial Officer

Yes, sure. Ian, from working capital standpoint, really this quarter, there's a lot of moving pieces, I guess, as there typically are. But this particular quarter, we had a lot of start-ups in Q2. So -- for example, the DS-12, the DS-7, the 8500s, and a few jackups. So typically your accounts receivable will swell when that happens. So we had -- that was one of the drivers.

And then we had other aspects such as some tax payments that hit in the second quarter. Typically, we would accrue those, but those -- they were just a bit more from a cash standpoint in Q2 than others. And then there were some other mobilizations that were going on this quarter. I would say those were probably the unique items this quarter that impacting working capital and I would expect that the next quarters would be more normalized, but for other kind of movements of rigs and those type of things.

Ian McPherson -- Simmons -- Analyst

Okay. And Jon,, you -- just to clarify, you said your merger costs are expected to be $65 million in the second half and I assume probably a little bit heavier in Q3 than Q4, is that fair?

Jonathan Baksht -- Executive Vice President and Chief Financial Officer

I think that's fair. Yes.

Operator

Our next question comes from Cole Sullivan from Wells Fargo. Please go ahead with your question.

Cole Sullivan -- Wells Fargo -- Analyst

Hi. Good morning. On the guidance for third quarter revenues, can you help us work through kind of the moving parts there? Little bit more in depth on and as to the rollovers. It sounds like the utilization could be a little lower there.

Thomas P. Burke -- President, President and Chief Executive Officer

Sure, Cole. From kind of a bridge standpoint from Q2 to Q3, what you see is that we do have some roll offs happening in Q3. So we've got the DS-4, 8504, the DPS-1 roll off in July and the 5006 in August. And so a lot of that is early in the quarter. And so that's -- that will contribute to a meaningful part of that drop-off.

And then, as I mentioned in the prepared remarks, CD&E is going up because it does take some time for us to ramp down those crews to put them in a more kind of warm state, if you will, and given that a lot of those roll offs are early in Q3, we will incur a lot of the cost to those rigs throughout the quarter. And then you also have other start-ups that are occurring and so, typically, as you know, we're going to ramp up the rigs to get ready to work.

And so we had some other start-ups occur in the second quarter that from a third quarter standpoint that you're now going to recognize a full quarter of CD&E. So those were the drillships: The DS-7, the DS-9, the DS-12. And then we've also got some mobilizations, which I mentioned, the Reliance, the Ralph Coffman and the Norway, all kind of impacting of Q3, which is -- which are all items that are adversely impacting the quarter.

Cole Sullivan -- Wells Fargo -- Analyst

All right. You said the cost savings in the second quarter ended at around $80 million on a run rate basis. Can you help us kind of split that up between G&A and OpEx? And then also can you help us think about how much of the cost savings -- how much additional cost savings is implied in the third quarter guidance?

Jonathan Baksht -- Executive Vice President and Chief Financial Officer

Well, in terms of where we're at today, from a run rate standpoint, the majority of that savings is impacting G&A at this point. And it's all -- the majority of it is back-office expenses, as you would expect. In terms of kind of the ongoing guidance, that trend will continue going forward. And you will see -- we -- as Tom mentioned and I mentioned, we are aggressively hitting the -- working on reducing cost, and so we're more focused on that part and so we'd expect that the Q3 numbers will continue to, from a synergy standpoint, go up, more of that kind of in the near term.

Cole Sullivan -- Wells Fargo -- Analyst

All right. Thanks I'll turn back.

Operator

Our next question comes from Taylor Zurcher from Tudor, Pickering, and Holt. Please go ahead with your question.

Taylor Zurcher -- Tudor Pickering and Holt -- Analyst

Hey good morning. Thank you Tom, maybe just start on some of your commentary on the floater market as relates to pricing. Clearly, the commentary provided is -- sounds like a recovery in pricing is continuing to push out to the right. And so my question is, if we could think about a futures curve for ultra-deepwater pricing, could you help us understand what your viewpoint of that curve might look like? And then, is the inflection point higher really now a 2021 event or is it a late kind of 2020 event?

Thomas P. Burke -- President, President and Chief Executive Officer

So I think when we -- when you -- when I look at my comments in the prepared remarks, what is clear is that we have seen a recovery in ultra-deepwater. And if we think back to sort of 2016, 2017, total utilization for floaters has come up from about 50% to about 66% and market utilization has gone from less than 70% to over 80% today. So we're on a good trajectory of improving floater utilization.

And as I mentioned in my prepared remarks, we have a significant number of FIDs. So we are seeing floater utilization go up, and correspondingly, we have seen floater pricing go up. And floater pricing is up where, as I mentioned, we see some -- we are working against contracts which are generating cash flow, which is good news, not what was the case 2 years ago.

We're sitting on a number of floater contracts, which are -- there are a lot of floater contracts and the teams are very busy preparing, responding to tenders and, frankly, very busy on the floating side. But the length of the contracts we were responding to are shorter than when we would like. So if we think about contracts which are starting between now and the end of 2020, more than 2/3 of them are less than 1 year in duration.

And so while utilization has gone up and we are seeing pricing momentum, the short-term nature of these contracts means that we won't see that much pricing momentum in the second half of 2019 or in the first half of 2020. Hopefully, we are wrong and we see more acceleration in pricing. But given the short-term nature of what we're seeing, a lot of the competitors in the market are going to be focused on getting this rig to work and then worried about the contract straight after it, and so keeping rigs that are working, working.

Now if we think past that in sort of the latter half of 2020 and into 2021, we expect to see some longer-term work. And we're seeing more longer-term work every month, more longer-term contracts to payer. But right now, the majority of the contracts are less than 1 year in duration. And so, therefore, we won't see much pricing momentum in the short term.

Taylor Zurcher -- Tudor Pickering and Holt -- Analyst

Okay, that's helpful. And maybe if we think about your ultra-deepwater fleet and, clearly, you've got a handful of Tier 1 floaters that will roll off in the next several months and you've got at least 2 warm-stacked high-end floaters. If we think about rigs like the DS-4 and the DS-6, they are still very capable rigs, but probably a step down from the bucket I just talked about. What's sort of the marketability outlook for those 2 rigs moving forward?

Thomas P. Burke -- President, President and Chief Executive Officer

Well, it really depends on the application that the customers have. So I would say that the DS-4 and the DS-6; the DS-4, for example, has just finished a job in West Africa and it's available right now. But it is a hot rig and customers are looking for assets, which have been working recently. So it's not all doom and gloom on the late 6 generation rigs like that -- the DS-4 because it's really about the customer's application.

If they are drilling -- if the needs of the reservoirs that they are drilling into are in very deepwater or very, very high-end look, then perhaps that's not the rig that's needed, but in lot of the application, the DS-4 is just fine as has been shown in the work it's just done in West Africa. There's no doubt customers are more focused on the high-end rigs, on the 7th generation rigs, but the DS-4 is still an excellent rig and it's got its place in the market.

Taylor Zurcher -- Tudor Pickering and Holt -- Analyst

Well thanks for that I'll turn it back.

Operator

Our next question comes from Kurt Hallead from RBC. Please go ahead with your question.

Kurt Hallead -- RBC -- Analyst

Good morning.

Thomas P. Burke -- President, President and Chief Executive Officer

Good morning Kevin.

Kurt Hallead -- RBC -- Analyst

Appreciate the color and the update and perspective on the dynamics at play in the market overall. Think maybe, Tom, just in the dynamics of how you outline the short duration in the churn, if you will, that's going to occur in the marketplace? Just curious, when you stated the pricing momentum or won't see much pricing momentum into the first half of 2020, would you suggest that the pricing momentum is completely going to stall? Or just from an upward dynamic, it's going to maybe inch along from here instead of maybe take a stair step, can you just maybe provide a little bit more context to that?

Thomas P. Burke -- President, President and Chief Executive Officer

Sure. Kurt, it's -- I would say it's more likely the latter. We'll see pricing improvements, but we certainly aren't going to see -- we are not expecting to see a stair step up, but we are not expecting it to stall. But again, we are seeing utilization go up, we are seeing rigs being recontracted. We are seeing, in South America, more assets being put to work. So utilization is improving and it will continue to improve.

But the short length term of the contracts will mean that even though utilization is pushing up, we're not expecting to see significantly increased pricing momentum. It doesn't mean it's going to stall, but it doesn't feel like it's going to take a jump up.

Okay. Appreciate that context, Tom. And in the dynamic of the guidance points that have been provided for the third quarter and initial outlook into maybe the fourth quarter from an operating cost standpoint, just kind of curious with the reduction in your debt, is that -- I guess, that's going to map out to be what? About less than $100 million of interest expense for the second half of the year per quarter? Is that about right if I were to kind of math that out?

Jonathan Baksht -- Executive Vice President and Chief Financial Officer

That's about right. Yes. So our run rate is just around 400 pro forma for the tender, so roughly about 100. And just keep in mind, Kurt, that's on a book basis. The cash is a bit different. And so third quarter for us is typically a higher cash interest expense. But your numbers are in line.

Kurt Hallead -- RBC -- Analyst

And just wondering if you might be able to offer us -- you provided the guidance or the input for ARO EBITDA for the full year. What's the flow through in the equity in earnings line for the year?

Jonathan Baksht -- Executive Vice President and Chief Financial Officer

For the year, we didn't provide any guidance for the year, but you can see Q2. And what I'd say is that it's a highly contracted fleet, so there is a lot less variability than maybe the broader Valaris fleet. And so if you look, one of the interesting things here and I'll probably use this opportunity to just kind of make a point on the purchase accounting aspect of this, but if you look at the equity earnings that flow through this quarter, it's -- really it's -- it's about $0.5 million.

But if you look at, and I'd guide you, there's a bit more detail if you look at the footnote 4 in the 10-Q. But if you look without the amortization of the purchase accounting, the equity interest is $8.4 million. And so it's probably fair to look at that as kind of a more normalized run rate for the business. But because we have to write that -- when the merger happened, we had to write up our investment and then amortize that, we effectively knock off a lot of the net income there due to purchase accounting, which is what you see flowing through on the income statement.

Kurt Hallead -- RBC -- Analyst

That's great. That's great color. I really appreciate that. I'll keep it there. Thank you guys.

Jonathan Baksht -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Our next question comes from Greg Lewis from BTIG. Please go ahead with your question.

Greg Lewis -- BTIG -- Analyst

Hey everybody thank you and good morning Jon, I think in your prepared remarks you mentioned about ARO and the potential financing opportunities around ARO. Any kind of color you could provide us around that?

Jonathan Baksht -- Executive Vice President and Chief Financial Officer

Well, certainly what we've said in the past, Greg, still remains true but, obviously, we are just up in 2 years into our journey with ARO as far as operating. We have, you are right, a highly contracted fleet. We are right -- as I mentioned in my remarks, we are right in the middle of determining the newbuild project which has slipped a little bit because of negotiations with the shipyard as well as the shipyard's construction being pushed a bit to the right, but things are going well with ARO.

As far as the capital structure, we'll -- once we understand the tempo and the timing of the newbuilds, then we'll determine what the right next steps are. One of those steps would be putting in a revolving credit facility. Another one would be making sure we have the right construction financing for the newbuilds, and another one might be bringing in some external debt. So -- but until we actually find the -- we have some visibility on the newbuild program which -- it's premature to start changing the capital structure.

Greg Lewis -- BTIG -- Analyst

Okay. Great. And then just one more for me. You mentioned in your comment, I think you called out three of the all floaters and then you kind of followed up with comments around asset sales. As we think about asset sales, I mean, historically, I mean, I guess, we have a name change, but historically, Ensco has been very good at kind of renewing the fleet, selling older assets, bringing in -- as we think about asset sales really, should I be -- should we be thinking about these as really just legacy noncore assets?

Or do you think we could -- do you see a scenario where maybe we could even sell some of the more valuable higher end rigs? Just, as you mentioned, you have more ultra-deepwater rigs than anyone else in the world.

Thomas P. Burke -- President, President and Chief Executive Officer

Yes. We would look at all avenues. With respect to the rigs that I mentioned in my prepared remarks, I would say that we'll evaluate those rigs. We continue to evaluate them. We have a very robust understanding of the need as far as upgrades, special surveys, etc. So we'll look at those rigs as they roll up contracts over the next 9 months and then determine what the right role is for them and whether we should keep them in the fleet if there is a good opportunity for them or we should sell them.

And you're correct. The company has sold a lot of assets over the last 10 years. With respect to sale of the other rigs, nothing is off the table. We would certainly look at what we believe the assets will work, and from a cash flow generation over time and what we'll be able to get to them and nothing is off the table.

Greg Lewis -- BTIG -- Analyst

Okay. Great. And congratulations on the tender, that was a really big deal for you guys.

Thomas P. Burke -- President, President and Chief Executive Officer

Thank you very much.

Greg Lewis -- BTIG -- Analyst

Thank you Rick.

Operator

Our next question comes from Chase Mulvehill from Bank of America. Please go ahead with your question.

Chase Mulvehill -- Bank of America -- Analyst

Hey thanks. Good morning. So I guess, I wanted to talk about the debt refi. Maybe you talked a little bit about this earlier in the call, but I hoped in a little late. But maybe could you provide any timing or maybe the amount of refinancing that you expect to do on the debt side? And then talk about maybe whether you'd prefer to do secured debt or prefer guaranteed notes?

Jonathan Baksht -- Executive Vice President and Chief Financial Officer

Yes, sure, Chase. So we actually haven't covered that much detail, so I'll cover some new ground with my comments. But in terms of, just in the prepared remarks, I did mention the fact that on top of the debt tender, which you are versed on, we did just repay the 2019 maturities that we had due today. So those are repaid and we did draw on our revolver to do that. Right now, we're drawn on the revolver to $125 million. So we are going to look at external funding sources to potentially continue to improve our liquidity. And so those funding sources could be secured debt or guaranteed debt.

I mentioned that right now we have a completely unsecured capital structure with gross asset value of $11 billion per third party. We have a book capitalization of over $18 billion. And further even the prior question, we have the ability to monetize assets as well. So we're going to look at all funding sources we have in the current environment to continue to bolster our liquidity to manage our ways through the cycle in the current conditions.

Chase Mulvehill -- Bank of America -- Analyst

Okay. Right. And on the timing, would you expect something to happen in the third quarter here?

Jonathan Baksht -- Executive Vice President and Chief Financial Officer

Yes, I would, Chase. I think what you've seen is that we're going to continue to be opportunistic. We are not going to rule anything off the table, but we're also not narrowing in. I think we'll -- we continue to watch the market, look for opportunities. We certainly have no need to rush out to the markets to do anything. We have ample liquidity at the moment. If you look at the liquidity we have, we still have the $2.3 billion on the credit facility with stick down to $1.7 billion. But with that amount of liquidity, we can be patient and wait for the appropriate market window.

Chase Mulvehill -- Bank of America -- Analyst

Yes. All right. That makes sense. And on the capex side, have you given any color around 2020 capex? Do you care to provide any color? Maybe we can kind of use the back half run rate as -- maybe as the starting point for 2020. Is that a good starting point?

Jonathan Baksht -- Executive Vice President and Chief Financial Officer

Well, we haven't provided 2020 guidance just yet, Chase. But what I would say is that we'd effectively, if you look at 2019 versus 2020, we are effectively past the newbuild program moving forward. We do have the DS-13 and the DS-14 that are outstanding. I'm putting those in a different bucket because we do have the ability to roll that capex into notes receivable, but barring those 2 rigs, if you just look at kind of the sustaining capex with the run rate kind of the base capex, that's something that we'll clearly have next year. But we haven't gone through our capital kind of planning cycle yet. So we don't have any guidance for that.

Chase Mulvehill -- Bank of America -- Analyst

Okay understood. I'll turn it back over.

Operator

And our next question comes from Vebs Vaishnav from Howard Weil. Please go ahead with your question.

Vebs Vaishnav -- Howard Weil -- Analyst

Hey good morning and thank you for taking my questions. Can we talk about going forward with all the changes you have done in the debt, how do we think about the cash interest expense? I think we touched a little bit about that. And how to think about cash taxes and maintenance capex?

Jonathan Baksht -- Executive Vice President and Chief Financial Officer

Sorry, Vebs, just to clarify, so cash interest expense, cash taxes and what was the last thing?

Vebs Vaishnav -- Howard Weil -- Analyst

Maintenance capex for the pro forma company.

Jonathan Baksht -- Executive Vice President and Chief Financial Officer

Okay. Yes. So I'll start with the cash interest expense. And I think you're looking for more of a run rate. And so, as I mentioned, our cash interest right now pro forma for the tender, our debt, I'll call it our unsecured bonds carrying interest expense of roughly $400 million. If we are to draw on the revolver for additional funding needs, that will add to that interest expense.

And so you saw that we shaved off about $52 million from the tender that we just did from our bonds. However, that will be partially offset by any revolver draw that we do. So I mentioned we just drew this week in order to pay down the 2020 maturities. And so as you go forward, the cash interest expense will be somewhat higher if we need to draw on that revolver further. And in the current environment -- with the environment that we have today, we do anticipate that we are going to continue to be drawing on that revolver, which will increase that cash interest expense.

On a cash taxes standpoint, I don't know if we have a -- it's very hard to guide to a run rate on that. I think we could probably go through that a bit more detail offline if you want to kind of understand how taxes work, but it really is a function of what jurisdictions we're working in, timing of contracts. And, if you know, we do make profits in certain jurisdictions even though we are operating at net loss today. Our cash taxes are very much impacted by where we are working in the margins in different jurisdictions, which does change over time.

And so it's much harder to provide kind of a run rate for that one, but if you look at kind of the current quarters, those are probably fairly decent guides to kind of the near term, anyway near term being may be the next quarter or 2, but it will very much be a function of our business mix. And then there is just some base level taxes that we will be paying just based on our jurisdiction that we operate in our structure. So I know that's not completely clear, but it's -- taxes is -- there is a variability just based on the operating profile.

Vebs Vaishnav -- Howard Weil -- Analyst

And I guess, maintenance capex, how should we think about it going forward?

Jonathan Baksht -- Executive Vice President and Chief Financial Officer

Yes. Similar to what I mentioned with Chase, we don't really have guidance out there from a long-term basis. I would say that if you look at kind of where we're at between now and the end of this current year's capex cycle or at least the back half of the year, that's probably good guidance for the end of the -- for the next -- that is the guidance for the next 6 months. Next year -- we're going to have our capital budgeting cycle later this year where we look at 2020.

We've completed the merger in the last quarter. So it's something we need to get together and really do an assessment on the fleet on what the type of maintenance run rate we really want to have as a pro forma fleet in the current environment. And so it's probably premature to guide to it, but suffice to say that, on a gross capex basis, we should be lower year-over-year given that we don't have the same number of upgrades and enhancements that we had this year, borrowing the 2, the DS-13 and the DS-14, which we can roll those into a promissory note. So stay tuned, we'll provide a bit more guidance on that in the coming quarter.

Vebs Vaishnav -- Howard Weil -- Analyst

Okay. And as I think -- as we think about the debt markets like can you say like what bankers are telling you about? How open the debt markets are, either on an unsecured basis or a secured basis?

Jonathan Baksht -- Executive Vice President and Chief Financial Officer

It's hard to comment. I think you can probably talk to your bankers and get the same input. I mean, you can see where the bonds are trading. Clearly, it's a bit of a challenge market right now, which is one of the reasons why we did the debt tender. So it's -- it was -- the bonds have really trade off and so we are able to capture meaningful discounts, I've mentioned 24% discount. So you can read through where our bonds are trading now and the discounts that they are out, the yields that we purchased those bonds at is a bit of a proxy for new issuance.

Obviously, there'll be some variances on the new issuance than where they're trading, but it's very much market-dependent and it could change. And so I don't necessarily want to provide guidance out there, but using our -- you could look at the yields on our bonds as a proxy. And clearly, if we were to do anything that were senior to the current bonds, we would expect that those would trade at a premium to the current complex given a similar type of tender. But the market is challenged at the moment.

Vebs Vaishnav -- Howard Weil -- Analyst

Thank you much for taking my question.

Operator

Thank you. And ladies and gentlemen, we've reached the end of today's question-and-answer session. At this time, I'd like to turn the conference call back over to Nick for any closing remarks.

Nick Georgas -- Senior Director of Investor Relations

Thanks, Jamie, and thank you to everyone on the call today for your interest in Valaris. We look forward to speaking with you again when we report third quarter 2019 results. Have a great rest of your day.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Nick Georgas -- Senior Director of Investor Relations

Thomas P. Burke -- President, President and Chief Executive Officer

Jonathan Baksht -- Executive Vice President and Chief Financial Officer

Ian McPherson -- Simmons -- Analyst

Cole Sullivan -- Wells Fargo -- Analyst

Taylor Zurcher -- Tudor Pickering and Holt -- Analyst

Kurt Hallead -- RBC -- Analyst

Greg Lewis -- BTIG -- Analyst

Chase Mulvehill -- Bank of America -- Analyst

Vebs Vaishnav -- Howard Weil -- Analyst

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