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spk09: Ladies and gentlemen, thank you for standing by. Welcome to the fourth quarter 2023 Diamond Allshore Drilling Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Kevin Bordosky, Senior Director of Investor Relations. Please go ahead.
spk02: Thank you, Michelle. Good morning or afternoon to everyone, and thank you for joining us. With me on the call today are Bernie Wolford, President and Chief Executive Officer, and Dominic Savarino. Senior Vice President and Chief Financial Officer. Before we begin our remarks, I remind you that information reported on this call speaks only as of today, and therefore time-sensitive information may no longer be accurate at the time of any replay of this call. Some of the information referenced on our call today is included in a slide presentation that you can find in the Investor Relations section of our website under Calendar of Events. In addition, Certain statements made during this call may be forward-looking in nature. These statements are based on our current expectations and include known and unknown risks and uncertainties, many of which we are unable to predict or control. These risks and uncertainties may cause our actual results or performance to differ materially from any future results or performance expressed or implied by these statements. These risks and uncertainties include the risk factors disclosed in our 10-K and 10Q filings with the SEC. Further, we expressly disclaim any obligation to update or revise any forward-looking statements. Refer to the disclosure regarding forward-looking statements incorporated in our press release issued yesterday evening, and please note that the contents of our call today are covered by that disclosure. In addition, please note that we will be referencing non-GAAP figures on our call today, You can find a reconciliation to gap financials in our press release issued yesterday. And now I will turn the call over to Bernie.
spk06: Thanks, Kevin. Good day to everyone. Thank you for your interest in Diamond Offshore as we present our results for the fourth quarter of 2023. 2023 was a transformational year for Diamond Offshore. We marked our one-year anniversary of relisting on the New York Stock Exchange, made measurable improvements in our capital structure, secured $485 million in new contract awards and safely delivered five shipyard projects, all while delivering industry-leading operational excellence for our customers. The positive momentum continues in 2024 with the addition of another $362 million in new contracts, taking our total current backlog to approximately $1.6 billion. Before addressing fourth quarter results and sharing some perspective, on our markets, I would like to provide a high level update on the previously reported Great White Incident. On February 1st, while waiting on weather, with the well secure and the lower marine riser package, or LMRP, disconnected from the BOP, the LMRP and riser unintentionally separated from the rig at the slip joint tensioner ring and dropped to the seabed. No one was hurt, no pollution occurred, and there was no damage to subsea infrastructure. Work to recover the LMRP is progressing methodically to ensure a safe recovery while working within the weather constraints west of Shetlands. The LMRP is situated on the seabed, exposed above the mudline in an upright orientation. We have successfully unbolted the riser string from the LMRP and are prepared to lift the LMRP to the rig in the next weather window. We currently estimate the total repair period to be 90 to 100 days from the date of the incident.
spk04: Dominic will provide additional information related to the estimated repair timing, cost, and insurance coverage in his remarks. In the interim, I'd like to recognize the extraordinary work by our team in response to the incident and the quality of the ongoing collaboration with our clients and local authorities.
spk06: Turning to the fourth quarter, I'm pleased to report that our rig crews and operations support team delivered exceptional safety results and revenue efficiency of 95% across our fleet during the quarter. This achievement was particularly noteworthy as we commenced four contracts in the quarter, one in each of the regions in which we operate. That's off to our teams for their steadfast commitment to planning and execution while never compromising on safety. Our fourth quarter financial performance reflects the impact of having four of our marketed fleet of 10 rigs on higher market day rate contracts at quarter end. Total revenue and adjusted EBITDA for the quarter were $298 million and $72 million, respectively. These results were above our guidance for the quarter, primarily due to the Patriot working longer than previously anticipated, the deferral of certain contract preparation costs, and earning a performance bonus for efficient and injury-free operations in Senegal. This feat, in part, reflects the impact of Briggs moving to higher day rate contracts and sets the stage for improving financial performance in 2024 owing to fewer planned shipyard days. The Blackhawk encouraged having a full year on higher day rates and the Black Lion and Black Rhino moving to higher day rates in the third quarter. Now let's turn to our view on the markets and opportunities for diamond in 2024 and beyond. The upcycle in offshore drilling continues to be supported by strong commodity prices, robust upstream capital spending, and anticipated year-over-year growth in exploration drilling. Taken as a group, these indicators support our view of a longer duration upcycle in deepwater drilling. Let's look at some of the numbers in support of a longer duration upcycle. Exploration drilling can be considered a leading indicator and a precursor to future development programs, and analysts now forecast year-on-year growth in floater exploration wells of 34%. Subsea tree orders are another leading indicator, and 2024 forecasts predict the third year in a row with over 300 new trees ordered. This level of order activity is the highest it's been since 2013, at a time when we had 115 more rigs in the market than we do today to execute the related drilling activity. Putting subsea tree orders into perspective relative to the global marketed floater fleet, back in 2012 and 2013, the number of orders per marketed floater peaked at 1.5 and 1.8 trees ordered per marketed floater respectively. In comparison, In 22 and 2023, those numbers were 2.1 and 1.8, and the 2024 forecast stands at approximately 1.9. This would indicate three continuous years with numbers matching or exceeding measures dating back 12 years. These trends sync well with the Atlas forecast for floater demand on a rig years basis. The forecast compound annual growth rate of rig years of demand from 2023 to 2026 by region are 7% for North America, 11% for South America, 10% for the North Sea, 7% for West Africa, and 25% for Southeast Asia and Oceania. Another key metric we track is the trailing four quarters tender activity on a rig year's basis. It has been a bumpy road from a peak in 2012 of approximately 106 rig years of tender implied trailing demand to a SOCL bottom of 28 in 2016 and a COVID bottom of 35 in 2020. The industry closed 2023 with 106 rig years of tender implied trailing demand, matching the number from 12 years ago. Closer to home, We are currently tracking 51 opportunities representing 52 rig years of demand with commencement dates through 2025, of which roughly 61% are for DP rigs and 39% for MARD rigs. The start date profile for these opportunities rises from a low in Q2 2024 to a peak of 12 and 11 in Q4 24 and Q1 2025, respectively. This data lends credence to the view that the second half of this year looks to be positive in terms of the number of expected fixtures and contract starts. For diamonds specifically, the UK sector of the North Sea continues to develop as a bright spot, with increasing demand in the region with shrinking harsh environment rig supply. Recent long-term commitments by operators in the region support our view that demand for plug-in abandonment, or P&A, work is becoming more certain and exist in larger quantities than previously anticipated. Additionally, green shoots of future drilling demand have emerged on the heels of the recent oil and gas licensing round, where 27 licenses were awarded for areas that have the potential to be brought into production quickly. Assuming options are exercised on the Black Hawk, we have one drill ship, the Black Rhino, with availability late this year. We are currently pursuing eight opportunities for the Black Rhino, all for work commencing following the conclusion of its contract report, its SPS, and MPD upgrade. In the context of these improving markets, we have been able to firm up additional contract term for 2024 and build significant backlog commitments for 2025 and 2026. Here today, we have secured $362 million in new contract awards, one for our seventh generation drill ship, the Black Line, at leading edge rate, and one for our moored harsh environment semi, the Patriot. The Black Line contract will start in direct continuation of its current work without any gap between contracts and provide firm work through the third quarter of 2026. Under this new contract, the Black Line will be positioned to generate approximately $115 million in annualized rig-level EBITDA and contribute significantly to our cash flow in the coming years. The Patriot contract is for a 60-day 2-well P&A campaign and is set to commence this week, filling in some of the gap in its schedule before beginning its three-year contract in early 2025. On the back of our recent contract announcements, excluding co-stacked rigs, we have 87% of our 2024 capacity contracted, 91% if you include priced options. Looking further out, excluding Co-Stacked Rigs, we now have 36% of our 2025 capacity and 30% of 2026 capacity contracted. If we include priced options, the 2025 number goes from 36% to 59%, notable contracting opportunities on the Black Rhino, Black Hornet, Endeavor, and Apex to further secure backlog. Over the last 20 months, we completed special periodical surveys, or SPSs, on six of our 10 actively marketed rigs, with a further two rigs due in 2024 and one in 2025. Through the combination of reduced planned shipyard days, Our recent backlog additions are positive exposure to improving market conditions. We are providing materially improved EBITDA and cash flow visibility through 2026. I will now turn the call over to Dominic before returning with some concluding remarks.
spk08: Thanks, Bernie, and good morning or afternoon to everyone.
spk06: In my prepared remarks this morning, I'll provide a recap of our results for the fourth quarter, including some operational highlights and additional details on our recent contract awards, the estimated financial impact of the recent Great White event, and guidance for the first quarter and full year 2024. For the fourth quarter, we reported a net loss of approximately $146 million, or $1.42 per diluted share. The reported loss consisted of net income before tax of $29 million and non-cash tax expense of $174 million. As discussed in prior quarters, the large tax expense in the quarter was the result of the reversal of the tax benefit recorded in prior quarters and the further normalization of our overall tax expense for the year. The results for the fourth quarter included a reported adjusted EBITDA of $72 million, well in excess of our guidance for the quarter of $50 to $60 million, with the U.S. GAAP required deferral of approximately $8 million of pre-contract commencement costs for the Courage and Blackhawk contributing to the favorable results. Our reported adjusted EBITDA for the quarter represents a significant increase compared to our adjusted EBITDA of $28 million reported in the third quarter. And this quarter-over-quarter increase was primarily a result of higher revenue reported in the fourth quarter. Excluding reimbursable revenue, revenue for the fourth quarter was $280 million, slightly higher than our guidance for the quarter, and up from $225 million in the prior quarter. This improvement was primarily a result of the Blackhawk commencing its contract in the Gulf of Mexico in early November after its SPS and MPP upgrade in the third quarter, the Patriot being on contract for the entirety of the fourth quarter after being between contracts in the prior quarter, and the Black Rhino earning its largest performance bonus to date during the fourth quarter. Contract drilling expense increased to $189 million for the quarter compared to $182 million for the prior quarter, primarily as a result of higher charter costs for one of our managed rigs and the accrual of the annual bonus expense related to the drill ship's BOP service agreements, partially offset by the absence of costs associated with the apex of the shipyard period in the prior quarter. Operating cash flow for the fourth quarter was $9 million, with negative free cash flow of $22 million, as compared to negative free cash flow of $48 million in the third quarter. The improvement in free cash flow was primarily a result of increased EBITDA and lower CapEx in the fourth quarter, offset by greater working capital use during the quarter as a result of commencing higher day rate contracts and the resulting higher accounts receivable at year-end. For the full year 2023, we reported revenue, excluding reimbursable revenue, of $984 million and adjusted EBITDA of $158 million. Apex for the full year was $132 million. After the successful execution of our capital structure refinancing in the third quarter, we exited 2023 with unrestricted cash and cash equivalents of $124 million and total liquidity of $422 million, including the undrawn balance of our revolving credit facility. Expanding a bit more on the fourth quarter operational highlights, we had notable successes in each region in which we operate. In the Gulf of Mexico, the Black Hawk commenced its new contract in November at the start of the commencement window after undergoing its SPS and MPD upgrade. In West Africa, the Black Rhino earned performance bonuses in the quarter totaling $3.2 million, the ninth bonus achieved during the Senegal campaign. In the North Sea, the Patriot executed a P&A campaign for a customer over the course of the fourth quarter and into January of this year, being on contract almost twice as long as originally anticipated. In Australia, after coming out of the shipyard in the third quarter, the Apex successfully commenced a contract for a new customer during the fourth quarter at a higher day rate. In Brazil, after completing its prior three-year contract with Petrobras in the third quarter, Courage safely and timely completed its SPS and contract preparation activities and commenced its new four-year contract with Petrobras in mid-December. Turning now to the Great White, and our estimate of the financial implications of the unintentional release of the LMRP and RISER. As Bernie noted, the Great White is currently in the process of recovering the LMRP to the surface and is estimated to be back earning day rate by the end of April or early May. As a result, we currently estimate that we could be off rates for approximately 90 to 100 days, which could result in approximately a $24 to $27 million reduction Our current estimate of incremental recovery costs and repairs and maintenance is approximately $20 to $25 million, and our current estimate of replacement capital expenditures is approximately $12 to $15 million. We anticipate that the incident will be covered by our hollow and machinery insurance policy and that all incremental costs, less our $10 million deductible, should be reimbursable under the policy. In addition, we maintain loss of higher insurance on the Great White. After a 60-day waiting period, the loss of higher insurance provides $150,000 per day for up to 180 days for each day of lost revenue as a result of a covered property loss claim. Based on our current expectations of being out of service for approximately 90 to 100 days, the loss of higher insurance may provide proceeds of approximately $4.5 to $6 million. Because the accounting treatment of insurance proceeds creates complexities in the reporting of financial results, and because the actual financial impact of the Great White incident is not yet known, we are presenting our initial guidance for 2024 results by excluding the estimated financial impact from the Great White event. We believe that this normalized approach will provide more accurate and meaningful visibility into our expectations of our ongoing recurring operations without regard to this extraordinary isolated incident. In addition to having a strong financial performance in the fourth quarter, we also had significant success in the quarter and early this year in booking new contracts, as Bernie mentioned. In the Gulf of Mexico, we enjoyed significant contract wins in the past month with the Black Lion executing a contract extension with its current customer with a duration of two years and a contract value of approximately $350 million. With this new contract, the Black Lion is now contracted through the third quarter of 2026. In addition, in the fourth quarter, the Black Rhino was awarded a contract in direct continuation of its Senegal campaign at a day rate in excess of $500,000 per day, the highest clean day rate awarded during this upcycle. These recent contract awards push the average day rate in our drill ship backlog up to $408,000 per day. Also during the quarter, the Patriot was awarded a contract valued at $240 million for a 35-well P&A campaign representing approximately three years of firm work expected to commence in early 2025, with up to 17 additional P&A wells subject to priced options that would add a fourth-year duration. Subsequent to year-end, the Patriot was also awarded a two-well P&A campaign commencing later this week filling in some of the gap before commencing its three-year contract in 2025. The Patriot is also being considered for additional work later in 2024, evidence of the improving moored floater market in the North Sea.
spk08: Turning now to our normalized full-year 2024 guidance.
spk06: Our $1.4 billion in backlog as of January 1, 2024, Combined with our year-to-date 2024 contract awards of $362 million, gives us visibility to over $1.6 billion of firm work to be performed over the coming years and positions us extremely well in terms of contract coverage for 2024, with 91% of our available dates, excluding cold stack rigs, committed with firm contracts or priced options. Our 2024 revenue, excluding reimbursable revenue, and excluding any estimated impact of the Great White Event, is currently expected to be between $940 and $960 million. This expected level of revenue represents a slight decrease from the revenue we earned in 2023. This expected decrease is primarily due to the managed rigs transitioning back to their owner over the course of 2024. and our plans for the Black Rhino to spend time in the shipyard conducting its SPS and MPD upgrade later this year. Partially offset by higher day rates for the Blackhawk, Courage, Apex, and Black Lion during the year. Our EBIDA guidance for 2024, again excluding any impact of the Great White Incident, is currently expected to be between $230 and $250 million. a more than 50% increase over 2023 EBITDA, largely driven by higher day rate contracts and increased EBITDA margins due to the return of the lower margin managed rigs back to their owner. It is worth noting that our EBITDA guidance for 2024 includes approximately $20 million of non-cash net amortization expense as required by U.S. GAAP accounting rule associated with the Courage and Blackhawk pre-convincement contract activities that occurred in 2023.
spk08: DNA expense for 2024 is expected to be between 72 and 77 million dollars.
spk06: Net interest expense for the year is currently expected to be approximately 40 to 45 million dollars, and cash taxes are expected to be approximately 5 to 10 million dollars. CapEx for 2024 is currently expected to be between $125 and $135 million, excluding any CapEx resulting from the Great White event or the potential reactivation of the Onyx should it be successful in securing a long-term contract. Our estimated CapEx spend for 2024 includes the installation of MPD equipment and the SPS for the Black Rhino, the SPS for the Black Hornet, as well as the BOP recertification for the Endeavor. Taking a look at our guidance for the first quarter, again, excluding any impact of the Great White Incident, we currently expect revenue, excluding reimbursables, to be between $260 and $270 million, EBITDA to be between $45 and $55 million, and CapEx to be between $38 and $43 million. Our expectations for the first quarter of 2024 are lower than the fourth quarter of 2023, as a result of the Patriot being off contract for a portion of the quarter and the amortization of pre-contract commencement costs for the Courage and Blackhawk.
spk08: Despite this dip in Q1, our projected EBITDA results for the year are essentially equally weighted between the first half and second half of the year, and we expect our free cash flow in 2024 should be meaningfully greater than 2023.
spk06: Beyond 2024, our visibility to estimated future earnings and cash flow is increasing as a result of our growing backlog at higher average day rates. In addition to our 91% contract coverage in 2024 for firm contracts and priced options, excluding cold stack rates, we have 59% and 30% of available days committed for 2025 and 2026, respectively. This level of contract coverage positions us extremely well for the next three years, yet still provides plenty of room for positive operational leverage as recontracting opportunities arise. And with the continued favorable fundamentals of the deepwater offshore industry, we are confident that we will be able to continue to secure meaningful day rate increases for our rigs as contracts roll over. And finally, by the end of 2024, We expect our net leverage ratio and other requirements under our credit facility and bond indenture to be met, which would allow our board to begin to consider the appropriate timing for a shareholder return program.
spk08: That concludes my prepared remarks. I will now hand it back to Bernie for some closing comments. Thank you, Dominic.
spk06: In the near term, our organization remains focused on the safe and timely restart of the Great White. Looking further ahead, as the black line rolls to its higher day rate in Q3, followed closely by an option on the black hog, we will have five out of our nine active rigs on contracts at market rates. We're ideally positioned to capture further upside in the strengthening drill ship market with the black rhino in late 2024 and the black hornet in early 2025. Similarly, the supply and demand picture for harsh environment semis bodes well for upside on the Endeavor, Apex, and Great White as we progress through 2025. In the interim, we are targeting several near-term opportunities for the Patriot that would allow us to fill a portion of the gap in 2024 prior to its long-term campaign in 2025. These factors, combined with a notable decrease in planned shipyard days, position us to deliver growth in both EBITDA cash flow while making significant progress in deleveraging our balance sheet. We appreciate your interest in Diamond Offshore and will now open the call for questions.
spk09: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And the first question comes from Eddie Kim with Barclays. Your line is now open.
spk01: Hi, good morning. It's a very constructive market outlook you provided here, but I'm just curious if you've been surprised at the lack of contracting for the 10 or so 7-gen sidelined drill ships. It seems like until all or maybe most of these sidelined rigs are absorbed, it might put a lid on day rate increases here in the medium term. So Have you been surprised here? And if you had to guess, just based on the demand you're seeing, do you think maybe we could see four or five of these 10 sideline rigs announce contracts by year end?
spk08: Thanks for the question, Eddie.
spk06: I wouldn't say surprised. I mean, looking at our investor presentation, you'll sort of see the staggered impact of new contract awards we expect throughout the year. Clearly, we would have expected some contracts to be awarded earlier than they have been, particularly one opportunity in Petrobras that we thought would have been already awarded at this stage. I certainly expect those awards to come through in the very near future. Q1 is typically a quiet time of the year and not any different this year if you look back from a historical perspective. As far as Sideline rigs returning to the market. I would expect, yes, that five to six of those do secure contracts by the time we reach the middle of this year, Eddie. I mean, I think that's highly anticipated and would be what I would say is kind of right down the middle of the fairway in terms of our expectations.
spk01: Sorry, just to clarify, you said five to six maybe announced contracts by middle of this year, so in a couple months?
spk06: Yes, by the middle of this year.
spk01: Middle of this year.
spk06: So these are contracts that would have start dates Q3, Q4, and Q1 of 25. Got it. There's sort of a demand around that time period that, and typically you'll see the contracts announced six months before the actual start dates.
spk01: Got it. Thanks for clarifying that. My follow-up is just on the black rhino. You highlighted eight potential opportunities for the rig. Could you see the rig mobilizing to outside West Africa, or do you see the rig staying in West Africa at this point? And separately, after it comes off contract, it goes in for a five-year SPS and an MPD upgrade. We've typically seen an MPD being upgraded for a rig for a specific contract, but it seems like in this case it's voluntary or maybe a preemptive upgrade on your part. So just wanted to get your thoughts here on why you're choosing to add the MPD on this rig.
spk06: Eddie, we're currently tracking four opportunities that start in Q4 and four that start in Q1 of 25 for the rhino. Those opportunities, some are in West Africa, some are in South America, and some are in the U.S. So it's hard to handicap where the rig will be next in terms of the opportunities we're currently tracking. I wouldn't expect any gap in the rig schedule after completion of the SPS and MPD installation based on our market intelligence as we sit here today. With regard to the MPD, it was a proactive decision to ensure that our four black ships were and remain in the top 30 rigs in a worldwide basis from a technical specs perspective. Having an NPD assures that you can bid on every opportunity that's out there and gives you a greater set of opportunities from which to secure work. And obviously, you can get some upside in terms of your rate for the NPD. But first and foremost, we look at it as a key to entry and ability to bid on every single tender that's out there for a drill show.
spk01: Got it. Got it. Great. Thanks for all that color, Bernie. I'll turn it back.
spk09: One moment for our next question. Next question comes from David Smith with Pickering Energy Partners. Your line is now open.
spk13: Hey, good morning. Good morning. Thank you for taking my questions, and congratulations on a solid quarter.
spk10: Thanks, Dave.
spk13: I wanted to make sure I understood the 24 guidance. Y'all were pretty clear, but just making sure, you know, excluding the Great White impact. We should think about that guidance as if the Great White had been working at its contracted rate with no interruptions.
spk06: Yes, that is correct. We will normalize our results for any impact that the downtime has or the insurance proceeds have as we report throughout the year. So that is a correct assumption.
spk13: appreciate it and for the on the financial impact for the property insurance with a 10 million dollar deductible should we think about that as only applying to the 12 to 15 million of replacement capex or would the recovery costs I think estimated 20 to 25 million also apply to that policy all of those costs would be covered by the policy so absent absent
spk06: it to the claim with the insurance company and what is covered, but the expectation is that all of that is potentially eligible to be recovered as part of the insurance policy.
spk13: So this could potentially, after insurance, be a net impact of maybe low $30 million range?
spk06: Right, yeah. By the time you factor in the loss of revenue, the potential loss of higher as well as the $10 million to deduct the bullets right at $30 million. They start our current estimate of 90 to 100 days.
spk08: Thank you. And if, well, I'll circle back in the queue. Okay. Thanks, Dave.
spk09: One moment for the next question. The next question comes from Frederick Steen with Clarkson Securities. Your line is open.
spk16: Hello, Bernie and team. Hope you are well.
spk17: And for me as well, good quarter.
spk16: I wanted to follow up a bit on your fleet. You clearly have good coverage for 24, and I think your revenue guidance is a testament to that. It's quite a narrow fleet. um range um so so i wanted to um you know get a few details on how that range is being built up um you know if it's uh will it be dependent on what you for example are able to secure additional work on patriot does it assume any uh impact of the onyx you know you're marketing that um or does it assume you know for example that the the priced options on the Blackhawk and the Park and the Great White that in 2024, although minimal, will also be exercised. Any thinking or thoughts around how we can move from the low to the high end of that range would be very helpful.
spk06: Thanks. I'll ask Dominic to comment on it, and I'll make some introductory comments first. Our current line of thinking is that we will secure additional work for the Patriot. We're actively pursuing two more probable than less opportunities right now for the Patriot for work in 2024 that would help us fill that gap. We don't anticipate filling 100% of the gap throughout the year. So in part, the range reflects filling a portion of the gap. As far as the price option, On the halt goes, our current expectation is that it's more likely than not that the client chooses to exercise the option. But obviously that's speculation at this point in time. We would expect clarity on that in the first half of the year and have good visibility one way or the other on that. And then with respect to the great white, we continue to anticipate is not only the farm work that's already committed for the Greg White, but at the tail end of the year, the likelihood that additional options become exercised. And to add to that, the Patriot is probably our biggest variable there. Certainly, we're optimistic that we'll be able to secure additional work from the Patriot, but given the fact that we've got a 2025 contract start, It's unlikely that we'll be able to release the crew or otherwise we'll have to maintain those costs. So every dollar of revenue we're able to achieve there is going to be upside relative to what we've considered in the forecast. Adding the ONIX into the mix, in fact, that would most likely be a negative to the forecast because the opportunity for the ONIX is really, would be something that would more likely begin in 2025. such that we have to reactivate the rig earlier than that and incur the cost, recrue, deal with that CapEx in the second half of 2024 if that were to be the case. So the ONIX variable, certainly currently not considered, but if it were to be contracted, it would most likely be negative relative to 2024.
spk08: That's very helpful.
spk16: And you partially kind of answered my follow-up. on the Patriots, are you able to, you know, share, I call it, how much of the gap you would expect, you know, sensible to model, not 100%, but do you think 50, 60, 30, 70?
spk06: I'd say 40 to 50% of the gap we're hoping to cover, particularly, I mean, the summer months, it would be the likely timeframe. So, Q2 and Q3, more likely than Q4, but I think 50% from a modeling perspective is probably not too far off.
spk08: That's very helpful.
spk16: Finally, now that you're refinanced, new bond in place, lots of liquidity through the RCF, good coverage on 2024, and coming into a period where some rigs have or rigs will be substantially repriced on the upside. Are you feeling or thinking actively about anything strategic? I know this is a recurring question in a way, but it's been quite quiet on the M&A front. Oil service sentiment in the equity market has been a bit off. But has anything changed on your side in terms of you know, thinking around consolidation where diamonds place in that mix could be acquired, be acquired, et cetera, or are the M&A discussions dead for now?
spk04: Thanks for the question, Frederick.
spk06: It's an ever-recurring question, but a fair question nonetheless. At this point in time, our view is with the strength of our backlog, with the strength of our balance sheet, We look to be a net acquirer, Frederick, going forward.
spk08: All right.
spk14: Looking forward to all of you, as always. Thank you so much for taking my questions, and have a great day.
spk09: As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. One moment for the next question. The next question comes from Noel Parks with Tuohy Brothers Investment Research. Please go ahead.
spk08: Hi, good morning. Good morning, Noel.
spk15: Just a couple of things. You know, one thing that has been coming up more frequently as companies have been reporting this quarter is it seems it's more consistent that various drillers are indeed seeing customers making that shift towards prioritizing the de-risking of future rig rates to the point that some of them are maybe, some of the larger ones are even, it might be furniture to call it, doing speculative bidding, but... but just that the trend, that trend does indeed seem to be materializing, and I recall it's something you saw hints of on the horizon. Is, you're still seeing that to be the case, and anything anecdotally you can point to that's reassuring on that front?
spk08: Thanks for the question, Noel. We continue to see client behavior
spk06: that is consistent with the thesis that they're looking to de-risk their future big-rate upside exposure. We're seeing longer-term contracts come through the door. The ones we're looking at now average just over a year, but we're seeing numerous three- to five-year opportunities come through the door and certainly a fair share of two-year opportunities. All would lead me to believe that the thesis remains that For the longer term, clients have significant development work. They know what they want to do, and they want to de-risk those projects by securing firm day rates in the near term.
spk08: Great. Thanks.
spk15: And, you know, of course, there is this keen interest by observers, the street about every contract and, of course, that desire to have them all decided and announced sooner rather than later, which, of course, is certainly every driller's interest as well. I just wonder, just being realistic about some of the tensions of being at very high utilization. Are there any sources of variability that could affect timing that people ought to have in mind just to be realistic looking at the quarters ahead? And I'm thinking things even, you know, differences in lead time between, you know, getting a deal signed in Africa versus, you know, a private direct deal in the Gulf.
spk08: Noel, I want to make sure I understood your question.
spk06: Are you asking from a diamond perspective? Are we seeing the likelihood of a high variability in future commitments? Or was your question more broad? And could you maybe restate it to make sure I'm clear on your question?
spk15: Sure, just more broadly. There's just so much scrutiny. Everyone's kind of hanging on seeing what the next contract announcement is, pretty much for every driller. But so I just am concerned that maybe people who haven't paid a lot of attention to the industry recently or just catching up to what's going on in the current cycle, you know, have this worry, you know, why isn't it happening faster? And just some of that, it seems to me, is probably not realistic considering that you're getting to such high utilization right now. So just anything to kind of give perspective on the pace of signings and, you know, you know, why that certainly is consistent with what you'd expect these days.
spk08: Yeah.
spk06: I'll start by saying, you know, as we finished the third quarter, the pace of signings was, for 2023 up to the end of the third quarter, was at a very high pace. You know, unprecedented in modern times, I guess you would say. We continue to see that the tenders out there, they're looking for commitments minimum of six months prior to the start of work, and in many and most cases as much as one year and even more than a year before the actual commencement date. I think what we're going through right now in Q1 is what I'm going to generally classify as noise relative to the longer-term trends. I think you're going to see some clients take advantage of uncertainty, if you want to call it that, by securing one or two rigs at below market rates. We've seen one interesting deal out there around the client securing partial ownership in an asset. We have two to three stranded assets out there that are very interested in getting into the market. And we have some people that may be interested in protecting the downside. So I think you'll see a few rates in what I would call the 300s for lower spec rigs or stranded rigs. But I think, again, that's noise. If you look at the average of what I think you're going to see contract signs and executed at this year, I'm going to say it stays in the 450 to 490 range. Even with averaging in the lower day rate contracts that are out there and are likely to come through where people are just looking for term over price for what I would call a second tier or sixth generation single activity or one BOP asset.
spk08: Great, thanks for the answer.
spk15: Sorry, please.
spk06: Sorry, to add to that, Noel, sometimes longer term contracts that operators are talking about take longer to negotiate. You want to make sure that both on the drilling contractor side as well as on the operator side that you get the liabilities right, you get the escalation factors right, you get the day rate right. So that could also be influenced some of the timing as we're talking about longer term.
spk08: Right. Absolutely. Thanks a lot.
spk09: At this time, I show no further questions. I would now like to turn the call back to Bernie Wolford, CEO, for closing remarks.
spk06: Thanks all for your participation in today's call. We look forward to speaking with you again next quarter and have a great day.
spk09: This concludes today's conference call. Thank you for your participation. You may now disconnect and have a great day. Bye. Ladies and gentlemen, thank you for standing by. Welcome to the fourth quarter 2023 Diamond Allshore Drilling Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press Star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press Star 1-1 again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Kevin Bordosky, Senior Director of Investor Relations. Please go ahead.
spk02: Thank you, Michelle. Good morning or afternoon to everyone and thank you for joining us. With me on the call today are Bernie Wolford, President and Chief Executive Officer, and Dominic Savarino, Senior Vice President and Chief Financial Officer. Before we begin our remarks, I remind you that information reported on this call speaks only as of today and therefore time sensitive information may no longer be accurate at the time of any replay of this call. Some of the information referenced on our call today is included in a slide presentation that you can find in the investor relations section of our website under calendar of events. In addition, certain statements made during this call may be forward looking in nature. These statements are based on our current expectations and include known and unknown risks and uncertainties, many of which we are unable to predict or control. These risks and uncertainties may cause our actual results or performance to differ materially from any future results or performance expressed or implied by these statements. These risks and uncertainties include the risk factors disclosed in our 10-K and 10-Q filings with the SEC. Further, we expressly disclaim any obligation to update or revise any forward-looking statements. Refer to the disclosure regarding forward-looking statements incorporated in our press release issued yesterday evening. And please note that the contents of our call today are covered by that disclosure. In addition, please note that we will be referencing non-GAAP figures on our call today. You can find a reconciliation to GAAP financials in our press release issued yesterday. And now I will turn the call over to Bernie.
spk06: Thanks, Kevin. Good day to everyone. Thank you for your interest in Diamond Offshore. center results for the fourth quarter 2023. 2023 was a transformational year for Diamond Offshore. We marked our one-year anniversary of relisting on the New York Stock Exchange, made measurable improvements in our capital structure, secured $485 million in new contract awards, and safely delivered five shipyard projects, all while delivering industry-leading operational excellence for our customers. positive momentum continues in 2024 with the addition of another $362 million in new contracts, making our total current backlog to approximately $1.6 billion. Before addressing fourth quarter results and sharing some perspective on our markets, I would like to provide a high-level update on the previously reported Great White incident. On February 1st, while waiting on weather with the well-secure and the lower marine riser package, or LMRP, disconnected from the BOP, the LMRP and riser unintentionally separated from the rig at the slip joint tensioner ring and dropped to the seabed. No one was hurt, no pollution occurred, and there was no damage to subsea infrastructure. Work to recover the LMRP is progressing methodically to ensure a safe recovery while working within the weather constraints west of Shetlands. The LMRP is situated on the seabed, exposed above the mudline in an upright orientation. We have successfully unbolted the riser string from the LMRP and are prepared to lift the LMRP to the rig in the next weather window. We currently estimate the total repair period to be 90 to 100 days from the date of the incident.
spk04: Dominic will provide additional information related to the estimated repair timing, cost, and insurance coverage in his remarks.
spk06: In the interim, I'd like to recognize the extraordinary work on our team in response to this and the quality of the ongoing collaboration with our clients and local authorities. Turning to the fourth quarter, I'm pleased to report that our rig crews and operations support team delivered exceptional safety results and revenue efficiency of 95% across our fleet during the quarter. This achievement was particularly noteworthy as we commenced four contracts in the quarter, one in each of the regions in which we operate. That's off to our teams for their steadfast commitment to planning and execution while never compromising on safety. Our fourth quarter financial performance reflects the impact of having four of our marketed fleet of 10 rigs on higher market day rate contracts at quarter end. Total revenue and adjusted EBITDA for the quarter were $298 million and $72 million, respectively. These results were above our guidance for the quarter, primarily due to the Patriot working longer than previously anticipated, the deferral of certain contract preparation costs, and earning a performance bonus for efficient and injury-free operations in Senegal. This feat, in part, reflects the impact of Briggs moving to higher day rate contracts and sets the stage for improving financial performance in 2024 owing to fewer planned shipyard days. The Blackhawk encourage having a full year on higher day rates and the Black Lion and Black Rhino moving to higher day rates in the third quarter. Now let's turn to our view on the markets and opportunities for Diamond in 2024 and beyond. The upcycle in offshore drilling continues to be supported by strong commodity prices, robust upstream capital spending, and anticipated year-over-year growth in exploration drilling. Taken as a group, these indicators support our view of a longer duration upcycle in deepwater drilling. Let's look at some of the numbers in support of a longer duration upcycle. Exploration drilling can be considered a leading indicator and a precursor to future development programs. and analysts now forecast year-on-year growth in floater exploration wells of 34%. Subsea tree orders are another leading indicator, and 2024 forecasts predict the third year in a row with over 300 new trees ordered. This level of order activity is the highest it's been since 2013, at a time when we had 115 more rigs in the market than we do today to execute the related drilling activities. Putting subsea tree orders into perspective relative to the global marketed floater fleet, back in 2012 and 2013, the number of orders per marketed floater peaked at 1.5 and 1.8 trees ordered per marketed floater respectively. In comparison, in 22 and 2023, Those numbers were 2.1 and 1.8, and the 2024 forecast stands at approximately 1.9. This would indicate three continuous years with numbers matching or exceeding measures dating back 12 years. These trends sync well with the Atlas forecast for floater demand on a rig years basis. The forecast compound annual growth rate of rig years of demand from 2023 to 2026 high region are 7% for North America, 11% for South America, 10% for the North Sea, 7% for West Africa, and 25% for Southeast Asia and Oceania. Another key metric we track is the trailing four-quarters tender activity on a rig years basis. It has been a bumpy road from a peak in 2012 of approximately 106 rig years tender implied trailing demand to a SOCL bottom of 28 in 2016 and a COVID bottom of 35 in 2020. The industry closed 2023 with 106 rig years of tender implied trailing demand, matching the number from 12 years ago. Closer to home, we are currently tracking 51 opportunities representing 52 rig years of demand with commencement dates through 2025, of which roughly 61% are for DP rigs and 39% for MARD rigs. The start date profile for these opportunities rises from a low in Q2 2024 to a peak of 12 and 11 in Q4 24 and Q1 2025, respectively. This data lends credence to the view that the second half of this year looks to be positive in terms of the number of expected fixtures and contract starts. For diamonds specifically, the UK sector of the North Sea continues to develop as a bright spot, with increasing demand in the region with shrinking harsh environment rig supply. Recent long-term commitments by operators in the region support our view that demand for plug and abandonment, or P&A, work is becoming more certain and exists in larger quantities than previously anticipated. Additionally, green shoots of future drilling demand have emerged on the heels of the recent oil and gas licensing round, where 27 licenses were awarded for areas that have the potential to be brought into production quickly. Assuming options are exercised on the Black Hawk, we have one drill ship, the Black Rhino, with availability late this year. We are currently pursuing eight opportunities for the Black Rhino, all for work commencing following the conclusion of its contracting report, its SPS, and MPD upgrade. In the context of these improving markets, we have been able to firm up additional contract term for 2024 and build significant backlog commitments for 2025 and 2026. Here today, we have secured $362 million in new contract awards, one for our seventh generation drill ship, the Black Line, at leading edge rate, and one for our moored harsh environment semi, the Patriot. The Black Line contract will start in direct continuation of its current work without any gap between contracts and provide firm work through the third quarter of 2026. Under this new contract, the Black Line will be positioned to generate approximately $115 million in annualized rig-level EBITDA and contribute significantly to our cash flow in the coming years. The Patriot contract is for a 60-day 2-well P&A campaign and is set to commence this week, filling in some of the gap in its schedule before beginning its three-year contract in early 2025. On the back of our recent contract announcements, excluding cold-stacked rigs, we have 87% of our 2024 capacity contracted, 91% if you include priced options. Looking further out, excluding co-stacked rigs, we now have 36% of our 2025 capacity and 30% of 2026 capacity contracted. If we include priced options, the 2025 number goes from 36% to 59%, with notable contracting opportunities on the Black Rhino, Black Hornet, Endeavor, and Apex to further secure backlog. Over the last 20 months, we completed special periodical surveys, or SPSs, on six of our 10 actively marketed rigs, with a further two rigs due in 2024 and one in 2025. Through the combination of reduced planned shipyard days Our recent backlog additions are positive exposure to improving market conditions. We are providing materially improved EBITDA and cash flow visibility through 2026. I will now turn the call over to Dominic before returning with some concluding remarks. Thanks, Bernie, and good morning or afternoon to everyone. In my prepared remarks this morning, I'll provide a recap of our results for the fourth quarter, including some operational highlights and additional details on our recent contract awards, the estimated financial impact of the recent Great White event, and guidance for the first quarter and full year 2024. For the fourth quarter, we reported a net loss of approximately $146 million for $1.42 per diluted share. The reported loss consisted of net income before tax of $29 million and non-cash tax expense of $174 million. As discussed in prior quarters, the large tax expense in the quarter was the result of the reversal of the tax benefit recorded in prior quarters and the further normalization of our overall tax expense for the year. The results for the fourth quarter included a reported adjusted EBITDA of $72 million, well in excess of our guidance for the quarter of $50 to $60 million, with the U.S. GAAP required deferral of approximately $8 million of pre-contract commencement costs for the Courage and Blackhawk, contributing to the favorable results. Our reported adjusted EBITDA for the quarter represents a significant increase compared to our adjusted EBITDA of $28 million reported in the third quarter. And this quarter-over-quarter increase was primarily a result of higher revenue reported in the fourth quarter. Excluding reimbursable revenue, revenue for the fourth quarter was $280 million, slightly higher than our guidance for the quarter, and up from $225 million in the prior quarter. This improvement was primarily a result of the Blackhawk commencing its contract in the Gulf of Mexico in early November after its SPS and MPP upgrade in the third quarter, the Patriot being on contract for the entirety of the fourth quarter after being between contracts in the prior quarter, and the Black Rhino earning its largest performance bonus to date during the fourth quarter. Contract drilling expense increased to $189 million for the quarter compared to $182 million for the prior quarter, primarily as a result of higher charter costs for one of our managed rigs and the accrual of the annual bonus expense related to the drill ship's BOP service agreements, partially offset by the absence of costs associated with the apex of the shipyard period in the prior quarter. Operating cash flow for the fourth quarter was $9 million, with negative free cash flow of $22 million, as compared to negative free cash flow of $48 million in the third quarter. The improvement in free cash flow was primarily a result of increased EBITDA and lower CapEx in the fourth quarter, offset by greater working capital use during the quarter as a result of commencing higher day rate contracts and the resulting higher accounts receivable at year-end. For the full year 2023, we reported revenue, excluding reimbursable revenue, of $984 million and adjusted EBITDA of $158 million. Apex for the full year was $132 million. After the successful execution of our capital structure refinancing in the third quarter, we exited 2023 with unrestricted cash and cash equivalents of $124 million, and total liquidity of $422 million, including the undrawn balance of our revolving credit facility. Expanding a bit more on the fourth quarter operational highlights, we had notable successes in each region in which we operate. In the Gulf of Mexico, Blackhawk commenced its new contract in November at the start of the commencement window after undergoing its SPS and MPD upgrade. In West Africa, the Black Rhino earned performance bonuses in the quarter totaling $3.2 million, the ninth bonus achieved during the Senegal campaign. In the North Sea, the Patriot executed a P&A campaign for a customer over the course of the fourth quarter and into January of this year, being on contract almost twice as long as originally anticipated. In Australia, after coming out of the shipyard in the third quarter, the APEX successfully commenced a contract for a new customer during the fourth quarter at a higher day rate. In Brazil, after completing its prior three-year contract with Petrobras in the third quarter, Courage safely and timely completed its SPS and contract preparation activities and commenced its new four-year contract with Petrobras in mid-December. Turning now to the Great White, and our estimate of the financial implications of the unintentional release of the LMRP and RISER. As Bernie noted, the Great White is currently in the process of recovering the LMRP to the surface and is estimated to be back earning day rate by the end of April or early May. As a result, we currently estimate that we could be off rates for approximately 90 to 100 days, which could result in approximately a $24 to $27 million reduction Our current estimate of incremental recovery costs and repairs and maintenance is approximately $20 to $25 million, and our current estimate of replacement capital expenditures is approximately $12 to $15 million. We anticipate that the incident will be covered by our hull and machinery insurance policy and that all incremental costs, less our $10 million deductible, should be reimbursable under the policy. In addition, we maintain loss of higher insurance on the Great White. After a 60-day waiting period, the loss of higher insurance provides $150,000 per day for up to 180 days for each day of lost revenue as a result of a covered property loss claim. Based on our current expectations of being out of service for approximately 90 to 100 days, the loss of higher insurance may provide proceeds of approximately $4.5 to $6 million. Because the accounting treatment of insurance proceeds creates complexities in the reporting of financial results, and because the actual financial impact of the Great White incident is not yet known, we are presenting our initial guidance for 2024 results by excluding the estimated financial impact from the Great White event. We believe that this normalized approach will provide more accurate and meaningful visibility into our expectations of our ongoing recurring operations without regard to this extraordinary isolated incident. In addition to having a strong financial performance in the fourth quarter, we also had significant success in the quarter and early this year in booking new contracts, as Bernie mentioned. In the Gulf of Mexico, we enjoyed significant contract wins in the past month with the Black Lion executing a contract extension with its current customer with a duration of two years and a contract value of approximately $350 million. With this new contract, the Black Lion is now contracted through the third quarter of 2026. In addition, in the fourth quarter, the Black Rhino was awarded a contract in direct continuation of its Senegal campaign at a day rate in excess of $500,000 per day, the highest clean day rate awarded during this upcycle. These recent contract awards push the average day rate in our drill ship backlog up to $408,000 per day. Also during the quarter, the Patriot was awarded a contract valued at $240 million for a 35-well P&A campaign representing approximately three years of firm work expected to commence in early 2025, with up to 17 additional P&A wells subject to priced options that would add a fourth-year duration. Subsequent to year-end, the Patriot was also awarded a two-well P&A campaign commencing later this week filling in some of the gap before commencing its three-year contract in 2025. The Patriot is also being considered for additional work later in 2024, evidence of the improving moored floater market in the North Sea. Turning now to our normalized full-year 2024 guidance. Our $1.4 billion in backlog as of January 1, 2024, Combined with our year-to-date 2024 contract awards of $362 million, gives us visibility to over $1.6 billion of firm work to be performed over the coming years and positions us extremely well in terms of contract coverage for 2024, with 91% of our available dates, excluding cold stack rigs, committed with firm contracts or priced options. Our 2024 revenue, excluding reimbursable revenue, and excluding any estimated impact of the Great White Event, is currently expected to be between $940 and $960 million. This expected level of revenue represents a slight decrease from the revenue we earned in 2023. This expected decrease is primarily due to the managed rigs transitioning back to their owner over the course of 2024. and our plans for the Black Rhino to spend time in the shipyard conducting its SPS and MPD upgrade later this year.
spk07: Partially offset by higher day rates for the Blackhawk, Courage, Apex, and Black Lion during the year.
spk06: Our EBIDA guidance for 2024, again excluding any impact of the Great White Incident, is currently expected to be between $230 and $250 million dollars. a more than 50% increase over 2023 EBITDA, largely driven by higher day rate contracts and increased EBITDA margins due to the return of the lower margin managed rigs back to their owner. It is worth noting that our EBITDA guidance for 2024 includes approximately $20 million of non-cash net amortization expense as required by U.S. GAAP accounting rule, associated with the Courage and Blackhawk pre-commencement contract activities that occurred in 2023.
spk08: DNA expense for 2024 is expected to be between $72 and $77 million.
spk06: Net interest expense for the year is currently expected to be approximately $40 to $45 million, and cash taxes are expected to be approximately $5 to $10 million. CapEx for 2024 is currently expected to be between $125 and $135 million, excluding any CapEx resulting from the Great White event or the potential reactivation of the Onyx should it be successful in securing a long-term contract. Our estimated CapEx spend for 2024 includes the installation of MPD equipment and the SPS for the Black Rhino, the SPS for the Black Hornet, as well as the BOP recertification for the Endeavor. Taking a look at our guidance for the first quarter, again, excluding any impact of the Great White Incident, we currently expect revenue, excluding reimbursables, to be between $260 and $270 million, EBITDA to be between $45 and $55 million, and CapEx to be between $38 and $43 million. Our expectations for the first quarter of 2024 are lower than the fourth quarter of 2023, as a result of the Patriot being off contract for a portion of the quarter and the amortization of pre-contract commencement costs for the Courage and Blackhawk. Despite this dip in Q1, our projected EBITDA results for the year are essentially equally weighted between the first half and second half of the year, and we expect our free cash flow in 2024 should be meaningfully greater than 2023. Beyond 2024, our visibility to estimated future earnings and cash flow is increasing as a result of our growing backlog at higher average day rates. In addition to our 91% contract coverage in 2024 for firm contracts and priced options, excluding cold stack rigs, we have 59% and 30% of available days committed for 2025 and 2026, respectively. This level of contract coverage positions us extremely well for the next three years, yet still provides plenty of room for positive operational leverage as recontracting opportunities arise. And with the continued favorable fundamentals of the deepwater offshore industry, we are confident that we will be able to continue to secure meaningful day rate increases for our rigs as contracts roll over. And finally, by the end of 2024, We expect our net leverage ratio and other requirements under our credit facility and bond indenture to be met, which would allow our board to begin to consider the appropriate timing for a shareholder return program. That concludes my prepared remarks.
spk08: I will now hand it back to Bernie for some closing comments. Thank you, Dominic.
spk06: In the near term, our organization remains focused on the safe and timely restart of the Great White. Looking further ahead, as the black line rolls to its higher day rate in Q3, followed closely by an option on the black hog, we will have five out of our nine active rigs on contracts at market rates. We're ideally positioned to capture further upside in the strengthening drill ship market with the black rhino in late 2024 and the black hornet in early 2025. Similarly, the supply and demand picture for harsh environment semis bodes well for upside on the Endeavor, Apex, and Great White as we progress through 2025. In the interim, we are targeting several near-term opportunities for the Patriot that would allow us to fill a portion of the gap in 2024 prior to its long-term campaign in 2025. These factors, combined with a notable decrease in planned shipyard days, position us to deliver growth in both EBITDA cash flow while making significant progress in deleveraging our balance sheet. We appreciate your interest in Diamond Offshore and will now open the call for questions.
spk09: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And the first question comes from Eddie Kim with Barclays. Your line is now open.
spk01: Hi, good morning. So, very constructive market outlook you provided here, but I'm just curious if you've been surprised at the lack of contracting for the 10 or so 7-gen sidelined drill ships. It seems like until all or maybe most of these sidelined rigs are absorbed, it might put a lid on day rate increases here in the medium term. So, Have you been surprised here? And if you had to guess, just based on the demand you're seeing, do you think maybe we could see four or five of these 10 sideline rigs announce contracts by year end?
spk08: Thanks for the question, Eddie.
spk06: I wouldn't say surprised. I mean, looking at our investor presentation, you'll sort of see the staggered impact of new contract awards we expect throughout the year. Clearly, we would have expected some contracts to be awarded earlier than they have been, particularly one opportunity in Petrobras that we thought would have been already awarded at this stage. I certainly expect those awards to come through in the very near future. Q1 is typically a quiet time of the year and not any different this year if you look back from a historical perspective. As far as Sideline rigs returning to the market, I would expect, yes, that five to six of those do secure contracts by the time we reach the middle of this year, Eddie. I think that's highly anticipated and would be what I would say is right down the middle of the fairway in terms of our expectations.
spk01: Sorry, just to clarify, you said five to six maybe announced contracts by middle of this year, so in a couple months?
spk06: Yes, by the middle of this year. Middle of this year. So these are contracts that would have start dates Q3, Q4, and Q1 of 25. Got it. There's sort of a demand around that time period. And typically, you'll see the contracts announced six months the actual start dates.
spk01: Got it. Thanks for clarifying that. My follow-up is just on the black rhino. You highlighted eight potential opportunities for the rig. Could you see the rig mobilizing to outside West Africa? Do you see the rig staying in West Africa at this point? And And separately, after it comes off contract, it goes in for a five-year SPS and an MPD upgrade. We've typically seen an MPD being upgraded for a rig for a specific contract, but it seems like in this case it's voluntary or maybe a preemptive upgrade on your part. So just wanted to get your thoughts here on why you're choosing to add the MPD on this rig.
spk06: Eddie, we're currently tracking four opportunities that start in Q4 and four that start in Q1 of 25 for the rhino. Those opportunities, some are in West Africa, some are in South America, and some are in the U.S. So it's hard to handicap where the rig will be next in terms of the opportunities we're currently tracking. I wouldn't expect any gap in the rig schedule after completion of the SPS and MPD installation based on our market intelligence as we sit here today. With regard to the MPD, it was a proactive decision to ensure that our four black ships were and remain in the top 30 rigs in a worldwide basis from a technical specs perspective. Having an NPD assures that you can bid on every opportunity that's out there and gives you a greater set of opportunities from which to secure work. And obviously, you can get some upside in terms of your rate for the NPD. But first and foremost, we look at it as a key to entry and ability to bid on every single tender that's out there for a drill show.
spk01: Got it. Got it. Great. Thanks for all that color, Bernie. I'll turn it back.
spk09: One moment for our next question. Next question comes from David Smith with Pickering Energy Partners. Your line is now open.
spk13: Hey, good morning. Good morning. Thank you for taking my questions, and congratulations on a solid quarter.
spk10: Thanks, Dave.
spk13: I wanted to make sure I understood the 24 guidance. Y'all were pretty clear, but just making sure, excluding the Great White impact, we should think about that guidance as if the Great White had been working at its contracted rate with no interruptions.
spk06: Yes, that is correct. We will normalize our results for any impact that the downtime has or the insurance proceeds have as we report throughout the year. So that is a correct assumption.
spk13: appreciate it and for the on the financial impact for the property insurance with a 10 million dollar deductible should we think about that as only applying to the 12 to 15 million of replacement capex or would the recovery costs I think estimated 20 to 25 million also apply to that policy all of those costs would be covered by the policy so absent absent
spk06: Certainly, it's subject to the claim with the insurance company and what is covered, but the expectation is that all of that is potentially eligible to be recovered as part of the insurance policy.
spk13: So, this could potentially, after insurance, be a net impact of maybe low $30 million range?
spk06: Right, yeah. By the time you factor in the loss of revenue, the potential loss of higher as well as the $10 million deductible, it's right at $30 million. Based on our current estimate of 90 to 100 days.
spk13: Thank you.
spk09: Well, I'll circle back in the queue.
spk08: Okay. Thanks, Dave.
spk09: One moment for the next question. The next question comes from Frederick Steen with Clarkson Securities. Your line is open.
spk16: Hello, Bernie and team. Hope you are well and for me as well.
spk17: Good quarter.
spk16: I wanted to follow up a bit on your fleet. You clearly have good coverage for 24 and I think your revenue guidance is a testament to that. It's quite a narrow um range um so so i wanted to um you know get a few details on how that range is being built up um you know if it's uh will it be dependent on what you for example are able to secure additional work on patriot does it assume any uh impact of the onyx you know you're marketing that um or does it assume you know for example that the priced options on the Blackhawk and the Park and the Great White that in 2024, although minimal, will also be exercised. Any thinking or thoughts around how we can move from the low to the high end of that range would be very helpful. Thanks.
spk06: I'll ask Dominic to comment on it, and I'll make some introductory comments first. Our current line of thinking is that we will secure additional work for the Patriot. We're actively pursuing two more probable than less opportunities right now for the Patriot for work in 2024 that would help us fill that gap. We don't anticipate filling 100% of the gap throughout the year, so in part the range reflects filling a portion of the gap. As far as the price to option, the hawk goes our current expectation is that is more likely than not that the client chooses to exercise the option but obviously that speculation at this point in time we would expect clarity on that in the first half of the year and have good visibility one way or the other on that and then with respect to the great white we continue to anticipate is not only the farm work that's already committed for the Greg White, but at the tail end of the year, the livelihood and additional options become exercised. And to add to that, the Patriot is probably our biggest variable there. Certainly, we're optimistic that we'll be able to secure additional work for the Patriot, but given the fact that we've got a 2025 contract start, It's unlikely that we'll be able to release the crew or otherwise we'll have to maintain those costs. So every dollar of revenue we're able to achieve there is going to be upside relative to what we've considered in the forecast. Adding the onyx into the mix, in fact, that would most likely be a negative to the forecast because the opportunity for the onyx is really, would be something that would more likely begin in 2025. such that we have to reactivate the rig earlier than that and incur the cost, recrue a deal with that CapEx in the second half of 2024 if that were to be the case. So the onyx variable, certainly currently not considered, but if it were to be contracted, it would most likely be negative relative to 2024.
spk08: That's very helpful.
spk16: And you partially kind of answered my follow-up. on the Patriots, are you able to, you know, share, I call it, how much of the gap you would expect, you know, sensible to model, not 100%, but do you think 50, 60, 30, 70?
spk06: I'd say 40 to 50% of the gap we're hoping to cover, particularly, I mean, the summer months, it would be the likely timeframe. So, Q2 and Q3, more likely than Q4, but I think 50% from a modeling perspective is probably not too far off.
spk08: That's very helpful.
spk16: Finally, now that you're refinanced, new bond in place, lots of liquidity through the RCF, good coverage on 2024, and coming into a period where some rigs have or rigs will be substantially repriced on the upside. Are you feeling or thinking actively about anything strategic? I know this is a recurring question in a way, but it's been quite quiet on the M&A front. Oil service sentiment in the equity market has been a bit off. But has anything changed on your side in terms of you know, thinking around consolidation where diamonds place in that mix could be acquired, be acquired, et cetera, or are the M&A discussions dead for now?
spk04: Thanks for the question, Frederick.
spk06: It's an ever-recurring question, but a fair question nonetheless. At this point in time, our view is with the strength of our backlog, with the strength of our balance sheet,
spk08: We look to be a net acquirer, Frederick, going forward. All right.
spk14: Looking forward to all of you, as always. Thank you so much for taking my questions, and have a great day.
spk09: As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. One moment for the next question. The next question comes from Noel Parks with Tuohy Brothers Investment Research. Please go ahead.
spk08: Hi, good morning. Good morning, Noel.
spk15: Just a couple of things. You know, one thing that has been coming up more frequently as companies have been reporting this quarter is it, it seems it's more consistent that, uh, various drillers are indeed seeing customer making that shift towards prioritizing the de-risking of future rig rates, um, to the point that some of them are maybe some of the larger ones are even, uh, it might be furniture to call it doing speculative bidding, but, uh, but just that the trend, that trend does indeed seem to be materializing, and I recall it's something you saw hints of on the horizon. Is, you're still seeing that to be the case, and anything anecdotally you can point to that's reassuring on that front?
spk08: Thanks for the question, Noel.
spk06: We continue to see client behavior that is consistent with the thesis that they're looking to de-risk their future big-rate upside exposure. We're seeing longer-term contracts come through the door. The ones we're looking at now average just over a year, but we're seeing numerous three- to five-year opportunities come through the door and certainly a fair share of two-year opportunities. All would lead me to believe that the thesis remains that For the longer term, clients have significant development work. They know what they want to do, and they want to de-risk those projects by securing firm day rates in the near term.
spk08: Great. Thanks.
spk15: And, you know, of course, there is this keen interest by observers, the street about every contract and, of course, that desire to have them all decided and announced sooner rather than later, which, of course, is certainly every driller's interest as well. I just wonder, just being realistic about some of the tensions with being at very high utilization. Are there any sources of variability that could affect timing that people ought to have in mind just to be realistic looking at the quarters ahead? And I'm thinking things even, you know, differences in lead time between, you know, getting a deal signed in Africa versus, you know, a private direct deal in the Gulf.
spk08: Noel, I want to make sure I understood your question.
spk06: Are you asking from a diamond perspective? Are we seeing the likelihood of a high variability in future commitments? Or was your question more broad? And could you maybe restate it to make sure I'm clear on your question?
spk15: Sure, just more broadly. There's just so much scrutiny. Everyone's kind of hanging on seeing what the next contract announcement is, pretty much for every driller. But so I just am concerned that maybe people who haven't paid a lot of attention to the industry recently or just catching up to what's going on in the current cycle, you know, have this worry, you know, why isn't it happening faster? And just some of that, it seems to me, is probably not realistic considering that you're getting to such high utilization right now. So just anything to kind of give perspective on the pace of signings and, you know, you know, why that certainly is consistent with what you'd expect these days.
spk08: Yeah.
spk06: I'll start by saying, you know, as we finished the third quarter, the pace of signings was, for 2023 up to the end of the third quarter, was at a very high pace. You know, unprecedented in modern times, I guess you would say. We continue to see that the tenders out there, they're looking for commitments minimum of six months prior to the start of work, and in many and most cases as much as one year and even more than a year before the actual commencement date. I think what we're going through right now in Q1 is what I'm going to generally classify as noise relative to the longer-term trends. I think you're going to see some clients take advantage of uncertainty, if you want to call it that, by securing one or two rigs at below market rates. We've seen one interesting deal out there around the client securing partial ownership in an asset. We have two to three stranded assets out there that are very interested in getting into the market. And we have some people that may be interested in protecting the downside. So I think you'll see a few rates in what I would call the 300s for lower spec rigs or stranded rigs. But I think, again, that's noise. If you look at the average of what I think you're going to see contract signs and executed at this year, I'm going to say it stays in the 450 to 490 range. Even with averaging in the lower day rate contracts that are out there and are likely to come through where people are just looking for term over price for what I would call a second tier or sixth generation single activity or one BOP asset.
spk08: Great, thanks for the answer.
spk15: Sorry, please.
spk06: Sorry, to add to that, Noel, sometimes longer term contracts that operators are talking about take longer to negotiate. You want to make sure that both on the drilling contractor side as well as on the operator side that you get the liabilities right, you get the escalation factors right, you get the day rate right. So that could also be influenced some of the timing as we're talking about longer term.
spk08: Right. Absolutely. Thanks a lot.
spk09: At this time, I show no further questions. I would now like to turn the call back to Bernie Wolford, CEO, for closing remarks.
spk06: Thanks all for your participation in today's call. We look forward to speaking with you again next quarter and have a great day.
spk09: This concludes today's conference call. Thank you for your participation. You may now disconnect and have a great day.
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