Seadrill Limited

Thank you for standing by. My name is Eric and I will be your conference operator today. At this time, I would like to welcome everyone to the CDREL fourth quarter 2023 earnings release call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Lydia Mabry, Director of Investor Relations. Please go ahead.

Thank you, Operator. Welcome to CEDRIL's fourth quarter and full year 2023 earnings call. With me for the call today are Simon Johnson, our President and Chief Executive Officer, Grant Creed, Executive Vice President and Chief Financial Officer, Tamir Ali, Executive Vice President and Chief Commercial Officer, and Marcel Wiegers, Senior Vice President of Operations. Today's call may include forward-looking statements that involve risks and uncertainty. Actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or year, and we assume no obligation to update them. Our latest forms 20F and 6K, filed with the U.S. Securities and Exchange Commission, provide a more detailed discussion of our forward-looking statements and the risk factors affecting our business. During today's call, we may also refer to non-GAAP measures. Reconciliations to the nearest corresponding gap measures are in the earnings release filed with the SEC and available on our website, federal.com slash investors. Our use of the term EBITDA corresponds with the term adjusted EBITDA as defined in our earnings release. Now, let me turn the call over to Simon.

Thank you. Today, I will address our recent accomplishments, near-term positioning, and future potential. Samir will then discuss our commercial activity and outlook, and Grant will review our financial results and 2024 guidance. Then we will open the call to questions. Seizure is a leading offshore driller. We consistently execute on our stated strategy, achieving financial and operational results that allow us to deliver industry-leading total shareholder returns relative to our offshore floated peers. We were the best performing equity in the peer group in the 2023 calendar year. And we've brought back over $340 million worth of sea drill shares through our ongoing repurchase program. Throughout the year, we continued our efforts to simplify and strengthen our business. We operated a modern floater-focused fleet concentrated primarily in the Golden Triangle. We achieved minimum efficient scale through our aqua drill acquisition, adding four drill ships with near-term contracting exposure. We secured leading-edge contracts for term work and announcing two major Brazil awards representing $1.1 billion in firm revenue at rates our peers would envy. And we followed that with another announcement of a benchmark rate in late January for the US Gulf of Mexico. We have long telegraphed and prepared for headwinds in 2024, first calling attention to them on our second quarter 2023 earnings call. Our trade rivals seem to be recognising varying degrees of emerging white space, supply chain pressures and inflationary capital expenditure and OPEX trends in 2024. At CEDRIL we continue to manage and mitigate the impact these trends may have on our operational and financial results. We aim to secure the right contracts for the right rigs in the right place at the right rates. Moving, for example, the West Polaris to a term contract in Brazil, a growing market for the industry and a key operating region for CEDRAL, where we've clustered rigs and benefit from economies of scale. We made early decisions to implement wage increases and retention programs, securing talent that's critical to our continued delivery of safe, efficient operations. We invest in our drilling crews' continued development, providing high-fidelity simulator-based training programs that allow them to practice and prepare for real-life scenarios in an immersive classroom environment. We maintain active dialogue with key vendors on supply chain requirements and realities, proactively ordering long lead time items to minimize schedule risk and to improve our ability to recover from unplanned events. Lastly, to the extent we're able, we've begun performing special periodic surveys and related work on an accelerated schedule to limit the interruption to our fleet's revenue profile and coincide with a broader transition year. We're commencing a transition to a more continuous approach to required rig classification in coming years. Going forward, we anticipate that we will see less time out of service for five yearly surveys. For 2025, we continue to de-risk our outlook and build greater earnings visibility through term contracts and optimised maintenance schedules. Our active fleet is now over 60% contracted for the year 2025, and that number will rise higher as we approach recontracting windows. Additionally, reduced maintenance obligations limit future out-of-service days and related impact to revenue and margin. We remain steadfast in our belief in a long and enduring offshore drilling up cycle. As the world's population continues to grow in both size and wealth, so too will the attendant demand for hydrocarbons, as they remain some of the most economic, efficient and reliable sources of energy. Increasingly, we expect offshore will be the source of supply of rising oil and gas demand, given the size and strength of its reserves, though rig supply remains constrained as most industry participants express reluctance to reactivate the thin inventory of stacked assets until customer terms and contract economics justify the time and capital investment needed. The resulting delta between supply and demand reaffirms our view that this will be a multi-year cycle. We're not alone in this, as third-party analysts expect drill ship demand to increase by nearly 20% in 2025 compared to 2023. At the firm level, we believe our ability to maintain a strong balance sheet and generate healthy cash flow allows us to withstand any near-term adversity and capitalise on mid to longer-term opportunities that will develop as the cycle progresses, creating continued value for our customers and shareholders. Based on current market conditions, we believe we can deliver meaningful EBITDA expansion and free cash flow generation from our existing business in 2025 and beyond. Let's elaborate on what that might look like in four simple steps using high-level estimates and round numbers. So let's begin with 2023 reported EBITDA of $495 million. First, 2023 actuals only included nine months of Aquadrill contribution. Future results will benefit from the full year. Second, we're on track to deliver our stated synergies of $70 million of value per year in respect to the Aquadrill transaction, largely associated with the elimination of third-party rig management fees. As many of you are aware, Legacy Aquadrill was more of a rig owner than operator, subcontracting drillers to operate rigs on their behalf. When we acquired the company, we acquired those contracts, effectively paying industry competitors to perform a job we do ourselves every day. As the rigs transition to new contracts through 2024, we will eliminate those management fees and see immediate bottom line impact. Third, repricing near-term contracts to market rates supports further EBITDA expansion. The West Polaris will see meaningful EBITDA improvement when it moves from India to its new leading edge contract in Brazil at the end of the year, despite India being a much lower cost operating environment. Finally, repricing should become particularly impactful when we mark the market of three rigs we currently operate in Brazil on long-dated legacy contracts booked in the fourth quarter of 2022. These three rigs have a current average disclosed day rate of just over $250,000 per day. Were they to secure contracts at rates like that awarded to the West of Riga, they would earn nearly twice as much revenue and, assuming costs remain the same, approximately $250 million more in annual EBITDA. Should the market improve, as we believe it can, that number could be even higher. So bringing this together, you can see how we can materially improve from our 2023 baseline. We believe this level of EBITDA expansion and resulting cash flow generation is both reasonable and realistic. We should soon benefit from a full year's contribution from the legacy Aquadrill fleet and the elimination of third-party rig management fees, and we will continue to see impact of near and longer-term repricing as rigs roll off existing contracts. We remain confident in the value we can create in the coming years. We actively manage our business in a way that reflects tomorrow's realities and tomorrow's opportunities, which Samir and Grant will discuss in more detail. With that, I'll turn the call to Samir.

Thank you, Simon. I'll review our recent contract awards and then walk through our fleet status, providing a CEDRAL-specific market outlook. Since we last spoke during our third quarter earnings call, We have secured approximately 80 months or six and a half years worth of additional backlog across four drill ships at an average day rate close to $475,000 per day. These awards are a testament to the strong brand and industry-leading team at Seadrill. In December of last year, as a part of the Buzios tender, Petrobras awarded both the West Auriga and the West Polaris multi-year contracts for Offshore Brazil. representing $1.1 billion in combined contract backlog. We expect the contracts to commence in late 2024. Notably, the West Eureka represents one of the highest day rates achieved thus far in the cycle by any industry player with an implied day rate of approximately $500,000 per day. In January, we announced another market-leading rate, this time in the U.S. Gulf of Mexico, The Westfella secured a 150-day contract with an implied day rate of approximately $490,000 per day, excluding managed pressure drilling services. We expect the work to commence in direct continuation of the rig's existing firm-term contracts, securing the rigs in the U.S. Gulf of Mexico through the middle of next year. Lastly, the operator of the West Capella exercised a priced one-well option valued at $24 million to maintain her for their current program. While we anticipate the option would carry the Capella through November, recent changes in the client's well schedule means she will only be working through August. Unlike firm-term contracts, well-based agreements may move to the left or the right depending on drilling programs and schedules. As of today, our 2024 contracted utilization is a solid 80%, excluding three cold stack rigs, which we market selectively. We currently have 39 months of uncontracted rig time across our fleet for the calendar year 2024. Scheduled maintenance should consume approximately seven months worth of this idle time, with five rigs requiring varying amounts of out-of-service time based on our current plans. Contract preparation could consume an additional 17 months, largely related to our two Brazil contract awards I mentioned earlier. We're actively looking to secure work for the remaining 15 months. The Savon Louisiana is currently undergoing five-year maintenance through the first half of March after completing her well-based contract earlier and effectively drilling herself out of work in December of last year. The Louisiana is one of the last remaining semi-submersibles in an increasingly bifurcated U.S. Gulf of Mexico. She competes in a smaller secondary segment focused on lower priced and more niche applications. We continue to market her actively in the U.S. Gulf and further abroad. And while we don't have anything to announce today, we remain optimistic on her contracting potential. Turning to the two rigs that were awarded contracts in Brazil, both the West Polaris and the West Auriga require significant modifications, mobilization, and intake and acceptance by Petrobras and regulatory agencies before they begin their new contracts at year-end. So, while the rigs are technically available to work now, the opportunity to slot in short-term work is limited, as any delays could jeopardize the rig's scheduled arrival offshore Brazil. We knew meaningful whitespace was a possible outcome when we pursued these contracts. Securing a fifth and sixth rigs in Brazil strengthens our already leading position in the local market and enhances our economies of scale. We expect the West Phoenix, our harsher environment semi in Norway, to finish its well-based contract in August. The rig will require a shipyard stay for upgrades and maintenance before she begins her next contract, and her destination market will influence the type and level of investment made. The Phoenix will be the first floater available in the Norwegian market. While we remain optimistic about her contracting prospects, We expect any potential future work would not start before the second quarter, as North Sea operators typically wait until spring to begin drilling programs. As previously stated, we now expect the West Capella to end its current contract in August, subject to well schedule. She is one of the few available rigs in Southeast Asia. Additionally, she is equipped with MPD. Given recent discoveries in Indonesia and elsewhere, we are confident we can secure further work for the rig soon. Lastly, we expect the West Neptune to be out of service for 45 days in the third quarter for its special periodic survey and upgrades scheduled between wells on its existing contract in the U.S. Gulf of Mexico. That concludes my walkthrough of the Cedro rig fleet. We expect to provide more insights on our 2025 contracting outlook the deeper we get into the year. Lead times for future contracts vary by region, from 6 to 18 months depending on geography. In some regions, customers are initiating conversations for projects with start dates in 2026 and beyond. In others, they're not even yet discussing the fourth quarter. In either case, we believe we're well positioned to secure the right contracts to generate the earnings potential Simon alluded to earlier. And with that, I'll pass the call to Grant. Thanks, Samir.

I'll start by reviewing our recent financial results before providing our full year guidance. For the full year 2023, we delivered $495 million of adjusted EBITDA on $1.5 billion in revenue. This translates into industry-leading EBITDA margin of 33%. Turning to the fourth quarter, adjusted EBITDA was $100 million, consistent with expectations as our 2023 full year guidance implied softer fourth quarter EBITDA of $90 to $110 million. Total operating revenues were relatively flat quarter and quarter at $408 million. We recognized $315 million in contract revenues, a slight decline from the prior quarter, primarily due to unplanned downtime related to well control equipment, and the Savan, Louisiana, finishing a well-based contract earlier than anticipated. We recognize an additional $73 million in management contract revenues, which represents income generated from the three rigs we operate as part of our Sunadryl JV. The $5 million sequential increase reflects higher reimbursable revenue relating primarily to rig maintenance that was offset by a corresponding increase in management contract expenses. Lastly, we recognize $14 million in other revenues, which includes bare boat charter income from our Gulf Drone Venture, and 6 million in reimbursables, which is offset by corresponding reimbursable expenses. Now, turning to expenses. For the fourth quarter, vessel and rig operating expenses were up $36 million sequentially, primarily composed of three components. Non-cash accruals represented $15 million, and much of the remaining 21 million was distributed relatively equally across two primary categories. The first category was planned maintenance projects and capital spares purchases, which was heavily related to timing. The second was rigged personnel. Fourth quarter results include the impact of pay rises and retention programs, reflecting a tight labor market and inflationary environment. Additionally, we saw third-party managers on legacy aqueduct rigs use temporary contract labor to full crew vacancies. SG&A costs were $6 million higher than the prior quarter, primarily related to severance. Moving on to the balance sheet and cash flow statement, we maintain a strong balance sheet and sound capital structure. At year end, we had total gross debt of $625 million and $697 million in unrestricted cash, resulting in a net cash position of $72 million. Fourth quarter operating cash flow totaled $140 million on the back of solid earnings and supported by a reduction in working capital. Capital expenditure for the fourth quarter totaled $90 million, divided almost equally across long-term maintenance costs, which, for your awareness, are treated as operating cash flows in the cash flow statement, and capital upgrades related to contract preparation and incremental equipment spend. This was slightly higher than previously guided on our third quarter call, due to the need to secure long-need items for the Auriga and Polaris projects. This yielded free cash flow of $92 million for the quarter. Now let's discuss our guidance. Our full year guidance reflects our expectations that 2024 is a transition year. We expect total operating revenues between $1.47 and $1.52 billion. Guidance largely reflects firm revenues, including 92% of contract drilling revenue already secured in our backlog, as well as the fleet status and outlook that Samir reviewed earlier. We anticipate adjusted EBITDA to be $400 to $450 million. Key points to note are extensive contract preparation and mobilization of the West Auriga and the West Polaris ahead of the Brazil contracts, and planned out of service time related to special periodic surveys and associated maintenance. Note that our revenue and adjusted EBITDA guidance includes amortized mobilization revenues and expenses of approximately $40 and $45 million, respectively. It also includes reimbursable revenue and expenses of approximately $70 million. And as a reminder, reimbursables are low-margin revenues. And finally, we expect capex of $400 to $450 million. This reflects a spike in our SPS cycle, as well as major projects for the Auriga and Polaris, which are due to commence long-term campaigns toward the end of the year. As it relates to capital allocation, we remain committed to shareholder returns. The pace at which we've brought back our own shares certainly demonstrates this. We initiated a $250 million share repurchase program in September. We completed it by November. And in December, we expanded it by an incremental $250 million. To date, we have repurchased $342 million worth of CEDRAL shares at what we believe is a highly accretive price level. This represents 11% of our total share capital. We remain committed to continued value creation across the cycle. Back to you, Simon.

Before we open the call for questions, I want to thank our employees for their continued contributions to our progress. As you're aware, we're closing our corporate office in London and concentrating our headquarters in Houston, bringing together our senior leadership and broader corporate team and aligning our presence with key customers, vendors and fleet operations. The move marks yet another transition this calendar year. We're excited about the energy and enthusiasm that being together will create. To our London team, thank you for your efforts to strengthen our organisation during your tenure. For those who will make the move to Houston, thank you for your continued commitment to Cedril and interest in making us one of the best in the industry. So, in closing, to all of our employees, suppliers and customers, Thank you for your engagement and ideas as we consider how we can be more collaborative, efficient, and responsive in our daily operations. It's through our combined efforts that we will continue to improve. With that, we can open the call for questions.

At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Ben Nolan with Stifel. Please go ahead.

Yeah, hi. This is Frank Galantian for Ben. Thanks for taking our question. In the past, you had talked about renegotiating the existing contracts early for the couple assets in Brazil with Petrobras. Can you provide us an update on where that stands?

Sure. This is Samir. I don't think we had said previously we'd renegotiate them, but we are definitely looking to recontract those rigs in Brazil. I'd say we're starting to enter that window. In the prepared remarks, we had said certain markets are nearing a six-month, certain markets are 18. I'd say Brazil is probably on the upper end of that range. So we are starting to have those early conversations with Petrobras and others about recontracting those assets. But As we get deeper into 2024, you should expect us to provide some more guidance about, you know, where we are on that recontracting for those rigs. I'd also say, you know, they're all Brazil-ready and they could stay in that market, but we're not opposed to moving them to other markets if required as well.

Okay. That's helpful. Thank you. And so I wanted to sort of follow up on the CapEx pretty meaningful step up in 2020. But can you sort of talk about sort of what goes into that number and really to sort of get visibility on what that number looks like on a go-forward basis in 2025 and going forward?

Yeah, good morning, Frank. It's Simon. Well, let me just kick off and then I'll pass to Grant to get into the numbers. But, I mean, our capex is meaningfully higher next year because of the SPS intensity. That is really itself a function of the delivery anniversary dates when these rigs were originally constructed. So we've been talking for many quarters now that this was coming at us. It was going to be a reality and that we were planning for it to mitigate its impact. The key thing to understand is there are going to be more revenue days in 25 and 26. We're proactively doing maintenance where we have the opportunity to do that as part of contract preparation. And we expect to be on materially high average rates across the fleet in future years and that's going to be at the benefit of the work that we're doing now. But Grant can go into detail in terms of the quantum.

Yeah, sure. And I'll just break it down into three categories that we typically talk about being the maintenance, SPS, and then the customer-specific requirements. But starting with the LTM, we have said consistently now that maintenance for one of our rigs is between $20,000, $25,000 a day, which for our fleet translates onto approximately $100, $120 million per annum. And that will continue to be the case 2024. Then going on to SPSs, we've said previously we've mentioned a figure of seven rigs on SPSs. Now that excludes the rig of Polaris, which I'll come on to. We said that Neptune and Louisiana are going to go through their full SPS cycle with associated downtime days. And so you can model in your full SPS cost. Phoenix, we put in the SPS category, I guess technically that's regulatory compliance work, but that's going to be undertaken this year. And that will have associated downtime days to the extent that when that's done rolling off the VAR contract. Then on the four Brazil rigs that are currently in Brazil, Jupiter, Carina, Saturn, Telus, those have SPS works. But we are not doing or not having associated SPS or out-of-service days. That's going to our continuous classing that Samira and Simon have talked to previously. And then finally, Auriga Polaris numbers are in there. Important when you look at Auriga Polaris, we've got the project, of course, as well. But within that, we're taking the opportunity to do some SPS work and long-term maintenance as well.

Okay, great. Thank you very much.

Thanks for the questions, Frank.

Your next question comes from the line of Greg Lewis with VTIG. Please go ahead.

Yeah, hi. Thank you, and good morning and afternoon, everybody. Simon, you know, thanks for the guidance. It kind of is we kind of match, you know, what free cash flow could look like. Kind of curious, you know, just given – the transition year this is. Kind of curious how you're thinking about the buyback. I mean, clearly we still have some available capacity, still have a lot of cash on the balance sheet. So just kind of any kind of thoughts around how you're thinking about the implementation of the buyback as 2024 plays out.

Yeah, good morning, Greg. Yeah, certainly. Look, I think capital return is going to be the heart of our proposition to the market in coming years. We have a facility in place that takes us through to at least the middle of this year. And I think we're very mindful that a lot of people like our stock for that visibility and that commitment to deliver value to shareholders that can't be otherwise utilised in the ordinary business of the firm. So we think it's important and we're somewhat unique in the space. We've got only one other major peer who's able to deliver in the way that we've been delivering. And yeah, we think it's a great feature. But Grant, maybe you'd like to add some color.

I think as it relates to the buyback, I think it's important to say that we will always assess the buyback at the point in time that we're making the decisions, and we'll always have reference to our financial policy. And we've been through that on previous calls, but then just to recap very quickly, looking at uh where the market is looking at leverage and liquidity projections looking at maintenance of the fleet including uh sps's then we look at any growth opportunities and with a focus on accretive growth opportunities but in the absence of that with excess cash and and uh visibility with comfortable leverage and liquidity we'll look to return capital to shareholders

Okay, great. And then I was hoping for some color. I guess it's a two-part question on the golf trail jackups. I guess one, how are we thinking about or how should we be thinking about the impact, the guidance around those rigs? I know we've been exploring a potential sale since at least the back half of last year. And then beyond that, what's the appetite then? realizing that the market is still digesting the news out of Saudi Arabia, not that these rigs are in Saudi Arabia, but the news around Saudi Arabia and that impact on the Jacob market. Yeah, that's kind of what I'm wondering.

That's an interesting question, Greg. Look, I think, first of all, it's important to say that the reaction to the Saudi news, we believe, has been disproportionate. And really, for us, the big takeaway is that growth outside the Kingdom of Saudi Arabia has been really undervalued by market spectators. The opportunities in Qatar, that's the biggest potential source of jack-up demand outside of Saudi Arabia, and it's been somewhat off everyone's radar. The Qatar market has also typically lagged activity in other market segments as well. So we have a great position there with our joint venture partner, We believe that they have a preferred status in terms of providing supply to that market. And as we think about the future, we're happy to stay with those rigs. They don't occupy a lot of management bandwidth, as we said before, and we'll be patient. If we choose to conclude a sale, it's going to be at terms that will be satisfactory to our shareholders. We don't feel pressured to hasten that sale process. We're going to wait until we get the right buyer at the right price. We are obviously transitioning out of the jack-up segment. That's no secret. But we're going to be patient and rational in the manner in which we do that. So we continue conversations with interested potential buyers. And when we've got some firm news, we'll come back and share that with the market, Greg. But at this point, we don't see any bad read across from the Saudi news. We think there's great news to come in terms of the Qatar market. and the value of those assets in that market.

Super helpful. Thanks, Simon.

Thanks, Greg. Great day.

Your next question comes from the line of Frederick Steen with Clarkson Securities. Please go ahead.

Hey, Simon and team. Hope you are all well and thanks for all the color today. I wanted to touch a bit on your contracting strategy, and as you said in your prepared remarks, you'll provide more color, particularly on 2025 as we move along. But as you're working through the opportunities that you're currently looking at, are you inclined based on your market view to chase shorter-term opportunities or longer-term opportunities? Do you have any preference in how you would like to lock in rates or if you would be bold and see if they go even higher? That's kind of the first question I have.

Sure, Frederick. This is Samir. I'd say both, right? So I think it's rig-specific, geography-specific. There are certain rigs that we're not opposed to chasing some short-term work. But we do have some longer term prospects that we're also looking at. So I think for us, it's being balanced and making sure that we're generating cash flow in the near term for some of our open capacity. But we're trying to box smart as well, right? So we're also looking at and being very surgical and strategic with where we place our assets. So we're not just going to chase everything. We're going to work for the right rig. So a long way of saying, Yes, on both accounts. I've got some assets that will take short-term, and then we've got some assets that we're waiting for that right opportunity and locking along a rate. As you saw with the Auriga and the Polaris, we thought there would be some turbulence in the market, so we went long on those. And there's some other shorter-term contracts in the Gulf of Mexico that we went short on and got high day rates on. So we will be pretty strategic about how we do it.

That's very helpful, Samir. Thanks. And just one more from me. On the West Phoenix, I think you said, and this I missed her, that when that goes off contract, work needs to be done. And it will probably not work until the second quarter next year. I got that right?

I think that's reasonable. I mean, for us, right now, she does roll off later this year. We do have some capital investment in her. you know, depending on the market she goes to, that'll drive that capital investment and her contract outlook. So, you know, I think we are working a few leads right now, but realistically speaking, probably, you know, the drilling season of 25 is probably when she picks back up.

Yeah, and then just as a follow-up on that, depending on what kind of a reach opportunities you are chasing, Will you, before you put capital into her, will you have to have something firmly signed? Or is there some work that you could do that would, you know, be needed to do anyway and then do contract-specific things? Or, you know, how are you going to play that so that you make sure that you'll actually get the return on whatever you put into her cash-wise?

Absolutely. So that's something that I spend a lot of time and the team spend a lot of time thinking through, right? So we will not spend a significant amount of capital in her unless we have a clear line of sight to something. We are looking at a few things, but for us to ask for a reasonable amount of capital, we need to have, I wouldn't say a firm contract, but we need to have a very, very clear line of sight towards something.

All right, great. Thanks so much, all. I'll hand it back. Have a good day.

Thanks, Frederic.

Ladies and gentlemen, as a reminder, if you would like to ask a question, press star, then the number one on your telephone keypads. Your next question comes from the line of Hamed Korsand with DWS Financial. Please go ahead.

Hi, good morning. So first question I had was what type of conversation, if any, are you having with customers at this point as far as the rigs are concerned? Are you seeing pushback on the contract or day rates, or is it really just more that the customers or potential customers have push back on their own timelines.

Hey, Hamed. Maybe I'll kick off and then Sumir can jump on the back. But look, I mean, I think your reference is the fact that rates have been sort of tracking sideways a bit. I don't think that's so much a function of some kind of structural resistance in the market. It's really more a reflection of the market absorbing some idle capacity from a short number of our competitors. There's a declining inventory of those idle rigs now. And I think the fact that the market has been able to absorb them pretty well in the last couple of quarters gives a good indication of the potential for further development in the future. So we're not too worried about that. What I would tell you is that we still believe that the fundamentals are strong. The medium term outlook is great for the rig business. We're seeing steady but continuous improvement in demand across a wide range of geographies. And really that's what is gonna drive the development of rates going forward. It's going to be about the interaction of that growth and demand with a relatively inelastic supply of rigs. It's really quite straightforward, I think. And I think we saw recently one of our major customers take a position in rig ownership. I think that was a great signal for the market. It was certainly great for the contractor in question. They have unparalleled visibility in their revenue profile. So I think what that does indicate is also potential for flexibility in the commercial bargain. The customers and their bid to maintain costs at levels that they deem acceptable are having to get more creative about how they reward contractors. So that may mean that you see them being willing to commit more money up front to defray CapEx challenges and assisting contractors in that manner, as well as maybe giving them some near-term relief or some long-term security of supply. So I think there's lots of things happening in the market. Overall, the trend is up and to the right, and we're continually encouraged by that. And one last thing I'll leave before I pass to Samir that people, I think, should be reflective of is that we're nowhere near the levels of customer demand that we saw at the height of the last cycle. We're roughly halfway, I would say, in that regard. So as people think about potential for where the market might go. That clear analog is what happened last time. But with that, I'll pass it to Smith.

Yeah. So we definitely saw 24 as the transition year. You saw a flurry of awards in the second half of last year. I think customers are just digesting now and going through it. And historically, if you look, Q1 has always been slower as well. So nothing terribly surprising. I think we saw this coming. That's why you've seen us make the moves we have. And as we look at 2025, we continue to see the progression going. So I think for us, none of this seems terribly surprising where we are in the market.

And just given the downtime you're taking this year, any estimate of what kind of downtime you would have in 2025?

We haven't guided to 2025 yet, but we have said it will be significantly less. We have a bunch of rigs going through survey this year, and it just takes them out of service in terms of our ability to market them. So part of that was us being conscious about doing a lot of it this year as we could because that transition was happening. But going forward, you should expect it to be significantly less than 25.

And last question is on the Capella. Have you already started marketing the rig, and how is the market there as far as being able to get another contract as soon as possible?

Absolutely. So we started marketing the day we closed on AquaTrill. So we've been actively having those conversations because part of our synergy capture was bringing those back all in-house. Paying a third-party manager to do something that we can do doesn't make a lot of sense for us. So we are doing that actively. In terms of when we could get something, she's on a well-based contract. You saw it slip. So it could go to the left. It could go to the right. We do have to transition back to ourselves as well. But really, that well-based contract will make it Kind of a little difficult to nail down a start window, but I can say we're in active dialogue with that rig, and we hope to be able to announce something in the near term.

Great. Thank you.

Thanks, Ahmed. The next question comes from the line of Kurt Khalid with Benchmark. Please go ahead.

Hey, good morning, everybody.

Hey, Kurt.

Kurt. Simon, team, everybody. So, yeah, hey, I had a follow up there was a reference there to the fact that demand. In this current where we sit currently is not anywhere near where it was. The last cycle, you know, I was just wondering, like, what. What kind of what kind of data can can people who are not. So, living the business, like, we are and you are. What kind of things can generalist investors look at to give them the same level of conviction that you guys have about, and others in this business, about the fact that demand is still on the way higher and hasn't plateaued, right? Because that's part of the concern. And we've already addressed part of it in the pricing dynamic. But again, you guys live and breathe it every day. So what are some things that people on the outside can look to to kind of give them the same conviction you have.

Yeah, sure. I think other than, you know, raw RID market data, and that picture is a little less transparent than it has been in the past because there's a lot of direct negotiations and extensions. So there's a lot of work programs that don't, you know, aren't visible even to inform participants in the market necessarily. So I'd say that at the outset. But, you know, there's a lot of other proxies for activity. be it wellheads, be it Christmas tree orders. We look at seismic programs. A good one was the 261 lease sale in December of last year, where you saw $382 million spent by the operators. It was the largest Gulf of Mexico sale since 2015. I think that doesn't translate into immediate drilling activity, but these are all great data points in terms of you know, giving us confidence in the future and subsequent years ahead. So, you know, we look at, you know, what other, you know, segments of the upstream business are doing, how all of that interacts with, you know, rig days that are in the market and supply. You know, most of the people in the management teams, our peer group, have been through multiple of these cycles. So it's, you know, part of it's muscle memory, but it is informed ultimately by underlying data And we spent a lot of time dredging through that and drawing conclusions about what the future might deliver. I've been in this business for almost 30 years now, and this is a good picture, as I've ever seen at this point in the cycle. Okay. That's great.

Appreciate that. So maybe on a follow-up to that, right, in the context of economics, right? So we've seen a lot of third-party data out there that shows that ultra-deepwater projects in multiple basins are generating 30 percent plus returns you know at 70 brent and or break even at you know 40 brent and below again i've heard numbers lower for guiana brazil um etc right so uh another setup here is that you know beginning some questions around you know how much uh pushback will the offshore drillers get on pricing improvement uh in the context of how that impacts overall drilling economics. So can you give us a refresher as when you think about the all-in spread rate for an ultra-deepwater rig, what is the percent of project economics that the rig represents?

Look, it's a difficult question to answer concisely, Kurt. I think the issue is that the operators, there's a wide variety of projects in their portfolios, some near-term tieback opportunities that are much more driven by rig rates. And then you're looking at big multi-year field developments where the rig rates are relatively unimportant as a proportion of the total cost. So typically the rule of thumb we use is that the spread rate these days is typically about a million dollars a day. And with rig rates tracking as they are at the moment, close to 500 a day, we represent about 50% of that total cost mix. But it does vary according to the project. What I would say though, and what I think is more important than how much of the spread cost the rig rate constitutes, what I think is more important is the fact that, or the understanding that the operators are constrained in terms of their capital allocation by their desire to return money to their shareholders. And I think that really is the more important thing rather than any sort of ultimate rate level. So they're wanting to reward their shareholders and some of our major suppliers are in a similar boat. And increasingly, as you've seen with our share repurchase agreement, we're also focused on that too. So never have I seen such synchronicity through the value chain in that regard. So when we're thinking about how our rates might sort of drive activity, will demand get pinched out at some point? Well, conceivably, yes. But really, I think we're more focused on how these project economics stack up relative to the return profile that the principal customers are offering their shareholders. So, yeah, I didn't quite answer the question, Kurt, but hopefully that gives you a bit of color.

No, that's good. Now, there is one more follow-up, if I may, right, is that the other dynamic here, I would have to imagine, right, is that when an oil company is assessing their future projects and assessing, you know, they've got to assess, okay, what rigs are available that have the specs that we want, I really have to assume when they go through that budgeting process, they're not looking in the rearview mirror with respect to potential price of a rig. And I have to imagine that they're looking at different ranges and what they may be willing to accept. But I have to imagine that they're not looking at these projects and saying, I can only do them at $400,000 a day. again yes i'm like am i completely off base in that process and i guess the real answer that question is our customers the oil company customers factoring in i have to imagine they're factoring in some sort of price increase for rates so when they assess these projects any you want to set me straight on any of that no no i think we're in uh violent agreement with you um uh you know what what i would say is you know

different technical specifications, the customer's ability to make active choices, their declines as the market gets tighter. And I think you also see less price discrimination between rigs of differing specification in a tight market as well. So, look, care to add anything, Simeon?

No, you know, I'd say clients claim that our rig rate makes a huge difference to their project FIDs, but in the reality, no, they don't, right? The projects work. It's just making sure that they can get all of their other equipment put together and through the process. And to Simon's point, it's a return on capital for them, right? It is, does this make sense for their capital? But in terms of rates, we'll get beat over the head that it makes a huge difference, but the realities are it does not really move the needle.

That's great. Thanks, Todd. Thanks, Todd.

Ladies and gentlemen, there are no further questions at this time. That concludes today's call. Thank you all for joining, and you may now disconnect your lines.