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Noble Corporation (NYSE:NE)

Q1 2014 Earnings Conference Call

April 17, 2014 9:00 AM ET

Executives

Jeff Chastain - VP of IR

David Williams - Chairman, CEO and President

James MacLennan - CFO and SVP

Simon Johnson - SVP of Marketing and Contracts

Analysts

Todd Scholl - Wunderlich Securities

Ian Macpherson - Simmons & Company International

Gregory Lewis - Credit Suisse

J.B. Lowe - Cowen & Company

Operator

Good morning. My name is Mellissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Noble Corporation’s First Quarter 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer period. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, Thursday, April 17, 2014. Thank you. I would now like to introduce Mr. Jeff Chastain, Vice President of Investor Relations. Mr. Chastain, you may begin your conference.

Jeff Chastain

Okay. Thank you, Mellissa and welcome everyone to Noble Corporation's first quarter 2014 earnings call. We appreciate your interest in the Company, a copy of Noble’s earnings report issued last evening, along with the supporting statements and schedules, can be found on the Noble Web site and that's noblecorp.com.

Before I turn the call over to David Williams, I'd like to remind everyone that we may make statements about our operations, opportunities, plans, operational or financial performance, the drilling business or other matters that are not historical facts and are forward-looking statements that are subject to certain risks and uncertainties. Our filings with the U.S. Securities and Exchange Commission, which are posted on our Web site, discuss the risks and uncertainties in our business and industry and the various factors that could keep outcomes of any forward-looking statements from being realized, including the price of oil and gas, customer demand, operational and other risks.

Our actual results could differ materially from these forward-looking statements and Noble does not assume any obligation to update these statements. Also note that we may use non-GAAP financial measures in the call today. If we do, you will find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation on the Web site.

With that, I'll now turn the call over to David Williams, Chairman, President and Chief Executive of Noble.

David Williams

Thanks, Jeff. Good morning and welcome everyone. In addition to Jeff I am joined today by James MacLennan, our Senior Vice President and Chief Financial Officer and Simon Johnson, our Senior Vice President of Marketing and Contracts. Jeff and Simon are in Houston today while James and I are in London.

I will open today with some summary comments on our strong results of the first quarter and quickly update you on our progress in shipyards which continued to be best-in-class and then I’ll turn the call over to James for a more detailed review of the quarterly results and some guidance for the remainder of 2014. Simon will follow with some brief thoughts on the offshore market and I will close with an update on the pending divestiture of Paragon Offshore and how Noble is strategically positioning itself for success in the next upswing in the offshore cycle.

As we noted in mid-March, results for the first quarter were better than expected with earnings of $0.99 per share. We beat even the most aggressive estimates. We benefited from several positive outcomes in the quarter. Downtime in our fleet was lower than expected at around 4.5%. We maintained a firm handle on operating cost which were well below our guided level and we experienced higher bonus revenue recognition which is a nice reward for having achieved better rig performance especially on the rigs in Brazil. James will offer more details on the results in just a moment.

Our company transformation remains on-track and is now in advanced stage. Shipyard execution remains among the best in the industry as evidenced by the additional on-time deliveries in the first quarter of the JU3000N jackups Noble Houston Colbert and Noble Sam Turner. The Colbert has completed its mobilization from Singapore to Argentina and currently sits on location, approximately 820 miles north of North Sea we are preparing to commence operations for Total under an initial 10 month contract at a day rate of $247,000 per day. The rig should make a meaningful contribution to financial results in the second quarter.

The Turner is about to deport Singapore and is expected to commence initial operations with Maersk under two year contract in the Danish sector of the North Sea late this quarter at a rate of $215,000 per day. The remainder of 2014 will see the deliveries of our final two ultra-deepwater drill ships from Hyundai, the Noble Sam Croft and the Noble Tom Madden. The Croft is on schedule for a May departure from Korea and an expected August commencement of operations with Freeport-McMoRan under a three year contract of U.S. Gulf of Mexico at a rate of $610,000 per day. And the Madden should exit the shipyard in late October with an expected February 15 commencement of operations in the Gulf also with Freeport-McMoRan and at a rate of $610,000 per day.

Also before the end of the year we expect to deliver two of our final three jackups under construction the Noble Tom Prosser and the Noble Sam Hartley with both rig expected to exit the shipyard of Singapore during the fourth quarter. We are evaluating promising contract opportunities for both rigs in certain key areas where the advanced features of the units were preferred by our customers and we remain confident that contracts will be secured before delivered from the yard.

In summary, we expect to take delivery of six premium new build rigs in 2014 which follows a delivery of five premium rigs in 2030. As I mentioned earlier our fleet transformation is nearing an end and increased premium asset waiting for our fleet is becoming more apparent as a growing percentage of our revenues from ultra-deepwater high specification jackups drive improved operating margins.

As many of you know, we have closely followed another significant component of our company transformation is the divestiture of 42 standard jackups and floaters in the Paragon Offshore fleet. I’ll close with some final comments on our progress with that transaction and an update on timing following James’ and Simon’s comments.

Now I’ll turn the call over to James for a recap of first quarter.

James MacLennan

Thank you, David and good morning to everyone on the call. In the bid of the departure from prior calls this morning I plan to scale back my prepared remarks regarding the quarter as the detailed press release and supporting statements and schedules were issued yesterday afternoon, address most of the significant developments that led to the favorable financial results. I plan to address in detail only those line items from the P&L that fell outside of the guided range offered on our last conference call held in January. This should allow more time for questions during the Q&A at which time we’ll be happy to address your questions providing clarity on certain items. And as always Jeff and his team will be available following the call.

I’ll also devote sometime this morning to covering our guidance assumptions for the coming quarter and for the remainder of the year, an area we know to be of interest to you as we fine tune new models for Noble. I’ll also cover in some details, the anticipated costs we expect to see relative to the pending spin off of Paragon Offshore. Let me start by echoing David’s observation that Noble delivered a very solid performance in the first quarter of 2014. We’re seeing the benefits of new additions to the fleet which are contributing more fully to the revenue picture and also at an accelerated pace.

I believe the facts show that we are getting much better at managing the rigs startup process, as can be seen by the full quarter contribution from the Noble Bob Douglas which experienced fewer than three hours of unpaid downtime in the quarter while continuing a drilling campaign in New Zealand. That rig is currently moving to the U.S. Gulf of Mexico and we anticipate it will resume drilling in late June. Noble is also benefiting from cost control initiatives, rig bonus recognition and of course our significant contract backlog. It is against this backdrop that I’ll now comment briefly regarding our first quarter revenues and operating costs as well as certain balance sheet items.

Here are the highlights of what we reported yesterday. First quarter 2014 net income of $256 million or $0.99 per diluted share on total revenues of $1.3 billion. Earnings per share are up approximately 45% from the prior quarter while revenue was 7% higher. Contract drilling services revenues in the first quarter grew by $82 million or approximately 7% from the fourth quarter to 1.2 billion.

The increase relates primarily to a full quarter of revenues from our new builds to Noble Bob Douglas and the Noble Mick O'Brien and the startup in the first quarter of the new build jackup the Noble Regina Allen. Contract drilling services costs in the first quarter were essentially flat, increasing approximately $1 million to 561 million compared to 560 million in the fourth quarter of 2013. This increase reflects the addition of the rigs discussed earlier offset by decreased mobilization cost and favorable timing of repair and maintenance.

You will recall that our guidance for first quarter contract drilling services costs was a range of 605 million to 615 million, the $30 million to $40 million favorable variance to guidance was primarily due to lower repair and maintenance and transportation and shipping costs due mainly to lower than expected downtime in the fleet. Lower operating costs on the Noble Bob Douglas while that fleet was competing its New Zealand campaign better experienced with new rig startup costs and lower mobilization costs associated with the new rig deliveries.

Lower costs on the idle semisubmersible Noble Homer Ferrington were incurred as we began to reduce the crew count during the quarter. G&A expenses of just under $26 million in the first quarter dropped $6 million from the fourth quarter. The decrease primarily relates to the timing of professional fees incurred during the first quarter. Our effective tax rate for the first quarter was 17% compared to 18% in the fourth quarter and guidance of 22%.

This reflects favorable discreet tax items recognized during the first quarter including the successful settlement of a 2009 U.S. tax audit with zero resulting adjustments. It should be noted though that this lower effective tax rate is not expected to continue through the remainder of 2014 as discreet items have a habit of occurring in both directions, both favorable and unfavorable. And I will come back to the matter of effective tax rate for the full year.

Capital expenditures in the first quarter totaled $517 million including capitalized interest above our guidance of 450 million primarily due to the final delivery payment on the Noble Sam Turner which was delivered to us from the shipyard in March, ahead of our April expectations. The components of our first quarter capital expenditures are $326 million from new build rigs, 127 million from major projects and other, $50 million for sustaining capital and 14 million in capitalized interest.

Looking next to the balance sheet total debt at March 31, 2014 was $5.73 billion. This was up 173 million from December 31st of last year. This increase was primarily the result of new build milestone payments made during the quarter. Liquidity which we measure as the sum of cash and cash equivalents and availability on the revolving credit facilities totaled approximately 1.03 billion. The decrease in liquidity from the prior quarter relates to the new build milestones payments made during the quarter as well as the maturity of $250 million in senior notes which we paid off in March using our commercial paper program.

Switching now to guidance for the remainder of 2014 and for the second quarter of the year I will review our forecast and certain line items that impact the P&L as well as capital expenditures. For clarity, the guidance I am about to provide relates to consolidated Noble as we exist today. I’ll address Paragon at the end.

Firstly operational downtime in the Noble fleet for 2014 is still expected to average 5%, this compares to actual operational downtime in the first quarter of 4.5%. Contract drilling services costs are expected to be in the range $2.35 billion to $2.45 billion for the full year, about $50 million lower than our prior guidance based in part on our experience in the first quarter. For the second quarter contract drilling services costs are expected to be in the range $580 million to $595 million.

The second quarter increase includes the impact of a full quarter of operations from the Houston Colbert, ramp-up activities on the Noble Sam Turner as a nearest contract commencement date, the expected return to service of the semisubmersible Noble Homer and higher mobilization costs including that relating to the new builds. For the third quarter we see a further increase of about $25 million which includes the impacts of new builds Sam Croft late in the third quarter and Sam Turner late in the second quarter. A slight additional increase will occur in the fourth quarter with the completion of the Tom Prosser.

DD&A for the full year is estimated to be in the range $1.02 billion to $1.03 billion slightly below our prior guidance. For the second quarter DD&A is expected to be $250 million to $255 million. And as mentioned on the January call the single largest factor in 2014 DD&A is the impact of new builds entering service throughout the year.

SG&A is expected to total $115 million for the year unchanged from prior guidance and approximately $29 million in the second quarter with the remaining cost split about evenly from quarter-to-quarter. Interest expense net of capitalized interest is expected to total $180 million to $190 million consistent with prior guidance.

Net interest expense in the second quarter is expected to be $35 million to $40 million and in the third quarter it will increase by $15 million upon the startup of operations over the three scheduled 2014 new build deliveries. The minority interest line on our P&L representing the Bully I and Bully II 50-50 joint ventures with Shell is expected to total approximately $60 million in 2014 and run approximately $15 million per quarter over the year. This line item of course is wholly dependent on the performance of those two rigs and in the first quarter the Bully both experienced lower than expected operational downtime.

Our effective tax rate for the year is expected to be in the range 20% to 22% as you are aware changes in the geographic mix, sources of revenue or levels of profitability and tax assessments or settlements or movements in a certain exchange rates all can affect this line. Additionally we are already aware of certain discreet items which will likely be booked later in the year leading to our continued annual guidance of 20% to 22% for 2014.

Finally we continue to expect our capital expenditures for 2014 to be approximately $2.6 billion. The breakdown by major spending category is expected to be in four categories, in our new build program we continue to expect spending of 1.4 billion, after 2014 the remaining CapEx needed to compete the final new build project, the CJ-70 jackup is approximately 510 million most of which is expected to be spent in 2016.

Major projects in 2014 are expected to total about $900 million unchanged from prior guidance. The amount includes new build and other capital spares of $300 million and several rig maintenance and regulatory inspection programs. As mentioned in January, this amount includes a possible project on the four wells which remains under review pending final costs and contract opportunities for the rig beyond its contracting commitments in Brazil.

Sustaining capital expenditures are expected to total $300 million of the CapEx spend in 2014 consistent with our prior guidance. And capitalized interest is expected to total $55 million to $60 million in 2014 again consistent with prior guidance. Total capital spending for the second quarter is expected to be about $700 million including the delivery of the drillship Noble Sam Croft.

My guidance comments after this point have been related at consolidated Noble as the Company exists today without the incremental costs to be incurred in connection with the spin-off of most our standard specification business into Paragon Offshore. We continue to project that this process will be complete by the end of 2014. Until the spin-off is complete, we’ll continue to incur expenses that relate to preparations from spin-off. As a reminder, our consolidated financial statements and results will continue to include the combined results of Noble and the Paragon business after the IPO of Paragon currently expected to occur in the summer. We’ll continue to consolidate Paragon results until a complete separation is expected through the final distribution of shares to Noble shareholders.

The final share distribution should follow the IPO by after six months which represents a typical six month lockup period. Between the date of the IPO and that of the final distribution, Paragon will be accounted for as a majority owned consolidated subsidiary. We expect to incur approximately $60 million to $70 million in one-time spin-off-related costs throughout 2014, as we continue to work to separate the Noble and Paragon businesses, these costs which totaled $12 million in the first quarter includes banker’s fees, pension curtailment costs, legal and other professional fees along with certain operational items such as the renaming of the Paragon rigs.

In addition, we’ll incur operating and administrative expenses as we create separate operation support, shore-based and administrative staff for Paragon as well as building the facilities and systems required for the new company. We expect the incremental operations and shore-based costs to be captured in contract drilling costs and this could range from $35 million to $45 million. Incremental G&A costs representing Paragon administrative expenses as the company prepares to operate as an independent public entity could range from $30 million to $40 million.

You should note that Noble has implemented a restructuring plan that addresses the reduced size of our operation in certain regions with an appropriately sized support function which partially offsets incremental Paragon costs. The preparations for the spin-off could also lead to additional income tax outlays this year. However, we believe the current tax rate guidance adequately addresses those increases.

That concludes my prepared comments and Simon will now cover the market outlook.

Simon Johnson

Thank you, James, and good morning everyone. There should be no surprise about our limited news flow for this quarter after an extended period of year-on-year growth, the NICs and larger independents have been selected as to where and when they’re investing their capital, and this is influenced expectations for market participants to some degree. Increasing oil projects, both exploration and development, are subject to growing scrutiny. This is manifesting itself also in the divestment of prospects and projects to other operators with different cost structures and growth drivers.

Ultimately, this is a necessary part of the long-term cycle and will be a positive development for our sector, but it will take some time for the trend sighting the material activity for drilling contractors. At the same time with some operators making adjustments to their existing portfolios and also adding to their holdings in key areas such as the U.S. Gulf of Mexico where the March lease sale resulted in excess of $870 million in high bids covering over 320 tracks.

Similar lease and concession activity has been observed for another highly perspective areas around the globe. There is ultimate time gap between leasing and exploration drilling, but if anything sustained interest in lease sale today is a good indicator of baseline demand. As areas such as Mexico for example make opportunities available and the outer demand picture becomes even clearer. So on balance could we be looking at meaningful higher activity in 12 guided month time. We believe this is likely. So in the market generally we expect that the increase in customer inquires in recent months. And we anticipate that we’ll continue see improvements in contracting opportunities as the year progresses.

In the near-term our marketing focus is on finding a limited number of floating rigs and outlays with availability in 2014 namely the semisubmersible Noble Homer Ferrington, Noble Max Smith, Noble Danny Adkins and the Noble Driller we have active prospects for all four of the rigs. The competition is strong and will remain so in the near-term. We’ll continue pursue work for these units where opportunities exist. We remain confident in our ability to bridge over the current market challenges, our backlog as at end of Q1 is on $14.3 billion overall. This consists of some $11 billion from floating rigs and 3.3 billion for jackups. Our short-term exposure of a handful of rigs across a 77 rig fleet with a backlog of 40 customers stretching out to 2023 is manageable.

We are also convinced with the long-term fundamentals of the offshore industry and that we’ll experience once again an opportunity rich environment. This confidence stems primarily from the enduring stability in the crude oil price that ultimately drives that market, which remains well above material investment threshold. Also the long-term shift in our customer base from, one, dominated by a small number of multinational oil companies to a much richer ecosystem characterized by the problems at NICs, independents who are increasingly responsible for opening up new hydrocarbon basins and a growing contingent of aggressive smaller players with low overheads and different value drivers. This coupled with the remarkable growth and proven hydrocarbon basin especially in the deeper waters of the globe bodes well for long-term health of our sector. And the larger independent operators remains static indefinitely we would change that idea. We let price create its own demand at some point and with time we say yes.

Upstream expenditure by our customers is driven largely by our production growth targets, reserve replacement ratios, replacement rights and host country expectation. We believe these drivers of activity will ultimately override short-term concerns, with that supply chain costs and investment economics that are to a certain extent hardwired in the new frontier where our industry is required to operate. The next phase of activity in our sector will not be solely about who has newest rigs, we have a lot of them anyway but also about who provides the best value for the customer and has the most enduring relationships.

Noble’s organizational culture and the memory of past cycles will guide our response. While market fluctuations aren’t a feature of many industry observers experience, I assure our listeners to this call that they are part of our technology. Supply availability is good for those operators who need it and of concern to those who must address delivery of well over issues in return. While we’re not immune to those concerns, where Noble stands out is in a relatively limited exposure to near-term price risk, time proven ability to manage costs, excellent fleet composition and what can I assure you has the full attention in our marketing team. The ability to hold, attract and win new business.

As we look at the macro environment we continue to monitor catalysts that could drive rig demand. Brazil to express up drive in the many frontier plays that are unfolding around the globe, Mexico in the medium-term and the improvement in investment confidence in regulatory approvals in key African countries it all acts as significant stimulus for the current supply demand outlook. Base fundamentals haven’t changed, but have become less interesting going increased new focused on near-term data points in discerning many new patterns of sustaining the industry activity.

On the supply side we acknowledge that there’s a modest excessive supply in most rig categories. However, we remain convinced that every rig on order is netted to make project going long-term demand and customer desires for more technically advanced equipment, with improved efficiencies and redundant features. Noble is in a stronger position today to address the client needs in the future with their growing fleet of premium semisubmersibles, drillships and jackups.

I’ll now return the call back over to David.

David Williams

Alright, thank you Simon, as most of you have already concluded as -- that Simon’s comments support 2014 has started out as a challenging period for the industry, especially for the floating rig segment relative to the offshore activity that we’ve enjoyed over the past four years or so. However as we said last quarter, it’s easy to become focused on near-term events and data and miss what remains a very fundamentally sound an opportunity rich business as we move through forward for 2014 and 2015.

Although the market presents its own set of challenges today we are positioning Noble for a success in the inevitable cyclical upturn. As I mentioned earlier, the addition of 15 premium ultra-deepwater drillships and high specification jackups continues to go exceptionally well. One other significant step in our transformation is the divestiture of Paragon Offshore and we continue to make progress with this strategic initiative. Our management team is now largely in place including Randy Steely as President and Chief Executive Officer who was named in February. An amended Form S-1 was filed in early March under the name Paragon Offshore Limited and we expect to file another amendment in the coming weeks.

Although we continue to work through certain internal restructuring steps we currently believe and as James mentioned earlier we will be in a position to launch initial public offering of about 20% of the company or up to 20% of the company over the summer and spend the remaining 80% of the shares to Noble shareholders following the traditional six month lockup period. We continue to be asked if there are any circumstances that would compel us to postpone or cancel this divestiture and the answer remains no.

Once the divestiture of Paragon is complete, Noble will have one of the most versatile and focused fleets in the offshore industry. In 2016 when substantially all new rigs are expected to be operational, up to 75% of our contract drilling revenues will come from floating rig operations, predominantly deep and ultra-deepwater units, and almost 80% of revenues will come from semisubmersibles, drillships and jackups equipped with premium drilling features and run by the best trained and most competent crew around. Without question this is a dramatic transformation.

As we exit 2014 only one new drill project will remain in the construction pipeline, the ultra high specification jackup CJ-70 with an expected delivery from the shipyard in mid-2016. Although we constantly evaluate the size, asset mix and technical features and verticality of our fleet and how these attributes can be enhanced, we are very reluctant in the near-term to consider ordering new premium assets from the shipyard without a firm customer commitment meeting or exceeding our investment return criteria. This is not to say that we will never order without a contract again, rather we want to have much better visibility on identifiable customer needs before we step out again.

With the fundamental strength of this business we are convinced those customer needs will become apparent again sometime in the future. Given the expected drop in our new rig reconstruction backlog, annual capital expenditures will decline substantially beginning in 2015 relative to the levels experienced over the past four years. Noble should experience strong free cash flow which will provide us with some options, we could utilize free cash to further address our dividend, currently at $1.50 per share per annum and yielding about 5% or given the reduction in share value seen over 2014 and I believe that the long-term fundamentals of the business are robust, we could repurchase shares. In short, we have alternatives for the use of cash and each alternative will be evaluated fully as we determine the best options to increase shareholder value.

And with that, I’ll turn the call back to Jeff and we’ll take some questions.

Jeff Chastain

Okay, David. Thank you. Mellissa, we’re ready to begin the question-and-answer segment of the call. I’d like to once again remind everyone to please follow the one question, one follow-up rule, so that we can get to as many questions as possible. Mellissa, go ahead with the first question.

Question-and-Answer Session

Operator

Your first question comes from the line of Todd Scholl of Wunderlich Securities. Your line is open.

Todd Scholl - Wunderlich Securities

Good morning guys. Great quarter.

David Williams

Morning. Thank you.

Todd Scholl - Wunderlich Securities

My first question is really about the market in general and what the creation of companies like Paragon and Shell kind of mean for because I think they are part of the supply demand balance that you are talking about and when you say that you believe that the all new builds that are currently in the order book are going to be needed probably means that you are expecting some retirements of older rigs. But doesn’t the creation of companies like Paragon and Shell potentially just prolongs the older rigs staying in the market and doesn’t that potentially create a longer down cycle?

David Williams

I appreciate the question, no I don’t think so. I think if you look at and let’s just take the jackup fleet for instance if you take the jackup fleet and consider the condition of the vast number of rigs that are standard specification rigs, the beauty of the Noble fleet which is going to become the Paragon fleet going forward is these rigs were, even though they are 30 years old or older in the some cases they were bought and refurbished in midlife. And so these rigs are really kept in very good condition and upgraded to basically the highest technical limits that those all will support. And they are in good shape and if there is a decent multiple it might work. We think the product price environment and what our customers tell us about them, about work going forward that there will be opportunities for these rigs.

And so I think what you will see is some retirements that you need to see is some separation of quality of the older assets. There are a lot of older assets out there that need to be retired. The Paragon fleet is not part of those, so we think those rigs will find work and we think they will prosper. We think there are a number of other rigs out there that can work with them. The fact of the matter is that even though we have built as an industry a number of new rigs over the last couple of years or several years, we haven’t really built enough to satisfy the total range of operator demand around the world. And so there is still going to be work for some of these older high quality rigs going forward. We think a lot of these rigs will continue life going forward, so we think it’s the right thing to do. We think that timing is good for us and we’re committed to the strategy.

Todd Scholl - Wunderlich Securities

Thanks, Dave. And just as my follow-up is kind of unrelated and it might be more directed for Simon that did you offer -- you guys are planning to sell that, it got canceled now it’s available in Mexico. How are the prospects there I mean is there going to be really one customer so do you expect that rig to back to work for Pemex or if they change that rig either get stacked or possibly mobilize to the U.S. Gulf for opportunities?

Simon Johnson

No, we are expecting the rigs will continue to work with Pemex.

Todd Scholl - Wunderlich Securities

Okay. Any thoughts on when a new contract might be forth coming?

Simon Johnson

Not at this time. We’re in discussions with, -- just expect the rig to go back to work for the much less required Pemex there in the near time.

Todd Scholl - Wunderlich Securities

Great. Thank you, Simon.

Operator

Your next question comes from the line of Ian Macpherson of Simmons. Your line is open.

Ian Macpherson - Simmons & Company International

Thanks. Simon, do you have a clear sort of fleet-wide strategy with regard to optimizing your utilization for Noble’s benefit versus defending pricing, is it more rig specific? You mentioned you have four deepwater rigs that have some market exposure right now or throughout this year. We know there are finite opportunities in the market relative to the available floater capacity, so is there a best strategy or are you more opportunistic rig-by-rig with regard to the utilization for this rig?

Simon Johnson

What I would say is that geography is an important component in how we’re responding to opportunities. It is a very dynamic market at the moment and we’re tracing every opportunity for every week, well so I’ll say that geography is an important component we’re fighting with our competitors to secure wherever we can. So, it’s really so much more than that at this time.

Ian Macpherson - Simmons & Company International

You were at ODF pickup on your reported bid on the driller to Pemex. It was a long-term contract. Your reported day rate was -- it wasn’t until the mid-water day rate to be sure. Is that indicative of, I mean you talked demand improvement within the couple of years, but given that does it still make sense to bid fortune rigs on the long-term contracts at mid-water day rates?

Simon Johnson

Well I think some of them were complicated than that, material is one of the better rigs that’s fit for that work. We’ve opportunity to expanding the tender but it’s an active tender, so there isn’t much more color that we can add that to right now, but I think that anticipation that bid is indicative necessarily of the a general thing, so for fourth generation equipment rigs going forward. It’s one of several opportunities for that rig right now.

Ian Macpherson - Simmons & Company International

Okay, thanks. Can I just squeeze in one more question regarding Paragon have you sort of finalized your thinking on capital structure there, the IPO and with regard to how much debt you think is reasonable for the company at the outset, David?

David Williams

All we can do is refer you to the S-1 on that, we can’t really say anything beyond what’s in the hands of the SEC right now.

Ian Macpherson - Simmons & Company International

Got it, alright. Thank you. Good quarter.

Simon Johnson

Sure.

David Williams

Thank you.

Operator

Your next question comes from the line of Gregory Lewis of Credit Suisse. Your line is open.

Gregory Lewis - Credit Suisse

Yes, thank you. Good afternoon and good morning guys. So I guess my first question is regarding some of your prepared remarks, David. You talked about 2014 and potentially ’15 being better for the Florida market. You left out the jackup market. As you think about the how the jackup market evolves over the next 12 to 18 months, are you starting to be less constructive on the jackup market?

David Williams

Are you asking drill, I’ll take it and see if Simon has anything to add. There are a lot of jackups under construction. Our jackup utilization has been very good. We continue to see good opportunities. We still as you know got two uncommitted new builds and we’re focused on those. We’ve got opportunities for those. I guess our exposure is even in the jackups is probably a little bit less than most, but we still see good opportunities in those rigs.

So, I think as we move through ’14 and ’15, we believe that we will see more clarity and better opportunities. It’s going to take a little while we think for this cycle and of course, of course nobody knows for sure how’s it’s going to play out. But we’re watching it very close product prices and we’re watching it very close the body language and the attitudes and the way our customers are behaving. And we continue to believe that we’ll see better clarity as move through his year and next year. The jackup market may see some pressure, and again we’re not, I don’t think as exposed to as others are, Simon do you have anything to add to that?

Simon Johnson

No well I will add is that I think people are being continuously surprised by the capacity of the jackup sector to absorb demand this has been an ongoing concern over many years, and the market has responded on this supply and demand side. So I do think that there still remain a couple of key geographic markets that continue to be strong in terms of demand and that’s in North Sea and the Middle East. So it’s not a great concern at this point.

Gregory Lewis - Credit Suisse

Okay great and then just following-up Simon. You mentioned earlier that the Tom Prosser and the Sam Hartley are in multiple discussions for potential work, when we think about the types of contracts that these should sort of be getting in terms of a duration, is it safe to say that these will probably be in terms of -- is it more along the lines of six to 12 months or more along the lines of let’s call it 24 months?

Simon Johnson

I mean those rigs have a particular specification that’s suited to the more challenging work that’s out there in the marketplace today. So duration of work it might be anything from 12 months to 24 months, something of that range, I would suggest.

Gregory Lewis - Credit Suisse

Okay, so there is still it seems like duration for high-end jackups is really still hanging in there?

Simon Johnson

Well what I’m saying is that some of the opportunities that utilize the high, the special capacities of those rigs. There is still demand out there and that’s the kind of turned duration you could anticipate.

Gregory Lewis - Credit Suisse

Okay, perfect, thank you guys for the time.

Simon Johnson

Thank you.

Operator

Your next question comes from the line of J.B. Lowe of Cowen & Company. Your line is open.

J.B. Lowe - Cowen & Company

Hey, good morning and good afternoon guys. Great quarter. I was just wondering about the timing of the Paul Wolff and when do you guys could make a decision on whether you’re going to put in the investment into that rig?

David Williams

We’re still in Brazil finishing up operations there. We will move the rig to the Far East and evaluate the condition and the scope of the work and what our forward plans are on the rig at that time. We’re looking at the market to see whether or not we want to spend money on the rig or not, but we need to get out of Brazil and we should go forward to fully access it. So J.B. there is going to be awhile.

J.B. Lowe - Cowen & Company

Okay, got you. And then just on the cost, the good cost that you guys had in the quarter was that something that was just a matter of timing in terms of the maintenance and repairs there or is that something that you guys have put in some processes in place that could be repeated as we go forward?

James MacLennan

J.B. this is James. It’s kind of all of the above. There have been processes and improvements made in systems and other things which are definitely sustainable. There was a timing issue where some project seemed to be slow to get off the ground run at the beginning of the year and then the pace quickens later in the year. We do have several new builds to be added to the fleet as we go through the year. That obviously adds risk. So it’s worth pointing out that we noted one of the reasons for beating the expected costs in the first quarter was because of lower than expected downtime, which brought down our transportation, shipping costs and other related costs. So some of that could be repeated we did have a very good year.

J.B. Lowe - Cowen & Company

Okay, thanks so much, that’s all I had.

David Williams

Okay Mellissa, we have worked through the queue, so we’re going to conclude the call. Thank you for your participation on today’s call and your interest in Noble. Make a note please, that our second quarter ’14 results are scheduled for reporting on the 30th of July with a call to follow on the morning of the 31st and we’ll confirm those dates as we get closer. Mellissa thank you for coordinating the call and good day everyone.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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Source: Noble's CEO Discusses Q1 2014 Results - Earnings Call Transcript
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