Transocean - Earnings Call - Q3 2020
November 3, 2020
Transcript
Speaker 0
Ladies and gentlemen, good day and welcome to the Third Quarter twenty twenty Transocean Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Lexington May, Manager of Investor Relations. Please go ahead, sir.
Speaker 1
Thank you, David. Good morning, and welcome to Transocean's third quarter twenty twenty earnings conference call. A copy of our press release covering financial results along with supporting statements and schedules, including reconciliations and disclosures regarding non GAAP financial measures are posted on our website at deepwater.com. Joining me on this morning's call are Jeremy Sigpen, president and chief executive officer Mark May, executive vice president and chief financial officer and Roddy Mackenzie, Senior Vice President of Marketing, Innovation and Industry Relations. During the course of this call, Transocean management may make certain forward looking statements regarding various matters related to our business and company that are not historical facts.
Such statements are based upon the current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for more information regarding our forward looking statements, including the risks and uncertainties that could impact our future results. Also, please note that the company undertakes no duty to update or revise forward looking statements. Following Jeremy and Mark's prepared comments, we will conduct a question and answer session.
During this time, to give more participants an opportunity to speak on this call, please limit yourself to one initial question and one follow-up. Thank you very much. I'll now turn the call over to Jeremy.
Speaker 2
Thank you, Lex, and welcome to our employees, customers, investors, and analysts participating in today's call. As we have since March, we continue to work remotely to do our part to prevent the spread of COVID-nineteen. Therefore, please forgive any challenges associated with maintaining audio quality during this call. As reported in yesterday's earnings release, for the third quarter, Transocean delivered adjusted EBITDA margin of almost 41%, with three thirty eight million dollars in adjusted EBITDA on $830,000,000 in adjusted revenue. Importantly, this strong operating performance, which was driven by our experienced and committed teams, enabled us to generate $81,000,000 in operating cash flow.
Despite a number of challenges, including a global pandemic and an extremely active storm season in the Gulf Of Mexico, we continue to deliver safe, reliable and efficient operations for our customers around the world. During the third quarter, we had 26 active rigs across 10 countries. To put just some of our pandemic related challenges in perspective, I will share with you that before a crew change, 14 of our rigs require crew members to enter a secured quarantine period ranging from five to fourteen days depending on customer protocols and country regulations. And they must also have a negative COVID nineteen test before joining the rig. In addition to the delays associated with quarantines and testing, to reduce overall exposure, we have asked more than 2,500 of our crew members to serve extended hitches, meaning even more time away from home, family, and friends.
In addition to the quarantine periods and extended hitches, while onboard our rigs, our crews are subjected to daily temperature checks and are required to wear face coverings and practice certain social distancing protocols when possible. Needless to say, these are suboptimal operating conditions, yet our crews persevere with absolute resolve. Their sacrifice and dedication to our company is truly inspiring. And it's not just our crew members demonstrating their commitment to Transocean success. Our excellent customer service could not be delivered without the contribution of the entire organization, including our shore based staff.
The logistics involved in planning, coordinating, testing, executing the movement of thousands of personnel, spare parts, and pieces of equipment during a global lockdown is nothing short of extraordinary. COVID-nineteen has forced our organization to adapt. Our offices around the world largely remain closed, and our employees continue to work remotely to help mitigate the spread of the virus. Virtual meetings and remotely provided expert technical RIC support are the new normal. And as a testament to the strength and resilience of our entire organization, we have continued to deliver the same high level of performance as we did before COVID-nineteen.
For all of this, I extend my deepest gratitude to all of the men and women of Transocean for the personal sacrifices they make each and every day to keep our rigs operating safely, reliably, and efficiently to support our customers. We faced tremendous challenges as a result of COVID nineteen. However, the strength and resilience our team has demonstrated throughout this pandemic is truly remarkable. We will continue to take every necessary precaution to keep our crews and our shore based personnel safe and healthy for as long as necessary while we deliver best in class operating performance to our customers. Now looking more closely at our third quarter performance, as a whole, our fleet continues to meet and often exceed expectations.
I'm extremely proud of our crews for the $10,000,000 in performance bonuses achieved during the third quarter as a result of exceeding our customers' drilling schedules. This is a direct result of our collective efforts each day to continuously improve Transocean, including through our investments in high specification assets, the development and deployment of innovative technologies, and our industry leading training programs. In addition, we have aligned interest with our customers by linking compensation and performance, a practice that many of our competitors have issued, resulting in an enhancement to our revenues. Obviously, this high level of performance helps in the efficient conversion of our $8,000,000,000 backlog into revenue, and ultimately into cash. Now turning to the fleet, starting in Canada, the transition Barron's recently completed a successful campaign with Equinor.
Since future prospects in Canada are somewhat bleak and demand in Norway continues to be robust, we have already begun the process to prepare her for mobilization to Norway. In Trinidad, the DD three completed her first full quarter of operations with Shell and continues on her one year contract until mid two thousand twenty one. We believe the DD three is well placed, and we are encouraged about potential follow on opportunities in the area. In The UK, Chrysler kicked off its ten month campaign with the Paul B. Lloyd Jr.
As you may recall, the work was originally slated for the 07/12, but was transferred to the Paul B. Lloyd, allowing us to further rationalize our fleet. Last quarter, we reported the anticipated early termination of the Deepwater India's work in Egypt. However, upon review of the successful drilling program, coupled with the improvement of oil prices, Borelis reversed course and fulfilled the full program without early termination. This kept the India drilling into July.
Unfortunately, with no near term prospects on the horizon, we moved quickly to cold stacker in Greece. Moving to offshore India, I'm pleased to report Reliance exercised its one hundred and eighty day option on the KG one. This will keep her busy through the 2021. Moving to Asia Pacific, the DD one recently completed her successful campaign in Australia with Chevron. As we currently do not see any near term opportunities for her, we have decided to cold stack her.
And finally, the k g two, just this week, commenced her contract with Woodside in Myanmar and is currently on standby at a reduced day rate. We believe that Woodside will commence mobilization in January, at which point we will be on full operating day rate of $250,000 per day. In addition to keeping our active fleet working, we remain diligent in assessing our fleet for ongoing marketability. And as we have demonstrated since the start of the downturn in 02/2014, once we determine that a rig has few profitable opportunities, we quickly removed her from our active fleet. Consistent with past practice and our disciplined philosophy on retirements of less competitive units, upon the completion of her recent drilling campaign, we decided to recycle the Transocean Arctic.
Looking now at upcoming market opportunities, the contracting environment has materially improved from when we last spoke three months ago, when there was minimal customer interest. As a reminder, when we entered 2020, we were starting to see tangible signs of the recovery unfolding. Our high specification harsh environment assets were fully utilized, day rates exceeded $300,000 and visibility to future work was very encouraging and improving. And in the ultra deepwater markets, utilization was also starting to trend higher. Indeed, at the 2019 and early twenty twenty, we were awarded several ultra deepwater fixtures with day rates around $250,000 a day, which represented a 100 increase from fixtures signed earlier in 2019.
In light of these data points, we were increasingly optimistic that the protracted market recovery was picking up sustainable momentum. Unfortunately, the world was hit with COVID-nineteen, reducing demand for energy. This, when coupled with a temporary increase in supply that was spurred by production disputes among major producers, drove oil prices to historic lows, stalling the momentum that we were experiencing through early twenty twenty. Understandably, this caused many of our customers to pause and reassess how and when to utilize the respective portfolios, and ultimately led to them delaying many of the projects that we expected to be sanctioned in the latter half of this year and the 2021. While the delay in awards has certainly been disheartening, we're encouraged by the fact that most of these previously anticipated projects have not been canceled.
Instead, they've been deferred by approximately twelve months. In fact, our bidding activity level this quarter has doubled from the low point in the second quarter and has returned to pre COVID levels. During the third quarter, we participated in 18 bids, which is the same amount we participated in during the 2019, just before COVID hit. Taking a closer look around the globe and starting in The U. S.
Gulf Of Mexico, while the near term is a bit challenging, a handful of projects with start dates in the 2021 are beginning to emerge among independents, IOCs, and NOCs. In Brazil, Petrobras recently awarded long term fixtures for the Tres Marinus project in the pre salt, and we expect to see several more Petrobras awards in the near future. Furthermore, Equinor has recently retendered its four year program in the Bacalab field, and we remain encouraged by the improving activity in Brazil. Moving over to Norway, we are excited about the opportunities unfolding as a result of the Norwegian government's recent enactment of favorable tax incentives for oil and gas projects sanctioned over the next two years. We anticipate this market will continue to tighten as more projects are brought forward to capitalize on the favorable investment incentives.
In fact, we've identified two dozen projects that could be given the green light as a result of the tax change. If all of these projects move forward, we believe that the market for high specification assets could be sold out as we exit 2021 and enter 2022. And with the most recent fixtures for such assets around the $300,000 per day mark plus performance bonus incentives, we are optimistic about the future prospects of our industry leading fleet in Norway, which once again will soon include the transition barons. In Africa, excluding Total's multi year tender for Mozambique, which could be awarded in the coming months, we see several medium and long term programs that could be awarded for work beginning in 2021. In the Asia Pacific region, including Australia, we anticipate 11 awards will be made over the next few months for work starting in 2021.
As you may know, this region has demonstrated continued activity through these difficult times, and the volume of opportunities is nearing pre COVID nineteen levels. In summary, while we are certainly disappointed that the ultra deepwater recovery continues to be delayed, we are encouraged by the emergence of multiple opportunities for work in 2021 and beyond. While we take some comfort in our approximately $8,000,000,000 backlog, we remain very pragmatic, recognizing the challenges to the industry and specifically those that Transocean will continue to face in the near term. As such, we will continue to take the necessary actions to preserve and enhance liquidity, including, but not limited to, delivering flawless operations that enable us to convert as much of our backlog into revenue as possible, further improving our cost structure to fit the evolving active fleet, quickly cold stacking or scrapping nonworking idle assets, and executing timely and opportunistic financing transactions. In this regard, as you likely know, the third quarter was very active from a capital markets perspective.
During the period, we undertook a series of actions to reduce our debt, and more importantly, did so while also improving our liquidity forecast. As a result, during the quarter, we successfully reduced our debt by almost $1,000,000,000, reducing our interest expense and extending our liquidity runway as we continue to navigate through this economic cycle. And as we have demonstrated over the last several years, we're not done. Our finance and legal teams have proven time and again that we can successfully execute fiscally responsible transactions and favorably resolve disputes as they arise. We will continue to be proactive in managing our balance sheet in a way that enables us to continue to invest in our people, our assets, the and development of new and differentiating technologies.
I would now like to provide a few comments regarding the state of the offshore drilling sector from our perspective. The majority of our peers have either formally started the restructuring process or taken steps that indicate that they are likely to do so in the near future. Given our large backlog, strong operating performance, and liquidity enhancing balance sheet transactions, Transocean is in a very different and advantageous position relative to our competitors, as we are not currently facing a restructuring decision, nor are we experiencing the difficult and sometimes demoralizing and crippling distractions associated with such a process. Instead, we believe we have the liquidity to continue to prudently invest in our business, and importantly, we are able to maintain a singular focus on delivering best in class operations to our customers. As our competitors emerge from restructuring, it is possible that we may see some consolidation, which we believe is a natural and inevitable result based upon industry economics.
Furthermore, marketable supply of rigs is likely to fall at a pace that we expect will eventually meet with the contracted rig count, which we are already starting to see. Therefore, when oil prices stabilize at more favorable levels, an inflection in rig contracting should have an almost immediate and positive impact on dayrates due to the shortage of marketable rigs and the significant expense associated with reactivating stacked rigs. Transocean will continue to take the necessary actions to ensure that we maintain the most competitive fleet in the industry and remain disciplined in our approach to contracting that fleet. In conclusion, Transocean has strategically assembled the largest and most competitive floating fleet in the industry, with the industry's most experienced crews and shore based support teams. We maintain the largest contracted fleet with the strongest and most lucrative backlog, providing us with the visibility to future cash flows that we need to continue to invest in the training of our crews and the maintenance of our assets.
As such, we are best positioned to survive this latest challenge and benefit from the eventual market recovery. We've accepted that a full scale recovery in the deepwater offshore market will not likely begin before the 2021. However, as the market has begun to stabilize, it gives us confidence that our customers will be ready to increase their offshore activity in the years to come. In the interim, we are committed to our customers and to the preservation and generation of cash flows. We are proud to have positioned ourselves as the clear leader in harsh environment and ultra deepwater drilling, and we'll continue to strategically refine our fleet to further enhance that position.
As such, we expect that our marketed fleet will remain the industry's most utilized as we successfully navigate this current economic cycle. With that, I'll turn it over to Mark.
Speaker 3
Thank you, Jeremy, and good day to all. During today's call, I will briefly recap our third quarter results, provide guidance for the fourth quarter and provide preliminary estimates on our financial expectations for 2021. Lastly, I will provide an update on our liquidity forecast through 2022. As reported in our press release for the 2020, we reported net income attributable to controlling interest of $359,000,000 or $0.51 per diluted share. After adjusting for favorable items associated with retirement and restructuring of our debt and discrete tax items and unfavorable items associated with the loss on disposal of assets and liability management costs, we reported an adjusted net loss of $59,000,000 or $0.11 per lift share.
Further details are included in our press release. Highlights for the third quarter include adjusted EBITDA of $338,000,000 reflecting strong fleet wide revenue efficiency coupled with robust performance bonuses. Fleet wide revenue efficiency exceeding 96%, reflecting our operational excellence and strong backlog conversion, $81,000,000 in operating cash flow. Looking close at our results during the third quarter, we delivered adjusted contract drilling revenues of $773,000,000 driven primarily by strong revenue efficiency and $10,000,000 performance bonuses across the fleet, as well as a short extension of the Transocean Bowens drilling contract. Operating and maintenance expense in the third quarter was $470,000,000 This is better than our guidance and due to the timing of in service maintenance and lower than expected costs associated with COVID-nineteen.
During the quarter, we recognized approximately $14,000,000 of COVID related expenses, of which approximately half are reimbursable by our customers. Turning to the cash flow and balance sheet. We ended the third quarter with total liquidity of approximately $2,900,000,000 including unrestricted cash and cash equivalents of approximately $1,400,000,000 approximately $200,000,000 of restricted cash for debt service and a $1,300,000,000 undrawn revolving credit facility. As Jeremy mentioned, during the quarter, we undertook a series of steps to further strengthen our balance sheet by meaningfully reducing our debt. In early August, we initiated exchange transactions for multiple series of our debt maturities, utilizing as a currency and as permitted by existing indentures and new senior guaranteed debt structure.
As a result of these exchanges, we'll be able to reduce our debt burden by almost a billion dollars by consuming any cash, thereby improving liquidity by approximately 250,000,000 through 2024, which is inclusive of $90,000,000 of net interest savings. Interest savings to the maturity of the exchange bonds exceeds $560,000,000 Furthermore, during the quarter, we also opportunistically repurchased approximately $49,000,000 of our debt in the open market resulting in more than $20,000,000 of savings. We continued our efforts to improve our balance sheet in October by initiating a cash tender offer for several series of our near dated debt maturities. As noted in the press release last week, tender participation has been very good, and we've already retired approximately $348,000,000 face value of debt at a discount of approximately 39%, resulting in a balance sheet improvement of more than $135,000,000. Including cash interest savings, this tender also improved our liquidity through 2025 by approximately $200,000,000 thus far.
The tender offer closes on November 9. The exchange transactions and cash tender are the latest actions in the long list of financing transactions that we've undertaken to improve our financial flexibility and capital structure since the beginning of the industry downturn six years ago. Since 2016, we have retired approximately $9,400,000,000 of mostly near dated maturities through various ordinary course and liability management transactions and issued approximately $9,300,000,000 of new debt via the Quebec capital markets. We will continue to take actions to improve our liquidity runway and capital structure for the benefit of our shareholders. Let me now provide an update on our expectations for the fourth quarter.
For the 2020, we expect our adjusted contract drilling revenues to be approximately $710,000,000 reflecting a revenue efficiency of 95% fleet wide. This reflects lower fleet wide activity as five rigs. The Discovery India, Discovery Inspiration, Transocean Barrens, Transocean Leader, and Transocean Arctic all concluded their recent respective drilling campaigns. Furthermore, the installation is now warm stacked in The US Gulf Of Mexico. The India and the leader have both been cold stacked in Greece and Norway respectively.
And as Jeremy mentioned, we have scrapped the Arctic, and we are mobilizing the parents to Norway. Which will be well put to simple work in 2021. We expect fourth quarter O and M expense to be approximately $455,000,000 The quarter over quarter decrease is attributable to a lower activity as a result of rigs rolling off contract. We expect G and A expense for the fourth quarter to be approximately $42,000,000 in line with the prior quarter. Net interest expense for the fourth quarter is expected to be approximately $145,000,000 This forecast includes capitalized interest of approximately $13,000,000 and interest income of $1,000,000 Capital expenditures including capitalized interest for the fourth quarter are anticipated to be approximately $55,000,000 This includes approximately $37,000,000 for our newbuild drillships under construction and $18,000,000 of maintenance CapEx.
Our cash taxes for the fourth quarter are expected to be approximately $3,000,000 Now I'd like to provide a first look at our financial expectations for 2021. We anticipate adjusted contract drilling revenue to be between 2,600,000,000.0 and $2,800,000,000 any percent of which monetizes previously established contract backlog. Furthermore, we believe our full year 2021 operations and maintenance expense will be between $1,400,000,000 and $1,600,000,000 And finally, we expect G and A to be between $150,000,000 and $160,000,000 Turning now to our projected liquidity at 12/31/2022. Including our undrawn revolving credit facility and potential securitization of the Deepwater Titan, our end of year 2022 liquidity is estimated between $1,100,000,000 and $1,300,000,000 This liquidity forecast includes an estimated remaining twenty twenty CapEx of $55,000,000 and a 2021 CapEx expectation of $1,500,000,000. The 2021 CapEx includes $1,400,000,000 related to our newbuilds and $100,000,000 for maintenance CapEx.
As always, our CapEx guidance excludes any speculative rig reactivations or upgrades. Now I'd like to address the recent news regarding our compliance with the New York Stock Exchange. During October, we received a continued listing standard notice from the NYSE because the average closing price of our shares fell below $1 during a consecutive thirty day trading period. We plan to remediate this deficiency and regain compliance well within the time period allotted by the NYSE, and we remain in compliance with all other NYSE listing standards. In conclusion, in addition to the safe and efficient operation of our regs, we continue to focus on preserving and enhancing our liquidity while opportunistically reducing our debt.
We proactively manage our balance sheet and capital expenditure requirements and explore all opportunities to reduce costs without compromising operational integrity or the safety of our employees. I'll now turn the call over to Lex.
Speaker 1
Thanks, Mark. David, we're now ready to take questions. And as a reminder to the participants, please limit yourself to one initial question and one follow-up question.
Speaker 0
Thank you. Ladies and gentlemen, at this time, the floor is open for your questions. If you would like to ask a question, you may do so by pressing star one now. If Our first question comes from Connor Lynagh with Morgan Stanley.
Speaker 4
Yes. Thanks. I wanted to focus on the back half 'twenty one opportunities you were discussing. I appreciate the commentary around that. I guess what we're trying to figure out is what do you think the customer sensitivity to to oil prices is these days?
And and how would you think about if oil prices remain, you know, broadly where they are today or or move up, you know, 5 to $10? How would you think about the relative sensitivity of those opportunities?
Speaker 2
Yeah. Connors, this is Eric. I'll I'm let Roddy chime in. From our perspective, there's still so much uncertainty in the world. When do we find a real solve, if you will, for COVID, and what does that do to global economies, and when does that take place?
Then how does that impact oil prices, certainly? As we saw in 2019, we had a relatively stable oil price that bounced around $60 a barrel for quite a period of time, That's really where we started to see these offshore projects pick up with some earnest. I think right now our customers are growing increasingly encouraged that oil prices have moved up from their bottoms, have stabilized a bit, and that if we can get through the election and determine what the landscape is going to look like there and then start to find whether it's a vaccine or whatever kind of solve for COVID, I think that that gives them even more confidence. That is if you can get oil prices up closer to $50 a barrel, I think we start to see quite a bit more activity. Roddy, don't know if you want to add to that.
Speaker 5
Yeah, I would just add to the fact that if we do go up another $10 or $15, that will really make a huge difference. Because, I think as we've mentioned this before, our customers have spent a tremendous amount of time retooling their wells, simplifying the designs to make them more and more profitable at, you know, around about that $50 mark. So I think if we can see something sustained at around the $50 mark, then, you know, that's that's that's gonna bode very, very well for offshore drilling where, you know, our competitiveness has relatively increased substantially over the past few years.
Speaker 4
Yeah. Makes sense. If if you could speak in broad terms, I know you don't wanna give away too much for competitive reasons, but but these opportunities that you're starting to see, how should we think about and certainly, I think you alluded to this on the harsh environment side of things. But on the benign environment rigs, what do you see contract durations, rates trending? It seems it certainly seems like things have been holding up a bit better relative to the prior downturn, but but just any broad comments around that would be helpful.
Speaker 5
Yeah. Yeah. That's a really interesting point. We were actually gonna make that point, that if you compare to where we were before in the previous, blip, day rates that Jeremy had alluded to had been down pretty low in the kind of mid 100s. But, you know, now, we're seeing that the bottom end of this is clearly not there.
Know, the I think some of the lowest rates we're really seeing are, you know, the one eighty to one ninety mark. You know, while we are certainly not there, you know, some folks are, but there seems to be, you know, just the economic reality of delivering the the service is kicking in. And I think we also expect to see that, you know, with the number of tenders that are coming out in places like Brazil, a lot of awards being made in other parts of Latin America, the the day rates seem to be less of a spread, and everything seems to be moving up a bit. So, you may see some near term, competitive stuff, but we think because of a lot of these tenders are now multiyear. In fact, there's probably, at least half a dozen multiyear tenders out there just now.
We we think that is going to have folks bidding, you know, above 200, and, those that are, you know, looking at four and five year terms are well above 200. They're gonna be closer to 300. So, you know, remains to be seen whether the operators move on those right now. But, certainly, we're optimistic about that because we certainly haven't seen the the depth of, day rate drop that we did last time around. So, clearly, economics are are better this go around.
Speaker 4
Yeah. Just to to sneak one more in here. Is what do you attribute that change in behavior to? Is it is it less optimism, less less sort of logic of, well, I just maintain the customer now, and I'll monetize later? Is it is it more financial constraints?
What basically, what what I'm what I'm, you know, trying to figure out here is if if your competitors do emerge with, cleaner balance sheets, probably not a ton of liquidity, but maybe more than they're working with today, does that derail this this discipline, or do you think it's more sustainable than that?
Speaker 2
Sorry, personal response Reddy. I don't believe it does. I think it could in the short term. If you're looking at individual rigs that are rolling off contract and they're just looking for a near term filler opportunity, you might see a little more competitive play to try to just position that rig for short duration. But as we said in the prepared remarks, and we're starting to see play out, we're starting to see more rigs cold stacked more quickly, more rigs scrapped, so the real active marketable fleet is shrinking.
And so if you want to get into one of these long term arrangements, then it's gonna require a rig reactivation. But like you said, their liquidity will be improved, but, you're looking at a $50,000,000 plus ticket to reactivate an asset. You can't do that in today's day rate. You have to go much higher or you have to get compensated on the front end from the operator. Go ahead, Roddy.
Speaker 5
Yeah. Yeah. Sure. I was gonna add to that that, you know, there's been a few mistakes made in the past. You've seen folks do the reactivation and mobilization speculatively, and it just didn't work out.
So I think there's a lot of hard lessons being learned. And I also think there's gonna be a tremendous expectation to create some form of earnings from these contracts. So as Jeremy said, reactivation costs are gonna curtail that dip in the rates again. But, you know, more interestingly than than that, the the the relative utilization of of high spec assets is is only going to get better. You know, as the opportunities have dropped in the latest COVID dip, so has the number of active rigs.
So if you look at the chart of, you know, the the seventh gen, drillships, of those that are stacked, the vast majority are cold stacked. So they aren't coming out anytime soon. And then we actually look at the the list that that I track, there were six or seven rigs, you know, that are listed as being warm stacked, and we know that four to five of them already have, you know, leading positions and tenders that will take them out of the market. So you really do find yourself at a situation that's similar to the the back end of '29 sorry, 2019 when we, we saw that that boost in rates from that kind of one fifty level up to the two fifty level, And it's just driven by the fact that there are fewer assets available.
Speaker 4
Makes sense. Thanks for the color.
Speaker 0
Thank you. Our next question comes from Taylor Zurcher with Tudor Pickering Holt.
Speaker 6
Hey, good morning and thank you. I appreciate all the color or the initial color on 2021. And if I'm doing my math correctly, the implied EBITDA number for 2021 is much better than what consensus is thinking right now. And so, Mark, I think I heard you say that at the revenue line, about 80% of your forecast is contracted today. And so a two part question.
For the other 20%, could you help us understand which rigs that are currently idle today are going to help move the needle the most or that you see the best opportunity for work in 2021 embedded in that forecast? And then secondarily, it seems like the biggest delta would be at least versus our thinking, would be on the cost side. So it's good to see that. If I just take the midpoint of the cost guidance for 2021, I think that's about 1,500,000,000 and divide that by four, that's $375,000,000 type quarterly run rate for 2021 relative to $455,000,000 you're guiding to in Q4 of this year. Just hoping you could help us understand how you get to that structurally lower cost run rate moving forward, absent a number of rigs rolling off contract in coming quarters.
Thank you.
Speaker 3
So thank you. Good morning. Let me respond to your first question regarding the 20% of spec revenue that's brought into our forecast. It really comes down to four or five regs. One being the Asgard, the Inspiration, the d d three, and the Norga.
And those are almost equally split between those. Then we've also got two other rigs, the Petrobras 10,000 and the Nautilus. They're coming at much lower numbers for for next year. So like I said, four rigs would drive the vast majority of that 20% of spec revenue. As you look at the cost for next year, it's not I think your your calculation of dividing the 1.5 by four is is a is a way of doing it.
But as you know, RINs are gonna be coming off throughout the year. As they come off, costs would be reducing on a quarter by quarter basis. Next year, we also see the full benefit of our cost cutting efforts, which we implemented this year throughout the second half of the year. As the rigs came off contract, we've had to reduce costs. We've stacked, cold stacked several rigs.
So all of that has happened incrementally in '20, '20. It'll in 2021, we get the full benefit in day one.
Speaker 6
Got it. That's helpful. Second question is on liability management from here. Clearly, you've been extremely busy over the past few months, which has really good to see. Moving forward, you still have quite a bit of CapEx slated for 2021 on the two newbuilds that you have remaining.
Can you talk about the timing of those back end payments and whether there's any potential to potentially push those out a little bit to the right. You've seen a lot of your competitors do that over the years, and I know you've got contracts in place for these two rigs, and there's some time constraints there. But do you see any potential as part of your liability management playbook to figure out a way to to push those those back end payments to the right a little bit?
Speaker 3
I would look at that, you know, to a certain light. That really isn't liability management. Know, we have a a commitment to shipyard for those two rigs, and, obviously, the final payments have been delayed several times in the past. With those rigs now slated to be delivered next year, we would need to take delivery of those rigs and pay the payments at the time. That being said, you know, we're always in conversation with, our vendors, including the shipyards.
And, there's a potential that, something could happen there, but at this stage, we are we are not, pointing to anything specific.
Speaker 6
Understood. Well, thanks for the answers.
Speaker 0
Thank you. Our next question comes from Kurt Hallead with RBC.
Speaker 7
Hey, good morning.
Speaker 2
Morning, Kurt.
Speaker 7
Hey. Thanks for that, thanks for that color. I wanted to, come back around, make sure that I understood some of the dynamics around the market outlook correctly. You guys talked about how currently ultra deepwater rates, are in the one eighty to one ninety range effectively. Looks like they're unchanged over the last few months.
Then you men mentioned, at least, half a dozen tenders on multiple years. And then I thought I heard you something heard something that, you know, with day rates approaching $300,000 a day for those multiyear tenders. Could you could you go back and just kinda clarify that, a bit?
Speaker 5
Yeah, sure. Hey, look, so I said that the low end is that 180 to 190. We're seeing, responses to tenders all the way up to 300 ks a day, but that's really because, of the length of term. So, I mean, I would say that the near term market is somewhere between, like, $1.80 to two thirty. And then that long term market looks to be substantially higher.
And and it really depends on how many rigs will be taken by these long term prospects. And and what you see there is essentially the low bidder is being taken first. So as as those rigs come off the market, in other words, they're committed, then, the balance of rigs available combined with, you know, the relative few number of, warm assets, we think that's gonna really help push the dynamic. So, hope hopefully, that makes sense. You know, as we see an uptick in bidding activity now, that should translate into an uptick in award six, nine, twelve months from now.
Speaker 7
Got it. Sorry. That's helpful. And then then, Jeremy, I'm I'm wondering if you could help us put into context. You've been among the leaders of taking assets out of the market and rationalizing your fleet.
I was wondering if you could give us some general sense as to maybe how many rigs you could expect to rationalize in 2021 and maybe put that into broader context of how many industry wide assets could be rationalized next year.
Speaker 2
Well, I take offense to among the leaders. I mean, we've been the clear leader, unfortunately.
Speaker 8
Yeah.
Speaker 2
With respect to our own fleet, I think you continue to watch us follow past practice. I mean, we've been pretty consistent as rigs roll off contract and we see limited prospects for them and we don't see them as overly marketable or profitable going forward. We won't waste any time in removing those assets from from our fleet. But I I'd tell you, you know, given what we've done so far, we've we've pulled vast majority of those assets out of the fleet as you as you well know. But, certainly, there could be a couple more, going forward, but, but we'll address those as they as they come.
Regarding the rest of the industry, it'll be interesting to see how these competitors emerge from restructuring and whether as part of that restructuring they are forced to retire, recycle some of the older, less capable assets. Our expectation is they will because they're just too costly to keep around and not overly viable going forward. That'll certainly help with the supply side on the spreadsheet. But candidly, we've said for for a long time now, we're we're not as worried about the total number in the Excel spreadsheet because we know, a lot of these rigs will never find another contract. But optically, it'll certainly it'll certainly improve things.
Speaker 3
Okay. Great.
Speaker 8
I think and that
Speaker 5
yeah. We we just see, you know, several of our competitors as their transitioning management teams are are making a lot of overtures around simply taking that supply out because it's, a, it's just not viable, and b, it does not help market dynamics. So, we encourage that.
Speaker 7
Got it. And may maybe one for Mark. What what do you what do you anticipate the securitization of the Titan debate?
Speaker 3
So, Kurt, as you know, that's a five year contract with Chevron at a pretty healthy rate. So I think we could get somewhere between $3.50 and $400,000,000 of secured financing against that rate. Okay. Awesome. Hey, thanks for
Speaker 7
the color, everybody. Appreciate it.
Speaker 2
Thanks, Kirk.
Speaker 0
Thank you. Our next question comes from Frederic Steen with Clarksons Plateau Securities.
Speaker 8
Hey, guys. Thank you for for your optimistic comments today. It's it's nice to hear that, it's more activity out there now than than it was three months ago. What I'm wondering about today is or or has to do with rig efficiency and and how your customers have approached that. And I'm thinking, you know, Equinor was with with the recent trade award was very vocal that they're now looking even more at cost per well versus adjusted day rate.
So so have you, I think it's been in place for some time, but have you kind of felt that even more now, when you're hearing about the high grading of of fleets, cold, stacking, scrapping, etcetera, leaving the best assets on water? Is that something that you you you feel will will be important both from our competitive standpoint going forward, but but also from a a utilization standpoint? And as a follow-up to that, since I mentioned Equinor, you're taking the Barrens to Norway. How do you view the rig contracting chance for the four rigs you have with Equinor already? Thanks.
Speaker 5
Yeah. Let me take the efficiency question first. So, look, that's been the push over the past several years. And, really, I think why we're seeing, offshore, particularly, you know, deepwater and harsh environment, doing well in terms of collecting bonuses and and and that kind of stuff. It's it's all about that well cost.
And the push for the well cost is not only obvious that it's it's better to drill a well for less cost, but, you know, it typically brings the well on earlier. So then you have less spread rate that runs for a longer time. And then you get earlier production, and you get to drill more wells in the same period of time. So it really is the the catalyst to more and more activity. So, yes, we are fully behind that push.
We have our customers, you know, equally participating in upgrades to rigs and allowing us to make substantial compensation on that. So it's it's a very healthy environment from that point of view in terms of performance and high specification assets. So you'll you'll have heard us say many times that that is our philosophy is to be at that cutting edge of performance, but, not because it's just, not only fun to be there, but it because it drives the economics of more activity and puts you in a better spot, reputation wise with the customers. They know if they pick up a translucent rig, then, they're gonna be drilling the fastest wells out there. So, look, that's really important for us and, obviously, makes a a big difference in terms of how much we can collect on a contract and how much profitability is in it for the operators as well.
The second part of your question was around, you know, bringing the Barents, to Norway. So, look, that that's her natural home. She was in Norway for a long time. She operated extremely well there. So she but over to Canada, Very successful campaign, from our point of view, operations wise, also from a financial point of view, worked out very well.
So, yep, we bring her back to Norway, you know, without tipping our hand. We're we're in discussions with a few folks. But, we think that the market in Norway is continues to be robust for those high specification and high performing assets. We do see a bifurcation between the lower spec assets or the, how would you say, the the lower performance reputations, and and and rates that is, you know, driving apart at a substantial clip. So really, think that those high specification assets are gonna see work.
They're gonna see it at solid rates. And while there may be a few gaps here and there on some schedules, we think it's gonna be a fairly robust activity, especially towards the '21 when, we begin to see, a lot of the tax incentives that were offered by the Norwegian government kick in and stimulate more activity. So, anyway, that's the long and short of the reason for bringing it to Norway, but, but, it seems to be a really good fit for the rig, and, we're we're fairly positive on her.
Speaker 8
Yeah. Super. Thanks. Also on the just just to follow-up there. The four rigs that you have with Equinor in Norway already, how do you view the outlook of of those rigs?
I I I spent a lot of time discussing with investors around those recently. So I think, you know, anything that you can give, do you think that they will be extended, that there's work for for that kind of rigs with, you know, the the midwater rigs, completion drilling, etcetera, in in the same way that you will find work for for the Barron's that that you believe that these will continue to be kind of Equinor's workhorses also when the firm terms expire?
Speaker 5
Yeah. So when we look at those, the the Cat Ds and the the kind of work that they deliver, that's they are absolutely fit for purpose. And not only are they fit for purpose for when they were built, but, you know, we've we've done some, upgrades to them. We've, brought them more and more into the the digital realm. So, you know, with Equinor, we've worked to, enhance the performance of those rigs, and, they're extremely pleased with the results that that has borne.
And, actually, again, for us, results in collection of bonuses and those kind of things. So but we continue on that push of, keeping those rigs, right up there in terms of performance, and the latest digital technologies. And as we see it and as the feedback we get is that, I I think Equinor are very keen to see them continue in that vein beyond their firm contracts. The contracts do have, options on them, so, we think there's plenty of scope for those to be extended in the not too distant future.
Speaker 8
As as the final follow-up to that, do you think if there is an extension that it's fair to assume that, you know, they they have options, but but maybe a rate that's more in line with with the current markets? Like, what is a new type of discussion?
Speaker 5
I think it's a little early to say, but, you know, that's always a possibility. But, you know, without engaging in significant and earnest negotiation on those, I think I'll I'll not be drawn on that for now. We'll just wait to see how that pans out when we when we do enter full full time negotiations.
Speaker 8
Thank you so much. That's all for me.
Speaker 0
Thank you. Our next question comes from Greg Lewis with BTIG.
Speaker 9
Hey. So thank you,
Speaker 10
and and and good morning, everybody. You know, Mark, I I guess I just wanted to ask a question around the on ongoing tender realizing that it's it's ongoing. You know, I know when it initially came out, it it was it was a $200,000,000 number, and and then you kind of reserve the right to increase it or decrease it. You know, assuming that it's it's successful, you know, how should we thinking about how should we think about the the the capacity or scope to to increase it beyond that that 200,000,000 number, if there is any?
Speaker 3
Yeah. Thanks, Greg. I think at this stage, we are just inclined to increase that cap beyond $200,000,000. Clearly, once we finish this, it will be, I think, the fourth liability management initiative we completed this year. So we're gonna we're gonna take a step back, take a look at our five year plan, look at our liquidity, and reassess the next step in the our efforts to improve our capital structure and increase our liquidity runway.
But for this tender, I think we're gonna keep it at 200.
Speaker 10
Okay. Great. And then just, you know, I mean, whether this is for Roddie or Mark, you know, I I know on on on the question around revenue, that the Asgard was was mentioned as a as a rig, that's, you know, gonna or has the potential to generate revenue in 02/2021. That, you know, that that rig is scheduled to to roll off at at some point, you know, this quarter. Just kinda curious how we think about that and, like, should we be thinking about maybe, you know, heading into winter?
Should we be thinking about maybe some idle time around that rig before it it starts working maybe in the spring or summer? Or or or do or or do we think that there could be an opportunity really to just keep that rig, you know, you know, really working, you know, post its roll off later this year?
Speaker 5
Yeah. I think you do have that opportunity to to to keep her going. But, you know, if, if there are some gaps in the schedule, we we expect it will be relatively short, you know, a month or two, here or there. But, yeah, she's, performing well. In general, she's, you know, really a high specification unit.
So, we've we've we've got a few irons in the fire on her. So, yep, I would expect to see her her working, but, certainly, it's possible there are a few idle spots on her schedule.
Speaker 10
Okay. And then just in thinking about that knowing that, you know, it's I mean, if the things looked at bottom and, you know, turning the corner. But as we think about you know? And, clearly, once you guys don't see much Rodney, once you don't see much of an opportunity to to keep the rig working, you you probably start lowering, you know, daily OpEx. You know, what is kind of the window that that we that that it make you know, I mean, we've realized the knee trick's probably different.
Is it kinda hey. If if we have line of sight for ninety to a hundred days, we'll kinda keep everything staffed up or I mean, like, just trying to understand, you know, if that's changed relative to, you know, what it was a couple of years ago.
Speaker 5
Yeah. I'm not sure it's really changed tremendously. I mean, as as we go into these short idle periods, we we have some levers to pull that, you know, reduce costs quite significantly. If there is an idle spot on a campaign, but then, you know, you've got to work on the back end of that. But, it really depends on that the future marketability of the rig, which, of course, they have started right up there at the very top of the list.
Speaker 2
Mhmm.
Speaker 5
And and also the the prospects in in that kind of region. And look. I mean, the Asgard's been down to, some parts of Latin America several times. She's a very mobile unit. So, you know, with with, Latin America in general doing extremely well just now, we we would expect that, the the idle time on her would be would be limited, but, we would be able to reduce expenditure during that time.
But, again, I think because this rig is in good demand or this class of rig is that, the day rates are going to be, pretty reasonable, so, you can offset a little bit of idle time with that.
Speaker 10
Sounds good. Good to hear. All right, everybody. Hey, thank you very much for the time.
Speaker 5
Thanks, Greg.
Speaker 0
Thank you. Our next question comes from Mike Sabella with Bank of America.
Speaker 2
Hey, good morning, everyone. Good morning.
Speaker 11
Good morning, Mike. I was I was kinda hoping we could maybe go back back to the kinda cost discussions and and really kinda try to unpack the the guide for next year. You know, when we think of, you know, bottom of the cycle type activities and and and layering in some of the advancements we've seen sort of globally in in remote monitoring and AI. You know, we understand lower activity means lower costs here. You know, how should we be thinking about, you know, lowering costs on, you know, the rigs that are that are working just as we see advancements, you know, here in AI and remote monitoring and kind of the same question on on where you think you could take the shore base.
Speaker 3
So, Mike, let me take a shot at this first. With regard to shore based, firstly, obviously, as rigs come off, you need fewer people on the shore based to manage and support those rigs. So that happens as the rig count varies over time. As it relates to digitization or AI or any other kind of, initiative, there's gonna be an investment into that, that initially offsets any cost savings you're gonna see in that in that quarter or that year. We've done a lot of this over the last several years.
So we're starting to see the benefit of that right now. And we'll we'll continue to see this into the future as we continue to invest in our rigs, make them more efficient and, more able to support the customers and their initiatives around digitalization.
Speaker 8
Yeah. I I think I'd just add
Speaker 5
to that to say, you know, the equipment equipment analytics programs and, systems that we put on the rigs that are remotely monitored from shore have already, proven to be extremely useful and primarily, you know, around being much more accurate in your maintenance and your assessment of the condition of the equipment, thereby not spending unnecessary maintenance dollars or time and effort. So we're already well down that track. And, you know, our steady implementation of digitization projects like that, whilst they may not be grabbing headlines, they are certainly helping us manage costs through these difficult times.
Speaker 2
Yeah. Just one more add to that. We have been working extremely hard over the last several years now to optimize the size of our crew and the activities on board to optimize fuel consumption, not only from a cost standpoint but from a carbon footprint standpoint. Continuing to work down those areas and then just delivering these wells faster drives cost out of these projects and out of the organization while also improving our carbon footprint as well.
Speaker 11
Yeah. Per perfect. Appreciate all that. And then just kinda switching gears, maybe maybe on the working capital front. It looks like it was a bit of a drag, there in 3Q.
You know, as as revenues kinda come lower, you know, are there are there targets for working capital that you could share with us, you know, as as we head into next year, you know, how how we should be thinking about the the working capital from here?
Speaker 3
So if you're looking at working capital for this year, we've had for the year to date, you had two things that happened that you're not gonna see on a written ongoing basis. One, we had the Macondo PSC settlement of a $125,000,000 earlier this year. And, also, the ENI settlement, which we only received one installment of that settlement with the rest of it being expected to be collected over the next three years. If you're looking at the quarter specifically, we had a increase in our interest payments for the quarter given the liability management actions we took, in addition to the fact that we accelerated some AP payments that were, a little slower in q two. So between the two of those, you got to about, you know, 80 to $90,000,000.
That, also is not a trend and shouldn't reoccur in the ordinary course.
Speaker 6
Great, thanks a lot everyone.
Speaker 0
Thank you. Our final question will come from Sean Meakim with JPMorgan.
Speaker 9
Thanks. Hey. Good morning. I think most of my questions have been yeah. Most of my questions have been covered here.
So just one, on the back end. Maybe, Mark, can we just talk about what type of liquidity levels are needed to run the business at current activity? And if you take possession of the new builds next year, how did your liquidity position look relative to your needs exiting '21? Anything else that needs to be done besides securing the secured financing on the Titan?
Speaker 3
So, Sean, I gave you our estimate for liquidity at the 2022. I don't have it broken out for 2021 right now. We can certainly get that to you. But we built in the payments to JSPL for those rigs, the Atlas and the the Titan. We also built in the potential financing using the cash flow from the Chevron contract on the Titan.
So all of that has been built. And in addition to that, as I mentioned earlier, we we took a significant action this year with regard to reducing our shore based overhead, our g and a, and any other costs associated with running the business, which has been implemented as our rig count came down during the second half of this year. You just heard me talk about five rigs that came off contract this quarter. So as those rigs come off, obviously, correspondingly, we reduce the folks involved in managing those rigs. So that is what I would I would point to with regard to costs.
Speaker 9
Okay. Fair enough. I appreciate it.
Speaker 0
Thank you. I'll now turn it back to mister Lexington May for closing comments.
Speaker 8
Thank you, David, and thank
Speaker 1
you everyone for your participation on today's call. If you have further questions, please feel free to contact me. We look forward to talking with you again when we report our fourth quarter twenty twenty results. Have a good day.
Speaker 0
Ladies and gentlemen, that concludes the third quarter twenty twenty Transocean earnings conference call. You may disconnect your phone lines and thank you for joining us this morning.