Noble Plc (NE) David W. Williams on Q1 2016 Results - Earnings Call Transcript

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Noble Corp. Plc (NYSE:NE)

Q1 2016 Earnings Call

April 28, 2016 9:00 am ET

Executives

Jeffrey L. Chastain - Vice President-Investor Relations & Corporate Communications

David W. Williams - Chairman, President & Chief Executive Officer

Dennis James Lubojacky - Interim CFO, Vice President, Controller

Simon W. Johnson - Senior Vice President-Marketing & Contracts

Analysts

Ian Macpherson - Simmons & Company International

Jeffrey L. Campbell - Tuohy Brothers Investment Research, Inc.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Gregory Lewis - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Jacob Ng - Morgan Stanley & Co. LLC

Matt Marietta - Stephens, Inc.

Mark Brown - Seaport Global Securities LLC

Operator

Good morning. My name is Tanya, and I will be your conference operator today. At this time, I would like to welcome everyone to Noble Corporation Reports First Quarter 2016 Results Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

Jeff Chastain, Noble Corporation, Vice President of Investor Relations, you may begin your conference.

Jeffrey L. Chastain - Vice President-Investor Relations & Corporate Communications

Okay. Well thank you, Tanya, and welcome, everyone, to Noble Corporation's first quarter 2016 earnings conference call. We appreciate your interest in the company. And in case you missed it, a copy of Noble's earnings report issued last evening, along with the supporting statements and schedules, can be found on the Noble website. And again, that's noblecorp.com.

Before I turn the call over to David Williams, I'd like to remind everyone that we may make statements about our operations, opportunities, plans, operational or financial performance, the drilling business or other matters that are not historical facts and are forward-looking statements that are subject to certain risks and uncertainties.

Our filings with the U.S. Securities and Exchange Commission, which are posted on our website, discuss the risks and uncertainties in our business and industry and the various factors that could keep outcomes of any forward-looking statements from being realized. This includes the price of oil and gas, customer demand, operational and other risks. Our actual results could differ materially from these forward-looking statements, and Noble does not assume any obligation to update these statements.

Also note, we are referencing non-GAAP financial measures in the call today. You will find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation on the Noble website.

And finally, consistent with our quarterly disclosure practices, once our call concludes, we will post to our website a summary of the financial guidance covered on today's call, which you will find second quarter and full-year 2016 figures.

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

David W. Williams - Chairman, President & Chief Executive Officer

All right. Thanks, Jeff. Good morning to everyone on the call and those participating through the webcast. It's good to see the financial community's growing interest in Noble, as evidenced by the participation on today's call and request for meetings with our management team, as we encourage and pursue opportunities to engage our investors.

I'm happy to report another quarter of solid performance across the fleet. Although, the historic downturn in the offshore industry continues unabated, our singular focus on executing at a very high level while implementing the necessary operational adjustments contributed to another successful quarterly result.

Before I begin my comments, I want to introduce the members of our management team joining you on today's call and who will be available to take your questions later on. In addition to Jeff, I'm joined in Houston by Dennis Lubojacky. Dennis is Vice President and our Chief Accounting officer and was recently named Interim Chief Financial officer. Also with us today is Simon Johnson, our Senior Vice President of Marketing and Contracts.

Following my brief comments on the quarter, I'll bring you up to date on the Noble Lloyd Noble project and the modest adjustment to its delivery schedule after the shipyard incident we reported in late February as well as address our discussions with Freeport-McMoRan regarding the status of the contracts for the Noble drillships, Noble Sam Croft and Noble Tom Madden.

Finally, I'll comment on last Friday's disclosure of our board's decision to adjust our quarterly dividend. Dennis will follow me with more detail on the first quarter result along with an updated guidance for the balance of this year, and Simon will provide a look into the offshore market and cover some topics pertaining to the Noble fleet. I'll then close with some final thoughts on our strong industry position along with some details on our liquidity and balance sheet.

First quarter results were supported by limited downtime across the fleet and a further reduction in operating costs which helped to deliver a pre-tax contract drilling margin relative to last quarter of 58% along with higher-than-expected cash from operations.

Downtime across the fleet was 3.8% compared to our guidance of 6%, while the unpaid portion was an impressive 1.9%. Contract drilling services costs declined 16% from the fourth quarter of 2015 and were down 22% from the first quarter of 2015.

Several of our semisubmersible rigs experienced fewer operating days in the quarter, as the weak market conditions continue to make it difficult to secure follow-on assignments. Additionally we continue to implement procedures that will limit margin erosion by scaling our organization cost structure to the prevailing level of industry activity.

In a moment, Dennis will provide more details on our guidance for 2016 operating costs which we have lowered once again. With regard to the jackup Noble Lloyd Noble, our final newbuild project, we reported in late February the rig sustained some damage when a shipyard crane boom operating near the rig failed. Following an investigation into the accident and a thorough assessment of needed repairs, we have reduced the expected period of project delay from a range of 30 to 60 days to now 15 to 30 days.

The rig, which is nearing 100% completion, is now expected to depart the shipyard at Singapore during the early to mid third quarter of 2016. We continue to work with our customer, Statoil, as we move closer to the rig's shipyard departure and journey to the UK.

We currently expect commencement of the four-year primary term contract in the early to mid fourth quarter of 2016, a slight delay from expectations at the start of this year but well within our contractual obligation.

Also, we continue to have discussions with Freeport-McMoRan concerning contracts for the Noble Sam Croft and Noble Tom Madden. Scenarios are under evaluation in an effort to identify an outcome that both parties find acceptable in light of our strong contract position, the difficult market conditions and Freeport-McMoRan decision to reorganize its Oil & Gas subsidiary. We expect to reach a resolution that is positive for Noble and our client, and an update will be provided once we conclude this process.

Finally, as we reported last Friday, our quarterly dividend has been adjusted to $0.02 per share from the previous $0.15 per share, effective immediately. A focus on the preservation of liquidity and the efficient use of cash have been paramount at Noble and an important component of our financial discipline and we have been – and have been crucial components to our long-term success.

Our successful management through this historic industry downturn has depended on – to a considerable extent, on our constant review of cash allocation strategies and objectives. The dividend reduction provides an additional $130 million per year in cash, which fortifies liquidity while further enhancing our financial flexibility.

At $0.02 per share, we've reset the dividend payout to the level paid in 2005, the early days of dramatic expansion in the deepwater segment. While we will naturally review our liquidity on an ongoing basis, Noble believes returning some level of cash to shareholders through a dividend program is still an important part of our capital allocation component.

With that, I'll turn the call over to Dennis. Dennis?

Dennis James Lubojacky - Interim CFO, Vice President, Controller

Thank you, David, and good morning to everyone. As David noted, highlights for the first quarter 2016 results included lower fleet downtime and further reduction in contract drilling services costs, as both were below guidance ranges offered in January. I will begin today with a quick review of our first quarter revenues along with a focus on the areas of our operation which fell outside of the guided range, including fleet downtime, contract drilling service costs, effective tax rate and capital expenditures.

I will also provide updated guidance on certain P&L line items for the remainder of 2016 and the second quarter. I'm happy to address other questions you may have regarding first quarter financial performance during the question-and-answer segment of the call.

For the first quarter, Noble reported net income attributable to the company of $105 million or $0.42 per diluted share on total revenues of $612 million. Contract drilling services revenue of $591 million declined 15% compared to the fourth quarter revenue figure of $693 million, which excluded the $145 contract termination payment on the Noble Discoverer. When compared to adjusted revenues in the fourth quarter, the quarter-over-quarter revenue decline was driven by a 216-day reduction in operating days following the completion of contracts on five rigs and the fourth quarter retirement of the Noble Discoverer.

We also experienced lower dayrate adjustments on the jackups Noble Sam Turner operating in the North Sea and the Noble Scott Marks and Noble Roger Lewis in the Middle East region. Lower fleet downtime, fewer shipyard days and the commencement of operations of the newbuild jackup Noble Sam Hartley in Southeast Asia helped partially offset the quarterly revenue decline.

Total fleet downtime in the first quarter was 3.8%, below our 2016 guidance of 6% and the average downtime experienced for the full-year 2015 of 5.3%. We continue to experience consistent fleet performance with downtime well below guidance in four of the last five quarters.

Contract drilling services costs totaled $251 million in the quarter, 7% below the low end of the guided range of $270 million to $285 million. The favorable variance was due largely to lower-than-expected repair and maintenance costs in the quarter resulting in part from the lower-than-anticipated fleet downtime.

A portion of the favorable cost variance was due to timing, and we expect some of this expense to be present in the second quarter, which I will address during my discussion on second quarter cost guidance. Also, we benefit from additional operating efficiencies and cost-control measures pertaining primarily to operation support cost.

Our effective tax rate for the first quarter of negative 5.5% was well below the guided range of 24% to 25%.

During the quarter, we recognized a favorable discrete tax item totaling $27 million or $0.11 per diluted share relating to one of our foreign subsidiaries. Adjusted for the favorable discrete item, our effective tax rate in the first quarter would have been 18%. We also experienced better-than-expected first quarter operating performance and a favorable geographic mix of revenue, which were additional positive influences on the tax rate. The first quarter results will drive a revised lower effective tax rate expectation for 2016, which I will cover in a moment.

Finally, capital expenditures in the first quarter totaled $51 million, including capitalized interest, and was below our guidance of approximately $120 million. The lower amount was due to timing of spending across all capital categories. Addressing the balance sheet, total debt at March 31 was $4.2 billion, down from $4.5 billion at December 31, 2015. The decline reflects the March 2016 maturity of $300 million of senior notes which we repaid with cash on hand. The debt-to-total capitalization ratio at March 31 was 36%, down from 38% at the close of 2015.

I will now move to a discussion on financial guidance for the remainder of 2016 and the second quarter of the year, noting certain line items on the P&L as well as our expected capital expenditures. First, our 2016 operational downtime assumption is being reduced to an average of 5%, reflecting our favorable results over the past several quarters.

Contract drilling costs in 2016 are now expected to decline into a range of $975 million to $1 billion, as we expect to benefit from further cost-management efforts. This revised range compares to $1.03 billion to $1.13 billion provided in January. Also note that we anticipate client reimbursable costs in 2016 to remain in the range of $65 million to $75 million. Inclusive of these reimbursable costs, total operating cost in 2016 should fall in the range of $1.04 billion to $1.08 billion.

Contract drilling services costs in the second quarter are expected to be in the range of $245 million to $255 million, reflecting in part the timing of certain repair and maintenance expenditures.

Beyond the second quarter, costs are expected to remain in the same range for each of the third and fourth quarters. Note that the newbuild jackup Noble Lloyd Noble is expected to be begin operations in the North Sea in the early to mid fourth quarter of 2016, reflecting a short delay of 15 days to 30 days following the previously reported shipyard incident.

Costs associated with client reimbursables are expected to range from $15 million to $20 million per quarter for the remainder of the year.

DD&A in 2016 is expected to be in the range of $585 million to $600 million, consistent with our previous guidance. In the second quarter, DD&A is expected to be in the range of $145 million to $150 million, with the figure in the third quarter flat with second quarter expectations and an expected increase of approximately $5 million in the fourth quarter driven largely by the commencement of operations on the Noble Lloyd Noble and planned capital spending throughout the year.

SG&A costs for 2016 are expected to be down from our previous guidance of $70 million to $77 million. We now anticipate a range of $65 million to $70 million for the year. In the second quarter, we expect SG&A costs to be approximately $17 million, with the remaining cost split evenly over the remaining quarters of the year.

The guidance range for interest expense net of capitalized interest is being increased slightly to $220 million to $230 million based on our existing debt structure. This range is about $5 million above the previously guided range due primarily to the decision by Moody's in the first quarter to downgrade Noble's debt rating to below investment grade.

The interest rate on our senior notes issued in 2015 will increase by 100 basis points as a result of the downgrade. The increase in our debt service costs will be partially offset by lower interest expense as a result of our repurchase in April of $36 million of senior notes following the close of our tender offer.

We anticipate a gain on this cash tender offer of approximately $11 million to be recognized in the second quarter. Capitalized interest is expected to total $17 million in 2016, as we take delivery of our final newbuild project in early to mid third quarter.

Net interest expense in the second quarter is expected to be in a range of $55 million to $60 million. The minority interest on our P&L representing the Bully I and Bully II 50/50 joint ventures with Shell is expected to total $70 million to $75 million in 2016 with a run rate of approximately $18 million per quarter through the year. This is consistent with previous guidance, with the expense ultimately dependent on the operational performance of the two jointly owned rigs.

Our effective tax rate for the full year is now expected to be in a range of 11% to 13%, which reflects the impact of the first quarter favorable discrete item. The new guidance compares to our previous guidance of 24% to 25%. Changes in the geographic mix, our sources of revenue and tax assessments or settlements, along with changes in the law or movements in certain exchange rates can also influence the tax rate.

And finally, we continue to expect total capital expenditures in 2016 to be approximately $800 million. We will include the breakdown of spending by major category, with our guidance summary to be posted to the Noble website following the conclusion of today's call.

Before I turn the call over to Simon, I want to close with a comment on the company's liquidity position and how we see this position transitioning over the year. With a cash position of $236 million and full availability on our $2.445 billion revolving credit facility, we closed the first quarter with a liquidity position of approximately $2.7 billion compared to $3.2 billion at December 31, 2015.

Recall in January, we allowed a second credit facility totaling $225 million with the 364-day maturity to expire, choosing not to extend due to our robust liquidity position. The maturity plus the March 2016 repayment of $300 in senior notes accounted for the quarter-over-quarter liquidity decline. Our remaining revolving credit facility does not mature until January 2020.

Our liquidity position in 2016 will benefit from strong contract cover, successful cost management initiative, no further debt maturities until March of 2017 and a reduced dividend payout, which will save us approximately $130 million annually.

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

Simon W. Johnson - Senior Vice President-Marketing & Contracts

Thank you, Dennis, and good morning to everyone. I'll begin this morning with a perspective on the offshore drilling markets including current activity and prospects from the specific regions. I'll also address some recent contracting successes and the near-term outlook for recently idled rigs.

To begin, the better-then-50% recovery in oil prices from the lows experienced in January is a welcome development. But this favorable move in pricing is yet to translate into a positive change in customer activity levels. This is true across the spectrum of clients, from the large integrated oil companies to the independents and national oil companies. All maintain a cautious posture with near-term focus on cost reduction. And this mood is expected to persist through 2016.

The customer response to improving oil prices should come as no surprise. With very few exceptions, exploration development companies seldom adjust offshore activity on the basis of short-term market movements in the underlying commodity.

However, if the improved pricing trend demonstrates some sustainability through the 2017 budget cycle, we believe this bodes well for upstream spending results relative to the past two years when oil prices declined through the summer and fall months.

Also, keep in mind that the seven largest publicly traded western energy companies replaced just 75% of the oil and natural gas they produced in 2015, the biggest combined drop in reserves replacement those companies reported in at least a decade.

At the same time, unconventional production and drilling activity has slowed noticeably. There are several key factors supportive of rig market recovery and worth tracking, of which sustained commodity prices is only one. We believe that global project cost rationalization will also prove to be and effective catalyst for future improvement in industry activity.

Another key factor is rig capacity. Many would argue that the much needed contraction in rig supply is not progressing fast enough. However, we suggest that a reasonable projection of the number and type of rigs that will be available for work when business activity return to steady-state levels requires an analysis that goes beyond the gross supported numbers.

If you consider the industry's floating rig fleet, we have seen 50 announced scrappings since the fourth quarter of 2014, with Noble retiring four rigs over this period. The present supply of floating rigs is approximately 300, excluding an order book that could add up to another 59 rigs, depending on the fate of Schahin in Brazil. The current supply includes a number of rigs with well control systems that will struggle outside of a limited number of markets and customers going forward, as the recent changes to API standards and the BSEE rules spread out across industry.

Further, many of these same motors have been in service now for over 40 years. This segment of the floating rig fleet is rich for the retirement candidates. We also have a growing number of stacked rigs in the floating fleet around 50 today. How many of these rigs transition back to active status would depend on how long they remain idle and how well they are preserved.

Inevitably, some portion of this number will never drill again, as the required reactivation capital becomes too high. And I will eventually sharpen the list of retired units. The point of this discussion is to highlight the inherent potential for fleet contraction, with scrapping expected to increase significantly over the next two years.

Other early indicators of improved business environment to drill is worth monitoring include a decline in the rig sublet market and an uptick in exploration activity. Although neither are currently signaling recovery, we believe the recent industry fundamentals that underpin them is well progressed.

For now, offshore activity levels for both floating and jackup rig segments remain poor. In the Western Hemisphere, few drilling programs for floating rigs are currently planned over remainder of 2016 in the U.S. Gulf of Mexico. And floating rig demand in South America is expected to trend lower, also. In the Eastern Hemisphere, the Middle East is busy with healthy levels of jackup rig demand; and in India, with expectations for incremental requirements for both floating and jackup rigs. Surplus jackup supply is expected to persist through 2016 in Europe and Southeast Asia.

Activity in West Africa is expected to be flat to contractionary, resulting in a floating and jackup rig surplus into 2017. We believe the best response to an improvement in industry activity is likely to manifest itself in those markets which are most reflexive in terms of operator behaviors, low lifting costs and with developed infrastructure. As we look across the globe, we believe that this will be in regions like the U.S. Gulf of Mexico, the North Sea and the Middle East. Noble stacked assets allocated in these areas today or can be easily repositioned into them.

As Dennis mentioned earlier, the scarcity of near-term drilling opportunities led to several of our floating rigs going idle in the first quarter. The semisubmersible Noble Amos Runner concluded a contract in February and is being cold stacked in the U.S. Gulf of Mexico at an expected daily cost of less than $10,000.

The semisubmersible Noble Jim Day and Noble Danny Adkins completed contracts in January and March respectively and are warm stacked in the Gulf, while opportunities for future work are being evaluated. Daily cost for each rig are expected to be $35,000 to $40,000, as rig preservation and readiness remain top priorities.

Finally, the semisubmersible Noble Clyde Boudreaux completed a contract in January and is warm stacked in Singapore as we review the planned class survey in light of the work prospects. Daily cost for this unit are expected to be below $20,000 per day.

Since the conclusion of the first quarter, the semisubmersible Noble Dave Beard completed its contract offshore Brazil and will be relocated to Singapore where the rig will be cold stacked. These five semisubmersibles represent the majority of our floating rig market exposure in 2016.

Our jackup fleet continues to maintain strong contract cover following two-year extensions on the Noble Sam Turner and the Noble Hans Deul, both operating in the North Sea. We currently have 87% of the remaining operating days in our jackup fleet in 2016 under contract, with 66% of available days spoken for 2017.

The Noble Regina Allen, which is warm stacked in the North Sea, remain the only jackup on our fleet with near-term availability as we enter the second quarter, with opportunities under evaluation. We also achieved clarity on jackup operations in the Middle East following the conclusion of dayrate discussions on four of (26:11) Saudi Aramco.

2016 amended rights on the Noble Scott Marks and Noble Roger Lewis of $167,250 per day and the Noble Joe Beall and Noble Gene House of $65,000 per day will be effective from January 1 and extend to the end of 2016.

As a final comment today, I want to offer special recognition to the management and crew onboard the Noble Globetrotter II. The rig just completed its second voyage into the Black Sea, handily beating the record time set by the rig in early 2015. The rig is equipped with a creative and unique drilling and package known as the multipurpose tower or MPT that allows for a highly efficient transit in the Bosporus passage.

In summary, the crew were able to remove top section of the MPT utilizing an onboard crane, which created the clearance necessary to sail beneath the suspension bridge, then resemble the top section of the MPT and commission the equipment all in 16 days compared to 26 days on our most recent transit. The latest result was dramatically faster than the four competitive rigs that have made the same voyage.

One of those vessels took several months to complete the same series of equipment modifications. This unique capability, which is also present on the Noble Globetrotter I, reduces our customers' well delivery costs and is a differentiating feature of the Noble fleet. On the Globetrotters, we're able to pass through the Suez and Panama canals, which allows us to access market opportunities in a way that no other drilling company can match.

That concludes my remarks, and I'll now turn the call back to David.

David W. Williams - Chairman, President & Chief Executive Officer

All right. Thank you, Simon. Before we begin taking your questions this morning, I want to address some final points that I believe will help you get a better understanding of how Noble is advantageously positioned to successfully manage a longer duration of the cyclical downturn.

These include: our young premium fleet, operational results that deliver a consistent and high level of performance, our strong contract backlog comprised of a solid mix of customers, our robust liquidity and a strong balance sheet featuring manageable debt maturities.

While we still remain vigilant in monitoring market conditions and adjusting where necessary, we believe the best strategy for Noble and its shareholders is to remain focused on these important qualities. They not only drive success and support our strong industry position, but these qualities will also leave us in a position to compete more effectively as the cyclical transition begins.

We're entering an interesting period for our company. Liquidity remains robust. And although we plan to draw against our revolver capacity in the near term as we take deliver of the Noble Lloyd Noble, we continue to believe full availability of the revolver is likely by the close of this year.

Beyond the current year, capital expenditures are more likely to fall into a range $250 million to $300 million or less, based on expected activity levels, compared to $340 million in 2016, excluding the Noble Lloyd Noble payment. The precise level of forward spending will depend on the number of rigs working and the expected trajectory of the market.

The lower spending levels should result from the conclusion of our newbuild program, the implementation of programs supporting these more efficient use of capital and the benefits derived from a young, technically advanced fleet, which includes limited expenditures on regulatory-driven surveys.

Finally, the manageable senior note maturity in 2017 of $300 million is expected to be repaid with cash on hand as we did with our $300 million maturity in March of this year. In summary, we believe Noble has a compelling control and excellent forward visibility on a number of important aspects of our operation.

Whether you expect the market to realize real improvement in 2017, 2018 or 2019, we can manage our operations with confidence and take advantage of our strong financial flexibility, which has been further fortified by our recent dividend adjustments. We have no newbuild projects that have been delayed into the future or massive debt obligations to meet in the near term.

I hope you recognize and appreciate our present position but, more importantly, how we're positioned for the future. And with that, I'll turn the call back over to Jeff.

Jeffrey L. Chastain - Vice President-Investor Relations & Corporate Communications

Okay, David. Thank you. Tanya, we're ready to begin the question-and-answer segment of the call. If you're assembling a queue, I'd remind everyone to please limit their questioning to one and a follow-up. Tanya, go ahead with the first question

Question-and-Answer Session

Operator

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

Ian Macpherson - Simmons & Company International

Hey. Thank you. David, we've been fascinated and impressed by how well received Ensco's equity raise was. Just curious what your thoughts are on reflecting on that. And what you think if you had reasonable assurance of an equally or similarly well-received offering, is it something that would make sense for you?

David W. Williams - Chairman, President & Chief Executive Officer

Thanks, Ian. We've been watching that as well. I would say that while you love to have the cash, our view of the market is that we have plenty of liquidity and we have good financial capability, good contract cover and plenty of capacity. I think diluting your shareholders is something that doesn't appeal to us at this point. We're certainly watching what Weatherford and what Ensco did. But I think at this point, diluting our shareholders is probably not in the cards for us.

Ian Macpherson - Simmons & Company International

Okay. My follow-up is unrelated. I thought you might have a comment on this. And since you didn't in the prepared remarks, you might not want to answer it now. But there's been increasing focus on the re-pricing of the Globetrotter I. You have other market index repricings following that, but that will be your first one. And I wonder if you could share any insights on the mechanics behind that or frame the expectations for next summer when that happens.

David W. Williams - Chairman, President & Chief Executive Officer

Ian, it's an index and it's based on current prices of rigs of similar capacity. Beyond that, I don't think that we could give a whole lot more clarity to it. I would encourage you not to over-think it. It's not a complicated process but one that we're certainly – we'll give you more guidance when it's time. But I think at this point, it's too early.

Ian Macpherson - Simmons & Company International

Well, I'm just curious because if I were looking at the average earned rates of all the drillers and we can cover a model, it's still much higher than leading edge. It's closer to 500 than to 200. So, if you were repricing today, I mean which would be the more valid reference point?

David W. Williams - Chairman, President & Chief Executive Officer

Well, I think if you include all of the existing rates that have been in place for several years, I think you're missing the point of the repricing. One of the benefits of having a 10-year contract with somebody is you de-risk the project quite dramatically over the life of the asset. And so in terms of financial performance of that particular and the internal rate of return on something that's got that long of a contract, if the market's great you want to take advantage of it. And when the market's weak, you just want it to work.

So after a five-year period of repricing, it's going to steer closer to leading edge than it is over longer term. But you need to have some of those reference points in order to get that, so – in order to determine that. So again, there are some limitations on this strategy. But again, I think it's going to work exactly the way we anticipated it would. And of course, it's going reprice for the next five years, so we would certainly expect the rate would come down in the near term and go back up in the out years.

Ian Macpherson - Simmons & Company International

Got it. Okay. Appreciate that.

David W. Williams - Chairman, President & Chief Executive Officer

Sure.

Operator

Your next question comes from the line of Jeffrey Campbell with Tuohy Brothers. Your line is open.

Jeffrey L. Campbell - Tuohy Brothers Investment Research, Inc.

Good morning. First question I wanted to ask was with the recent Schahin authorization for bankruptcy and Noble wiping out their backlog, what's your view of the Brazilian floater supply/demand market, particularly going forward into 2017?

David W. Williams - Chairman, President & Chief Executive Officer

Well, I'll make a comment and then I'll let Simon. Regardless of what's going on with Sete with Petrobras, Brazil is a bit of a mess. It's a place we've been involved with for a long, long time. And we're watching that market closely because historically it's been one of the swing markets in terms of being able to take in large numbers of rigs when the market's weak. And historically, Petrobras has been one of the best contractors of rigs in weak markets.

I think their political situation and their – the other issues they have down there are going to inhibit their ability to do that this time. I'd just say just on the margin, I'm delighted that we only have one rig there and it's leaving. So we'll look forward to the opportunity to go back in the – when that market is more encouraging. And beyond that, I'll let Simon comment on the real state of affairs in terms of numbers of rigs and...

Simon W. Johnson - Senior Vice President-Marketing & Contracts

Yeah. I mean I agree that the outlook is definitely contractionary. I mean the devaluation of the real, the changes within Petrobras are still playing out, the political complications David talked to. They're all going to take some time to give clarity on what Petrobras' way forward looks like. I think if there is a ray of light on the horizon – and it is several years out – it's going to be the involvement of the companies like Shell and Chevron and the role that they play in a return to activity. I think that'll be increasingly important in new rig requirements going forward.

Jeffrey L. Campbell - Tuohy Brothers Investment Research, Inc.

Thank you. I appreciate that color and wanted to ask one more broader demand question, thinking of 2017 again. We recently had a prominent subsea equipment provider that spoke of 20 major global projects awaiting final investment decision; that seemed encouraged that many of those could receive investment beginning of 2017. I assume you guys look at similar data points, and I'm just wondering what your reaction was to that.

David W. Williams - Chairman, President & Chief Executive Officer

I would say any positive comments from the service and supply sector that is engaged with the operating community is terrific, and we certainly watch those. I would echo what Simon said earlier. We're encouraged by the trajectory of oil price. As we've gone through the last two budget cycles, there's been so much turmoil in our – in product price and it's hard for our customers to give any – or with any confidence to project forward spending.

So it's early in this year. But so far, I would say the trajectory of the market and the mood of our customers I would say is better now than it's been in last 18 months, in my opinion. There is a long way to go before I think we see real help in this business. This year's going to be tough; there is no question about it. The strength of next year is going to be determined on what the level of confidence that our customers have going forward, and it's certainly very early in the game to predict that.

But again, I'll go back to what I like about where we're positioned. We've got good visibility this year. We've got reasonable visibility into next year. And so we're encouraged by all the signs we see right now, but we're not through the hard part yet. So we've still got rigs with big rates that are rolling off contract. We've idled a number of rigs this quarter. Happily, we kind of – the exposure we've got this year we've already dealt with, largely. So we're going to focus on running the company and look forward to the trajectory continuing going the right way, and we'll be ready to respond when it does. Right now, it's going to be a tough year.

Jeffrey L. Campbell - Tuohy Brothers Investment Research, Inc.

Well, let me – if I could ask you one quick follow-up, just because I want to make sure I understood what you said earlier.

David W. Williams - Chairman, President & Chief Executive Officer

Sure.

Jeffrey L. Campbell - Tuohy Brothers Investment Research, Inc.

Are you of the opinion that the level that we're at now – let's call it mid-$40s, that that actually – if we could just stay there with less volatility through the rest of the year that, that actually would be encouraging to the oil companies coming into 2017, or do we need another leg up?

David W. Williams - Chairman, President & Chief Executive Officer

Well I mean – I would say that I'm encouraged by some of the commentary that I've heard from some of our customers at recent conferences when they talk about making money in the Gulf of Mexico in the mid-$40s. Certainly, there is a repricing. As Simon talked about, there's a repricing and a restructuring if you will of the cost basis of the offshore service sector. We need our customers to be able to make money in order to thrive. Reality is, major oil companies and even large independents and national oil companies can't sit on the sidelines indefinitely. And so they've been on the sidelines for quite some time.

So I would say what's more important in – than the real price at any given point is the trajectory of the market and the confidence that our customers have in that price or better price. So when the markets heading down, that's painful. When it's bumping along the bottom, could be painful. But when the trajectory is more positive as it is now, that's a very positive sign. So, yes, I'm encouraged by where we are.

Jeffrey L. Campbell - Tuohy Brothers Investment Research, Inc.

Okay. That was great color. I really appreciate it. Thank you.

David W. Williams - Chairman, President & Chief Executive Officer

Sure. Thank you.

Operator

Your next question comes from the line of Robin Shoemaker with KeyBanc. Your line is open.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Thank you. David, wanted to follow up with one question about the three rigs you mentioned earlier that go to market index contracts. When you cite your contract backlog – I think it was $6.9 billion at the end of 2015 – is that figure calculated with an assumption that the dayrate on those three rigs continues or has a – at the fixed rate level? Or kind of what's the assumption for the second five years of those 10-year contracts?

David W. Williams - Chairman, President & Chief Executive Officer

Robin, we have to make an assumption based on kind of where we think the market is going. We run a five-year model in Noble that we update every quarter. So I would say that there's – we've made some assumptions about what the near-term rates would be, and we've made some assumptions about what the long-term rates would be. And the backlog is based on those assumptions.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Okay.

David W. Williams - Chairman, President & Chief Executive Officer

So whether or not our assumptions match yours, I don't know. I could tell you that we certainly are not making assumptions across the board that we're at the peak of the market. So those rates are going to be variable. And exactly where they're going to be is going to depend on the forward conventional market and those repricing opportunities. But they're based on our assumptions.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Okay. Understood. My other question had to do with, you know, Simon has talked about the strategy on the Adkins and the Day to get some short-term work in the Gulf of Mexico throughout this year. And I wonder if the current – currently, Simon feels like that is going to be possible. And given the warm stack cost of those rigs, if you really believe there will perhaps a series of short-term opportunities.

Simon W. Johnson - Senior Vice President-Marketing & Contracts

Robin, it's Simon. There is a possibility in working 2016, but that seems slimmer today than it did yesterday. There may be opportunities in 2017 of greater interest. As we stated before, though, these are two of most capable semisubmersibles operating in the Gulf of Mexico. They're ideal choices for deepwater completion work; very stable hulls; great deck space; and most importantly, excellent performance records.

So we think they're particularly well placed to compete for some of the high-end work that we think will be amongst the first to break free as the business environment improves. So that's why we've made that decision. Cold stalking entails a level of capital expenditure and the time out of the market that we didn't believe was warranted for those two assets.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Right. Okay. All right. Thank you.

David W. Williams - Chairman, President & Chief Executive Officer

Thank you.

Operator

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

Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker)

Yes. Thank you and good morning. Yeah, I just had one sort of big-picture question, just in regards to – just because it topical – in regards to the recent sale at auction of, I – it was six-gen drillship. Just – I guess, did Noble actually inspect and look at that rig? Do you have an assessment of the rig? And more importantly, as we look at book value and think about asset value across the industry, what type of impact do we think if any that this asset sale should have on book value assets?

David W. Williams - Chairman, President & Chief Executive Officer

Thanks for the question. I'm not going to comment on whether or not we actually inspected that rig or not. We have inspected some rigs, and that – I would say that's more to see what the condition of certain rigs might be versus other rigs and rigs coming out of other markets and kind of get a – kind of gauge. We certainly like to gain market intelligence by looking at different pieces of equipment. I would say in the context of the broader condition of the market and the theme of the market, we were not surprised by the sale level of that particular rig.

Coming out of the market where it's been operated and under the operational control of that particular rig in that market, I would say that there's probably a good bit of capital that's got to be spent on that rig in addition to just the purchase price in order to make that rig an active competitor in today's fleet.

Keep in mind that a post-Macondo world, most of the major operators have adopted similar Gulf of Mexico – most major contractors have adopted similar Gulf of Mexico realities and that you have to do a full certification of the BOP every five years. That involves a lot of dismantling and testing of equipment. You need to be in proximity to a certain kind of shop and capability to do that with an OEM that's capable. There's also other major pieces of equipment that probably need refurbishment and will certainly need inspection.

So I would say that the cost to put that rig in service is much more than the tens of millions of dollars. Now the buyer of that rig may argue that and certainly has more intimate knowledge of that rig than we do. But I think the purchase of that rig is a speculative option of the future. I would estimate it's going to be quite some time before that rig goes to work, and I would say it probably needs a lot of capital.

So we certainly watch that market. Right now, we have rigs that could meet near-term requirements and some longer-time requirements. We believe as this market evolves, there're a number of other assets, good assets that will come to the market. If and when we decide that we want to make a move, we'll have that capability. But right now for us, it's too early.

Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker)

Okay. Thank you very much.

David W. Williams - Chairman, President & Chief Executive Officer

Yep.

Operator

Your next question comes from the line of Jacob Ng with Morgan Stanley. Your line is open.

Jacob Ng - Morgan Stanley & Co. LLC

Thank you and good morning. I wonder if you might be able to comment on how the latest BSEE BOP rules could impact Gulf of Mexico activity.

David W. Williams - Chairman, President & Chief Executive Officer

Good question. Appreciate you asking. It was a 500-page, around 500-page rule issue, so I mean we were able to delineate fairly quickly the guts of it. But we're still going through it in some detail and trying to evaluate the long-term impacts. I would say that just overall – generally speaking, that we were not altogether disappointed in the rules as they were originally proposed versus what was originally posted. The industry, I think, did a very good job of coalescing around a view – and it's unusual for – I would say it's not unusual – but I would say around these rules, the industry did a good job in terms of different industry associations, different companies and different perspectives. I mean they're coming together and advising government on what they thought was reasonable and appropriate.

There have been some – I will say a number of post-commentary since the issue of rigs of how much it's going to cost the industry and how dramatic it's going to be. I don't think any of us yet knows exactly how much it's going to cost. I will say that in terms of what this means for late-generation newbuild equipment – and I'm particularly talking about Noble's – we don't see anything yet that causes us a lot of fear and concern about our ability to comply with the rules in the near-term. And the longer-term requirements, don't see anything that's a real challenge there for us to be able to meet – given that the industry I think more termed it to comply.

Anything – any time that the government imposes new restrictions, how those are going to be enforced; how they're going to be ruled and how the government views those is always frightening for those of us in the industry. I would say the rules could've been a lot worse. I would say we're not happy about the rules, but it's not going to be a huge impact to us. And we would expect that oil prices recovery – recover, that the industry will look through these rules and to continue to operate.

Jacob Ng - Morgan Stanley & Co. LLC

Got it. And as my follow-up, do you think these rules could perhaps move the industry closer to it, the BOP leasing model?

David W. Williams - Chairman, President & Chief Executive Officer

Well I think the leasing model that GE and Diamond have gone to and as it relates to these rules are two different questions, both practically and strategically. So no, I don't think that these rules have – I don't think they have anything to do with – frankly, with that model.

Jacob Ng - Morgan Stanley & Co. LLC

Got it. Thank you.

David W. Williams - Chairman, President & Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Matt Marietta with Stephens, Inc. Your line is open.

Matt Marietta - Stephens, Inc.

Hey. Thanks for taking the questions this morning, guys.

David W. Williams - Chairman, President & Chief Executive Officer

Sure.

Matt Marietta - Stephens, Inc.

And kind of piggybacking on that dialogue that just concluded there, a lot of attention has been placed on that alliance between GE and Diamond on the BOPs. At the surface, at least it looks positive for your peer, competitor, I guess, or both. But can you maybe help us see your perspective on that specific alliance or that sort of alliance in general? And really more importantly, are there opportunities like this across all the supply and value chains here within the industry to help drive out inefficiencies, working more closely with partners, vendors? Maybe elaborate a little bit on the dynamic at work where everyone really needs to work together here to drive out these costs. And if there are more strategic alignment potential in the industry.

David W. Williams - Chairman, President & Chief Executive Officer

Sure. Thanks. Appreciate your question. And let me see if I can take it in chunks here. Certainly, working with our vendors strategically is a good thing I mean and certainly something that Noble has a long history of. We've got very close associations with a number of our very close vendors. We have aligned with some of our equipment providers to look into reliability and safety features for years and years and years. The goal of those is to drive safety and efficiency into the market. And look, the GE guys and the Diamond guys are smart – they're smart guys. We're watching that model with interest to see what kind of advantages or what kind of opportunities they might create out of it.

Structurally, I will say that there are some I would say fundamental challenges I have with that model, and not the least of which is introducing a profit motive into maintaining a piece of equipment that it is, A), a critical piece of safety equipment, and B), a piece of equipment that we have a very high degree of confidence in maintaining and a very – and the gaining a very low level of operational downtime with. So I'm not quite sure – if you can make it safer and more reliable, that's good. But when you're talking about our unpaid downtime this quarter was 1.9%. You're never going to get to zero and it's not all subsea. So the prize is, did you say half that, that's less than 1%. So it's going to come down to what you are paying for that and what you are getting for it?

So I would say without – it's a different model. We will watch it closely to see if it's better. I will tell you on the surface, we can calculate what we spend on our BOPs and we can calculate exactly what our efficiency level of performance with those – with that equipment is. It's a critical piece of safety equipment, and we are going to make sure that we know how it's maintained every day because those are our people on that vessel. And we're not going to throw that control away to anybody just for the sake of a few bucks.

But just on the surface, I don't think it passes the safety test and I don't think it passes the more commercially efficient test yet. So we'll continue to watch. If we've missed something, we're – where there's no pride of authorship if – we're certainly willing to learn from what other people do. But I would say that we're very happy with the model we have, the level of performance we've got, the level of safety we've got. I don't see that there's a commercial advantage in that model at all.

Simon W. Johnson - Senior Vice President-Marketing & Contracts

If I could just add, too, the customer response to it has been somewhat muted. I mean there's been a couple of prominent people in the industry who've promoted this model. But really, when we've looked out across the broader customer base, it's -

people have really been neutral on its uptake.

Matt Marietta - Stephens, Inc.

That's very helpful. It sounds like it's something that if it moves the needle, to be determined at this point. And then moving on, another question I have – my last question here, as more and more rigs get stacked, do you mind just revisiting what the ballpark cost would be to reactivate the different types of rigs we have out there in the industry or the market right now? What would it cost, even a newer six-gen rig to get reactivated with BP systems and maybe down to what kind of a fourth, fifth-gen sort of semi would cost to reactivate without DPs?

I mean obviously, this is going to be a major constraint from a supply standpoint as more and more rigs get stacked. But trying to put pen to paper on the math, and maybe if you can give us maybe just some examples or ballparks, that would be really helpful. I think...

David W. Williams - Chairman, President & Chief Executive Officer

Matt, I wish we could. That is a little bit like how long is a line? There are so many variables that go – that come into play. I mean we certainly have a handle on ours. What's it going to take for us to reactivate, say, the Homer Ferrington? Or what's it going to take for us to put the Jim Day back to work? And we have not disclosed that number – or those numbers and we probably won't. I will say that if we think the number's too big, we have been ready to make harder decisions. And since – in the last 18 months, we've retired five additional rigs since we did the Paragon transaction. So we're looking at this in terms of how much cash it takes and what the long-term viability of the asset is.

In terms of other rigs around the world, the material aspects of what it's going to take to start the rig up would go to the age of the rig and the condition of that particular piece of equipment when it was laid up. I would say that historically speaking those contractors of rigs, those operators of rigs who were maybe financially stressed going into the downturn probably cut the capital and the maintenance cost on those rigs long before they actually went idle.

And so they were laid up in a weaker condition – or a weaker condition than they might if they were laid up being brand new. That is going to drive the cost of reactivation up. How long it sits there; oxygen, salt water and steel don't mix. And so the longer it sits there and the quicker that the coatings deteriorate, the more steel replacement. So you can take a rig that's been cold stacked for a short period of time. And if you had an opportunity to put it, you can get out with millions of dollars or maybe tens of millions of dollars.

If that rig sits for a long time and it needs a full BOP refurbishment, the mooring and all the equipment has outrun its five-year survey or whatever the survey cycle might be on a particular mooring kit or riser or whatever, that number could get very, very large. And so I would encourage you to look at the contractors that own those rigs and what you think their reputation is. How old the rigs are and how long the rigs are idle before you make an assessment on whether or not those rigs are going to come back into service.

The odds are when these rigs come out of stack, they're going to come back for a short-term contract. And after the financial stress that's in the market, is a contractor going to take a 30-year-old jackup or a 30-year-old semi and spend $30 million, $40 million, $50 million or $100 million to put it to work for a short-term contract that's nominally above cash breakeven? The answer that's probably no. And so the longer they sit, they longer they're going to sit.

And so I would argue that as this cycle continues to develop, what is included in the real supply, what you folks and what we look at as the real supply is going to be vastly overstated over what the marketed supply is going look like. And so it's one of things that encourages me about the strength of this market, as it starts moving the trajectory – these rigs that are going to go idle for a while, they're going to be out of the market for some period of time. So I can't give you numbers but I can give you that color.

Matt Marietta - Stephens, Inc.

That's very helpful. That helps us kind of think about the other constraints beyond the numbers, too, that are going to limit that available potential supply. So thanks a lot for the color there.

David W. Williams - Chairman, President & Chief Executive Officer

You bet.

Operator

Your last question comes from the line of Mark Brown with Seaport Global Securities. Your line is open.

Mark Brown - Seaport Global Securities LLC

Hi. Thank you. I was just wondering, you have a number of floaters that were built in the 1980s, maybe a half dozen or so. A lot of those were upgraded. But given what your commentary was regarding that the industry needs to stack and scrap or actually scrap more of the older fleet. I'm just curious is, is there any – why not go ahead and make that hard decision in the very near term rather than continuing to incur the cost of stacking those, some of those rigs?

David W. Williams - Chairman, President & Chief Executive Officer

Well Mark, I appreciate the question. There's a lot of smiles around the table because we thought we might get that question. We've taken the decision on four semis and one jackup over the last, again, I guess 18, 19, almost two years, I guess now since we completed the Paragon transaction. Post transaction, we have 35 rigs. We're now down to 30 active rigs. And the rigs that you refer to in the 1980s, we may have a difference in opinion on what those are. I would consider those to be the three EVAs and then four jackups.

We have a couple of rigs that were (59:08) modifications wherein we took a 1980s vintage hull, completely refurbished that hull and put a larger, newer topsides on it. And those rigs were really stripped down to bare metal and bare deck. And so those rigs have been largely – completely refurbished. And I'm referring to the Dave Beard and the Clyde Boudreaux and, to a lesser extent, the Homer Ferrington, which has been laid up in Malta.

But the three EVAs are purely 1980s vintage hulls. They were originally built as submersibles. Those companies are probably, in terms of engineering innovation and return on capital employed, probably the best projects probably ever contemplated when you take non-performing assets that could work in 100 feet or less and make them work and up to, in the case of the Paul Wolff, 9,000 or 10,000 feet of water.

But we've taken the decision on some of those rigs because of where they were in the survey cycle or what they needed to remain competitive or condition of particular assets. We're hanging onto the rigs we've got because, for the exact same reason, where they are in their survey cycle and what the condition of those hulls are and whether or not we think they have viability going forward.

If this cycle continues to run along its current trajectory and the cost of reactivation of those rigs goes up because of time, then we will certainly make that call. I would say all but probably one of our rigs we probably have prospects in mind for. And when we run out of prospects for those rigs, we'll make harder decisions. But the major refurbished rigs in terms of – we're talking about the Beard and the Boudreaux are not on the radar screen for those types of decisions yet.

But certainly, the older EVAs and even maybe the Homer Ferrington in time could be. But those are older hulls, lesser capable. But where they are on their survey cycle, the condition of those rigs and what we see in the marketplace for those particular rigs, we haven't made the decision yet. But they're certainly – as the market develops we may or may not.

Mark Brown - Seaport Global Securities LLC

All right. Well that's all I had and I appreciate the commentary. Thank you.

David W. Williams - Chairman, President & Chief Executive Officer

Sure. Thank you very much.

Mark Brown - Seaport Global Securities LLC

Okay. Thanks, Mark.

Jeffrey L. Chastain - Vice President-Investor Relations & Corporate Communications

And with that, we'll close todays call. Thank you for your participation and your continued interest in Noble. Please make a note, we expect to report our second quarter 2016 results on July the 27th, with a call to follow on the morning of the 28th. And we will confirm those dates as we get closer.

Tanya, we appreciate your time in coordinating today's call and good day, everyone.

Operator

This concludes today's conference call. You may now disconnect.

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