Ocean Rig UDW's (ORIG) CEO George Economou on Q1 2014 Results - Earnings Call Transcript

May.23.14 | About: Ocean Rig (ORIG)

Ocean Rig UDW, Inc. (NASDAQ:ORIG)

Q1 2014 Earnings Conference Call

May 23, 2014 8:00 AM ET

Executives

George Economou - President, Chairman and CEO

Anthony Argyropoulos - Capital Markets Special Adviser

Gill Bocabarteille - COO

Michael Nielsen - VP, Marketing and Contracts

Analysts

Darren Hicks - Evercore Partners

Mike Urban - Deutsche Bank

Ian Macpherson - Simmons & Company

Oliver Corlett - R.W. Pressprich & Company

Lukas Daul - SEB Enskilda

Operator

Thank you for standing-by ladies and gentlemen, and welcome to the Ocean Rig Conference Call of the First Quarter 2014 Financial Results. We have with us Mr. George Economou, Chairman and Chief Executive Officer; and Mr. Anthony Argyropoulos, Capital Markets Special Adviser to CEO. At this time, all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, Friday, May the 23, 2014.

Matters discussed in this release may constitute forward-looking statements. Forward-looking statements reflects current views with respect to future events and financial performance and may include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts. Please take a moment to read the Safe Harbor statements on Page 2 of the slide presentation. Risks and uncertainties are further described in the report filed by Ocean Rig with the U.S. Securities and Exchange Commission.

And I'll now pass the floor to one of your speakers today, Mr. George Economou, CEO of Ocean Rig. Please go ahead, sir.

George Economou

Thank you. Good morning everyone and thank you for participating in Ocean Rig’s first quarter earnings conference Call. I'm starting with Slide 3. For the first quarter of 2014, Ocean Rig posted a U.S. GAAP net loss of approximately $1.5 million or $0.01 per share, included in the result is approximately $32.6 million of non-cash write-offs and redemption cost related to the early repayment and refinancing of our unsecured notes. Excluding these items, our adjusted net income was approximately $31.1 million or $0.24 per share. Net revenue from building contracts amounted to approximately $361 million. Finally our EBITDA for the quarter was $172.2 million.

On Slide 4, I would like to take the opportunity to address some recent highlights. Starting with operations, our fleet-wide operating efficiency for the first quarter was approximately 86%, which is lower than Ocean Rig’s usual standards of reliability. A series of BOP-related issues with the Ocean Rig Mylos, not uncommon during the start-up period was a main factor impacting our operating efficiency this quarter. The rest of our fleet operated at a healthy 94% efficiency rate and I am pleased to announce that the Ocean Rig Mylos is on full operation rate during the second quarter.

In late March we took delivery of the Ocean Rig Athena, our seventh generation drillship and we are mobilizing her to Angola to commence drilling operations under the three year contract with ConocoPhillips in late June. In addition the Ocean Rig Skyros successfully completed acceptance testing and commenced drilling operations under the Total contract in Angola on March 2nd. I am also pleased that the Ocean Rig Skyros has been awarded a six year contract from Total for drilling operations in Angola. The contract which is subject to sign the final documentation on that has a contract backlog of almost $1.3 billion and expected to commence in the third quarter of 2015. Consistent with our stated strategy to implement value creation initiatives for our stakeholders, our Board of Directors declared a dividend of $0.19 per share with respect to our first quarter of operations and paid at the end of this month.

Another significant value creation initiative is our goal to launch the initial public offering of a new Master Limited Partnership subsidiary before the end of 2014. We are continuing to work towards achieving this objective. Finally, we successfully refinanced our 9.5 unsecured notes with new $0.5 billion unsecured notes that have a 7.25% coupon and mature in April 2019. I also remind you that in February, we refinanced the Term Loan B facility with a fungible add-on to the long-term tranche.

Slide 5, moving onto our new buildings, following the daily market and technical specification and analysis, we placed an order with Samsung for two new integrated design and advanced specification seventh generation ultra-deepwater drillships capable of drilling in water depths of up to 12,000 feet. We expected delivery is scheduled for the first and second quarter of 2017 and at a total cost of approximately $685 million per drillship. The drillships will possess a number of new advance design and technical features which includes amongst others capacity for dual 7-ram BOPs, increased storage and hoisting capacity, larger deck space and living quarters and are based on a new fuel efficient and superior motion stability hull design. These features make the drillships ideal for development, drilling operations worldwide and provide our customers with increased flexibility, efficiency and cost savings. Our recent order is consistent with our stated strategy of moderate growth and reinforces our commitment in the non-shallow water ultra drilling sector with premium assets.

In addition, we believe the new buildings along with Ocean Rig Santorini, whose delivery was moved at no cost to us to meet 2016, will be delivered in what we expect to be a very strong market. I now turn order to our Chief Operating Officer, Gill Bocabarteille to provide you with a first quarter operational highlights.

Gill Bocabarteille

Thank you, George. I start from Slide 7. The slide illustrates the term and standard nature of our contracts. The average terms of our contracts including the short-term contracts for the Eirik Raude is 2.3 years or 3.6 years including optional periods. Excluding optional periods, we are in the contract for effectively all of 2014, 70% for 2015 and even 39% for 2016. In addition, we expect to be able to announce in the next couple of months, additional positive contract developments that will significantly increase our contract coverage through 2016 and beyond.

Turning to Slide 8, with this slide we provide again an analysis of our fleet operating performance during the quarter. Included in the slide is a breakdown of the $32.7 million in amortization of our deferred revenue that were recognized during this period. During the quarter, we had 728 calendar days and we spent 61 days mobilizing and completing acceptance of the Ocean Rig Skyros from Korea to the drilling location in Angola to commence the Total contract and 8 days mobilizing the Ocean Rig Athena from Korea to Angola for ConocoPhillips. We note that we expect an additional 91 days in Q2, 2014 for the Ocean Rig Athena mobilization and acceptance.

Our fleet available drilling days for the quarter amounted to 659 days. As previously mentioned, we experienced several downtime related to BOP quality issues with the Ocean Rig Mylos and we also incurred 19 days of BOP-related down time for the Ocean Rig Mykonos, resulting in a total of 93 off-hire days. As a result of which we were earning revenue for only 566 days, so our fleet-wide operating efficiency rate that is our revenue earning days over our available drilling days was 85.9% during the quarter. We would like to reiterate our expectation and guidance for 2014 of supplying 92.5% on available drilling days in order to estimate our future growth revenue and further approximately 3% of fees and agent commissions to arrive to net revenue.

Turning to Slide 9, now moving onto the operating expenses, on this slide we highlight our direct and onshore rig operating expenses run rates during the quarter and provide a breakdown on the 19.7 million in amortization of our deferred operating expenses that were expensed during the quarter. Our daily direct and onshore rig operating expenses this quarter averaged $194,000 versus $192,000 during the fourth quarter of 2013 and $209,000 during the first quarter of 2013. Direct and indirect operating expenses excluded amortization of deferred expenses related mainly to mobilization and maintenance expenditure expensed during the period. The slight increase in the fleet-wide operating expenses is attributed to increased cost associated with the Ocean Rig Skyros start-up operations.

Now, I turn over the presentation to Anthony Argyropoulos to provide you with first quarter financial highlights.

Anthony Argyropoulos

Thank you, Gilles. I start from Slide 10, our income statement to tie all the revenue and operating expense items. During the quarter, we had 328 million in drilling revenue and 32.7 million in amortization of deferred revenue. So, our total revenue was 360.8 million. Our revenue was higher than consensus estimates this quarter due to pure off-hire days and revenue associated with Corcovado. Our direct and onshore rig operating expenses were 128.1 million, maintenance and other expenses were 3.7 million and amortization of deferred expenses was 19.7 million.

Going forward, as we mentioned, we expect our direct rig operating expenses to average $200,000 per day fleet-wide. We will also incur about $50 million per annum for general maintenance expenses, including special items, spare parts and upgrades. So, during the quarter against the $360.8 million in total revenues, we had a $151.5 million in total rig expenses.

Our depreciation was 76.7 million which increased from the fourth quarter as it includes the ownership of Ocean Rig Skyros for the entire quarter and about seven days of ownership of the Ocean Rig Athena. Our G&A expenses were 35.4 million while our net interest expense for the quarter was 86.1 million, significantly higher than last quarter because of 32.6 million in non-cash write offs including 24.9 million in cash for the premium, with a core premium paid related to the refinancing of our unsecured notes.

Turning to Slide 11, we are pleased with successful refinancing completed on May 13th, following the redemption of the remaining 9.5% unsecured notes that were outstanding as of the end of the quarter. The refinancing of the 9.5% notes due 2016 with a new 7.25% notes maturing in April of 2019 resulted in a significant reduction to our 2016 maturities, and increased our weighted average maturity to 5.1 years. Through 2016 we have no debt maturities, while our debt is expected to amortize by 438 million over this three year period.

In addition I remind you that in early February we financed the short-term tranche over a Term Loan B with a fungible add-on to the long-term tranche. The entire 1.9 billion Term Loan B facility will now mature no earlier than the third quarter of 2020. Following the refinancing of 9.5% unsecured notes our next significant maturity is that of our 800 million, 6.5% secured notes in 2017 that we will most likely refinance in October of 2015. As a result of our refinancing activities over the past 18 months we have diversified our sources of debt as well as increased our dividend capacity and harmonized our covenants.

Turning on to Slide 12, our continuing view of the offshore drilling market remains bullish on the long-term fundamentals of our industry based on growing global demand for energy which is expected to be satisfied by new offshore discoveries and developments, of already discovered mid, deep and ultra deep water reserves. Our proven growth strategies has allowed to be in a manageable position where we do not have any un-contracted new builds being delivered during this market downturn and have the ability in capital resources to further expand our fleet with new building deliveries in what we expect to be a very strong market in 2016 and 2017.

This view underpinned our decision to construct two new design, advanced specifications, seventh generation drillships capable of drilling in water depths of up to 12,000 feet and with expected delivery in the first and second quarter of 2017 respectively. The all-in cost of each of these units is about 688 million, we already paid approximately 155 million in the second quarter of 2014 and expect to incur approximately 130 million in annual pre-delivery CapEx for these two drillships in 2015 and in 2016 which will be covered from our cash from operations and finally about 480 million for each unit payable at delivery which will be filed with a combination of debt and cash.

Focusing on our 2015 and 2016 new build drillships, the two that are under construction we have already paid 363 million for these two units. We expect to fund the remaining 447 million in capital expenditure payments in 2015 with a combination of new debt and cash.

Now I turn over the presentation to Michael Neilson to provide you with an industry update.

Michael Neilson

Thank you, Anthony. I start on Slide 14. The offshore drilling market is in a short-term corrective cycle which is expected to last through late 2015. After an extended period of year-on-year growth national oil companies as well as the larger multinational oil companies are reevaluating when where to invest their capital, leading to temporary cutbacks in the exploration drilling, continued delays in project developments and a slowdown in tendering activity, this has resulted in our demand and supply imbalance as several existing rigs are coming off contract and un-contracted new builds are being delivered in 2014.

A large portion of the available rigs in 2014 and 2015 will depend on short-term work to maintain utilization over the coming 12 to 18 months, although we are starting to see signs of increased activity in the form of enquiries and tender preparations. Although the oversupply of ultra deep water rigs also affect somewhat modern and advanced units we remain confident that oil companies will continue to prefer new and higher specification units over older rigs, thus we believe that high spec units will continue to enjoy high utilizations, although contract rates may remain relatively soft. In conclusion, we remain confident that the longer term prospects for our ultra-deepwater market continue to be healthy.

Moving onto Slide 15, the recovery of the offshore drilling market will be driven by consistent high oil prices and incremental global demand for oil and gas. Production growth rates, depletion rates and reserve replacement ratios are the key drivers that will lead to drilling market recovery. The oil and gas production gap in 2020 is estimated to be around 32 million barrels equivalent per day due to declined production earnings on existing deals plus rising annual demand of 1% to 2%. Going forward, operators will increasingly look to fill the gap of offshore production and within the offshore sector we believe the deepwater fields are most optimal due to having the highest proven reserves, for field and for well.

Brent pricing is projected to remain in excess of US$100 per barrel in the future and therefore significantly above the average ultra-deepwater breakeven cost of about $65 per barrel. Even at the upper range of ultra-deepwater breakeven economics, offshore projects are viable and offshore drilling will continue to be the main contributor of the increasing proven total reserves of oil companies. The offshore drilling market has a tendency to move quickly in both directions and we anticipate oil companies will resume their focus on expanding exploration and development drilling in particular in Africa and North and South America from 2015 and beyond.

Moving to Slide 16, the pie chart indicates that only 12% of all ultra-deepwater assets operate in ultra-deepwater while 88% of the ultra-deepwater fleet operate in and is rendering obsolete to old, mid and deepwater assets. Oil companies prefer modern ultra-deepwater rigs also in mid and deepwater due to the better efficiency, flexibility and compliance its latest safety regulations which again results in wells being drilled cheaper and safer.

Dual activity drilling, high hook load and riser capacity, large deck space, living quarters as well as advanced BOP and mud treatment systems are all key rig features that enable oil companies to have flexible and seamless operation across borders, regulatory regimes and in different water depths. Ocean Rig’s modern and advanced drilling units are tailor-built to meet customers’ current and future requirements.

Moving onto Slide 17, modern ultra-deepwater rigs are replacing the conventional mid and deepwater rigs from the 1970s and 1980s which are becoming obsolete and will end up in coke stacking and scrapping. Therefore sorry, to-date there are about 107 mid-water and 68 deepwater floaters in total globally with an average age of 32 and 28 years respectively. All of this will have to be replaced sooner rather than later as there are limitations to upgrades you can perform on an older unit.

In addition, there are effectively no mid and deepwater new building so it is ultra-deepwater drillships that are poised to replace those fleets. A significant number of older floater units will remain stacked going forward, as being on ideal time does not provide savings on daily operating expenses and might even be more costly as fuel and helicopter costs are under companies account. An older floater unit have been stacked for significant period it is not likely to able to return to service again as evidenced during the jack-up market down cycle. Currently free floater rigs are in the process of being scrapped while another free units will follow soon. Consequently, we are confident that there will be an increase in attrition of older floater units and as such attrition will result in a balanced ultra-deepwater market.

I now turn the presentation over to Mr. Economou for some closing remarks.

George Economou

Thank you, Michael. We now turn to Slide 19, I would like to summarize where the Company is to-date. Ocean Rig is a large global peer play ultra-deepwater capable drilling company with premium assets run by an experienced management team. Our focus on containing costs, maintaining efficiency and new value creation initiatives make this a very exciting time for our current as well as prospective shareholders. Our measured and well-timed fleet growth plans supports the future growth of our business and earnings. We are uniquely positioned with a $5 billion contract backlog that provides strong cash flows from a diverse mix of highly creditable counterparties. This cash flow will be further supported we by addition contracts and will fund our growth, debt repayment and dividends. We have now reached the end of our first quarter presentation and we now open the floor for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) The first question today comes from the line of Darren Hicks. Please ask your question. Darren Hicks your line is now open. Please ask your question.

Darren Hicks - Evercore Partners

Hi, good afternoon.

George Economou

Good morning.

Darren Hicks - Evercore Partners

You mentioned that you expect the offshore drilling market to remain in somewhat of a correction phase through the end of 2015, I’m just curious on your thoughts at how that may affect your initiatives to create an MLP and just wondering if that initiative is still expected to take place sometime in the second quarter?

Anthony Argyropoulos

While to the extent to answer the MLP part of the question, it does not affect our plans. We believe that current conditions, prevailing conditions in the MLP market as such, and the fixed rate nature of the contracts of these assets, lend itself for that structure regardless of what is happening at that point in time, as you know, we have mentioned that we are now well in a way of concluding the six-year contract from the Skyros. So in short, plan is as we had originally disclosed.

Darren Hicks - Evercore Partners

So you feel that the appetite and from the capital markets perspective it’s still therefore in offshore drilling company that’s an MLP.

Anthony Argyropoulos

Yes, an MLP with a long-term fixed rate contracts.

Darren Hicks - Evercore Partners

Okay, thanks. And it seems like you have little bit of exposure in mid 2015 with some contract expirations. I understand it’s a bit early but what measures, do you plan to take the kind of bridge your exposure over the soft period in 2015 for those few vessels.

George Economou

We are well underway to conclude contracts for all the rigs that are opening in 2015 which is only basically three, and we hope to announce something very shortly.

Darren Hicks - Evercore Partners

Okay, great thank you very much.

George Economou

Sure.

Operator

Thank you. And your next question today comes from the line of Michael Urban. Please ask your question.

Mike Urban - Deutsche Bank

Thanks. Good morning and good afternoon. So on one hand pushing back the delivery of a previously ordered new build, but at the same time ordering a couple of additional rigs into an admittedly soft market at least right now and I completely understand the positive long-term outlook on deepwater, but it’s pretty high degree of specificity on the timing and this is a market that’s been notorious for projects sliding to the right. So just trying to get a sense for and trying to understand why you have that level of confidence in that particular timing? Is it as you look out and see a certain set of projects that you expect to go forward in that timeframe? Is it customer discussions, again just trying to understand the confidence in that timeframe?

George Economou

Yes. We don’t have a crystal ball as nobody else does. But obviously from market information and mostly based on our context within that markets will pick up, I think. You have also the fact that you need two-three years for operators with old units to go from the denial stage to the acceptance. Denial meaning that they think they can still fix the old rigs. Acceptance meaning that after 2-3 years they will find that they cannot, so that’s our best guesstimate for the time being.

Mike Urban - Deutsche Bank

Okay, got you. Do you have a view on the -- what kind of retirements or scrapage that you might see and is that based on age, is that based on SPS -- special surveys and then maybe those older rig don’t come back out once they have to go in I mean, do you have a sense for what that attrition rate might be or estimate that you are baking into your assumptions?

George Economou

It’s a very difficult question, and honestly it depends upon the market. But while we have seen and if we correlate it to the jack-up market, then is it typically somewhere between 35 years, after which it becomes too expensive to keep maintaining the older units and while also at the same time do not really meet the regulations in the countries worldwide also drilling of course becomes more demanding and older units can simply not be the upgrade to fulfill those demands in the future.

Mike Urban - Deutsche Bank

Okay, that’s helpful that’s all from me. Thank you.

George Economou

Thank you.

Operator

Thank you. And your next question today comes from the line of Praveen Narra. Please ask your question.

Unidentified Analyst

Hi. Good morning congratulations on the quarter. I guess just a follow-up on some -- if I’m not mistaken you guys had an option to build, expire in November, so I guess what has changed between November and now, are the decisions about these rigs?

George Economou

Well, these rigs are very different than the options that we had. We have been developing this design for the last year. It takes a lot of time from both the engineering teams of ours and of the yard to conclude excess occasions for a very different design, than the ones that they have been produced to-date. We are only going ahead because we are going to be getting directions that not exist around. But as we mentioned before our ideal for development world and that’s the reason, so the option was on the standard, we decided not to decide it with being losing money on it and we placed these rigs.

Unidentified Analyst

Okay very cool and then there has been some new stories on energy, and I guess could you update us on how that impacts Ocean Rig, and you’re involved in the JV and what you guys are thinking about that going forward?

George Economou

I don’t think there has been any new stories, while we have said in the past, we have signed a MoU, that we could potentially be in some of the areas that they maybe operating. We haven’t done anything. We have said in the past, we jointly given a token of money, south of $20 million. If ever get to do that, it’s just an option that we have. So you don’t need to worry about it from the point of view of financial exposure of what it holds end of these projects.

Unidentified Analyst

Okay, perfect thank you very much.

George Economou

Sure.

Operator

Thank you. And your next question today comes from the line of Ian Macpherson. Please ask your question.

Ian Macpherson - Simmons & Company

Hi. Thank you, great quarter. I had a question on your BOPs in your fleet, can you talk about what you’re seeing in terms of customer demand for running drillships with two of the BOP stacks. How many stacks do you own across your fleets. Are you running your new rigs with two right now and do you plan to over the next couple of years?

George Economou

Yes, on the BOPs, and in particular on the Mylos, as you know it’s a rig that we took delivery last year and after the pretty successful acceptance we run the stack on the first location and develop some issues, where it was identified to be some quality problems. It is unfortunately, BOPs at the start is always a sophisticated system that requires a very detailed acceptance process. We did manage you have seen the successful operations on the Skyros, that we took delivery recently. We do have, on one of our rigs, two stack, and this is the new buildup coming in. We have options to deliver these rigs with two stacks.

Ian Macpherson - Simmons & Company

Okay, thank you. And then, just on the Skyros, George, what is the difference between having a letter of award and having a contract, but one that is not yet signed. What has progressed from last quarter to this quarter that you say you have a contract now, but it’s not signed yet?

George Economou

This has been ongoing for over year, maybe a year and a quarter -- a year and a half, and basically they got all the permissions that they needed from their partners and the country and so on so forth, and this is just maybe one or two weeks away from signing legal documentations. So it’s progressed and as much, as the client has gotten all the permissions that they wanted, so they can sign the contract.

Ian Macpherson - Simmons & Company

Excellent and well congratulations on getting that one across the finish line in the stock market.

George Economou

Thank you.

Operator

Thank you and your next question today comes from the line of Kathryn O’Connor. Please ask your question.

Unidentified Analyst

Hi. Just a follow-up to Slide 7, I think when you were going over the backlog and maybe another question that you had about contracts that are just about to come over the line. When you’re talking about that, did you say you expected the backlog to increase significantly, did you see by the end of the month?

George Economou

No I said soon. I think it may very well be before the end of the month, but then really before the end of June.

Unidentified Analyst

Okay, great, and then just on the process for the MLP, I know that you said that in the comments that they will be before the end of 2014; can you remind us of the process there and kind of the different hurdles that you have?

George Economou

Yes, I think we have already started the process the process I mean the way we are doing it is filing -- we took authorization of filing with the HC. We got the first common stack so eventually we have to clear the process we think we’ll be doing this in September that’s what’s we’re shooting for but we always like to positively surprise the market rather than negative or adversely.

Unidentified Analyst

Okay, great. And then just one other question on the 2017 new builds it seems like you went into a lot of you said it took a year for you to come up with exactly what you wanted with time consuming and there was a lot of work sort of put into did you talk with the specific customers about what they might want on the units or was this more collaboration with the shipyard?

George Economou

No, it did involve us starting to all the clients and showing them the specification then revise and show them again show it was a constant process going around practically over 10 clients receiving the comment and incorporating all the comments that we have received from the clients so far.

Unidentified Analyst

Okay, great. And then just lastly as we think about beyond 2017 deliveries and sort of what you need in order to be able to have enough assets to drop down into this MLP I mean do you think that with the assets the four new builds that are coming on in the next couple or I guess three years through 2017 how far does that take you when is the next drillship that you need to take is it 2019 or do you still anticipate needing orders in 2018 I guess?

George Economou

Well we can drop I mean the plan is to that in the first MLP to drop one-third of a three rig fleet normally you need about six months plus maybe eight or nine to keep on dropping another third so just to finish with the entire three rigs would take us probably if we start in September then it will take us another 12 to 18 months to do that. Then we can always go back to the four other rigs that we have and so on and so forth so I think the sufficient backlog of fixed drillships to keep on feeding the MLP without really needing to consider right in ordering new building or not so I think that is something that we have to address 2, 3, 4 years down the line.

Unidentified Analyst

Okay, great. Thank you very much.

George Economou

Sure.

Operator

Thank you. And your next question today comes from the line of Oliver Corlett. Please ask your question.

Oliver Corlett - R.W. Pressprich & Company

Hi. Good morning. Just following up on the MLP thing, can you give some idea of what the cap structure of the MLP is like, is there leverage transferred to the MLP or is it new debt or is it transferred and typically what kind of yields and payouts do you expect can you flash out a little bit?

George Economou

First of all in terms of the debt the existing debts of the three drillships that George mentioned that we have earmarked with the MLP it’s a fraction of interest there all that we have earmarked with the MLP will be transferred to the MLP. In terms of the yields I mean as you can obviously see where our closest comp of course is Seadrill partners there is no other drilling offshore drilling MLP. Based on coming in at a slightly higher yield in order to facilitate the pricing of our initial public offering we believe that such cap rate would be in the area of 7 to 7.5 but of course this potential market conditions at the time.

Oliver Corlett - R.W. Pressprich & Company

Okay. And the three rigs, which three rigs are you talking about when you mentioned the three, is it the 2011 generation is that what it is?

George Economou

No these are the group of four the three we are referring to are the Skyros, Mylos and Athena two of which were delivered this year and one in 2013.

Oliver Corlett - R.W. Pressprich & Company

Okay, that’s helpful. Thank you. Just one other question and there was a report while there has been some reports that and you may not want to comment on this but that the Erik Raude is on the point of being signed up for a contract in the Falklands at 500,000 a day. Is there -- can you make any comment about that at all?

George Economou

What we are discussing I wouldn’t like to comment on that but we hope to positively surprise and what he said.

Oliver Corlett - R.W. Pressprich & Company

Okay. And in the Falklands I know in the past when you had I think Lisa Eriksson on that you said that expenses tended to be pretty high because you weren’t allowed to use the South American ports because of a dispute over the Portland would you expect operating expenses to be hypothetically to be sort of above the normal level if Erik Raude did go to work down that?

George Economou

They will be but we have negotiated a better contract we don’t think that we have the same level of increased expenses if we are to operate that and we are being compensated by the rate as well.

Oliver Corlett - R.W. Pressprich & Company

Okay and finally what is the mobilization period roughly from the current location which I guess is West Africa, right?

George Economou

Well if we’re going there it will take 35 days.

Operator

Thank you. And your next question today comes from the line of Lukas Daul. Please ask your question.

Lukas Daul - SEB Enskilda

Thank you. Good morning and good afternoon. Just a quick question on Skyros, when it in Angola working for Total. What happens in between the short-term and the longer-term contracts when I look at your chart, is there some modification work that needs to be done on the rig or?

George Economou

I think little bit of waiting, we hope to minimize that or if not eliminate it.

Lukas Daul - SEB Enskilda

And then on the two…

George Economou

It’s the same client.

Lukas Daul - SEB Enskilda

Yes I was just wondering what’s going to happen in between those two timeframes. So that’s alright. And then on the 2017 new build drillships the price that you quote the 685, does that include two BOPs or is it only one stack?

George Economou

It’s only one.

Lukas Daul - SEB Enskilda

Okay, alright that’s all I have. Thanks.

Operator

Thank you. There are no further questions at this time, please continue.

George Economou

Thank you operator thank you very much for the call and now we’ll talk to you next quarter.

Operator

Thank you. That’s does conclude our conference for today. Thank you for participating. You may all now disconnect.

George Economou

Thank you.

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