Transocean Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 31, 2023

Key Takeaways

  • Q3 financials: Transocean delivered adjusted EBITDA of $162 million on $721 million of revenues (≈22.5% margin), reflecting strong profitability.
  • Backlog growth: Added $745 million in incremental backlog to reach $9.4 billion, marking the sixth consecutive quarter of backlog increases.
  • High-value contracts: Secured major fixtures including a 3-year Deepwater Quila contract at $448 k/day and extensions on Deepwater KG-1, driving ultra-deepwater average day rates up ~33% since Q4 2022.
  • Longer contract terms: Proportion of rigs contracted for >12, >24 and >36 months rose by 42%, 150% and 160% respectively, enhancing revenue visibility.
  • Q3 loss and cash flow: Reported a net loss of $220 million ($0.28/share) and adjusted net loss of $280 million, with negative free cash flow of $94 million due to $135 million in mobilization spend.
AI Generated. May Contain Errors.
Earnings Conference Call
Transocean Q3 2023
00:00 / 00:00

There are 11 speakers on the call.

Operator

Good day, everyone, and welcome to today's Q3 2023 Transocean's Earnings Call. At this time, all participants are in a listen only mode. Later, you will have an opportunity to ask questions during the question and answer session. Please note this call is being recorded. It is now my pleasure to turn today's call over to Ms.

Operator

Johnson, Director, Investor Relations.

Speaker 1

Thank you, Mike. Good morning, and welcome to Transocean's Q3 2023 earnings conference call. A copy of our press release covering financial results Along with supporting statements and schedules, including reconciliations and disclosures regarding non GAAP financial measures are posted on our website at deepwater.com. Joining me on this morning's call are Jeremy Sigpen, Chief Executive Officer Keelan Adamson, President and Chief Operating Officer Mark May, Executive Vice President and Chief Financial Officer and Roddie Mackenzie, Executive Vice President and Chief Commercial Officer. During the course of this call, Transocean Management may make certain forward looking statements regarding various matters related to our business and company that are not historical facts.

Speaker 1

Such statements are based upon current expectations and certain assumptions and therefore are subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for our forward looking statements and for more information regarding certain risks and uncertainties that could impact future results. Also, please note that the company undertakes no duty to update or revise Thank you very much. I'll now turn the call over to Jeremy.

Speaker 2

Thank you, Allison, and welcome to our employees, customers, investors and analysts participating on today's call. As reported in yesterday's earnings release For the Q3, Transocean delivered adjusted EBITDA of $162,000,000 on $721,000,000 of adjusted contract drilling revenues, resulting in adjusted EBITDA margin of approximately 22.5%. As released on our October 18 fleet status report, We recently added $745,000,000 in incremental backlog, given to a total of $9,400,000,000 Of note, this is the 6th sequential quarter increase in our backlog. Now to our latest fixtures. In India, the Deepwater KG1 received a 60 day extension with its current customer reliance at a rate of $348,000 per day, As well as a 21 month contract with ONGC at a rate of $347,500 per day, excluding a mobilization fee of $5,000,000 The rig is now committed through the end of the year, at which time it will undergo a brief period of contract preparation before its program with ONGC commences in February 2024.

Speaker 2

As discussed on our Q2 earnings call, an operator in the U. S. Gulf of Mexico awarded the Deepwater Invictus a P and A well at a rate of $440,000 per day. The program was completed in the Q3. Finally, in Brazil, the newbuild ultra deepwater drillship Deepwater Quila was awarded a 3 year contract with Petrobras At a rate of $448,000 per day, excluding a mobilization fee of 90 times the contract day rate.

Speaker 2

The Aquila was delivered from the shipyard earlier this month will soon receive customer specific upgrades for its initial contract, which is expected to commence in the Q3 of 2024. Contract with Petrobras was particularly important as it facilitated the acquisition of the outstanding interest in our joint venture, Laquilla Ventures Limited, Through which we assumed full ownership of the Deepwater AQUILA. Transocean now owns and with the commencement of the AQUILA contract will operate 8 of the 12 globally competitive 1400 short ton hook load dual activity ultra deepwater drillships in the world. The acquisition of the Aqylo is consistent with our strategy of continuously high grading our fleet, a strategy which has proven very effective, particularly over the last 18 to 24 months as we have secured market leading day rates with these high specification assets. As an example, since the Q4 of 2022, Our ultra deepwater fleet average day rate has increased by approximately 33% to $416,000 per day.

Speaker 2

By the Q3 of 2024, based upon current firm backlog, we expect this average rate to increase to $437,000 per day. Based upon the status of discussions with customers, we expect that the Transocean Barrons will be contracted for new work starting in mid to late 2024 until initially late 2026 and the Deepwater SKUros will be similarly committed until early to mid-twenty 25. Details of these prospects will be forthcoming assuming execution of fully binding customer commitments. Not only do we have significant backlog over the past several quarters, but we also substantially lengthened contracting term during this period. In April of 2022, 12 of our rigs were contracted for durations greater than 12 months, 6 were contracted for greater than 24 months, and only 5 are contracted for more than 36 months.

Speaker 2

By comparison, today, 17 of our rigs are contracted for durations greater than 12 months, a 42% increase. 15 are contracted for greater than 24 months, a 150% increase and 13 are contracted for more than 36 months, a 160% increase. Of our 2023 contracted backlog, just over 80% now consists of programs of more than 1 year in duration. Another clear indication that our customers believe in the longevity of this upcycle and in the capability of Transocean. The significant increase in contract commitments is reflected in the size of our industry leading backlog.

Speaker 2

From the beginning of 2022 to the present, We've added approximately $6,800,000,000 in backlog. When building our backlog, maximizing EBITDA and associated margins remains our goal. And these data points clearly demonstrate the effectiveness of our long standing asset strategy and portfolio management approach to placing our assets on contracts of appropriate and meaningful value. We take decisions that make the most economic sense for the company and our shareholders. It means that at times, we may seek the highest day rate possible for a specific asset or job, A consequence of which may be that we accept short periods of idle time on individual assets.

Speaker 2

In other instances, we may determine that maintaining high utilization has the optimal Long term financial impact, meaning that we fix an asset at prevailing or otherwise acceptable market rates for a longer duration, securing high quality backlog, meaningful EBITDA generation and longer term visibility to future cash flows. As reflected in their budget processes, our customers continue to be disciplined in their allocation of capital. The results of this behavior is exhibited in the lumpiness of the timing of contract awards we have observed over the last couple of years. We expect this trend to continue. Our sizable backlog and portfolio approach to fixing our assets minimizes our exposure to this natural ebb and flow of customer activity, while best ensuring we achieve the best margin possible.

Speaker 2

Notwithstanding the timing of announced contracting activity, our customers are securing rigs for longer and longer duration And for programs expected to commence well into the future. This is evidenced by the increase in average contract award lead times, which have increased significantly since 2021. Drill ship contracting lead times have increased by approximately 53% to 3 19 days and semisubmersible Lead times have increased approximately 38% to 284 days. The number of global floater opportunities continues to expand, reflecting very strong demand and further encouraging our view of the longer term sustainability of the cycle. Indeed, overall demand remains on the rise 84 rig years of activity expected to be awarded for 77 discrete programs starting in the next 18 months.

Speaker 2

Looking closer to each region, the U. S. Gulf of Mexico continues to be defined by direct negotiations with our customers, with operators engaging contractors of choice for specific We see a steady stream of demand for short term programs with independent operators amidst a solid market with a limited supply of high specification ultra deepwater assets. Notably, we are engaged in discussions for follow on work for the Deepwater Atlas upon completion of its current contract and are already having conversations with numerous customers regarding additional programs, many of which are not expected to start for up to 3 years, once again demonstrating our customers' belief in a prolonged up cycle. The Invictus is currently competing for multiple local campaigns, including one which we believe will require a high hook load 7th generation drillship, The available supply of which is very limited.

Speaker 2

We are also actively marketing the inspiration in various jurisdictions around the world. As you well know, Brazil continues to be a source of strong demand. And based upon open tenders, we expect the active rig count to continue The next 12 months from the 29 rigs operating today. Over the past year, there have been 27 awards made in Brazil, 18 rigs already in country and 9 that brought new rigs into country. Between the open tenders including Glusios, Stepia, Moored and BMC 33, There are expected to be another 8 rig awards, which should require 2 incremental rigs from outside of Brazil.

Speaker 2

This brings the addition of non Brazilian rigs to 11 since the upcycle began. Furthermore, it's widely expected that more tenders in 2024 will keep all of the incumbent rigs busy and pending exploration success Could demand a further call on the global market to add yet more rigs to Brazil. Clearly, Brazil is set to remain a pivotal long term consumer of ultra deepwater rigs, With active rig count expected to reach at least 36 in 2024 2025, just by fulfilling today's known tenders. Across the Atlantic, we see an excess of 20 opportunities scattered throughout Africa and the Mediterranean commencing in the next 18 months. For the first time in nearly a decade, Nigeria, following its national election, is showing significant signs of revival.

Speaker 2

We expect between 24 long term programs to be tenured over the next 6 months, including 3 from international oil companies. In Angola, Chevron, Exxon and other large operators have a mixture of short and multi year opportunities currently expected to commence in 2024. Additionally, Namibia may require more rigs as Total Energy has confirmed future development, while Chevron Shell have programs expected to be awarded in 2024. The Namibian Ministry of Mines and Energy recently confirmed that projects requiring as many as 5 rigs are set to commence in 2024. And finally, in Mozambique, we expect tenders for both Total Energy's Annie and I in the coming months.

Speaker 2

In Australia, regulatory requirements At this point, we anticipate formal tenders will be released in 2024 and expect our 2 rigs currently active in the region to be competitive for these tenders following their existing programs. As such, we expect both the Transocean Endurance and Transocean Equinox to remain in country for the foreseeable future. There have also been promising developments elsewhere in the Eastern Hemisphere. We anticipate that ENI will soon require a rig for follow on development for its recent discovery in the Kutai Basin in Indonesia. Eni also has an open tenant for approximately 18 months of work in multiple countries in the region.

Speaker 2

And in Malaysia, we expect PTTEP and Petronas We'll come to market in the near future for an ultra deepwater drillship with a commencement in 2024. Finally, we expect the high specification harsh environment market to remain tight As active supply in Norway is now fully utilized, in large part due to the departure of numerous rigs to other markets. As witnessed recently in a couple of public announcements, Many incremental programs will require operators in Norway to mobilize rigs from other regions. And since many, if not all, of the recently departed rigs We'll likely continue their active utilization outside the Norwegian market. We expect this region to remain tight for the foreseeable future.

Speaker 2

In addition to the fact that our customers are fixing contracts with start date 2 years in the future, the broader fundamentals also are approximately 115,000,000 barrels below their 5 year average, while the International Energy Agency reported global crude stocks have Also falling to their lowest level since 2017. Meanwhile, the IEA forecasts increasing oil demand through 2028, While OPEC projects a steady increase through at least 2,045. These predictions are supported by population and GDP growth projections, particularly for developing nations where renewables infrastructure is in its infancy. We continue to believe that much of new hydrocarbon development will come from deepwater basins These have consistently shown to yield superior investment returns and produce some of the lowest carbon intensity barrels available today. Reliable third party analysis Suggest upstream offshore CapEx will increase materially over the next several years, crossing $200,000,000,000 next year and reaching $234,000,000,000 by the end of 2027.

Speaker 2

In summary, our outlook for a prolonged offshore deepwater drilling recovery remains firm and we will continue to manage our rig portfolio to maximize value. As always, we will continue to place paramount importance on the safe and flawless execution of our operations to minimize the conversion to maximize the conversion of backlogs

Speaker 3

to cash.

Speaker 2

In this regard, our performance is truly a team effort, and I extend a sincere thank you to the entire Transocean team for their commitment every day to provide safe, reliable and efficient operations. I'll now turn the call over to Mark.

Speaker 4

Thank you, Jeremy, and good day to all. During today's call, I will briefly recap our 3rd quarter results and then provide guidance For the Q4, I will conclude with our preliminary expectations for full year 2024 including our latest liquidity forecast. As is our practice, we will provide more specific guidance for 2024, we have our 2023 year end call in February of next year. As reported in our press release, which includes additional detail on our results, for the Q3 of 2023, we reported a net loss attributable to controlling interest Of $220,000,000 or $0.28 per diluted share. After certain adjustments, we reported adjusted net loss $280,000,000 During the quarter, we generated adjusted EBITDA of $162,000,000 Operating cash flows were $44,000,000 primarily due to approximately $135,000,000 of contract preparation and mobilization costs, Affecting 7 rigs starting new contracts in late 2023 2024, including 2 rigs in Brazil, Two rigs have been prepared for Brazil, 2 rigs bound for Australia and 1 rig operating in the Eastern Mediterranean.

Speaker 4

The negative free cash flow of $94,000,000 in the 3rd quarter reflects the aforementioned negative $44,000,000 of operating cash flow and $50,000,000 of capital expenditures. Capital expenditures for the Q3 included $30,000,000 related to We have 2 recently delivered 8 generation drillships, the Deepwater Atlas and Deepwater Titan and the 7th 7th plus generation New World Deepwater Killer. Looking closer at our results during the Q3, we delivered adjusted contract drilling revenues of $721,000,000 and an average daily revenue of approximately $391,000 This is consistent with our previous guidance despite the lower than expected operating activity, which is mainly due to the delayed start On the Doropay deepwater KG2 in Brazil related to an importation issue. A recent application of the laws governing importation was Contrary to the application of the laws, which have been applied to all previously imported rigs, this issue in the KT-two has been resolved and the rig is expected to commence operations later This week, we do not expect similar issues with the other rigs scheduled to enter Brazil. Operating and maintenance expense in the Q3 was $524,000,000 This is below our guidance primarily due to lower than in service Maintenance costs and operating activity primarily related to the delayed start of the KG2.

Speaker 4

General and administrative expense in the Q3 was $44,000,000 This is also below our guidance mainly due to lower than anticipated professional service, IT related services fees and personal expenses. Turning to the cash flow and balance sheet. We ended the Q3 with total liquidity of approximately $1,400,000 including unrestricted cash and cash equivalents of approximately $594,000,000 approximately $183,000,000 of restricted cash for debt service And $600,000,000 from our undrawn revolving credit facility. Now I would like to address the impact of the significant increase in our backlog on our revenue and operating costs. As Jeremy mentioned, in the last 22 months, we've added approximately $6,800,000,000 of backlog.

Speaker 4

Many of these contracts including those with Deepwater Mykonos, Deepwater Kokavado, Deepwater Orion, Page 2, Transocean Barrons, Transocean Endurance and Transocean Equinox, which together comprise 2,100,000,000 This backlog increase requires substantial contract preparation and mobilization, which typically must be completed prior to the commencement of operations. We started to incur these costs in the Q2 of 2023 and expect our EBITDA margins to be adversely affected by varying amounts Through the Q1 of 2024. For reference, we expect to either defer or capitalize about 60% of these costs With the balance increasing expenses and reducing EBITDA. These preparation costs are obviously temporary In nature, it would translate into higher day rate revenue and operating margins in future years. We anticipate quarterly increases in contract drilling revenues throughout 2024.

Speaker 4

I will now provide an update on our expectations for the Q4 of 2023 and full year 2024 financial performance. As always, our guidance reflects only contract related reactivations and upgrades. For the Q4 of 2023, we expect adjusted contract drilling revenue Approximately $760,000,000 based upon an average fleet wide revenue efficiency of 96.5%. This quarter over quarter increase is mainly due to higher day rates on the KNG-one, Kokoboto, Mykonos and Petrobras 10,000. More operating days than had other service periods in the Q3 and expected commencement of the KG2 contract in the 4th quarter.

Speaker 4

This is partially offset by idle periods in several rigs. We expect 4th quarter O and M expense to be approximately $565,000,000 This quarter over quarter increase is mainly due to the timing of in service maintenance activities, higher operating in relation to the commencement of operations for the KG2 in Brazil and the Transocean Barrens in Cyprus and a full quarter of activity for rigs And at out of service periods in the Q3, this is partially offset by lower costs incurred in idle rigs. We expect G and A expense for the Q4 to be approximately $55,000,000 This quarter over quarter increase It's mainly due to the high professional and IT related fees that were not incurred as anticipated in the 3rd quarter. Net interest expense for the Q4 is forecasted to be approximately 127,000,000 This includes capitalized interest of approximately $6,400,000 Capital expenses for the Q4 are forecasted to be approximately $270,000,000 including approximately $210,000,000 Related to the preparation of the Deepwater Killer for its 3 year contract with Petrobras in Brazil and $16,000,000 with the Deepwater Atlas and Deepwater Titan. Cash taxes are expected to be $24,300,000 for the 4th quarter.

Speaker 4

I'd like to provide a preliminary overview of our financial expectations for 2024. We currently forecast adjusted contract revenue to be between $3,700,000,000 $3,900,000,000 This includes approximately $200,000,000 of additional services and reimbursable expenses. We expect our full year O and M expense to be between $2,100,000,000 $2,300,000,000 Finally, we anticipate G and A cost to be around $195,000,000 Our preliminary Projected liquidity at the end of 2024 is $1,500,000,000 to $1,700,000,000 reflecting our revenue and cost guidance and including The $600,000,000 capacity of our unbought revolving credit facility and restricted cash of approximately $340,000,000 most of which is reserved for debt service. This liquidity forecast includes 2024 CapEx expectations of $195,000,000 Of which approximately $105,000,000 is related to the Deepwater killer and approximately $90,000,000 for sustaining and contract preparation CapEx. In conclusion, as our risk continue to move to higher day rate contracts, our corporate imperatives Unchanged.

Speaker 4

1st, we will focus on safety of our people and execution of reliable and efficient operations. We also remain committed to strengthening our balance sheet and Restoring value to equity holders. As such, we will continue to manage our allocation of capital prudently and in a manner that allows us to continue to delever We are compromising safety and operational execution or highway to in growth opportunities. This concludes my prepared comments. Now I'll turn the call over to Alison.

Speaker 1

Thanks, Mark. Mike, we're now ready to take questions.

Speaker 5

Thank

Operator

And our first question comes from Greg Lewis with BTIG.

Speaker 6

Well, hey, thank you and good morning and thanks for taking my questions everybody. I guess, Mark, I was hoping you could talk a little bit more about the next year's guidance and thank you for that. I may be off by rig or 2, but as I count rigs with available or open revenue days in 2024, I'm looking at about, 8 I think it's around 8 rigs that have some are idle, some maybe roll off in Q3 of next year. As I think about the revenue guidance that you're giving, any kind of color you can kind of Talk to on those rigs, I mean clearly in Jeremy's prepared remarks, he announced white space. Is there I would imagine some rigs are better positioned than others to get to work or to maybe extend.

Speaker 6

Any kind of broad strokes you can give around that?

Speaker 4

So Greg, thanks for the question. Firstly, if you look at our guidance of approximately $3,800,000,000 take to the middle of the range, About 90% of that is contracted revenue. So there's about 10% which we obviously Roddie's And Keelan are very much involved in that. We sit down and we look at the rigs, we look at the opportunities, we look at the probability, Obviously. And then we assume a day rate based upon our 5 year planned day rate deck.

Speaker 4

And in some cases, we will put that rig to work using that dayrate deck. Other times, we will assume that the rig sits idle for a little while For the longwall depending on where it is and what type of rig it is. So there is an element approximately 10% in that Which is spec revenue and we update that as we go through the quarters next year.

Speaker 7

Yes. I'll add a little bit to that. If you take out the I guess the strict reading of the fleet data report, then we are currently looking at about 8 rigs. In our internal view, I mean, obviously, we can't divulge all the conversations we have with customers, but we think that number is maybe closer to 3. So We're pretty optimistic about being able to fill those gaps as we go forward.

Speaker 6

Okay. That's great to hear. And then, Ronny, since you're chiming I did have a question, right? I mean, and Jeremy alluded to it in his prepared remarks. I mean, clearly, there's a lot of Activity going on and a lot of demand from customers.

Speaker 6

As we sit here, I guess, That's the last day of October. Happy Halloween, everybody. I guess what I'm wondering is how much of it is part of this seasonal I. E. We're heading in the winter and maybe we see kind of Operator start to lock up some of these rigs as we move as they're starting to get ready for springtime.

Speaker 6

Any kind of seasonal factors maybe we could be thinking about in terms of that eventual activity or not even activity, fixturing Our contracting pickup that I think a lot of us are waiting for.

Speaker 7

Yes, I think so a couple of things to unpack there. So First of all, it may look like the absolute number of fixtures is slightly lower this year, but the truth is The length of each one of those fixtures is progressively longer year on year. So the actual number of rig days committed is looking really, really good for 2023 already. So as we enter like the last couple of months of the year, the things that we're actively engaged in just now Are all long term in nature. There's 1 or 2 short term things, but the majority of the stuff, especially the headlines that you're going to see over the next couple of 3 months is All for long term stuff.

Speaker 7

And we're not just talking about 1 year deals. We're talking about like 3, 4, 5, maybe even 10 year deals. So there's a lot of stuff in terms of the stats on the number of fixtures made, but what we're looking at is kind of Jeremy said is Making sure we're picking up the right pieces of work that give us that length of contract, but also a really good day rate because The decisions we make are all about generating returns and value for the shareholders. So we're going to continue pushing down that track. And In terms of seasonality, I think you're basically right in budget season right now for the major operators.

Speaker 7

So they're kind of going through that churn. And typically what we see is A lot of interest in the Q4, where people start thinking about what other fixtures they'll make in 2024 and start putting out tenders. So you may or may not be aware, but there's some of the big operators are out for tenders just now And there's more expected for kind of multi year, multi rig, multi country kind of tenders. So expect to see several of those in the near term.

Speaker 2

The other thing I'd say to that is they're making bigger commitments now for longer periods of time and they just take more time to process that decision and execute. And so I wouldn't read anything else into it other than that.

Speaker 6

Super helpful everybody. Thank you.

Speaker 2

Thanks, Greg. Happy Halloween.

Operator

And And our next question comes from Eddie Kim with Barclays.

Speaker 8

Hi, good morning. Just wanted to ask about the day rate Congression that we saw earlier this year. It seemed almost like a foregone conclusion that we'd see an announcement of Term contract at $500,000 a day before year end. And I know we still have 2 months left, but it increasingly feels like that expectation has shifted to Early next year instead. Would you agree with that based on your conversations with customers today?

Speaker 8

And if so, any particular reason for the Kind of the air pocket of contracting activity that we've been seeing the past few months that's pushed this timing out of it?

Speaker 2

I would say our customers are violently opposed to any day rate that starts with a 5 at this point in time. And like you, we've been disappointed that we haven't seen one. I do feel like there is that's kind of become the new ceiling for our customers that they don't want to see any of us push through that number and they certainly don't want to be the first to agree to a contract Of that day rate, but it's going to happen, Eddie. I don't know if it's going to happen over the next 2 months. There's still some opportunities out there that we're pushing, But it will happen.

Speaker 7

Yes, yes. No, I'd also add in that. As you look at the kind of the average drillship fixture across the market of all the 23 So far, that's about 367,000 a day. Transocean's average across the 23 fixtures for us is 415. So we're kind of like 10%, 15% higher than the average.

Speaker 7

And when you turn that to the semisubmersibles, We go from $336,000,000 to $392,000,000 So we're 17% higher on the semis and diamond barrel fixtures. So look, It's certainly not us that's holding that back. But as Jeremy said, the customers obviously are looking to Exercise as much capital discipline as they can, which we totally respect. But certainly for us, scoring dayrates in the high 400s It's good business any day of the week.

Speaker 8

Got it. It sure is. Just my follow-up is on Deepwater Aquila, could you just remind us of the cash outlays related to

Speaker 9

this rig over the next 12 months

Speaker 8

to 18 or 12 months, I should say? I believe there was a shipyard payment to take delivery of the rig earlier this month. How much was that? And What do you expect to be the kind of the all in activation cost for the rig to make it completely drill ready before its contract with Petrobras?

Speaker 4

So Eddie, we put 20% down when we purchased the rig about a year ago. So the final payment which we made in early October was the remaining 80%, dollars 160,000,000 As I said in my prepared comments, We intend to spend about $200,000,000 on preparing the rig for Brazil. As you know, Petrobras has some stringent requirements around What the rig has to be able to do, what equipment they want, including NPD, and we will be Taking the rig into Brazil sometime in June, July, August of next year.

Speaker 8

Okay, got it. Sorry, Mark, The $210,000,000 related to the Aquila, that's CapEx guidance for Q4, right? And then I thought I heard An additional $105,000,000 of CapEx for next year. Did I hear that correct?

Speaker 4

That's correct. Yes.

Speaker 8

Okay. Okay, understood. Thanks for that clarification. I'll turn it back.

Operator

And we have our next question from Kurt Hallead with Benchmark.

Speaker 9

Hey, good morning, everybody.

Speaker 5

Good morning, Kurt.

Speaker 9

Always appreciate the color. So in the just in the context of terms and conditions, and it looks like you have you referenced a number of opportunities where you're going to see 3 to 5 year kind of contract terms. Again, that kind of historically wouldn't necessarily jive with a Landmark new high day rate, right? Usually you're trading some term for rate. So just kind of curious as To those dynamics and kind of how you're thinking about them and again in the context of you as a management team trying to maximize And maximize cash flow as we go into this next upcycle.

Speaker 2

Yes. I'd say we covered it a bit in the prepared remarks and I think a bit last quarter Kurt, but I mean, we sit as a team and really evaluate each rig and each opportunity. And there are times with certain rigs where you say, you know what, We don't want to fix this rig to a longer term contract that we believe is going to be a discount to market by the end of that contract. And there are other rigs, we want to that rig and kind of test the market on short term work and continue to push day rates as much as we possibly can. Now the risk in that is you get some idle time Now and then you get some white space as we do right now with the Invictus, but that is the rig that we have continually used to push rates and got us to where we are today.

Speaker 2

So with some of our rigs, we will continue to take that strategy with other rigs. We'd like to lock them up into 3 or 5 year contract that what might be a discount toward the tail end of that Sort of the tail end of that contract, because it gives us that firm backlog and that visibility to future cash flows. So it's really this portfolio management approach that we've talked about previous calls and we continue to do that with each opportunity.

Speaker 7

Yes. I think I'd just add, we're also very specific about what we target In terms of the specification of the rig matching up with the requirements of the tender or the program. So Kind of a little bit counter to previous cycles where all the best rigs got fixed first at the lowest day rates, We've been quite purposeful in trying to keep a couple of them available, so that later in the cycle, The operators can still get their hands on high specification, top spec rigs, and of course, that might come with a little extra cash.

Speaker 9

Got you. Thanks for that. So, I guess my follow-up question here is, you kind of referenced You addressed some of the questions earlier on about a little bit of a lull in new contract announcements as we kind of progress through the second half of the year. But is there also an element of or are you seeing an element where the oil companies are Kind of looking at the same rig availability profile that everybody else kind of sees and basically now at a point where they are making decisions to push off project start times beyond 2024 because they just can't get the rigs That they want?

Speaker 7

I think there's probably an element of that, that if you for example, if You're going to do a P and A program. Then obviously, you would prefer to be able to push that to a point that you think dayrates will be Lower or you find the right rig or the specification rig that can do the work and you can get it at a reasonable rate. I think If you look at what's going on with the majors and I realize that not all of the information is public, but if you look at what's going on with the majors, you're going to see several fixtures made in the next short while that are for made in the next short while that are for multiple years and they're on higher spec rigs. So these guys are in the market today Kind of working diligently towards placing the right assets where they need them. So I kind of think it's a little That you see there's a lot more direct negotiation stuff going on today that you don't necessarily see in the tender market as such.

Speaker 7

And I just think you're going to continue to see, I wouldn't even say it was a deficit. It's just good. In terms of long term contracts, you're going to continue to see steady fixtures being made for multiple years. And if you think about where we were like being made for multiple years. If you think about where we were like just 1 year ago, we were looking at an activity chart Literally had a couple of handfuls of rigs that had the longer term stuff on it.

Speaker 7

Now we're talking about somewhere in the region of kind of 15 to 17 of our rigs have got more than 2 years outlook on them. And of course, by the end of the year or in Q1 next year, we expect that to get up To 20 or so. So I mean, I just think this is the transition period because you just have Fewer short term opportunities, but longer and larger number of long term opportunities. So this is just

Operator

And our next question comes from David Smith with Pickering Energy Partners.

Speaker 5

Hey, good morning and thank you for taking my question.

Speaker 8

Good morning, Dave.

Speaker 5

This is actually a question about cost. So please bear with me a second. But the average reported ultra deepwater rate in Q3, dollars 406,500 a day. I know that doesn't include reimbursables or contract termination. Multiplying that rate times the in service days reported Suggest about a $44,000,000 difference versus the reported Ultra Deepwater revenue of 516,000,000 The delta for the Ultra Deep quarterly has been averaging around $20,000,000 the last several quarters.

Speaker 5

I just want to verify If Q3 was just a big step up in the reimbursable revenues with a likely similar amount of cost.

Speaker 4

Yes. David, let's take this math offline. I don't want to go through this when we try to talk about the macro. Sorry. You bet.

Speaker 4

We can

Speaker 5

Absolutely. Then quick follow-up, if I may. The support cost of $67,000,000 was a little step up versus Prior run rate, was there anything anomalous or is this a good run rate to use?

Speaker 4

Well, we do have Hi, reimbursement. There's no question about that. And we've seen more and more customers requesting that we buy things, Perform services on their behalf. It's so much easier for them. So, as an example, if you look at the Petrobras contracts signed 2 or 3 years ago, Very low in reimbursables.

Speaker 4

If you look at the ones now, much, much higher. So yes, there is a higher run rate of reimbursables. But like I said, we can give this to you offline and give you the math.

Speaker 5

Perfect. I'll circle back with the big picture question. Thank you.

Operator

And our last question comes from Scott Gruber with Citigroup.

Speaker 3

Yes, good morning. I had a question on CapEx For next year, Mark, the base maintenance spend for next year at around $90,000,000 sounds rather benign. Are you just not seeing much Inflation in service cost or is this really a reflection of the initiatives around how you guys manage maintenance spend that Let's keep the wind on spending.

Speaker 4

So a couple of things there, Scott. 1, that $90,000,000 includes Some contract prep of about $10,000,000 so the rest is about $80,000,000 It's actually a little bit lighter than U. S. Bank it is. We have seen some inflation, no question about that.

Speaker 4

But as you know, we do have what we refer to as care agreements with Most of our OEMs and as part of the care agreement is a cap on the inflation Each year and that cap ranges around 2%. So even if inflation is 4% or 5%, which it Clearly, as at the moment, we're not experiencing all of that with a lot of our spend. So, Next year is also a lighter year when it comes to SBSs for rigs that are older. So you're not going to see a lot of money being spent on that. And we've also maintained our rigs fairly well throughout the down cycle.

Speaker 4

So we're not going to have a catch up In 2023, 2024, 2025 and beyond. So I think this is what you can expect from us going forward. Our CapEx has been very high Because of new builds, but on a sustaining basis, we've been saying this for a long time that you don't expect to see very big numbers from us going forward.

Speaker 3

Right. And just a quick follow-up on the SBS side. You will have a few more, It looks like in 2025 and 2026, and I know you're not spending as much on the 10 year SBS this cycle as you did last cycle, but just Kind of ballpark, what would a 10 year SBS run you now?

Speaker 4

It all depends on the asset because with these agreements, we have 10 year contracts with these OEMs. So part of The benefit to Transocean with regard to these agreements is that the rigs equipment stays certified 20 fourseven, 365. So, the cost benefit because we pay a day rate to our vendors, the cost benefit is that we can do For the drill ships, we can do the SPSs while the rig is working in service for the 5 year 10 year. Obviously, we're just past halfway with these contracts. We'll start to look at renegotiating this or terminating this or whatever We decide to do with regard to those agreements for the years 11 through 2015 or beyond.

Speaker 4

But clearly for us the 5 10 year is not a big number and most importantly for the drillships no out of service time. For the semis, however, we do have to take those rigs into the dry dock because we have to inspect the howl, the pontoons and The undercarriage of the rigs and that can be 15 to 20 days. Got it. I appreciate the color. Thank you.

Speaker 2

Thanks.

Operator

And our next question comes from Frederic Steen with Clarkson Securities.

Speaker 10

Hey, Jeremy and Tim. Hope you're all well. I wanted to Circle a bit back to the market here and weighing short to medium term versus Long term outlook, and I think we're pretty much aligned in what we think about this market that it's going to be Highly sustained and long upcycle. But based on how estimates for Drills in general has been revised a bit downwards now for 2024 and partially 2025 over the last few months. It's there seems to be Some concerns that Elite24 will be, call it, a bit volatile.

Speaker 10

And then you partially touched upon it with white space and all that. But I just wanted to, in a way, confirm that what's happening behind the scenes or underlying and then maybe Particularly in relation to your comments about longer term work taking longer to finalize, if The white space that we're we might see on a few rigs in 'twenty four for you and peers, More like a result of call

Speaker 2

it what can

Speaker 10

we say, Arbitrary contract ends and start ups are not really a result of anything changing in how you look at this market In the long run, it's just people need time to decide. And the consequence of that is it's a bit of white space, although it Shouldn't be taking up the time of a weaker market. Sorry for all those words, but hopefully I No,

Speaker 7

no, no, that makes sense. Yes. No, that makes sense.

Speaker 9

Yes.

Speaker 7

So really that's exactly our view is that For example, we talked about a couple of rigs. So if we take the Inspiration, so Inspiration actually was a winner In one of the tenders that just did not get consummated. So, she would have assuming that had gone ahead, there was Some technical issues on wells that they decided not to do, but assuming that got ahead, she would be booked now and then we'd be busy getting ready for that contract. So I really don't think the fact that you have a couple of spots of white space are indicative of the market. I think it's more indicative of just Confluence of events.

Speaker 7

So for example, in the U. S, we really had no hurricanes this year upsetting activity, which is great, right? But normally, that does have an impact on the length of term for some of these rigs. And likewise, in some of the other places we had instances where options were perhaps not taken on rigs, In one case, actually because the results were so good that they decided not to drill the extra wells. So that's kind of like a victim of Elon's success.

Speaker 7

But other instances where either some political stuff happens or there's some Delay on trees or something like that and options weren't taken. So I think like if we think back to where we were last year, we had tons of white space And a lot of it got filled because we got lucky in terms of programs running longer. This year, things have not run longer. They've really gone either to plan or we've delivered ahead of time. So On a macro view, that's actually a really positive thing because it means that the well costs for the operators are coming down again.

Speaker 7

And we think that's positive for building Larger demand as we go forward. It's just slightly unfortunate because some of those rigs were on the short term contracts that we talked about. But the really good upside is with the substantial portion of our fleet migrating to the long term contracts, those things are not going to be an issue anymore as we step into Later in

Speaker 8

2024 and 2025.

Speaker 10

That's very helpful. And just a follow-up on that. Now that we're seeing some of this white space in 2024 for these various reasons, Do you think, all else equal, that this has delayed the pace at which Capacity will be reactivated either from cold stacked or from yard, both For the market as a whole, but also on your own and since you're controlling most of that coal fired capacity.

Speaker 7

Yes. So like a good example might be what's happened in Brazil. So obviously, I can't really talk about It will fixtures that haven't yet to be made, but there's rumors that there was a switch by a winner of a particular project that they decided to put forward assets that are already on the market rather than bringing out 2 assets from the shipyard. So that would be a consequence of, well, it makes sense to place your active fleet ahead of reactivating or standing up New build rigs, so that's probably the best example to date that There is still plenty of discipline there amongst the drillers that they're not bringing out rigs at all costs. They're basically saying, hang on a minute, this makes sense for us to Keep that capacity off the market and to place our active rigs.

Speaker 7

So I think you'll see That kind of ebb and flow as we go forward. But, yes, for the most part that probably little adjustments like that make a lot of sense. And certainly, Our position has always been, we are not in a hurry to reactivate the rigs. We are only going to do it when it makes economic sense, when we have the contract that Genuinely justifies spending the money to do that. So again, I think the only real consequence of any Shortness of work in the near term is that those rigs will be delayed from coming out of the yard and certainly we will not be reactivating Speculatively, so we'll still work to contract on that.

Speaker 10

All right. Thank you. Thank you very much for comprehensive

Operator

And we have our final question from David Smith with Pickering Energy Partners.

Speaker 5

Hey, thanks for letting me back in. And a little bit bigger picture question. Just focusing on some of these 5 year plus programs that operators are looking to fill, I expect they're looking for a discount to leading edge rates and maybe they could get those discounts with rates that give really solid returns For a reactivation, right, or one of the new builds that were bought from a yard earlier this year. When I look at those 7 gen rigs that are still stacked or previously stranded, I only count 6 that aren't owned by you. I'm not including the Libro that can do new builds.

Speaker 5

I think those are going to cost a lot more. My question to you is just Given your view of demand, when do you think we see these last 6 incremental 7th gen drillships absorbed those ones not owned by you? And then what happens to the cost of incremental supply when those are on?

Speaker 7

Right. Okay. So don't take my word for it. But I think Westwood Energy had an article out recently that they expect utilization to reach 100% In the kind of late 'twenty four, 'twenty five timeframe, and then the following year in 'twenty They were projecting 104% or 105% utilization. So what that tells you is that the timeframe in which you would expect to see All of those rigs reactivated.

Speaker 7

So in their projection, you've basically got all of the stranded assets being brought out of the yard, put to work, And there's a call on 5 to 6 additional cold stacked assets in that timeframe. So again, My crystal ball is a little biased, but I would say if you follow some of the commentary elsewhere, you'll probably point to The 2025 time frame is being completely sold out of active rigs. Most all of the stranded assets either Being deployed or about to be contracted for future deployment and then we'll start thinking about When is the right opportunity to bring out the stacked assets? I would also say the first part of your question to address the multiyear tenders. That's clearly the case is that operators are looking to secure capacity at a day rate that they feel is acceptable and works for the projects.

Speaker 7

And there are some compromises in that. One of the compromises being it's a lot easier to do a lower dairy if you have the assurity of a long term contract. But also I would not count that as being 7th gen rigs only. I think you're going to see that the 6th gen rigs are quite attractive for those. So If you see what happened in Brazil, basically a lot of the 6 gens went to work for long periods of time in Brazil because they're perfectly adequate for those campaigns.

Speaker 7

I think you're going to see the same thing on some of these long term 5 year deals. It's not necessarily the top spec rigs that are going to do it. They're going to be fit for purpose rigs because again That's how you get the right day rate for that asset for a long period of time.

Speaker 5

Great point and great color. Thank you so much.

Operator

And we have now reached the allotted time for a Q and A session. I will now turn the call back over to Allison Johnson for closing remarks.

Speaker 1

Thank you, Mike, and thank you everyone for your participation on today's call. We look forward to talking with you again when we report our Q4 2023 results. Have a good day.

Operator

This does conclude today's program. Thank you for your participation. You may now disconnect.

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