Ocean Rig's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: Ocean Rig (ORIG)

Ocean Rig UDW Inc. (NASDAQ:ORIG)

Q4 2012 Earnings Call

March 07, 2013 08:30 am ET

Executives

George E. Economou – Chairman, President and Chief Executive Officer

Anthony Argyropoulos – Capital Markets Special Advisor

Analysts

Darren T. Hicks – Evercore Partners

Gregory Lewis – Credit Suisse

Collin Gerry – Raymond James & Associates Inc.

David Epstein – CRT Capital Group LLC

Lukas Daul – SEB Enskilda

Lou V. Nardi – Global Hunter Securities LLC

Oliver S. Corlett – R. W. Pressprich & Co., Inc.

Operator

Thanks for standing by ladies and gentlemen, and welcome to the Ocean Rig conference call on the Fourth Quarter 2012 Financial Results. We have with us Mr. George Economou, Chairman and Chief Executive Officer; and Mr. Anthony Argyropoulos, Capital Market Special Adviser to CEO. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session (Operator instructions)

I must advise you that this conference is being recorded today, Thursday, March 7, 2013. Matters discussed in this release may constitute forward-looking statements. Forward-looking statements reflect current views with respect to future events and financial performance, and may include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts.

Please take a moment to read the safe harbor statement on page 2 of the slide presentation. Risks and uncertainties are further described in the report filed by Ocean Rig with the US Securities and Exchange Commission.

And I’ll now pass the floor to one of your speakers today, Mr. Argyropoulos. Please go ahead, sir.

George E. Economou

I think, it’s actually me George Economou who is going to be starting the presentation. So good morning everybody, and thank you for participating in Ocean Rig’s fourth quarter earnings conference call.

I am starting with slide 2. For the fourth quarter of 2012 Ocean Rig posted a US GAAP net loss of $71 million or $0.54 per share. Included in the results are $43.9 million or approximately $0.33 per share in cost associated with the 10-year class special survey for the Eirik Raude, and as a result our adjusted net loss for the fourth quarter of 2012 is $27.1 million or $0.21 per share.

For our 2012 operations, we posted a US GAAP net loss of $132.3 million or $1.00 per share. Excluding $65.5 million in costs associated with ten year class special survey for the Eirik Raude, our full year 2012 results would have amounted to a net loss of $66.8 million or $0.50 per share.

Slide 3, I would now like to take the opportunity to address some highlights of the past year. 2012 was a landmark year for our company during which we laid strong foundations for the years to come. For the first time we had six units drilling around the world at deep and ultra-deep water locations while at the same time, gearing up our operations for 2013 newbuilding drill ships.

Our 2012 results were negatively impacted by the prolonged acceptance periods of the use of the Mykonos and Petrobras in Brazil. During the year, the Leiv Eiriksson was drilling the Falklands. We will see a high daily operating expense at remote locations. Later in the year, we commenced and completed Eirik Raude 10-year special survey drydock, which also adversely impacted our results.

We increased our backlog to $5 billion plus from $1.6 billion at the beginning of the year. Specifically, we secured long-term contracts of the Leiv Eiriksson, Olympia, Poseidon, Mylos, establishing long-term partnerships with several new customers, including cash flow visibility for several years to come.

During 2012, we were also active in the financing market. We refinanced the Leiv Eiriksson, Eirik Raude, bank facility with new senior secured notes and commenced the syndication process for $1.35 billion facility to finance our three 2013 newbuildings, which we signed last week.

In addition, we eliminated all financer's risk associated with our major shareholder DryShips by removing all cross-default and clause acceleration process related to it’s debt. During the year DryShips also reduced its ownership from 73% to 59.4% which has resulted in increasing our free float.

As per our policy of reasonable growth going forward, in 2012 we ordered a new 7th generation under the rig ship, interesting to our existing units. From a long-term (inaudible) assumption, the Ocean Rig Apollo is expected to be delivered in January 2015 and we are pleased to announce that we have already received a letter of award for this unit from a major oil company.

Slide number four. I would now like to update you on the recent operational developments on the Eirik Raude and Leiv Eiriksson. The Eirik Raude entered into a one well problem drilling, contract with ExxonMobil for drilling offshore Ireland. Total revenue backlog is expected to be approximately $120 million. In addition, we entered into a four well program plus options with Lukoil for drilling offshore West Africa. Total revenue backlog is expected to be approximately $217 million.

Finally, we successfully dealt with some unplanned events. In January, the rig experienced 21 days of downtime related to a malfunction of the brand new BOP part which we had installed during the class survey, (inaudible) at no cost drive by the manufacturer.

At the beginning of this week we also received a notice that European hydrocarbons canceled its contracts. We expect to receive an early termination payment of approximately $13 million. The Eirik Raude is currently mobilizing to Ireland for the ExxonMobil contract which is expected to commence at the end of March.

Moving on to Leiv Eiriksson, Leiv Eiriksson is currently on drydock for contract related upgrades. We are happy to announce as we are on schedule to commence operations by mid April. We believe that following the earnings noise from the Eirik Raude cluster for this past quarter and then drydocking for upgrade related to the rig management contract on Leiv Eiriksson in the first quarter of 2013. We will generate strong cash flow going forward.

Slide 5; in 2012 we experienced very delayed mobilize into locations and acceptance testing took longer than expected for certain of our long-term contracts. In addition, we had several short-term contracts that is out in more frequent mobilization and certain of our rigs travelled long distances between locations. Currently, the vast majority of our drilling units are either drilling under, or soon commencing long-term contracts.

During 2012, our ultra-deepwater fleet achieved an 89% utilization rate, our available drilling days which excludes mobilization on statutory updates. Specifically, our four sixth-generation drillships achieved on average 91.4% utilization. The utilization of the drillships is mostly effected by the extraordinary downtime of that in May through June which was related to BOP and drilling line issues.

Utilization on our two semis was remediated. There operations were affected by frequent change of locations, requiring downtime to setup for drilling operation each time, the harsh environmental weather of the Falkland and BOP related issues.

Slide 6; Ocean Rig’s marketing efforts have yielded far superior results as evidenced in this graph which includes the rates secured for contracts with duration of over 12 months. Throughout 2012, we have secured three year contracts on Leiv Eiriksson, some without adjustment for the customer invest and the upgrades; Olympia, Poseidon, Mylos and Athena and we have now been awarded a contract on the Apollo, our 2015 new building. We have the flexibility to assign these LOA to similar dual ships.

Over three year contract averaged $600,000 per day which based on our calculations is approximately $100,000 higher than what certain peers did for the three year contracts. This means over the three year period, $500 million in net revenue, cash flow and net income.

In addition, our new contracts incorporate various high provisions BOP and general rig maintenance that will lead to increased revenue/efficiency going forward.

Slide seven, our corporate focus is to increase operating efficiency and reduce cost within challenging industry conditions. To do so, we are reorganizing and decentralizing our management structure. We established an office in Brazil which is now fully tasked and are staffing our newly established office in Angola. These offices together with our office in Norway will be regional onshore hubs responsible for drilling operations.

I expect reallocation of our senior management under my personal sites, over site to result in higher efficiency across the company. This will also enable us to leverage our significant office base realization, thus we’ll handle a number of corporate functions. Our general and administrative expenses have increased as a result of making these changes and ramping up the realization to manage nine under new ordered units. Once the realization is complete we will focus on containing these costs.

I will now turn over the presentation to Mr. Anthony Argyropoulos, to provide you with an industry update and fourth quarter financials highlights.

Anthony Argyropoulos

Thank you George and good morning and good afternoon to everyone. Let’s now turn to the industry, starting with slide nine, where we believe conditions in the ultra-deep markets are perfectly aligned to support sustainably high dayrates for some time to come.

In 2013, global E&P spending driven by international markets is expected to reach $644 billion that is up 7% from 2012 and reached $900 billion through 2016, this represents an additional quarter trillion dollars of global E&P spending over the next four years. Specifically when it comes to offshore drilling, it is said to increase by 61% by 2015 to $200 billion with strongest gains in the US Gulf of Mexico, West Africa, and the North Sea. About half of that spending is in the ultra-deep water markets where it’s expected to double from $50 billion in 2011 to $90 billion by 2015.

Today, global open demand by type of well is only 8% for development and 92% for exploratory drilling. The success in exploration continues. Last year there were 52 discoveries in 4000 feet of water or more of which 18 were in 7000 feet or more. The discoveries were located in 14 countries, the last record year boosted a mere 37 discoveries. So we had a big increase.

This means that the proven reserves shown in the right-hand chart, which have grown from $75 billion to $120 billion barrels between 2005 and 2011 and continue to grow, will require substantial ultra-deep water drilling capacity in years to come for development drilling.

In addition, the complexity and depth of these wells is expected to require even more rig capacity. So in summary, we have a continuing exploratory drilling demand as a result of E&P CapEx growth and the upcoming development drilling from existing, proven reserves.

Turning to slide 10, in the ultra-deepwater segment, 2012 turned out to be the most active year excluding 2008 when Petrobras was active. Oil companies were signing contracts for a record high 179 rig years. We expect activity to remain strong particularly in West Africa, a region which we have unrivalled experience. We will be operating four of our units in West Africa this year. We are also ramping up our regional presence with Angola as George mentioned before. The expectations of Petrobras will enter the market to cover its midterm requirements, we believe will result in an even tighter market.

Turning to slide 11, deep and ultra-deepwater breakeven economics ranges from approximately $30 to $70 per barrel. In this light, generally we will try to discuss the relative attractiveness of deep and ultra-deepwater exploration and development largely due to investments in infrastructure and social programs, the necessary oil price needed to balance the budgets of many key oil-producing countries has increased approximately $80 to $100 per barrel. We expect these countries to curtail production in order to stem price decline in the event of a market downturn. We already saw this recently in the case of Saudi Arabia.

As a result, we believe that even at the upper range of ultra-deepwater breakeven economics, there is approximately $60 to $70 dollars, offshore projects are viable. The IRR of some of the best place in U.S. onshore are at 80% plus, far outpacing those in offshore deepwater projects. However, in non-core areas of the U.S. and internationally, IRRs range in the upper teens, while offshore deepwater projects have IRRs in the low 20s.

Leading oil companies like Total and Anadarko rank return on their deepwater projects in the very high-end of their project portfolio. From a portfolio view, in fact, many oil companies also prefer projects like deepwater with a long life time as opposed to typically short-lived onshore projects.

Turning to slide 12; the high level of exploration and resulting development demand we described in our previous slides comes at a time when the offshore drilling fleets are old than our substandard specifications. Frankly, there is a significant need to replace the aging offshore drilling fleets, specifically although the ultra-deepwater fleet is modern shown on the right pie chart, half of mid and deepwater floaters shown on the other two pie charts are more than 30 years old and in fact many becoming obsolete.

Operators are forced to use high spec deepwater and ultra-deepwater units as no modern mid water units that meet technical requirements are available. This has resulted in the market cascading whereby ultra deepwater rigs are working in deepwater and deepwater rigs in mid water.

So we’re not concerned about 2015 and beyond, since limited yard capacity and shortage of high spec assets will keep supply constraints for sometime.

Turning to slide 13, yard capacity as we said before is limited at a handful of top shipyards and competing with other asset classes. There are no new building slots available in 2015. In the past few years, the market proved it can easily absorb yard capacity delivery about 25 ultra-deepwater assets per year. So we’re not concerned about 2015 and believe that a shortage of high spec assets will keep supply constrained.

Moving on to the financial highlights on slide 15, a quick overview of our fleet employment profile, as George mentioned, we received the letter of award from a major oil company for a three year plus options drilling contract for a 2015 new building drillship, the Ocean Rig Apollo. The contract is for drilling in offshore Congo, and as a backlog of approximately 680 million including mobilization.

In addition, we have the flexibility to elect either the Ocean Rig Apollo or a similar drillship within our feet to drill under this contract, should we choose to do so. Assuming the LOA on the Apollo materialize into a contract, our backlog will be approximately $5.1 billion up from $1.6 billion in twelve months ago.

It is important to note our contract counterparties are highly credit worthy, Total, Petrobras, ExxonMobil, ConocoPhillips, ENI and Repsol are all major oil companies. The average term of a contract including this LOA is to 2.8 years or 4.4 years including the options. Excluding these official periods, we’re pretty much under contract for all of 2015, almost 90% of our fleet capacity for 2014, 65% for 2015, anyway it's 30% for 2016.

Turning to slide 16, with this slide we provide again an analysis of our days and revenues, so as to improve the disclosure of our feet operation during the quarter and assist those who want to analyze our company. Included in the slide is a breakdown of the amortization of our deferred revenues that were recognized during the quarter.

We had 552 feet calendar days and we spent 38 days mobilizing Eirik Raude and Leiv Eiriksson. We also had the planned 10 year class special survey for Eirik Raude which lasted 80 days. This left 434 available drilling days and during the quarter we also incurred 28 of hired days, as a result of which we are earning revenue for 406 days.

So our operating efficiency rate that is our revenue earning days, over our available drilling days was 93.5%. Although in this quarter we exhibited somewhat higher performance, we would like to reiterate our expectation and guidance for 2013 of applying 92.5% on available drilling days in order to estimate our future growth revenues and a further, approximately 3% for fees and agent commissions to arrive to our net revenues.

Slide 17, moving on to operating expenses, our industry as a whole has experienced a significant increase in cost and maintenance expenses. The increased numbers of ultra-deepwater units within the post month counter drilling environment has led to increasing in salaries, client requested upgrades and stringent maintenance and testing.

On this slide, we highlight our daily cash direct rig operating expense run rates during the quarter and provided a breakdown of the amortization of our deferred operating expenses that were expensed during the quarter.

As far as what we call our daily direct rig operating expenses, that is our GAAP OpEx excluding amortization and extraordinary items they averaged $199,000 compared with $197,000 during the previous quarter.

We are in line with our expectation that there will be around 200,000 per day on average fleet wide subject to cost adjustments going forward. The main culprits behind this quarter’s increase were peripheral costs associated with a special survey of the Eirik Raude, and a completion of the Leiv Eiriksson Falklands Islands contract.

We are pleased to point out that operating cost for our drilled averaged at about $185,000 per day although we do expect quarter-to-quarter fluctuations in these numbers.

In addition to our daily direct rig operating expenses, we also incurred certain expenses that are particular to the location we operate, address particular requirements under the contracts and certain other overhead shore based expenses. We refer to these as our onshore rig operating expenses and expect them to be approximately an additional 15,000 per rig per day.

Now turning to slide 18, we show our income statement and we will tie all the revenue and operating expense items. During the quarter, we had $214.5 million in drilling revenue and $15.3 million in amortization of deferred revenue. So our total revenue was almost $230 million.

Direct rig operating expenses were $102.2 million, the Eirik Raude special survey cost $44 million, our onshore and maintenance expenses were $14.7 million and the amortization of deferred expenses was $12.3 million.

Going forward as we mentioned, we expect direct rig operating expenses to average $200,000 per day fleet wide. And we will also incur the additional $15,000 per day for onshore rig operating expenses. We will also incur about $40 million per annum for general maintenance expenses including special items, spare parts and upgrades worldwide.

So during the quarter against our $230 million in total revenues, we had $173 million in total rig expenses or $129 million excluding the Eirik Raude dry dock and special service. Our depreciation was $56.5 million and our G&A expenses were $23.5 million. This figure is in line with our G&A guidance for 2013 of $19 million or $10 million per rig which is also in line with our peers of similar size. Our interest expense for the quarter was $29.8 million and our income taxes $11.4 million as per our guidance of 5% tax rate on revenues.

Turning to slide 19, looking at our balance sheet at the end of December, we had free cash of approximately $317 million. In addition, we had approximately $193 million in restricted cash, which includes minimum liquidity requirements under our two credit facilities.

Our capital structure at the end of December is robust as evidenced by a modest 41% net debt to capitalization ratio.

In mid-February, DryShips our largest shareholder sold for the public equity offering $7.5 million of our shares. DryShips ownership as a result was reduced to 59.4%. We appreciate that a major concern among investors is a so-called overhang of the DryShips shares. As you know DryShips needs to raise cash to fund its new business commitments and debt repayments and is working to reduce these outflows to the extent possible. We also understand that DryShips will provide guidance on their conference call of their cash needs through 2014.

Our equity market capitalization is $2 billion and our free flow is worth approximately $800 billion based on a current enterprise value of a mere $3.6 billion. We are trading at 600 million per rig, which is well below the newbuilding rig value of $850 million per rig.

Turning to side 20, this slide shows on the top left, our debt development over the next four years including the incurrence under our new $1.35 billion facility to fund our 2013 newbuildings and also we expect the incurrence of $450 million in bank debts for our 2015 unit. By the end of 2015, our total debt will be very manageable at about $388 million per unit. It will decline even further to $354 million per unit in 2016. Of course our net debt will be significantly lower given the strong excess cash flow generation over the period.

Below we provide a breakdown of our indebtedness, which also shows that we have no debt maturities prior to 2016.

We are very comfortable that our low debt per rig and even lower net debt per rig rate at that time of approximately $350 million will facilitate the refinancing of the debt maturing at that time.

Moving on to the right-hand side of the slide, our scheduled debt repayments are provided by facility for your ease of reference. As you can see, in total, we are repaying $187 million of debt this year, $301 million in 2014, and estimate about $341 million in 2015 and beyond. So we’re paying down debt at a healthy pace deleveraging our balance sheet going forward. By the end of 2014 which is in fact in a short period of time, we expect our leverage to be below four times trailing EBITDA.

Turning to slide 21, we have no unfunded capital expenditures in the near future. We already paid the $727 million for a three 2015 newbuildings when we order them. The balance due at Samsung on delivery during the second half of this year will be covered by our new facility.

On September 28, we placed an order Samsung for our eight drillships, with the delivery date in early 2015. The cost of the unit including additional equipment, commissioning and supervision is estimated at $683 million. Our growth has been exceptional, starting with two units as late as 2010, six by the end of 2011 moving to nine units in 2015 and then ten in 2015.

Clearly our growth rate over the next few years is expected to slow down from the exponential pace of the past few years and through 2013. And now, I will turn over the presentation to Mr. George Economou for some closing remarks

George E. Economou

Thank you, Anthony. Please turn to slide 23. I would like to summarize where the company is to-date. Ocean Rig is a large global pure-play in the ultra-deepwater space with premium assets run by an experienced management team. Its massive multibillion dollar investment is almost completed. Having survived through the worst part of financial crisis, which is accountable with no unfunded CapEx in the immediate future.

Having also gone through a low in contracting activity, we now boast approximately $5.1 billion contract backlog with major oil companies to operate in the highest growth segment of the drilling space. The benefit of our multibillion dollar investment will drive our financial performance and are poised to change the shape of the company. And yet, neither the equity valuation or the yield levels on our notes seem to reflect these.

We now have reached the end of our fourth quarter presentation and we now open the floor for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Okay. And your first question comes from the line of Darren Hicks from Evercore Partners. Please go ahead.

Darren T. Hicks – Evercore Partners

Hi, good afternoon George and Anthony.

George E. Economou

Good morning.

Darren T. Hicks – Evercore Partners

You highlighted that Ocean Rig’s SG&A cost have been on the rise due to corporate reorganization and in preparation for the delivery of newbuildings, and you are expected to manage those closely. So can you give us an idea of – yet your corporate reorganization is complete and if you have an idea of when SG&A could eventually plateau and perhaps if you have a quarterly run rate for this year that would be great?

George E. Economou

Yes, as we have said, I mean we are diminishing the account of people in Norway, building up in Angola and it has to do with operating one rig in Norway Ford and Angola and Brazil is complete, but it took time for just to be completed. And we're moving a lot of the corporate fractions and high-level operating and technical stuff and IT in our sense. That should be completed by the end of second quarter beginning of third. We have started this process back in November, so October-November I would say. So we are in the midst of it to be fully complete.

As we mentioned and Anthony did, we expect the average to be around 10 million per rig and forward. It’s obviously something that we are concerned as well being also investors in the company and we will try to reduce as and when we can. Unfortunately the expenses in Brazil and Angola are going – only be going up because these are expense allocations to operate little bit trying to streamline the onshore personnel and allocations and the personnel in the offshore – in the corporate office.

Darren T. Hicks – Evercore Partners

Okay, thank you. And now that you have contracts or letters for contracts on nine of ten rigs that you own, to provide a good foundation in cash flows for the next several years. Is the dividend implementation decision still high on the Board’s agenda and is future employment of the key roles factor in the decision or the timing of the decision.

George E. Economou

I would say that we’re not concerned about the skews and the employment. I hope that we will soon be able to announce a contract for, if not we can always flittering to the conduct of the 2015 newbuilding. Obviously we'll have to find an interim employment over year which is not a problem, but the dividend restriction will – decision rather would be restricted only by the financial results of the company in 2013. As soon as we are able to distribute dividends, we will do so and it’s high on our priority, very high.

Darren T. Hicks – Evercore Partners

Okay, great. Thank you. That's all I have.

George E. Economou

Thank you.

Operator

Thank you. Our next question comes from Gregory Lewis from Credit Suisse. Please go ahead.

Gregory Lewis – Credit Suisse

Hi, George.

George E. Economou

Hi good morning.

Gregory Lewis – Credit Suisse

So I mean clearly, Ocean Rig is frustrated with its valuation where it is today. I mean when you think about unlocking the value inside Ocean Rig, I mean given the ultra-deepwater fleet that you had, I mean at what point do we think about maybe, I am paying this company?

George E. Economou

We have thought about it. We considered it quite closely. We need to have some amendments in our existing debt facilities which are provided by the banks, specifically most importantly the Deutsche Bank facility. We have started the process to ask for changes in the facility and it is something we will be closely looking The other thing obviously would be to refinancing the American capital market, the existing bank debts which is not something that we will have to do. Firstly because we’ve paid the fees to get this facility, those which have not been easy. It's not easy to raise money in the bank market and secondly because our cost in getting new facilities in the capital markets will exceed, the cost of the banking facilities by about 200 basis points if we take an indication of achieving 6.5% on the notes we did in September of last year, as compared to what we're getting today which is 350 over LIBOR and you can swap the LIBOR for below 100 bps. So this is something that we are working on and as soon as we can do it we will try to implement it.

Gregory Lewis – Credit Suisse

And then I am just thinking about a time line, clearly the negotiations it sounds like you've already started with the banks. From the time that the facilities are – assuming that the debt covenants change and there are no covenants that prevent you from doing an MLP. From that point go forward is that something that takes another 12 months or I mean is it in other words I guess what I'm getting there, is this most likely into 2013 event or is it probably a 2014 event?

Anthony Argyropoulos

No, no, I think it's a 2013 event. I mean now that we can probably give you, guide you better on the exact timelines, you’ve lived up with great details. So please answer me.

Gregory Lewis – Credit Suisse

Okay, okay, well, you know what Anthony, just to change topic, just to keep the call moving. I noticed with the Eirik Raude that was, we stripped down some of the special survey costs as related to one-time cost, where there any unexpected charges that sort of related to that striping out of the special survey or is it simply a process going forward as to think about how Ocean Rig is going to report earnings, special surveys in general are going to be treated as one-time items.

George E. Economou

That's the accounting policy is to treat one time items that are complete expense and of course they hit our financial statement in Q4 as opposed to deferring then amortizing it through the special survey cycle – so I think that's something we will continue to do and treat the surveys the same way, clearly we have at this point until 2016 for the first special survey of our new drillships.

Anthony Argyropoulos

Here Anthon, the expenses for the drillships are going to be a lot less than we have experienced that with the Eirik Raude and the Leiv Eiriksson because these are high-quality, much higher than a 10 year old rig that had been running under previous management, not with our over tied and maintenance procedures so any expense on drillships would clearly be a lot less in time and money.

Gregory Lewis – Credit Suisse

Okay guys perfect. Thank you very much for the time.

George E. Economou

Thanks Rick.

Operator

Your next question comes from Collin Gerry, from Raymond James. Please go ahead.

Collin Gerry – Raymond James & Associates Inc.

Sorry I had a problem with the mute button. Good afternoon.

George E. Economou

Good morning to you.

Anthony Argyropoulos

Good morning.

Collin Gerry – Raymond James & Associates Inc.

Question on the Apollo, what we assume for mobilization, but my math says that the clean rate, a little bit lower than some of the previous rates that you signed in West Africa, I guess first half, is that correct and in the second-half does that indicated any sort of soft end in the market or maybe just talk to us a little bit about the marketing efforts and how that compares to prior (inaudible).

George E. Economou

Anthony, go ahead.

Anthony Argyropoulos

Well I think the key differentiating factor here that you have to appreciate is that the quantities for 2015 built unit, so it's a forward contract as opposed to – let's say a contract with a more prompt delivery, so it's not 100% comparable, we believe that given the duration of three years, and the fact that this contract essentially will be for 2015, '16, and '17 plus it has options. That it's a very firm rate and indicates as a matter of fact that the customers contract to the industry and perhaps the investors believe that there will a shortage of equipment and they need to secure the equipment for their needs.

George E. Economou

I think it was a decision to be conservative and have a backlog, and undo the market because when you do fix forward, it’s not an indication where the market is today, today it would go back, and do three year contract we would fix similar levels for three year contract category and what we have fixed recently.

Collin Gerry – Raymond James & Associates Inc.

Okay.

Anthony Argyropoulos

Another thing I would add on this contract is that similar to what we have done in other cases, there are escalations in the contracts, so the headline day rate goes up every year and we were doing this in order to cover, and address the various unit cost increases that we anticipate over the life of the contract.

Collin Gerry – Raymond James & Associates Inc.

Okay that's helpful. Second one for me and I might have missed it, you might have said it in your prepared remarks, is there a scheduled level of further selling down of ownership by DryShips as we look over the next two years do we think, is there a known amount of stock that the DryShips wants to sell.

George E. Economou

I think we recently we will cover on DryShips call but since you're asking at it, the money we have raised in DryShips we feel pretty comfortable that we will not need to sell, but a bit of more Ocean Rig shares a lot less than has been sold in the past, and we will cover that in the DryShips call by the end of '13, and we will try to avoid it to the degree that we can.

Collin Gerry – Raymond James & Associates Inc.

Excellent. Thank you very much.

George E. Economou

Sure.

Anthony Argyropoulos

Thanks Collin.

Operator

Thank you. Your next question comes from the line of David Epstein from CRT Capital. Please go ahead.

David Epstein – CRT Capital Group LLC

Good morning. I just wanted to reconcile slide 19 and 20, can you just tell me what are the year-end 2012 bank debt that actually is and whether that includes deferred financing fees or not

Anthony Argyropoulos

The figure that you have on the slide includes the – it’s net of the fees

David Epstein – CRT Capital Group LLC

On slide 19.

Anthony Argyropoulos

Correct.

David Epstein – CRT Capital Group LLC

All right slide 20 was a little bigger figure so maybe that includes the fees?

Anthony Argyropoulos

Yes, that's the difference, correct.

David Epstein – CRT Capital Group LLC

Thank you very much.

Anthony Argyropoulos

You are welcome.

Operator

(Operator Instructions) Your next question comes from the line of Lukas Daul from SEB. Please go ahead.

Lukas Daul – SEB Enskilda

Thank you, good afternoon guys.

George E. Economou

Good afternoon to you.

Anthony Argyropoulos

Good afternoon.

Lukas Daul – SEB Enskilda

Quick question on your comment about the shipyard capacity, did I understood you correctly that you are saying that there are no free spaces in for delivery in 2015?

George E. Economou

Well there is space but, if you are today because of the amount of time that is required to deliver the rigs effectively, there is no space if you look at berth space, yes there is berth space, but for all practical purposes there is not, all that can be done today that will be delivered in 2015, that's the best answer on that I think.

Lukas Daul – SEB Enskilda

And what do you reckon, you would have to pay for drillships similar to what you are building?

George E. Economou

I think you will have to pay as the base price more or less what we are paying today. It may be a little bit softer, but not much and the fact that we see the total cost because of all the other equipment that is own or rent equipment, the supervision, all extra that we’re putting on our rig, so I wouldn't say that the prices have moved south, yes they are trying to keep their prices, and I'm sure that if you do you will achieve a small discount but that is not going to be substantial.

Lukas Daul – SEB Enskilda

Okay, and then you mentioned the subsea equipment downtime provisions that you are negotiating for your new contracts, I was wondering could you maybe say a little bit more about what standard looks like today, and what you are trying to push through in the new contracts?

George E. Economou

Yeah, I think that we can cover on a separate goal, we can have one of the guidance and the operations we’ll give you a call, but basically you will notice going forward that most drill is operating in this space will experience higher downtime because there is only agreement really that you need to look at the BOP, the BOPs have become much more sophisticated, which means that more reasons to build up when something goes wrong, and the tolerance of the industry, whereas in the past there would be saying that you would not pull the BOP for – now you pull them, and also you pull them proactively. If you want more details we'll have one of our guys to give you a call if you want much more technical details.

Lukas Daul – SEB Enskilda

Yes that will be terrific.

George E. Economou

Okay, we’ll do that

Lukas Daul – SEB Enskilda

Thank you for that.

George E. Economou

Sure.

Operator

Thank you, our next question comes from Lou Nardi from Global Hunter Securities. Please go ahead.

Lou V. Nardi – Global Hunter Securities LLC

Good morning, I was just curious on the new bank loan, is that amortization or is it $124 million a year, it’s going to be semiannually or quarterly, which if it's semiannually, what’s the quarter…

Anthony Argyropoulos

Its semiannual, the number that you missed of course is the annual repayment, it's payable every six months, and it depends on the drill down of each particular new building, so for a morally point of view if you take the delivery date then add six months to that, you will more or less have the date that the payment is due.

Lou V. Nardi – Global Hunter Securities LLC

Okay, the 9.5 become callable next year, it's pretty high rate versus the rest of your debt, and seemingly U.S. capital markets are still stronger they are now and do you think there is only targets, try to think of that early?

Anthony Argyropoulos

It's possible; yes we will look at usual present value calculations and make a decision near that time.

Lou V. Nardi – Global Hunter Securities LLC

Okay and finally we talked about 200,000 a day operating rate for 2013, any guesses on 2014 and 2015?

Anthony Argyropoulos

Probably towards the end of 2013, I think right now we are comfortable with the guidance we have given in particular for the areas that we operate, which are relatively high cost areas, but at this point I think 2014 is still far away for us to provide any guidance.

Lou V. Nardi – Global Hunter Securities LLC

Okay, thanks.

Anthony Argyropoulos

Sure.

Operator

Thank you, your next question comes from Oliver Corlett, from R.W. Pressprich. Please go ahead.

Oliver S. Corlett – R. W. Pressprich & Co., Inc.

Hi good afternoon and thanks for taking the call.

Anthony Argyropoulos

Good afternoon.

Oliver S. Corlett – R. W. Pressprich & Co., Inc.

Could we dig into the OpEx a little bit deeper for Q4? You had to $102 million, you said and sort of direct OpEx on your chart and you had $173 million in your income statement of which $44 million would be for the class survey, so that means I’d like to see $27 million roughly for the sort of non-recurring or indirect which is by my calculation about 50,000 a day seems kind of high, can you sort of deal with that a little?

Anthony Argyropoulos

Yeah. I think you have to subtract also the deferred operating expenses.

Oliver S. Corlett – R. W. Pressprich & Co., Inc.

Which was about $12 million?

Anthony Argyropoulos

Which is about $12 million and then the $17.4 million that you see on slide 18, that's onshore and maintenance expenses, so with that if you run the numbers this is the $15,000 onshore expenses that we mentioned on top of the 200 plus the $40 million in maintenance, special item, spare parts expenses that we will be incurring fleet wide in 2013.

So if you take the $40 million divided by the nine you will also then divided by the, excuse me, the six units and then divided by the number of days, you will get your number.

Oliver S. Corlett – R. W. Pressprich & Co., Inc.

Okay. And so going forward you said $15,000 a day roughly for onshore expenses?

Anthony Argyropoulos

Correct.

Oliver S. Corlett – R. W. Pressprich & Co., Inc.

Is that – so they were unusual items in the fourth quarter relative to that level?

Anthony Argyropoulos

The fourth quarter – essentially if you look at the $15,000 as I mentioned before and $40 million maintenance, okay that adds about $60 million a year.

Oliver S. Corlett – R. W. Pressprich & Co., Inc.

The $40 million maintenance, is that something that continues?

Anthony Argyropoulos

That’s the budget for 2013. So you can figure that more or less every quarter. We will be incurring that. If you look at the onshore and maintenance expenses over about 50 million times forward, that’s also $60 million.

Oliver S. Corlett – R. W. Pressprich & Co., Inc.

Okay. So it’s roughly inline with the guidance.

Anthony Argyropoulos

Right.

Oliver S. Corlett – R. W. Pressprich & Co., Inc.

So really with onshore and the offshore, you are looking at 215 a day for 2013 and 2014 roughly?

Anthony Argyropoulos

Correct.

Oliver S. Corlett – R. W. Pressprich & Co., Inc.

Okay.

Anthony Argyropoulos

For 2014, we’re still not ready to give any guidance.

Oliver S. Corlett – R. W. Pressprich & Co., Inc.

Okay.

Anthony Argyropoulos

You can use it as an indication.

Oliver S. Corlett – R. W. Pressprich & Co., Inc.

As far as the locations go, why is Angola particularly expensive? Is there any reason for that?

Anthony Argyropoulos

George?

George E. Economou

Yeah. I think as you find in Brazil, and Angola is more so, they are making money of the services. Everything is more expensive. If you go down to the details of housing, cars, the amount of money you will pay, everything is more expensive. Is there a reason, probably not. I think people are trying to benefit from the only or one of the few resources they have which is the oil industry.

Oliver S. Corlett – R. W. Pressprich & Co., Inc.

All right, okay. So it's rigorous for the local, got you. Now on the new build, you had some options that were expiring in March on further new builds, are those going to expire or do you, can you shed some light on that?

George E. Economou

Yeah. Those options as we have said in previous calls, they were options, which were in reality first refusals, so if we want to still go ahead and build one, we will be given an option of the (inaudible) and other party that is contemplating in order they will come to us and will ask us because of the relationship as well, whether we would like to exercise the options.

The intention is not to look at any new buildings unless everything is fulfilled which means basically miscued us, and we are (inaudible), but we are not very keen to do. I know you believes our goals, we understand that as compared to other companies we have few sections, the debt of the company is higher, so the backlog is good, so we need to reduce that and get the valuation, that's one of the way that we can probably get [at least] higher than where we're today and obviously producing the results, which I think is going to be easy going forward, because we are not going to have all these moves that we have with the short-term employment contracts in difficult areas like the Falklands or one we did in the Greenland and so on so forth and also because we have spent the money and the time for the two special surveys of the Leiv Eiriksson and the Eirik Raude and the current upgrading which we are paid for on the Leiv Eiriksson and also the acceptance test, which took long in Brazil, which is not amusing, because every single contractors that followed us or preceded us on these contracts have the same delay.

So we expect the results much better going forward as well.

Oliver S. Corlett – R. W. Pressprich & Co., Inc.

Okay. That’s all I have. Thank you very much.

Anthony Argyropoulos

Thank you.

Operator

Thank you. And your next question comes from the line of (inaudible) Clarkson Capital Markets. Please go ahead.

Unidentified Analyst

Hi good morning guys.

Anthony Argyropoulos

Good morning.

Unidentified Analyst

Yeah, I had a question on the LOA for the Apollo. You mentioned cost escalations included in that. Is that in the form of fixed increases year-over-year or is that tied to more of the actual cost increases that you’d see?

Anthony Argyropoulos

It’s tied to an increase, a fixed increase in the day rate.

Unidentified Analyst

Okay.

Anthony Argyropoulos

It’s not related to cost and this is actually our preferred method of addressing cost escalations.

Unidentified Analyst

Okay. So that $680 million backlog number might theoretically increase those escalations.

Anthony Argyropoulos

No, actually the backlog includes the escalations.

Unidentified Analyst

Okay.

Anthony Argyropoulos

Yeah, it is inclusive of the escalations which as I said are fixed. They are not subject to some kind of index or it is like that, so, predetermined in the contract.

Unidentified Analyst

Okay. Can you share at all what the year-over-year increase might be to kind of model the yearly day rate for that contract?

Anthony Argyropoulos

Yeah. What we tried to do in general for the contracts, we target around a 2% escalation, sometimes a little closer to 3%.

Unidentified Analyst

Okay. All right, that’s all from me. Thank you.

Anthony Argyropoulos

Thank you.

George E. Economou

I think given the fact that we have another call in three, four minutes starting for DryShips, we can take one more question and then who would like to ask questions, they can call us individually after Anthony will be available, he is not participating on the DryShips call, but I will and why don’t we take one more question and then we have to go on to another call.

Operator

Thank you. There are actually no further questions at this time.

George E. Economou

Okay. Thanks everybody then, and if you have any other additional questions please feel free to call us.

Operator

Thank you. That does conclude our conference for today. Thank you for participating, you may all disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!