Valaris Limited (VAL) Q3 2011 Earnings Report, Transcript and Summary

John Mark Burns - Senior Vice President, Western Hemisphere James W. Swent - Chief Financial Officer and Senior Vice President William S. Chadwick - Chief Operating Officer and Executive Vice President Sean P. O'Neill - Vice President of Investor Relations and Communications Daniel W. Rabun - Chairman, Chief Executive Officer and President Kevin C. Robert - Senior Vice President of Marketing

Nigel Browne - Macquarie Research Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division Collin Gerry - Raymond James & Associates, Inc., Research Division John D. Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division James Woods - FBR Capital Markets & Co., Research Division Geoff Kieburtz - Weeden & Co., LP, Research Division David Wilson - Howard Weil Incorporated, Research Division Robin E. Shoemaker - Citigroup Inc, Research Division Andreas Stubsrud - Pareto Securities, Research Division David C. Smith - Johnson Rice & Company, L.L.C., Research Division Judson E. Bailey - Jefferies & Company, Inc., Research Division

Good morning. My name is Ryan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ensco plc Third Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Sean O'Neill, Vice President of Investor Relations. Sir, you may begin.

Thank you, operator, and welcome, everyone, to Ensco's Third Quarter 2011 Conference Call. With me today are Dan Rabun, CEO; Bill Chadwick, our Chief Operating Officer; Jay Swent, CFO; as well as other members of our management team. We issued our earnings release, which is available on our website at enscoplc.com. As usual, we will keep our call to one hour. Any comments we to make about expectations are forward-looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our earnings release and SEC filings on our website that define forward-looking statements and list risk factors and other events that could impact future results and disclose important additional information regarding our recent acquisition. Also, please note the company undertakes no duty to update forward-looking statements. As a reminder, our most recent fleet status report was issued on October 20. Now let me turn the call over to Dan Rabun, Chairman and CEO.

Thanks, Sean, and good morning, everyone. Before Jay takes us through the financial results, I will discuss third quarter highlights, the state of our markets and the integration of our recent acquisition, which is going very well. Starting with third quarter highlights. ENSCO 8503 drilled a major discovery on its initial well for Telo in French Guiana, and we are very pleased by our customer's success in this new deepwater region. The discovery by Telo is significant, as it suggests the geological trend from the equatorial margin of West Africa makes stand to the Americas. [Technical Difficulty] highlights. ENSCO 8503 drilled a major discovery on its initial well for Telo in French Guiana, and we are very pleased by our customer's success in this new deepwater region. The discovery by Telo is significant, as it suggests the geological trend from the equatorial margin of West Africa makes stand to the Americas. We expect this will lead to future demand for deepwater drilling in French Guiana, as our clients move to assess and develop this new geological trend. ENSCO 8504 commenced drilling for Total in Brunei, and we expect Total will exercise their options to keep the rig working in the region. Brunei is another exciting geological region, and operators are likely to require more rig time to fully assess the value of this relatively new region. ENSCO 8505, which will be delivered soon, was contracted by Anadarko, Apache and Noble Energy for at least 2 years in the U.S. Gulf of Mexico. We view this as another positive sign that customers expect the pace of permitting in the U.S. Gulf will continue to improve. Our customers for ENSCO 8505 recognize the benefits of standardization across our 8500 Series rigs. For shareholders, when you compare our cost to build our 8500 Series rigs and our cash operating cost versus other deepwater rigs, we believe that we will achieve superior financial returns. We also exercised an option to build a third ultra-premium harsh environment jackup, bringing our total newbuild program to 7 rigs now under construction. Our decision to exercise the additional jackup option was due in part to a recent contract for our first ultra-premium harsh environment jackup, which we named ENSCO 120. Details will be forthcoming once we receive final customer approval to issue the details in the press release. What we can disclose is that the contract is for an initial 500-day term with a day rate of $230,000 per day plus mobilization. We have been working on this contract for some time, and we are very pleased to have the rig contracted well ahead of its scheduled delivery in 2013. The unique design, including a proprietary high-capacity cantilever envelope, provides increased drilling efficiencies for multiwell platform programs, ultra-deep gas drilling and ultra-long reach wells up to 40,000 feet total drilling depth. As I mentioned last quarter, several of our ultra-deepwater rigs have recently commenced their contracts, and I commend our crews for their hard work and dedication during these startups. By and large, these commencements went very well, but some of our newbuilds are experiencing downtime that is outside of the acceptable range. Most of this is due to OEM equipment issues that we are working to resolve with suppliers. We are systematically sharing lessons learned with the rest of our fleet to ensure that we do not experience repeat occurrences. Our ENSCO 8500 Series rigs and drillships that have been in service continue to perform extremely well, and I should add that our midwater segment also had a good utilization this quarter. The jackup segment showed significant improvement in utilization, rising 6 percentage points from last quarter to 83% for the legacy Ensco fleet. We expect this will jump further to approximately 90% in the fourth quarter. Finally, the integration of our newly acquired operations is going extremely well. The relocation of personnel is largely complete. Operations is actively integrating systems and procedures to ensure consistency across our organization, especially for our safety management systems. We are realizing significant synergies from the acquisition, and customers have responded extremely well, as evidenced by our recent contract awards in various markets. We know that our workforce is our greatest asset and our highest priority, and we expect to promote and add hundreds of employees over the coming years as our newbuild rigs come out of the shipyard and go to work around the world. Now let me discuss the markets. I will begin with deepwater where all but 2 of our existing deepwater rigs have commitments to at least the first half of 2013. Given the strength of the markets and our deployment schedules, we believe Ensco is in the sweet spot in terms of our uncontracted rigs under construction. As I mentioned earlier, we recently contracted ENSCO 8505 with 3 customers in the U.S. Gulf of Mexico, which we have been indicating has the potential to be a catalyst for new incremental demand. We were encouraged that deepwater permits are being issued at a much better pace, and this is driving a pickup in deepwater contracting. In Brazil, we have 6 deepwater rigs operating, as ENSCO 7500 commences its drilling program. We expect the market for deepwater rigs in Brazil to remain strong. And currently, Petrobras has outstanding tenders for multiple rigs for 3- to 5-year term contracts. Other operators such as Shell, Perenco and Total also have requirements. The West Africa deepwater market improved during the quarter, with several contract awards and several tenders and inquiries coming into the market for both deepwater and ultra-deepwater equipment. Deepwater activity in Asia has seen a significant increase across Malaysia, Brunei and Indonesia with national and independent operators. We have been indicating for several quarters that Asia will experience growing deepwater demand. Floater activity in the Mediterranean remains finally balanced. Currently, their outstanding opportunity is in Egypt and Israel. And longer term, there's potential in Libya. Moving to the midwater markets. The worldwide midwater fleet will remain challenged in 2012. Ensco's fleet of 6 rigs, however, are contracted through year end and 4 contracted into 2013, including Ensco 5002 and Ensco 5004 with OGX in Brazil. Turning to the jackup markets. In the U.S. Gulf of Mexico, we anticipate the utilization and day rates will continue to improve, as hurricane season comes to a close and as supply continues to tighten with the departure of several rigs. The premium jackup fleet is expected to remain fully utilized. In Mexico, our 4 jackups are contracted to PEMEX with terms into 2012. PEMEX intends to increase their jackup fleet by some 20 rigs. However, due to contract stipulations such as rate caps, technical requirements and penalties for not meeting short-window start dates, awarding outstanding offers continue to be a challenge. Multiple tenders have been issued recently and more expected soon, with some recent tenders not being awarded due to a lack of response from drillers. In the North Sea, standard duty rigs in the Southern U.K. and Danish sectors are fully utilized for the remainder of 2011, and we expect an undersupply of rigs through 2012. In the heavy-duty jackup market, 2 industry rigs were stacked. However, we expect the market to balance in 2012. We are already receiving inquiries for work in the Central North Sea for 2012, 2013 and even in 2014, a target market for our newbuild jackups. The Mediterranean jackup market is expected to remain a challenge for the remainder of 2011, with several rigs available. There is potential for future opportunities in Egypt, Tunisia and Greece. Authorities in Libya are working hard to restart operations as soon as possible, and Egypt may be opening up further, with more blocks being offered in January 2012. Competition remains high in West Africa, given the mobilizations from the mid and contract rollovers later this year. The market for jackups in the Middle East tightened considerably this quarter, with 8 jackups receiving contract awards, including ENSCO 91, in addition to other contract extensions. Saudi Aramco will still have 2 outstanding requirements. In the Southeast Asia market, industry utilization continues to increase even with the mobilization of 4 jackups into the region. We increased our fleet size with the addition of ENSCO 105 that mobilize from Tunisia, and all of our rigs are contracted. A number of tenders have failed in Indonesia and Malaysia, as no suitable rigs were available. Operators are now forming consortiums for rig sharing in hopes that longer programs will attract rigs into the region. Petrobras has moved to direct negotiations in order to lock up rigs with their programs. We believe that the Ensco jackup fleet in Asia will be near full utilization through 2012. To summarize, growing exploration and appraisal success; emerging deepwater basins, including French Guiana and Brunei; rising energy demand and healthy commodity prices, all bode well for our long-term growth. We believe demand for deepwater floaters will continue to grow, as clients are under pressure to efficiently replace production in the midst of increasing technical complexity and rising safety standards. Activity is improving in the U.S. Gulf of Mexico. Petrobras continues to sign contracts due to their increasing geological success in pre-salt, and deepwater opportunities are opening up in new areas around the world and clients are now placing a greater value on high-specification equipment. The jackup markets are picking up pace as well, with increasing utilization in most markets. Saudi Aramco and PEMEX are adding multiple jackups to their fleets, and the North Sea is almost fully utilized. To date, all newbuild rigs are being absorbed into the fleet. Most clients are focused on hiring companies with proven operational experience, competent crews and successful safety and environmental track records. Scale is an important factor, and having newer assets also gives us a distinct advantage. Our newbuild delivery schedule not only puts us ahead of the curve in terms of meeting new customer demand, it also will perpetuate our advantage of having one of the youngest fleets in the industry. In closing, we remain laser focused on safety and operational execution. We are quickly integrating our operations and significant call synergies are already being achieved from our recent acquisition. Our teams are doing a fantastic job managing the integration process. Several new rig startups and multiple construction projects all on top of their daily responsibilities. Our team has worked countless hours to get us where we are today, and I'm extremely proud of their accomplishments. Now let me turn it over to Jay.

Thanks, Dan. My comments today will cover highlights of our third quarter results and our future outlook. Regarding third quarter results, let me start with a few introductory comments. We completed our acquisition on March 31, so third quarter 2011 results include a full quarter of our newly acquired operations, while third quarter 2010 results do not. We have provided information on our earnings release that we issued yesterday after the market closed that will assist you in making certain year-to-year comparisons. Therefore, my focus today will be on operational factors that influence the quarterly comparisons, not the effect of the acquisition on both third quarter results or the GAAP adjustments to require -- to acquire drilling contracts to estimate fair values which we spelled out in our press release. The effect of the acquisition and the adjustments to drilling contracts to estimate fair values were included in our prior outlook. We will be issuing our 10-Q shortly, which will also provide helpful information regarding our third quarter results. Starting with third quarter results versus prior year, earnings from continuing operations were $0.88 per share, down from $0.92 a year ago, but up significantly from $0.59 in the second quarter 2011. Combined severance costs and other integration-related expenses reduced earnings per share by $0.04 in the third quarter, with $0.03 reflected in G&A expense and $0.01 reflected in contract drilling expense. Total revenues were $916 million, up from $428 million last year. Deepwater revenues increased to $440 million. Adding ENSCO 8502, 8503 and 8504 to our fleet over the past year also increased revenues. However, ENSCO 7500's mobilization to Brazil following its shipyard reduced revenues year-to-year. Midwater revenues were $121 million, all related to the newly acquired midwater fleet. Jackup segment revenues rose to $330 million. Utilization for the legacy Ensco fleet improved 4 percentage points year-over-year to 83%, but the average day rate declined by $3,000 to $102,000 per day. Sequentially, legacy Ensco utilization increased 6 percentage points, and the average day rate improved by $3,000 from the second quarter. Other revenue was $24 million, all related to the newly acquired managed rig operations. Third quarter contract drilling expense increased to $478 million. Deepwater segment contract drilling increased to $233 million. Similar to the revenue comparisons, adding ENSCO 8502, 8503 and 8504 to our fleet, was partially offset by the ENSCO 7500 mobilization to Brazil. Midwater contract drilling expense was $72 million in the third quarter, all related to the acquisition. Jackup segment contract drilling expense increased to $155 million. As we had anticipated on our last earnings call, an $11 million pretax gain from a cash settlement for the ENSCO 69 insurance claim partially offset higher operating costs related to increased utilization. Our contract drilling expense was $18 million related to our managed rig operations. Depreciation and G&A expense are clearly spelled out in our earnings release, so I won't repeat them here. Other net in the third quarter of $11 million included $12 million of currency -- or foreign currency exchange gains related to intercompany accounts, as the U.S. dollar appreciated against certain currencies, mainly the euro and Brazilian real. Now let's discuss the fourth quarter outlook. Revenues are expected to increase to about $1.04 billion. ENSCO 8504 will have a full quarter of operations. ENSCO 7500 will commence its contract in Brazil, and there will be more operating days for our jackups. Jackup segment utilization, which includes the impact of legacy Pride rigs, some of which are cold-stacked and not being marketed, is projected to be in the mid-80% in the fourth quarter. Legacy Ensco jackup fleet utilization is projected to increase to the 90% level in the fourth quarter. Moving to expenses. We anticipate fourth quarter 2011 contract drilling expense will increase to approximately $525 million, due in part to more operating days and higher utilization. Depreciation should increase to about $140 million, and a full quarter impact from ENSCO 8504 will drive the increase. We anticipate G&A expense will rise slightly to approximately $43 million in the fourth quarter, which will include about $8 million of expense related to the Pride acquisition. Interest expense is estimated to be about $42 million net of capitalization, which is a good run rate for 2012. Our 2011 effective tax rate outlook for the fourth quarter is 15.6% or approximately 17% for the full year. The higher tax rate outlook for the full year versus our earlier projection is due to various discrete items and the lower estimated pretax income for 2011, which results in changes in the relative components of our earnings generated in tax jurisdictions with higher versus lower tax rates. As Dan mentioned earlier, unplanned downtime on some of our newbuild rigs outside of our targeted ranges has caused our full year pretax income outlook to decline compared to earlier forecast. We continue to explore further tax efficiencies with respect to the legacy Pride rig ownership structure, and we believe there will be opportunities for improvement in the tax rate in 2012 to below 14%. 2011 capital spending is forecasted as follows: $660 million for the construction of our drillships, 8500 series rigs and ultra-premium jackups; $235 million for rig enhancement projects; and $200 million for sustaining projects. Now a few comments on synergies. We've already realized some synergies in 2011, and they are reflected in our cost guidance. As we outlined on our last conference call, for 2012, we expect total expense synergies to be approximately $100 million, with about half related to G&A and half related to contract drilling expense, mostly from purchasing efficiencies as we leverage our increased scale. Anticipated full year run rate synergies for years following 2012 will be approximately $150 million, comprised of $120 million of expense savings and $30 million of capital expenditure synergies. Our cost synergy outlook is augmented by our favorable outlook for revenue growth, with utilization on average day rates improving in 2012 and our newbuild rigs being put to work. Now I will turn the call back over to Sean.

Thanks, Jay. Now, operator, please open it up for questions.

[Operator Instructions] And our first question comes from the line of Collin Gerry with Raymond James. Collin Gerry - Raymond James & Associates, Inc., Research Division: I guess the topic of the day, especially as it relates to one of your bigger competitors, has been the pressure control equipment and the new standards and how it's affecting the industry. And it's clearly not as demonstrated in your results or in your guidance. So I wonder if you could just give us some color on what you're seeing for your fleet as it relates to any kind of I guess the post-Macondo world, and what you're seeing in terms of pressure control needs on your BOPs.

This is Bill Chadwick. We, like everyone else in the industry, are being subject to a lot more scrutiny with regard to all of our well control equipment. But our biggest issue initially was trying to understand what the standards were. That's becoming clear. I think we've been very successful on all of our equipment in meeting whatever standards have been established. We have no instances where we have not been able to meet standards, which have been clearly established. And we have no rigs which are out of service by reason of not being able to meet any standard, which has been established by our customer or regulatory authority. As expectations change, we were really asking more of some of this equipment than it was designed to do. So I think some of these standards are still developing, and some of the methodology applied to the maintenance of this equipment is still developing to meet a whole new level of expectation. But this is something that the industry is responding to very successfully and will continue to be successful. Collin Gerry - Raymond James & Associates, Inc., Research Division: Okay. That's a helpful color. I guess switching gears maybe to more the marketing side. Clearly, we're seeing an increase in kind of day rates across the board, and it seems to me that, that's trickling down, not just in the high spec, but also into the standard rig fleets, be it floater or jackup. Could you comment on that, whether or not you're seeing it? And if so, where would you suggest the highest rate of change we'll see going forward? Would it be on the standard jackup side or on the older standard floater side?

Well, I can't speculate on the particular areas, but yes, we're seeing across the board in all sectors strengthening demand, tightening utilization, that in some markets like deepwater and jackups, like you mentioned, is taking affect a little bit quicker than in midwater. So as we look at our portfolio and look into next year, we're optimistic that those trends are going to continue. Collin Gerry - Raymond James & Associates, Inc., Research Division: But you're not seeing a more acute price gain on the floater side versus the jackup or vice versa?

Well, I think you got to go market-by-market. If you look at the U.S. Gulf of Mexico, the commodity jackups have had some pretty substantial increases. On a percentage basis, I haven't tried to go around the world and then look at it, but it's strong in all areas. And certainly, on the floater side as well, especially in premium equipment, we've seen some strong increases since June of this year.

Our next question comes from the line of Ian Macpherson with Simmons.

I got on 1 or 2 minutes late, and I don't know if you addressed this in the opening remarks, but curious about the DS-6, and we've been watching anxiously for that contract and haven't seen it yet. And I'm curious if the lack of the contract announcement now reflects anything in the way of your decision to hold it off as long as possible as rates move higher, or if this is an issue where negotiation is sort of protracted and just taking its time.

Yes, I think it's the latter of the 2, so just keep watching.

Fair enough. Also, Dan, with -- just to follow up on the question about control systems and inspection, et cetera. Outside of the rig that lost a quarter in Israel last -- lost a month I mean -- last quarter, have you seen anything unexpected with regard to the Pride fortune rigs in the -- for the midwater semis that has caused you to sort of rethink what the efficiency of those assets might be over the next couple of years?

No, not really. It's a 5,000 and 6,000. I think it had some unique issues to it but no other -- we're very pleased with the equipment.

Okay. I like these short answers. It gives me time for one more quick one. Jay, I'm sorry, I fell behind, what changed, as you're updating your synergy guidance, it sounded like you tweaked it higher, and I didn't catch what the increase was versus...

I don't think we've tweaked it higher at all, Ian. It's exactly what it was before. I was talking about beyond 2012 is $150 million.

As you stated on the last call, right? Okay.

Right.

Our next question comes from the line of Jud Bailey with Jefferies and Company. Judson E. Bailey - Jefferies & Company, Inc., Research Division: Question maybe for Kevin. When we look at kind of how floater rates have progressed here in the last few months, we've seen deepwater rates close the gap a little bit. It seems like with ultra-deepwater, midwater has still been a bit flattish, up a little bit. As you look forward and look at the demand you're seeing for all the various asset classes, do you think we can see a stronger increase in midwater rates next year? Or do you think that the bifurcation between those more deepwater rigs and midwater, do you think it widens, or do you think it narrows significantly?

Again, Jud, that's difficult to predict. But the facts that we have right now is our deepwater fleet between 98%, 99% utilized. And as you look into 2012, we do our best to kind of count available rigs. We're coming up with less than 20 for 2012. That's assuming that some contracts that we know about go ahead. On the midwater fleet, the marketed fleet, these are marketed utilization numbers. We're seeing that fleet at about the 90% level. So, when you try to look forward, that's the level where you're kind of on the fence, and we need to see a little bit more activity. The primary difference between those 2 sectors is the term. That's really what's kicking in on the deepwater fleet. So activity level is good. I'd like to see it a little bit stronger, to see that midwater market move on up. And I think we'll just have to stay tuned and see what happens. Judson E. Bailey - Jefferies & Company, Inc., Research Division: Okay. And then my follow-up is for Jay. And again, I apologize if I missed this as well. On your revenue guidance, did you say how much of that would -- how much of a fair market value write-up on some of the old Pride contracts that would be in that number?

I didn't, but Jud, it's a little over $25 million for the fourth quarter. Judson E. Bailey - Jefferies & Company, Inc., Research Division: Okay. And is that going to be relatively consistent for the next few quarters?

It bounces. It swings around next year. For full year of 2012, it's only going to be about $25 million in total for the year, with some pluses and some minuses. We'll give you a little more guidance on that on our next call.

Our next question comes from the line of Geoff Kieburtz with Weeden & Co. Geoff Kieburtz - Weeden & Co., LP, Research Division: Dan, you talked a bit about the unexpected downtime in the newbuilds. Can you elaborate a little bit? Are we talk about subsea systems again here?

Let me let Mark answer that because those are within his view.

Okay. Jeff, this is Mark Burns. As Dan alluded to in his opening comments, yes, we have experienced some unplanned downtime on starting of our newbuild rigs, but it's important to note that this is not uncommon. We're working closely with our customers, our equipment suppliers to resolve these issues, and we're getting their full support. Primarily, yes, it is some subsea equipment, but other equipment as well. So again, I just want to say it's not a developing trend and the startup of new rigs. If you recall, our commissioning and startups of our ENSCO 8500 semis and their ensuing performance has been very impressive. And most importantly, and I think Dan mentioned this also, is that we're sharing our learnings with the rest of our fleet where applicable. So again, we have a good understanding of this, and we're going to get on top of it. Geoff Kieburtz - Weeden & Co., LP, Research Division: And insofar as these were unexpected, are you having any difficulty getting your vendors to respond to your needs?

No, I can assure you, we are not.

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

I wanted to ask you just in terms of the recent Petrobras tender, there seem to me to be a couple of Ensco rigs that could have qualified on the availability for that, and I'm just curious as to whether you didn't bid in that because you've already kind of got something lined up for those rigs that would be available by the end of '12, or if you thought that perhaps this was -- you have enough exposure to that market as it is today.

We did have some rigs that could have qualified, but they were involved in other contracts. We continue to look at Brazil as a good place to grow our business, but there's also a lot of good opportunities in other parts of the world. So we continue to seek the highest value application for our rigs.

Right. Understood. Okay. So then along those lines, you seemed like you have some positive commentary on Asia. And did you include the deepwater market in Asia as part of that? And seems that you have perhaps one rig now in the deepwater Asia market, but what is the kind of overall market growth rate there that you would anticipate perhaps for some of your currently available rigs?

I'd characterize Southeast Asia, remember, it includes Australia. There are some very, very strong developments on the gas side. A lot of that gas is in deeper water. Brunei is a fantastic prize. It looks like it's got a lot of upside. So we're starting to see just around the world, especially in southeast Asia, as the geologist begin to piece together trends from one region to another region, that's what we're seeing. It's really pretty early. And I think, traditionally, that's been kind of a midwater floater market. We're starting out there to 5,000 feet. And more importantly, even in the 3,000, 4,000, 5,000 feet you have to look at the drilling demand in terms of how deep you're going, high pressure, high temperature, there are some complex drilling out there that I think we'll see a growing trend of higher-specification rigs working out there. And that will be good for our business.

Okay. So is -- does that mean that this 8504, which is out there I think until March of next year, would seem that you have really good prospects for that beyond that contract?

Yes, I think -- Robin, in my prepared remarks, I think we said we're very confident that rig will remain out there with the customer.

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

I just have one quick one here. Dan, operationally, it seems things are going well. Integration seems to be progressing nicely. But on the financial side, any thoughts or discussions yet about revisiting the dividend and increasing it a bit? I know you still have some big payments on rigs that are under construction, but cash flows are strong. I just wanted to get a sense of what you're thinking about allocating free cash flow over the next year or so.

What we've -- I think what we said when we did the acquisition, we're going to focus on getting the integration done and trying to get through this year. Our board looks at this every quarter in a considerable amount of time, the way the benefits of reinvesting in the business, paying down debt or returning capital. And for right now, we feel good about where the dividend is, but we also feel very bullish about what the future is. But I'm sure we'll be revisiting that again at the next board meeting and considering what our options are. But we do look at it very -- on a continuous basis.

Okay. And just concerning I think some of your comments in the past where you talked about doing more newbuilds and you probably had a pretty full plate. I mean does that kind of -- I'm sure that goes into the discussion, but does that kind of limit where the free cash flow goes?

Yes, I think as I said we've got plenty on our plate right now, but Ensco has a way of upping the ante.

Our next question comes from the line of David Smith with Johnson Rice. David C. Smith - Johnson Rice & Company, L.L.C., Research Division: I saw in the report that you may have bid the Ensco 5006 and the Petrobras tender for workover demand, and wondering, if so, if that that was indicative of maybe an negatively revised outlook for the capabilities of the rig.

No. The 5006 -- this is Kevin Robert -- has lots of opportunities out in the current market that it's in. Like I said earlier, we're looking all the time globally around the world trying to maximize the value of our fleet. So we have numerous times that we're offering rigs that are currently under contract in other regions. It so happens that you can see it on a public tender like Petrobras, but it's not the only place that we're looking at taking our rigs. And the 5006, along with the 5001, have some pretty good opportunities, which is an indication that even at more deepwater, market is starting to strengthen. David C. Smith - Johnson Rice & Company, L.L.C., Research Division: Okay. Also, we've seen some pretty attractive rate increases for the international standard jackups, rigs that are 25 years and older priced in the $85,000 to $115,000 a day range. A nice move over the past 6 months. Should we think about rates for these assets going forward as tracking at discount to kind of generic newbuild pricing? Or is there a greater segmentation in these markets for the old versus new rigs?

The jackup market has got some distinct segregations from region to region. Again, you can pick a region and see within that region different rig classes earning different rates. But I think your characterization is correct. Across all those categories, you see increasing demand. And certainly, operators will look at their drilling program and put a value on different qualities of rig. The reason we're looking at the ultra-harsh premium jackups that we're building new and looking at some high-specification improvements through our fleet because we see that there's good value there and there's growing demand for that high-spec equipment, but the lower commodity equipment, it's well maintained like our fleet, still has a good market in front of it, and have seen high demand by all of our clients.

Our next question comes from the line of Matt Conlan with Wells Fargo Securities.

Did I miss it -- did you state what the day rate was or the contract terms were for the 120?

Yes, we stated it was a 500-day initial term, with a day rate of $230,000 per day plus mobilization.

Great. And going back to the pressure control issues and getting rigs out of surveys, I know most your deepwater fleet is, of course, very brand new. But did the DS-1 or the DS-2 to have to go through any surveys in the next 12, 24 months?

They're subject to 5 yearly periodic surveys, just as all rigs are. The DS-1 is scheduled next year. I believe we plan to go in about the third quarter. The DS-2 is sometimes thereafter. I'm not sure exactly when.

Okay, and how about any of the older Pride semis?

Well, again, it's a periodic requirement for all of them, so we'll have various semis continuing to come due for their 5 yearly survey at various points in time. That's just routine for all of the fleet.

Okay. I was just uncertain of what the timing of various cycles were. Okay. And then the last one, on the DS-6 that we're all anxiously waiting for the contract, you've recorded some very recent contracts above $500,000 a day. Are those benchmarks relevant for your current negotiations? Or did your negotiation start before those types of contracts got posted?

The benchmarks are always relative, but probably what's more relative is the specific job we're being asked to do, our presence on the ground, in the market, and our ability to fulfill our clients' requirements. I'll remind everybody that these big rigs require an awful lot of support services, some real solid operational people on the ground. So, most of these conversations start 4 to 6 months in advance of the actual contract being signed.

Our next question comes from the line of James Woods with FBR Capital Markets. James Woods - FBR Capital Markets & Co., Research Division: I'm calling in on behalf of Rob MacKenzie. Just a quick question today. I was wondering, you highlighted on the call that the midwater is sort of been moving sideways, while the deepwater and the jackups have really been getting more and more constructive. I'm wondering, what do you think the catalysts are going to be to move that midwater market higher? Or I guess another way to ask it is: What's holding it back?

The midwater market, you need to look at the North Sea midwater market. It is 30-somewhat rigs, and that market acts regionally on its own, and it's very cyclical due to the weather. The rest of the midwater market is dispersed around the world. And with strong commodity prices, it certainly is very important that the operators that have that kind of between shallow water and deepwater geology see the geologic trends that they need to put longer term together. So I think the catalyst is really the term of the fleet. Now you look at currently marketed utilization on that fleet, it's about 90%. But as you look into next year, about half of that fleet rolls to new contracts. So until we see terms start to push those rollovers out 12 to 18 months, probably we'll just see modest increases in that market. James Woods - FBR Capital Markets & Co., Research Division: Okay. That's helpful. Another question is, you guys announced the contract with Noble and the joint contract with the 3 E&Ps. Do you view that as something that's going to become a more common contracting structure going forward in the U.S. GOM? Or is that something that was sort of a one-off? Can you give us a little insight in how the negotiation on that went?

Well, if I think if you look at our 8500 Series rigs, that's been a pretty common practice on the rigs with this rig sharing agreement. So I don't think it's anything new, quite frankly. I think what's important about that contract is that these are return customers that have used our equipment, 8500 and 8501, and have demonstrated the efficiencies to be gained from the equipment, and we have repeat customers. I think that's what's important. James Woods - FBR Capital Markets & Co., Research Division: Okay. So how did the terms differ between that contract and other contracts and between -- are there -- is there differentiation in the terms that each E&P received in that contract? Or is it standardized across the 3?

No, it's a standard. It's one contract, and they have an agreement amongst themselves, how they share the rig, but it's just one contract.

Our next question comes from the line of Nigel Browne with Macquarie.

My question has already been answered. Sorry about that.

Our next question comes from the line of Andreas Stubsrud with Pareto.

I'm just going to revisit the ENSCO 120. I'm just surprised that you're not -- even if it's not a very specialized market and a kind of a small market, I'm just surprised that you're not building more. When you get $230,000 a day, which in my view is a payback between 4 and 5, an EBITDA payback, can you comment on that? Are you thinking about building more in this segment? Or are you going to wait and more look for ultra-deepwater?

We are building 3 currently for that marketplace, which is quite a bit of equipment for that market.

Okay. I totally agree with the strategy.

And I do agree. It's a fantastic contract, and you can do the back-of-the-envelope math and see the financial returns. The payback we're getting on that are really very favorable.

So just a follow-up, do you think that rate is something similar you can get for that type of a rig in Middle East? Or is it more harsh environment U.K. contract type?

Well, you always get the highest day rate when you find a customer that needs the capability -- the full capabilities of the rig. So if you were to take that rig to another market, you don't need the harsh environment still and some of the capabilities that rig has, so you won't be able to get a price for that because the customer doesn't need it. So this particular customer. And there are many opportunities in Central North Sea right now with several customers that are out talking about rigs that require those technical capabilities. And we think that's the most likely market for them to end up because that's the market where they need the technical capabilities.

Our next question comes from the line of John Lawrence with Tudor, Pickering, Holt. John D. Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Just a question on Hawaii and Pennsylvania. Could you bid those rigs in the Saudi? Or do those likely stay stacked?

No. Those rigs technically could work in that market, yes, but they have been stacked for some time because we made a value judgment when they rolled off their last contract, that the investment we would need to put into them to just keep them working to our standard didn't establish a fair rate of return for our resources employed, so that's why we've stacked those rigs. John D. Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Okay. And then just a follow-up on the 5003 in West Africa. Does that stay there post the current contract? Is there enough work to keep that there?

It's a good market traditionally for that midwater fleet. It certainly has been a little bit quiet, so we're working that rig hard, but we're optimistic it will find work as we go. But at this moment, we're hoping sometime late first quarter. John D. Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Okay. And then, Jay, just a quick follow-up on interest income. Any reason why that was so high this quarter?

Well, you're actually going to see that going forward. That has to do with the contract that we entered into with one of our customers where we did some upgrades and deferred mode and we're charging interest expense on that being paid as part of the -- on a monthly basis. So you'll see that for the next couple of quarters. It'll start to decline over time, but it will be of that sort of magnitude for the next few quarters.

And at this time, I'm showing no further questions.

Okay. Well, thank you, everyone, for participating on our conference call, and we will talk to you again next quarter. Thank you.

This does conclude today's conference call. You may now disconnect.