Seadrill Limited (SDRL) Q3 2018 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Seadrill Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to John Roche, Vice President, Investor Relations. Please go ahead.

Thanks and good afternoon, everyone. Thank you all for joining Seadrill's third quarter earnings conference call. Before we do kick off, I'd like to remind everyone that much of the discussion today will not be based on -- is based on historical fact, but rather consist of forward-looking statements that are subject to uncertainty. Included on Page 2 of the presentation is a comprehensive list covering forward-looking statements. For additional information and to review our SEC filings, please visit our website at seadrill.com. Now moving on to the agenda; on the call today, you'll hear from Anton Dibowitz, our CEO; and Mark Morris, our CFO in our prepared remarks and in the room with us for Q&A are Matt Lyne, Chief Commercial Officer and Leif Nelson, our Chief Operating Officer. Anton will cover off the highlights for the quarter and provide you all with our views on the market, the shape of the recovery and how we are positioned for it. Mark will then provide an overview of our reorganization and how it has impacted the presentation of our financial statements and the financial performance for the quarter. We'll then open up the lines to take some questions from you all. And with that, I'd like to turn over the call to Anton. Anton?

Thank you, John, and very good day to everyone on the call. Before I go into the highlights for the quarter and our thoughts for the future, given that this is our first earnings call in over a year, I'd like very briefly talk about where we've been. Since we last addressed you all, we've made great strides in positioning our company for the future. The path was long and paved with difficult decisions but we made it through without our premium fleet intact and now the capital structure that affords us the ability to capitalize on the recovery. The end result of this challenging process is a recapitalized balance sheet with financial flexibility supported by significant liquidity position. No near-term maturities or amortization and little covenant risk. Our operational focus never wavered and we continue to contract our assets throughout the process. Our customers saw our restructuring for the financial exercise that it was and we have now emerged in a much stronger position. Before I expand on our view of recovery I want to first take you through some of the key performance metrics and commercial successes for the third quarter. Operationally, we never took our eye off the ball through the restructuring and the same holds true today. We continue to implement technology in our rigs to facilitate improved asset integrity, operational performance and safety, but is a dedicated and focused personnel, both onshore and offshore and their ability to harness those technologies that are driving the high levels of performance you see. As a result, we had another strong operational quarter posting uptime of 98% with no significant downtime incidents. As if not more importantly, our key safety metrics continue to lead our peer group of offshore drillers. Although it will be nice to have more rigs working, we are comfortable with our current level of utilization when we consider today's day rates. The financial flexibility we've built allows us to make disciplined contracting decisions and hold back supply until day rates improve. We are focused on maximizing the utilization of our marketed fleet and minimizing spend on assets with our cold stacked until contract economics justify reactivating them. With that backdrop, let's have a look at new business over the last several months. Since the end of the second quarter, we signed almost $300 million in new business made up of new contracts, exercised options and extensions to existing contracts and I'd like to highlight a few of those. When looking at floaters, I'm going to talk about three contracts. First the West Hercules contract with Equinor provides another solid data point for the harsh environment market with day rates continue to hold strong with contracts between $275,000 and $300,000 today. The Hercules has been contracted at Equinor's exploration rig and we look forward to continuing our long relationship with them with this asset. Second, the recent signing of a new contract for West Carina is out third deep water floater contract with Petronas in the last year. Asia represents one of the bright spots we see in the floater market, with customers are willing to compensate contractors for high specification units such as the Carina, which is equipped with our third-generation MPD System. And third, the contract extension for the Sevan Louisiana with Walter Oil & Gas, further positioned this unique asset class to compete in the mid water market. The rig's cylindrical design allows the rig to effectively work in the waters as shallow as 850 feet in dynamic positioning mode, saving the customer time and money and lowering risk around existing infrastructure where more rigs have traditionally been used. We've also had success in the quarter with our Jack Up fleet. Two items I'd like to highlight in this segments are, first an extension on the West Cressida for a fear for their development program, which will keep the rig busy into 2020, indicating a return in demand for the jack up market. And second, in Qatar, we signed a contract with GDI to work for Qatar Gas. The partnership with GDI provides a competitive advantage in an exciting market with potential for significant growth in the coming years. Overall these contracts are reflective of the underlying trends we are seeing in the market and our strategy. It's all about the life contract economics and how they position us for what we see coming as the recovery takes hold. I am not going to spend a lot of time talking about macroeconomic indicators as I'm sure you've heard at nauseam [ph] about GDP growth and the fact that demand for energy continues unabated. The fact of the matter is the fundamental outlook for a business is improving. After many years of under-spending our customers are facing the inevitability of what follows, the need to replace production. The recent volatility in oil crisis has little bearing on how the vast majority of our customers invest. Their time horizon is much longer. Even at today's oil prices, the off shore barrel is profitable for our customers, competitive with other sources of supply and needed to meet global demand requirements. In addition to the positive upstream backdrop, the drilling industry has seen continued scrapping activity and consolidation. These are trends that are supportive of improving forward pricing levels. This is certainly reflected in the activity we are seeing today and expect to see more of based on the conversations we are having with our customers. Stated simply, rates in the harsh environment have recovered to the high 200 and we expect these to go higher. Rate for benign ultra deepwater floaters are in the mid-to-high 100 for '19 and we expect to be contracting significantly higher than this level in 2020 and then the premium benign jack up market we see a significant increase in demand levels and this is driving increased pricing. In closing we spent a considerable amount of time and effort to recapitalize our business and create financial flexibility. Our young modern fleet is made up of the rigs that customers want. We're comfortable with our current fleet utilization levels because we firmly believe that higher day rates are coming and we will be disciplined in how and where we deploy our capital and continue to have a laser focus on cost. Our continued focus on cost efficiency and the best people in the business is a powerful combination that puts us in the prime position to capitalize on the recovery. I will say that reading the analysts reports this morning, it appears that many of you feel that this is a comeback for us. From a quarterly reporting standpoint that may be true, but in reality it couldn't be further from the truth. We've been here for years. We continue to execute our core business while we restructure our balance sheet. We look forward to being here for many years to come and making this the most successful and profitable driller in the industry. Now I'd like to turn over to Mark to take us through the Q3 financials.

Thank you, Anton. Well, good morning and good afternoon wherever you are. As you're aware, it's been an eventful quarter with us -- for us, having emerged from Chapter 11 on the 2 July, our reorganization and Fresh Start accounting and having relisted on the Oslo Stock Exchange, while maintaining a continued listing on the New York Stock Exchange. I don't want to spend a lot of time talking about Fresh Start accounting; however it is just worth highlighting a couple of key points to understand what it is and what it does. Fresh Start effectively treats us like a brand-new company. Our assets and liabilities have been fair valued in line with the distributable value approved by U.S. Bankruptcy Court, which is the value of about $11 billion. It creates adjustments to our assets and liabilities that have a one-off impact to the point of emergence as well as adjustments that will have a recurring impact to future quarters. All of these adjustments are non-cash items. All the business covered in a huge amount of detail in the 6K and F1 documents, we said we're not proposed to go through here, on the site is a complex and technical area. We've included the reference the main returning adjustments as an appendix to the press release, so it can be factored into your model. These will arrive through the OpEx interest expense and investments in associated company lines going forward. Importantly, revenue and EBITDA again will not be affected by any Fresh Start adjustments. The key takeaway here though for our first quarter post emergence is that there were no comparables. So this is our first clean quarter. So now, turning to the financials, out of 35 rigs, 16 were working on average throughout the quarter. Seven floaters have an average dayrate of 240,000 per day with 97% uptime and nine jack ups at an average dayrate of 98,000 per day with 98% uptime. It was a strong quarter operational for us. With regard to our reported OpEx and G&A, is worth reminding everyone that in addition to the 35 rigs we own and consolidate in our accounts, we also manage 11 rigs to Seadrill partners, five rigs for SeaMex and two rigs for Northern Drilling. The management of our Partners rigs incurs both OpEx and G&A related expenditure, which is included in our reported figures. These related costs are charged out on a cost plus basis to our partners and recognized in other revenues. Our reported G&A for the quarter is $31 million, includes $14 million that has been charged to our partners. So the G&A that relates directly to the management of the 35 rigs we own and consolidate is $17 million. G&A for the quarter is a little lower than our expected run rate, reflecting the change to certain accruals following the completion of the restructuring. Going forward, we expect reported G&A to be around $150 million per year of which approximately 30% to 35% will be recovered from our partners. Similarly, reported OpEx the quarter of $163 million includes $7.5 million related to rigs we manage. We continue to focus relentlessly on cost reduction and we've made significant progress in reducing OpEx and G&A over the last few years. Our average daily running cost is approximately 120,000 per day for benign floaters and 40,000 per day for benign jack ups, for our cold stack units, daily cost of around 10,000 and 4,000 respectively. Moving on the balance sheet, most of it is self-explanatory following the reorganization and Fresh Start adjustments and the $1.1 billion of fresh capital that came in as part of the broader restructuring. Total cash stood at $3.1 billion at quarter end and includes $560 million of restricted cash. Just pulling out a few key items here, restricted cash of $560 million comprises of $126 million of West Rigel proceeds that are subsequently been used to redeem the new secured notes at par, $227 million of escrow collateral for the new secured notes which is part of the restructuring agreement, a $56 million loan repayment from Sapura Energy, which is tied to security to the new secured notes and $102 million cash back in certain guarantee from letter of credit facilities. Drilling units and investments in associated companies both reflect Fresh Start movements which have seen their carrying values reduce by circa $5.7 billion and $670 million respectively. Again there's plenty of details in 6K. The amount due from related parties primarily relate to $390 million of loans to SeaMex, around $200 million of receivable from Seadrill Partners, mainly comprised of trading balances and adjustment to the west -- for the West Vela earnout previously not on the balance sheet, but now included as part of Fresh Start. $100 million relates to loans to the Seabras joint venture and a $47 million loan to Archer. Lastly relating to the current debt of $165 million, this relates to two components. The West Rigel proceeds that we were holding in Q3 for redemption of the new secured notes that occurred in Q4, which is a one-off and the annual pay down of Ship Financed bank debt facilities, which we consolidate on our balance sheet is variable interest entities representing the three rigs we have on lease from Ship Finance. So we talked on the previous slide about the $2.1 billion of cash. Now let's just recap on our capital structure following emergence. Our $5.7 billion of bank loans mature between 2022 and 2024 and there is no amortization until 2020 and potentially until 2021 if we elect to use the $500 million amortization of conversion election facility. Our $880 million of new secured notes mature in 2025 and comprise of 4% cash interest and 8% pick. We have a number of redemption mechanism included in the indenture, which allows to retire the notes, while asset sales that are in place to securities of the new secured notes or by raising capital at Seadrill Limited and you'll have seen that we have already redeemed the $126 million of the new secured notes already. Retiring the new secured notes will be a high priority for us going forward. While there is no bank debt amortization on maturities, we do have three rigs on lease from Ship Finance Limited. These leases are accounted for as variable interest entities and the debt of $713 million is consolidated on our balance sheet. As part of the restructuring, we've negotiated the limited set of financial covenants to ensure we have adequate flexibility through the recovery. We have one covenant until 2021, which is a minimum liquidity covenant. There also we have an additional two covenants that come into effect in 2021, a net leverage and debt service cover ration. Lastly our exposure to interest rates is limited through the purchase of interest rate caps that were taken out in Q2. We are about 80% hedged at a protected rate of 2.87%. The interest rate caps extend out to 2023. It's just worth reminding everyone that in addition to owning and operating our 35 rigs, we have four other significant investments that are not consolidated, which are recognized in marketable securities and investments in associated companies. These are Seadrill Partners in which we effectively own a 65% economic interest for our various investment holdings. SeaMex which is a 50-50 joint venture with our partner Fintech, Seabras Sapura which is a 50-50 joint venture with our partner, Sapura Energy and lastly Archer which we hold a 16% equity interest. You can read the details for yourselves, but it's worth noting the combined backlog contract terms EBITDA, debt and cash held at these entities alongside our respective interest in them. We believe these represent material value for us going forward. Since the end of the third quarter we've completed immensely par redemption of approximately 126 million of our new secured notes, related to West Rigel proceeds. We also launched a $56 million mandatory offer at 103 related to the proceeds received from maturing loan to Sapura Energy. On expiry, approximately $150,000 was tended in total owing main to the fact that the notes were trading about 103. We've completed an agreement that extinguished $486 million of guarantees related to our joint venture Seabras Sapura. In return for extinguishing the guarantees, the lenders received a prepayment from the joint venture collateralization of the relevant facilities and an increase in margin and the consent fee again paid for by the joint venture. Finally, we also received $35 million as a partial repayment of shareholder loans provided to Seabras Sapura. And now turning to our guidance for the first full quarter, EBITDA is expected to be slightly lower for Q4. This primarily relates to G&A returning for more normalized levels than Q4 which will be slightly higher than Q3 for you to certain one off changes to related restructuring pools not being repeated. So to summarize, it's going to be back reporting quarters on a regular basis. Our restructuring has given us the opportunity to recapitalize the balance sheet and provide financial flexibility while we wait for the recovery. We believe our large modern fleet and proven operational track record, positions us well with our customers and our continuing focus on cost reduction will help ensure we remain competitive. We believe that is also significant value in our non-consolidated investments. And finally, as Anton said, we are not going to get drawn into contracting long-term in a relatively low dayrate environment when we have a premium fleet and financial flexibility. We will be patient so we can take the right deals. And with that, I'll turn over to John to start the Q&A.

Thanks Mark, while we assemble the queue for questions, I'd just like to request if there's any technical accounting or model-oriented questions that we take those offline. Happy to spend as much time as required with you all to help you understand that. And with that, I will turn over to the operator to take our first question.

We'll now being the question-and-answer session. [Operator Instructions] The first question will come from Mike Urban of Seaport Global. Please go ahead.

Thanks. Good afternoon. So you've been going through the restructuring process, you've seen quite a bit of consolidation in the broader space. How do you see yourselves going forward? Is it mostly executing on the business and now you've got a better balance sheet and liquidity profile or is there an opportunity to participate in the consolidations that's been going on?

Thanks for the question Mike. Look first of all, the consolidation is great for the industry and we welcome it, whether it's done by others having fewer more rational players in the business makes for a bit better business for everybody. It increases contracting discipline amongst the players that are there, generally when M&A happens it gives people a license to execute scrapping that needs to take place, that need to continue to take place. While it's not been a layout hard zone on where we see ourselves in that space, but I think if you can look at our history and now DNA as a company, you'll see that we've very seldom sat on our hands. We have a very active anchor shareholder and if the right opportunity is there, we will certainly take part in. But for us M&A is not the necessity that it has been for some other players in the industry. We've always had a young premium fleet and rigs that customers prefer. For us, it's about if the right value is there and the right deal can be achieved and it fits in with our fleet and our strategy we'll do that, but we certainly don't feel the necessity to do M&A to improve our fleet or to improve our composition. I think others are more driven by that metric. For us, it's really about the right opportunity and whether it makes sense. So we are open to it, but not a necessity I guess somewhere.

And then from a market perspective, historically you had a very strong presence in both of the major markets in Latin America and Brazil and Mexico and continue to. With the political changes there, how do you see the landscape unfolding, especially as it pertains to foreign operators? I was at Petrobras and Pemex begins to continue to be active in their perspective markets, but are you seeing any caution or hesitancy to move forward or maybe at least take a wait and see and either or both of those markets given the political changes there?

Yeah I mean geopolitics and changing in governments is obviously something that we look at very intently in executing our business. Pretty business forward government in Brazil, I think that's good for that future market. The addition of the IOC to Brazil in a large way is certainly going to help drive that market in the absence of Petrobras driving itself is certainly adds to that market. Mexico, we have long-term contracts there. So I think we're just going to have to see how the administration plays out, but the one thing that is true in Mexico is Pemex needs to replace production and replace reserves. We've had a great relationship with Pemex since we've been there in the last seven, eight years and we expect that to continue and we have presence, we have exposure, we have experience in that market and we look forward to continuing to be active in that market going forward.

Great. Thank you. That's all for me.

[Operator Instructions] The next question comes from Greg Lewis of BTIG. Please go ahead.

Yes Thank you and good afternoon, gentlemen.

Good afternoon.

I guess I'd like to talk a little bit about how you're thinking about capital allocation? Clearly you've been -- the focus seems like it's paying down the new senior secured notes, but on the flipside of that, you still have as you mentioned you a lot of rigs, good rigs working, but you also have a lot of good rigs on the sidelines. And I'm just trying to understand how you kind of look down your fleet on the nonworking rigs, how we should think about some of these rigs being reactivated and sort of what types of costs we should be thinking about? Any kind of color around that you could provide would be super helpful.

Sure. I'll give you the headline and then maybe a little bit of color behind that. We will not reactivate rigs purely on speculation until the market justifies. We're comfortable with the rigs we have working. We have significant presence in all the major markets that we're in. We're very focused on keeping the utilization on our rigs that we have out and active in the market where it is, but part of having the financial flexibility that we have is about having forward capital disciplines with where we deploy that capital going forward and it doesn't make sense for us to spend significant amounts of capital to reactivate rigs in speculation without any visibility of work or to reactivate rigs and bring them into a market that the cost of bringing the rig back into the markets doesn't justify. So we look at each contract based on its own merits. What sort of term, what sort of dayrate, what it's going to cost to reactivate the rig? Whether an SBS is required, but until we see the dayrates or a promotional opportunity that makes sense for us to bring a rig back into the market, we're all going to err on the side of being capital disciplined for our cold stacked rigs.

Okay. Great. And then just one other one for me. During the restructuring process, there were a couple jack ups that the company decided to part with, sell get a good price. I guess since then, we've seen actually more improvement in asset values for I guess for jack up rigs at this point. So as we think about potential -- you mentioned potential opportunities, could we also see Seadrill potentially be willing to sell with some more assets as kind of we see some improvements in the market that sort of speed up the deleveraging process?

The one thing we don't do is fall in love and fall in love with our assets. That's why we don't name them after members of management with directives because that makes them harder to sell and I think you can't do that. So if you look at those three jack ups that we divested, we have made a core part of our strategy being a young and premium asset provider of those rigs that we sold even though our fleet on the whole is young and premium. They were on the older end of our jack up fleet. A couple of those units had not worked for a period of time and it was an opportunistic deal for us at the time to divest those assets. I wouldn't read too much into it. We will continue to be opportunistic on either the sales side or even on the purchase side where it makes sense.

Okay. Perfect. Thank you very much.

Thanks.

The next question is from Patrick Fitzgerald of Baird. Please go ahead.

Hi. Are all of your rigs without contracts cold stacked? Are any of them one stacked?

It depends in what timeframe you're looking at. The numbers that are in the quarter was at the end of that quarter. So on the jack up side, we had one rig that was warm stacked. On the floater side, there were four, a couple of those rigs that I think you can expect to go back to work, one of those rigs, the West Eclipse is currently undergoing the process of having a mooring system installed in it. So it's considered warm stack, but it's actually in the yard undergoing an upgrade process. So does it cover it? Does that answer your question?

Yeah. So what are your options with the with the new-build jack ups at this point?

So the new-build jack ups that we have, it is a complicated process, but I think about it this way. Those rigs were contracted in special purpose vehicles in an entities that had direct relationship with the yard. No parent company guarantees back to Seadrill Limited, associated with those rigs. So some of them have been delivered or missed their delivery dates and were in a discussion with the yard about what we do with them. So we view them as optionality for us. There is no -- there is no, although we carry it in the mills, there is no liability for us back to Seadrill Limited other than the initial down-payments we made to build those rigs and we'll continue the constructive discussions we have with Dalian about how we resolve those rigs going forward. But I was view it as an option for us that's how you can think about it.

Okay. You talked about accelerated payments with respect to your new 12% secured notes those are callable in 2021. What kind of accelerated payments can you make?

Well, just to be clear, the note matures in 2025 and it carries interest both pig and cash. The pig eventually accumulation and becomes more and ascends but the redemption mechanisms really all three fold. Obviously there is a make hole, which obviously isn’t really attractive to us. There is a provision or an equity that allows us through the raising of capital either equity or debt at Siegel Limited to take off a large part of the NSNs. And then the other way in which we can do that is through mandatory offers from various assets that we plan to security for the new secured notes and will see not already in part both with which legal proceeds that we use to redeem 126 million of the new secured notes and a mandatory offer that we have to make in relation to a maturing loan that was repaid back to us from Sapura Energy and there we have to make an offer at 103 and obviously generally that will be tendered for acceptance if it's below and not obviously above and at the time, it was above. Off of that, we have an ability to call half of that amount on the NSN's. So there is various mechanisms in which we can take down the NSNs either by realizing cash proceeds, sale proceeds from the sale of securitized assets or through raising capital of Seadrill Limited.

All right. Thanks a lot next.

The next question is from Michael Alsford of Citi. Please go ahead.

Thanks for taking my questions. I've just got a couple of specific questions around '19. So could you give maybe a bit of guidance on where you actually see CapEx of the group for '19 I guess for the countries around and what maintenance spend will be but also some other some investment you needed to make into the fleet. And then just secondly around tax, clearly you're not making much in the way from that profit, but I am just wondering whether there is obviously tax to pay as you're heading into '19 on an underlying basis, thanks.

We don't break out CapEx as we look forward into each year and with regard to tax, look we paid our cash taxes are paid where we operate effectively and closely we're moving from year-to-year depending on where we are operational but and of course it will reflect generally where we're making profit in the basis of which tax is paid. And sometimes it can be deemed profit. So it can be actual profits that will flow us the customs and other taxes that we pay. So I think it is there in front of you we guidance the '19 as pretty difficult. I am sorry, I can't be helpful with your question.

Okay. Thanks. And maybe I can ask a follow-up then around your rights and you're obviously talking about a furthering up of some of the roads versus the harsh environment rigs, but could you give us a sense as to the directional pace of which you think the rates will recover. We are sort of talking about a multiyear recovery or should we think about as sort of end of '19 that's when you're starting to see some regional tightness in some of the rigs, some classifications within the market, thanks?

Well, I think what we can say and as I've said in my prepared remarks, we already are starting to see tightening in rates. It's difficult to predict and those who prognosticate about the precise shape of a recovery generally turn out to be liars. So it's not -- we're reluctant to get into speculation about exactly the shape of the recovery. What we do know is that the fundamentals are there and signposts are therefore recovered market. If you wind back six months ago, the kind of in the benign ultra deepwater market, the prevailing rates were stay closer to 100 than they were to 150 and what we're already seeing as we saw with the Korean is the right specification of units in the right market that a customer wants, that the rates are closer to 200 than they are to 100. We expect that trends to continue through '19. Utilization levels in all the markets are picking up. Marketed utilization across the global fleet is in the mid 70s in the floater side and trending upwards and if contractors remain disciplined and consolidation is helping that and we're certainly going to play our part in being disciplined and not speculatively reactivating rigs and certainly hear others on their conference call saying that they are going to be disciplined in doing that, I think you can see, you can expect to see additional tightness in the market. Obviously it has to do with the contracted behavior and also continued need for operators to put their rig back to work, but I think -- I don't think it's going to be '19, it's going to continue to be given the timing, the lead time between when contracts are -- when rigs are contracted especially on the deepwater side and when they actually go to work. '19 is going to be a challenging year for a lot of people in the market and we're going to remain disciplined in that, but the dayrates are certainly heading the right direction. They're already solid and the harsh environment market and we continue -- we expect that to continue and that is kind of a more broad-based general recovery in the jack up market really driven by a significant increase in demand driven from the Middle East.

Okay. That's very helpful. Thank you.

The next question is from Renaud Saleur of Anaconda Investments. Please go ahead.

Hello. Good afternoon. I was wondering when you expect the recovery in the ultra-deep water day rates. We've seen that most of your competitors and yourself have significant in essence an improvement in OpEx and that the average dayrate is probably for Transocean, probably for use about 230,000 a day that we need to see evidence of a recovery in the dayrates especially in ultra-deep water. You think it's for the first half of '19, second half of '19? And to follow up on this and your dept, which is at 13% year to call, the 2025, you think you may be able to generate enough free cash flow by 2021 to be in a position on that to exercise a call?

I'll handle the first one, I think it's very similar to the last caller. We are seeing increasing utilization levels in ultradeep water, rates pushing towards $200,000 a day, which is already a significant step up from where they were six months ago. We're certainly bidding higher in the second half of '19 and into '20, significantly higher and even though given that we're bidding those dayrates, we're still having constructive discussions with customers at those rates. So I think that the key indication for us and on where the market is going.

So I think just to try and try out your last part of your question Renaud, obviously we sort of triangulate around three things, where dayrates are going i.e. the speed of the recovery, the ability to reactivate rigs and spend upfront cost in order to generate more EBITDA and revenue and preservation of liquidity while we wait for the recovery and that is something you look at very carefully because we know that we have to balance carefully the need to bring rigs out at the right time to generate the improving dayrates or when dayrates have improved. But as we sit here today, I think we're comfortable and against the background of looking at the NSNs the 12% notes it also where it is obviously if we -- we have other ways in which we can retire those particular notes, but affordability versus economics is afraid we look at while we wait for the recovery and that's the position that we've taken adopting as we sit here, we're confident with the various tools that we have on our disposal and another things that we can do, but we should see the recovery before obviously we get to out on the grass as it were.

Just around on cost environment you're about $300,000 a day, I guess harsh environment was more 2014 around $700,000 a day, do you expect to go back somewhere in the middle, with extra potentials you from on harsh environmental rates.

I don't want to get to again prognosticating about where they could go. I think what we would say is we were at the bottom of most markets and coming off heading towards mid cycle. I think the harsh environment market is certainly leading that and I think you need to look at reinvestment when you go the economics to look at the potential of where dayrates in any of the markets including harsh environment could be going. It's still an expensive proposition to build a high specification unit and especially so in the harsh environment and with continued tightening of demand ultimately in the long run dayrates should trends towards reinvestment economics.

Just a final one, you said your average OpEx is 130,000 a day on floaters, is it 130 for harsh environment as well?

120 I think was our average and obviously that is an average across the fleet and there is quite -- that's a blended rate across the fleet. It changes by jurisdiction especially, as a cost differential between Norway. We are carrying an extra crew versus other parts of the world, depending on how much crew regulation. So north of that in Norway, South of that in some other places. The average across, even harsh environment in U.K., it's harsh environments and it's lower than Norway as it East Coast, Canada.

Given that you make 300,000 a day in harsh environment, does that mean that you may be at 170 operating pass through already on harsh environment?

We're not going to break out geographical areas and subcategories of our floater fleet. We're providing an average and within that, there is a range and I think it's fair to say that the harsh environment in Norway is a higher end of the spectrum of costs and harsh environment generally is higher but U.K. and Canada are lower than Norway.

Okay. Thank you very much.

The next question is from Piotr Ossowicz of Ironshield Capital. Please go ahead.

Thank you for taking my question. I understand that this might be a bit too early to give the guidance for 2019, but can you give us a bit more color on where should we expect the cash flow and the cash position moving in Q4 regarding CapEx stocks, working capital and the another components?

We've given in the guidance that we've given, I think there is plenty of our competitors that given their guidance at all, but it's coming out from someone that's been silent for a year as we've gone for restructuring. Obviously the only guidance we're giving is the two pieces that I've given, one on EBITDA and one where we are on G&A for the year or the run rate for the year, but I don't think we're going to be staked out in the sun on individual items. There's obviously lots of moving parts and we'll go ahead around certain figures.

All right, but overall, it sounds like to the partial repayment of the bones, should we expect CapEx to be flat from September to December?

From September to December, yes it should be broadly flat.

Okay. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to John Roche for any closing remarks.

Thank you and thanks everyone for joining us on our Q3 earnings call and this concludes our call. Thanks again everyone.