Diamond Offshore Drilling Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 6.14 | About: Diamond Offshore (DO)

Diamond Offshore Drilling (NYSE:DO)

Q4 2013 Earnings Call

February 06, 2014 10:00 am ET

Executives

Darren Daugherty - Director of Investor Relations

Lawrence R. Dickerson - Chief Executive Officer, President, Director and Member of Executive Committee

Gary T. Krenek - Chief Financial Officer and Senior Vice President

Analysts

Ian Macpherson - Simmons & Company International, Research Division

David Wilson - Howard Weil Incorporated, Research Division

Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Robert J. MacKenzie - Iberia Capital Partners, Research Division

Gregory Lewis - Crédit Suisse AG, Research Division

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Thomas Curran - FBR Capital Markets & Co., Research Division

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Lance Ettus - Tuohy Brothers Investment Research, Inc.

Operator

Good morning. My name is Maria, and I will be your conference operator today. At this time, I would like to welcome everyone to the Diamond Offshore Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to turn the call over to Darren Daugherty, Director of Investor Relations. Please go ahead, sir.

Darren Daugherty

Thank you, Maria. Good morning, everyone, and thank you for joining us. With me on the call today are Larry Dickerson, President and Chief Executive Officer; John Vecchio, Executive Vice President; Gary Krenek, Senior Vice President and Chief Financial Officer; and Kane Liddelow, Director of Contracts and Marketing. Following our prepared remarks this morning, we'll have a question-and-answer session.

Before we begin our remarks, I should remind you that statements made during this conference call may constitute forward-looking statements, which are inherently subject to a variety of risks and uncertainties. Actual results achieved by the company may differ materially from projections made in any forward-looking statements. Forward-looking statements may include, but are not limited to, discussions about future revenues and earnings, capital expenditures, industry conditions and competition, dates the drilling rigs will enter service, as well as management's plans and objectives for the future.

A discussion of the risk factors that could impact these areas of the company's overall business and financial performance can be found in the company's 10-K and 10-Q filings with the SEC. Given these factors, investors and analysts should not place undue reliance on forward-looking statements. Forward-looking statements reflect circumstances at the time they are made, and the company expressly disclaims any obligation to update or revise any forward-looking statements.

And with that, I'll turn the call over to Larry.

Lawrence R. Dickerson

Thank you, Darren. Good morning, and welcome to the Diamond Offshore Fourth Quarter 2013 Conference Call -- 2014 -- 2013, excuse me.

I trust that you've seen our earnings press release, and I'd like to start off by discussing the delivery of our first newbuild drillship. Last week, we completed our commissioning procedures on the Ocean BlackHawk and accepted the rig from the shipyard. And the rig will soon mobilize to the U.S. Gulf of Mexico, where it will begin a 5-year job for Anadarko. We're expecting its sister ship, the Ocean BlackHornet, to be close behind with a scheduled shipyard completion in April, followed by commissioning and mobilization to the U.S. Gulf -- also to work on a 5-year contract for Anadarko. Our third ship, the Ocean BlackRhino, is scheduled to be completed by the shipyard this summer. The Ocean BlackRhino is right on schedule with a shipyard delivery in early 2015. We've not yet signed contracts on the Rhino or the line, but we have customer discussions regarding a number of potential opportunities around the world.

Clearly, the ultra-deepwater market reflects some concern over the supply-demand balance for 2014. Dayrates have been under some pressure after what has been a prolonged period of market strength. We're seeing more prospective contracts in the range of 2 to 4 years and for 5-year opportunity.

While we're down from the peak, we still see market rates that continue to be in the range that we're comfortable will generate ample returns on our newbuild projects. Additionally, we have taken delivery of our 6,000-foot semi, the Ocean Onyx, which is now on location and working in the U.S. Gulf on a 1-year job for Apache. Our other deepwater semi under construction, the Ocean Apex, is scheduled to be delivered and on dayrate by year-end. And we signed a 1-well contract with ExxonMobil at a rate of $485,000 per day. We have a number of potential opportunities for follow-on term work.

With respect to our mid-water and deepwater fleet, investor sentiment has been negative. I will point out, however, that 5 of our mid-water units are contracted in the North Sea, including the Ocean Patriot, which is currently undergoing upgrades before beginning a 3-year term with Shell. Additionally, a number of our deepwater rigs, such as Victory and Star, have had substantial enhancements and are very competitive in terms of performance for standard wells.

Additionally, we can work these units for considerably lower operating costs than fifth generation -- fifth and sixth generation rigs. And our fleet, which is just a handful of rigs that may have limited prospects after completing their current assignments. However, there are potential markets even for these rigs. We will -- while we are not seeing many term contracts in mid-water outside of the North Sea, this market has usually been characterized by well-to-well jobs rather than term commitments.

Our idle rigs include the Ocean Quest and the Ocean Monarch, which released following customer credit issues, which we've previously disclosed. The Far East market is not likely, as we said, to provide work until the second quarter due to lead times. Although we have interest in the rigs, this timeline is still our best estimate. Additionally, the Ocean Valiant has just completed its special survey in the Canary Islands, but it does not currently have a contract. We had expected this rig would work in West Africa but is now being marketed in the Mediterranean and North Sea.

Not included in our Rig Status Report issued last night is that we're in detailed discussions regarding extensions for 2 of our jack-up rigs working in Mexico, the Titan and the Scepter. While jack-ups represent a small segment in our overall result, I think these opportunities are representative of our general optimism on the Mexican market. We anticipate some tenders later this year to potentially absorb incremental mid-water capacity. And the energy reform that is currently underway might ultimately lead to additional opportunities there.

Turning to our results, I will say that an otherwise [indiscernible] quarter is marred by a tax issue. In December, we received a notification from the Egyptian government of an income tax audit for the period from 2006 to 2008. We disagree with the audit findings and feel that large portions of the potential assessment and penalties reflect the desire of the Egyptian government to increase revenue and are not in line with tax treaties and accepted practices.

We intend to vigorously pursue all legal remedies available to refute this tax assessment. But because of the inherent uncertainties associated with Egyptian income tax laws, we recorded a $57 million income tax liability, including potential penalties, during the fourth quarter. We've had as many as 4 rigs working in Egypt, but with recent departure of the Ocean Endeavor, we do not currently have business operations there. In a moment, Gary will give more color on our results for the quarter and the full year.

Offsetting this negative development is our favorable settlement with Niko Resources. I'm very pleased that we're able to come to a resolution where we will receive $25 million cash and the potential to receive up to $55 million in future additional payments.

One final item I would like to mention is that during the quarter, Diamond was upgraded to A from A- by the Standard & Poor's rating agency, highlighting our strong balance sheet. Along with our A3 rating from Moody's, we remain the only A-rated company among the offshore drillers.

And with that, I'll turn it over to Gary.

Gary T. Krenek

Thanks, Larry. As always, I'll give a little color on this past quarter's results and then cover what is to be expected for the upcoming quarter. In addition, as is our custom with the -- our fourth quarter earnings call, I'll spend some time providing additional information on what we expect for the entire year of 2014 with regards to various line items on the income statement, expected capital expenditures, downtime, et cetera.

For the quarter just ended, we had after-tax net income of $93 million or $0.67 per share. That was based on contact drilling revenues of $708 million. This is a slight decrease in EPS from $0.68 in the third quarter and reflects the $57 million tax expense booked in Q4 related to our Egyptian operations for the period 2006 through 2012, which Larry has already discussed. As highlighted in the press release and as Larry just said, the current quarter was also helped when we recorded, as revenue in Q4, the $25 million received from Niko Resources as part of the settlement of the Monarch and Ocean Lexington contracts.

I will now address some of the additional line items on our fourth quarter income statement. First, contract drilling expenses for the quarter came in at $409 million, $10 million less than the prior quarter and at the low end of our Q4 guidance of $405 million to $425 million, demonstrating that cost control remains one of our top priorities. Depreciation expense of $97 million and G&A costs of $16 million also came in either at the low end or just below our prior guidance, while interest expense of $7 million came in above our guidance of $1 million to $2 million. The increase in interest is primarily due to the $1 billion of 10- and 30-year senior notes that we issued in early November of the year just ended.

Our tax rate for the fourth quarter was, of course, higher than expected due to the Egyptian tax adjustment. Had it not been for that, the rate would've come in lower than our original guidance of 27% to 29%. The differences primarily are normal year-end true-up [ph] for geography difference of where we are on our pretax income and foreign tax rates at the different locations where we earn.

And finally, we incurred some $229 million in capital expenditures during the quarter, almost exactly split 50-50 between maintenance CapEx and newbuild projects.

Before moving on to what we see coming up for the year 2014 and in the first quarter of this coming year, I'd like to point out that during our fourth quarter conference call last year, we said that we expected to incur some $1.6 billion to $1.7 billion in rig operating costs during 2013. While there were a number of pluses and minuses during the year, those costs actually came in just under that range at $1.572 billion. Again, a testament to our cost control programs that are in place.

Also, we said that we expected our 2013 yearly tax rate to be between 27% to 30%. Again, a number of pluses and minuses during the year, but our final 2013 tax rate was 29%, within guidance despite the Egyptian tax adjustment in Q4. Other income statement line items for the year, such as G&A, interest expense and depreciation, also came within or slightly under our original guidance.

Now looking forward into 2014 and some of the items that will affect our financial performance for the coming year. We had a significant number of downtime days in 2013 due to 11 rigs being out of service for surveys. In 2014, we are projecting only 6 rigs to undergo the regulatory surveys, along with the completion of surveys for the Ambassador, Scepter and Valiant, which were in the shipyard on December 31. In addition, the Patriot and the Endeavor will spend the first part of the year in shipyards preparing for long-term contracts, the Patriot, with 3-year contract with Shell in the North Sea; and the Endeavor, an 18-month contract in the Black Sea with ExxonMobil.

The final significant downtime to be incurred will be down days for the Ocean Confidence, which, as previously forecasted, will be in the shipyard undergoing a service life extension. For the exact number of down days expected in 2014 and the timing of these projects, I'll refer you to our Rig Status Report that we filed last night.

I would now like to focus on our guidance for individual income statement line items for the full year 2014 and then for the first quarter of the year. Contract drilling expense, not including reimbursable expenses, is expected to be in the range of $1.7 billion to $1.8 billion for the year. That's approximately $175 million to $200 million above the $1.572 billion that we reported in 2013 that I spoke about earlier. The largest portion of the increase will be to normal operating costs associated with our newbuild rigs that will be delivered this year: the BlackHawk, the BlackHornet, the Onyx and the Apex. Rig operating costs on these rigs are expected to be just under $150 million. We also expect additional costs to come from inflation, which we expect will be in the range 5% to 7%. These increases will be somewhat offset by capitalization, rather than expensing of operating costs while the Patriot, Endeavor and Confidence are in the shipyard undergoing their projects.

I want to add just a little bit more color on our rig operating costs. In addition to normal daily operating costs, rigs undergoing surveys incur additional costs for inspections, mobs to and from the shipyard and additional repair costs. We're expecting most of these rigs to incur between $8 million and $10 million of survey costs during the year. The exceptions will be the Ocean Alliance, which we expect will incur additional costs somewhere between $15 million to $18 million, and the jack-up Titan, which should incur less than the average, at about $4 million to $5 million.

We will also incur amortized mob in contract preparation expenses for the year of about $40 million. That will be broken down into $8 million for the first quarter, and then approximately $10 million to $12 million in the second, third and fourth quarters. Those costs, however, will be offset by amortized revenues, which should total about the same $40 million. As always, I remind everyone that I've been talking about the line on our income statement contract drilling expenses. The numbers that I've just given you do not include costs incurred in the line reimbursable expenses. Reimbursable expenses is always -- whatever the amount incurred, will be offset almost dollar for dollar with additional reimbursable revenues.

Looking at just the first quarter of 2014, our guidance for contract drilling expenses remains the same as last quarter, $405 million to $425 million. That will consist of our normal operating expenses, survey costs associated with the completion of the Ambassador, Valiant and Scepter surveys, along with survey costs for the Yatzy and Alliance down in Brazil.

Depreciation expense for the full year is estimated to be in the range of $460 million to $465 million. As with rig operating expenses, the increase over 2013 DD&A is due to the delivery of the BlackHawk, BlackHornet, Onyx and Apex. We expect Q1 depreciation costs to come in at $100 million to $105 million, with that increasing in future quarters as new rigs begin working.

G&A costs are expected to total $75 million to $80 million for the year, with approximately $18 million to $20 million incurred during the first quarter and then remaining at that level for the subsequent quarters.

Interest expense, net of capitalized interest, is also expected to total $75 million to $80 million, or about $50 million above the total for 2013, this as a result of lower capitalized interest during the year and the addition of the $1 billion of new debt.

Net interest in each of the quarters 1 through 3 should run $15 million to $20 million, with the fourth quarter interest expense to come in at slightly above $20 million.

We are looking at an effective tax rate for the year to be in the range of 25% to 28%. As always, any changes in the geographic mix and the source of earnings, as well as tax assessments or settlements, or movements in exchange rates, will impact this effective tax rate.

And finally, our capital expenditures guidance. We believe that we'll spend maintenance capital of approximately $285 million for the full year 2014, which is down slightly from our 2013 maintenance CapEx spend of $310 million. Newbuild CapEx for 2014 is expected to be $1.8 billion, which includes the final 70% shipyard payments for the BlackHawk, BlackHornet and BlackRhino, which will be made during the year, along with CapEx incurred for the Patriot, Apex and Confidence. That, along with the $285 million in maintenance CapEx, means total capital expenditures for 2014 should total approximately $2.1 billion. Looking even further out, we expect 2015 capital expenditures to be approximately $800 million, primarily made up of the 70% shipyard payment on the BlackLion and maintenance CapEx.

And with that, I'll turn it back to Larry for any further comments.

Lawrence R. Dickerson

Okay, I think we will go straight to questions, Darren.

Darren Daugherty

Operator, we'll open it up for questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ian Macpherson of Simmons.

Ian Macpherson - Simmons & Company International, Research Division

Larry, you alluded to the fact that some of your rigs are better positioned than others with regard to those which are available. Could you walk us through just a few of the highlights of which rigs might be under consideration for stacking at this point and are currently stacked and what's a good timeframe, the decision parameters you're looking at for those type of rigs?

Lawrence R. Dickerson

Well, I don't know that we have any plans specifically to idle rigs. I was just trying to highlight that out of our entire mid-water and deepwater fleet, many of them are in niches such as North Sea or in Mexico, where they're highly valued and earn decent dayrates. But if you look throughout the fleet, there may be just a handful that have questionable futures and I -- certainly, we've idled some of those already. But I don't -- we don't have any specific ones, but some rigs may fall out of Brazil. And due to its condition or the amount of money that we feel we have to spend to market it in other areas, as an example, could lead to either being stacked or shifting into a lower-spec market, of which there a few around the world that would provide employment for those type of rigs.

Ian Macpherson - Simmons & Company International, Research Division

Okay. Which markets where you operate do you think are relatively best behaved right now in terms of demand and opportunity to put rigs back to work, that are idle currently?

Lawrence R. Dickerson

Well, certainly, the North Sea, where you see term and rate, and I think a lot of that is due to the premium or North Sea brand oil. And the fact that there are a number of companies that exist to exploit an area that already has infrastructure, that has a mature regulatory regime and has targets, which, absent the weather, are actually fairly easy to drill compared to some of the worldwide areas. In Mexico, you got an area where people -- or the customer Pemex is driven to up production and has not really exploited their semi-target areas as much as has been in other areas. Everybody's aware of some of the changes may be coming in Mexico. So that's an area. And in the Pacific, Asia Pacific, we are able to employ a number of rigs over there as well.

Operator

Our next question comes from the line of Dave Wilson of Howard Weil.

David Wilson - Howard Weil Incorporated, Research Division

Larry, kind of circling back from your prepared comments, we're hearing about and seeing some evidence of the softening floater [ph] market. I'm just wondering here if the softness would be, in your opinion, incurred by lower dayrates. Meaning that if rates were lower from here, that would simulate demand? Or is this a case kind of what we saw back in 2009, but maybe for different reasons, or demand was soft regardless of what they have to offer. I just wanted to try and get a sense of your thoughts around the price elasticity of the market right now.

Lawrence R. Dickerson

The price does determine supply and demand. We all know that. But I think -- I believe some of the -- like for instance, if we take the Ocean Valiant that's come out of the shipyard, we'd be seeing focus on ultra-deepwater prospects in West Africa and some of the prospects the deepwater would drill are being deferred with price being a component of it. But I think another part of it is just overall budgets and -- of the majors and where they're choosing to spend their money, or cost overruns that may exist that are depriving some funds. We think, to the degree that this is budget issues, that we're looking at deferrals rather than stepping away from prospects. We know that there's a number of prospects around the world in deepwater areas, where there are already infrastructure and trees and what not ready to go, and so we would expect that there'll be some increase in demand. But to get back to your question, obviously, price does have an impact.

David Wilson - Howard Weil Incorporated, Research Division

Okay, great. And then just kind of as a follow-up, kind of the other end, understanding that a couple of your newbuilds, you're -- that you are recently coming out of shipyard or below market rates right now, but in regards to the uncontracted ones, what has been the response from operators in terms of your efforts to maintain high level of dayrates? No doubt there's going to be pushback there as there is with any contractual negotiation, but is there a level of appreciation on the part of operators that, they're going to have to pay higher rates for a newer, more capable rig? I'm not sure and I'm trying to gauge how much pricing discipline can be maintained in this type of environment.

Lawrence R. Dickerson

Well, I think the way to look at it is, historically, at the award -- at the contract award, you've seen see those rates decline sequentially by $10,000, $20,000 a day. And so we can get a job done and say we need X price, but we have to meet the competition. I think it's an open -- it's a bid situation, and it's where it is.

Operator

Our next question comes from the line of Klayton Kovac of Tudor, Pickering, Holt.

Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

So on the last conference call, you mentioned the Ocean Apex is having a 6-month LOI. But in last night's Fleet Status, you showed it as having a 2.5 month contract with Exxon. Could you just kind of reconcile those? I know you've mentioned something in your prepared remarks, but I didn't quite catch all of it.

Gary T. Krenek

Sure. That was more of a customer timing issue. I wouldn't read too much into it in terms of the rig's prospects. That really was a unique case of a customer timing issue and commitments in country that 2 programs couldn't be linked.

Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. All right. And then as a follow-up...

Lawrence R. Dickerson

I would just add to that, the Apex and Onyx deepwater units being essentially the only new ones coming to market with enhanced quarters, and everything that they bring to the table are getting lots of interest in numbers of programs. The Onyx is working in the Gulf for a year, and we've got people looking at it hard for jobs to follow on. And the Apex has some -- we thought the initial well in the area close to the Singapore area to be a good place to break the rig in and get it going. And then we've got several opportunities to bid that for longer-term wells around the world.

Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And then my next question, so I realize you guys have great contract coverage in Brazil for 2014. But as you think about 2015, what's sort of your feeling around Petrobras exercising its options for some additional work on these rigs?

Lawrence R. Dickerson

I think it's -- I think if the prospects are good, Petrobras will not be taking delivery in that timeframe of any new constructed rigs. So in order to maintain their programs, a number of those rigs would go forward. I think they'll have a preference for the larger ultra-deepwater rigs that have capabilities to advance their programs. I think some of the mid-water that we have there might be among the rigs that we have to find alternative work or cold stack.

Operator

Our next question comes from the line of Rob MacKenzie of Iberia Capital.

Robert J. MacKenzie - Iberia Capital Partners, Research Division

I actually wanted to follow up a little bit on the last question and answer, if I may. Larry, would you give us a feeling for how you are weighing the decision of the cold stack versus maintaining rigs, keep them at warm stack or ready stack, if you will, and then incurring the operating costs versus a cold stack decision, I guess, on an older rig that might mean it doesn't work again?

Lawrence R. Dickerson

One, I don't think there's a huge factor at play. We -- the primary thing that causes us to cold-stack a rig is that the capabilities of that unit put it at the low end of the market and that there's a lot of capital required to keep that rig operating, and it's only going to [indiscernible]. So if, for instance, a rig does not get renewed in any one particular market and it's at the low end, that's the driver. And in most cases, they require quite a bit of capital and we're unable to add additional capability. That's why it's important for us to supplement our fleet with rigs like the Onyx and the Apex and deliver more capable rigs.

Robert J. MacKenzie - Iberia Capital Partners, Research Division

Great. And I believe you mentioned earlier on your prepared remarks that you thought rates still supported new construction. Would that apply to you guys thinking about building new rigs? Or did I hear you wrong?

Lawrence R. Dickerson

I think you heard me wrong. What I wanted to say is that the rates we're in the range that we were still comfortable, that we would earn an adequate return. I'm not sure -- clearly, other people have made construction orders, so they must be projecting rates that they think are comfortable. At the moment, we've got delivery. We still -- we have an inventory of 2 rigs that are uncommitted. We need to commit those. And we think that the rates that we see in the coming year will still be adequate to justify our decision.

Operator

Our next question comes from the line of Gregory Lewis of Crédit Suisse.

Gregory Lewis - Crédit Suisse AG, Research Division

So it sounds like the Valiant, it's in the yard, it's potentially being marketed to work in the North Sea, I believe, so that it could go to the North Sea or the Mediterranean. In the event that the Valiant were to go to the North Sea, is it North Sea-ready or would we have that expected to stay in the yard currently and need to be upgraded? Or is it -- if you could just sort of provide some color around the position of that rig in the North Sea.

Lawrence R. Dickerson

Well, the rig has worked in the North Sea previously, but it was some time ago, and so there would be -- we would have to update our safety case. And there's some pieces of kit that would be -- have to added to the rig. But in general, it's not a major issue. So I can't give you an answer, but it's not as significant in either time or money that it would take to prepare it for the North Sea.

Gregory Lewis - Crédit Suisse AG, Research Division

Okay, great. And then just one quick follow-up from me. In thinking about the market, I mean, clearly, the customers are having lots of questions and there's lots of concerns about the overall market. Have you seen any noticeable uptake or increase in subletting of either your rigs or rigs from other companies in the market that are actually on longer-term contracts? Is this something that has sort of picked up as we start 2014? Or has it kind of just been steady as it's been over the last 6, 12 months?

Gary T. Krenek

I would say that there's been some activity as it relates to '14. But what is noticeable is there doesn't seem to be a lot of time on offer for '15. So we're not seeing a lot ourselves, but what we're hearing in the market is there might be some short-term availability as the operators have near-term capital constraints.

Operator

Our next question comes from the line of Darren Gacicia of Guggenheim Partners.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

First, it's one of those things that they grill [ph] in the room, seems that the stock is really concerned about kind of age of fleet and kind of what has longevity. I know when everyone else is kind of sort of taking an integral approach to this question, I'm going to try to kind of just go right between the eyes on it. So, one, it seems like your mitigating factors, how much you have to spend on rigs to keep them around, are there any rigs that screen for needing kind of a greater spend? And is there any way to kind of quantify, so you can kind of really get a good feel for this for kind of what's built in -- what's built for the numbers of maybe what -- what maybe needs to retire over the next couple of years? And I'll leave it there.

Lawrence R. Dickerson

Well, an example is the Ocean Confidence. We're spending quite a bit of money scheduled on that rig to get it up to snuff on the market. But many parts of our fleet, we got these Victory-class rigs, which range from the Endeavor, which will be working for Exxon in Black Sea, on down through the Ocean Quest, which we just relocated to the Pacific as we release from OGX. And those rigs have had a lot of capital put in them and are quite capable. And I don't think that it's a major number, but certainly, as more capable rigs are delivered on the higher end, it does raise customer expectations. And some of the -- if you take, for instance, the rigs that we've already cold-stacked and said that we're holding -- we said are hold -- something like the Ocean New Era and Ocean Whittington, those rigs are much less capable, don't really have room to be upgraded, and the amount of money you'd have to put into that, we don't think it makes sense. We'd rather put the money into something like our new construction rig for BP, the Ocean GreatWhite. So that's -- you can sort of look at that, and depending upon the way that the market plays out, there could be 2 to 3 of those rigs, in my judgment, that might fall in that range going forward. But I think there's been some commentary looking at our entire mid-water fleet and our entire deepwater fleet and saying that it is uniformly old, and we just don't -- we don't think that's the case. We don't think our customers see it as the case. And we're certainly able to work the vast majority of those units at solid returns.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

And you think that that's over kind of like a 5- to 10-year window? Or do you think that -- I mean, how do we think about it? Like this is a quantity. This is like -- I really think that quantifying this issue is really important here. So I mean, what do you -- do you think that they extend out and can survive maybe through 2020 with some of these rigs or do you think the window is shorter?

Lawrence R. Dickerson

I don't make any projections for 2020. I mean, 6 years into the future, I can't say what's going on. But I would say that rigs that we've put substantial capital in, we did that with the expectations that we would last for some period of time, so those would carry forward. The North Sea is -- those rigs have been maintained, and the dayrates are not generally high enough to attract new builds into that area. So we think that area continues. And we think a number of markets -- it just does not make sense to use the new ultra-deepwater BP units. And those will provide some ongoing capability.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

If I could squeeze one last in, when you talk about kind of rigs held for sale, do you think that they go to buyers that want to operate the rigs in the drilling capacity? Or do you think we have a probability of production platforms or accommodation or -- what do you think kind of happens to these assets, that they are not just a diamond [ph] for probably around the market.

Lawrence R. Dickerson

Well, generally, the rigs -- the kind of rigs that we're talking about, and we've done this -- the industry had done this over the years, very few of them return to drilling capacity. Somebody will occasionally buy it and put a bunch of money in, hang a bunch of scaffolding. You'll see one down in Galveston from a couple cycles ago, that's still sitting there. I just -- I don't see them returning to work as drilling units.

Operator

Our next question comes from the line of Thomas Curran of FBR Capital Markets.

Thomas Curran - FBR Capital Markets & Co., Research Division

So your net debt to total cap ratio has shot up to the highest level, I think, since the second quarter of 2004. Could you maybe take a step back and just give us an update on how you're thinking about leverage these days in terms of what would be the maximum ceiling you'd can consider comfortable, both heading into the market we're in for the next 12 months and then longer term beyond that?

Gary T. Krenek

The net debt ratio hasn't changed yet because we haven't spent any of the money that we raised. We will be spending it as the drillships are delivered during '14. So it will certainly increase then. But having said that, we remain the best-positioned drilling company out there as far as leverage. We've always been a very conservative company, and we will remain to be so. I'm not going to speculate as to how much it could potentially change, but we will continue to safeguard the balance sheet and make sure we don't overreach ourselves in the future. However, taking into consideration we are still the least levered, could we do something [indiscernible] in the future? I wouldn't rule it out. But again, we will remain conservative.

Lawrence R. Dickerson

Okay. And just to point out, we have $500 million of debt this coming year over the next couple years. And so, to the degree that we don't refinance that, utilize some of the financing we've already had to pay that down and adjust our leverage.

Thomas Curran - FBR Capital Markets & Co., Research Division

I appreciate that. I guess, turning to the CapEx then, could you speak to 2015, 2016, how much at this point will be left to spend on the existing newbuild and upgrade programs?

Gary T. Krenek

Well, in '15, we'll make our final payment on the BlackLion, which will be in the order of $400 million, give or take. And then in '16, the final 70% payment on the GreatWhite which will be a little bit above that.

Thomas Curran - FBR Capital Markets & Co., Research Division

And then turning to the 3 semis that are held for sale, just an update on the level of interest you're seeing there. And then when it comes to the secondary market for older generation deepwater and mid-water units in general, have you seen any proactive interests in rigs that you haven't made any effort to market on that front, but you're now starting to see people reach out to you on in the expectation you might be more open to it?

Lawrence R. Dickerson

I think, in general, there's interest in the jack-up market with people with cash to buy jack-ups. And in general, it's very difficult to find somebody that wants to buy a semi, especially semis that have been idle and don't have operating certificates.

Thomas Curran - FBR Capital Markets & Co., Research Division

And so, I guess, I have to ask maybe this follow-on on the jack-up side. Other than the Spartan, are there any other units you're reevaluating, whether or not you'd be willing to sell?

Lawrence R. Dickerson

Well, in general, we've been selling our jack-ups for several years now with the goal of focusing most of our attention on deeper water. We don't expect to raise a whole lot of money there, but we just want to focus the company as much as anything. So to the degree that there was an attractive offer, we would consider that. But our jack-up fleet essentially is in Mexico right now, which we view as a long-term market for us and gives us a base there. We've got a rig in the Gulf of Mexico and a rig in Ecuador. And so I would say those 2 rigs are not core part of our fleet, but we're working them, and we got good crews on them and we can -- our expectations is that we would go forward in that one.

Operator

Our next question comes from the line of Matt Conlan of Wells Fargo.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

So just to dive in a little deeper to what Tom was talking about, do you guys project that you're going to need to take -- hit the debt markets again in order to meet all your CapEx obligations and the debt retirements?

Lawrence R. Dickerson

We've -- a lot's going to depend on future cash flows that come in from revenues and where dayrates and where the market goes. I can tell you currently, in the near future, there's no plans to do so, and we don't project any need to go back to the debt market. And we have a revolver in place. We have a $750 million revolver that if we need to utilize that, we certainly could.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Okay. And in those cash flow forecasts going forward, assuming that operations turn out as you expect at this point, how do you feel about your dividend? That's -- the dividend is something that you have adjusted during past down cycles to build a war chest to go after rigs that might be available on a -- on distressed basis? Is that something -- is it premature to think about such opportunities here?

Lawrence R. Dickerson

Well, as you know, we don't give forward guidance on our dividends, the bulk of which is a special dividend, which is declared, as is the regular dividend, by the Board each quarter. And we examine all investment opportunities when they're set each quarter.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Okay. Loews still likes the dividends, though?

Lawrence R. Dickerson

I believe they liked it. I believe they like cash. They have -- all our shareholders liked that.

Operator

Our question comes from Lance Ettus of Tuohy Brothers Investment Research.

Lance Ettus - Tuohy Brothers Investment Research, Inc.

I just kind of have a follow-up on the dividend. The bulk of the dividend is the special dividend. I think it's been paid since mid-2010. I'm thinking you guys don't really get full credit for this because it's divided up for the special and regular. I guess, is there any thoughts to changing the special, converting it to entirely a regular dividend?

Lawrence R. Dickerson

I think we're comfortable with the structure. I understand what you say because people often -- you'll see a stock table that lists us as a pretty low yield, but we think we've attracted people that understand that and the bulk of our shareholders know the kind of yield that they're actually receiving, including the special dividend.

Thank you. And I appreciate your attention during the quarter. And the company will speak with you again at the next earnings release. Thank you.

Operator

Thank you. This concludes today's fourth quarter 2013 earnings conference call. You may now disconnect.

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