Noble Plc (NE) Q4 2016 Results - Earnings Call Transcript

| About: Noble Corporation (NE)

Noble Corp. Plc (NYSE:NE)

Q4 2016 Earnings Call

February 10, 2017 9:00 am ET

Executives

Jeffrey L. Chastain - Noble Corp. Plc

David W. Williams - Noble Corp. Plc

Adam C. Peakes - Noble Corp. Plc

Simon W. Johnson - Noble Corp. Plc

Analysts

K. Blake Hancock - Scotia Capital (NYSE:USA), Inc.

Ian Macpherson - Simmons & Company International

Haithum Nokta - Clarksons Platou Securities, Inc.

Colin Davies - Sanford C. Bernstein & Co. LLC

Gregory Lewis - Credit Suisse Securities (USA) LLC

Praveen Narra - Raymond James & Associates, Inc.

Kurt Hallead - RBC Capital Markets LLC

Operator

Good morning. My name is Carol, and I will be your conference operator today. At this time, I would like to welcome everyone to the Noble Corporation fourth 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.

At this time, I would like to turn the call over to Jeff Chastain, Vice President-Investor Relations.

Jeffrey L. Chastain - Noble Corp. Plc

Okay, Carol. Thank you and welcome, everyone, to Noble Corporation's fourth quarter and full-year 2016 earnings call. We do 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 the Noble website, and that's as you know 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. That 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 today's call. 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 has concluded, we will post to our website a summary of the financial guidance covered on today's call, which will cover first quarter and full-year 2017 figures.

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

David W. Williams - Noble Corp. Plc

All right. Thanks, Jeff, and good morning, everyone. I'd also like to welcome each of you to today's call and express our thanks for your interest in Noble. We're going to report to report and offer perspective on our solid financial performance in the fourth quarter of 2016. We'll also provide some initial thoughts and direction for 2017.

But before we begin, I'd like to introduce the members of the Noble management team who are participating on today's call. Beginning with Adam Peakes, Adam officially joined Noble as our Senior Vice President and Chief Financial Officer on January 23. He brings a wealth of experience in oilfield services and global natural resources. He has broad industry knowledge, M&A experience and financial leadership and understanding of capital markets will be extremely beneficial to us, and we're delighted to have him as part of our team. So, welcome Adam. Also joining me today in addition to Jeff and Adam is Simon Johnson, our Senior Vice President of Marketing Contracts. I'll begin this morning with some comments on our fourth quarter performance, while highlighting several achievements in the quarter that have positive implications for Noble's competitive position as we proceed beyond 2016.

Adam will follow this morning with a full review of the fourth quarter and our initial detailed look at 2017 guidance, including some updated thoughts on operating cost and capital expenditures. Sam will then provide some comments on the market developments and I'll close with some final thoughts before we take your questions this morning.

As you examine the fourth quarter's reported figures, which include a non-cash charge for impairments and several gains, you'll find that Noble closed 2016 with a continuing commitment to strong operational consistency and demonstrated resolve around sound financial discipline. Once again, fleet downtime of 4.8% was lower than guidance. And also note that during the fourth quarter, we returned to rigs to active status and commenced operations on our last newbuild unit. For the year, fleet downtime of 4.3% was noteworthy and that it represents another year of improvement, due impart to the excellent performance in our subsea operations.

During 2016, downtime associated with subsea operations accounted for only 3.8% of the total operating hours in our floating fleet, a 20% reduction when compared to 2015, and an indication of the continuing success of our subsea training and development programs, as well as our solid technical expertise.

In addition, contract drilling services costs in the fourth quarter were 10% below guidance and finished the year 19% lower than our full-year 2016 expectation. We did see fewer operating days throughout the year as the challenging industry conditions led to ideal periods for certain rigs.

However, we also continued to identify cost-saving measures in both our offshore and shore-based operations. Throughout the period, we challenged our global workforce to find and eliminate operational inefficiencies, as well as identify and implement new cost-saving measures. These initiatives brought the company additional savings.

Adam will discuss our thoughts on 2017 contract drilling services costs, which have been revised lower still in part through the success of these efforts. We also made the decision in the fourth quarter to retire the semisubmersible's Noble Max Smith, which has been sold for scrap, and the Noble Homer Ferrington, with both rigs included in impairment charge. We concluded both rigs would suffer from limited market opportunities and of equal importance, drilling reactivation costs.

Later on, Simon will provide some information on industry rig attrition, which remains an important component for the future recovery of the offshore drilling industry, whether that attrition is delivered or not. Noble has been an active participant in fleet management, as we've increased the concentration of premium and versatile rigs through newbuild additions, rig divestures and retirements. In fact, we retired six floating rigs and one jackup since the fourth quarter of 2014, amounting to 20% of our rig fleet.

Our fleet management efforts have reduced the average age of the Noble fleet to among the industry's youngest at just six years when you exclude the four standard jackups operating in the Middle East with an average service life of over 36 years each. In addition to our operational success in the fourth quarter, I believe it's important to highlight, three previously reported accomplishments in the same period that we expect will provide immediate benefits.

First, we commenced operations on high specification jackup Noble Lloyd Noble, placing the company's final newbuild into service on a four-year term contract in the North Sea. Second, we entered into an agreement with our customer to amend the multi-year contracts on three of our premium drillships, the Noble Bully II, the Noble Globetrotter I and the Noble Globetrotter II.

The contract amendments established a four-day rate for each rig, which together with other term contract commitments provide a secure base of revenue that enhances visibility in the years to come. And third, we executed a highly successful issuance of $1 billion in unsecured senior notes and related tender offer, which allowed the company to reduce the size of intermediate term debt maturities, while expanding our liquidity position.

Each of these accomplishments, along with the skill and dedication of our global workforce contribute to the enhancement of Noble's strong industry positioning. Finally, I'd be lax in failing to comment on the excellent start that we've already seen in 2017, with regards to new contract awards.

Two of our jackups in Middle East, each received five-year contract extensions from Saudi Aramco in January, adding approximately $581 million to our contract backlog and keeping both rigs active into 2022. These awards expand our industry-leading operating days under contract in our jackup fleet to 80% in 2017 and 50% in 2018.

We believe continued improvement in committed days for both years is likely, as we evaluate other contract opportunities for the jackup fleet. So, congratulations to the team for a strong start-off to the year.

With that, I'll now turn the call over to Adam.

Adam C. Peakes - Noble Corp. Plc

Thank you, David, and good morning to everyone. I'm excited to be a member of the Noble team and I'm pleased to be with you on the call today.

As I get more deeply integrated into the Noble organization, I continue to be impressed with how the company has navigated this historic downturn, while also making sure we're well-positioned to capitalize on opportunities when the market rebounds.

This is a very interesting time to be in the offshore drilling industry and I look forward to playing a role in the future direction of Noble. I also look forward to meeting each of you over the coming weeks. In keeping with the company's past practice, I'll provide some summary comments on the fourth quarter results and offer a number of observations on our capital expenditure program and balance sheet.

After that, I will conclude with a discussion of first quarter and full-year 2017 financial guidance. Noble reported the fourth quarter adjusted net loss attributable to the company of $37 million or $0.15 per diluted share on revenues of $394 million. The adjusted numbers exclude the impact of non-cash after-tax impairment charges totaling $1.3 billion or $5.34 per diluted share. And the impairment charges were partially offset by after-tax gains totaling $32 million or $0.13 per diluted share, including the extinguishment of debt, after the December closure of a tender offer for $762 million of senior notes due in 2020 through 2022.

Additional offsets to the impairment charge include a lump-sum settlement following a customer's decision to terminate the remaining term on the contract for the jackup Noble Tom Prosser, while the rig operated offshore Australia and a discrete tax item.

Reported results for the fourth quarter, which include these special items, were a net loss attributable to the company of $1.3 billion or $5.36 per diluted share on revenues of $410 million. To provide better clarity and understanding of these adjustments, we have included a non-GAAP supporting schedule with the other financial statements and schedules that accompany our press release issued last night.

The schedule provides a reconciliation for total revenues, net income/loss attributable to Noble Corporation, income tax and diluted earnings per share for the fourth quarters and full years of 2016 and 2015. The non-GAAP schedule can also be found on our website at Noblecorp.com.

The $1.3 billion of non-cash impairment charges recognized in the quarter included five of the company's semisubmersibles and certain capital spares. Three semisubmersibles were partially impaired; The Noble Dave Beard, Noble Clyde Boudreaux and the Noble Amos Runner. And as David noted, two rigs were fully impaired and retired; the Noble Max Smith and Noble Homer Ferrington.

The reported contract drilling services revenues in the fourth quarter of $401 million included $16 million resulting from the contract termination lump-sum settlement. Excluding the lump-sum settlement, adjusted revenues were $385 million compared to $373 million in the third quarter.

The 3% improvement was due to better performance from our jackup fleet, which saw a 10% increase in operating days, following the return to service of the Noble Regina Allen and Noble Houston Colbert in the North Sea and Middle East regions respectively, and the commencement of operations on the Noble Lloyd Noble and Statoil's Mariner field in the North Sea in late November 2016.

The fourth quarter guidance provided during our third quarter call for fleet downtime and certain items on the P&L proved to be accurate with the exception of operating costs and non-controlling interests, so I will provide an explanation on each. David already commented on our favorable downtime results in the quarter of 4.8% compared to guidance of 6%.

Contract drilling services costs in the fourth quarter were $177 million compared to a guided range of $190 million to $205 million, with the favorable variance due largely to lower than expected repair and maintenance expenses and lower costs for the Noble Lloyd Noble due to a slightly later than expected startup of operations.

Non-controlling interests in the fourth quarter were $20 million compared to guidance of $18 million with the positive variance due to higher than expected operating days for the drillships Noble Bully I and Noble Bully II. Capital expenditures in the fourth quarter were $68 million, slightly above our guidance of $60 million, due largely to the timing of sustaining capital expenditures. For the full year of 2016, capital expenditures reached $660 million, including $435 million of expenditures for the delivery of the high-specification jackup, Noble Lloyd Noble. Sustaining capital spend on the fleet in 2016 was $96 million.

Finally, a comment on the balance sheet and liquidity, total debt at December 31, 2016 was $4.3 billion compared to $4.1 billion at September 30. In December 2016, we issued $1 billion of 7.75% unsecured notes due in 2024, providing $970 million in net proceeds. $762 million of these proceeds were used to pay the purchase price and accrued interest in a concurrent tender offer for senior notes due in 2020 through 2022.

Following the debt offering and subsequent tender, the company significantly improved its debt maturity profile, with each of our annual debt maturities from 2018 through 2022 now at or below $250 million. The modest increase in total debt together with the $1.3 billion reduction in shareholder equity resulting from the impairment charges elevated our total capital ratio to 40.2% in the fourth quarter compared to 34.7% at the conclusion of the third quarter. A portion of the net proceeds from the debt issue were reflected in the cash and equivalents balance at year end, which increased to $726 million.

The cash balance together with our undrawn $2.445 billion revolving credit facility that matures in January 2020 resulted in total liquidity at December 31 of just under $3.2 billion. We plan to utilize cash on hand to repay the $300 million of senior notes due in March 2017.

I'll now review our guidance for full-year 2017, beginning with operational downtime. We are improving our guidance for operating downtime to 4%. Please recall that we began 2016 with downtime guidance of 6%, lowering the measure to 5% beginning with the second quarter, which remained our full-year view. As I mentioned earlier, our actual result for 2016 was 4.3%, representing the third consecutive year of improvement. The lower guidance in 2017 is due in part to the higher mix of jackup operating days and continued improvement in subsea performance.

Contract drilling service costs in 2017 are now expected to range from $600 million to $640 million. The range of guidance represents an update to comments made during our third quarter 2016 call, where we noted early expectations for contract drilling services costs in 2017 at $675 million. At its midpoint, the revised range represents a 30% decline from 2016 contract drilling costs and reflects our assumptions regarding operating days across the fleet.

The range is further evidence of our ongoing efforts to reduce costs throughout the operation, including costs associated with idle rigs. The range reflects the expected lower operating costs of the drillships Noble Globetrotter II and Noble Bully II following commencement of idle periods for each rig resulting from contract amendments reached with Shell in December 2016. The Noble Globetrotter II and Noble Bully II will collect a day rate of $185,000 and $200,000 respectively through the idle period, with operating costs expected to decline approximately $100,000 a day per rig. This assumes a warm-stack posture.

Costs associated with client reimbursables in 2017 are expected to be in the range of $20 million to $25 million, resulting in a range of total costs in 2017 of $620 million to $665 million.

Contract drilling service costs in the first quarter are expected to fall in the range of $175 million to $185 million, reflecting a full quarter of operations on the Noble Lloyd Noble and Noble Houston Colbert in our jackup fleet, with lower costs expected on the Noble Globetrotter II, which began its idle period in late December 2016.

Costs associated with client reimbursables are expected to range from $5 million to $7 million in the first quarter, reflecting the decline in our active rig count.

DD&A in 2017 is expected to be in the range of $535 million to $550 million. The range compares to actual DD&A in 2016 of $611 million, with the 11% favorable variance driven by the value impairments and rig retirements in the fourth quarter of 2016, partially offset by a full year of depreciation on the Noble Lloyd Noble. In the first quarter, DD&A is expected to be in the range of $135 million to $140 million.

SG&A cost guidance in 2017 declines to a range of $58 million to $62 million compared to actual SG&A in 2016 of $69 million. The favorable variance here is due largely to successful cost management efforts over 2016 and lower professional fees. In the first quarter, we expect SG&A cost to be approximately $17 million.

The guidance range for interest expense net of capitalized interest is $285 million to $295 million compared to $223 million in 2016, due largely to a higher average cost of debt following the issuance of the $1 billion of 7.75% senior unsecured notes in December 2016, and the discontinuation of capitalized interest following the delivery of the company's final newbuild project.

Net interest expense in the first quarter is expected to be in the range of $72 million to $74 million. Non-controlling interest expense on our P&L representing the Bully I and Bully II 50:50 joint ventures with Shell is expected to range from zero to $10 million in 2017, with the first quarter of 2017 representing the highest quarterly level for the year at $13 million.

The Noble Bully I is expected to complete its current contract term in March with a gap in utilization currently expected thereafter. The Noble Bully II will be idled by Shell following the completion of the current well program for a period of up to 365 days, expected to begin no later than May 2017.

Turning to our tax guidance, as we continue through this challenging phase of the market cycle, we have undertaken an internal reorganization to better competitively position the company on a go-forward basis. Previously, we could easily find ourselves in a position where the company could report an operating loss in a given year, yet still incur cash taxes. As a result of our reorganization, we expect to realize a more predictable annual tax outcome with an effective tax rate more closely aligned with our earnings.

We expect to achieve a meaningful reduction in cash tax outlays beginning in the first quarter of 2017 and continuing into future years. We do expect to incur a non-cash charge totaling approximately $280 million in the first quarter, due to a deferred tax liability associated with this reorganization.

Naturally, the relative size of this non-cash charge will impact our expected ETR. We currently estimate tax expense on loss for full-year 2017 of approximately 40% to 44%. However, the cash benefits this year and then in the years ahead support our other cash savings initiatives.

We do not expect to incur other non-cash charges related to the restructuring, although changes in the geographic mix of our business and other factors may also influence the ultimate tax rate.

To put this in perspective, excluding the non-cash charge, the estimated 2017 ETR would flip to a substantial tax benefit. Simply put, while this may seem confusing with the first quarter non-cash charge that distorts our ETR, we view this reorganization as a big positive for Noble with real cash benefits in 2017 and beyond.

And finally, we are reducing our capital expenditures guidance for 2017 to $115 million, which updates our preliminary 2017 guidance of $125 million provided during the third quarter call of 2016. The updated lower expectation compares to $660 million in 2016 or $225 million excluding capital expenditures associated with the Noble Lloyd Noble. Included in the $115 million is an estimated $76 million relating to sustaining capital expenditures. Capital expenditures in the first quarter are expected to total approximately $35 million.

In closing, Noble has established a strong financial platform to execute our business through 2017 and beyond. Operating days under contract support revenues in 2017 in excess of $1 billion, while operating costs are projected to decline another 30% from actual costs in 2016. Intermediate term debt maturities have been reduced significantly, producing a highly manageable debt profile through 2022, while liquidity remains at a healthy level. As always, further improvements to our capital structure and liquidity position remain under evaluation.

That concludes the financial review. I will now turn the call over to Simon for the marketing discussion.

Simon W. Johnson - Noble Corp. Plc

Thank you, Adam, and good morning to all.

We completed another challenging year in 2016 with our customers' offshore expenditures declining from the previous year. But as David mentioned, there has been some meaningful contract progress to note in the fourth quarter. After expanding on these recent contract awards, I'll provide a perspective on the offshore market, including some comments on regional activity.

I will also address the outlook for those rigs in our fleet that are currently idle. In our floating rig segment, amended contracts on the three ultra-deepwater drillships under long-term contract with Shell demonstrate joint commitment to the cooperative spirit of our alliance, while effectively reducing market risk with the addition of day rate floors. The Noble Globetrotter II commenced an idle period of up to 730 days in late December 2016, and we are exploring opportunities to deploy the rig with other operators during this time.

An idle period for the Noble Bully II of up to 365 days is expected to commence late in the first quarter, during which time the rig will receive $200,000 a day. As we've indicated previously, operating costs are expected to be reduced by $100,000 or more per day for each rig. As noted in our most recent fleet status report, and as David mentioned earlier, five-year term extensions in the Kingdom of Saudi Arabia was secured for the Noble Roger Lewis and the Noble Scott Marks, keeping both rigs under contract through March 2022, and July 2022 respectively.

These extensions demonstrate the strength of our relationship with the client and highlight the successful execution by our crews employed on these high-specification assets, which continue to drill and complete some of the most challenging wells in the world today. We are one of only two offshore drilling contractors that our client entrusts with this task, which speaks volumes to our technical capability and the operational execution of the crews.

Additionally, our two standard jackups operating in Saudi Arabia, the Noble Joe Beall and the Noble Gene House, recently had their 2017 operating day rates confirmed, following the conclusion of discussions with our client. Both rigs will remain at $65,000 a day through 2017.

These commitments that I've profiled represent solid additions to our best-in-class jackup cover amongst our peer group in what continues to be a turbulent market. We see more visible interest in jackups employed through 2017 and are satisfied to be leading the pack for the work that is out there in this first-mover asset class.

Rig attrition continues to play an ongoing role in balancing the offshore drilling fleet. For the period covering mid-2014 through 2016, that count indicates that 70 floating rigs have been retired. Further retirement should be expected as competitors complete the year-end impairment tests and assess the rationale of reactivating cold-stacked rigs.

Industry-wide, the average age of cold-stacked floaters is 21 years and over half of these rigs have been out of service for more than a year. Although, the total amount of jackup rigs retired during the same timeframe is considerably less at 25 units, the outlook for many of those rigs returning to service is less favorable, especially those that were not particularly well maintained. Of the current cold-stacked jackup fleet, 85% are more than 30 years old and 86% have been out of service for more than a year.

Before passing the call back to David, I want to briefly touch on developments in offshore activity across the globe and the near-term outlook for those of our rigs that are currently seeking work. In the U.S. Gulf of Mexico, jackup requirements are likely to remain flat, but floater demand is expected to pick up slightly in the second half of the year with predominantly short-term programs, assuming oil prices remain in the $50 range.

In Mexico, the rig market is developing, albeit slowly post energy reform due in part to formulation of permit requirements and implementation of new policy. The country's first deepwater lease auction held on December 5 was successful, with 8 of the 10 blocks that were offered receiving bids. Additional tenders are expected later this year and we will continue to monitor developments in this region as rig rate requirements become clearer. It is encouraging to see many clients competing for blocks and that underwrites our belief in a deregulated Mexican rig market as an important part of the regional demand profile in the medium term.

In South America, activity along the Northwest Coast is increasing with operators following through on projects. Brazil on the other hand continues to experience low levels of activity compared to the past, but recent changes in oil and gas laws, a new government, and divestitures by Petrobras to IOCs will ultimately form the basis of recovery in this important deepwater region. In the Eastern Hemisphere, activity in West Africa remains muted with few new fixtures or upcoming programs of substance.

We see limited nature and growth potential in the North Sea. However, the recent transactions involving asset transfers from the larger to smaller players is an encouraging development for this brownfield region. We expect these assets transfers to eventually serve as a catalyst with new nimble liners accelerating work programs. The Middle East has shown an increase in tendering through late 2016, a trend we expect to continue into 2017.

Although day rates are likely to remain generally flat in the immediate future, we anticipate an increase in contract durations. Finally, the capacity imbalance mentioned on the previous call continues in Asia Pacific. That said, we have seen an increase in tendering and awards, especially in the jackup segment.

In summary, as we look across the worldwide market and reflect on conversations with our clients, we have detected subtle, but generally positive changes in their outlook and confidence level. Much of this is driven by the relative stability in the oil price, which we had identified in the past reports as a key requirement.

Also, the supply chain pricing reset is playing out and many projects have benefited from this difficult but necessary process. Significantly, offshore projects that were sanctioned in a different cost environment and at breakeven oil prices well above the prevailing market have been restructured to benefit from new cost decks and will now contribute healthy margins to our clients' coffers.

The degree to which this will translate into solid new opportunities is uncertain, but appears increasingly likely. As we hit into 2017, 20 of Noble's 28 rigs are currently under contract. We presently have four units in warm-stack mode, including three floaters, the Noble Sam Croft, the Noble Tom Madden in the U.S. Gulf of Mexico and the Noble Globetrotter in Asia and one jackup, the Noble Tom Prosser, in the Middle East.

Looking ahead in 2017, the floating rigs, Noble Bob Douglas, Noble Bully I, Noble Paul Romano and jackups, Noble Mick O'Brien and Noble Houston Colbert, are set to complete contracts. We continue to evaluate opportunities for each of these units and are reasonably confident in finding work over the next 12 months, with each rig's historical performance, technical capabilities and strategic positioning remaining important client considerations.

Our balance sheet and the work that Adam and his team have done on the capital markets is also beginning to separate Noble and the short list of our peers from the rest of the industry in terms of counterparty risk. A growing concern of our clients is financial challenges complicate and potentially prevent contractual performance.

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

David W. Williams - Noble Corp. Plc

Okay. Thank you, Simon.

The past two years have been characterized by an intense focus on efficiency as we manage the difficult cyclical downturn. Through this challenging period, we have remained true to the fundamental values that have sustained Noble for almost 96 years, a commitment to operational excellence and a dedication to financial discipline.

Our efforts have clearly paid off as demonstrated by the consistency of our operational execution, highlighted most recently by another year of reduced fleet downtime and continued cost improvement.

I also call your attention to our strong contract cover, which provides important visibility, our solid balance sheet and ample liquidity as evidence of our commitment to financial discipline and the success of our long-standing operational philosophy.

Initiatives we completed in 2016 substantially strengthened our company. For example, the contract amendments with Shell removed the market risk on three rigs and support our cash flow from operations, while allowing for future upside. Also, our $1 billion issuance of senior unsecured notes and related tender offer provide a significant step forward in our debt management efforts by reducing the size of our intermediate term maturities, giving us a much more manageable maturity profile for the next eight years.

While it was already solid, we've extended our liquidity runway and can report today liquidity at the end of 2016, right at $3.2 billion. We've not needed to access the revolver, despite utilizing almost $750 million in cash on hand in 2016 to repay maturing senior notes and deliver the Noble Lloyd Noble. Even following the expected use of cash on hand to repay the maturing notes in 2017, no draws against our revolver are currently contemplated for the year, as we benefit from a core base of rigs under contract and successful cost management and capital preservation efforts.

With booked revenues of over $1 billion and our ability to scale operating cost to prevailing activity levels, we expect to generate cash in 2017 prior to debt repayment. Even in 2018, we expect our revenues to exceed operating costs and sustaining capital expenditure requirements. In light of these developments, I suggest you that Noble's strong industry position has not only been preserved through the cyclical trough, but it's improved.

For the past two-plus years, the words such as survival and reorganization have been all too common in the financial community vernacular. As we look ahead, the word recovery should begin to find its way into more conversations. We believe it's not too early to turn our eye toward the industry recovery.

Maybe it's not for all, but certainly for Noble. We realize more time is required before obvious measures indicating fundamental improvement emerge in our industry, perhaps another year or two. But slow and steady progress is already evident. The global oil market is improving and we note a growing conviction with regard to near-term balance in crude oil supply.

Customer bid activity is up and we see additional progress resulting from our customers' progress on simplifying many offshore projects through successful reengineering, resulting in significantly improved project economics. We believe the Noble fleet is well positioned for recovery given its premium composition and our clients' preference for advanced and efficient offshore drilling capabilities with skilled crews.

Our decision to maintain a warm-stacked posture on some idled premium rigs in our fleet should prove beneficial as we take advantage of an expected quickening pace in the reactivation cycle with lower expected costs compared to those rigs that have been cold-stacked. Keeping our currently active fleet employed is a primary focus in 2017. As we enter the year, 70% of our fleet is under contract, and following our recent contrast awards, only two floating rigs and two jackups are expected to conclude existing contracts before December 2017.

Our efforts will also be directed to capturing contract opportunities to provide the appropriate economics to support the reactivation of idled premium rigs, and finally, while we remain focused on maximizing cash flow through continued cost management efforts and efficient use of capital.

Thank you again for your attention and interest in Noble, and now I'll turn the call back over to Jeff and we can take some questions.

Jeffrey L. Chastain - Noble Corp. Plc

Okay, David. Thank you. Carol, let's go ahead and enter the Q&A segment of the call. If you'd assemble the crew, I'll mention to everyone that we're going to take question to the top of the hour. So if you could please limit your questioning to one and a follow-up, we would greatly appreciate it. Carol, go ahead.

Question-and-Answer Session

Operator

Thank you. And your first question today comes from Blake Hancock from Scotia Howard Weil. Please go ahead. Your line is open.

K. Blake Hancock - Scotia Capital (USA), Inc.

Thank you. Good morning, guys.

David W. Williams - Noble Corp. Plc

Good morning, Blake.

K. Blake Hancock - Scotia Capital (USA), Inc.

Simon, maybe for you, could you talk a little bit about the two Shell rigs here that are going idle? Are there any opportunities here in the second half of the year that you're seeing, while they still may be short term, to put those rigs on a rate and get them back to work?

Simon W. Johnson - Noble Corp. Plc

Yes, there are a number of things that we're aware of and are closely monitoring. We're making proposals for the rig for a number of different opportunities. There's some work in Africa and further afield. It is in the second half of the year, but yes, we're quietly optimistic about our chance of scoring some sublet work in that time.

K. Blake Hancock - Scotia Capital (USA), Inc.

That's great. I appreciate it, and, David, maybe one for you. As we think about the rigs that you took the impairments on and the two that we're scrapping here, maybe on the two we're scrapping, can you help us? You talked about the reactivation costs maybe being too high. Can you maybe help us think about what the reactivation – what you guys thought those costs would be, and then in reality maybe what the end outcome for the Beard and the Runner and the Clyde Boudreaux might be given you scrapped two rigs of similar design here?

David W. Williams - Noble Corp. Plc

There's a good bit of difference technically between the Ferrington and the Max Smith and the Boudreaux, Beard, and the Runner is in that ilk, but the Boudreaux and the Beard, clearly a class apart. But the decision on the two rigs that you referred to, the Max Smith and Homer Ferrington, those are much older hulls. They have some good technical capabilities. But just as we continue through the cycle, the opportunities for those rigs versus other probably more capable rigs, we just view it as diminishing opportunities.

In terms of the cost to reactivate, I don't want to get too granular on it. But as these rigs sit, there is ongoing maintenance that's required to ensure the operability and the safety aspects of the rig that not only we require, but our customers and some cases regulatory authorities require.

So for instance, post-Macondo, where you have to recertify the BOPs every five years, that's a very expensive exercise. It's not only just the BOPs, but all the pressure control equipment. But there are riser inspections, there are hoisting equipment inspections, there's refurbishment of other equipment, mooring systems – once a mooring system is 10 years old, API recommended practice is a full evaluation of that every 18 months.

And so when you start looking at adding all that up just in terms of real dollars, the longer the rig is stacked and the more there is to do, the more it compounds. And so the more maintenance you defer, we're not accruing those costs, so the more you defer, just the bigger that pile gets. The Ferrington frankly is not in bad shape when you look at it, but the cost to put it back to work just starts to get to a point where as we see the cycle, we see better opportunities for other rigs.

K. Blake Hancock - Scotia Capital (USA), Inc.

All right, that's great. I appreciate it, guys. Thank you.

David W. Williams - Noble Corp. Plc

Sure. Thank you.

Operator

Your next question comes from Ian Macpherson from Simmons. Please go ahead. Your line is open.

Ian Macpherson - Simmons & Company International

Thanks. Good morning, everyone.

David W. Williams - Noble Corp. Plc

Good morning, Ian.

Ian Macpherson - Simmons & Company International

Hey, David. Simon, I was curious about your comment about floater demand picking up in the second half of this year, and I just wanted to maybe put some clarity around that comment, whether you see just an increase in contract startups relative to contract startups that we've been witnessing, or if you're actually seeing something that we could call a floor in contracted rig count because those could be two different interpretations.

Simon W. Johnson - Noble Corp. Plc

Yes. Look, we're further into the cycle, but we've seen some small improvements in recent months in the Gulf of Mexico. We think that will continue. Most of that is for the end of this year or even into next year. So I think in the near term, we believe there will be continued erosion in the utilization, and that will crowd out some of the incremental demand. But overall, the trend is a positive one. People are talking about 2018 programs and beyond, so really it's more of a reference to directionally the news flow seems to be improving somewhat.

Ian Macpherson - Simmons & Company International

Understood, thanks; unrelated, maybe a question for you, Adam, and welcome to Noble. Your cost guidance, I was wondering if you could give us a little bit of flavor around what's embedded in there for activity levels, particularly around the four or five rigs that will be rolling off contract throughout the year, if your cost guidance assumes a steady state of readiness or if there are warm-stacking assumptions in there or if it's a mix of the two.

David W. Williams - Noble Corp. Plc

Ian, given that Adam has been on the payroll 20 minutes and hasn't been here through the budget process, I'll go ahead and take that rather than hang him out to dry this early.

Ian Macpherson - Simmons & Company International

Okay.

David W. Williams - Noble Corp. Plc

The cost guidance we've given is a base level of guidance that we expect based on the expectation of our current active fleet with some room in the event we want to put some other rigs to work. So I would say that if we go through the year and we are not successful in finding some of the rigs that are rolling off for maybe the Globetrotter II or the Bully, then we would be at or below the low end the range. But if we start putting some rigs to work or have opportunities, we could be up into the range or push higher, but it's a fairly conservative view.

The budget going forward, there are still cost saving things that we can work on, but I would say that our cost management now really is a function of rig operating days. So even as you look into next year when we have a good bit of work already under contract, if those are the only rigs at work, we could bring costs down even further. So it's a function of utilization now.

Ian Macpherson - Simmons & Company International

Okay. Thank you, David.

David W. Williams - Noble Corp. Plc

Sure, thank you.

Operator

Your next question comes from Haithum Nokta from Clarksons Platou Securities. Please go ahead. Your line is open.

Haithum Nokta - Clarksons Platou Securities, Inc.

Hey, good morning.

David W. Williams - Noble Corp. Plc

Good morning.

Haithum Nokta - Clarksons Platou Securities, Inc.

David, on your comments around the reactivation costs related to the Homer Ferrington and Max Smith, you mentioned a lot of small things that added up to an eventual big ticket. Would you say that that's the same as it could be for some of these six-gen floaters that have been stacked in the industry for two years maybe by now and then maybe three, four years by the time the industry starts to recover?

David W. Williams - Noble Corp. Plc

It's a different animal, I think. If you take say, the Sam Croft or the Tom Madden, the way we've got those rigs stacked, those rigs are two years old, two years out of the shipyard. I would say the startup effort on those and of course we're keeping marine crews on them, so we can put to sea if we need to. And all the marine systems are hot, the drilling equipment is preserved essentially.

In those rigs, the startup of those rigs really is a function of crews and man days. There's a not a lot of capital requirements. There's not a lot of additional expense or other things. So it's a function of crewing the rig up, running the equipment and getting it hot and sparing up those kinds of consumables versus the rigs that have been idle for some period of time and are a little longer in the tooth.

When you talk about BOP recertification and mooring inspections and hoisting equipment, they maybe little to you, but – to some people, but they could be extremely costly.

When you start getting into a string riser that's five, six, seven years old and laid up for couple of years, the cost to inspect that riser and refurbish that riser and ensure that it's good for the pressures that are intended, particularly Gulf of Mexico, where you really can't work a rig that's a 10,000-pound BOP system anymore. The time and the cost of that gets – can compound very quickly.

And so, newer equipment is going to be better, easier, we'll say that some of these ships that have been cold-stacked and some of the higher tech equipment have been cold-stacked depending on the condition and how long it was really in service before, there could be some software challenges with some of those rigs that I think that software changes very quickly.

So there will be some challenges, some of the late generation rigs that have been cold-stacked that have been working for a while, but for instance, I can't speak to the whole fleet, I can speak to our fleet, but rigs like the Croft and the Madden, we don't see any real challenges in those, even the day in the Adkins, we've removed those thrusters and put them on bottom, but the age of those rigs and the condition of those rigs would make them fairly easily restarted, if we had the right opportunities.

Haithum Nokta - Clarksons Platou Securities, Inc.

Appreciate that color. Simon, I think you mentioned increasing jackup durations that you expect going forward. Was that just to the Middle East or is that kind of a global perspective? And I guess kind of related to that, is that something that you think the industry is seeing or is that maybe just kind of what Noble can maybe achieve based on its higher spec fleet compared to the industry?

Simon W. Johnson - Noble Corp. Plc

Yes, it is predominantly the Middle East. There are a few other opportunities in other geographies, which I choose not to elaborate on just now. But a lot of the requirements are slanted towards high specification units. And as you point out, our JU3000N design is tailor made to drill those more changing wells. And yes, it is typically the more demanding work that we're seeing the term crowding around in places like Qatar, Kingdom of Saudi Arabia, Dubai, and as I said further afield.

So we feel quite well placed in that market. We've got good contract cover through the rest of this year, but the rigs are hot and they are performing extremely well. As we have seen with the recent contraction in term on the rig that we have working in Brunei, not in terms of the term, but in terms of the duration, I should say. The reason that, that contract is going to finish earlier than anticipated because of the spectacular performance of the rig. That's the combination of the crews and just the fundamental outfitting and specification of the rig. So, we're quite excited with what we see coming to the market here in the near term.

Haithum Nokta - Clarksons Platou Securities, Inc.

Okay. I'll turn it back, thank you.

Operator

Your next question comes from Colin Davies from Bernstein. Please go ahead. Your line is open.

Colin Davies - Sanford C. Bernstein & Co. LLC

Thank you. Good morning. I'd like, if I can, to get a little bit more color on the extensions with Saudi Aramco. Typically, the contracts there seem to have an annual renegotiation around the pricing. Could you give a little bit more color on the extension of term there for five years and whether it's likely to get adjusted as we go forward?

Simon W. Johnson - Noble Corp. Plc

Yes. Sure. I mean the Kingdom of Saudi Arabia, that's the largest jackup market in the world today. I think there's 43 jackups that are deployed there right now. The rig count's increased significantly in the last 10 years. We believe it will continue to increase based on the projections that we've seen. Aramco is a demanding client, but obviously, they are well aware of their place in the ecosystem of demand. So, we've taken and most of our peer group have taken the stance that we'll continue to work with them as we navigate this difficult phase of the market.

I can't tell you what's in their mind in terms of future renegotiations of rate, but I can tell you that what we understand is that our rigs will continue to play an important part in their portfolio, the fact that they've awarded us a five-year contract at a healthy rate at a time where a lot of other people aren't even getting extensions at all. I think that speaks volumes to the regard that we held in, and on a relative basis, we anticipate to compete strongly there going forward.

David W. Williams - Noble Corp. Plc

Colin, I would add to that, if you will recall, those rigs when we first took them into drill these big gas wells, these cut wells there, the rates were quite a bit higher than they are now and through this renegotiation, as you refer to with Aramco, those rates came down to a range about where they are now and they've stayed in that range from $159,000 to about $160,000 for the last really three years.

So, we didn't go into this discussion with Aramco, and we're thinking they're going to get renegotiated. This has been a range they have been comfortable with and we would expect these rates to be honored through the next five years.

Colin Davies - Sanford C. Bernstein & Co. LLC

Okay. And then just one follow-up, just in terms of the market and the way you approach the tender opportunity further out there. How do you approach the rate versus term debates? I mean I would've thought that a lot of your customers are starting to think about, can I lean forward and lock in perhaps lower cycle rates for somewhat longer term. But how do you guys approach that and the need to keep the rigs busy, but not lock yourselves into too lower rates for too long?

Simon W. Johnson - Noble Corp. Plc

I think at the moment, we're still at very, very low levels of demand overall. So, in a sense beggars can't be choosers, but what I would say is there are very operators out there today with big packages of demand that they can bring into the market and seek to go long at very low rates. The state oil companies typically have played that role in past market down cycles, but – and what we're seeing today, there is few of them who're able to bring that amount of demand and put it on the table.

So, I think there's probably a lot of people who'd like to do those kind of things, but they're unable to at the moment. The IOCs are noticeably quiet as a particular part of the customer base, right now. So they are the once, I think who tend to think more strategically about those kind of things, but they simply don't have the demand that they can commit to. I do agree that there is a danger in going long on too many rigs at current rates, which I think will prove to be historic lows.

So we're trying to take a sensible approach, a mixture of some term and some shorter fixtures to the extent that we can be choosers in that process I think will position us well.

David W. Williams - Noble Corp. Plc

Colin, you are trying to insert logic into an illogical contracting strategy, I'm afraid. If these guys could go low – could go longer, now it would serve them well, but that's just not the mentality.

Colin Davies - Sanford C. Bernstein & Co. LLC

Yeah. Sure. Thank you. I will turn it back. Thanks.

David W. Williams - Noble Corp. Plc

Sure, thank you.

Operator

Your next question comes from Greg Lewis from Credit Suisse. Please go ahead. Your line is open.

Gregory Lewis - Credit Suisse Securities (USA) LLC

Thank you and good morning, gentlemen.

David W. Williams - Noble Corp. Plc

Hi, Greg.

Gregory Lewis - Credit Suisse Securities (USA) LLC

David, realizing you don't have a crystal ball, in your prepared remarks, you talked about the next phase of the cycle; clearly Noble is in a better position it is today than it was two years ago. How should we be thinking about this next phase of the cycle? What do we think that's going to look like?

David W. Williams - Noble Corp. Plc

I appreciate the question, Greg. It's – we view the recovery as a process, not a point in time. And I think that we see a decidedly different body language and mood from our customers now than we did a year ago. And so, while as Simon's already pointed out, we would expect still some of the rigs under contract, particularly some of the higher rates to continue to roll off and see some pressure on utilization. But we're having better and more conversations now with our customers for future opportunities than we have in recent months.

And so, we're not expecting a reversal of fortune overnight, but we are expecting a bottoming and a slow climb and a return to a more constructive dialogue with our customers around first utilization and then rates for the rigs that are hot, and then opportunities for some of the warm-stacked rigs and then cold-stacked rigs after that.

My view is, this recovery when it comes will be in stages. You're going to see some pricing power on the rigs that are hot. Then you'll see some pricing power on – they'll trade up to a level where there is some capacity for some of the warm-stacked rigs, and so it will ramp up in stages.

This is not going to happen quickly overnight. It can happen fairly quickly, but that's not something that we're calling now. We'll just say, our view is that we're seeing a decidedly better mood, I would say, from our customers in the industry than we were previously, and so that leads to a more constructive positioning going forward.

Simon W. Johnson - Noble Corp. Plc

One thing I would add to that too is that there's a lot of focus on capital expenditure patterns and I think the focus on dollars in that regard is actually masking changes in the underlying level of activity. So, I think if there is one thing I'd encourage people to do is look at the actual level of activity in the marketplace in terms of capital expenditure as opposed to the ultimate dollar value.

David W. Williams - Noble Corp. Plc

Good point.

Gregory Lewis - Credit Suisse Securities (USA) LLC

Okay, great. And then just one quick one for me on the two rigs that were stacked, the Smith. Those were non-DP rigs. Is that – beyond – you walked through the capital expenditure, the age of the hulls, is there anything regarding sort of your outlook on maybe what the mid-water next cycle market looks like, or is it really just rigs-focused?

David W. Williams - Noble Corp. Plc

I'm a firm believer that these people that think moored rigs are obsolete are dead wrong. There is a market for moored rigs. There's certainly a preponderance of DP [Dynamic Positioning] rigs that have been built over the last few years. But this is a situation that really was specific to our view of the future for these two particular rigs, which are good, solid drilling equipment, but on older hulls that have been idled for around – the poor old Max Smith was in the Gulf, been to Mexico, been to Brazil. It's been all over the world, working all over the world, but it's a 30-plus year old, 35-year-old hull. And the Ferrington was a new top-sides 15,16, 18 years ago, but that's a pretty old hull too.

So there's still a future for good moored equipment. We think the Boudreaux still a rig that's got a good future. We kept the Amos Runner viable because of the condition of it and where it is and what we see the near-term opportunities for it possibly. So we still believe that there's a market there. It was just the particular decision on these rigs.

Simon W. Johnson - Noble Corp. Plc

I think I would encourage you to look at the Paul Romano too. It's one of the very few hot floaters that's capable of operating in that sub-2,000-foot water depth range in the Gulf of Mexico. And I think everyone has been surprised by the resilience of work that's available in that market (53:31). The market is not over for those rigs.

Gregory Lewis - Credit Suisse Securities (USA) LLC

Okay, perfect. Thank you for the time, gentlemen.

David W. Williams - Noble Corp. Plc

Thanks, Greg. Mute your phone.

Operator

Our next question comes from Praveen Narra from Raymond James. Please go ahead. Your line is open.

Praveen Narra - Raymond James & Associates, Inc.

Hi, good morning, guys, and kudos on the strong quarter.

David W. Williams - Noble Corp. Plc

Thank you very much.

Praveen Narra - Raymond James & Associates, Inc.

I just wanted to talk on the Shell rigs. You guys have put the floor in on some of those contracts, so you have a more visible or solid and stable cash flow stream that you can point to on that. How do you guys think about considering that in those rigs and those contracts as collateral for secured debt at this point in time, or is that something you just want to hold on to as a lever for later if necessary?

Adam C. Peakes - Noble Corp. Plc

This is Adam. Look, I think the encouraging thing is, as we think about opportunities for secured debt, there are plenty of opportunities at our disposal there. But more importantly, as we think about ways to access capital, all the alternatives are open for us at this point. And we don't that for granted, but I think it's one of many things that we consider here. The bond deal that was done in December was really important, really superior execution and well timed.

And so as we sit here today, we evaluate everything from secured debt alternatives like you talk about to unsecured and all the way to equity. So everything is on the table, and we'll continue to evaluate those. And my job here is to make sure the balance sheet is well positioned for whatever the market presents, good or bad. And so that will continue to be our focus.

Praveen Narra - Raymond James & Associates, Inc.

Okay, perfect. And then as we think about some of the rigs rolling off contract in the Gulf of Mexico, and you mentioned that there are contracting opportunities for them even on the shorter-term side of things. But when we think about those rigs rolling off, does it make more sense when you weigh the costs of cold-stacking versus that opportunity cost of just keeping them warm-stacked to keep more rigs in the Gulf of Mexico warm-stacked than you have previously, or does it still make sense to follow that cost-savings route?

Simon W. Johnson - Noble Corp. Plc

Look, what I'd say is that, when we look at the Gulf of Mexico, we look at it relative to other markets. We believe that it's going to be one of the more responsive markets around the world, certainly for those floaters, and that's because of the more elastic environment, so capital investment amongst clients, the infrastructure, et cetera, et cetera.

So what we're trying to do is to ensure that we have enough rigs available to make the requirements that are in the market at the time. So we tend to want to keep one or two rigs out there that we can participate with, but we kept a watching brief on what our clients are doing through time. And the problem is that right now there isn't great visibility. So we continue to monitor it and put the rigs to work that we think we can put to work.

David W. Williams - Noble Corp. Plc

We think the warm-stacked philosophy that we've applied on the rigs that we have in Gulf will serve us well. Whether or not we have more, the Bob Douglas is actually going to sail out of the Gulf. Whether or not we would bring it back or not, that remains to be seen. And of course, there are future opportunities for it. But we'll look at different markets and different opportunities as we go, but we think where we are now will serve us well.

Praveen Narra - Raymond James & Associates, Inc.

Okay, perfect. Thank you very much, guys.

David W. Williams - Noble Corp. Plc

Thank you.

Jeffrey L. Chastain - Noble Corp. Plc

Carol, let's take a final question, please.

Operator

Certainly. Your final question today comes from Kurt Hallead from RBC. Please go ahead. Your line is open.

Kurt Hallead - RBC Capital Markets LLC

Hey, good morning.

David W. Williams - Noble Corp. Plc

Hey, Kurt.

Kurt Hallead - RBC Capital Markets LLC

David, I appreciate you breathing a little bit of life into the offshore drilling market this morning.

David W. Williams - Noble Corp. Plc

Kurt, I don't think we can take credit for it. We're just reporting what we see.

Kurt Hallead - RBC Capital Markets LLC

Hey, I'll give you credit for it no matter what.

David W. Williams - Noble Corp. Plc

Thank you.

Kurt Hallead - RBC Capital Markets LLC

Hey, no worries. So I just want to gauge a couple things. You guys indicated some increase in demand in the Gulf of Mexico going into the back half of the year. When I look at your fleet right here, you've got – let's see, three, four, five rigs that are sitting idle in the Gulf of Mexico, floaters that are sitting in the Gulf of Mexico right now. I had three of those going back to work, so really capturing that incremental demand. But on one of them, I'm really curious about, which is the Boudreaux, and you might have mentioned it before. So you took big impairments on the Boudreaux, the Beard, and the Runner. That would almost infer to me you don't expect those rigs are going to come back into the marketplace. Could you add a little bit more color around that?

David W. Williams - Noble Corp. Plc

I would disagree with that. I think if we didn't think they had a place in the marketplace, we would have taken them down to zero and cut the cord, if you will. The Boudreaux has a great track record. It's a very versatile rig, and we think it has broad applications certainly in the Asia markets. And frankly, we see opportunities for it as we sit today. So we view its ability to compete, it's a deepwater moored rig, which I think has certain applications. But given the shape of the deepwater market now with more deepwater – or excuse me, dynamically positioned than other rigs, we just see the pricing power of that rig long term as a bit of a challenge. But in terms of working capability, the rig's got good life left in it, we believe.

The story is similar for Dave Beard. It's a smaller hull than a lot of the other DP rigs that have worked in, and so it may be – it may work at a little bit of a – at somewhat disadvantage in terms of the technical features of the rig. But its operability in the right market, we see good long-term viability. And so that really was a function of its particular positioning against the rest of a very high spec fleet around the world going forward. But we think the rig still has good utility, it's got a great track record, it did perform very well in Brazil. But it's a DP2 hull with big drilling package on a small platform.

And so, both of those rigs we view as having additional utility as we do the Runner. The Runner in the Gulf of Mexico, there are not a lot of very competitive quality moored semis in the Gulf of Mexico that can service this need. This is a market that requires, when it's active, a decent number of moored semis and with the rules post Macondo, you really need a 15k stack. And so, it's just not that many of them here, and so we see good utility for that rig in the future and that's why we didn't take it all the way to zero. So we had a different view of the Max Smith and the Ferrington than we do those three.

Kurt Hallead - RBC Capital Markets LLC

Got it. And that's great color and in the interest of time, I will keep it there. Thanks again.

David W. Williams - Noble Corp. Plc

Kurt, thanks very much.

Jeffrey L. Chastain - Noble Corp. Plc

Okay. With that, let's close today's call. I'd like to appreciate – I'd like to thank everyone and we appreciate your interest in the company. Please make a note that we expect to report our first quarter 2017 results on May the 4th with a call to follow on the morning of the 5th. Carol, we appreciate your attention today in coordinating our call and good day everyone. Have a good weekend. Thank you.

Operator

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

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