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Noble Corporation plc (NYSE:NE)

Wells Fargo MLP, Pipeline & Energy Conference Call

December 11, 2013 8:00 AM ET

Executives

Jeffrey L. Chastain – Vice President of Investor Relations

Bernie G. Wolford – Senior Vice President of Operations

Analysts

Matthew D. Conlan – Wells Fargo Securities, LLC

Matthew D. Conlan – Wells Fargo Securities, LLC

Okay, thank you all very much for coming. We’re very pleased to have Noble Drilling, Noble Corp, but everyone calls it Noble Drilling. Bernie Wolford, Senior Vice President of Operations is going to be joining me for a fireside chat here and starting it off though by Jeff Chastain, probably the best Investor Relations Director in the oil field service base. He is going to just give us some very introductory remarks, overview of the company. There is a lot going on. So Jeff, please go ahead. Thank you.

Jeffrey L. Chastain

Thank you Matt and good morning everyone. I am happy to be joined today – to be here today with Bernie. Bernie is – as Matt said our Senior VP of Operations. And so, he’ll be addressing some questions that you may have and that Matt has. Obviously, I’ll really just go through a quick overview of the company today, most of what I’ll talk about is of the factual nature.

So to begin with before the overview, I just want to highlight some of the things that we’ve been able to accomplish this year. It has been extremely busy for Noble and it sets us up nicely for 2014. We’ve already delivered three ultra-deepwater drillships this year and two high specification jackups. There is one jackup remaining to be delivered in the year 2013. And then as we roll into 2014 that we really are in a position to largely complete the newbuild program. There will still be one jackup project that will extend out into 2016. But 2014 is a year where we do complete the majority of our remaining projects. We’ve seen some nice improved operations execution this year. I’m going to let Bernie to address that in a little more detail.

We continue to grow our backlog at the end of the third quarter, $16 billion, a little over $16 billion of backlog that obviously is a very much a structurally different aspect of our business today. We have moved the dividend higher $1 shares where we moved it. We continue to review that aspect of our capital allocation for the possibility of further increases as we go forward. We have recently completed the migration of Noble from Switzerland to the UK. So we are now officially in the UK and getting setup there.

And then finally, I would say that we’ve moved really closer to a key event for our company and that is the separation of our fleets into two distinct components, one a premium side and one made up of standard rigs. And this is a project that we would expect to complete in the year 2014. So premier company one of the largest in the business, we – as I mentioned a significant transformation going on. I’m going to talk mostly about that and then we can get into more detail in the Q&A. We’ll talk about the contract backlog that we continue to see growth, very nice earnings and cash flow profile for the company as we add all these new premium units. And then as an aspect of capital allocation, we are seeing that really a transition into another phase that has been dedicated to building rigs, but we’ll now have other opportunities such as the return of capital to our holders.

The fleet of 77 rigs is really very geographically diverse. Our deepwater fleet, and our floating fleet really resides in the U.S., Gulf of Mexico and Brazil with some additional presence in the Eastern Med and Australia. The jackup side of our business primarily Mexico, North Sea, Middle East with some smaller accumulations of assets in West Africa and South Asia. The business if you break it down into the various regions where we source revenue, the U.S. Gulf of Mexico is the single largest area of 31%. That’s growing. About a year ago that was closer to 20% to 25% and we have added several rigs to the U.S. Gulf operation high-spec rigs as they’ve come out of the yard. And we still have three more that will eventually find their way into the Gulf in two cases there to be completed in 2014, in one case the rig is making an initial stop in New Zealand to do some wells for our client and then it’s expected to move on into the Gulf from there.

You can see who our larger clients are. It’s really a mix between the IOC’s and the NOC’s shale; Petrobras, Pemex are the top three. I mentioned the backlog at $16.2 billion at the end of the third quarter. This number was just a little over $14 billion when we started the year. And did a calculation be how much we burn-off a day in backlog; it’s about $11 billion a day. So you can see – when you talk about what’s offsetting these number everyday to have added over $1 billion, it really does show that we have done a very good job of securing contracts and our fleet bodes with good term behind them and at leading edge day rates.

I talk about the Spin; two distinct businesses are being formed here. What we call remaining Noble will be the premium fleet 15, premium jackups, mostly premium jackups and 20 floaters, again most of those being of a premium nature. The Spin side largely defined by assets that have been in service for a number of years albeit very well maintained and as I noted earlier a diversified fleet from a geographic as well as asset type that 34 jackups and 8 floaters will make up that that fleet.

The Noble fleet as we breakaway and go up on our own as Noble Corp, the smaller company really the fleet has broken down into a 11 semis, 9 drillships and then of that – of the 15 jackups, 10 of those have been built in very recent days really since about the 2007, 2008 timeframe. And you can see where we will be operating. Again most of our floating presence will be in the U.S., Gulf and Brazil with continuation of presence off of Australia and the Eastern Mediterranean. The business for SpinCo: there are floating rigs in this, three semis and five drillships, but most of the fleet made up of standard jackups and again most of the jackups operating in the Mexican market for Pemex off the North Sea for a variety of clients as well as in the Middle East for a variety of clients.

So really to give you an update on where we stand with this project. We have completed the process of a review for a tax-free status, we did achieve that. Next steps, we expect to be in a position to announce the leadership team for SpinCo in the very near future. I would expect that there will be a registration statement filed here before the end of the year. And we’ll continue to work on some internal things that we have to complete from a restructuring standpoint. At that point, I think that we still want to have an alternative here of how we deal with this business as we break it away. We could see an IPO followed by a spin, or we could just do a 100% spin and that’s something that we will firm up as we complete this year and move into 2014.

Finally, I’d just tell you that we’ll talk probably in the Q&A about outlook in our business. From the floating side of our business, I’d tell you that we have a lot of our time in 2014 is already committed. This shows 76% committed days, but the reality is we’ve seen some additional things happened here. For instance, we’ve just received near three year contract on one of the rigs that was been shown in that 24% of open time. So when you think about that has now contracted the Noble Discover. And when you remove things like some stacked rigs, there is a semi-submersible or I should say a drillship and a semi in that number. Really the effective number that’s opened next year is just a little better than about 10%, but we have a good amount of our fleet already committed in 2014.

With that I think I’ll just let it go back to Matt and deal with your questions. Thank you.

Matthew D. Conlan – Wells Fargo Securities, LLC

Thank you very much Jeff. So Bernie thank you for coming up, since you are the leader of the operational team, we’ll start you off with an operational question.

Bernie G. Wolford

All right.

Matthew D. Conlan – Wells Fargo Securities, LLC

Noble did suffer through a lot of downtime in 2012 and this year got hurt by the GE bolt issue in the first quarter, but revenue efficiency really seems to have improved. What’s going on at the company to get your legacy fleet working well and the deliveries of new rigs coming out so effectively?

Bernie G. Wolford

There are several legs to that stool Matt. One of the keys as that we’ve really strengthened our core technical skill set from an operational support point of view out of the corporate office and also field support teams that go to all our rigs across the fleet and deliver subsea BOP maintenance and turnaround services. Second to that as we rollout the latest string and newbuilds, we’ve taken a much more focused effort in having the crews 100% ready to go to work in terms of their training and competency. That involves the standard training we’ve always done which is sort of classroom based, but it involves another layer on top of that, we call operational readiness where we literally teach the guys while working on the rig during the last 60 to 90 days of the delivery process, how to operate their equipment, how to maintain their equipments, what are the key processes and procedures they need to understand to safely operate their equipment.

Matthew D. Conlan – Wells Fargo Securities, LLC

And you have a new subsea center in Huston right near the airport, has that been fully built out now?

Bernie G. Wolford

It is. Over the last three years, we’ve probably spent on the order of $280 million to $300 million in capital that capital solely for subsea and solely to support a five-year turnaround program on all of our subsea stacks around the world. And it’s to a large extent related to the findings post-Macondo and the new actions by BSEE but we’ve taken that and sort of globalize that to assure the process safety if you will and readiness, so that we don’t have to wait on stacks. It’s already paid off for us a couple of times. We’ve awarded significant time, downtime on the Clyde Boudreau this year about being able to ship a triple BOP down there. And then on top of that that’s where we do all our trending for new fleet of subsea engineers, which we have about 22 coming up through the ranks as we speak.

Matthew D. Conlan – Wells Fargo Securities, LLC

And the OEM equipment that has come onto your newbuilds is that having fewer bucks in them now than a year ago?

Bernie G. Wolford

Generally speaking fewer, we had great success first with the multipurpose towers. We delivered from Houston [ph] on the Globetrotters and the Bullies, those are proving themselves in the field and we continue to have very good uptime results on those rigs. And the most recent delivery being the Don Taylor and the Bob Douglas now New Zealand working, both of those startups have been essentially flawless from an equipment perspective and then the Mick O’Brien just delivered in the Middle East and just went to work. We had a couple of issues with the cyber control systems required a software upgrade, but that’s done working and that will be applied to the other five jackups in that series.

Matthew D. Conlan – Wells Fargo Securities, LLC

Okay, terrific. I want to change gears a little bit to the market; investors are concerned about all the newbuilds coming out and the demand. Your eight newbuild drillships are all contracted, but how do you see the ultra-deepwater market over the next few years. All in the near-term, it’s generally known and it continues to be confirmed that the operators will have a nice exploration success. And as we speak today, still the majority of the newbuilds coming out of the yards are going to exploratory program, which bodes well. That continued success points to development projects in the future that will require more rig years and supports the current newbuild activity.

I don’t see any challenges with the newbuild deliveries coming in 2014 and the first half of 2015. We do watch it carefully. The second half of 2015, we’ll be watching it carefully as those remaining units come on to the market and will adjust. To date, it’s just had literally no impact on us and we continue to expect placements to go forward three to six months before rigs get out of the shipyard.

Matthew D. Conlan – Wells Fargo Securities, LLC

Okay. And you – what’s your view on the 2016 sort of delivery pipeline, you I think it will slow it all from the last few years?

Bernie G. Wolford

The pace in the very near-term has slowed. I know the shipyards have availability kind of mid-2016 to late 2016 for newbuild jackups and deepwater drillships. The process for those assets hasn’t changed that dramatically. There is some creep up in the total package cost. I think you’ll continue to see some spotty commitments for newbuilds, but I think it will be much reduced from the pace we’ve seen over the last 24 months.

Matthew D. Conlan – Wells Fargo Securities, LLC

Okay. And on the demand side, Petrobras is kind of the gorilla [ph] in the market.

Bernie G. Wolford

Sure.

Matthew D. Conlan – Wells Fargo Securities, LLC

What’s your view on their demand going forward? They’ve had some tenders out for both deepwater and mid-water rigs. Are they looking to hold flat, expand, contract? They have dropped a few rigs in the last six months. What’s your view there?

Bernie G. Wolford

Well as you state, they’ve dropped some mid-water moored units more recently here. I spoke to Roger Hunt, our Senior VP of Marketing before coming up and then I was just in Brazil two months ago talking to the Senior Management of Petrobras. Quite frankly, Petrobras has struggled recently to support the amount of rigs they have working. They have kind of grips with that now and their management team seems fully committed and capable of bringing up their support capability in turn to support more rigs. The recent award of the Lippert concession bodes very well for Noble and the industry in general, Shell being a 10% partner in that concession, huge opportunities there in the mid-water and ultra-deepwater water depths. In general to answer your question, I think we’ll see Petrobras surprised slightly to the upside in terms of demand in the near-term.

Matthew D. Conlan – Wells Fargo Securities, LLC

Okay. Now, since you just spoke with Petrobras recently, did you get any sense for their plans with their indigenous newbuild program, has that changed at all?

Bernie G. Wolford

See the central Brazil program; the new rigs they have coming out there are on the top of their agenda list. I didn’t sense any change. But what I did sense was a keen interest to assure that the – what I would call the major international drilling contractors ourselves and our peers are more involved in their future. They want to see the region diversify, they want to see companies like Noble there and therefore the long-term and I think they are prepared to make that happen. What that means? What form that will take? I’m not exactly sure. But that – the one unique thing about those meetings was the tone of, look we want you to be a part of this, we are not sure how, but we want you to be a part of this as we start delivering these rigs.

Matthew D. Conlan – Wells Fargo Securities, LLC

Okay. Staying in Latin America some interesting developments going on in Mexico with some energy reform…

Bernie G. Wolford

Sure.

Matthew D. Conlan – Wells Fargo Securities, LLC

How is Noble thinking about that? How do you see that unfolding?

Bernie G. Wolford

Mexico, I think finally has a political will to make that happen to develop a concession model that allows the international integrated oil companies to come in there and participate. They certainly, from our perspective will benefit greatly from the deepwater expertise that some of those international companies could offer them and would allow them to get into the deepwater market much more aggressively, and I think they will. I think they’ll push that through. I think the timing before we see real impact i.e. new deepwater assets added to their fleet as a result of that.

It’s probably more on the two to three year horizon because the process does take some time working through the government and the political part of it as well as fully engaged in the international oil companies and then finally being able to come into work. So significant and positive for the industry, one that Mexico solely needs for their export business, their production that has been in decline. The key there is timing. And again, I would tend to think that’s a two-year horizon more really has a positive impact for us.

Matthew D. Conlan – Wells Fargo Securities, LLC

Okay. And I guess it’s too early to tell whether that would be for new ultra-deepwater rigs or some of the older rigs.

Bernie G. Wolford

I think looking at their water depths and their geology as far as I know it, they could certainly observe some of the mid-water MOD fleet. They have prospects in a shallow, is 1,500 feet to 2,000 feet of water. We have the Max Smith down there closer to the 4,000 foot water depth range for a couple of years. And then as you get closer to the U.S., Mexican international waterline essentially the same ultra-deepwater fields, the shale and others are developing right now, so 9,000 feet kind of range. So next Matt.

Matthew D. Conlan – Wells Fargo Securities, LLC

Okay. And then staying with the MOD fleet, you do have some rigs that are coming available fairly soon, the Romano’s in the Mediterranean, the Max Smith. What are the outlooks for those rigs? Are you concerned about any downtime on those rigs. I guess the Ferrington has had some downtime?

Bernie G. Wolford

Sure. I will address them one by one. The Romano will go to work for Genel on a three-year contract kind of mid-March timeframe next year work in the Med and across Northern and West Africa. So we got a long-term commitment there for that rig, which will tie that rig. The Max Smith in Brazil I believe our last fleet status report indicated availability sort of late third and fourth quarter. The reality is now that they’ve awarded the labor concession in Brazil. We feel a lot more confident about the Max Smiths future in Brazil.

Shale has had some challenges, putting wells together for the rig. They whispered that they might be willing to form it out and within days we had other clients talking to us about availability for the rig and we’ve already started having more formal discussions with those clients now. So the demand for that rig in Brazil is pretty solid. The Homer Ferrington and the Med will be spotty. We’ve got the one job with Total in Egypt now, potential for one more job with Total. But with the uncertainties in Egypt and the changes in Libya that demand will probably continue to be spotty for the Homer Ferrington. So we’ll be faced with decisions whether or not to chase that market in the Med or try to compete in a backyard where there maybe other assets already of the same sort of water depth capability.

Lastly, the driller in the Gulf of Mexico mid next year, I’m not sure how familiar you are with the driller, but it’s a 10,000 PSI BOP stack as opposed to 15,000 for the ultra-deepwater. Generally, we use presets for the mooring. So the driller will be challenged in the Gulf of Mexico to find work. It’s very unique in terms of capabilities that was sort of purpose designed for a particular shale program and we will find challenges for that particular rig.

Matthew D. Conlan – Wells Fargo Securities, LLC

Okay. How about the other the Jim Thompson, the Amos Runner, are there moored rigs in the Gulf of Mexico? Are they going to be replaced in the Gulf of Mexico or they are going to have to leave the Gulf of Mexico to find work in a moored fashion?

Bernie G. Wolford

Quite frankly, you know, no. I mean the Jim Thompson and the Amos Runner [indiscernible] in the Gulf of Mexico in that 5,000 foot to 6,000 foot water depth range, very low daily operating cost compared to the ultra-deepwater DP units, plenty of development work still to go in that kind of water depth range and not a lot of competition that sort of up to spec with the mooring systems for hurricane season with the BSEE approved BOP control systems and so forth. So I think the future is pretty good for those in the Gulf.

Matthew D. Conlan – Wells Fargo Securities, LLC

Okay, terrific. Turning to the jackups, you have a few rigs of the standard spec rigs in Saudi Aramco, working for Saudi Aramco and some high spec rigs now coming out some looking at Saudi Aramco.

Bernie G. Wolford

Sure.

Matthew D. Conlan – Wells Fargo Securities, LLC

A couple of your competitors have signed very long-term contracts, have you – has Noble looked at the 7 to 10 year contract model in Saudi Arabia?

Bernie G. Wolford

We have – as you know we’ve fairly recently renewed both the Roger Lewis and the Scott Marks at very good rates for three year time with the Aramco. Aramco…

Jeffrey L. Chastain

Those rates are 250…

Bernie G. Wolford

257, 257, I mean top-tier kind of dayrates. And the rigs are already there in countries, so go to work minimal – virtually no cash investment and just continue at the end of the current contracts. But Saudi Aramco is a key client for us particularly for the JU3000s we’ll be delivering later this year, absolutely a key client. You know that daily operating costs in Saudi are not that significant, certainly not as compared to ultra-deepwater. So if you’re looking at maybe a 6% year-on-year inflation rate, you can build that into your dayrate or at least make a reasonable stat of that and go long 7 to 10 years if that’s the structure of the contract that they come out with. So to answer your question, we’d be willing to go long.

Matthew D. Conlan – Wells Fargo Securities, LLC

Okay. And just of clarification, the issue there is that Saudi doesn’t allow for contract cost escalation in the dayrates?

Bernie G. Wolford

Right.

Matthew D. Conlan – Wells Fargo Securities, LLC

So you have to build those – that inflation expected inflation into your initial…

Bernie G. Wolford

Right.

Matthew D. Conlan – Wells Fargo Securities, LLC

Okay, now to spin-off, we’ll talk about that. I think I heard you say that the S1 is expected maybe by the end of the year.

Bernie G. Wolford

That’s our target, absolutely.

Matthew D. Conlan – Wells Fargo Securities, LLC

That’s your target, okay. And what kind of information I guess it won’t be a fully complete S1, but will we have an indication of what the capital structure is, who the leadership will be. Obviously, we’ll know that the rigs and their historical operating performance…

Bernie G. Wolford

Sure.

Matthew D. Conlan – Wells Fargo Securities, LLC

But, what are that kind of financial information will be in that?

Bernie G. Wolford

For the financial I may turn to Jeff here, but in terms of leadership, I don’t think you’ll see any announcement around the CEO for the SpinCo in that timeframe. I do think in parallel with that S1, you’ll see an announcement around some of our key executive – executive level appointments within SpinCo those that are set to manage the operations, marketing and another key support functions in the company. So you’ll start to get a feel for the nature of the company, the seriousness of our commitment in terms of setting that company up for success with good people and good system. So, if you want to comment on the financial side.

Jeffrey L. Chastain

I would say really that – the only thing we can say about the financials is that we do expect to see a – excuse me, a more detailed display of P&L, balance sheet than what you have been given to date. There is still some things as Bernie said that we’ll need to conclude. So that’s why we will call this a preliminary registration filing, but the P&L and balance sheet, capital structure will be in more detail than what you’ve received today.

Matthew D. Conlan – Wells Fargo Securities, LLC

Okay, terrific. And understanding that you’re very busy with SpinCo these days and it takes up all your corporate finance time. As Noble done much work on an MLP, I see transition has said that they’re going to establish a small MLP relative to the size of their fleet. Is that something that Noble has focused on at this point?

Bernie G. Wolford

I know that David, CEO and the Board have discussed MLPs at lengths. And we continue to look for opportunities where the timing of the term of the contract is appropriate or the collection of similar type assets with similar contract term would lend itself to an MLP. We’re definitely not ready to make any announcements in that regard. It’s just safe to say that we continue to carefully consider and it is still only agenda of opportunities.

Matthew D. Conlan – Wells Fargo Securities, LLC

Terrific, we have a few minutes left. If there are any questions from the audience, we’ll be happy to take them.

Question-and-Answer Session

Unidentified Analyst

[Question Inaudible]

Matthew D. Conlan – Wells Fargo Securities, LLC

So the question for the webcast is – is one about capital returns and asking if capital allocation going forward will yield better returns on capital for the company.

Bernie G. Wolford

Jeff, do you want to take it first?

Jeffrey L. Chastain

Yes, I’d say historically Noble has had a very good record there. There has been a period of time where we have seen our return on capital fall back from the levels that we saw and say the late 90s, early part of the last decade. We’ve invested a lot of money or committed a lot of funds to building rigs and a lot of those rigs are just now entering the fleet. The returns on those, we anticipate being quite good. So I would expect that you will see an improvement in the return on capital as we go forward and see these premium ultra-deep rigs and jackups begin to contribute to the fleet, but that’s part of growing your fleet. There is a commitment of capital required that is about a three-year process as you are constructing these units and we are just – as I said just now starting to see the real benefits of that to build in.

Unidentified Analyst

Thanks Jeff.

Jeffrey L. Chastain

Great. Are there any other questions from the audience?

Unidentified Analyst

Well I definitely have one Jeff, I think it’s probably for you. You doubled your dividend last year to $1. You said that was kind of a signal, you were still cash flow negative because of your large construction deliveries in 2013 and 2014. What’s the outlook for another dividend increase in 2014?

Jeffrey L. Chastain

I think it’s very good. Again, the free cash – significant free cash year for this company is expected to be in 2015. We are much closer to those stay a neutral cash flow, free cash position in 2014. As Matt said, 2013 was a year where many probably wouldn’t have expected the company to address its dividend because we were significantly free cash flow negative with the heavy newbuild program. As we go forward and have this free cash position building I think that the dividend continues to be given a strong look by management and the Board. And so I think it’s increasingly likely that the alternative that we turn to return cash to shareholders would be the dividend in enhancing the yield on the stock.

Matthew D. Conlan – Wells Fargo Securities, LLC

Great, thank you. We are out of time, but thank you very much.

Jeffrey L. Chastain

Great. Thank you.

Matthew D. Conlan – Wells Fargo Securities, LLC

And I wish I’ll get off to you in next meeting.

Bernie G. Wolford

All right thanks, Matt.

Jeffrey L. Chastain

Thank you.

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