Seadrill Limited

Q3 2024 Earnings Conference Call

11/13/2024

spk01: Hello and welcome to the CEDRIL third quarter 2024 earnings 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 at that time, please press star one on your telephone keypad. I would now like to turn the conference over to Lydia Mabry, Director of Investor Relations. You may begin.
spk00: Welcome to CEDRIL's third quarter 2024 earnings call. Today's call will feature prepared remarks from Simon Johnson, our President and Chief Executive Officer, Sameer Ali, Executive Vice President and Chief Commercial Officer, and Grant Creed, Executive Vice President and Chief Financial Officer. Our comments 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. Our latest forms 20S 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 that affect our business. During the call, we will also reference non-GAAP measures. Our earnings release filed with the SEC and available on our website includes reconciliations with the nearest corresponding GAAP measures. Our use of the term EBITDA on today's call corresponds with the term adjusted EBITDA as defined in our earnings release. I'll now turn the call to Simon.
spk04: Thank you for joining us on our quarterly conference call. I'll begin with a few comments on our quarterly performance before discussing our market outlook and strategy. Samir will then talk about tactics and contracting before Grant reviews our quarterly financial and operational performance and full year outlook. Our third quarter results exceeded expectations. We delivered $93 million in adjusted EBITDA, securing additional work and uncommitted capacity propels us above our previous full-year guidance. Most notably, the Savard, Louisiana continued its existing contract with an independent operator in the US Gulf of Mexico. We're now increasing our EBITDA guidance midpoint by 13% to $385 million. Our continued progress on Brazil projects minimizes the downside risk to guidance. Both the West Auriga and West Polaris are in-country and going through the customer and regulatory acceptance process after clearing customs in record time. Our operations teams focused attention on these critical projects, meaning these rigs are on track to begin their new contracts in December and will then start generating meaningful EBITDA and cash flow. During the quarter, we stacked the West Phoenix to reduce operating capital expense in the absence of an immediate market opportunity. We were unwilling to spend valuable shareholder capital investing in a rig without a bedrock of continuous visible demand. We've released the crews and are actively reducing direct rig OPEX. Following the completion of the West Capella and West Vela's recent contracts, we've now also reintegrated the four Aquadrill drill ships back into the Cedral fleet. In the 18 months since closing the transaction, we've successfully navigated complex, costly rig management agreements and exceeded all cost synergy targets. The Vela and Capella, along with the Auriga and the Polaris, are now managed and crewed to CEDRAL standards and can reliably provide the safe, efficient, responsible operations customers expect from our organisation. Now on to market outlook and strategy. We firmly believe underlying industry fundamentals remain intact, characterised by the interaction between increasingly inelastic supply and inherently variable demand. The prevailing market question is when and where those lines intersect. In our view, the temporary imbalance between drill ship supply and demand is not a true reflection of the fundamentals that support a sustained strong industry cycle, but rather a reminder of the market's volatility. This volatility only deepens my conviction in our strategy, operating a floater-focused fleet that benefits from strong contract coverage, preserving a good balance sheet, and maintaining a relentless and virtuous focus on continued efforts to strengthen and simplify our business. At the heart of our plan to win is operating the right rigs in the right regions. In our experience, most deep water opportunities require dual activity drill ships with 15K BOPs and MPD capabilities. Rigs focused on achieving operational efficiency and endurance rather than exploring technical frontiers. Our fleet meets those requirements. All our drill ships are dual activity and dual BOP capable or equipped. 75% of the drill ships we operate are 7th gen. And in 2025, we expect 80% of our own drill ships will have MPD, as we focus on leading the industry in thought and practice in this important operational activity. We operate premium quality assets in the heart of the market. We cluster almost all our rigs in the Golden Triangle, spanning the Gulf of Mexico, South America and West Africa, which represents the greatest concentration of deep water drilling activity now and into the foreseeable future. We've secured 70% contract utilization for our market and managed fleet in calendar year 2025, a figure that is expected to improve with time as customer conversations convert to contracts. In addition to our contract coverage, we benefit from strong balance sheet and our current cash position feels prescient in today's market. However, we recognize this does not completely insulate us from competitive market realities. We will not rest on our laurels. We will continue to evaluate better, smarter ways of running our business. 2025 will be a year in which we focus increasingly on optimising our operations. We want to be a lean, efficient, right-sized drilling contractor. We plan to reduce bureaucracy across the organisation, empowering our senior leaders offshore to do what they do best, leading, supervising and mentoring their teams to the benefit of our customers who count on us every day to deliver safe, efficient, responsible operations. By doing right for our employees and our customers, we'll do right for our shareholders. We must remain agile. We'll continue to evaluate opportunities to refine and grow our fleet, dynamically adjust our costs as our active rig count fluctuates, and further solidify our formidable financial position. Now, as ever, we're focused on what we can control. how we sign our contracts, how we run our rigs and how we allocate our capital. Our commercial team continues working to secure contracts with terms that maximise each rig's earnings and cash flow. Our operations teams continue to keep drill bits turning to the right, operating costs low, crews safe and customers happy. And our leadership team endeavours to remain disciplined stewards of shareholder capital. We constantly evaluate our approach to capital allocation based on market conditions, outlook, and competitive positioning, and the relative impact these decisions have on strengthening the procedural story. Clear examples of that capital stewardship have been our continued fleet refinement and industry-leading share repurchases. We were the first of our peers to pursue a meaningful buyback program and have reduced our issued share count by 19% since September 23, improving our per share performance across key metrics. At Cedral, we've continuously made decisions to simplify and strengthen our business for the benefit of our shareholders. And as we make our way through 2025, it should become increasingly clear that we build a resilient business that can deliver real returns to shareholders through the cycle, especially once 2026 contract repricing comes more clearly into focus. With that, I'll pass the line to Samir.
spk02: Thanks, Simon. By our estimation, There are about 95 competitive drill ships in the global marketplace. Approximately 20 of these are inactive and require extensive investment to be put to work as they're either cold stacked or not so new builds with limited to no operating history. But slow contracting activity can make even a thin market seem temporarily oversupplied. Between now and the end of next year, around 30 competitive drill ships will become available after completing their current contracts. Many of these rigs will find follow-on opportunities, but not all of them. The absence of visible demand to consume available capacity will soften the market. Drill ship marketed utilization, a measure of market tightness, slipped below 90% in April, after rising for over a year. It now hovers in the high 80s and will likely continue to trend lower. As more assets become available, it will put downward pressure on rates, leading us to believe 2025 will be increasingly competitive. Fortunately, We are relatively insulated. In 2025, we benefit from 70% market utilization across our fleet. Recent updates to existing drilling programs fill some of the white space. For example, the Vela is not working through the third quarter of 2025, and the West Carina and the West Telus are now committed fully through year end and into early next year. We have the most market exposure next year in the Savon, Louisiana, the West Capella, and the Sauna Drill drill ships. As we've said before, the Louisiana has a broad range of potential outcomes. Opportunities can appear and disappear quickly. Recent contracts suitable for the rig specifications have been shortened both their lead times and their duration, which limits our ability to plan with an acceptable level of certainty. As time progresses, we may show less willingness to play the spot market and will stack the rig. For the Capella, the Gemini, the Kingella, and the Lebongos, our focus remains on securing contracts for the second half of the year. We believe all these rigs are competitively advantaged. They benefit from premium specification, proven work history, and deep customer relationships, making us a preferred provider for customers who have chosen Cedral time and time again. However, there is a scarcity of immediately available, visible opportunities. We continue to see a slow pace of contracting tied to the market, uncertainties, and capital restraint. In Angola, for example, we're seeing indications of softening rig demand as the basin commutes for capital across customers' global portfolios. We continue to make positive progress on recontracting and repricing the Jupiter, Carina, and the Telus, seeing term contracts that provide visibility of earnings and cash flow. As we consider the market, we don't believe drilling contractors can create demand, and we are not willing to contribute to our own white space, idly burning OPEX waiting for the desired opportunities to emerge. With every decision we make, we consider cash flow per rig, We strive to achieve favorable economics across our individual units and our full fleet. When those economics are challenged, we will act decisively. We are dispassionate managers of valuable shareholder capital. As we navigate through near-term air pockets, we intend to remain disciplined with the way we manage our fleet. Across the market, competitive choices will dictate financial outcomes. And with that, I'll turn it to Grant.
spk10: Thanks, Samir. I'll review our third quarter performance before providing an updated outlook for the full year. In the third quarter, CEDRAL earned $354 million in total operating revenues, down from $375 million the prior quarter. Contract drilling revenues were effectively flat quarter on quarter at $263 million. The benefit of the Louisiana contributing a full quarter of revenue at a higher average rate, complemented by higher economic utilization across the fleet, was offset by the Phoenix and Capella contract completions. Management contract and leasing revenues declined sequentially. Our second quarter results included income related to retroactive adjustments to the management fees and Bevo Charter Income Owned from our sonodral JV and BVT income from the golf draw jack-up rigs we sold in June. Third quarter management contract revenues were $62 million and leasing revenues were $9 million. Third quarter results provide a good indication of expected run rates for both these line items through the end of the solid role rig's current contracts. Additionally, we earned $20 million in reimbursable revenues. The $5 million sequential increase was accompanied by an equivalent increase in reimbursable expenses. In the third quarter, we incurred total operating expenses of $307 million, up from $290 million in the prior quarter. Vessel and rig OPEX increased by $7 million to $172 million, and management contract expense increased by $4 million to $45 million. The timing of repair and maintenance expenses drove the increase. RNM is the second largest cost component on rig P&Ls, so variances can have a meaningful OPEX impact. SG&A was $27 million and included $2 million of costs related to the consolidation of our corporate office in Houston. which we consider a non-recurring adjusting item from EBITDA. Third quarter adjusted EBITDA was $93 million. Adjusted EBITDA margin, excluding reimbursables, was 27.5%. In the third quarter, we spent $131 million in CAPEX, including $78 million of long-term maintenance captured within operating activities and the cash flow statements, and $53 million of capital upgrades captured in investing cash flows. In the third quarter, we continued our share of purchase program, completing $183 million of share of purchases under our current $500 million authorization. Now that we're no longer listed in Oslo, we intend to report our purchases on a quarterly basis in arrears. Since initiating our purchase programs in September 2023, We have returned a total of $692 million to shareholders through the end of the third quarter and reduced our issued share count by 19%. Now, on to our outlook for the rest of the year. As Simon mentioned earlier, we're increasing our full-year guidance. For 2024, we now expect adjusted EBITDA of $375 to $395 million on revenues of roughly $1.4 billion. and we're narrowing our full year guidance for CAPEX to $420 to $440 million. Our ability to secure additional work on the Louisiana is the primary driver behind the guidance range. The rig continued working from August into November and potentially through December, effectively lifting our full year EBITDA midpoint to $385 million. Our full year outlook implies lower run rate EBITDA for the fourth quarter. primarily attributable to lower operating activity. Specifically, the Phoenix being stacked following its most recent contract completion, the Capella finishing its latest job in September before starting new work in mid-December, the Neptune spending approximately 50 days out of service while it undergoes its SPS and other upgrades, and lastly, the Vela incurring out-of-service time in October when it was reintegrated into the Cedral fleet. In addition to this, on the cost side, we have expectations for increased OPEX based on the timing of repairs and maintenance activity plans that take place in the fourth quarter. The Orega and Polaris are on track to commence contracts in the fourth quarter. Precise timing of these start dates will impact Q4 results, and having these rigs working again will help drive run rate EBITDA higher in the new year. Year-to-date, we've spent a total of $286 million on CapEx, and we anticipate a meaningful increase in Q4 as we complete Brazil contract preparation for the Auriga and Polaris. Looking into 2025, we believe it's too early to provide guidance, as contract discussions and negotiations for uncommitted capacity are ongoing, and the outcome of which will materially affect our financial aspect. Back to you, Simon.
spk04: Thanks, Grant. 2024 has been a significant year of transition for Sea Drill. Amidst headwinds like idle time, inflation and required fleet investment that we identified and communicated early, we continued to progress our efforts to simplify and strengthen our business. We sold the Gulf Drill jackups and we integrated the Aquadrill drill ships. We delisted from the OSE. We maintained a healthy balance sheet and we continued our industry-leading repurchase program. Throughout the year, we've consistently beat our peers in total shareholder return. We're recognised as a universal buyer across the sell side, from Norwegian and US analysts alike, who recognise the continued value we're positioned to deliver as 2026 contract repricing comes into focus. We intend to run our business relative to the opportunities available in the marketplace, not the ones that we hope may materialise. We will not burn valuable shareholder capital praying for better weather, It's clear to us that in the past 18 months, too many rigs have been reactivated by our trade rivals without sustainable matching demand beyond initial contracts. I'm proud of what we've accomplished as an organisation thus far and recognise there's more work to do as we continue to strengthen CEDRIL to the benefit of our employees, our customers and our shareholders. Expect us to be disciplined as we seek to create meaningful value now and into the future. With that, we'll open the line for questions.
spk01: Thank you. As a reminder, if you have a question, please press star 1 on your telephone keypad. To withdraw your question, simply press star 1 again. Your first question comes from the line of David Smith with Pickering Energy Partners. Your line is open.
spk08: Hey, good morning. Congratulations on the quarter and the increased guidance. Thanks, David. I know it's a little farther out, but given the tenders out there, including one recently opened, I wanted to ask about your outlook for your drill ships in Brazil, specifically the Jupiter, Carina and Telus.
spk04: Yeah, sure. Let me kick off and then maybe Samir can add some embroidery at the end. I mean, Brazil is the most important and the most resilient deep water market on the planet. And as we said before, recontracting our rigs in Brazil is a primary focus for the organization. As you know, we don't announce contracts until they're formally signed, so we have no specific news to share with you today on the status of those rigs. But as Samir pointed out in his prepared remarks, we continue to make meaningful, positive progress with our customer on re-contracting our rigs in Brazil, and we're pretty optimistic about the future of those rigs. Petrobras has recently recognized our performance by awarding us a Drilling Contractor of the Year, which was a nice bouquet to receive. And whereas some deepwater regions face near-term headwinds, Brazil's remained stable in terms of demand outlook, which we really like. We believe that, yet again, we've made a prescient decision and bet on Brazil at the right time. So as an incumbent in Brazil, we'll soon have five rigs working, the Petrobras, that we've deployed over the last two years. We're keenly aware of the advantage that confers when recontracting in-country, not just money and cost of entry. It's obviously also about, you know, schedule and regulatory risk. So there's a lot of talk about near-term turbulence in 2025. We're largely contracted in terms of rig days for 2025. For us, Brazil is a key part of our story. Unlike our rivals, we're not recontracting rigs. We're not hot-stacking rigs. Our story is very, very simple. It's all about recontracting in Brazil. Anything to add, Samir?
spk02: No, I would just say, you know, we remain confident in our abilities to recontract those rigs and are making meaningful progress, but don't have ink on a page, so there's nothing to announce at this point.
spk08: I appreciate all the color. If I could ask a follow-up. I noticed NAV's orders this quarter included hook load upgrades to convert to 6th gen drill ships for 7th gen capabilities. And I wanted to ask how you see the potential for additional 6th to 7th gen upgrades and whether this might reshape the 7th gen supply demand balance going forward.
spk04: Yeah, great question. Look, I think the distinction between 6- and 7-gen is somewhat arbitrary. I mean, generally speaking, it's as much about year of delivery as anything. I think it's fair to say that there is a broad spectrum of technical capability across the 6-gen fleet. Most 6-gen units are mid-life now, so there's often a need to review obsolete systems and renew marine coatings, particularly after the reduced investment associated with a decade-long depressed market. So I'm presuming it's about 2.5 million hookload upgrades Samir, we'll have some comments on that, I'm sure.
spk02: Sure. So, you know, I'd say hookload's one factor between a six and a seven, but it's not the only one. You know, the rigs being upgraded have their own technical challenges beyond just hookload. And candidly, we're prudent with our shareholder capital, and we're not going to invest in an upgrade unless we can see a return on it. We are looking at other upgrades on our six-gen assets, but those are, you know, we can monetize and we can actually generate a return on capital on those investments. And for whatever it's worth, our six gens are located in markets that have a proven track record, and then you really don't need the extra hook load. And so for us, we feel very comfortable with where our six gens are upgraded, and we don't see the need to upgrade them at this point.
spk06: Good call. I appreciate it. Thanks, David.
spk01: Your next question comes from Kurt Hallied with Benchmark. Your line is open.
spk09: Hey, good morning, everybody. Good morning, Kurt. I always appreciate the color commentary. So I guess as we look out into next year, a couple things caught my attention with respect to the prepared commentary. So I was just looking for maybe a little bit more maybe context around it. And the first was I think, Samir, you referenced that the market dynamics are such that in 2025 any contracts that that get booked will be price competitive. And at the same time, you know, you referenced that you are looking to kind of maximize, you know, the cash margin dynamic. So maybe give us some context around that and maybe, you know, are you seeing some opportunities to, you know, despite maybe some price competitiveness to maintain cash margins at about where they are on existing contracts, and is there some regional differences we need to consider?
spk02: Yeah, absolutely, Kirk. So I'd say, you know, when we look at bidding work, we're very, very focused on the cash generation. You know, headline day rate's nice, but at the end of the day, can we generate cash? Each market's individual. Your OPEX is going to be different. Your CAPEX requirements to comply with the contract are going to be different. So for us, we look to maximize our cash flow wherever we, when we bid work. In terms of our fleet, we are 70% contracted into next year. Most of our opportunities are for the second half of next year. We're in active dialogue on most of those assets. Actually, all of those assets that are rolling off in the second half of next year. So for us, we feel pretty good in our ability to recontract them, again, at good rates for where they're at. But at the end of the day, for us, it's less about headline day rate. It's much more about cash flow generation.
spk04: Just to add there, Kurt, to a couple of extra points. I mean, as you would know as an experienced commentator on the business, I mean, there's material economies of scale to be harvested by industry participants, and many of these are a function of how many rigs you have in a discrete geography, choosing the right markets in the first place. There are material differences in cost across different markets. As a management team, we are really committed to dealing with market realities, and we're determined to operate a franchise that flexes overhead, OPEX and CAPEX dynamically to reflect the business environment. And we'll adjust these individual elements to continue to deliver superior margins to our shareholders. That's always been a feature of Cedral through time and is a core proposition to our investors. Gotcha.
spk09: And maybe on the follow-up, you guys have been very capital return friendly and you're on pace probably to buy back about $500 million worth of stock this year. Given the fact that you're like say only 70% book on your contracts and maybe some relatively soft dynamics in a pricing environment. How do you see the opportunity to, or do you see an opportunity potentially buy back as much stock in 2025 as you did in 2024?
spk10: Hey, Kurt. It's Grant. Look, of course, we can't comment specifically on how much we're going to buy back next year. All I'd say is consistent with prior calls, when we look at the buybacks, we're really going through our financial policy framework and beginning with the outlook in future years. And of course, that goes hand in hand with the 2025 comments that Samir was talking about and the 70% contracting. To the extent that firms up, then that gives us a lot more confidence to lean into the capital returns and uses of capital. Just to reiterate the financial policy, you know, looking at one times net leverage, paying our maintenance capex, and then thereafter looking at accretive uses of capital. And that accretive uses of capital can be buying other assets, and it could be returning capital to shareholders. Really just weighing up those two. And at the end of the day, what's going to be more accretive for our shareholders?
spk09: Gotcha. Gotcha. I actually got one more, if I may, maybe an assignment for this one. You know, given the, again, a little bit of a lull that we have in opportunities in the first part of 2025, you guys have always mentioned that, you know, you're agnostic as to whether or not you buy assets or, you know, wind up being, you know, on on the other end of that. But in the context of potentially looking at some assets, has this lull presented some opportunities that maybe didn't exist earlier in the year?
spk04: I'm expecting that will become more of a feature if this ends up being a more protracted sort of turbulent period. I mean, obviously, a balance sheet is poised to respond if the right opportunity presents itself. We've spoken before about the strict metrics that any potential acquisition needs to hit in terms of returns, accretion analysis, and so on. So at the moment, I don't think there's anything that's on the horizon right now, but there's certainly a number of players in the industry who will not be able to withstand an extended period of hardship. And we keep a watching brief, and I think our board's very supportive about the opportunity for growth of that nature.
spk09: Great. Appreciate all that. Thanks.
spk04: Cheers, Kurt.
spk09: Thank you.
spk01: Your next question comes from the line of Frederik Steen with Clarkson Securities. Your line is open.
spk05: Hey, Simon and team. Hope you are well, and thank you for taking my question. So I think that the first one that I'd like to ask is just on the geographical spread of your fleet currently. You have a meaningful number of rigs in Brazil, particularly with the Auriga and the Polaris coming onto their contracts now shortly, and you're otherwise well covered in the Gulf of Mexico and West Africa. But then you have the Capella, for example, in Southeast Asia. How do you feel about the placement of that single rig? Are you confident that you can get opportunities in the region it's already in, or do you think, or talk about potential relocation of any of your assets?
spk04: As you know, Fredrik, we have a declared strategy of clustering rigs wherever possible. We've only recently taken control of the Capella, and as the market has become a little bit challenging and more competitive in the near term, we've focused mainly on opportunities in the region where it's currently operating. So I think at this point, we're content to chase the work that we see in that area. But in the medium term, we would hope to secure a contract that will permit the relocation of that rig into an area where we already have a pre-existing competitive position. But Samir can probably give you a bit more color.
spk02: Yeah, so to Simon's point, we are chasing opportunities both in that region and outside. But if we can... secure work that generates meaningful cash flow in that region we'll happily keep the rig out there but the eventual plan would be to cluster it either into an existing region or develop southeast asia as a new region for ourselves as well okay now that that's very helpful um and then i guess briefly touching upon you know the high level uh fleet composition and thinking about your assets
spk05: particularly now that you've decided to stack the West Phoenix. How do you think about that move and, for example, the Aquarius and Eclipse in terms of potential pecking order if they were to be reactivated? Is there now a higher likelihood of you guys actually scrapping one of the two instead?
spk04: We don't have any immediate plans in that regard. What I'd say is that the Phoenix and the Aquarius are both easier to reactivate than the Eclipse. The Eclipse definitely will have a larger capital ask and would require a larger body of work to underwrite its reactivation. So, I mean, the way we think about it is that, you know, we need the, you know, a material contribution to defray that capital reactivation cost and we need to see a, you know, a sense of comfort that there'll be a sustaining market after that initial reactivation contract to keep the rig busy?
spk02: But we continue to market both the Phoenix and the Aquarius. And if we find the right opportunity that justifies the investment, we'll do it. But it's a tall order, right? For us, we need to find a job that justifies the investment in those rigs. But of the three, the Phoenix and the Aquarius are probably the more capable rigs, and we'd look at reactivating those first.
spk05: Okay. Thank you very much. Actually, just one quick one, and I think this goes to Grant. On the sharing purchase side, I think under the current 500 mil authorization, you have a $200 million tranche to begin with, which should suggest that that tranche is almost used up. Is there any, you know, should we expect that new tranche to be opened or is it already? I'm just a bit unsure now that you don't have the same disclosures around it as you were listing on Oslo.
spk10: Yeah, thanks, Fredrik. Good question. Yeah, just to remind everyone that now we're delisted from the Oslo Stock Exchange. We no longer have certain disclosure requirements with respect to the buyback. Those sort of sub-authorizations like the $200 million is no longer required. And so we will not be announcing sub-authorizations. We've got the blanket authorization from our board of $500 million, which was provided by a board in the second quarter. Remember the 200 million you're referring to was a subauthorization within that. That was a Norwegian disclosure requirement, and you're correct. We are now essentially through that 200 million. We've spent 192 of that 200 by the end of the third quarter, and we can continue to buy back shares under the blanket 500 million authorization, which is going to extend over a two-year period from Q2 this year to Q2 2026.
spk05: Perfect. Thank you so much, all of you. Have a good day. Thank you. Cheers.
spk01: Your next question comes from Hamed Korsend with BWS Financial. Your line is open.
spk03: Good morning. Could you just talk about a little bit of the negotiation of the talk process that you have with potential customers? Are they just holding off and just saying, wait, or is this more about their own supply chains and their timing because of the price of oil?
spk02: It's uncertainty. So it's what's happening with commodity price, what's happening with their own supply chains. It's also a reallocation of their portfolios. Most of our clients have global portfolios, so some are saying they'd rather invest in one region versus another. And then it's also their return of capital to their own shareholders. So it's this big pot of uncertainty that's leading them to deferred decisions. And it is a deferral. We're seeing things get pushed into 26 from 2025.
spk03: And then the other question is, are you done with your special surveys for 2025, or are they being pushed until there's actual contracts?
spk04: We do have one scheduled survey that we've spoken to before that's scheduled for 2025. We are currently doing an SPS on the West Neptune and that may drift into next year depending on how things go in terms of some of the cost of that. And then also, I mean, when you're contemplating out of service time, Hamid, I'd encourage you to think that there's a number of potential causes of that. SPSs and five-year surveys are one potential ingredient, but another one is contract preparation costs. And as we think about the opportunities in front of us in our fleet, there may well be some time required to prepare for long-term contracts in other markets and things like that. Does that help?
spk03: Yes, it does. Thank you.
spk04: Excellent. Thanks, Samir.
spk01: Your next question comes from Josh Jane with Daniel Energy Partners. Your line is open.
spk06: Thanks. Good morning. First question in Simon's prepared remarks talked about the company optimizing your operations in 2025. I was just wondering if you could expand more on that, if you have any goals that you've laid out and potentially how you're thinking about that into next year.
spk04: Yeah, sure. I mean, obviously we're facing some near-term headwinds and early 2025, maybe through the middle of the year potentially, is showing some difficulties in the recontracting efforts. We've recently cold stacked the West Phoenix and released the crews there. So I think one of the things that is really important to us is how we manage rigs that don't have contracting opportunities in front of them. And what we're going to be doing is taking our medicine if we're not able to secure work. The turbulence in that market, we believe that at this point that that's going to be short term, but we need to make difficult decisions as quickly as we can and adjust our cost base. and our capital programs in order to reflect the business environment. So increasingly what I was signaling in the prepared comments, increasingly is that we're gonna do that in real time. This is a very tough business and what I've learned in my sort of almost 30 years is that it's really important to manage the cost base at all points in the cycle, not just when times are bad. So as an organization, we're very focused on being agile, lean, and right-sizing the organization to make sure we have enough people and that we assemble our assets, our human resources, our software, if you like, to be able to respond to the needs that are in front of us. We don't have much appetite for excess capacity.
spk06: Understood. Thanks. And for my follow-up, Just given the market's importance to Cedral and your number of assets there and how you're likely to be a player going forward, I wanted to ask a follow-up on the Gulf of Mexico and if you expect to see any change in the near to intermediate term in that market just as a result of the new administration.
spk04: That's an interesting question. Perhaps let me start, Josh, and then I'll pass to Samir. I think it's fair to say that we don't really care who's in the White House. You know, we're driven by shareholder returns. What I will say is that we think the offshore barrel will win in the longer term. Well, all 48 production is really about the law of diminishing returns, whereas offshore has the volumes, has the reservoir upside, has the blue sky. And our customers are telling us that that is where the new production is coming from. And onshore is important, but it's pinching out. So it's in the deep blue seas where we'll be replacing production going forward.
spk02: It's not politics. It's fundamentals. The geology doesn't change with whoever's in the White House. At the end of the day, those barrels will get drilled, and they're more economic, and they're lower carbon and cheaper to produce than anywhere else. So we do expect them to continue to get produced over time.
spk06: Thanks for taking the questions. I'll turn it back. Thanks, Josh.
spk01: Again, if you have a question, it is star 1 on your telephone keypad. Your next question comes from Noel Parks with Tuohy Brothers Investment Research. Your line is open.
spk07: Hi, good morning. Just sort of following along with your last comment, I was just thinking about exploration and, as you mentioned, the barrels are going to get drilled sooner or later. And, you know, do you... I guess with... trying to be conservative at this point in the cycle. Does that kind of represent any change in your sense of, you know, exploration outcomes just as, you know, different footprints get explored and so forth? And there does seem to be this consensus that funds do need to flow to the offshore. It's nothing else to just help make a dent in... you know, global base decline. So any thoughts you have on that?
spk04: Yeah, look, you know, I think we sort of hinted at it before. You know, we believe it's in the offshores where we're going to be replacing, you know, productions. You know, that's where we can achieve rates of delivery that can't be matched onshore. Certainly, as we think about the customers who have exposure to both onshore and offshore basins, we've noticed a shift in their investment activities. activity coming down the pipeline we believe um that's somewhat uh muted by the fact that you know all of our customers have such a short-term outlook and expenditure on expiration uh generally speaking is at the bottom of their capital allocation priority list um um yeah but you know if i take our portfolio or our rigs as a microcosm we are starting to see some exploration you know two years ago there's almost zero exponent expiration you're starting to see
spk02: you know, on a long well program, it's, you know, we'll tack one well out of, you know, 10 or 12 into an exploration well. But again, it's happening, but it's still relatively small on the margins.
spk07: Got it.
spk02: Thanks.
spk07: That's helpful perspective. And I mean, is it, so I mean, if customers then due to oil price or whatever are sort of deprioritizing steady operations by hanging on to a rig just based on their own capital discipline. Is that sort of part of the shift that's happening then?
spk02: Yeah, absolutely. There's real startup costs and switching costs, right? Putting a rig down and then starting it up has meaningful costs. But what we're seeing with our client base is they're pushing that cost out further and further and saying, you know, we're going to preserve cash in the near term for either returning it to shareholders or reallocating it to different parts of their portfolio. and when you ask them privately they'll say yes we acknowledge that there will be an incremental cost to pick this rig up in 2026 but it's a 26 problem not a 2024 2025 problem okay wow so that is definitely more sort of short-term thinking than we're used to in the in the deep water for sure so thanks helpful excellent thank you so much
spk01: With no further questions, this will end our Q&A session, as well as today's conference call. We thank you for joining. You may now disconnect your lines.
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