Noble Plc (NE) David W. Williams on Q2 2016 Results - Earnings Call Transcript

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Noble Corp. Plc (NYSE:NE)

Q2 2016 Earnings Call

July 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 Chief Financial Officer, Vice President, Controller

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

Analysts

Ian Macpherson - Simmons & Company International

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

Jeffrey Campbell - Tuohy Brothers Investment Research, Inc.

Haithum Nokta - Clarksons Platou Securities, Inc.

Operator

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

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

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

All right. Thank you, Lindsay. And welcome, everyone, to Noble Corporation's second quarter 2016 earnings call. We appreciate your interest in the company. 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 Noble's 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. And 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'll find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation on our website.

And finally, consistent with our quarterly disclosure practices, once our call has concluded, we will post on our website a summary of our financial guidance covered on today's call, which will cover third quarter and full year 2016 figures.

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

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

All right. Thanks, Jeff, and good morning, everyone. I'd also like to welcome everyone to today's call regarding the second quarter results and an update on topics that are relevant to Noble and the offshore drilling industry.

Besides Jeff, I'm joined this morning by Dennis Lubojacky and Simon Johnson. Dennis is our Vice President and Chief Accounting Officer and also serves as our Interim Chief Financial Officer. He'll provide an overview of the financial results for the quarter and update our financial guidance for the remainder of the year. Simon is our Senior Vice President of Marketing and Contracts and he will bring you up to date on the global offshore business and some topics specific to Noble, including a new contract for the Noble Bob Douglas that was just awarded to the company.

I'll open today with a brief discussion of some of our recent achievements that I believe hold important implications for the future, including some second quarter highlights, which was another excellent result despite the declining market conditions, our contract settlement with Freeport-McMoRan which provided significant support to our liquidity position, and the recent delivery from the shipyard of the Noble Lloyd Noble, completing our current highly successful newbuild program.

Given the poor state of our industry, it's easy to overlook important progress and achievements, but make no mistake about it, results in the second quarter were noteworthy, especially in two areas. First, our operational performance was exemplary and demonstrated once again our keen focus on operating at a very high level. This was evident in our impressive fleet performance with total fleet downtime of only 2.9% and unpaid downtime of just 1%. That 2.9% total fleet downtime was our best quarterly results since we began our fleet transition into a greater mix of premium assets. So I offer congratulations to Bernie Wolford and his global operations team, and I know they'll continue to do the good work that they've done throughout the year.

Also, the quarter was noteworthy due to our successful efforts at further reducing our contract drilling services costs while slowing the pace of operating margin erosion. Once again, operating costs were below our results in the previous quarter and below our guidance as we worked diligently to align costs, both at the rig and field support level, with the reduction of fleet operating days.

The prevailing poor industry conditions resulted in the idling of three of our floating rigs in the quarter and one jackup. Our goal has always been to keep our most advanced, high-specification units active through the downturn, however, while we're forced to manage periods of inactivity in this segment of our fleet, we will reduce daily costs as far as practical on each rig while maintaining a level of rig preservation readiness to allow an efficient response to opportunities that might appear in the short term. Simon will discuss this in more detail in just a moment.

I also want to comment on developments over the second quarter involving the completion of discussions with Freeport-McMoRan. As we reported during the quarter, these discussions, which involve the remaining term on contracts for the ultra-deepwater drillships, Noble Sam Croft and Noble Tom Madden, concluded positively from the company's perspective with the contracts for both rigs being canceled effective May 10 and a settlement agreement of $540 million, which we collected in full before the conclusion of the quarter. Although it was disappointing to have two of our premium state-of-the-art drillships idled, we were able to substantially preserve the contract margin. With the collection of the $540 million settlement, we ended the second quarter with more than $820 million in cash, significantly bolstering our liquidity position.

With our significant backlog that remains, coupled with the reduction in our operating cost and capital expenditures, and our continuing ability to generate cash and leverage off our excellent customer relationships, we remain convinced that our company occupies an enviable position in the offshore industry. Not that the business is without challenges. There are many at present. But we still have good cash generating contracts in place with excellent customers as we continue to navigate through this cycle. As for the Sam Croft and the Tom Madden, daily costs are in the process of being reduced by an estimated $100,000 per day per rig as we warm-stack the units and continue to evaluate contract opportunities.

Finally, I'm delighted to report that on July 15 we took delivery of the ultra-high-specification jackup rig, the Noble Lloyd Noble. The rig is arguably the world's largest jackup with some very unique advanced capabilities, including the ability to operate in water depths of up to 500 feet and drill to a total well depth of 33,000 feet. The Lloyd Noble was completed in a period of 31 months and well under budget. The rig has commenced an estimated 12,300-nautical mile journey to the UK, where it's expected to begin a four-year primary term contract with Statoil in the fourth quarter on the Mariner field in the North Sea. We're excited about this project and the opportunity to once again work with our friends at Statoil. Their support throughout the project has been appreciated and we look forward to starting the work on the Mariner field.

With this delivery, Noble's current newbuild project portfolio is complete, an effort that involved the management and delivery of 15 projects over a six-year period, significantly enhancing the strength and the capabilities of the Noble fleet without a single order being delayed or canceled. As you know, rig delays and cancelations have become prevalent in the industry over the past two years, but not at Noble. I'd like to recognize Scott Marks and his project management team for a superb best-in-class effort in bringing this final project to fruition.

Now I'll turn the call over to Dennis.

Dennis James Lubojacky - Interim Chief Financial Officer, Vice President, Controller

Thank you, David, and good morning to everyone.

Results for the second quarter included several net favorable after-tax items totaling $322 million, or $1.27 per diluted share, relating largely to the contract cancelation agreement and settlement with Freeport-McMoRan announced in May. Each of the items along with their impact to net income were identified in our press release issued last evening, so I will not take the time to walk through these.

Excluding these items, net income attributable to Noble Corporation in the second quarter was slightly greater than $1 million, or $0.01 per diluted share. A 16% decline in total fleet operating days, led by a 31% reduction in our floating rigs fleet, was a critical factor in the second quarter, leading to lower profitability compared to the results in the first quarter. The quarterly results were partially offset by another quarter of strong operational execution, highlighted by a further reduction in downtime across the fleet and lower than expected operating cost.

Since our press release issued last evening discusses the changes in our operations compared to the first quarter, I will spend my time this morning reviewing the areas of our operation which fell outside of the guided range provided in April. This will include a quick discussion on fleet downtime, contract drilling and service cost, SG&A and non-controlling interest. I will also bring you up to date on capital expenditures for the first half of 2016 before I update our financial guidance for the remainder of the year.

We continued to build upon a favorable downtime trend in the second quarter with total fleet downtime of 2.9%, which was well below our guidance of 5%. For the first six months of 2016, fleet downtime was 3.4%. Reported contract drilling services costs in the second quarter totaled $244 million, which included $11 million of accelerated recognition of unamortized expenses on the Noble Sam Croft and the Noble Tom Madden due to the contract cancelation with Freeport.

Excluding the recognition of the unamortized expenses, contract drilling services cost $233 million and compared favorably to guidance of $245 million to $255 million. The favorable variance was driven primarily by lower labor costs, reflecting crew reduction on several rigs following the completion of contracts over the first and second quarters. This included early activities associated with warm-stacking the Noble Sam Croft and the Noble Tom Madden.

We also benefited from a reduction in shore-based and operations support cost as we continued to align our overhead expenses with a decline in fleet operating days. SG&A expenses of $19 million was higher than the guided amount of $17 million, due primarily to higher professional fees. Finally, non-controlling interest of $23 million exceeded guidance of $18 million due to better than expected performance from the drillships, Bully I and Bully II, with both rigs experiencing out of service time in the first quarter.

Capital expenditures in the second quarter totaled $69 million, including capitalized interest, and was well below our guidance of approximately $140 million due to lower spending across all categories, including sustaining capital expenditures and major projects. As a result, the company is lowering its 2016 total capital expenditures, which I will address in a moment.

Before I begin updating guidance for the remainder of the year, I want to provide some comments on balance sheet and liquidity. Total debt at June 30 was $4.1 billion, with $3.8 billion of long-term debt and $300 million classified as current maturities of long-term debt. The $300 million represents our March 2017 senior note maturity which we expect to repay with cash on hand. The long-term debt balance reflects the early termination of $36 million of senior notes in April.

The debt-to-total capitalization ratio at June 30 was 34.6%, down from 37.5% at the close of 2015. Our liquidity position at the close of the second quarter of $3.3 billion improved relative to the first quarter as a result of the collection of the Freeport contract settlement of $540 million. The components of liquidity at June 30 were cash and equivalents of $823 million and a revolving credit facility of $2.445 billion which remains undrawn.

I'll now review our guidance for 2016 and the third quarter with comments on certain line items on the P&L as well as our expected capital expenditures. Regarding our 2016 operational downtime assumption, guidance is being held at an average of 5% for now, even though results through June have proven much better. We continue to believe 5% is a prudent operating assumption, given the premium nature of our fleet and our clients' complex well construction programs.

Contract drilling services costs in 2016 are being lowered another 8% and to a range of $900 million to $925 million compared to $975 million to $1 billion previously. Lower crew costs resulting from fewer fleet operating days, in addition to the continuation of cost management efforts, are largely responsible for the reduction. Several of our premium rigs are currently inactive, and by deciding to warm or cold-stack the units during the inactive period, we're able to effectively manage daily cost.

For example, in the U.S. Gulf of Mexico, semisubmersible Noble Danny Adkins is warm-stacked and is running daily costs of approximately $35,000 to $40,000, as we have noted in previous calls. The semisubmersible Noble Jim Day, which is in the process of being cold-stacked, is expected to cost $10,000 to $15,000 per day once the process is complete. The ultra-deepwater drillships, Noble Sam Croft and Noble Tom Madden, are warm-stacked with expected cost of $40,000 to $45,000 per day per rig. Finally, in the North Sea, our high-specification jackup, the Noble Regina Allen is warm-stacked at a daily cost of $15,000 to $20,000. We're continuing to evaluate the costs associated with stacking these rigs in an effort to further reduce costs.

Costs associated with client reimbursables in 2016 are expected to remain in the range of $65 million to $70 million, resulting in total cost in 2016 of $965 million to $995 million. Contract drilling service costs in the third quarter are expected to be in a range of $200 million to $215 million, reflecting in part the decline in fleet operating days, especially in the floating rigs segment, with costs expected to remain in the same range through the fourth quarter, even with the expected commencement of operations on the jackup Noble Lloyd Noble, in the fourth quarter 2016. Costs associated with client reimbursables are expected to range from $17 million to $19 million per quarter for the remainder of the year.

DD&A in 2016 is expected to be in the range of $595 million to $610 million, up slightly from our previous guidance of $585 million to $600 million. The increase is due to normal capital expenditures over the remainder of the year. In the third quarter, DD&A is expected to be in the range of $150 million to $155 million as we expect to maintain this range through the fourth quarter.

SG&A costs in 2016 are expected to be in a range of $75 million to $80 million, due largely to higher professional fees. In the third quarter, we expect SG&A costs to be approximately $20 million and to remain at this level through the fourth quarter. The guidance range for interest expense, net of capitalized interest, is $225 million to $230 million, based on our existing debt structure. The range reflects the impact of the recent ratings action by S&P, a downgrade to BB+ from BBB. The action causes a 50-basis point coupon step-up on our 2018, 2025 and 2045 notes.

Net interest expense in the third quarter is expected to be in a range of $51 million to $54 million and increase to an estimated $60 million in the fourth quarter with no further capitalized interest, following the Noble Lloyd Noble delivery. Capitalized interest is expected to total $17 million in 2016. The minority interest line on our P&L, representing the Bully I and Bully II 50%, 50% joint ventures with Shell, is expected to total $75 million to $80 million in 2016 with a run rate of approximately $18 million per quarter for the remainder of the year. The expense is ultimately dependent on the operational performance of the two jointly owned rigs.

Our effective tax rate for the full year 2016 is now expected to be in a range of 10% to 12%, which reflects the impact of discrete items over the first half of 2016. Changes in the geographic mix of our business, our sources of revenue, tax assessments or settlements, along with changes in law or movements in certain exchange rates can also influence the tax rate.

And finally, we've reduced our capital expenditures in 2016 to an estimated $675 million, down from our previous guidance of $800 million. The lower spending expectation is driven by reduced spending across all categories, especially in the areas of maintenance capital and major projects. 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.

In light of the revised capital spending guidance, expenditures in the third quarter are expected to run $500 million or approximately $90 million excluding the final payment of $409 million on the Noble Lloyd Noble, which has already been paid, with spending in the fourth quarter estimated to be $56 million.

This 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.

The marketing function at Noble has remained very busy since our last update in April. Customer inquiries have been on the rise, with a number of requests in support of operators' 2017 budget cycle while others relate to evaluation of new work programs or reexamination of stalled or deferred projects. While we're encouraged by the continuing positive trend, the international rig market nevertheless remains in a challenging state with regard to the fundamental interaction of rig supply and demand.

Through last Friday, July 22, the industry reported 174 floaters under contract, or a market utilization of 73%. That compares to 75% in late April at the time of our previous earnings call. The worldwide jackup fleet has 328 units under contract, or market utilization of 71% compared to the 73% referenced on our last call. It is clear we will need more time to work through the existing supply side surplus.

Meaningful levels of unit attrition continue to impact the global MODU inventory. For example, since mid-2014, 76 floating rigs have been identified for retirement, or almost a quarter of the total supply as at June 30, 2014. This number is likely to grow as drilling contractors cast a critical eye over the competitiveness and holding costs of units within their fleets.

In addition, 158 rigs are currently identified as cold-stacked compared to 59 rigs at the end of June in 2014. A number of these MODUs may never return to the active fleet, due in part to limited technical capability and uneconomic reactivation thresholds as a result of age and extended periods of stacking. We know that in time, the combination of improved rig demand and the removal of uncompetitive units will help bring the industry back into balance.

I now want to provide a perspective on regional activity, starting with the Western Hemisphere. In the U.S. Gulf of Mexico, the outlook remains flat for now, but as I've noted before, the region has an abundance of production infrastructure with excellent hydrocarbon potential and a predictable business climate. We believe these factors will confer an early mover outcome to oil and gas companies participating in this basin relative to others when capital investment improves. In Mexico, another shallow water licensing round will be conducted early in 2017 with 15 offshore blocks up for bid, along with the initial deepwater licensing round which has attracted some prominent industry names set for December of this year.

In Central America and the Caribbean, we're seeing growing operator interest for programs in the West Indies and important wells to be drilled in Colombia. Activity offshore Brazil remains depressed for now, but we're encouraged by the recent announcement by the government there to seek approval to reverse the requirement that Petrobras act as sole operator of pre-salt fields. We expect this strategy will provide opportunities for other parties to increase drilling in the medium term as Petrobras addresses its financial capability.

Clearly, a bright spot in this half of the globe is the emerging deepwater hydrocarbon play offshore Guyana following the giant Liza field discovery by Exxon in 2015 and the recent successful appraisal well drilled earlier this year. Interest in the region extends to Suriname where Apache will drill a deepwater well in the first half of 2017. The customer has awarded a one well plus options program to our ultra-deepwater drillship, the Noble Bob Douglas with an expected commencement around April 2017 in direct continuation of the rig's current contractual commitment to Anadarko in the U.S. Gulf of Mexico. The unit will be well-positioned to address future drilling needs in the region, which is emerging as one of the few hotspots for new demand at present.

Moving to the Eastern Hemisphere, we were initially optimistic regarding activity in the North Sea through the second half of 2016, but Brexit and other issues have introduced a lot of uncertainty in the region that will mute the material improvement that we've been anticipating.

The appeal of the Mediterranean and Black Seas has been revised positively as a consequence of some big discoveries and appraisal drilling. We are familiar at Noble with all the key Mediterranean markets, having worked in Israel, Egypt and Cyprus in recent times. Our Globetrotter II is currently drilling in Bulgaria on its second Black Sea deployment. We hope to be a regular fixture in the Black Sea, given the special capabilities of our Globetrotter design, which allows transit over Bosphorus in the fastest and most economic manner possible in the industry today.

The major petro economies of Angola and Nigeria remain uncertain with sparse work opportunities expected to materialize through the balance of 2016. With the exception of some excitement surrounding Senegal, West Africa is notably quiet as a whole at this time.

In the Asia-Pacific region, we're seeing a slight improvement in tender activity for some areas, such as Indonesia and Myanmar. Also, India's national oil company, ONGC, is fulfilling its traditional role as an important source of incremental demand in market troughs to both floating and jackup rigs and we expect this NOC to source incremental rigs in coming months for programs in 2017.

Finally the Persian Gulf continues to see consistent demand in all key countries with upside potential in both Saudi Arabia and Qatar. Iran could also take in a number of incremental rigs, although the ability of most international drillers, including ourselves, to participate in this market is limited.

Across our floater fleet, contract cover stands at 40% of available days in 2016 and 27% in 2017. Our jackup fleet continues to enjoy a particularly high level of operating days under contract with 85% of available days committed for the remainder of 2016. In 2017, the corresponding figure is 68%.

In recent years, many called for pure play contractors with easy to understand business models. We are glad we sought to diversify our fleet across segments. Our total backlog at June 30, 2016, stood at $5.1 billion with contracts extending out as far as 2023.

Finally, and as David noted earlier, a key objective of the company and a significant challenge for the marketing contracts group is to keep the premium rigs in our fleet working through the cyclical trough. This remains an important priority as active high specification rigs managed by reliable, high quality contractors are sure to be the early beneficiaries of incremental standing that will accompany the anticipated improvement in our sector. We're not interested in calling the market at this juncture, but rather are seeking to position our company with a clear ability to respond as the business environment accelerates.

Given the significant decline in rig demand, we have had to manage periods of inactivity across our premium rigs, including our floaters, Noble Sam Croft, Noble Tom Madden, Noble Danny Adkins, Noble Clyde Boudreaux, and our jackups and Noble Regina Allen and Noble Houston Colbert. We've used our client's demobilization obligation to relocate Houston Colbert to the Middle East, which, as I mentioned earlier, is one of the most prospective markets for jackup rigs right now. We're currently pursuing contract opportunities for all six MODUs and have moved each to a warm-stack status, reducing the daily cash burn as we address marketing opportunities. We continue our efforts to maximize the possibility that some or all of the six rigs will return to work in the near to immediate future.

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

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

All right. Thank you, Simon.

My closing remarks today will begin with a simple statement. We remain confident in the operational and strategic positioning of Noble as we manage through this historic correction in our industry. Our confidence is based on the following points.

Noble fleet is young, versatile, modern and operating in exceptional level of performance. Our contract backlog of $5.1 billion at June 30 continues to provide important visibility over the next two years and provides a base of $1.2 billion and just under $1 billion of revenues expected in 2017 and 2018.

At the close of the second quarter, our liquidity position was $3.3 billion, even after a $409 million payment in July to deliver the Noble Lloyd Noble. The position is estimated at about $2.9 billion at present and provides excellent line of sight through the coming years.

Our capital expenditures are in rapid decline following the completion of our newbuild program. And as Dennis noted, a total annual spending range of around $250 million or less is more likely as we think about 2017 and 2018.

Of course, the primary variable in our projected spending in this is the advent of an inevitable industry recovery as we stand ready to reactivate our best units as opportunities emerge.

Our debt maturity schedule is manageable through the end of the decade with a $300 million senior note maturity in 2017, followed by maturities of only $250 million and $202 million in 2018 and 2019, respectively. Believe Noble has built a level of financial flexibility and agility that few in this business possess. And we will continue to evaluate ways to improve this position, creating even more visibility through the remaining cyclical trough.

Finally, we believe the offshore business will rebound. The pace of activity for now is slow. But we think several factors are converging to support an improvement. Keep in mind the following points. We believe the oil market fundamentals are improving, with crude oil demand growing while production continues to decline. The underperformance of our customer base relating to reserve replacement in 2015 is not a sustainable model in the long term.

Our customers are speaking more confidently about successful offshore project cost rationalization efforts. And hydrocarbon potential offshore is immense, attractive to both large and small producers, with no better example today than emerging opportunities offshore Guyana and Suriname. These developments suggest opportunities to come, and Noble is well-positioned to benefit. The strategic path that we mapped out over five years ago supports our ability to excel over the long term.

And with that, I appreciate your time. And we'll turn the call over to Jeff and take some questions.

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

Okay, David. Thank you. Lindsay, we're going to go ahead and enter into the question-and-answer segment of the call. And while you assemble the queue, I'll ask everyone to please limit their questioning to one question and a follow-up so we can take as many calls as possible up to the top of the hour. Lindsay, go ahead with the first question, please.

Question-and-Answer Session

Operator

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

Ian Macpherson - Simmons & Company International

Hey. Good morning. Thanks for the good detail in the prepared remarks. I suppose the Bob Douglas day rate is a sensitive data point right now. But if you could, Simon or David, comment on where leading edge spot day rates are relative to cash operating costs, that might be a helpful insight.

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

Yeah. Good morning, Ian. Look, we're very pleased to be working again for long-term client Apache. We like their operating style, and clearly, they like ours. It was a very competitive process to tender. We're reluctant to disclose the rate just now other than to confirm it was consistent with the prevailing market. In the current market context, I think utilization is everything. We're not so concerned about headline rate so much as we are with keeping rigs working through this difficult time. So the work opportunities aren't necessarily lucrative in terms of an EBITDA contribution perspective. But we're able to preserve the asset work for an important client, maintain our crews and hopefully navigate this difficult time.

Ian Macpherson - Simmons & Company International

Okay. Well do you think that you will publish that in the future? Or will this remain an undisclosed day rate?

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

We'll keep you posted.

Ian Macpherson - Simmons & Company International

Okay. Fair enough. I guess my follow-up would be, we moved past the Freeport saga, and it does seem like you got a very, I'd say, a fair shake based on your contract strength there. Is your sense that we have kind of moved past the part of the cycle where backlog is – we had a spike in contract terminations industry-wide during Q2. Do you sense that that may be is abating or that there's still pent up pressure there to rework the operator's backlog of rig contracts?

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

I think there's going to be a risk of contract cancelation, renegotiations with us for some time yet. And they will continue until we see some semblance of better balance in the market. The potential for blend and extend discussions seems to be pinching up somewhat as customer project inventories are exhausted. But I think that you may see some more creative exchanges of value between contractors and clients going forward. You may see some terminations based on financial capability of contractors going forward as well. So we're not at the end of the process, by any means.

Ian Macpherson - Simmons & Company International

Okay.

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

Ian, I would say I would add to that, that probably the longer term contracts that have been in place for a while, if there was a risk, that risk would have manifested itself already. So newer contracts probably have, they're shorter term. But there's also some risk if they're longer-term contracts, I think there are some risk in there. But, for instance, you take, for instance, Shell. Those contracts are going nowhere. And so when we look at our backlog going forward, we have an extremely high degree of confidence not only in our relationship with Shell, but also the strength of that contract. And so, I think Simon's right that there are still risks in the industry. But at least for us, when you look at the contracts that have been in place for a while, and I'll note Shell because people are concerned about Shell, those contracts are going nowhere.

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

Yeah. We're talking to market more generally.

Ian Macpherson - Simmons & Company International

Yeah. That's a good point. Thanks, David. And we have seen some of those newer vintage contracts falling off recently. So that's a good clarification. Yeah. I'll turn it over. Thanks.

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

Appreciate it. Thank you.

Operator

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

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

Yes. Thank you. And good morning.

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

Good morning, Greg.

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

Simon or David, you mentioned clearly you guys are a little bit bullish on Guyana and Suriname. I mean there's already one rig down there and you guys are sending the Bob Douglas down. I think we mentioned we called it a hot spot in the prepared remarks. Just as we think about that opportunity set, is that a two rig, three rig basin? Or I mean, what type of potential, without painting you guys in a corner, I mean how do we think that in sort of a maybe a little bit of a blue sky case there? How does that market evolve?

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

Well let me mention just a brief comment, and then I'll let Simon clean it up. I would say that any bright spot as it develops is incremental and adds potential. So I think you're correct in your assessment of this as an emerging opportunity and one where there's growth opportunities, likewise we agree with that, obviously. And we're delighted to be able to have the opportunity to position this rig in direct continuation down there. I'm not disappointed in the rate, although we haven't disclosed it. So we don't want to paint a picture that it's just an ugly deal. Our costs are coming down. Rates are coming down. So I'm delighted with this opportunity to be able to position a rig there. We expect there will be further opportunities. How many there are, we're not sure yet. But certainly I think positioning this rig there will present a huge opportunity for us. And we'll see how fast they develop and what goes on from there. And I'll let Simon add to that if he has anything to add.

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

Yeah, I think if we look at, firstly, at Senegal, I mean we've had two major discoveries there by Kosmos and Cairn. And in Guyana, obviously, there's the Exxon discovery. All of these announcements have been revised upwards three times. But we're clearly in the very early days of exploring those basins. So I think it's a little bit difficult to talk about their long-term potential in terms of rig requirements. But it's certainly a positive and expansive. So we're pleased to be chasing some of those opportunities. And in the case of the Bob Douglas, as we said in the prepared remarks, well-positioned for follow-on opportunities.

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

Okay. Great. And then just one more for me. It's more about I guess how you guys are kind of in viewing like an indifference rate. I mean I guess you kind of provided some guidance around what the warm-stack cost is for the Danny Adkins of about $35,000 a day. Clearly, you guys have a number that you think you can run the rig at in terms of OpEx. So when we think about bidding that rig for work in the Gulf of Mexico, and the reason I mentioned it is it seemed like there was some work that potentially the company could have won that was previously announced. Just as we think about that, is that something where any spread over, any cut into that $35,000 stacking number is a positive or at a certain point we run the numbers and we're zero breakeven and it's not worth it to have the rig running? Just I'm trying to understand how operators, or at least Noble, is thinking about bidding in the work that is potentially below their cash breakeven OpEx.

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

Let me take a stab at that. The rigs that we have warm-stacked are warm-stacked because we believe that we'll be able to work them in a period of time that is more cash efficient and more beneficial to the company and shareholders than spending the money to cold stack the rig, take it out of service and wait for the market to recover to a point that you then want to commit the additional capital to bring it out. So anything that, from a cash perspective (38:18), so you're effectively running that elbow of the company, and you're just running it for cash. And so anything that improves your position relative to what your committed cash to maintain those assets in that stacking mode are, you'll consider. So as you look at opportunities that come up, a short-term requirement that there may be somebody that's closer to or you don't see a follow-on opportunity or it doesn't lead to anything else, may or may not be just as beneficial as you might see a little better term or something you're closer to. Mobilization, de-mobilization, starts to mean a lot, whether the rig is the size of the rig and the cost of the operator to run it in terms of fuel costs and day of support (39:03) becomes a consideration as well.

So there are lots of things that play into it. We have an excellent marketing capability. We have, I would say, a high degree of experience in the operational management group. We have a very good eye on what it takes to successfully run this fleet efficiently. And so we're going to target the opportunities that we think have the most opportunity for us and drive the most value from a cash perspective. And that's specifically why we're so pleased about this Bob Douglas job. We're not going to stop. We're going to go straight from one operator to the other. We'll move location we think is a hot spot. And so we may not bid every job as aggressively as others. We're going to target the opportunities and try to drive as much cash in the system as we can. That's the goal. And I think we have the team that can do it.

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

Perfect. Thank you very much.

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

Thank you.

Operator

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

Jeffrey Campbell - Tuohy Brothers Investment Research, Inc.

Good morning. Just to pick up on what you were just discussing, can we take the thought process about what's going on in current marketing and turn it around the other way, meaning you mentioned that the Apache process was a very competitive process. Do you get a sense that right now all the operators care about is a good enough rig at a low enough price? Does kind of superior technology or age or even being in the basin already versus having to be mobilized from someplace else? Do any of those variables give you any kind of an advantage?

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

I would say all of those variables give us an advantage under the right circumstances. What the operator is looking for, safety is a given, I mean an operator wants to use a contractor he has confidence in, not only from a personal perspective, I'm not only talking about personal safety but also risking his project. So I would say that operational reputation is a key element and I think that we have an advantage in that regard. I'm sure other contractors will say they have an advantage. But with our, what we've done at our training capability center and what we've done to simulate wells on paper I think that gives Noble a little bit of a leg up. But other things – what the operator primarily is looking for is a highly competent contractor that can execute the work most efficiently.

So a larger rig that has a higher carrying capacity has an advantage over a smaller unit say. A rig that's closer to the location or can move there efficiently and quickly has an advantage over a rig that's going to move more slowly and has to come a long way. A contractor that has a high degree of execution capability in terms of running rigs efficiently and staying off downtime, downtime not only costs us money, but it costs the operator money. All of those things accrue the benefit to those contractors that can demonstrate a high degree of competence and have the right fleet. It's one of the reasons that I'm so pleased about being finished with our newbuild program. We spec'ed ourselves at a very high level so we can compete down from the very top of the competitive chain all the way down to the bottom.

I mean we built these big jackups but they don't have to work in 300 feet of water, they can work in much less water. They've got full quarters, they've got big mud systems, they've got a lot of deck capacity. They have broad, they can compete with just about anybody anywhere, and the same thing with the floaters. So what the operator is looking for is the most efficient operation they can have that they can get executed safely for the lowest price possible, and the lowest price or the greatest value fleet capability is going to drive that. And so that's one of the reasons I think that we're in such good shape.

Jeffrey Campbell - Tuohy Brothers Investment Research, Inc.

Okay. Great. Thanks, I appreciate that comprehensive answer. I have just two quick follow-ups on things you mentioned during the call. One, I think there was an allusion to 2017 and 2018 CapEx run-rate, maybe around $250 million a year. I hope I got that number right. Does this mean keeping the current fleet whether it's working or stack-and-tacked or does it anticipate any kind of rig retirements over that period of time?

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

Well we're not – we're trying to give notional, not live guidance so much as kind of a notional implication. We've not budgeted next year yet or the following year, obviously. What we're trying to indicate is that our capital requirements where we spent over $1 billion, up till last year we had no renewals, with a couple billion dollars per year for the previous three years before that. And we've projected $800 million now, brought that down to under $700 million. The $250 million is kind of a notional number and I think what I said is $250 million or less. That's we're looking at maintenance CapEx and project capital, and that contemplates the fleet that we think we're going to be able to operate next year. So we'll give you more precise guidance later in the year.

Hopefully, we'll be able to give you something on the October call, some more precise guidance of what our capital – but the point is that our capital requirements are going to come down dramatically over what they've been over the last few years. Last year we spent about $500 million. This year we're going to spend under $700 million. Next year I'd expect to be $200 million, $250 million or less. And so that's the idea. Not so much to give you precise guidance but to tell you it's coming down dramatically and quickly.

Jeffrey Campbell - Tuohy Brothers Investment Research, Inc.

Okay. Thank you. Well, that's helpful. And my last question is, of the 158 of cold-stacked rigs that were identified earlier, how many of those do you think need to stay offline to help balance the eventual recovery based on your current market view?

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

I think every one helps, frankly. I mean the attrition side is important but it's not overwhelmingly important. I've been more focused on demand and the early signs of that supply inventory will be there for some time. But really it's customer demand coming back to the fore. That's what is most important and will provide the greatest opportunity for rebalancing the supply.

Jeffrey Campbell - Tuohy Brothers Investment Research, Inc.

Okay. Thank you very much.

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

Thank you.

Operator

Our next question comes from the line of Haithum Nokta with Clarksons Platou. Your line is now open.

Haithum Nokta - Clarksons Platou Securities, Inc.

Hi, good morning.

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

Good morning.

Haithum Nokta - Clarksons Platou Securities, Inc.

Simon, congrats on the Bob Douglas contract. Seeing you guys have talked a bit about the parameters that helped you win that opportunity. I just wanted to ask one question. Do you think the fact that that rig's coming off of a hot contract, did that help the situation at all? Compared to other rigs that have been idle for a period of time?

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

Yeah, I think that's definitely the case. Warm-stacked units are somewhat disadvantaged relative to the rigs that are hot with full crews on board. What I would say though is that in the current environment the rig that is least attractive to a customer is a newbuild that's been lurking in a shipyard for a period of time with unproven crews and unproven equipment. So, I mean yeah, this is clearly a continuum or a spectrum of preference to the operators in terms of down time, operational and execution risks. And at one end you have the hot rig rolling off of a contract. And at the other end, you have a newbuild that hasn't drilled a well yet. And with the Bob Douglas, clearly Apache showing their preference for a rig that's working.

Haithum Nokta - Clarksons Platou Securities, Inc.

And can you give us some like (46:50) level of, what kind of terms should we expect for that well? Is that kind of like a 90-day type well? Or can you help us out figure that part out.

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

Look I'm reluctant to discussing too much detail exactly what we're doing for Apache. The term is a single firm well for now. There are options to extend. I don't know if I can provide much more clarity than that. But we expect that the rig's going to be down there for a couple of months.

Haithum Nokta - Clarksons Platou Securities, Inc.

Okay. All right. And then just to shift gears a little bit on the jackup side. Do you sense at all that we're nearing a bottoming in jackup demand by the end of the year, especially since shallow water investments tend to be shorter cycle nature compared to deepwater?

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

It's an interesting question. I think there's certainly still a downward momentum in the jackup segment. I don't know when that will bottom. The jackup market, of course, is a much shorter term market relative to the deepwater market. So I think it's going to move around as expectations change and as the oil price oscillates. For the time being, we think it's going to continue to move downwards. But the improving oil price outlook and customer confidence generally at some point that'll arrest and reverse.

Haithum Nokta - Clarksons Platou Securities, Inc.

Okay. Thank you. Appreciate it. I'll turn it back.

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

Thank you.

Operator

Our next question comes from the line of Ed Beshnuv (48:16) with Cowen. Your line is now open.

Unknown Speaker

Hey. Good morning. And thank you for taking my question.

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

Good morning.

Unknown Speaker

Good morning. Thinking about M&A, how does the high debt gap or high debt EBITDA based on consensus expectations play into either asset acquisition or M&A, despite having solid liquidity?

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

Well let's take M&A, just take acquisitions. Acquisitions take cash. And every rig you buy, to the extent it's unemployed, burns more cash. So I would say that our position on that is I think it's going to be different for each contractor. Our position is we're watching it. We're not uncomfortable with our position. We've got big revolver capacity. We've got good contracts that are going to provide a base of about $1.2 billion of revenue and about $1 billion in the year after that for 2017 and 2018 respectively. So as our operating costs come down, our capital costs come down, our costs to run the company continue to come down, we're not uncomfortable with having a base level of revenue like that. Whether or not we get into continuing to eat our cash and have to go on a revolver over the coming years remains to be seen. Nobody knows exactly how it's going to last. So I would say that on an individual asset basis we would want to see more clarity in the market before we get interested in that.

On a larger M&A scale, I'm not sure the cash makes as big a difference. I don't think anybody really wants to sell their company when they're trading below books. So I would say those deals are going to be, would theoretically have to be targeted between customers of like position. We wouldn't be interested at all in a combination of somebody that had a caustic debt position that would undermine our own strength and likewise we work very hard to position our company at a place that's got a very premium asset base with a very young fleet and so diluting that dramatically doesn't make a lot of sense to us at this point either.

So M&A is always something that's on the minds of investors and bankers and other people, and we obviously watch it. There are challenges whether a market's good and there's challenges when the markets are where like it is now. And I would say those challenges balance. It's always tough to get done, valuation is always a problem. And so that's one of the things that we think that Noble is well positioned, Simon talked a little bit about the jackup fleet. We've got a very high spec jackup fleet with good contract backlog. Again I think we can compete with anybody.

So our relative position I think to the rest of the market is stronger than most. And so we don't want to dilute that, and so we'll watch the market as it develops. We have a history of taking action when we think it makes sense, but we have a lot of optionality. We've got liquidity and we've got a good contract backlog. So we're going to monitor this and be very deliberate and slow about how we move and we'll see what the market brings us.

Unknown Speaker

I guess I was thinking maybe the industry would look – take time to look for assets that may be available for cheap before actually engaging in M&A. But it doesn't sound like it is as simple as that. It could be before, M&A could be before (51:50).

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

I'd say I think you look at both. Cheap is relative, and so there have been some second hand sales of some late generation equipment, but the holding cost to put that equipment back in service and the time, the holding time and the cost of a particular rig that sells, as we say cheap, could be significant. And so it's a little more challenging than just buying cheap. There's holding cost, you're buying an asset that may be in some cases competing with assets you've got in case and you've got limited cash. Again nobody knows how long this is really going to last. We believe that we're headed out of the fray instead of still into the fray, but how long it takes us to emerge into something that's more profitable, we don't really know, so cheap is relative. There are some assets out there for sale, there will be a lot more. I would say that the real benefits of the second hand market have not even begun to show up. I think that's still to come. There's going to be a lot more retirements of older assets and there's going to be a lot more distressed assets to hit the market, so I would say that opportunity is still emerging.

Unknown Speaker

Okay. And one last question if I may?

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

Sure.

Unknown Speaker

Did you guys talk about what are the options on Noble Bob Douglas?

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

We did not, only to say that there are a number of different possible scenarios there. We'll move the rig down there and drill this well and there are different option scenarios. I think what Simon said is there are options and I think what he said is we expect to be in the country at least a couple months. So beyond that we didn't really say anything more. And we'll give you more clarity on the fleet status when we can.

Unknown Speaker

Great, thanks for taking my question.

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

Thank you very much.

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

Okay. With that, I think we'll go ahead and close today's call, knowing that it's a busy day of earnings and each of you are going to move onto the next report. So I'd like to thank everyone for your participation today and your interest in the company. Thinking ahead to the third quarter, make note that we do plan to announce third quarter results on November 2nd, with a call on November 3rd, and we'll confirm those dates as we get closer. Lindsay, 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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