Transocean Ltd (Switzerland)

Good day and welcome to the Q1 2021 Transocean Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Lex May, Manager of Investor Relations. Please go ahead.

Thank you, Shelby. Good morning and welcome to Transocean's first quarter 2021 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 Thigpen, President and Chief Executive Officer, Mark May, Executive Vice President and Chief Financial Officer, and Roddy McKenzie, 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 our forward-looking statements and for more information regarding certain 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.

Thank you, Lex, and welcome to our employees, customers, investors, and analysts participating in today's call. As reported in yesterday's earnings release, for the first quarter, Transocean delivered adjusted EBITDA of $245 million on $709 million in adjusted revenue, resulting in an adjusted EBITDA margin of over 35%. Despite the many challenges over the past year, we have continued to deliver best-in-class operations for our customers, picking up in 2021 essentially where we left off in 2020. As you may remember from our last call, we delivered the best overall annual operational performance in Transocean's history. This performance continued into the first quarter of 2021 as we delivered over 97% uptime across our global fleet, achieving one of the strongest operational quarters in company history in both uptime and safety performance. I cannot stress enough how proud I am of the dedication exhibited by our employees to deliver these amazing results. For that, I say thank you to our entire team at Transocean for their devotion each and every day to deliver best-in-class service to our customers. Turning now to the fleet, starting in the Gulf of Mexico, I am pleased to announce the Deepwater Asgard was awarded a three-wheel fixture with Beacon Offshore Energy following its successful 2020 campaign. And, as compelling evidence of improving market conditions, this most recent fixture includes two wells priced at $240,000 a day, with a third well, which requires managed pressure drilling, priced at $280,000 a day. This award adds over $30 million in backlog and provides us with the opportunity to reactivate a warm-stacked asset in the Gulf of Mexico. The campaign is expected to commence in June and should continue through October and includes a one-well option. While we are still not earning the day rates we want or need to provide the appropriate returns to our shareholders, this fixture clearly demonstrates both the tightening market in the Gulf of Mexico and Transocean's ability to command premium rates based upon our industry-leading assets and services. As you may know, the Asgard is one of the most technically advanced and well-respected assets in the U.S. Gulf of Mexico. As such, we're excited to get her back on contract at what is currently a market-leading day rate. And we're actively bidding the Asgard into multiple follow-on opportunities in the Gulf of Mexico, reinforcing our belief that the offshore recovery is starting to take shape. Moving down to Trinidad, the DD-3 continues to demonstrate operational excellence with Shell and is set to start her next fixture with BHP directly after completing her current contract in June. Including options, the DD-3 could remain on contract with BHP in Trinidad through September. And because of her stellar reputation and versatility, we are bidding her into multiple opportunities around the world. Continuing our journey further south to Brazil, the Petrobras 10,000 is scheduled to conclude her contract with Petrobras in September. As such, we're in the middle of discussions with Petrobras about a possible long-term extension. Jumping over to Norway, the Transocean Norga was just awarded another one-well extension by Equinor at $297,000 per day plus bonus. The rig is now expected to remain on contract through June and is actively being bid into multiple opportunities in the robust Norwegian market. This state-of-the-art rig has developed a strong operational reputation and continues to draw customer interest from both NOCs and independents. Also in Norway, the Transocean Barons is scheduled to commence her campaign with MOL Norga next week, which is expected to run to the fourth quarter and possibly beyond. Again, we remain encouraged by the Norwegian market's resilience and future outlook. Turning now to West Africa, as we noted on last quarter's call, the Deepwater Ski Roast was awarded Total's Rig of the Year thanks to its superior operational performance. As additional confirmation that our performance is a key differentiator, we are in the middle of discussions with our customer about a possible six-well option expected to last for more than a year for the rig. And finally, looking at the Asia-Pacific region, just last week, the Deepwater Nautilus began her 90-day campaign with POSCO. This contract will keep the rig active through July. We are actively bidding the Nautilus into multiple follow-on opportunities in the Asia-Pacific region. Looking forward, we are encouraged by the relative stability in oil prices, as they've remained persistently above $60 per barrel since early February. As the COVID-19 vaccines are distributed around the world, we expect that global demand for hydrocarbons will continue to recover, and as global oil inventories decline, prices are likely to push even higher. Most importantly, we believe our customers also subscribe to this view. Their confidence in improving oil market fundamentals has resulted in accelerated planning for new or previously delayed projects, many of which are expected to commence later this year. Taking a closer look around the global market environment, starting in the U.S. Gulf of Mexico, activity is expected to increase with several projects starting late this year and in early 2022, with awards expected in the next several months. Importantly, if all of these projects move forward as expected, we believe that the entire Gulf of Mexico fleet of active rigs will be sold out later this year. This is something that the industry hasn't even contemplated since 2014, and clearly supports a meaningful inflection in day rates from current levels. It's important to note that we are not only responding to more tenders, we are also engaging in far more direct negotiations, particularly with customers operating in the Gulf of Mexico. In fact, one IOC has recently submitted a request for a proposal for multi-year contracts for two of our highest spec rigs. And there are other indications that there will be more projects moving forward. Independents and IOCs are both requesting information on available assets in this region, with an urgency not seen in quite some time. In fact, operators are increasingly entertaining paid mobilizations and reimbursement of project-specific rig upgrades, another important data point that indicates improving market conditions. The increased level of activity we are seeing in the U.S. Gulf of Mexico corresponds to the belief that many of our customers are redirecting their focus to offshore projects from onshore shale opportunities. This is the result of pressure our customers are facing to generate cash flow and acceptable economic returns while maintaining spending discipline, something that shale has not been able to deliver. We also believe the focus on carbon emissions are playing into investment decisions for our customers. We believe that this shift from shale and oil sands to offshore could also be influenced by the fact that, according to NOIA, one barrel of oil from the deepwater Gulf of Mexico has the lowest carbon intensity of any other oil in the United States. Remaining in the U.S. Gulf of Mexico, we remain optimistic about our new-build drill ships, the Deepwater Atlas and the Deepwater Titan, on order from CEMCOR Marines Drone Shipyard, which are expected to commence their maiden projects with Beacon Offshore, Energy, and Chevron, respectively. That said, global supply chain disruptions related to the pandemic are expected to result in delays in deliveries from the shipyard for both rigs, thus affecting the timing of our capex spend, which Mark will provide additional details on, as well as a delay in the commencement of each rig's maiden drilling campaign. As you might expect, the delay has a fairly broad impact, and we are in ongoing discussions with Femcor with a range of potential outcomes, Since we are actively engaged in discussions with all parties, we are unable to provide any additional detail at this time. However, I can tell you that the conversations with Chevron, Beacon, and CEMCOR remain constructive. In Brazil, Petrobras continues to award contracts, adding long-term fixtures for several projects. They also recently launched several additional multi-year tenders for the Campos and Santos basins that should absorb many, if not all, of the available rigs in Brazil. Based on Petrobras' tendering activity and the incremental demand forecasted from the IOC, we expect the recount of Brazil to rise steadily over the next couple of years. We are also optimistic that a handful of successful exploration wells in the pre-salt fields by the IOC will signal a welcome return of activity in Brazil to levels not seen in several years. In Norway, we're excited about the opportunities unfolding as a result of the government's enactment of favorable tax incentives for oil and gas projects sanctioned during the next two years. We anticipate this market will continue to remain in balance as more projects are brought forward to capitalize on the favorable investment incentives. With much of the Norwegian fleet already contracted, opportunities for 2022 and beyond are now beginning to appear on our radar, voting well for the continued high utilization and strong day rates for our assets. Looking now at the UK, we are witnessing a surge in market opportunities and are actively responding to a number of new tenders that emerged over the past couple of months. Current opportunities could add over five rig years of work that would start within the next 12 months. And due to the lack of warm assets in this market, available assets could command increasingly stronger day rates. If this happens, given the prohibitive cost of reactivating a cold stack rig, we could find ourselves in an environment in which hot rigs from Norway are being attracted to this market to perform some of the work anticipated over the next year. Turning to West Africa, our customers are becoming more willing to consider programs in this region. In fact, we're seeing multiple opportunities emerge for both short- and long-term work. Additionally, we are eagerly awaiting both Total's and Exxon's awards for multi-year programs in Angola that would add a minimum of three and a half rig years of work beginning in 2022. We believe we are well-placed to capitalize on one or more of these opportunities. In the Asia-Pacific region, which includes Australia, we see several short- and medium-term opportunities starting in the second half of this year and carrying over into next. We are encouraged by the continued volume of opportunities this region has generated. In fact, this morning, we also secured additional work for the Deepwater Nautilus in Southeast Asia that is in direct continuation of its current contract and will keep the rig busy into 2022. In summary, we believe we are in the early stages of a sustained recovery for offshore drilling. We are very encouraged by the improving macro environment and the ongoing conversations with our customers for opportunities emerging in the second half of 2021 and into 2022. On last quarter's call, we noted that the volume of opportunities was now back to pre-pandemic levels. This trend has not only continued, but further strengthened in certain parts of the world. I'd now like to take a moment to discuss the recent industry consolidation. As you may know, many of our peers have recently emerged from restructuring, and as expected, we are now starting to see much-needed consolidation, with the first major transaction recently announced between Noble and Pacific Drillings. We welcome these actions as it improved the industry structure, and we expect it to drive more disciplined behavior, including, but certainly not limited to, contracting practices and accelerating the retirement of more floating assets. We believe we will continue to see further consolidation, which in turn could lead to more rig retirements and a more balanced market. The stage is being set for a strong recovery in offshore drilling, with demand for rigs increasing and the marketable supply of rigs simultaneously decreasing. If the market plays out the way we currently think it will, day rates could, and for Transocean should, significantly increase as we move into 2022 and beyond. Our fleet of high specification floaters is exceptionally well positioned to capitalize on the recovery, ultimately providing us with the opportunities to generate sufficient cash flow to meaningfully deliver the balance sheet when opportunities arise. While we are increasingly encouraged by the market dynamics and take comfort in our approximately $7.4 billion backlog, we will remain pragmatic and prudent in our operational and financial planning, recognizing that there are always going to be unforeseen challenges. In conclusion, Transocean has strategically assembled the highest specification floating fleet in the industry, with the industry's most experienced crews and shore-based support team. We maintain the largest contracted floating fleet with the largest and certainly highest quality backlog, providing us with the visibility to future cash flows that we need to continue to invest in the training of our valued employees and the maintenance of our assets. As such, we are best positioned to overcome challenges and benefit from the oncoming market recovery. We're seeing data points now that confirm our belief a full-scale recovery in the deepwater market is beginning to emerge later this year. Indeed, as oil inventories continue to deplete, our customers need to replenish the reserves through high-quality, cash-flow-generating projects seen offshore. We are proud to have positioned ourselves as the industry leader in harsh environment and ultra-deepwater drilling and will continue to deliver best-in-class operating performance while strategically continuing to refine our fleet to further enhance our position. And, as always, we remain committed to creating value for our shareholders. Needless to say, we are encouraged by various market data points and will continue to execute our strategic priorities to further enhance our position as the industry leader. Mark?

Thank you, Jeremy, and good day to all. During today's call, I will briefly recap our first quarter results the second quarter, and then update you on our liquidity forecast through 2022. As disclosed in our press release, which includes additional details for the first quarter of 2021, we reported a net loss attributable to controlling interest of $99 million, or $0.16 per dilute share. After adjustments associated with retirement of debt, disposal of assets, and discrete tax items, We reported adjusted net tax loss of $117 million, or 19 cents, per diluted share. Highlights for the first quarter include adjusted EBITDA of $245 million, reflecting robust revenue generation and excellent cost control. Speed-wide revenue efficiency of 97.4%, showcasing our operational excellence and yet another quarter of excellent backlog conversion. and $96 million of positive cash flow from operating activities. Looking closer at our results, during the first quarter, we delivered adjusted contractual revenues of $709 million. This was above our guidance, primarily due to stronger than forecast agreeability efficiency, as well as higher than anticipated reimbursable expenses. Operating and maintenance expense for the first quarter was $435 million, which is slightly below our guidance. primarily due to the timing of certain shipyard projects. Energy cash flow and balance sheet. We ended the fourth quarter with a total liquidity of approximately $2.7 billion, including unrestricted cash and cash equivalents of approximately $1.1 billion, approximately $300 million of restricted cash for debt service, and $1.3 billion from our ongoing revolving credit facility. Let me now provide an update on our financial expectations for the second quarter. We expect adjusted contract ruling revenues of approximately $675 million, based upon an average fleet-wide revenue efficiency of 95% and lower reimbursable revenue. We expect second quarter O&M expense to be approximately $445 million. The $10 million quarter-over-quarter increase is primarily attributable to the translation of Barrett's and Deepwater Asbro directivation. as well as high-end service maintenance expenses across the working fleet. From an activity standpoint, the Deepwater Nautilus commenced her campaign with POSCO in April, the Trans-Asian Barrens took a kick off her campaign next week with MOL Norga, and the Deepwater Asgard will look to commence her campaign with Beacon at the end of June. This increase in activity will be largely offset by the KG2, which concluded the contract with Woodside in April and is temporarily warm-stacked in Asia as we burrow into multiple opportunities. We expect G&A expense for the second quarter to be approximately $40 million in line with the first quarter. Net interest expense for the second quarter is forecasted to be approximately $110 million. This includes capitalized interest of approximately $12 million. Capital expenditures, including capitalized interest, for the second quarter are forecast to be approximately $60 million. This includes approximately $40 million for new-build drill ships under construction and $20 million of maintenance paychecks. Cash taxes are expected to be approximately $15 million for the quarter. And liquidity at December 31, 2022 is estimated to be between $1.2 and $1.4 million. This estimate includes the potential securitization or the deported titan. This liquidity forecast includes an estimated 2021 capex of $725 million and 2022 capex expectation of $835 million. The 2021 capex includes $670 million related to our new builds and $55 million for maintenance capex. As Jeremy mentioned, this updated capex pilot reflects our expectation to take delivery of the Atlas at the end of this year and take delivery with Titan in 2022. And to reiterate Jeremy's comments, we will not provide any further information regarding the new builds as well as active discussions with the shipyard and others. As always, our guidance excludes any speculative rig reactivations or upgrades. In addition to the safe and efficient operation of our rig, we will continue to focus on optimizing cash flow generation through revenue enhancement and cost control initiatives. As the market improves, We are mindful of reactivation expenses associated with our stacked assets, and furthermore, we will maintain discipline and will not reactivate a cold-stacked asset without a contract or contracts that justify the associated expense. In conclusion, we will continue to take steps to opportunistically improve our balance sheet and liquidity. As evidenced by our history, we can expect we will continue to monitor capital markets and, when appropriate, execute timely and strategic transactions. This concludes our prepared comments. And I'll turn it back to Lex.

Thanks, Mark. Shelby, 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.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We'll pause for just a few moments to allow everyone an opportunity to signal for questions.

We'll take our first question from Taylor Zurcher with Tudor Pickering Holt.

Hey, good morning, and thanks for taking my question. My first one, Jeremy, you painted a pretty optimistic, or I should say encouraging picture for continued recovery, really across, it sounds like almost all markets on the deepwater side over the next, call it 12 to 24 months. And if I look at your fleet today, you do have some near-term contract rollovers. But if I look at what's warm stack today, it's really just the Orion and the Inspiration So I wonder when you talk about a pretty robust or at least healthy recovery off the bottom over the next 12 months and a number of different markets, if you could help us parse through what might be truly incremental to your rig fleet today and what might be kind of renewals or new contracts signed for near-term rollovers for rigs that are currently contracted within your fleet over the next 12 months.

Hey, Taylor. Good morning. Thank you for the question. We are very encouraged by what we're seeing in the marketplace. If you go back to the fourth quarter of 2019 before the pandemic, we had a similar tone. And as you remember, at the end of the fourth quarter and beginning of 2020, we signed five ultra deep water fixtures at day rates that were kind of $250,000 a day, which was significantly above where we were at the beginning of 2019, where fixtures were being signed at $135,000, $140,000 a day. So we have a similar feel about the market as we did then. Now, we've had a couple of head fakes over the last six, seven years with some macro issues that were beyond our control that sent oil prices down and certainly demand from our customers down. So we are mindful that something like that could occur again. We are hopeful that it doesn't and that actually the market improves as vaccines are distributed around the world and global economies pick up again, demand for oil picks up. And as you know, there's been very little investment in vaccines. and replenishing reserves over the course of the last seven years. So all of that bodes well. The fact that our competitors are consolidating and retiring assets at a more rapid pace also helps the view. So everything seems to be lining up, and we're seeing it in our customer conversations and the opportunities that are presenting themselves for later this year and next. With regard to our fleet specifically, I'll hand it over to Roddy to get some of his thoughts regarding what he's seeing and hearing from our customers around specific regions and specific rigs. Roddy?

Yeah, sure. So, Taylor, just the two that you mentioned, we are in advanced discussions on those. We do expect that something positive is going to come pretty soon. I obviously can't give you the details of that currently in negotiations. But just to reiterate Jeremy's comments, And also, you noted that all sectors are up, and that's actually what all of our charts show, that all sectors are up and projected to continue to go up in terms of demand. So, I mean, we'll get into some more specifics as we go through the call, but, you know, with Brent at 69 and, you know, many pundits predicting an oil super cycle, I think dwindling reserves and dropping production rates from existing assets mean that certainly a lot more drilling has to take place just to keep pace with the current demand in the macro. So, as Jeremy said, we've had a few head fakes along the way, but this one looks for real, so we're excited about that.

All right, good to hear. And my follow-up is on the Titan, and I won't ask on specifics as it relates to the delivery timeline and the stuff going on that's wrong, but Just mechanically, in your liquidity forecast for year-end 2022, you do include the expected secured proceeds from the Titan in there. And I wonder if you could remind us how that process works. Is it the rig goes to work in the back half of 2022, and you could immediately raise that $400 million of expected secured proceeds? Or is there a bit of a lag there? Just any color on the mechanics that would be helpful.

Yeah, so thanks, Taylor. We have options. So if you look at our various debt capacity baskets, we can put financing on that rig right before delivery, right after delivery, or to optimize our baskets within 12 months of the rig starting to work, not from delivery, but actually operating. So if you consider the fact that you're going to be operating the rig somewhere three to six months after leaving the yard, we have that. plus 12 months to raise the financing. So we put it in 2022, but quite realistically, you could see it in 23.

Okay, understood. Thanks for that.

Thanks, Taylor.

And we'll take our next question from Ian McPherson with Simons.

Thanks. Good morning. Jeremy, you did draw, I think, an apt comparison to the temperature of the market to where you were just before COVID-19. derailed us for a little bit here with regard to just the percolating pricing power. And I think what's quite different now versus then is where your competitors are with their process, right? I mean, so you had a recovery market with the whole competitive landscape in distress, and today you have the recovery market with the competitive landscape coming out of distress. And that had been, in a lot of people's minds, bearish angle for Transocean the cleansing of your competitors balance sheets but you're describing a market that's still well you didn't say specifically but you didn't point to any disruptive pricing tactics by your competitors so do you feel as sanguine about competitive price discipline now given the change the landscape as you did you know 15 or 18 months ago

Yeah, thanks, Ian. I do. I think we're going to see drastically different behavior from our competitors post restructuring. They now have new ownership, new governance on their boards. And our strategy has been to maximize cash flow from our drilling contracts. I think maybe strategy from some of our competitors was to increase and maximize utilization. I think that approach is going to change under this new leadership. I mean, you saw how quickly Pacific and Noble came together post emerging from restructuring, that is a clear indication that new leadership over there wants to do everything they can to maximize cash flow. And you do that immediately by consolidating businesses to eliminate board costs and executive management team costs. You also do that to expedite the retirement of assets to avoid the stacking costs and future reactivation costs. So we think there is going to be a far more disciplined approach to generating cash flow from our competitors. Certainly with the elimination of their debt, we acknowledge that they're not going to have the interest expense that we carry. And so fundamentally, they will have a lower cost structure, which they could leverage. But they also emerged from restructuring without a whole lot of cash. I mean, I don't know if you look back, Pacific emerged from restructuring with $100 million in cash. And within four months, when they merged with Noble, it was down to $30 million. These businesses consume a lot of cash. And when you have backlog that's not generating much cash because the day rates are so low, they can burn through it quickly. And so we think that the focus from our competitors is like us, going to be on maximizing cash flow from these drilling contracts. And so we're hopeful as we start to move through the year that everyone sees the tightening market, especially in the Gulf of Mexico, and then acts accordingly with respect to bidding practices.

Yeah, I think I would just add that, you know, destructive bidding practices are just not required because the market's there to support something much, much better. And, you know, everybody's looking at the same data as we are, so we think there's going to be a significant shift for sure.

Okay, good. Thank you both. And then I wanted to ask you, Mark, you gave some full-year guidance parameters last quarter, including $2.7 billion for revenues and $1.6 billion for O&M expense for the year. Are we still good with those? Any reason to refine either or both of those at this point in the year?

No, and as of right now, we stand by those numbers. There is some upside, obviously, given the comments from Rory and Jeremy, but not enough at this stage to adjust it. Great.

Thanks, everyone. Thanks, Ian.

We'll take our next question from Connor Leinall with Morgan Stanley.

Yeah, thanks. I just wanted to return to the new bill just for a minute. Obviously, it's one of the most topical things we discuss with investors on your stock right now. And I just wanted to confirm or at least, you know, see if you could comment on the probability. There's obviously some concern that your customers could change their minds with delays and things like that. So I just wanted to get a temperature check on, you know, how you're thinking about your customers' willingness to move forward and, you know, the – the probability of a, of a, you know, worst case scenario where the customers walk, but you still have to pay the shipyard. Do you think that's a reasonable possibility at all?

So, so really can't comment on this right now. What I will say, I'll reiterate our, our conversations with, with Chevron beacon and some core are all constructive and, and are well along the way. And I will also reiterate that it is a very positive macro environment right now. So if these projects look good to our customers, you know, back when oil prices were depressed, you'd think they'd look better now. I can't speak for our customers at this point in time. I can tell you that our conversations with all parties involved are constructive, and we hope to have resolution in the coming weeks and months. And obviously, we'll publicly communicate that, because this is, we know it's forefront of your minds. It's definitely material to the company.

Yep, understood. Understood. Sorry, go ahead.

Yeah, I was going to add, not specific to that question, but if you had to draw a parallel to the macro environment, we've gone through several years here where very good prospects were put on the shelf because operators were being abundantly cautious about moving forward. Now we're seeing all of those things being dusted off. So it's really an acceleration of projects that were already kind of on the cusp of being profitable, but now are going to be producing tremendous returns. So I think that's why you're seeing such a big increase in the number of bids and inquiries and what the forward demand looks like for rigs. Since we were talking about the Gulf of Mexico there, I mean, we're going from, you know, we had three bids and tenders to answer this time last year. Right now we're sitting on 17. So, I mean, that's a tremendous example of just how quickly things are moving.

Appreciate that. Maybe sort of pivoting here, your prepared remarks were pretty constructive, not just on the development drilling prospects, but also the general reserve replacement theme and need for exploration activity. I guess there's certainly been some visible large customers out there that have signaled a willingness or a desire even to see their production decline over time, which implies less need for reserve replacement, but maybe they're a bit overrepresented in the you know, the market's mind. I'm just curious if you could, you know, give some context for how you think customers are thinking about that, you know, what sort of gives you conviction that there won't just continue to be underinvestment in the near term here.

Yeah, I think one of the primary drivers here is, you know, because of the extent of the loan investment and the number of years that that occurred, you know, project sanctioning projections from, you know, pick a third party, but I mean, from 21 to 22 is supposed to double and then double again into 23. So I think that is driven primarily because production declines are real. The energy transition is very important to us and to everybody. And in that transition, you know, the phrase that black pays for green has never been truer. We're basically at the position here that cash flows are generated from oil and gas production, and that's what's required to put this significant investment into the global. Even in those projections, we show that the current demand for oil and gas never actually retracts. It's just that the global demand for energy overall begins to be met with green technologies. But that's obviously in the optimistic case for renewables. If you take kind of a base case, it actually demonstrates that oil and gas production and specifically the demand will increase over time despite the transition to renewables. So, yeah, again, I think all of those things coming together, the years of delayed investment, it's now come to a head and there are little other choices but to press ahead with oil and gas.

Thanks very much. I'll turn it back.

And again, to ask a question, please press star one.

We'll take our next question from Greg Lewis with BTIG.

Hey, thank you, and good morning, everybody, and I guess good afternoon. You know, I guess for Jeremy or Roddy, I was kind of hoping you could kind of touch a little bit on you know, something you mentioned around the Gulf of Mexico tightening. And as we think about that, right, I mean, there's a lot of debate around what a warm stacked rig is, what a hot stacked rig is. You know, everyone's looking at the same kind of data, and, you know, we can argue that there's, you know, 50-ish type of warm stacked rigs that are classified. Is there any kind of detail that you look at to kind of say, well, you know, what we consider actually competitive hot rigs is a little different than that number? Kind of curious, any thoughts around that, just as we think about a tightening market, how that could look?

Yes. Good morning, Greg. Let me take a shot of this from Grant's side and then – Friday or during the convention as well. When I look at this, a hot rig is a rig that can go to work tomorrow. It doesn't require any capital. It's fully crude and it's been working very recently. A warm stack rig should be able to go to work within 30 days and cost you around $5 million at most. So you have to add some junior crew, and you can do that, like I said, within 30 days. When you get beyond that, then it becomes a little gray. Now, you mentioned about 40 rigs that are in the warm stack category. I would bet you if there's 10, you're lucky, because there's very few rigs that are actually warm stack and go to work in 30 days for $5 million or less. It's going to take a lot more than that. So I think it supports the comments that Jeremy made, the comments that Roddy made, that it's going to require a lot more capital to get these rigs working. Again, balance sheets that are strained, which means pay rates or mobilizations of both have to go.

Yeah, I think I'd add to that just to say, look, I mean, this is why you're seeing the urgency and the very short turnaround on tenders and bids, because the recognition of which rigs are actually ready to go is that there's just not that many. And, you know, we're rapidly approaching a sold-out status of active rigs. And the next kind of paradigm is, as Mark said, you know, a lot of these rigs are not ready to go, so they're going to require tens of millions of dollars to get ready. And that is... really what's pushing um the realization from the operators that they have to get their hands on the available hot rigs otherwise the the the day rates required to to bring those polar rigs out are substantial um you know as we talked to a lot of the the operators many privately will uh will admit that they fully expect rates to go beyond 300k a day shortly so um Nobody says that publicly, but certainly the status of active rigs is driving prices up significantly and quickly.

Yeah, and we can debate whether it's going to be later this year or next year. And then just kind of staying on that theme, I guess what I'm kind of curious about is clearly there's been a pickup in activity. Is there any way to think about the duration of the type of work we're seeing, i.e., it seems like it's a lot of short-term work, which is actually good in keeping the market tight. Are we starting to kind of hear rumblings about, you know, we saw the one in Brazil, but are we starting to hear rumblings about longer-term duration work that maybe starts to kind of warrant maybe some of that investment, or we're still kind of in a, short-term contract market, which kind of just aids in the tightening process.

So that's a really interesting point. So certainly for short-term work, as you said, you're retaining optionality for an improving market. But I have to say that when we compare the average duration of bids in Q1 last year and where we are in Q1 this year, they've essentially doubled. So duration is up. We've got several out there that are now multi-year or multi-rigs. So we're seeing a kind of a phenomenon here where the operators that are increasingly certain about their programs going forward, recognizing that they need multiple assets, but they need them for several years, they're really pushing to get some fixtures now. Because, of course, as things rise on the short-term market, locking in our best assets at low rates. As you know, as we've said many times before, it's not our MO. So you're seeing a lot of increased activity for longer-term fixtures, and I think that's primarily operators trying to get ahead in the market that they're already seeing.

Okay, perfect. Thank you all for the time.

We'll take our next question from Mike Sabella with Bank of America.

Hey, good morning, everyone. I was wondering if you could give us an update, I guess, on kind of the cold stack fleet. I think in the past you guys have talked to this sort of $50 to $75 million to reactivate those rigs. Can you just, I guess, clarify what that means? Is that capital cost just to get the rig basically at a point where you can, you know, at a minimum start bidding in? You know, if you were trying to get those rigs to where – you know, from like a technology standpoint up to where your operating fleet is today? How much do you think the capital is for you to do that?

So, Mike, yes, we've given the estimate of $50 to $75 million on our fleet. I want to differentiate between our fleet and other rigs out there. And those numbers are all inclusive. So that is getting from being cold stacked, reactivated, and mobilized to the new locations. This would not include something like MPD, because it's a customer-specific ad, and that would be above that. The same thing if it's going to Brazil. Brazil has certain requirements that are going to cost you an additional $10 million to $20 million. That would be in addition to our $50 million to $75 million. So customer-specific items are separate, but those $50 million to $75 million we stand behind.

Yeah, just to clarify on that, we are not bidding any exact assets into the market today.

Yeah, no, I understood on that. And then if we could, and I'm positive somebody asked this, if we could just touch, I guess, a little bit on M&A. You know, has anything surprised you on the pace of the consolidation so far? You know, as these guys all come out of bankruptcy, you know, how do you think that looks for the rest of this year? And, you know, has anything changed TransOcean's mind as to whether they should participate in that?

Well, so if you look at what's transpired so far this year, not long after Noble and Pacific emerged from their processes, they announced a merger. So just within the last week or so, I guess Valeris and Diamond have just emerged as well. We would not be surprised at all to see more consolidation over the next few months. Don't know how quickly that'll all come together, but But it makes sense. There is value to having a larger fleet of floating rigs. There's quite an infrastructure that you need to provide the technical support, the supply chain, the operational support for these assets that are operating in some pretty challenging environments. You have to have that support. So if you can spread that support across more revenue generating assets, it makes you more efficient as an organization. And so we wouldn't be surprised at all to see more consolidation take place. You can obviously combine management teams and eliminate that expense. You can combine boards and eliminate that expense. So we would expect more consolidation as we move through this year.

And with respect to TransOcean, I think that was the other question.

If there's a company out there where assets have backlog and we can see visibility of future cash flows, that would be interesting to us. But quite frankly, we have enough really high-spec floating assets that are currently cold stack. We don't need more.

Understood. Thanks, everyone.

We'll take our next question from Frederick Steen with Clarkson's Plateau Securities.

Hey, guys, and thanks for taking my question, and congratulations on a very solid operating quarter here. I think many of my main points have been touched upon, but I wanted to dig a bit deeper into the dynamics that you're currently experiencing with your customers here, and obviously you're painting a very constructive picture for the demand side. So I was wondering around this urgency that you mentioned, is there a way to quantify that? And I guess my point here is that have you seen any other type of behavior from those customers that they're trying to kind of accelerate programs further to put rigs to work faster because they're seeing a wave maybe next year. I know that you mentioned a few opportunities coming this year already, or are you seeing that they're trying to contract rigs with startups quite some time out just to make sure that they have the capacity when they need it. So kind of any call you can give around those dynamics and how that currently compares to, for example, a year ago, that would be great. Thanks.

Yeah, so there's a couple of examples where constructive tax incentives from certain governments are encouraging operators to act sooner rather than later, which is always helpful, and we welcome that. But I'm sure our competitors do the same thing, but we frequently discuss supply and demand dynamics with our customers. And as we've gone through that, you know, more and more recently, we've had several instances where, you know, we go through kind of extensive review with a customer who's considering a project, who thinks they're going to get to move forward. And then after we go through that review, I mean, practically instantly we get a bid or a tender. And that bid or tender has a turnaround of a week or two weeks or something like that. So, I mean, you're seeing there that I think for many of the operators, they simply need the kind of the external confirmation that the squeeze is on. And for others, I think they have predicted this. In fact, we talked to one customer recently who admitted that presentation that we went through with them showing a completely sold-out market in 22, they claim that they had made that presentation internally to their executives six months prior to that. So I think they really do have their finger on the pulse. I think they're very aware of the situation. As Jeremy and Mark have described, the cost to reactivate cold assets is substantial, and the number of of truly active rigs available is really short. So those that want to get on with their drilling programs in a near-term timeframe, they really are getting on the stick in terms of trying to make commitments.

Okay, thanks. And just a quick follow-up on that with what you said about the cold stack assets. You said that you're not beating any cold stack assets at this point, right? Just to confirm that.

That's correct.

Yeah.

Yes, until the customer is going to pay for it, either through capital injection at the beginning and mobilization cost or through higher day rates and longer term that justifies the reactivation, we will not be marketing cold stack assets.

Yeah. On that, I know that a few tenders and maybe mostly on the Jacob side so far have been putting, call it age limit or stacking limits on whatever they're tendering for. Do you think that they're currently kind of putting day rates and or reactivation costs aside is there a reluctance with operators to potentially use cold stacked assets down the line because maybe they're perceived as more risky or do you think that at some point they would be forced into doing that anyway yeah i think it's the latter i think um you know when when there was a significant abundance of available rigs um we observed a lot of um

the operators putting stipulations in. They wouldn't accept a rig that had been stacked more than a certain period of time. But they also put in stipulations about they really wanted to get the very highest specification rigs because they were available. So that gives them a lot of flexibility as they move forward. But now that things tighten up, certainly As we think the active supply of hot rigs is going to be sold out in 2022, it just begs the question, so what's next? And if the increased demand continues, as all of the projections show, then there's going to be a big ask on the potential to reactivate cold assets. And as Jeremy had pointed out, the free cash sitting on balance sheets is not that abundant anymore. So The idea about picking up $75 million or more proactively to reactivate an asset is just not going to happen. It's certainly not going to come from us, and I think you've heard almost everybody else in the industry say that they're not going to do that either. So you're going to see that when it comes to that stage, the mobilization fees are going to be substantial. There's not going to be much of a willingness to... spend a lot of money on short-term prospects, so I think you'll begin to see longer and longer commitments with more cash up front. But certainly that's our position of how it should be, and we intend to remain very disciplined in that regard.

Great. Thanks. We'll get back in the queue.

We'll take our last question from Carl Blunden with Goldman Sachs.

Hi, good morning. Thanks for the time. It looks like the market certainly is tightening in several areas. I wonder if you could discuss the potential for some more 20K PSI work that could be a follow-on post-Ginandoa. And I'm not necessarily looking for specifics, but you discussed the potential liquidity improvement from secured financing on Titan. And I'm wondering if as you look at your out-year liquidity forecast, where the secured financing on the Atlas could be a realistic expectation as well, given the potential for some follow-on work there.

Yeah, so I'm not going to comment on the Atlas or the Titan specifically, But you are right about follow-on work on 20K. There's several prospects in the Gulf of Mexico. There's actually a couple overseas as well. We do see these high wellhead pressures that require... the 20K technology to be able to complete the wells. So just focusing on the Gulf of Mexico, there's multiple operators. There's actually probably about five or six operators today that have very realistic probability of moving into 20K in the next few years. So when you start to think about that and the fact that we're moving first on this technology, we're bringing it to bear and We do expect that we'll be able to deliver that soon. I think there's a ton of follow-on work and it will be interesting to see just how big the demand for that 20k stash becomes.

And I think keep in mind that these assets wouldn't be restricted to 20K work. I mean, these are going to be the best assets in the industry with 3 million-pound hook loads, enabling our customers to do some different things with their projects, that 10,000 PSI mud pumps, large deck space for completions, making it more efficient to move material and equipment around. I mean, these will be the most sought-after rigs in the industry.

Yeah, fair points. Just maybe a follow-up here on liquidity, and maybe it's for Mark. On the last call, you did talk about the potential openness to equity-linked issuance. Now it does look like things are turning more positive here, and you've improved liquidity through some exchanges, and the CapEx forecast that you have is a little different than what it was prior. I wonder if you could talk about whether it's still something that – So it's something that you'd look at whether the likelihood or interest in that may have changed. And then I just, you know, final point on liquidity. It does look like debt came down a bit more than we had forecast, at least. I'm interested in your view on using a little bit of excess liquidity for further opportunistic debt reduction, maybe what you did in the first quarter and then going forward.

Yes, thanks, Carl, for that. Look, I said in the last call that we will use all the tools in the toolbox, which includes equity, equity linked, and maybe a little bit of cash in the event we see an opportunity which is too good to pass up. That being said, we're not going to be looking to issue equity when we're trading in the threes. So suffice to say that we would need to have a more robust stock price for us to get creative around equity usage. And clearly, if we do raise cash through equity, we'll be much more aggressive in buying back or tendering for some of our debt. So yes, we're certainly focused on this. And as the market improves, the market being the stock market as opposed to the fundamental market, which typically moves ahead of the fundamentals, we look to take advantage of that.

Appreciate it. Thanks.

That concludes today's question and answer session.

At this time, I will turn the conference back to Lex May for any additional or closing remarks.

Thank you, Shelby. And thank 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 second quarter 2021 results. Have a good day.

This concludes today's call. Thank you for your participation. You may now disconnect.