Noble Corporation Plc (NE) Q4 2014 Earnings Report, Transcript and Summary

Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Noble Corp. Fourth Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, Thursday, February 5, 2015. 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, Melissa. And welcome, everyone, to Noble Corporation's Fourth Quarter 2014 Earnings Call. We appreciate your interest in the company. 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. 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 financial performance, the drilling business or other matters that are nonhistorical 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 are using non-GAAP financial measures on the call today. You can find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconsideration on the website. Finally, consistent with our quarterly disclosure practices, we will post to our website, following the conclusion of our call, a summary of the financial guidance covered on today's call, which will highlight first quarter and full year 2015 figures. With that, I will now turn the call over to David Williams, Chairman, President and Chief Executive of Noble.

All right. Thank you, Jeff. Good morning, and welcome to a new year. As we entered 2015, I'm pleased with Noble's strong position in the offshore drilling industry, having largely completed in 2014 a transformative and well-executed newbuild program, along with the divestiture of the majority of our standard capability rigs, our fleet is now dominated by modern and virtual assets with excellent contract coverage, as evidenced by the current backlog of $10.1 billion. With these transformative steps behind us, we can focus our organization on stellar execution and preparing Noble for an industry recovery. There is no question our industry faces challenges in 2015. But this is a resilient business in the best and the worst of cycles and I'm confident we'll witness a vastly improved outlook when we exit this period of weakness and Noble will emerge as a clear industry leader. Joining me today in London is James Maclennan, our Senior Vice President and CFO. Jeff is in Houston along with Simon Johnson, our Senior Vice President of Marketing and Contracts. I'd like to begin today with some brief comments on our results for the fourth quarter including some thoughts on the asset impairment charge and our decision to retire 3 semisubmersibles. James will follow with a deeper dive in the fourth quarter results and, more importantly, our initial guidance for 2015. Simon will follow James with some brief comments on the offshore market and the status of the Noble fleet. I'll return with some closing comments to address some areas of focus during the cyclical turbulence and a discussion on capital allocation strategy with updated thoughts on the MLP structure, share repurchases and the dividend before we take your questions. As you saw from the earnings report issued last evening the reports -- the reported results for the fourth quarter included a noncash after-tax charge of $713 million, resulting from the impairment of 3 semisubmersibles and the entire amount of the company's goodwill balance. The decision to retire 3 of our semisubmersibles, the Paul Wolff, the Jim Thompson and the Noble Driller, followed updated assumptions on each rig's future marketability, with consideration given to their years in service, limited technical features and anticipated capital requirements as we work through our annual impairment analysis. In fact, each of these rigs either were already or soon to be scheduled for significant upgrades or refurbishments that had already been done on other rigs within the fleet. Consequently, we concluded the best course of action was to permanently retire each rig from service. The benefits of this action are numerous and include a reduction on the average age of the fleet whose concentration of premium assets is already among the industry's highest. Also the company will benefit from reduced capital expenditures. Based on our preliminary estimates, capital needs for the 3 rigs were expected to exceed well over $300 million, just to address regulatory and certain reliability factors. Finally, annual depreciation expense will decline by about $60 million a year. Excluding the impairment charge, our net income in the fourth quarter would have been $119 million, or $0.47 per diluted share. Compared to the third quarter of 2014, the results were negatively influenced by the lingering offshore rig supply imbalance and the rapid weakening of crude oil prices, which resulted in increased market uncertainty and caused many customers to adopt a greater reluctance toward initiating new drilling programs. Although Noble enjoys a high percentage of fleet contract cover, some of our rigs, particularly in the floating sector, experienced greater idle time quarter-over-quarter, as they rolled off contract with no immediate work, while other rigs began new contracts reflecting the new lower rate environment. The result was a decline in utilization and average daily revenues, coupled with a modest increase in operating cost. James will provide more details on these aspects in just a moment. A highlight of the quarter was the commencement of operations on the ultra-deepwater drill ship Noble Tom Madden. You recall the rig was delivered from the HHI Yard in South Korea in late August, 2014, almost 1 month early. In just 84 days from delivery, the rig completed its mobilization of almost 8,300 nautical miles to the U.S. Gulf Mexico, finished commissioning in client acceptance activities and commenced its initial 3-year contract ahead of schedule. This represents another example of excellence in our newbuild program, for project management and shipyard execution through operational readiness and delivery to the client. We also took delivery in the fourth quarter of the high-specification jackup, Noble Sam Hartley, from the [indiscernible] marine yard in Singapore. As we noted on our last call, the rig is the only newbuild of '15 ordered by Noble since 2010 to be delivered without a contract. The rig is completing additional modest capital upgrades in Singapore that will extend its capabilities, expand its theater of operation and increase its overall competitive standing. Simon will provide more details on the rig and others in our fleet momentarily. We exit 2014 with one remaining newbuild construction project, the ultra-high specification jackup, Noble Lloyd Noble, which is expected to complete its construction in the second quarter of 2016 and thereafter commence a 4-year contract with Statoil by mid-2016. With our well-timed newbuild program nearing completion, our focus in 2015 is superior execution, which we control and positioning Noble for success in the next cyclical upturn. I'll include some thoughts on these points in my closing comments. But for now, I'll turn the call over to James.

Thank you, David, and good morning, to everyone on the call. I'll begin this morning by providing some high-level observations on Noble's fourth quarter results. I plan to cover only those line items that fell outside of our previously guided range in order to allow more time for a review of 2015 financial guidance. I'm happy to address items not covered in my prepared comments during the Q&A session at the end of today's call. You'll recall that our spinoff of Paragon Offshore was completed on August 1, 2014, and the operational results of Paragon and incremental spinoff related costs for the periods covered in our prepared statements have been recast and captured net of tax in the line net income from discontinued operations in our profit and loss statement. The highlights of the fourth quarter are as follows: we reported a net loss from continuing operations of $595 million, or $2.38 per diluted share on total revenues of $805 million. As David noted, these results included an after-tax impairment charge of $713 million, or $2.86 per diluted share relating to 3 of our semisubmersible rigs: the Noble Paul Wolff, the Noble Driller, and the Noble Jim Thompson, as a result of our decision to discontinue marketing these units and taken in connection with our annual impairment analysis. An impairment of the total amount of our goodwill, being $60 million, which originated from the acquisition of Frontier Drilling in 2010, is included in the $713 million charge. Excluding the after-tax impairment charge, net income from continuing operations would have been $119 million or $0.47 per diluted share. The results compared to net income from continuing operations in the third quarter of $147 million, or $0.57 per diluted share on total revenues of $829 million. Contract drilling services revenues declined by approximately $23 million from the third quarter to $788 million. The decline was driven by fewer operating days, as rigs in the fleet came off contract during the quarter, including the Noble Max Smith, Noble Mick O'Brien, and the Paul Romano, which completed their contracts in August, October and November, respectively. In addition, daily revenues, on average, decreased by approximately 5%, as several rigs primarily in the U.S. Gulf of Mexico, experienced unfavorable contract -- contractual day rate changes. Partially offsetting these decreases were a full quarter of operations for 2 newbuilds, the drillship Noble Sam Croft, and the jackup, Noble Sam Turner, and the fourth quarter contract commencement of the newbuild drillship, Noble Tom Madden. Utilization in the fourth quarter declined to 82% compared to 85% in the previous quarter, while average daily revenue declined 5% in the fourth quarter to approximately $331,000 a day from $347,000 days approximately in the third quarter. Contract drilling services costs in the fourth quarter of $391 million, were just ahead of the high-end of our guided range $375 million to $390 million. The early contract commencement of the Noble Tom Madden was the primary reason for the slight increase from guidance. DD&A was $167 million in the fourth quarter, compared to our guided range of $160 million to $165 million. The variance to guidance was due primarily to the timing of newbuilds placed into service. SG&A expense was $29 million in the fourth quarter, compared to guidance of $25 million. The unfavorable variance was primarily due to the timing of professional fees related to ongoing projects. Interest expense, net of amounts capitalized, was $41 million in the fourth quarter compared to a guided range of $45 million to $50 million. The lower-than-expected expense relative to guidance was due to a lower level of borrowings. We capitalized approximately 17% of interest in the fourth quarter, compared to 23% in the third quarter reflecting the completion of several newbuilds and other major projects. The noncontrolling interest line on our P&L, representing the Bully I and Bully II 50-50 joint ventures with Shell, was $15 million in the fourth quarter compared to guidance of $16 million to $20 million. The decrease compared to guidance was due to the Bully II being placed on a standby dayrate following our joint venture partner's decision to relocate the rig from Brazil to a location in the Eastern Hemisphere. Our effective tax rate for the fourth quarter, excluding the impact of the impairment charge, was 17.6% compared to a guided range of 18% to 20%. The decreased rate was driven by favorable changes in the geographic mix of pretax income, as well as favorable changes in discrete items. Capital expenditures in the fourth quarter totaled $325 million, including capitalized interest and below our guidance of $400 million. Lower spending on major products was the primary cause of the variance, due in part to lower-than-expected spending on the Noble Paul Wolff, following the company's decision to retire that rig. Spending in the fourth quarter brought our total capital expenditures for 2014, excluding expenditures related to Paragon offshore rigs, to approximately $1.9 billion. The components are as follows: $1.3 billion on newbuild rigs; $374 million for major projects; $148 million for sustaining capital; and $47 million in capitalized interest. Let's now take a look at the balance sheet. Total debt at December 31, 2014 was $4.87 billion, an increase of $132 million compared to September 30, 2014. The debt to total capitalization ratio was 40% at December 31, up from 37% at the end of the third quarter. Liquidity, measured as the sum of cash and cash equivalents and availability on our revolving credit facilities, totaled approximately $1.8 billion at December 31, 2014. The increase in total debt and the decrease in liquidity from the prior quarter reflects short-term borrowing to fund our ongoing capital expenditures. In January 2015, we terminated our existing revolving credit facilities and entered into 2 new credit facilities that will provide the company with a significant level of new, 5-year bank capacity. And we added a new 364-day facility to increase the company's available liquidity even further. The combined facilities total approximately $2.7 billion. I'd now like to focus on guidance for the full year 2015 and the first quarter of the year, covering certain line items on the P&L, as well as capital expenditures. First, operational downtime in the Noble fleet for 2015 is expected to average 7%. This compares to actual operational downtime in 2014 of 8.8%. This guidance reflects our high specification fleet mix. Contract drilling services costs are expected to be in the range of $1.35 billion to $1.45 billion for the full year 2015. While the operating margin is essentially steady with margins in 2014 at approximately 50%. Actions intended to manage cost have produced an expected 7% reduction from levels in 2014. Let me provide a reconciliation of the decrease from the 2014 level of $1.50 billion. Firstly, new rig operating costs, including startup costs, add $140 million. The largest impact of this increase results from a full year of operations for the Noble Tom Madden and Noble Sam Croft along with the commencement of operations for the Tom Prosser and the Noble Sam Hartley. Our direct rig operating expenses, determined on a same-rig basis are down approximately $45 million, or 7% compared to 2014, reflecting the impact of various cost-reduction efforts undertaken. The expected cost inflation for materials and suppliers is effectively 0 and labor adjustments are expected to be lower than in the recent past, given the current market condition. Rigs for a significant amount of out-of-service time reduced costs approximately $130 million as compared to 2014. This includes retiring the Wolff, the Driller and the Thompson. Lower mobilization expense of $70 million was about $15 million of the reduction related to newbuilds placed into service in 2014 is the next element. The remainder relates to rigs that completed contracts in 2014, including the Noble Max Smith, Noble Paul Wolff, and Noble Mick O'Brien. We expect a corresponding decrease in mobilization revenue for about 70% of these costs. Also, we anticipate 2015 client reimbursable costs in the range of $80 million to $90 million, resulting in total operating cost of $1.43 billion to $1.54 billion. For the first quarter, contract drilling services costs are expected to be in the range of $350 million to $355 million. If we look beyond the first quarter forecast, costs are expected to drop slightly in the second quarter, and then increase to between $350 million to $360 million per quarter for each of the third and the fourth quarters. Costs associated with reimbursables are expected to run $20 million to $25 million per quarter. DD&A for the full year is expected to be in the range of $620 million to $635 million, about flat for 2014. Two major offsetting events keep depreciation flat: firstly, incremental depreciation on newbuilds add approximately $60 million in depreciation; and then the 3 rigs to be retired in 2014 -- that should be 2015, reduced depreciation by a similar amount. For the first quarter, DD&A is expected to be in the range of $150 million to $155 million. We expect depreciation to increase about $3 million to $5 million per quarter through 2015. SG&A is expected to decrease compared to 2014 to a range of $85 million to $95 million in 2015, and approximately $24 million in the first quarter, with the remaining costs split about evenly over the remaining quarters of the year. Interest expense, net of capitalized interest, is expected to total $170 million to $180 million, based on our existing debt structure. $20 million above the total for 2014, primarily due to lower capitalized interest following the completion of newbuilds in 2014. Capitalized interest in 2015 is expected to total $30 million. Net interest expense in the first quarter is expected to be $40 million to $45 million. The minority interest line in our P&L representing the Bully I and Bully II 50-50 joint ventures with Shell, is expected to total $50 million to $55 million in 2015 with a run rate of approximately $15 million per quarter through the year. This expense is ultimately dependent on the operational performance of these 2 jointly owned rigs. Our effective tax rate in 2015 is expected to increase to a range of 24% to 25%, compared to 18% to 20% in 2014. Our current tax structure is more efficient in years where we experienced higher levels of profitability. Conversely, lower levels of pretax income adversely affect our tax rate. Due to market conditions, which we're all very much aware of, we therefore expect a higher tax rate to result. Of course, changes in the geographic mix or sources of revenue and tax assessments or settlements, or movements in certain exchange rates, also can affect this line. Finally, we expect our capital expenditures for 2015 to be $585 million, down from approximately $1.9 billion in 2014. Before I walk through this 2015 CapEx breakdown by major category, I want to point out that our cost control efforts extend to capital expenditures to the extent allowed by preexisting commitments and to costs that are discretionary. A large part of the year-over-year reduction is related to our largely completed newbuild program. However, we also reduced major project in a sustaining capital expenditures, where we could do so without hindering the safe and efficient execution of our global operations. The breakdown by major spending category is expected to be as follows: in our newbuild program, we expect to spend $70 million relating largely to our progress payment on the Noble Lloyd Noble, and the additional capital enhancements on the Noble Sam Hartley. The remaining CapEx needed to complete the newbuild program in 2016 and beyond should total approximately $470 million. Major projects in 2015 are expected to total approximately $315 million, down from $374 million in 2014. The amount includes subsea component purchases and newbuild and other capital spares of $200 million. And several rig maintenance and regulatory inspection programs, including but not limited to work on the Paul Romano and the Bully I rig. Sustaining capital expenditures are expected to total $170 million of the spend in 2015, up from $148 million in 2014, as a result of the increase in fleet size and the change to a more premium mix of assets. Capitalized interest is expected to total $25 million to $35 million in 2015. Q1 is expected to be around $6 million, and each quarter thereafter increases by approximately $1 million per quarter. Total capital spending for the first quarter is expected to be about $125 million. I'd like to close with a summary of our share repurchase activity. David will expand our discussion on capital allocation and use of cash in his closing comments. Under our previous share repurchase authorization, we reported share repurchase activity in the third quarter of 2014 of 2 million ordinary shares. We repurchased 4.8 million additional ordinary shares in the fourth quarter of 2014 at an average price of $21.13, exhausting the previous authorization. In 2014, our aggregate cash expenditure for the repurchase of shares was $154 million. Additionally, we received shareholder approval in December 2014 for a share repurchase authorization of up to 37 million shares, or approximately 15% of ordinary shares outstanding. In January, we repurchased 6.2 million shares at an average price of $16.10 per share, for a total of $100 million. This reduced the company's total shares outstanding to 241.3 million shares. Finally, liquidity is something we're watching very closely with our new revolving credit facilities that I mentioned earlier. We should end 2015 with available liquidity in excess of $1 billion, after repayment of the $350 million of senior notes due in the third quarter of 2015. We will also continue to monitor the debt markets for opportunities to bolster our liquidity through the cyclical weakness. We currently expect to have positive free cash flow in 2015 and we should end the year with a debt to capitalization ratio only slightly above 40%, the level at the end of 2014. I realize an abundance of financial detail has been provided this morning. To summarize the information into 2 key financial directives in 2015, they are: firstly, to reduce operating costs to the extent possible without compromising operational imperative such as health, safety and the environment and revenue efficiency; and secondly, to demonstrate greater capital allocation discipline with a focus on dividends and liquidity management. David will expand on this final directive momentarily. That concludes my comments. And Simon will now cover the market outlook.

Thank you, James, and good day to everyone. This morning I plan to make some comments regarding conditions in both the floating and jackup sectors in our business, and I'll then turn my attention to Noble's demonstrated achievements and inherent strength in the cyclical pullback, including some statistics on the backlog, our rig-specific exposure to this market and efforts to position the company for the next upturn. In that respect, many of my comments today will extend beyond those affecting Noble and address the larger marketplace. To be sure, this is a tough contracting environment, we are focused on building on our considerable backlog and harvesting our strong customer relationships and capturing the value inherent in the Noble fleet. That said, we continue to observe numerous signs of stress in the offshore industry during the fourth quarter, and our view is that this market dynamic is not expected to abate materially in the near-term. The offshore rig supply imbalance that became evident in late 2013, was further complicated by commodity price weakness during the second half of 2014, especially during the fourth quarter. The timing of the price weakness was critical as it occurred during our customer's 2015 capital budget cycle. As oil process continue to decline, customers readjusted planned spending activity downwards. The fallout from these events have been featured on mainstream media reports on a daily basis. The current climate clouds our ability to make a reasonable judgment of when the market might moderate and improve. Operators are taking a wait-and-see approach that could well extend into the middle of the year. A significant first step towards recovery would be stability in the price of crude oil and higher levels than those experienced today. From 2010 through mid-2014, the consistency in crude oil prices, not just the price level themselves, was crucial in supporting healthy levels of upstream expenditure. Stable prices facilitate a great confidence from investment decision-making by operators and underwrite the health of the upstream business more generally. Confidence will generate predictability in future expenditure patterns and this will ultimately be reflected in the activity levels. Stability is very likely more important than a return to the $100 oil. The floating rig sector experienced further deterioration in the fourth quarter as customer interest for additional rig capacity slowed considerably. Expiration of appraisal drilling has been the hardest hit area of activity as is typically the case in the weakest point of the offshore cycle. The list of idle rigs is expected to continue to grow and so should the list of cold stacking scrap rigs. Our industry has been moving towards a significant rig retirement event for several years now and the rig capitalization activity is undertaken by larger players since 2008 will accelerate this process to meaningful much-needed levels. In the past, when contractors have retired rigs, they always believed they could mothball them and wait until the market corrected. On this occasion, we believe the level of reinvestment remain competitive going forward is increasing to material levels. Including Noble's announcement regarding the retirement of the Paul Wolff, Jim Thompson and Driller, the industry has seen 25 rigs retired since mid-'14. It is possible that this number could eventually reach significantly high levels once each contractor has completed a review of their floating plates and made a determination on the amount of capital investment needed for certain rigs with advanced service lives, just to maintain acceptable standards in reliability and efficiency. This is a stage of industry evolution and is a necessary supply response towards a healthier balance in the market. The jackup sector held up better through 2014 than the floaters due primarily to stable to expanding capacity needs in regions with significant consumers of rig time, specifically Mexico, the Middle East, India and the southern gas basin of the North Sea. We are expecting a reduction in upstream spending in the customers' drive to reduce service costs, to negatively impacted global jackup segment 2015. Utilization levels across most geographies are declining, leading to lower day rates, and we expect the same signs of stress evident in the floating sector to become manifest in the jackup segment through 2015, albeit in a more subdued manner. Also, supply growth in the fleet is a common theme, with approximately 69 jackup deliveries expected in 2015, to add to the near 124 units added since 2010. So we continue to be surprised by ordering activity in some recent sales transactions and what we believe are unsustainably high levels. As with the floating sector, jackup stacking retirements should accelerate in this environment, which would facilitate the move towards equilibrium in the sector. Achievements are often overlooked during difficult periods in the industry, but they remain a critical component for limiting the downside scenario and positioning of the drilling contractor such as Noble for the recovery phase. I just want to spend a moment on the big picture view of what Noble achieved in 2014. As David mentioned earlier, we completed our newbuild floater program at Hyundai Heavy Industries, with the delivery in August of the ultra-deepwater drillship, Tom Madden. All 4 rigs ordered at HHI were delivered on time or early, with firm term contracts in place and each rig is now on the payroll. We executed the Paragon divestiture, significantly improving the premium mix of assets in what is now one of the most impressive and capable fleets in the industry. The company moved to the final stages of its newbuild jackup program, with a single delivery remaining in 2016. We successfully placed 2 floating rigs in 2014 availability with customers in the face of heavy market competition, and in the process, we've diversified our customer base. And finally, we move aggressively to control costs through stacking of rigs and the repositioning of others to regions where anticipated client needs are better aligned with rig specifications. I now want to comment on the Noble backlog. We closed 2014 with a total backlog of $10.1 million, providing visibility into 2023. More importantly, it's providing an important cover in 2015 with approximately $3 billion of gross revenue forecast during the year. It is likely to be the most challenging in recent times as we move through the trough of the industry cycle. An estimated $8 billion of the total backlog is associated with the floating segment of our fleet, with $2.1 billion from jackup sector. Also in 2015, a healthy the 80% of our available floated days were accounted for now, and 82% of the available jackup days are also committed. Finally, I realize there have been some industry reports regarding actual or the risk of contract renegotiations and possible cancellations. Which you may have been wondering about the reliability of the backlog figure. Although the terms and conditions of contracts are confidential matters with our customers, I can confirm some clients will exercise creativity when budgets encroach [ph] economics are challenged and the goal is to recognize a reduction in service costs. Given the drop in oil prices, it is not unusual for a customer to request Noble to reconsider contract pricing in the face of what has been a significant reduction in the oil price. However, these discussions are much more fruitful when value is achieved by both sides. And that is exactly how Noble will approach any such requests. Before I close, I want to comment on the rig substitution involving our customer Hess and the Noble Paul Romano, as well as provide an update on the outlook for rigs in the Noble fleet with current or near-term availability. As noted in our press release, we have made the decision to retire the semisubmersible Noble Jim Thompson. Now the Noble Paul Romano will take its place to execute the contract in the U.S. Gulf of Mexico. The 4-well primary termed contract with a dayrate of $300,000 a day was awarded last September and is immediately available. And the ultra-deepwater rigs, Noble Danny Adkins in June, and the Noble Amos Runner and the Noble Clyde Boudreaux in November. Our confidence level remains high regarding suitable opportunities for the Adkins, while the current limited industry visibility makes it difficult at this time to comment with reasonable certainty on the Smith, Runner and Boudreaux. Looking towards the jackup fleet exposure in '15, our focus is on the Noble Mick O'Brien, the Noble Sam Hartley. Both rigs are under consideration for programs with 2015 commencement days. However, the jackup market is becoming increasingly competitive. We believe that high specification of these rigs and their ability to deliver extra value to the customer will provide a competitive edge, but neither rig is presently expected be active before the middle of 2015. As we have demonstrated in the fourth quarter, Noble will to continue process a fleet evaluation and move increasingly toward a distillation of rigs that display technical ingenuity, sophistication and deliver enhanced efficiencies to our customers. And Noble Globetrotter II is the embodiment of these attributes. The ultra-deepwater drillship with the unique multipurpose tower was mobilized by a long-term client to the Black Sea. The rig used its onboard crane to remove the top section of the tower and sail beneath the Bosphorus Bridge in Istanbul, Turkey. The removal project was completed in about 1 month, half the time it has taken other rigs to complete the time-consuming transit and that customer additionally avoided the challenges and expense of costly cranage [ph] to affect the derrick removal and reinstallation. We believe unique capabilities, such as those found on our Globetrotters and other rigs in our versatile fleet give Noble a strong and competitive posture with an increasingly complex and demanding industry. I'll now turn the call back to David.

All right, thank you, Simon. Whether industry prospects are encouraging or challenged execution and solid operating performance remains critical to success in our business. So we are very focused on execution and our success in 2015 will be in part contingent upon 3 primary elements intended to promote operating efficiencies and cost control while we limit margin erosion. These elements include continued improvements in rig uptime and, in particular, continuation of our subsea BOP reliability improvement efforts which have led to BOP-related downtime reductions in excess of 35% in 2014, relative to our 2013 results. Also, we subscribe to the philosophy that a safe operation is an efficient one, hence our commencement to continuous to improvement in this area, and as demonstrated through our continued performance relative to our peer group and IDC [ph] criteria. In 2014, Noble had a total recordable incident rate of just 0.39, evidence of our safety leadership in the offshore industry, and I commend our crews for this impressive performance results. Finally, we are highly focused on cost, which includes proactively stacking rigs with limited market opportunities. The retirement of the Noble Paul Wolff, the Noble Jim Thompson and the Noble Driller will remove $80 million from operating costs in 2015, contributing to a forecasted 7% decline in year-over-year contract drilling operating cost and supporting operating margins at or around 50%. Should we have a need to stack additional units, we plan to take proactive measures to cut cost in the short-term while protecting the assets for the long term. I mentioned in my opening comments that Noble is strongly positioned in the offshore industry, and the company is capable of successfully steering through a period of uncertainty during 2015. Several attributes lead us to this conclusion, including the premium nature of the fleet, with more than half the fleet having been added just in the past 5 years, including 10 ultra-deepwater floaters and 7 high-specification jackups. We enjoy excellent contract coverage because our fleet is younger and is equipped with many of the technically advanced features and efficiencies that customers prefer. As I note in the 2014 remains strong at $10.1 billion, and is expected to provide gross revenues in 2015 of an estimated $3 billion, with continued strong visibility in 2016. Our liquidity position stands at $1.8 billion as we enter 2015. And as James noted earlier, in January, we closed on a new revolving credit capacity, providing access of up to $2.7 billion in capital, with most of the capacity extending into 2020. Our balance sheet is well-maintained, which supports our efforts to preserve an investment-grade credit rating. Finally, capital expenditures are expected to decline to $585 million in 2015, well below the average seen over the past 3 years. The positive free cash flow expected in 2015 affords us greater flexibility as it relates to [indiscernible] market fundamentals. As we note in our press release, the development of an MLP structure was a compelling alternative for 2014, because it offers the company enhanced financial flexibility and optionality in regard to how cash was generated and utilized. However, as all of you would agree, our business has changed dramatically over the last 90 days, and the previous appeal to the MLP structure has been greatly diminished, leaving us to conclude further development of the structure is not a prudent use of the company's time and resources in the current environment. Our ability to pay dividends and execute a share repurchase program was never conditioned on the MLP structure. Pertaining to share repurchases, James covered the company's activity in the fourth quarter and following another shareholder authorization granted in December, the additional repurchase activity in January 2015. Although our share repurchase authorization extends us the flexibility of choosing the most opportune time to acquire shares, we believe a more cautious approach for repurchases is warranted, as we proceed in 2015 with an eye towards capital discipline and preservation of liquidity until at least such time as we begin to recognize increased stability in the offshore drilling business. The more guarded approach and focus on capital discipline and liquidity is supportive of my earlier comment relating to the maintaining -- to our maintaining a conservative balance sheet and preserving our investment-grade credit rating. The Noble quarterly cash dividend of $0.375 per share remains a priority. As we've noted on the call this morning, we are in an uncertain environment at present, and further unfavorable developments in our industry are possible in the presence of declining crude oil prices. We believe the company's solid liquidity in 2015 leaves us well positioned with respect to a dividend and nothing regarding the status of the offshore business compels us to alter that view at this time. We'll continue to monitor the developments, and we look forward to updating you in future quarters. Now, I'll turn the call back over to Jeff.

Okay, David, thank you. Melissa, we're ready to begin the question-and-answer segment on the call and I realized our comments ran long today. There was a lot of detail to cover, but I would still like to ask that everyone please follow the 1 question and 1 follow-up rule so that we can get to as many questions as possible. Melissa, go ahead with the first question.

Your first question comes from Dave Wilson with Howard Weil.

First one regarding the EVA semis [ph], can you relay your thoughts on these rigs longer term given that I think one still looks like it's available. You just retired 2. Do you think this rig class in some form survives this downturn, whether that be just a couple of them that are used for specific applications or for specific customers?

Dave, thank you for the question. We really look at the fleet and the rigs as they have come up for refurbishment, facelifts and upgrades as they've come over the last few years, as you know. We spent a good bit of cash, or a good bit of capital on the Max Smith before we -- after we took it out of Mexico and before we took it to Brazil. For the program we show a couple of years ago, we also spent a good bit of money on the Romano and the Runner to upgrade those rigs. We did steel work, we did BOP refurbishments and other things. It was -- we had talked about the Paul Wolff and what it was required for it. The Thompson, as it came up, we had a job for it, but if you look at the competitive landscape, and what was required to keep all of these rigs, to drill all these rigs in service, it was a lot of capital. And so as we look at the supply coming in and the useful life of these rigs and how much just cash it was going to take to keep them competitive, we decided the better part of valor was to let those rigs go by the wayside and do our part for the -- for supply and we made a hard call on those rigs. The other rigs that we've got are -- have already been through the upgrade process. For jobs, they've already executed, they're in good shape, they're in class, there's not a lot of capital required for them in the future. So we'll continue to take a look at them. But as we sit today, we're happy with the fleet we've got. The Max Smith, we wanted it to position in that part of the world. We think we have some opportunities for it. So we took a hard look at the whole fleet and these are the 3 that we felt like needed dealing with now.

Okay, great. Thanks for that. And then a follow-on, Simon, I guess this one is for you. Regarding Noble's good contract coverage and kind of the lack of demand here near term, where do you find your efforts? From a marketing perspective team-wide, are being focused, is it like you said in your -- some of your prepared comments? Is it on -- you're getting a lot of conversations with renegotiating contracts for extended-term lower rates? Or how do you feel that your focus is changed over the last 6 months?

Yes. Well, obviously, in the immediate term, our attention's focused on getting jobs for the 2 jackups, [indiscernible] and the Max Smith. We're chasing a number of prospects for each of those rigs. With respect to the renegotiation comment, yes, we are seeing a lot of customers request discounts at the moment. Sometimes operators have short memories, but otherwise look at things with the correct lens. Our customers are driven by the oil price and the gas price, and when utilization is high, the joint contractors don't seek to renegotiate our contracted day rates higher. We'd honor our obligations, and rather than seek to reprice that prevailing market rates when we can. So when operators are being [indiscernible] historically high and stable oil prices, we've embarked upon a massive rebuilding program and that has to be financed, and we continue to finance that on a going forward basis. So we've endured a financial meltdown, a drilling embargo due to Macondo and where you, like the others, have seen big supply chain cost growth. We've enjoyed some good returns, but we've largely reinvested the profits. And so I guess this is a long lead in, but what I'm trying to say is we're going to be defending our contracts that we have in hand, whilst we work with our customers where we can to identify cost savings for both parties, where trading rate per term [ph] or other items to which we attribute value. So we're looking to work with our customers, but there needs to be something in it for us as well as them in so far as renegotiations required.

Your next question comes from the line of Jeffrey Campbell with Tuohy Brothers Investment Research.

I'd like to go back to the scrapped rigs again, just real quick and ask the question another way. Aside from the avoided cost that you've already given a lot of detail on, does the scrapping of the Paul Wolff and the Driller say something about demand for midwater rigs generally, or perhaps that they cannot compete with higher spec rigs that are accepting lower day rates?

I think it says something about our long-term view of the market, given the quality of the high-end of the supply coming in. These rigs are going to have to compete forevermore. All of these rigs are 30 plus years old, they're going to have to compete forevermore with a higher technical capability rig. And the question is, I think I threw out a number of -- well in excess of $300 million. It could have been a lot higher and I'm not -- I don't want to get too succinct about what each rig required. But in the grand scheme of things, do you want to spend several hundreds of millions of dollars or many hundreds of millions of dollars on these rigs that are already 35 years old and have a limited life? And given the near-term prospects and the long-term supply, complexity and supply, we came to a conclusion that the answer to that question on these particular rigs was no.

Okay, that's fair. I'd like to ask one as a follow-up, the broader question, because I know that you guys keep an eye on these kind of days. Looking forward, how does the prospectivity of the offshore exploratory landscape look to you? For example, in the past up-cycle just ended, we had noteworthy exploratory failures offshore Greenland, New Zealand, Angola presalt [ph], and the Norwegian Arctic, as a few examples.

I think we remain committed for the long term prospects of the industry. In addition to those failures you mentioned, there's also been several notable discoveries in the Gulf of Mexico and in other basins around the world. So whilst there've been a couple of well-publicized dry holes here recently, I think the broader picture is that people are continuing to explore the frontiers. We're opening up new plays and new basins. And I think there's going to be winners and losers in that obviously. I think the good news is that certainly, as far as the deepwater is concerned, these are long development cycles that are required -- long investment cycles. And in terms of people looking at the short-term impact of the pullback in the commodity price, I think there's a better story about the health of the deepwater if for no other reason than the investment cycle stretches beyond short-term periods of weakness.

Your next question comes from the line of Klayton Kovac with Tudor, Pickering, Holt. Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: So my first question, in your prepared remarks, you sounded confident regarding the Danny Adkins finding additional work after finishing its contract in June. Could you elaborate a little bit on prospects for this rig? For instance, do you feel like it stays in the Gulf of Mexico, or do you think it likely moves elsewhere?

Yes. No, look, certainly -- no, the Danny Adkins is -- has got an excellent operational record. It's been drilling some technically challenging wells. The specification of the rig is in the top shelf of those available in the near-term market in the Gulf of Mexico. We are, like everyone, considering every opportunity for our rolling rigs outside of the markets that they're currently in. But at this stage, we are quietly confident that we'll get ongoing work for the Adkins. As I say, that's going to be driven by specification, its reputation. And at this stage, we're not concerned. Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Okay, thanks. And as a follow-up, so after stacking and subsequently retiring the Paul Wolff and Driller, you're now left with only 1 cold stacked floater, the Homer Ferrington. What made you decide not to retire this floater as well?

The upgrade on the Ferrington was done -- completed in about 2000. So it’s a little later vintage. The hull was -- previously had been a floating hull that was stripped to the bare deck and completely refurbished from the -- effectively from the keel up. So it's a little bit different mouse trap. Plus we had in advance of moving the rig in the Mediterranean and during the process of being there, done some other upgrades on the rig. So just the condition of the hull, the condition of the rig, the future marketability of it, it's got better variable load than some of the other rigs. So we didn't feel like it was a good candidate.

Your next question comes from the line of Gregory Lewis with Crédit Suisse. Gregory Lewis - Crédit Suisse AG, Research Division: Simon, in thinking about the jackup, the Sam Hartley and the other one, the Mick O'Brien that are currently looking for work. As we kind of look around, there are -- there is tendering activity that we're seeing in the jackup market. If you could just elaborate a little bit, for the Mick O'Brien in the Middle East, is that something customer-specific that is delaying it? Or any color you can provide around that rig and then also on the Hartley.

Yes. Certainly. The Mick O'Brien and Sam Hartley, in fact all of our JU3000s have very big drilling packages. They're able to drill very demanding wells. And we've been focused principally on finding work for them that matches that specification where we can deliver the most value to the customer and obtain the best pricing terms. Now unfortunately, as the oil prices retreated, those kind of projects are exactly the ones that have been the victims of operator capital budget pullback. So what that has meant is that now we've forced to sort of reconsider the sort of jobs that we compete for with those units, and that's -- what you're seeing is just a little bit of time required for us to readjust our thinking and complete in the mainstream of the marketplace with those units. Gregory Lewis - Crédit Suisse AG, Research Division: Okay, perfect. And then just, David, real quick, clearly the outlook is challenging for '15, '16 is looking equally challenging. As you think about positioning the company for the next up-cycle, how should -- how are you thinking about the length of the duration of the current down-cycle? Like when can we start to maybe see some green shoots in the offshore drilling sector?

That's a great question. I guess nobody really knows. We certainly have a view. So what I would say is that the velocity of this little market evolution that we've seen here has been certainly more -- quicker and more dramatic than anything I've seen in my 30 something years. And as Simon noted, when it hit, I mean it hit right in the middle of the budget cycle that our customers are going through. We had an industry, high-level industry analyst-type company come through and kind of give us their long-term view of the market. I think in November or December, and then they came back in January and said, "Everything we said 30 days ago is now wrong." And then gave us another view and they characterized 1 operator as on iteration 22 of their budget. So the fact that it's been such a high velocity of impact and then the timing of it has made it really hard to kind of get any clarity for where the market's going. And I think as Simon pointed out, what we need to see is some oil price stability before we see operators kind of calm down and settle into an environment that makes sense. I think most people think that the old price is not -- can't stay down very long. Very long is relative. In our business, we still have to deal with the supply question. And so exactly how long takes to manifest itself, we don't know. I mean, what I can tell you is that after looking around the landscape of other competitive drillers, I like where we sit. We've got -- the backlog this year covers about $3 billion. We've got good coverage into next year. The oil price will settle down. And we will see our operators get back into what's the new normal. And you will see this cycle roll out. And so, it's all about -- one of the key elements of being a successful drilling contractor is managing the cycles. And so as we approach the cycle, we got the things done structurally that we needed to do. We're well-contracted. We're well-positioned. We're running a very efficient company right now. We're making some hard decisions. But with what Bernie's got going operationally in our contract cover, if it takes 6 months, we're in great shape. It takes 18 months, we're in great shape. So we'll see how it goes. As the market -- as the year progresses, we'll see more clarity that's the short answer.

Your next question comes from the line of Ian Macpherson with Simmons. Ian Macpherson - Simmons & Company International, Research Division: It's impressive to see how much you can preserve the cash flow margins from OpEx and CapEx when you move assertively with these retirements and stackings. And you've got -- there've been some questions already about idle, higher capability rigs or jackups specifically. Can you sort of explain what the strategy is? How long you're going to wait on a rig before you cold stack it, if it is the Sam Hartley versus the Danny Adkins versus the Max Smith? As you go down the food chain, how long do you wait before you stack -- before we eventually start seeing new generation rigs getting stacked indefinitely?

Let me make a quick comment and then I'll see if Simon has something to add. But for me, what you look at is the number of prospects that you have for that rig and the likelihood of success on one of them. Then that's -- so each rig in each different area of the world is a little bit different. You look at the Homer Ferrington, it's in the Med, and it's in the Eastern Med. We're a long way from really anywhere. There's so much political instability in that part of the world. There are not a lot of opportunities that we could move the rig out. The rig is ready to go to work, we can move the rig out, but there are other rigs in other parts of the world that are also ready to go, that are better positioned geographically to be able to take that work. So there's an easy coeffect [ph] decision. But the other rigs that we've got, we've got good opportunities for, or we're going through an analysis now on what they're about. The 3 that we retired not only had limited opportunity work, but also needed a lot of capital put into them. And so, that's what made those decisions easier. And then I'll let Simon -- do you have anything to add from the market perspective, Simon?

No not really. Just -- all I would add is that the Danny Adkins is not in any danger of getting stacked. The Max Smith is facing a much more challenging outlook. And we're continuing to compete for that rig to obtain work for it. For the jackups, obviously, I think we've addressed your questions earlier Ian, but we believe that we're going to have work for those rigs as we indicated in the middle of the year. Ian Macpherson - Simmons & Company International, Research Division: Okay. And Simon, thanks. Quick follow-up, I know that there is a rationale for why you retain the 4 standard jackups that did not go to Paragon and that Aramco and other operators in the Middle East have wells in platforms that are well-suited for the capabilities and the footprints and the standard rigs. But that being said, is there any rationale that makes sense to you and/or the customers to just putting your available high-spec rigs in those contracts, so that you can accelerate the retirement of older rigs and your own fleet high-grading [ph], does that make sense or does it not?

Not for the rigs that you refer to. The customers have -- got all those rigs under contract. They like them very much, and they're amongst the highest performing in their respective fleets in the Middle East. So I don't think that the customer attributes great value to a substitution of that nature. We're happy to chase work in the open market for the high specification rigs. I'd rather be selling a Mercedes and Toyota in the current market environment. So no, we have no intention to look at doing those kind of swaps. And the kind of customers that the older rigs that you referred to have under contract, they're not terribly motivated to explore those kind of swaps.

Nothing against Toyotas, mind you.

Melissa, we're getting close to the top of the hour. Let's take a final question, please.

Your final question comes from the line of Jud Bailey with Wells Fargo Securities.

Question, there've been some public commentary on Saudi Aramco and PEMEX, looking to potentially exercise their cancellation clauses on their contracts, or at least they're asking for pretty big price concessions. I know you guys that don't have any exposure to PEMEX anymore, but I was wondering if you could comment any on what Saudi Aramco is indicating to contractors or just overall discussions towards surface providers at this point?

Yes, look, I don't think it's limited to Saudi Aramco. I think there's some -- although most of the press coverage is focused on PEMEX and Aramco. I mean there's a number of other people, [indiscernible], Petrobras, some of the independents are also waving the flag on this point as well. I mean, what I'd say is that everyone has contracts with termination risks in them. In the current market environment, it's obviously a time of vulnerability for contractors. What I would say is that most of the discussions are about renegotiations and et cetera, rather than actual outright termination threats, with the past exception of PEMEX, where they seem to be determined to put a whole bunch of rigs out of contract shortly. So I think most operators take more of a holistic and a longer view of contractor relationships. And termination, even if it's prescribed right in the contract, is recognized generally as a pretty blunt instrument and a short-sighted one, and it reduces that operator's contracts' attractiveness relative to the others in the market. So it has a bigger impact than the short-term advantage, has enduring implications for the reputation across the whole market through time. So all contractors, not just Noble, have very long memories. So I think that the operators have to be very careful how they make these kind of threats.

Okay, I appreciate the color there. And then my follow-up is on the operating costs. Even factoring in the cold stack -- I'm sorry, the retirement of the 3 deepwater rigs, your operating costs were probably a little bit below what we would've expected and you highlighted some things like lower mobilization that contribute to that. But could you maybe give a little more color? It looks like you could probably see some, mistake me if I'm wrong, some deflation, or reduction on a per rig level based on the level of guidance. Am I correct in thinking that? And could you maybe discuss a little bit kind of the cost initiatives that you put in place that could help get the number down to where you have guided for this year?

Yes, Jud, this is James. Many initiatives, I really can't get into them, we don't have time for that. Work [indiscernible] in places we went through the tail end of 2014 and into the budget cycle for 2015. You are correct that the there was a per rig reduction in cost when we were finished pulling our numbers together for 2015, and that was a fairly significant reduction. As I mentioned in the prepared section, we do see a close to 0 inflation in goods and materials, and lower increases in personnel costs than we've seen in the past, and that's just a function of the market as it currently stands.

There's clearly a lot of work going on in this front, Jud. I mean running our business efficiently is a key driver. And I agree with James, we really don't want to get into all of the things that we're doing, but we're pulling every lever we can to save costs. But we got to maintain efficiency as well and that's a key driver for us.

Melissa, we're going to go ahead and conclude the call. Again, I realize we provided a lot of detail this morning, and unfortunately, we left a few names in the queue, but I will be reaching out to each of you over the course of the day. Thank you for your participation on today's call and your interest in Noble. You might make a note that our first quarter 2015 results call will be scheduled for the 30th of April and the results to be reported the evening before the 29th. And we'll confirm those dates as we get closer. Melissa, thank you for coordinating the call and good day to everyone.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.