Ensco's (ESV) CEO Carl Trowell on Q2 2014 Results - Earnings Call Transcript

Jul.31.14 | About: Ensco PLC (ESV)

Ensco (NYSE:ESV)

Q2 2014 Earnings Call

July 31, 2014 11:00 am ET

Executives

Sean P. O'Neill - Vice President of Investor Relations & Communications

Carl Trowell - Chief Executive Officer, President and Director

David Ethan Hensel - Senior Vice President of Marketing

James W. Swent - Chief Financial Officer and Executive Vice President

John Mark Burns - Chief Operating Officer and Executive Vice President

Analysts

David Wilson - Howard Weil Incorporated, Research Division

Ian Macpherson - Simmons & Company International, Research Division

Robert J. MacKenzie - Iberia Capital Partners, Research Division

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Michael W. Urban - Deutsche Bank AG, Research Division

Roland Morris - Cowen and Company, LLC, Research Division

Gregory Lewis - Crédit Suisse AG, Research Division

Grace Hoefig - Franklin Value Investors Trust - Franklin Balance Sheet Investment Fund

Operator

Good day, everyone, and welcome to the Ensco plc's Second Quarter 2014 Earnings Conference Call. [Operator Instructions] Please also note that today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Sean O'Neill, Vice President of Investor Relations, who will moderate the call. Sir, please go ahead.

Sean P. O'Neill

Welcome, everyone, to Ensco's second quarter 2014 conference call. With me today are Carl Trowell, CEO; Mark Burns, our Chief Operating Officer; Jay Swent, CFO; David Hensel, our Senior Vice President of Marketing; as well as other members of our executive management team. We issued our earnings release, which is available on our website at enscoplc.com.

Any comments we make about expectations are forward-looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our earnings release and SEC filings on our website that define forward-looking statements and list risk factors and other events that could impact future results. Also, please note that the company undertakes no duty to update forward-looking statements. As a reminder, we issued our most recent fleet status report on July 16.

Now let me turn the call over to Carl Trowell, our new CEO and President.

Carl Trowell

Thanks, Sean, and good morning, everyone. Since this is my first earnings call as Ensco's CEO, I will start out with some introductory comments, and then, I will cover highlights for the quarter. David will then discuss the state of our markets, and Jay will review our financial results and future outlook.

First, let me say that I'm honored to be Ensco's new CEO and President. Many years ago, one of my first jobs in the oil field was working as a well site engineer for Shell on ENSCO 72 and ENSCO 85. And I've watched Ensco's progress under its first 2 CEOs as the company grew to become one of the largest and more importantly, most well-respected offshore drillers.

Since I started 8 weeks ago as CEO, many people have asked me what attracted me to the position. And I tell them it's a long list, but foremost amongst them were: an excellent safety and operating record, an ethos and culture that has led it to be ranked #1 in customer satisfaction 4 years running, a quality fleet in both floaters and jackups across a global platform, leading net income margins among the major offshore drillers, the strongest balance sheet with significant capital management flexibility, a dividend yield that is among the top 5% of S&P 500 companies and 7 newbuild rigs under construction that will support future earnings and cash flow growth. But the major attraction is what I believe Ensco can become, given these many strengths and accomplishments.

Over the past several weeks, I've been meeting with employees and customers around the world, first, to listen and learn; and secondly, to define my priorities. My expectations walking in have been exceeded. Ensco has an incredibly strong value system and culture, dedicated employees, proven systems and processes and a talented management team that is well respected by our customers

So what's next for Ensco? As I've told our employees, my top priorities will be, above all, no change to our laser-focus on safety, quality and operational excellence. In fact, this will only increase. But we aim to become a truly global company and leverage our diversity and global footprint. We pursue opportunities for differentiation and growth, including technology application. We define and execute the next 5- to 10-year strategy and of course, navigate through the near-term market conditions.

Now obviously, it's still early days, but let me give you a sense of why my expectations have been exceeded and why I think Ensco as a company can do even more. First, if we look at recent contracts for our Ensco DS-8 and 9 drillships and the ENSCO 120 series jackups, we see great examples of how Ensco has been able to differentiate itself from the competition. When you dig into the Energy Point Customer Satisfaction Rating data and you look at how the drillers do as a group in various categories, it's interesting to note that the category with the lowest ranking is technology. This represents an opportunity which Ensco has already started to capitalize on, and I think there's more to come.

Through collaborative interaction with customers, Ensco has been able to develop unique rig designs with significant technical advantages, which, coupled with proven operating systems, deliver greater efficiencies and overall cost savings to customers, and the key is to deliver the best overall drilling service to customers. And I think there will be many opportunities in Ensco's future similar to these examples that truly differentiate Ensco versus the competition. I have a great deal of experience developing and deploying new technologies and related service offerings, and I think there will be some great opportunities for Ensco in this area, especially given the strength of our engineering team.

Second, Ensco's workforce is represented by more than 100 different nationalities, and we work on 6 different continents. Ensco's geographic expansion, though, has happened relatively quickly, and I think it's fair to say there are even more opportunities to truly leverage our global platform and diversity. These are just 2 areas where I believe some of my experience and perspectives will be helpful.

An important third area is strategic direction. I've been fortunate in my career to work with a wide range of E&P customers on some of the most complex projects around the world, which has given me a great deal of insight into the market and broader challenges our E&P customers are facing. That, I believe, will be helpful as we formulate and execute our strategy for the next 5 to 10 years. Now let me caution you. Please don't expect any major changes to the core services we offer. Any expansion of our business will be done with the same disciplined approach that Ensco has applied over its 27-year history.

With that as an introduction, now let's discuss the highlights for the quarter. Operational utilization was very good at 95% for the fleet, led by our jackups at 99% and 8500 series semis at 96%. This operational performance is a reflection not only of equipment and process standardization, but also our efforts to further reduce unplanned downtime by working even more closely with our vendors, customers and industry groups to improve the quality and reliability of equipment. We are seeing consistent improvements in operational performance from these efforts, and I believe, with the next level of internal initiatives, we can go further. Safety performance has also been very good, with a total recordable incident rate year-to-date that is even better than last year's record performance.

In terms of new contracts, we signed a 5-year agreement with Total, one of our largest customers, for Ensco DS-8 in Angola, and ENSCO 5005, which we recently upgraded, was contracted to PTTEP for 1 year. During the quarter, we also extended contracts for several jackups with Saudi Aramco in the Middle East. In the North Sea, our last remaining rig with 2014 availability was contracted. ENSCO 121 joined our active fleet as it began its contract with Wintershall in North Sea, and ENSCO 122 was recently delivered and will commence its contract with Shell/NAM later this year. These additions to our fleet are a great example of Ensco's high-grading strategy, which we will continue.

The other side of high-grading is divesting older, less capable rigs. And during the second quarter, we completed a granular market review and an in-depth analysis of our fleet. We concluded that we will sell 5 of our floaters, which are now included in discontinued operations. Four of these rigs, with an average age of 37 years, had a loss on impairment. The rigs we intend to divest are mostly older mid-water semisubs that we believe do not have a place in our long-term fleet structure. After this action, our remaining floater fleet will have an average age of just 9 years. We also wrote down the value of 4 additional floaters that remain in continuing operations to reflect our current assessment of the market. Jay will go through the details of the $1.5 billion impairment charge we took this quarter for these 8 rigs.

As we performed our in-depth analysis of the fleet, my approach was to take decisive steps now to reduce expenses. Backing the held-for-sale floaters will lower cost more quickly, which we think is the right thing to do in terms of current market softness, especially for older mid-water assets. We are fortunate to have only a limited number of rigs affected by our fleet review. Some of our competitors have rigs in the 35-year-plus age group in much higher numbers. And if they, too, conclude that reducing operating costs is the best option, then we could see more floaters come out of the system, which would be helpful to all offshore drillers as a group.

In terms of the deepwater market, a significant number of new drillships and semis are being built, and customers have tightened CapEx spending, which, together, are pressuring the supply/demand dynamics. Therefore, it's hard to predict the length and depth of the current downturn in the floater market. There are a series of positive factors, however, that should support growing demand in the mid to long term. They include robust commodity price levels, coupled with positive global GDP forecast; a significant number of deepwater discoveries yet to move to appraisal and development drilling; continued customer participation in offshore lease sales, including new frontier areas; and while rates of return have trended down for E&P companies, most IOCs have production levels beneath those of 2010 and reduced offshore rig rates will likely trigger return to drilling as the imperative to replace production increases.

My recent tour and review of global operations has highlighted that the offshore drilling market is much more segmented in outlook in terms of both asset class and geography. I see different dynamics driving the floater and jackup market. This has in part led to our second quarter fleet decisions. Please note that as part of our fleet review process, we did not impair the value of any rig in our jackup segment. In fact, after completing a tour of many of our regions, I feel very good about the near-term outlook for our jackup fleet, which reached near-record backlog this quarter.

There are, however, a large number of jackups being built around the world, and we need to be cognizant of this new supply. It is worth noting that more than half of the jackup rigs being built have been ordered by firms that are not operating even 1 rig today on the open water. Therefore, it's unclear when and how these rigs will come to market and whether they'll be sold and if so, to whom, given that many of the established drillers already have active newbuild programs in place.

Finally, over the next few years, an increasing percentage of the global jackup fleet will have an average age of 35 years or greater, which is beyond their original intended life. Unlike some of our competitors, we see many benefits to owning and operating both jackups and floaters within the same company, including access to market, economy of scale and managing personnel. We intend to remain the leader in the premium jackup market.

To quickly recap, Ensco has many strengths that we can build on. This positions the company well for both the long term and in current market conditions. The long-term outlook for our sector is positive, and Ensco will be a leader in offshore drilling. For the quarter, operational and safety performance was strong, and we are seeing the benefits of work done by our executive team and employees over several years to drive improvement. Our newbuild rigs are running favorable contracts due to our differentiated rig designs and drilling services. These newbuild rigs will support growth and cash flow in the future.

We have completed a thorough review of our fleet and have taken decisive steps to sell several rigs to quickly reduce expenses under our control, and we canceled certain planned upgrades to reduce capital expenditures. We are keeping a close eye on changing market conditions, and we will proactively leverage our cost structure advantages and capital management flexibility to navigate market changes as they occur. We remain committed to our dividend policy and to delivering shareholder value.

Now I will turn the call over to David.

David Ethan Hensel

Thanks, Carl. This morning, I will present our outlook for the floater and jackup markets and recap some of our contract signings that occurred during the quarter. As Carl mentioned earlier, the fundamental long-term drivers of our business are in place in terms of commodity prices that are well above breakeven levels for our customers to continue drilling; customer investment, both in shallow water and deepwater, in order to achieve their production targets; appraisal and development drilling that will follow successful new discoveries over the past few years; favorable activity in terms of new offshore lease sales; and longer term, the emergence of new markets in terms of deepwater opportunities.

The jackup market in general has remained fairly strong as evidenced by near-record contracted revenue backlog for our jackup fleet. However, we have seen the floater market soften this year, particularly for older mid-water assets, including some floaters going idle recently in certain regions as the supply of new rigs coming into those markets and a decline in the number of tenders and inquiries have affected the balance of supply and demand. As we look at specific regions, the West African market continues to show increasing customer demand across several countries, including Angola, Ghana and Nigeria. We signed a 5-year contract with Total in Angola for one of our ultra-deepwater drillships, ENSCO DS-8, that added $1.2 billion to our contracted revenue backlog. We expect ENSCO DS-8 to start work in the second half of 2015 after it has completed acceptance testing.

There are currently 3 open deepwater tenders for multiyear terms in West Africa, and we have bid ultra-deepwater drillships and semisubmersibles into these opportunities. We see other opportunities in the coming months that will require 1 or more rigs in mid to late 2015. In addition, several operators have exploration programs planned in East Africa and South Africa. We anticipate that many of the new discoveries in East Africa will result in significant development programs over time. We also see demand for several incremental jackups in West Africa for multiyear terms.

Turning to the North Sea. Customer demand for jackups remains strong. Maersk exercised a 1-year option for ENSCO 72 in the low $170,000 per day range to keep the rig into late third quarter 2015. As a result, we have no rig availability in the North Sea for the remainder of 2014. Customers are looking to secure rigs in the region for work beginning in 2015, and several of our jackups with contracts rolling over during 2015 have contract options that we expect customers will exercise. We are already having conversations with customers for ENSCO 120 and ENSCO 121 when they finish their initial contracts in late 2015 and 2016, respectively, another example of strong customer interest in the operational efficiencies of our ENSCO 120 Series design. We continue to have strong customer interest for ENSCO 123, our fourth ENSCO 120 Series rig, which is not scheduled for delivery until 2016.

In the U.K. floater market, supply and demand continues to remain balanced. ENSCO 5004 has its multiyear contract commencing this quarter in the Mediterranean, and we believe there are opportunities for additional floaters in this market, including Egypt and Israel. In the Middle East, we executed 1-year extensions for 3 of our jackups with Saudi Aramco during the second quarter of 2014. We now have all our jackups in the Middle East contracted into 2015 and are having discussions with customers on rigs with 2015 availability, including opportunities for multiyear terms. We see additional opportunities for up to 9 rigs from other customers in the region, particularly in the UAE, for standard and high-spec rigs for multiyear terms. We expect customer demand for differentiated technology and contract drilling services to remain strong in the Middle East in the years to come and that ENSCO 140 and ENSCO 141, with our patented cantileverage advantage technology, plus other design features that provide cost advantages for customers and Ensco, will draw significant customer interest in the market.

In India, ONGC has a tender outstanding for up to 12 jackups. We expect most or all of these requirements are against incumbent units, but this tender may absorb 1 or 2 incremental rigs. Opportunities also exist in the region with other customers which require at least 3 jackups. We also see potential demand for several floaters in India as well.

In the Asia Pacific region, on the floater side, there are several contracting opportunities, including opportunities in Australia, Indonesia, Malaysia, South Korea and Vietnam. During the quarter, we signed a 10-well contract with PTTEP for ENSCO 5005 at $230,000 per day. The Asia Pacific jackup market remains balanced. We signed a 6-month extension with Shell in Malaysia for ENSCO 105 and are in discussions with customers for our jackups with remaining 2014 availability. We expect that customer demand in Malaysia, Thailand, Vietnam, China and Australia, as well as recent lease sale in Myanmar, will lead to additional rig requirements, in some cases, for multiyear programs. However, we expect the jackup market in the Asia Pacific region to remain competitive in the near term as uncontracted newbuilds increase rig supply.

In the U.S. Gulf of Mexico, on the jackup side, we recently signed short-term contracts for several of our rigs, including ENSCO 99 with ENERGY XXI and ENSCO 75 with Renaissance. While we expect the jackup market in the U.S. Gulf to remain largely in balance, we have seen terms on new opportunities shorten in duration, which has put pressure on rates and has created some gaps in contracting in the market. While there can be challenges starting wells in certain locations during hurricane season, we have seen an increasing number of prospects following hurricane season.

Floater supply and demand dynamics in the U.S. Gulf have become more challenging as several newbuilds will be delivered into the market later this year to begin exploration programs for customers. Ongoing exploration activity and new discoveries could lead to incremental appraisal and development in the region over time. Discussions are ongoing with customers for our 8500 Series rigs with upcoming availability for work both in the U.S. Gulf, as well as other regions, such as West Africa, the Mediterranean and Southeast Asia.

In Mexico, we expect Pemex to continue growing their jackup fleet, and energy reform within the government is expected to open the market to more floaters in the coming years. Moving to Brazil, Petrobras is looking to increase pre-salt development, and we expect that they will contract one or more rigs for work beginning next year. In addition, we understand Petrobras is finalizing renewals for ultra-deepwater rigs with contracts expiring in 2015. We continue to see tenders and inquiries from other major customers in Brazil as well. This activity relates to leases that were acquired during the 2013 bid rounds, and we expect this positive development will translate into more opportunities in the future.

Looking at the worldwide order book for floating rigs. We see 14 new rigs that will be delivered before the end of 2014, of which 8 are uncontracted. The newbuild order book for competitive jackups shows 16 to be delivered by year-end 2014, 12 of which are uncontracted. The presence of uncontracted newbuild deliveries has created supply pressure, which we believe will result in an increasing number of older jackups and floaters being retired. Based on the population of the competitive independent cantilever jackup fleet, we estimate that, currently, there are more than 50 jackups that are 35 years of age or older and that this age group will nearly triple in the next 3 years to approximately 150 jackups or 28% of the global jackup fleet.

Upon reaching 35 years of age, each of these rigs will be required to complete a regulatory survey in order to meet classification requirements, and significant capital expenditures may be required to keep these rigs certified, especially for jackups that have not been well maintained over their useful lives. These capital expenditures may prove cost prohibitive for many of these rigs, and we believe that these surveys could serve as a catalyst for jackup retirements. While the numbers I just gave you are for jackups that are at least 35 years of age, if we look at actual rig retirements over the past 3 years, the average age of the 36 jackups taken out of the global supply is 32 years.

The global fleet of competitive floaters may experience similar phenomenon as approximately 60 floaters or 20% of the global fleet are at least 35 years of age. With customers' preference for newer rigs that provide drilling efficiencies and with less capable floaters challenged to find contracts in the current environment, many of these floaters may face extended periods of time without work. Drillers may look to reduce costs on older assets by stacking these rigs. And reactivation costs for floaters, depending on the condition of the rig and the length of time the rig has been stacked, may prove too costly and force these rigs into retirement

Now let me turn the call over to Jay.

James W. Swent

Thanks, David. Today, I'll start with a discussion of the impairment charge we recorded in the second quarter, and then, I will cover highlights of our second quarter results, our outlook for the third quarter and our financial position.

As part of our ongoing review of the fleet and in light of our assessment of market conditions, we identified 9 of our 29 floaters that required action. 5 rigs will be sold and are now classified as held-for-sale assets in discontinued operations. Four of these rigs, ENSCO 5000, 5001, 5002 and 6000, had impairment charges totaling $546 million before tax. The fifth rig, ENSCO 7500, did not have an impairment charge. Only ENSCO 5001 currently has a contract which ends in January of next year. The other rigs are either cold stacked or will be cold stacked soon to reduce expenses as quickly as possible.

We also determined that 4 other rigs, ENSCO DS-1 and DS-2 and ENSCO 5004 and 5005, had carrying values that exceeded undiscounted future cash flow projections, and we booked a $992 million impairment charge for these rigs in the second quarter. This charge was recorded in continuing operations because we intend to keep these 4 rigs in our fleet and operate them.

As noted in our press release we reported a loss of $5.07 per diluted share. This included a loss of $2.38 per share from discontinued operations, which includes the held-for-sale assets and ENSCO 85 that was sold during the second quarter of 2014. The loss from continuing operations was $2.69 per share, including a $4.27 loss per share from impairment charges. Adjusted for these impairment charges, earnings per share from continuing operations were $1.58 compared to $1.48 since a year ago, as shown in our earnings release.

So let me make a couple of comments about the accounting implications of all of this. Obviously, the impairment charges we recorded this quarter are noncash in nature and do not affect our liquidity. Our debt-to-capitalization ratio is affected slightly as the impairment charge caused our debt-to-capitalization ratio to increase to 29% from 27% last quarter. When we classify assets as held for sale, their year-to-date and all prior financial results are moved into discontinued operations.

Going forward, we stopped depreciating these assets. Any future gains or losses on sales of these assets will also be recorded in discontinued operations. We intend to actively market the held-for-sale rigs through our normal disposition channels, and this should generate positive cash flow in future periods. Some of the older, less capable assets could be scrapped if there are no buyers, and we believe this is already reflected in the write-downs we have taken.

With respect to the 4 rigs in continuing operations that we impaired but we'll continue to operate, the book values of these rigs have been reduced, and we have adjusted their depreciable lives to reflect their expected remaining economic lives. While we have written down the values of several of the older, less capable rigs acquired as part of the Pride transaction, we have not made any adjustments to our goodwill on the balance sheet, in part, because we are still receiving significant economic benefits from the Pride transaction.

Our floater fleet in continuing operations now has an average age of just 9 years, placing us second among the top 5 drillers. The next youngest fleet has an average age of 20 years, more than double the average age of Ensco's floaters. Considering this advantage and the benefits of our standardization strategy, we believe we have a strong competitive position in the floater market.

Turning to the income statement. Total revenue for the second quarter was $1.2 billion, up 6% from last year. This was driven by the addition of ENSCO DS-7, ENSCO 120 and 121 to the active fleet. Also contributing to the revenue growth was a 7% increase in our total average day rate to $242,000, which was partially offset by a decline in total utilization to 85% from 87% a year ago. Total utilization is reduced by the time in days that a rig does not receive day rates due to a combination of factors, including uncontracted time, planned downtime related to upgrades and surveys and unplanned downtime caused purely by operational matters such as mechanical issues. The decline in utilization year-to-year was driven solely by nonoperational factors, primarily planned upgrade projects and uncontracted rigs. In fact, the uptime performance of our contracted rigs improved as highlighted by our increase in operational utilization to 95% from 94% last year.

Floater revenues increased 1% to $721 million from the prior year due to the addition of ENSCO DS-7 to the active fleet. Year-over-year, the average day rate for the floater segment grew 11% to $479,000. Reported floater utilization, however, declined to 77% from 87% a year ago due mostly to planned shipyard upgrades. As noted in our press release, some rigs that were working last year were undergoing planned upgrades in second quarter 2014, ahead of multiyear contracts beginning later this year. Operational utilization for the floater segment improved to 93% for the quarter compared to 92% a year ago.

Jackup segment revenues increased 19% primarily due to a 10% increase in the average day rate to $134,000. A full quarter of operations for ENSCO 120 and a partial quarter of operations for ENSCO 121 also contributed to this increase. Reported utilization for the jackup fleet increased to 89% from 87% last year as the number of planned days for shipyard upgrades or inspections declined compared to second quarter 2013. Operational utilization for the jackups was 99%, an excellent performance that equaled last year.

Total contract drilling expense increased $49 million year-over-year, mostly due to the addition of 3 rigs to the active fleet, as well as an increase in unit labor costs. Depreciation expense increased $7 million to $139 million due to our growing active fleet. General and administrative expense for the quarter was $36 million, unchanged from last year. The effective tax rate was approximately 11% for second quarter 2014.

So before I move on to the third quarter outlook, let me make a few comments on our second quarter results versus our outlook from the last earnings call. Obviously, the reclassification of 5 rigs to discontinued operations was not contemplated in our prior guidance since we did not make this decision until late in the second quarter. Since this distorts comparisons to our prior outlook in the press release, we have tried to help you reconcile your models by giving some color in the discussion of discontinued operations. When you exclude the $2.20 per share impairment charge and the $0.01 per share after-tax gain on the sale of ENSCO 85 from the loss from discontinued operations of $2.38, the remaining loss of $0.19 per share reflects the results of the 5 rigs now held for sale. Projections for these rigs were included in our prior outlook and would have been included in your models as well.

When you subtract this $0.19 per share loss from continuing operations, exclusive of the $4.27 impairment charge, earnings per share was $1.39. Additionally, we had a $0.04 benefit from adjusting the depreciation schedule, as I referenced earlier. So in a nutshell, our operational performance during the quarter was very good. Adjusted for discontinued operations, our revenues came in as expected in our prior outlook. Contract drilling expense was a bit higher than we forecasted, but this was more than offset by positive variances for other expenses.

So now let's turn to outlook for the third quarter. Total revenues are expected to increase about 2% above the second quarter 2014 levels of $1.2 billion. We will have a full quarter of operation for ENSCO 121 and more operating days for other jackups that have completed shipyard stays, as well as the reactivation of ENSCO 5004 and 5005 that are completing upgrades. Higher expenses for these rigs in the third quarter are projected to be offset by lower repair and maintenance expense and lower insurance cost. Therefore, we anticipate contract drilling expense in the third quarter will be roughly in line with $576 million we reported in second quarter 2014.

Depreciation expense should decrease about $1 million to $138 million in the third quarter due to the adjustments from impairment on 4 floaters in continuing operations, partially offset by depreciation for ENSCO 121. G&A expense is projected to decline to approximately $32 million in third quarter 2014. Other expense is anticipated to be approximately $34 million during the third quarter, comprised of $37 million of interest expense, partially offset by interest income.

On our last earnings call, we mentioned proposed changes in U.K. tax laws that were finally enacted earlier this month. Since the new law is retroactive to April 1, our third quarter effective tax rate will increase to approximately 15%. Our fourth quarter effective tax rate, however, should decline to approximately 13%.

Our current outlook for 2014 capital spending is approximately $1.7 billion. Through June 30, capital spending totaled $630 million, so the balance for the remainder of the year is $1.1 billion. The full year estimate includes $800 million in newbuild CapEx, including the final payment for ENSCO 122, as well as a milestone payment for ENSCO DS-10 and the initial payments for ENSCO 140 and 141, plus $570 million for rig enhancement projects and $330 million for sustaining projects. As a reminder, approximately $200 million of our rig enhancement CapEx will be funded by our customers. We project newbuild CapEx in 2015 will increase to approximately $1.6 billion and then drop significantly to $400 million in 2016 as we deliver our final rigs under construction. Therefore, for the balance of 2014 and 2015, cash flows from operations will be dedicated primarily to milestone payments for newbuild rigs that will support future growth and the dividend, as I mentioned on our prior conference calls.

During the second quarter, shareholders approved our capital reorganization proposal and our proxy, which is now effective, providing us more flexibility to return capital to shareholders through dividends and share repurchases. While cash flows are already spoken for, as I just mentioned, for this year and next year, we thought it was appropriate to implement this capital reorganization proposal, which is unique to U.K. companies, so that we have maximum flexibility to manage capital for the benefit of our shareholders.

I'll wrap up by emphasizing that we ended the second quarter in a very strong financial position, including $11 billion in contracted revenue backlog, which provides us with significant visibility into our revenue outlook for 2014 and 2015; a 29% leverage ratio; $145 million of cash; and $2 billion of fully available revolving credit facilities. This strong financial position fully supports our dividend commitment of $3 per share annually. While we are facing a more challenging market, especially for older mid-water rigs, we are adjusting our fleet mix and cost structures accordingly. This includes stacking rigs quickly where it makes sense to reduce daily cash costs. We are fortunate to have one of the best cost structures in the business today, and we intend to keep it that way by maintaining tight focus on all elements of contract drilling expense, including labor costs and G&A expense.

Finally, we will be actively marketing our 5 rigs held for sale, and we'll continue, as we always have, to high-grade our fleet. These are all prudent steps that we are taking in light of some market uncertainty, and we would rather lead in this regard than follow.

Now I will turn the call back over to Sean.

Sean P. O'Neill

Thanks, Jay. And now operator, please open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from Dave Wilson from Howard Weil.

David Wilson - Howard Weil Incorporated, Research Division

Carl, I want to go back to something you said in your prepared remarks regarding the rigs held for sale and that there's -- I think I heard you say there's no ready buyers for those and there might not be. So a couple of questions around that. How long will you keep them held for sale before you just decide to scrap them? Granted, I guess, the financial impact is kind of off the continuing side of the ledger for now. And then also, on those -- because they're held for sale, are you -- how much effort is going in, in trying to find new contracts for those rigs?

Carl Trowell

Okay. Dave, so the 5 rigs that we have held for sale, there is quite -- there's a difference between 4 of them, the more aged fleet floaters and the 7500. So yes, it will take us a little bit of time to market these. So we're not going to put any hard and fast time limit on it. But we have, certainly on the aged floaters, written them down accordingly by, basically, 90%. So if we do need to move to scrap, we don't anticipate any major impact from that. Although it's early days, we have had people contact us with interest to have a look at those rigs, especially because now some of them look like they could be reconfigured for other usages. And we expect the 7500 actually will go in and be picked up by someone and taken for drilling. So we will look at this down the line, but we're not going to set a hard and fast time frame. And I'll hand over to Mark, who might have a little bit more to add on this.

John Mark Burns

Yes. Dave, just a couple of other comments. This is Mark Burns. Obviously, we're going to look at each rig specifically and the location they're in and that type of thing as we look for prospective buyers. But I just want to point out that we have been very successful in divesting some of our jackups over the last 3 years. So we know that market and potential or perspective buyers, so we'll look at that and use some of our past experience.

Carl Trowell

And Dave, if I come back a little bit on your second part of the question. We have faith in some -- quite a bit of guidance from brokers from the market about what the value of these will be going forward. But on your question about costs is that we have actually moved already very quickly to reduce costs on these. Most of those rigs are already stacked or in the process of being stacked. And we are bringing down costs very quickly on them, and we expect to be able to do that and see impact, certainly, going into next quarter and the quarter after. So even if takes a while, we really think we can bring down the costs of keeping those rigs stacked to a very low level, a minimum level.

David Wilson - Howard Weil Incorporated, Research Division

Great. And then, Jay, if I could kind of circle back on one of your prepared comments regarding goodwill. I know you guys -- you said you look at it, but I was just, I guess, surprised by the amount of the write-downs and the number of rigs involved that there wasn't something coming out of goodwill as well. Could you kind of go through your thought process there in a little more detail?

James W. Swent

Yes. I guess, Dave, just to help you a little bit. We allocate goodwill by segment, not by rig, and so that goodwill and -- that probably explains most of the answer for you. We allocate that across the whole segment. And as we said, I think we feel like all the benefits of the Pride transaction are more than being realized at the moment. And most of that goodwill came about, obviously, as part of the Pride transaction, but that goodwill is over a very large number of rigs.

Operator

Our next question comes from Ian from Simmons.

Ian Macpherson - Simmons & Company International, Research Division

Really, for Carl or whoever might want to tackle this. One of the more recent and relevant data points in contracting was the BlackRhino for Murphy, where they essentially got a free upgrade on an existing contract. And I wonder if you're seeing customers pushing for that, asking you for essentially free upgrades and rigs replacing other rigs. I assume the 5001 will see out its backlog. I'm not particularly asking about that rig. But more broadly across the fleet, is that something that you see occurring either for Ensco or industry-wide?

Carl Trowell

So Ian, no, we haven't seen that yet. We've not had any client request for it, and we don't see any coming at the moment. So I think the issue, of course, is the placement of new rigs as they come out, which we're -- now with the delivery of the 120 Series into the North Sea, with DS-8 and DS-9 having good contracts, we actually have had good placement of our new rigs, and we are not having to offer that or proactively do it ourselves at this point. I'll hand over to David to see if he's got anything further to add.

David Ethan Hensel

Well, Ian, I would just add that each situation is unique, and each contractor and operator have different motivators. But to Carl's point, no, we have not been approached in that fashion.

Ian Macpherson - Simmons & Company International, Research Division

Okay. A follow-up question. There's been some talk recently about one of the 8500s having some nibbles for shallow water work that would entail a mooring upgrade. Are there any updates on that prospect?

Carl Trowell

So I'll start, and I'll let Mark take some of the details on that. But the 8500 Series is proving to be a very versatile rig group, and we have been very carefully looking at the marketplace, which if you like, is for a hybrid that could work in DP and in moored processes. And we have been looking at the conversion of 1 or 2 of the rigs to a moored option. And I'll let Mark take the rest.

John Mark Burns

Yes. Ian, as you know, the 8500 Series, it is an efficient rig design. It's got good, strong technical capabilities, but it also gives us the flexibility of working in a DP mode or in shallow water in a moored configuration. So we're looking at that, and we're talking and showing this to various customers. So we'll continue to do that, but other than that, we really don't have much to say on that.

Operator

Our next question comes from Rob MacKenzie from Iberia Capital.

Robert J. MacKenzie - Iberia Capital Partners, Research Division

Carl, I guess, perhaps for you. Give us a little color, if you don't mind, on how you decided where to cut off the rig divestitures here. The ones you chose versus perhaps others that you decided to leave in the fleet that they may not be quite as old, but really, what I'm trying to understand is how you made that decision. Were they more earnings driven in terms of what you could absorb? Or was it more asset life left in the assets? And why wouldn't you have gone further perhaps, in this case, and then got rid of some more of the older rigs, perhaps like the 8500s, which had some contracting difficulty here?

Carl Trowell

Okay. Look, the actions you've seen us take this quarter -- let me backtrack a little bit and just give you a bit more context. The actions you've seen us take this quarter have been driven by 2 major things. The first is, during the quarter, we did see a weakening in the floater market, particularly in the number of inquiries and the tenders that we have seen come in and also, some trigger events of a few, certainly, of our competitors stacking rigs. And I was looking at the future forecast of some of the rigs that you've seen here, like the 5001, 5002. Now combined with that, we did a real step-back look at the market from a granular level built up from the business units and as a consequence of kind of the world tour that I did. And we did an in-depth review of the fleet, and that led to the decision we had to sell some of the older, particularly the mid-water semis, and triggered the look at the carrying value of the rest of the floater fleet. Now what triggered us to look at some rigs and pick the ones that we have decided to hold for sale versus others was very much a look at not just the short term, but also what we want our go-forward fleet to be 1 -- 2, 3 years down the line. And we looked very carefully at, did they fit with the standardization, which rigs were going to require major upgrades and class recertifications and the balance that we wanted to have between drillships, semis, mid-water semis, et cetera. And so the decision has been very much taken on that, not a short-term reaction to just instant earnings. And if I can -- what I would also add is that you raised the point of the 8500s, and I think it's really important to point out that the 8500s are in a very different category and class from the rigs that we've impaired here. The 8500 Series is currently the most efficient and the best operating rigs we have in the floater fleet. It regularly wins rig of the quarter from our clients, and our customers really like working with them because of their deliverability on the wells. And I've heard that directly over the past few weeks. I'd also point out that the deepest well thus far drilled in the Gulf of Mexico was drilled by the 8503. So these are very capable rigs in our marketplace. The short-term contracting problems and challenges that we face coming up on 3 of the 7 are not because there's any intrinsic problem with these rigs or any weakness, they're just facing the same market conditions that, basically, every deepwater rig or semi has that's coming off contract in the current environment, particularly in the Gulf of Mexico. So there is a very important distinction to draw between the rigs that we've done for held for sale and have impaired and the 8500s. And we definitely see the 8500s as being part of our go-forward fleet.

Robert J. MacKenzie - Iberia Capital Partners, Research Division

Great. And a quick follow-up, if I may. Once you sell the rigs held for sale, use the proceeds, look to perhaps build more rigs, buy some in the open market or happy with your fleet the way it will stand post divestiture?

Carl Trowell

So we have 7 newbuilds yet to be delivered over the next couple of years, in addition to the ones that come out this year, so I feel very comfortable with the organic growth on the fleet. So we don't feel at all compelled to go into the market to build anything new at this point. In fact, our option on the DS-11 drillship expired today, and we do not intend to extend it. So the cash that would come in from this, we would basically keep probably within the business, and we would look at, first and foremost, making sure we can fulfill our dividend policy. And we also have, as Jay pointed out, significant stage payments for the newbuild rigs coming in the remainder of 2014 and '15, and it's likely that we will keep them over for that.

Operator

Our next question comes from Byron Pope from Tudor, Pickering.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Carl, you had a comment in your prepared remarks about there being different dynamics driving the floater and jackup markets going forward. And since you're coming at it with a fresh set of eyes as it were, I was wondering if you could just elaborate a little bit on that comment.

Carl Trowell

Yes, certainly. I can add a little bit more color on that. What I won't do is go into it in a super granular manner, but it is not the time and place. And some of that color has been added in David's comments. The other one is that, I think, we do see a little bit of that granular knowledge as a competitive advantage going forward. But if I raise it to a high level -- let's take the 2 segments. So in the floater segment, at the moment, it's very clear that the market dynamics have been driven by an increase in supply from the new rigs coming to market and quite a marked decline in activity. So it's been driven from both ends. At the same time, a lot of the rigs coming to market are coming and are being operated by established drillers, who have done very good preparation work, the crews are in place, the equipment's in place. So what's driving the floater market is quite different from the jackups, for example. And a number of rigs coming out this year are available to be bid basically anywhere. Now on the jackup side, it's quite different. And if you'll note, in my comments, I actually stated that I thought the jackup market for Ensco in the near term was quite positive. And if you take the world as a whole, the jackup market is quite robust. There are a few pockets, in the short term, where we have some concern. The Gulf of Mexico will be one of them as we go through hurricane season. But in general, globally, the jackup market is robust and in some places, growing. Now so the issue is not a demand one, it's purely the outlook of the new jackups coming to market. So the weakness or the pricing pressure that comes there is from an anticipation of the delivery, but not a dropoff in demand. And it's forming a slightly different dynamic in different places. The other part, just to quickly draw it to a close, is that a jackup is not a jackup is not a jackup. And whereas -- there is probably a lot of competition for generic ones that we see still quite a lot of granular demand for differentiated rigs that can fit key markets. So I hope that adds a little bit more for you. Now the other bit is that, in this weak marketplace, certainly for the floaters, at the moment, we see that our -- the assumption we are working to is that the pricing for recontracting is going to be weak going into the second half of the year and into 2015 and that there will be, across the industry as a whole, greater idle time and utilization problems between contracts. However, for Ensco, there are some major upsides offsetting that, in the fact that, next year, we will have a full year effect of ENSCO 120, 121 and 123 in the North Sea. We will have the full year effect of the 3 semis which have undergone major upgrades this year, 5004, 5005 and 5006, and we will see the startup of contracts on DS-8 and DS-9. So all of those are coming in on good term contracts with good pricing. So we see that as a big offsetting factor on the positive. And we also feel, at this stage, quite confident about ENSCO 104 and ENSCO 110 ending up with good contracts when they come out.

Operator

Our next question comes from Mike Urban from Deutsche Bank.

Michael W. Urban - Deutsche Bank AG, Research Division

I wanted to follow up on the last line of questioning about the differences between the floater and jackup market again, without getting into a huge discussion here. I wonder if there's -- if you do distinguish between the short term and the long term. Longer term, I completely agree, but we still do have this reality of a lot of rigs coming onto the market regardless of who they're owned by. And I just wanted to kind of clarify things. I mean, would you expect some weakness or potential decline in pricing and rates on those rigs as those -- as we figure out what's going to happen with those rigs? Or are you assuming that you do get this pickup in attrition that you do see some of these rigs owned by nontraditional players just not make it into the markets? Again, just trying to distinguish between, I guess, the time frame on the more positive outlook.

Carl Trowell

Yes. Okay, Mike. Yes, certainly, I do draw a distinction between the short and longer term. And my comments were very clear on saying it was in the short term, and by that I mean the kind of the next 18 months. And it's very much based on our backlog and the success we've had on contracting over the last quarter, particularly. And just to remind you, we've ended this quarter with near-record backlog in the jackups. But that doesn't mean we're complacent on it. And there is, quite clearly, a large amount of new jackups coming to market, and we're already seeing some early indication of some shortening term and some pricing pressure. But I think that were well placed to be able to place the fleet that we have in that marketplace. Now I was just going to add to that there is out there a thesis that the whole jackup market is about to roll over in the next 6, 12 months, and I think the evidence of that, so far, from our side, doesn't support that. There is pressure on pricing, and there will be as the newbuilds are delivered, but a wholesale collapse is not how it looks at all, certainly not from the fleet structure that we've got.

Michael W. Urban - Deutsche Bank AG, Research Division

Okay, understood. And then a follow-up question on the accounting and the fleet changes that you've made here. What, if you have it in front of you, did you write the 7500 down to?

James W. Swent

Yes. Mike, I think we'd probably prefer not to give you a lot of detail rig by rig because we are actually marketing these rigs to customers. But I would tell you that on the 7500, we didn't take any write-down at all on that rig. We think we'll probably do very well selling that. The write-down that we took was on the other 4 rigs.

Michael W. Urban - Deutsche Bank AG, Research Division

Yes. I'm sorry, I was going to ask the book value rather than the write-down. But it sounds like you wanted to keep that close to the vest.

James W. Swent

.

I hope you don't mind, but yes.

Michael W. Urban - Deutsche Bank AG, Research Division

No, I understand why. Don't want to tip off the market.

James W. Swent

We'll tell you when we sell each one of them. How's that?

Michael W. Urban - Deutsche Bank AG, Research Division

Sounds like a deal.

Operator

Our next question comes from Roland Morris from Cowen and Company.

Roland Morris - Cowen and Company, LLC, Research Division

I just wanted to ask, going forward, are there any -- is there a price that you guys would be willing to look at jackups that are being built by first time and nonoperators that might be distressed in the future? I mean, with the cash on hand, would you do that? Is there -- are there certain levels that are distressed? And what areas of the jackup market would you add to your fleet? Obviously, you said every jackup isn't a jackup isn't a jackup isn't a jackup. So if you could just kind of expand on what areas you might be looking to look at in the future and if there's a price or distressed price that you'd be looking to buy.

Carl Trowell

Yes. I think any pronounced downturn here would throw up opportunities of either asset acquisitions or company acquisition. But with the fleet structure we have, certainly with the newbuild deliveries, we don't feel compelled to do anything. And what the, I think, the 120 Series has taught us is that having rigs that are very, very tailored and engineered to customer and market demand brings a real advantage in how to be able to secure good long-term term contracts and good pricing. So we will be very cautious about buying just speculatively rigs out of speculative developers, especially because the build quality is not always so good. We don't -- we haven't been able to do our own QA, QC on the build in the shipyards, and they don't fit with the standardization. So we will, of course, keep an eye open. But it doesn't really fit with the company's strategy, and also, they wouldn't fit with the standardization that we've been trying to pursue.

Roland Morris - Cowen and Company, LLC, Research Division

Are there any areas of your fleet though that you would find more attractive? Just trying to get an idea of where you're looking to add, obviously, in the future, I know not in the near term.

Carl Trowell

Certainly, we've been very happy with the 120 Series and how they've been able to address the North Sea market, and of course, we have the 123 coming there. And the other -- there's no secret because we've made the order and announced it before. But the 140 Series, which is, we think, in the first place, aimed at Middle East, but other areas of Africa potentially is an area where we felt the structure was light. But we've already placed the orders there. So unless the market has got something additional to add, I don't think we'd see a big gap.

John Mark Burns

Roland, the only thing I was going to add, as you know, we are the leading provider of independent-legged premium jackups in the industry, and we are very pleased with the fleet spread that we have across the world in each major jackup area we're working in. And we have implemented a number of patented technology on our jackups. It's given us some enhanced improvements. So we're very pleased with the jackup fleet the way it's made today, the technical characteristics of them. So we're going to continue to operate these as they are currently.

Operator

[Operator Instructions] Our next question comes from Gregory Lewis from Crédit Suisse.

Gregory Lewis - Crédit Suisse AG, Research Division

I just wanted to follow up on one more thing on the jackup fleet. I mean, clearly, Ensco's focus has been on constantly renewing the fleet and not really getting caught with older assets. And as we think about how that pertains to the current jackup fleet, should we expect you guys to continue to prune the fleet over the next 12 to -- 12-plus months? And as we think about that, if that is the case, is it going to be a function of jackups as they come off contract that don't have current work? Would those be the sale candidates? Or is it potentially, "Hey, these assets actually have contracts which makes them better sell candidates?" Because it seems like there's at least 1 or 2 companies out there that are probably going to look to start to consolidate the jackup market.

Carl Trowell

Okay. Greg, so the -- I think, let me start first by saying that given the company's approach, we didn't approach this in the -- like some of our competitors have done with the wholesale spinout. We actually think the fleet having been a hybrid driller and having the jackups, semisubs and the drillships brings us some key advantages. So the idea of removing big chunks of the jackup fleet in a big-scale spinoff is not something that we've considered at this stage. However, there are pockets of the jackup fleet that we may consider, going forward, on a divestiture, our individual ones as they come up. And actually, there's no hard and fast rule on whether we would do it when they're idle or when they've got contracts. It's much more driven by is it a jackup that we want to have in the fleet going forward. So it's much more driven by the individual characteristics of the jackups rather than whether they're just marketable to someone else.

John Mark Burns

Yes. Greg, just to echo what Carl said. Obviously, we look at each rig independently. We're constantly analyzing our operations. We look at each market independently, where the rig is operating at, what is the future opportunities for the rig, do we have any major upgrade cost schedule, do we have any major surveys that would cause us to look at things differently? So we look -- mainly look at each rig and market independently.

Carl Trowell

Greg, I think the thing here is that, first of all, you should consider that we will continue the process of high-grading the fleet, which means we will be looking. The approach to this is much more a kind of medium- to long-term outlook rather than just purely opportunistic, and it's part of an ongoing and considered process. And some of the rigs that we have in the fleet, even though on paper they may look like aged ones, they are actually doing very well and earning us very good cash flows, especially because they've been invested in, over a multiyear period. So the age of the rig in its own right doesn't actually indicate how much -- its potential going forward.

Operator

Our next question comes from Grace Hoefig from Franklin Templeton.

Grace Hoefig - Franklin Value Investors Trust - Franklin Balance Sheet Investment Fund

Could you give us the total CapEx budget for 2015? You gave us the newbuild CapEx. Can you just give us sustaining and rig enhancement CapEx?

James W. Swent

I think, Grace, we're still -- we haven't gotten to the full-blown budget process for 2015. I'd say probably a reasonable way to look at it is we won't have the same level of upgrade CapEx that we had in 2014. We'll probably have a similar level of sustaining CapEx, would be in the $300 million range. So I think you ought to figure that next year we'd be in the $2 billion range, probably not much over that.

Carl Trowell

Grace, I would just add to that, that we will be drastically reducing the upgrade CapEx, as Jay just said.

Grace Hoefig - Franklin Value Investors Trust - Franklin Balance Sheet Investment Fund

The $570 million is basically cut in half or...

James W. Swent

I think it's a little too early to tell because we haven't been through the budget process. But it's going to be a very low number would be my guess.

Grace Hoefig - Franklin Value Investors Trust - Franklin Balance Sheet Investment Fund

Okay. So sustaining CapEx is around the same and the number -- okay, I can plug it in. All right.

Carl Trowell

As a working assumption, I think that's fine. But the one that will be different is the upgrade CapEx. We've done a significant amount this year. We feel very comfortable with the fleet structure, and in the current market conditions, that's one of the areas that we'll be very disciplined on.

Operator

And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over for any closing remarks.

Sean P. O'Neill

Okay. Operator, thank you. Since there are no more questions in the queue, we just want to thank everyone for their interest in Ensco, and have a great day. Thanks.

Operator

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.

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