Noble Corporation Plc (NE) Q2 2013 Earnings Report, Transcript and Summary

Good morning, name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Noble Corp. Second Quarter 2013 Earnings Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, Thursday, July 18, 2013. Thank you. I would now like to introduce Mr. Jeff Chastain, Vice President of Investor Relations. Mr. Chastain, you may begin your conference.

Okay. Thank you, Regina, and welcome, everyone, to the Noble Corporation's Second Quarter 2013 Earnings Call. We appreciate your participation in today's call. A copy of Noble's earnings report issued last evening, along with the supporting statements and schedules, can be found on the Noble website, and that's noblecorp.com. Also, I want to take this opportunity to remind everyone about the Noble dinner we will host in New York on the evening of September 9. A save-the-date notice went out in May and we intend to provide additional details, including an agenda for the evening next week. If you do not receive information from the company on the event and wish to attend, you will find the details posted on the Noble website. Before I turn the call over to David Williams, I'd like to remind everyone that we may make statements about our operations, opportunities, plans, operational or and financial performance, the drilling business or other matters that are not historical facts and are forward-looking statements that are subject to certain risks and uncertainties. Our filings with the U.S. Securities and Exchange Commission, which are posted on our website, discuss the risks and uncertainties in our business and industry, and the various factors that could keep outcomes of any forward-looking statements from being realized, including the price of oil and gas, customer demand, operational and other risks. Our actual results could differ materially from these forward-looking statements, and Noble does not assume any obligation to update these statements. Also, note that we may use non-GAAP financial measures in today's call. If we do, you will find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation on our website. Okay. With that, I'll now turn the call over to David Williams, Chairman, President and Chief Executive of Noble.

All right. Thank you, Jeff. Good morning, everyone, and welcome. Joining me today on the call, along with Jeff, are James MacLennan, our Senior Vice President and Chief Financial Officer; and Roger Hunt, Senior Vice President of Marketing and Contracts. Jeff and I are handling the call from Houston today, while James and Roger are in Geneva. I'll begin this morning with some comments on the quarter, and the improved performance that we've seen through the first half of 2013, I'll highlight some additional milestones pertaining to our new construction program, and the continued transformation of the Noble fleet. And finally, I'll touch on the news that we communicated early in July, concerning the proposed change of our placement corporation from Switzerland to the U.K. Following my comments, James will provide a more detailed review of the second quarter results and Roger will cover some details regarding the offshore drilling markets. Before we can take any questions, I'll close by covering a final point of growth opportunities and an update on the potential spin off of standard specification assets. We have a lot to be excited about through the first 6 months of 2013. It's been a very busy time for Noble and I'm delighted to report additional progress have been made on several fronts and more progress is expected. The second quarter was another strong result for the company, with revenues up and operating cost down when compared to the first quarter. Unpaid operational downtime declined further in the second quarter and average daily revenues grew as we continue to benefit from a strong business cycle in both the shallow and deepwater sectors. James will cover this topic in much more detail in just a moment. Also, we continue to advance our newbuild program. During the second quarter, we took delivery from the shipyard of the drillships Noble Don Taylor, the first of 4 built ultra-deepwater drillships and the Noble Globetrotter II, which was delivered from Holland. In addition, in early July, we dedicated the first of our 6 JU3000N high-specification jackups, the Noble Mick O'Brien. This rig is expected to exit the shipyard in Singapore by the end of July. By the time we close the year, we expect to deliver another Hyundai drillship, the Noble Bob Douglas and 2 more JU3000s, the Noble Regina Allen and the Noble Houston Colbert. We expect to see revenue contributions from the Taylor, Globetrotter II and the O'Brien during the second half of the year. In fact, we'll bring forward by 30 days the expected first revenue date for the Globetrotter II. We now expect the rig to begin operations offshore Benin in October, rather than our previous expectation of November. We are reviewing the status of mobilization, testing and acceptance processes on both the Globetrotter II and the Don Taylor to determine if further favorable adjustments to the expected first revenue dates are warranted. If this is the case, we'll update you in due course. With these deliveries, we'll be left with 6 newbuilds in our project backlog. The 2 final Hyundai drillships and 4 high-specification jackups, with 5 of these projects expected to be delivered in 2014. The remaining project following the 2014 deliveries is the ultra-high specification CJ-70 jackup that was ordered in early June, following the order of a 4-year primary term contract with Statoil, to work on the Mariner Field in the U.K. sector of the North Sea beginning in 2016. I'll say a little bit more about the CJ-70 project in my closing remarks. You probably heard me mention before what I refer to as exceptional timing regarding our entry into the shipyard to secure the 15 state-of-the-art drilling rigs order since 2010. One measure of success with this program is our experience in securing contracts to provide attractive returns to our shareholders. Most of these rigs were ordered on spec, and as we stand here today, just 3 are uncontracted. And those 3 have good opportunities either under negotiation or under consideration. I also believe it's appropriate to comment on the exceptional execution we've seen by our teams in the shipyard, as we are delivering these units on time, aside from the jackup lag testing period on Regina Allen in the shipyard in 2012, and on budget. Our project teams at Korea, Singapore and The Netherlands have performed their roles with passion and dedication, and I want to thank each of them for their strong commitment in delivering successful results. Before I turn the call over to James, I want to address the news we reported on July 1, regarding our post change of incorporation from Switzerland to the U.K. Hopefully, you've had a chance to read through the proxy filed on July 8. And I want to reiterate that we believe that London's position as an international business center, coupled with its well-established tax regime, will help us maintain our competitive position in the global marketplace and manage our geographically dispersed operations. We also believe that this transaction, which is expected to be tax neutral to the company, will include a number of other benefits including: Access to the U.K.'s well-developed legal system, corporate law and tax regimes and its established standards of corporate governance; flexibility associated with being incorporated in a common law of jurisdiction; an enhanced stability to attract and retain executive talent; and the fact that London is a very centrally located global travel hub. We believe the proposed move is in the best interest of Noble shareholders. And given that we are with proxy filing -- given where we are with the proxy filing, excuse me, we expect to conduct an extraordinary meeting with shareholders in the fourth quarter of 2013. Since we have a proxy statement currently under review by the SEC, when we get to the Q&A segment of the call, we will not be taking any questions related to the proposed migration, and refer you instead to the proxy filing. Now I'll turn the call over to James for the financial discussions.

Thank you, David. And good morning to everyone on the call. As I usually do, this morning I will cover details of our second quarter revenues and operating costs, as well as provide comments regarding liquidity and then certain balance sheet items. I'll also update the guidance provided last quarter, followed by an update on our planned CapEx for the second half of 2013. As usual, anything requiring additional details can be addressed to in the question-and-answer session of today's call. As you saw from our disclosure last evening, Noble reported 2013 second quarter net income of $177 million or $0.69 per diluted share on total revenues of $1.02 billion. The results compared to net income in the first quarter of $150 million or $0.59 per diluted share on total revenues of $971 million. Results for the second quarter included $18 million of revenue or $0.06 per diluted share, relating to the cancellation of the contract by the customer on the newbuild jackup, Noble Houston Colbert. Following that customer's decision to postpone its drilling program offshore Alaska. Excluding the impact of that contract cancellation, second quarter earnings were $0.53 per share. Contract drilling services revenues improved $47 million, or approximately 5% from the first quarter, to $975 million. Again, without the $18 million of contract cancellation revenue, contract drilling services revenues were $957 million, compared to revenues of $929 million in the first quarter, an improvement of 3%. This revenue improvement was driven primarily by the continuation of a strong offshore drilling industry fundamentals, resulting in higher average dayrates throughout the fleet. Contractual dayrate increases accounted for approximately $29 million in additional revenue, when compared to the first quarter of this year. The dayrate increases were seen primarily in our jackup operations in the Middle East, the North Sea and Mexico, and with the semisubmersible Noble Max Smith, which continued to full quarter of operation, following the commencement of the 3-year contract midway through the first quarter. Also, low downtime in the second quarter added an estimated $24 million, with the Paul Wolff experiencing higher utilization following a wellhead connector bolt failure in the first quarter, and other activity increases throughout the floating rig fleet. We also completed the contract preparation project and the mobilization of the George McLeod, with the rig commencing operations offshore Malaysia during April. Finally, higher bonus and mobilization revenues and one additional calendar day added a further $19 million to revenues. The mobilization revenues were primarily associated with the Max Smith move to Brazil, and the Lewis Dugger move from Mexico. As we reported in our July fleet status update, the sale of the Lewis Dugger for $61 million was closed in early July. These revenue improvements were partially offset by several planned shipyard programs for regulatory inspections and maintenance. For the 3 rigs involved, it was a combined impact of negative $25 million to revenue. Each of those 3 rigs returned to work prior to the start of the third quarter. Also, idle time on the semisubmersible Homer Ferrington, which had an $18 million negative impact; out of service time on the Noble Danny Adkins, negative $6 million; and the conclusion during the first quarter of the special shipyard dayrate for the drillship Noble Roger Eason, negative $4 million, were additional offsetting events in the second quarter. On the second quarter, normalized average daily revenues improved 5% to $184,100 compared to the first quarter of this year. Contract drilling services costs in the second quarter increased $8 million to $492 million, compared to $484 million in the first quarter. The increase was due to the settlement of Mexico VAT assessments. These costs forms part of a much broader tax settlement, which I'll come to later, and they were not operational in nature. So our real operations cost level in the quarter was $484 million or about exactly flat with the first quarter. Over and above this, we experienced higher labor cost, stemming largely from ramp-up activities on the drillships Dawn Taylor and Globetrotter II, following delivery of those rigs from shipyards early in the quarter, and also one additional calendar day in the quarter, those added $8 million. Also, higher mobilization and demobilization costs, $6 million. These quarter-over-quarter cost increases were exactly offset by lower repair and maintenance costs, $10 million, and a decrease in other miscellaneous costs, which was about $4 million. Total operational downtime was approximately 5% in the quarter, which was essentially unchanged from the first quarter. DD&A in the second quarter was $213 million, which compared to $206 million in the first quarter, and was within the guidance range. G&A expenses are just under $27 million, we're $1 million above the first quarter and again, in line with guidance provided on our last call. Interest expense, net of amount capitalized, declined $3 million to $24 million in the second quarter compared to $27 million in the first quarter, also within the range of guidance provided in the last call. The decrease in interest was due to an increase in interest capitalized, which in turn was driven by newbuild activity. We capitalized approximately 56% of interest in the second quarter, compared to 52% in the first quarter. Our tax rate for the second quarter was 16% compared to 17% in the first quarter, and guidance of 18% to 20%. The lower rate were due to changes in the geographic mix of pre-tax income in the quarter, and partially offset by certain discrete tax items, including a settlement of Mexican tax assessments. On that issue, during the second quarter, the company worked very diligently with the Mexican tax authority, and was able to achieve settlement of approximately $500 million of tax audit claims by their government, at a cost of just over $0.10 on the dollar. Moving next to CapEx. Capital expenditures in the second quarter 2013 totaled $872 million, this included capitalized interest and was below our guidance of approximately $1 billion. This lower-than-expected amount was due primarily to the timing of certain new build and major project expenditures. This was partially offset by the first milestone payment for the new CJ-70 design high-spec jackup which was ordered in May, that was $179 million, and this was not planned for in our prior guidance. The second quarter total spend included $614 million related to newbuild assets. This brought our capital expenditures for the first 6 months of 2013 to $1.2 billion. The components of the $1.2 billion CapEx spend are: firstly, $752 million related to newbuild rigs; $324 million on major projects, including $44 million in subsea-related expenditures; $106 million for sustaining capital; and $62 million in capitalized interest. Now I'd like to comment briefly on liquidity and on certain balance sheet line items. At June 30, cash and cash equivalents totaled $166 million. Liquidity, which is measured as the sum of cash and cash equivalents and availability on revolving credit facilities, totaled approximately $1.2 billion. Accounts receivable at June 30 of $835 million declined $53 million from the first quarter, following in a major customer's resolution of certain administrative matters and the resulting collection of receivables from that customer during the month of April. Finally, long-term debt at June 30, 2013, was $5.3 billion, up approximately $400 million from March 31. The increase reflects additional borrowings to fund both capital expenditures, as well as the pay off of a $300 million senior note that matured in June. During the second quarter, we made final payments on the drillships Dawn Taylor and Globetrotter II. Then to total capitalization was 38.1% at June 30. I'll now provide updated guidance for the third quarter and the full year 2013, covering certain line items on the P&L, as well as capital expenditures. First, operational downtime in the Noble fleet for the second half of 2013 is projected to average 5%. This was consistent with the first 2 quarters of 2013, both at approximately 5%. We are slightly trimming the range of expectations before we have contract drilling service costs from the previous full year range of $2.05 billion to $2.15 billion, and our new guidance range is $2.05 billion to $2.10 billion, reflecting our experience through the first half of the year, which has run a little below expectation. The Don Taylor, Globetrotter II and Mick O'Brien are expected to begin operations in the second half of the year. For the third quarter, contract drilling services costs are expected to be between $525 million and $535 million. The increase compared to the first 2 quarters being driven primarily by newbuild ramp-up costs and also, bringing back the Roger Eason back online. Any earlier than anticipated newbuild startups would lead to the high end of this range of guidance. DD&A for the full year is estimated to be in the range of $855 million to $875 million. For the third quarter, DD&A is expected to be $220 million to $225 million. G&A is expected to total $110 million for the year, and approximately $30 million in the third quarter. With several corporate projects ongoing at the moment, as disclosed previously, we are seeing increases in legal and consulting fees, as one would expect. Interest expense near the capitalized interest is expected to total $110 million to $120 million, slightly below our guidance on the last call. This lower guidance is due to higher capitalized interest associated with the new CJ-70 jackup. Net interest expense in the third quarter is expected to be $20 million to $25 million. And in the fourth quarter, it's forecast to increase by about $10 million, as the new rigs are placed in service. Minority interest line on our P&L, representing the Shell share of the Bully I and Bully II joint ventures, is now expected to total $60 million to $65 million in 2013, an increase from previous guidance of $55 million to $60 million. And approximately $15 million for each of the remaining quarters in 2013. The increase for the year is the result of better-than-expected rig performance on both rigs. Our effective tax rate for the year is expected to be in the range 17% to 19%, excluding the effects of discrete items. As you are aware, any changes in the geographic mix of sources of revenue, levels of profitability, tax assessments or settlements or movements in exchange rates, all can affect this line. Finally, we now expect our capital expenditures for 2013 to amount to approximately $2.9 billion, the increase compared to our previous guidance of $2.8 billion, again resulting from our initial payment on the new CJ-70. The breakdown by major spending category is expected to be as follows: In our newbuild program, we expect to spend $1.7 billion in 2013; CapEx needed to complete the remaining newbuild projects in the out years should be another $1.7 billion, with $1.2 billion of that amount expected to be spent next year, 2014. Major projects in 2013 are expected to total approximately $800 million. Sustaining capital is expected to total $300 million in a year, down slightly from previous guidance. And capitalized interest is expected to total $105 million to $115 million in 2013. Third quarter capitalized interest should be an estimated $30 million, with the amount decreasing approximately $10 million in the fourth quarter, following the commencement of the contract on our new rigs. And total capital spending for the third quarter is expected to be about $850 million. That concludes my comments. Roger will now cover the market outlook. Roger?

Thank you, James, and good morning, folks. I would love to start this call out, as I did on the last call, by announcing another leading fixture for the ultra-deepwater arena. But unfortunately cannot do so because Noble is sold out of capacity. Oh well. But I will lead with 3 observations about our industry as we passed the midway point of 2013. First, the ultra-deepwater sector remains strong with attractive, albeit, steady dayrate trends in place for the near term. Second, all the deepwater capacity, including most conventionally moored rigs in many of the dynamically positioned units, which had their staff 10 to 15 years ago, are experiencing some dayrate pressure. Third, the jackup segment, including standard and high-spec capacity, continues to surprise with strong utilization and stable to higher dayrates across most regions. I will now expand on each of these observations. In the ultra-deepwater sector, recent contracting experience indicates a steady dayrate range in place. Of the roughly 13 contract awards in 2013, predominantly new rig sector exit the yard over the next 12 months, dayrates have averaged $590,000. This compares favorably to the last 6 months of 2012 when the average was approximately $585,000. We remain confident that demand will be steady and customers will show a preference for rigs with the highest capacity. We still have solid industry fundamentals in place, including strong crude prices, with brand averaging $106 a barrel year-to-date in 2013. Successful exploration results, for which we have seen 20 additional announced discoveries today, 2013, following last year's record of 52 announced discoveries. Expanding geographic reach as operators explore frontier areas. And growing appraisal and development backlogs representing the bounty from the exploration successes over the past 5 years. Now let's consider the supply side of the ultra-deepwater sector. With 2013 new capacity effectively sold out since last year, 2014 capacity was a growing concern. Of the 21 rigs scheduled for delivery in 2014, 19 were without contracts at the start of 2013. Today, that number is down to 13 and is probably lower when you consider ongoing discussions for many of the rigs. 2014 capacity -- once 2014 capacity is committed, which we believe will occur during the next 6 to 9 months, the supply of ultra-deepwater rigs becomes an interesting discussion. There are approximately 54 rigs with planned yard deliveries after 2014. Of these 54 rigs, 29 are committed to work for Petrobras. Of the remaining 25 rigs, 8 are contracted to various operators, and 3 are highly questionable as to whether they are built. If we count the 3 questionable rigs, there are an estimated 17 rigs with free and clear availability after 2014. Should the industry fundamental hold or possibly improve, and if most operators commit additional time to existing rigs, then one might question whether the available capacity is sufficient to meet demand. There are several potential demand catalysts in the sector that could have a meaningful influence on customer's ultra-deepwater needs beyond 2014. Those catalysts include: Brazil's successful bid round held during May; the forthcoming auction of Brazil's presold opportunity to labor field; the building importance of the lower tertiary in the U.S. Gulf of Mexico; and the increasing exploration appraisal and development activities along the transformed margin and presold acreage offshore West Africa. Depending on how these event scenarios play out, one can build a reasonable case for an increase in ultra-deepwater rig demand beyond 2014. Any rig ordered today that is not supported by an existing delivery option, will not exit the shipyard until the first half of 2016. As I mentioned earlier, Noble is currently sold out of new ultra-deepwater capacity. Our next available rig is the Danny Adkins, which completes its current contract in August of 2014. Discussions with customers have already begun. In the deepwater sector, we noticed that dayrates have softened somewhat as customers showed preference to the highest specification available to them on a particular program. And contractors respond by offering a more attractive value proposition. With a fairly high level of contract rollover in the global deepwater fleet over the next 12 months, we should have a better sense for pricing in this segment over the next couple of quarters. In Noble's deepwater fleet, immediate availability exists on the semisubmersible Homer Ferrington. The rig is bid against opportunities in several areas, including the East and Med, where it is currently located. However, given political unrest in Egypt and mobilization time to other areas, we believe the rig could be idle through the third quarter of 2013. Or even for the rest of the year, if the rig were to mobilize to a region outside of the Med. Also, we continue upgrades and maintenance on the Paul Romano and Malta. As reported in the last fleet status report, the project scope was recently expanded resulting in a delay of approximately 60 days. With the combination of additional time in the yard and political unrest in Egypt, places uncertainty around execution, or an estimated 70-day well offshore Egypt for Total. We will continue to monitor developments, and update you on any changes through our monthly fleet status report. In the jackup sector, high utilization and improving dayrates continue with strong opportunities for additional work in most regions. The compelling aspect of this sector is the 3 largest consumers of jackups capacity, PEMEX, ONGC and Aramco, continue to evaluate needs with the expectations for increasing requirements for standard and high-spec units. However, but perhaps for the first time in our industry, there are a few idle standard capability rigs that serve as acceptable candidates for reactivation, given stained economics leading many operators to commit longer duration to rigs under contract or seek newbuilds. Also, it is increasingly likely that we may be entering a period of accelerated rig retirements, or transactions that position many rigs for uses other than drilling. Many operators have specific requirements driven by the complexity of the drilling program, leading to steady demand for the new capacity exiting the shipyards, call for a rig with more advanced features, such as the CJ-70 design that Noble will build the Statoil's Mariner Field in the U.K. The strong sector conditions are evident in Noble's jackup fleet with numerous contract awards and extensions over the past 90 days for rigs operating in Mexico, West Africa and in the Middle East, where the Jimmy Puckett received a 4-month contract extension and an operating rate of $140,000. To summarize, we like what we see in the offshore drilling business for the balance of 2013, and well into 2014. Numerous opportunities are under evaluation in all segments of our fleet. Crude oil prices remain supportive of activity in both shallow and deepwater. New rig additions, especially in the ultra-deepwater segment, are at a measured pace, despite clearly attractive newbuild cost in a strong and steady pricing environment. Uncertain, event drilling catalysts are present that could sustain ultra-deepwater demand over future quarters. I'll now turn the call back to David for closing remarks.

Thank you, Roger. I want to close today by saying we continue to be optimistic about the offshore business cycle and our ongoing transformation as a company. This activity remains robust for the rigs we are working to contract in both the shallow and deepwater sectors, and we believe we are making measurable progress in addressing the operational challenges we faced in 2012. But more work and additional improvement is still needed. We will not be satisfied with operational downtime hovering around 5%. Our numerous additions to new systems, processes and procedures are intended to continue to produce additional operational improvements, and deliver more of the favorable trends you see in the first half of 2013. Transformation of our fleet is on track, as evidenced by the numerous milestones already reached in 2013, with more to come over the second half of the year and in 2014. Although the current new construction program is fairly well advanced, we continue to evaluate other attractive alternatives that fit our strategy for building and assembling the industry's most versatile and premium fleet. This is certainly the case with the order of 4 CJ-70 design jackup to be deployed on Statoil's Mariner Field. The rig will be among the industry's most advanced jackup rigs with tremendous size of advanced capabilities and capable of addressing work that has traditionally been the domain of semisubmersibles in the very harsh northern North Sea. We believe the project offers sound economics, as well as tremendous strategic value to Noble, as we broaden our customer base with the addition of Statoil, a global name in the offshore oil and gas industry, and add another high-specification rig to our growing list of premium assets, including the first in our fleet that will be compliant for operations offshore Norway. As our capital expenditures begin declining from an expected level of $2.9 billion in 2013. We will continue to evaluate growth opportunities, but we will have more flexibility to consider other ways to utilize our growing free cash position. Cash dividends have been an early focus by our board and management, as evidenced by the recent near doubling of our current annual dividend to $1 per share. Further increases in the dividends and other means of enhancing shareholder returns will remain a regular topic of discussion as we move through the coming years. Finally, we continue to make progress towards the proposed potential spin off of our standard specification assets, although I know it may be difficult to see progress from where our shareholders sit. Let me bring everyone current on where we are today with what we believe could be a significant transformative event. We continue to expect the ruling from the IRS regarding the tax-free nature of the potential transaction. We believe we are in the late stages of this review but we are not in control of this element of the process. We remain optimistic that we will obtain the ruling in due course. Once we have a ruling, and assuming the ruling provides us with the level of comfort we anticipate, we will take the plan of divestiture to our Board of Directors for a thorough review and seek their authorization to proceed with the proposed transaction. We would expect to promptly communicate some initial details, post-transaction, to our stakeholders, when and if we received the authorization from the board that we expect. I appreciate your patience as we evaluate this transaction and work through this process, as well as your continued interest in Noble. And now I'll turn the call back over to Jeff.

Okay. David, thank you. Regina, we're ready to begin the question-and-answer segment of the call. As you assemble the queue, I want to reiterate a comment David made earlier. We will not take questions on the proposed move from Switzerland to the U.K. Instead, we direct you to David's prepared remarks and our filings with the SEC, including the final proxy statement when it is mailed to our shareholders. Thank you for your understanding on this matter. Regina, go ahead with the first question.

Our first question will come from the line of Jud Bailey with ISI Group.

Roger, I wanted to follow-up on one of your comments. I believe you mentioned in your prepared comments you're seeing a little bit of softness in kind of the deepwater segment of the market. I was wondering if you could maybe expand on that just a little bit and maybe comment on -- we've seen a little bit of softness, it seems like, is there a case to be made that we could continue to see those rates trend down next year, as more ultra-deepwater rigs come into the market? Or is there a case to be made that next year perhaps we sort of see things stabilized a bit? And if that does happen, what has to happen to see those rigs find a bit of a floor over the next few months?

Jud, I'm going to address the question through the eyes of our fleet. As I mentioned, that we have the Homer Ferrington in the Med. If it wasn't for Egypt right now, I'm fairly confident that the rig would be headed towards a contract. So I put that up as the barrier to immediate employment. That's actually changing day by day. The outlook key in that sector beyond 2013 is good. As you are aware, there's a lot of exploration planned for places like Cyprus and other countries around the lower Med. Either -- the rigs are still earning good dayrates, very good rates. And I guess, as you said, I would have us be patient and look to the next 12 months, where there's going to be a lot of rollover, not so much with us, but with others in the deepwater fleet. And only then will we know how the pricing deck unfolds.

Okay. And then my follow-up question is on Brazil. You mentioned that as one of your many -- potentially, one of your areas you can see a catalyst for ultra-deepwater demand. Could you maybe talk a little bit, are you starting to see or have any dialogue with customers about bringing rigs in, regarding the most recent lease sale in the North? Are you already having conversations about that? And then post this upcoming pre-salt lease sale, is it your sense that there's going to be some flexibility for operators, other than Petrobras, to be able to add rigs or are we going to be stuck where Petrobras is still going to be the one procuring rigs and services for those pre-salt blocks still?

Jud, to your first question, it's a quick no. No, we haven't had any conversations with customers yet, other than observe who the major players are, and we're very pleased about that because it matches up with our own customer base. I think the timeline on that is probably 2 to 3 years. We would expect customers to start conversations here in the next 12 months. To your second question, I think it's too early to tell. The published answer is that Petrobras will be the operator, but I think one might have a view that they're going to partner up with foreign oil companies and the foreign oil companies may have positive influence on contracting strategy. So let's hope that it turns out that way.

Our next question comes from the line of Ed Muztafago with Societe Generale.

I wondered if you could talk a little bit about -- you clearly made some good improvements in operational efficiencies and reducing the unplanned downtime. As you sort of look over the last 6 months and then kind of look forward, can you maybe sort of qualitatively give us an idea as to how far along you think you are in improving on this, is it 50%? Is it 25%? How much more could we see over the next couple of quarters?

Well, that's a great question. One that I'm not sure I can answer with any kind of certainty at. We have -- we worked very hard to get people, processes and equipment in place to be able to deal with. And as you correctly point out, it's unplanned. So we don't really have a view of what it's going to look like. We're still having an incidence, but we're dealing with it faster, we're not having as many -- some of the contract features that the marketing guys have built in are giving us some contract coverage on some of them. So while they are down and our performance is better, it is not where we expect it to be or where we want it to be. I think we're still learning, in some cases, the level of tolerance from regulators, both in the U.S. and other markets, about things that historically have been not eventual, I guess, on subsidy BOP systems that now become a little more apparent to regulators, and regulators want to deal with these things quicker. But overall, we're in a process. We know this is going to be a continuous improvement, it's like safety. To me our goal is goal 0. I don't know when we get there. Downtime is going to be exactly the same. We will be working for continuous improvement forever. But again, as long as we're in an imperfect world and we run machinery made by man, we're going to have downtime and so -- but we will continue to improve. So I don't -- whether we're half way there or third, I don't have any idea yet. We're not there yet, I can tell you that.

Okay. I wanted to follow-up, as well, on your comment that you think we're likely entering a period of significant rig retirements or legacy rig retirement. If you kind of look at that portion in the fleet, something around like 80% to 85% of the legacy floaters have actually found work in the recent past, and maybe like 90% of what you might consider near legacy. Can you talk about how a material retirement cycle would plan to your thoughts of demand for additional deepwater newbuilds and potentially even the dayrate environment? I know you guys highlighted some pressure in the deepwater and maybe midwater side of the fleet.

Well, retirements, I think it's noteworthy in so far as people are so concerned about the level of supply growing at the pace it's grown over the last few years. If you look at -- let's just take jackups, there are roughly 535-or-so jackups either built or under construction. And I think -- and I'm not sure exactly what the numbers are, but roughly half or maybe up to as many as 55% are 25 years or older, and since many of those rigs are 30 years or older, they don't have an infinite life. We don't know -- there are so many components that go into how long a life is that it's hard to predict exactly what the useful life is. Largely, it's going to be market-driven, and we all know this is a cyclical business, so I think the reason it's meaningful is that supply from the shipyards continues to grow. And right now the market is very hot, it's one of the reasons we like to spin now is because there's so much value built into that part of the fleet. But it is cyclical business, and sooner or later, it's going to rollover and whether that's 2 years from now or 5 years from now, if those rigs go stacked, there will be some of those who don't come back. And how many is going to depend on when the slide comes, how deep it is, how ugly it is and how long it lasts. So I think it's one of the things that we like about the supply and demand story, it's that acceleration of retirements is on the horizon. Exactly when and how deep, that's hard to predict.

Your next question comes from the line of Dave Wilson with Howard Weil.

You guys had another good quarter on the cost front and actually coming in below guidance. Is there -- I just wanted to see if there's something special about that? I know James had mentioned a reduction in repair and maintenance, and that seemed to account for about half of it. I want to see if there's anything else there or if you guys are just being conservative with guidance, which is fine.

I would make comments, then see if James has anything to add. I mean there's nothing special there. We run our business hard all the time. As we've had to ramp up over the last couple of years, it's been a little bit harder to predict, as we've hired -- we've onboarded so many people and had so many different elements of the company right now, I think, as we're headed out of the newbuild program. And the ramp up in staff is slowing in many respects and the people are assigned to units and that's easier to predict from an HR perspective, and the amount of downtime we're having is helping as well. So I think we're just running our business better. I'll leave it -- James, do you have anything to add to that?

Not much. I suppose it's probably worth pointing out that I think it's reasonably well known that in this industry, there is a certain amount of seasonality where repair and maintenance cost does tend to increase in the third and fourth quarters versus the first and second quarters. But primarily, in the second half of the year, the increase that we're showing and guiding to is driven by new asset start ups.

Okay. Great. As then this is as a follow-up on another matter, regarding the CJ-70. Given its cost, did you guys need to have some visibility beyond this initial 4-year contract to gain enough comfort to go through with the project? Or maybe some of the stuff that Roger alluded to in his prepared comments, was this initial contract sufficient enough to get you guys over the goal line on that one?

Well, there are some options on this thing to take it out for a good while. Those are always, I mean, there are options, we don't -- what we planned in our initial economic model is the primary term contract, and we've tested a number of different scenarios beyond that, good, bad and ugly, frankly, to see whether or not we thought it made sense. We think it makes sense on the 4-year contract, but it is based on the capability of that rig and where we see real investment or rigs of this capability, of which effectively there are one. There are some others of similar capability but this is a little bit peculiar insofar as it's able to work as a third rig yet [ph] . So when you build a rig like this that has a sponsor like Statoil, it has a huge amount of investment both in the U.K. sector and Norway going forward. We have a lot of comfort in the technical capability of that rig. I mean keep in mind, you have some expensive rig, but it's a mid-force rate. And that the operating cost in that rig is going to be much, much, much less than one of these big deepwater semis. Our efficiency that we have been running our rigs in the U.K. and set to the North Sea is actually pretty good. So you keep in mind the cost elements that. We're not at all unhappy with the economics of this deal.

And David, I would just add a remark for all of us to remember. David made a remark about relative to a semi, but just about every other CJ-70 unit that's being added to the market, you'll note that it's working in the Norwegian sector. So you may have a view of what the OpEx is for a jackup in the Norwegian sector. The OpEx on this rig is going to be an order of magnitude less, by virtue of it operating in the U.K.

Great. And just one last one, on the CJ-70. I know it's operating in the U.K., would there be any additional CapEx required to get it to work in the Norwegian sector?

That's not -- not right now. That won't be for 4 more years. I mean, after the construction program is delivered, 2016, and then it will be 2020. So we'll have to meet whatever the rules are at that time. But as we sit today, no, there's nothing else that would be required.

It has been built to Norwegian spec.

Your next question will come from the line of Matt Conlan with Wells Fargo Securities.

I guess my first question is for Roger, to follow-up on the jackup retirement comment. Do you think that newbuilds coming out are going to displace active rigs from their jobs, enforce their retirements? Or are you just referencing stacked rigs that are too expensive to bring back?

Yes. Interesting question. Matt, if we turn the clock back 12 months ago, there was probably around 80 rigs under construction. And if we checked that statistic today, it's still 80 rigs under construction. And just in the past quarter, I believe there's been 13 or 14. So the delivery rate has been somewhere between 3 to 4 jackups a month. The industry until now has been able to, surprising to all of us, absorb that increased supply and rates have held nicely. It will not be able to sustain that kind of delivery rate into perpetuity.

Okay. And what region do you think will lead the trend of active rigs getting crowded out by new rigs?

I don't think I'll reach out on that one, but I'll turn it back to you. If you just put a radius around where all of the rigs are being built, you could surmise that Southeast Asia will be the first area to come under pressure. However, it has not. If any area is probably feeling a little pressure, maybe it's the non-Saudi Middle East.

Best to keep in mind these rigs are mobile. So you bring pressure on one market, people start moving them around. So it is very much a global market. So you'll start forcing the lower spec rigs, the rigs that have the least broad applicability, which is a hard and ugly way to say it, but the least capability, you'll see if those force out first.

Okay. Great. And then just an unrelated follow-up. The CJ-70 contract, does that signal that you're now less interested in further spec building and more interested in contract covered building?

I wouldn't say it signals anything. We really like Norway. We think just a bold move just to move the rig in and hope for the best is always challenging. This is kind of a soft landing, we think. We think Statoil is a company that has real opportunity for a company like Noble. And we like this opportunity. We like this rig. We like this customer. We like this program. And we think this is a good first step for us into a Norwegian opportunity. So no, it doesn't really -- I wouldn't -- it doesn't really signal anything, one way or the other. This is an opportunity that came up and we are happy to have it.

Your next question comes from the line of Ian Macpherson with Simmons. Ian Macpherson - Simmons & Company International, Research Division: David, I think my first question would be a follow-up on that. Because it seems like your past couple of quarters you have said more explicitly that you're inclined to build only against contract. I don't if you said that exclusively, but I think that was a clear information. And now you have built with contracts. You're response to the last question to me left me thinking that you are open again to building on spec. So I don't want to put words in your mouth, but I just want to understand sort of where you are strategically?

You sound like you're confused by our tactics, in the words of Ricky Bobby. We don't mean to signal anything. I would say that as we went through our -- the newbuild program that we've in -- that we're deeply into right now, the stars aligned. We really like where the market was, we have a significant buildup in backlog and a lot of cash to deploy. We saw that our fleet was aging and shipyard availability was good, and we really like where we believed strategically the market was headed. And so we've made a fairly significant bet. And I think that our timing was spectacular. I am absolutely delighted with our execution. And I think that as we continue to move through this program through the rest of this year and next year, I think our shareholders will be delighted with our execution, our newbuild program is doing great. As this cycle moves on, we're seeing more opportunities. It seems we're 4 different types of applications, we're engaged in a number of different discussions with a number of different operators about different classes of rigs for different applications all the time. But it seems like there's more of those now than there were. Does that mean that we're not going to do someone's spec? Not necessarily. It just -- we're seeing more of those kind of opportunities and we're looking at some of those. Our hurdle rate hasn't changed. Our view of the world hasn't changed. We are deeply engaged in the newbuild program right now, so we have limited capacity to take on a lot of newbuilds. So we are looking at the ones that make the most sense. If we get closer to this, to the end of this, end of next year and we still have -- we still see the market where it is and we don't have something slated, then we may very well go back and do some step-on spec. But right now, we're taking them as they come and this was a good opportunity. Ian Macpherson - Simmons & Company International, Research Division: A follow-up question. I know you asked us to avoid the news of the U.K. as a conversation topic, but I believe this is an acceptable question. I think we appreciate the fact that London is really an easier and better place to run or to headquarter your business, clearly. But then when you look at other reasons for doing it, I think we probably aren't privy to the fiscal and tax considerations that you are. But I think we also think that you're probably going to have the more flexible dividend authorization regime there as well. Could you just say whether those 2 considerations are sort of similar or if one of them is demonstratively better as you move to the U.K. versus Switzerland?

Yes. I really can't say much. There's one thing we like about the U.K. sector is their very well-established law, very well-established corporate law. That information is available to you, and there are some pretty detailed information in the proxy. And that proxy is under review by the SEC right now. And I don't think it's appropriate for us to comment extemporaneously about what's in front of the government to review, so I'd really rather not.

Our next question comes from the line of Robin Shoemaker with Citi.

Just wanted to ask you, going back to Roger's comments about a little bit of softness in the floater market to conventionally moored in the smaller DP vessels. Would that affect your decision or timing about possibly including some of those rigs in your spin off?

We're so far down the road with our friends at the IRS, I don't think that we have much room to wiggle in terms of what's in and what's not in the spin. Again, we're not trying to -- what we've taken in the view of this, of the rigs that are in spin from our perspective, again, we haven't disclosed this in the market, but the view we've taken is of strategic and a technical evaluation of the rigs. The ones that fit our long-term goals and the ones that don't. And so like as we've said before, not all of the assets are in there, some are, some aren't. So changes in the market when we know it's an evolving market, and I think what Roger actually tried to say or what I've got from his comments, was that there may be some periodic softness now. But if you look out 12 months, we have a lot of confidence in it. It's a cyclical business, and we believe both these companies have very viable business opportunities. We believe that as the market becomes increasingly bifurcated with new and some legacy rigs that it really becomes a different strategy and a different business. And we try to separate the fleets on that basis not, "Well, I'd really like to get rid of this rig or I really want to keep that rig." So we've really have taken a strategic view of this, not just a snapshot in time. So no, it doesn't really make a difference to us.

Okay. One other kind of question going back to the jackup issue and the large number of jackup orders that have been placed here year-to-date. Some of these companies that are ordering rigs are not as familiar to us, we're not household names in the drilling industry, certainly so. I just wonder if, from where you sit with your program, are people offering some of these rigs ordered and under construction to you? Or do you think these are -- some of these lesser-known companies really intend to get in the business?

I would say, well, I can't speak for other companies what their ultimate goals are. We do, from time to time. And then some companies that have been started up and been in the business that are not maybe not household drilling company names, but have built some rigs. We've seen rigs that these companies have been built, been offered to us from time to time for sale. We've looked at those from time to time to see whether or not it fit our daily rate. I would expect some of these rigs that are under construction to probably come to the market for predelivery secondhand transactions. Some we like, some we don't. Again, if you look at what's being built and what we're building, they're very -- other than our fleet, they're very different. We're building at the very high end of the spec. We really like the JU3000, the opportunities that, that rig has really kind of created by virtue of this -- its own specification, have really been a real positive, surprise us. And so there's not much out there that's being built at that technical ilk. But having said that, I mean, if we saw a rig that was under construction in some place that fit a specific opportunity that we had, that we feel like that we could execute that would make a good deal for our shareholders, we would look at that. We clearly haven't seen that yet and don't know if we will, but we wouldn't be opposed to taking a look at something that was under construction to a decent spec in a good yard.

Regina, with Robin's question, we're going to conclude the call. For those of you left in the queue, John and I will be contacting you over the course of the day to address your questions. So thank you for your participation on the call today and your interest in the company. Make a note please, that our third quarter 2013 results are scheduled for reporting on the 16th of October with a call to follow on the morning of the 17th, and we'll confirm those dates as we get closer. Regina, thank you for coordinating the call. And good day, everyone.

Ladies and gentlemen, this does conclude today's conference. Thank you all for joining and you may now disconnect.