Valaris Limited (VAL) Q2 2013 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Ensco plc Second Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I will now turn the call over to Mr. Sean O'Neill, Vice President of Investor Relations, who will moderate the call. Please go ahead, sir.

Thank you, operator, and welcome, everyone, to Ensco's Second Quarter 2013 Conference Call. With me today are Dan Rabun, CEO; Mark Burns, our Chief Operating Officer; Jay Swent, CFO; Kevin Robert, our Senior Vice President of Marketing; as well as other members of our senior management team. We issued our earnings release, which is available on our website at enscoplc.com. As usual, we will keep our call to 1 hour. Any comments we 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. 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 July 15. Now let me turn the call over to Dan Rabun, Chairman and CEO.

Thanks, Sean, and good morning, everyone. I will start by covering highlights from the second quarter. Kevin will then comment on the state of our markets, and Jay will review our financial results and provide a detailed outlook for the third quarter. We had a strong second quarter. We achieved record revenues, grew our operating income by 12%, hosted our naming ceremony for ENSCO DS-7 that will commence its initial 3-year contract later this year and continued to invest in our fleet with new orders for 2 more rigs. ENSCO 8506 and ENSCO DS-6, which commenced operations during the first quarter, drove a 17% increase in revenues year-to-year. Both rigs had a very good uptime performance during the second quarter. ENSCO DS-6 drilling offshore Angola for BP, a repeat customer with 3 of our Samsung DP3 drillships, had 98% utilization. I should add that BP was very pleased with the acceptance testing process for this rig before it began drilling its first wells. ENSCO 8506 had 95% utilization during the second quarter. This rig is one of 3 8500 Series working for Anadarko in the U.S. Gulf of Mexico. These are vivid examples that show the advantages of standardization. Both of these rigs benefited from the lessons learned that were passed down by rig managers and others who worked on the first rigs in each series. These advantages of standardization will continue with the orders we placed for 2 additional rigs during the second quarter. We ordered ENSCO DS-10, an ultra-deepwater drillship, which is scheduled for delivery in third quarter 2015. It will be our eighth Samsung DP3 drillship and will have the improved drilling capabilities and fuel efficiency that the GF12000 design provides. This new drillship order reflects our conviction that demand for ultra-deepwater rigs will remain strong as new discoveries drive the need for more appraisal and developmental drilling. We have seen significant customer demand for shallow water rigs. As a result, we ordered ENSCO 110, a 400-foot water-depth premium jackup, in April. ENSCO 110 will be delivered during the first quarter of 2015 and will be the seventh Keppel FELS B Class rig in our fleet. For ENSCO 110, customized enhancements to the basic design include dual-drilling fluid capability and upgraded accommodation units. These new build orders give us 8 rigs under construction, 4 ultra-deepwater drillships and 4 high-spec jackups, representing a total commitment of more than $3 billion. In addition to this newbuild program, we are making significant investments to our existing fleet. Major upgrades are currently underway for ENSCO 5005, and we expect this work to be completed in first quarter 2014. The shipyard project includes enhancements to subsea equipment and the derrick, as well as upgraded accommodation units to meet customer demands for a larger crew complement. Discussions with potential customers have already started for drilling programs after the rig leaves the shipyard. During 2014, we will also complete a major upgrade of ENSCO 5006 prior to the rig commencing work for Inpex in Australia. Planned upgrades include the BOP, lead systems and accommodation units. The customer is funding most of these upgrades, as well as paying a day rate during the rig shipyard stay and mobilizations. ENSCO 5006 will do developmental drilling on the Ichthys program. The initial phase of this project is estimated to take 40 months, and there may be potential for a second phase that could take an additional 60 months. ENSCO 6001 and ENSCO 6002 will both undergo major upgrades during 2014 as well. More than $80 million will be invested in these rigs during their 5-year contract terms with Petrobras, who is funding the majority of these upgrades. We will also earn day rate while the rigs are in the shipyard. Recently, we announced the 1-year extension for ENSCO DS-2 with Total in Angola. This 1-year term is ideal since we will begin mandatory 15-year survey work and a major upgrade when the contract is completed. The upgrades will include increasing the BOP rating from 10,000 to 15,000 psi and from 4 rams to 6 rams for improved well control. We will also enhance the accommodation units to support more crew members. With these upgrades, ENSCO DS-2 will have greater technical capabilities, improving the marketability of the rig. Discussions with customers for well programs beginning in 2015 have already begun. Just as we solved significant revenue and earnings growth this quarter from rigs ordered in prior years, we expect that Ensco's recent orders for new rigs, along with planned upgrades to our existing fleet, will drive future earnings growth. We have a lot of positive momentum, and we look forward to the remainder of this year and the years ahead. Before I turn it over to Kevin, I just want to note that London has quickly become an offshore drilling hub. Recently, another driller has decided to move its headquarters here. So 4 of the largest offshore drillers will now be based in London. We can certainly attest to the tax efficiencies, capital management benefits and geographic advantages that the U.K. provides, all the benefits that Ensco has enjoyed since we redomesticated to the U.K. in 2009. Now I'll turn it over to Kevin to discuss the state of the markets.

Thanks, Dan. This morning I will recap activity levels, highlight some of our contract signings that occurred during the quarter and present our outlook for the floater and jackup markets. Before I do though, let me make a few macro comments about our industry. Numerous organizations have recently published their midyear assessments of global economic growth, energy supply and demand trends and associated spending levels. The conclusions reached in these studies forecast continued energy growth for decades, driven by expanding prosperity across a rising global population. Growing transportation requirements, rising electricity needs for homes and increasing energy needs to power industry will require exploration and development of oil and gas reserves at a faster pace. Oil will remain the #1 global fuel, but natural gas will overtake coal for the #2 spot. Safely delivering new technology and innovation to develop hard-to-produce energy resources is a key requirement of the drilling industry. A recent IHS study examined the source of oil and gas discoveries from 2007 to 2012 and found that almost 80% of reserve additions were from new deepwater basins. These basins are common on both sides of the Atlantic Ocean but have also been found in East Africa, Australia, New Zealand, Israel, Cyprus, India, Eastern Canada, Eastern South America and the Arctic. Production from shallow water wells continues to supply more than 1/3 of worldwide production, and improved technology is critical to our clients as they seek to produce more from existing shallow water basins. Regarding sector activity, we experienced a large increase in combined tender and inquiry activity, rising from 55 to 60 per quarter to a new high of 80 in the second quarter. Floating rig formal bid activity was steady, but we saw a significant increase in the number of floater inquiries. We believe the jump in floater inquiries is an indication that clients are realizing that rig supply in 2014 is tightening. Additionally, customers are spending more time selecting rigs for their drilling programs, resulting in earlier discussions with operators for specific rig availability. On the jackup side, the number of formal bids doubled versus the first quarter, reflecting clients' urgency to get production onstream. Increasing activity in the jackup market resulted in higher rates and lengthening terms in every jackup market where we operate. Beginning in the West Africa floater market, there were a couple of deepwater commitments made against open tenders, and there remain several active tenders in the region. We expect these active tenders will absorb another 4 to 7 deepwater floaters before the end of 2013. As Dan mentioned, we received final approval on a 1-year extension for ENSCO DS-2 with Total in the high $430,000 per day range in Angola. This deal represents a cooperative effort with Total, where the underlying contract fundamentals were agreed upon over a year ago in order to facilitate a major upgrade project for the rig. The scope of this upgrade underscores the increasing specifications that customers are requiring for floater projects in West Africa. Most new tenders in the region typically require a minimum 5 ram BOP, 0 discharge and the ability to handle larger subsea trees. We are also seeing work for high-spec moored floaters begin to materialize in the region. Therefore, our outlook for West Africa activity remains bullish. The West African jackup market, which has been a lagging market, showed signs of increasing activity as the process began on 4 tenders offering multiyear terms for standard rigs. We are seeing more inquiries about rig availability indicating incremental future activity in the region. In the U.S. Gulf of Mexico, floater demand remains robust. As expected, a number of contracts were announced for ultra-deepwater drillships during the quarter. These contract announcements have been for 3-year terms with rates in the mid- to high $500,000 per day range for drillships with 2 BOPs. Rig availability for the region is effectively gone for 2013, so the new contracts were for rigs commencing operations in mid- to late 2014. We continued adding backlog to our ultra-deepwater fleet in the U.S. Gulf as we extended ENSCO 8502 with LLOG in the low 500s and then booked the rig for work with Marathon into first quarter 2014 at $530,000 per day. After Marathon, ENSCO 8502 will work for Stone into the third quarter of 2014. Marathon is a new direct client for Ensco that they have previously partnered with other operators using the 8500 Series rigs in the U.S. Gulf. We are also in discussions for our next available rig in the region, ENSCO 8503, and have multiple prospects for the rig when the current operator completes their program in first quarter 2014. Permitting activity in the U.S. Gulf is back to normal, and the last fleet sale in the region proved very successful. We expect the floater market to remain very active through 2014 and into 2015. We already have a number of clients in the pre-qualification stages for work commencing in late 2015. We expect that our new drillships, ENSCO DS-9 and ENSCO DS-10, will be strong contenders for these projects. Jackup demand in the U.S. Gulf continues to outstrip supply, and activity for our premium rigs is brisk. We were able to contract several rigs at higher rates and longer terms during the quarter, including ENSCO 81, ENSCO 87 and ENSCO 99. In fact, rates and terms increased appreciably over just a few months. For ENSCO 82, we were able to increase the rate and term twice in the second quarter alone. Early in the quarter, we executed a 6-month contract at an increased rate of $135,000 per day. Subsequently, we were able to contract ENSCO 82 for an additional year in the low 140s. As we look forward, we expect the U.S. Gulf jackup market to remain strong, given the limited rig supply and compelling drilling economics. In Mexico, Pemex picked up 3 more jackups through direct negotiation and now has 44 rigs under contract. We expect a strong jackup market to continue as Pemex plans to add 5 to 10 incremental jackups to its existing fleet. We continue to evaluate moving more jackups to Mexico. But at present, we do not have available rigs. Pemex also has a tender due for bid this month for a floater in 1,000 feet of water for a 2-year term. Pemex is evaluating adding a second floater, plus a deepwater rig to their fleets, so we expect incremental demand in Mexico. Turning to Brazil. Petrobras continues to focus on maintaining production in their existing basins as evidenced by our previously-announced contracts for ENSCO 6001 and 6002. Petrobras committed both rigs for 5 years at a rate in the mid- 370s, plus upgrade costs and day rates while in the shipyard. We submitted bids in the latest market inquiry as Petrobras is looking to add deepwater work over and intervention rigs to help stimulate production. Petrobras also continues its efforts to develop pre-salt as they're working to renew rigs with contracts expiring in 2015 to ensure their resources are efficiently applied toward the high-priority pre-salt developments. ENSCO 5000 is due for a mandatory survey and recertification work, and we plan to mobilize this rig to a South African shipyard. We will continue to evaluate opportunities for this rig. Recently, we were the successful bidder for multiyear work with ENSCO 5004 in the Mediterranean. And currently, we are in final negotiations with the customer, so the rig will mobilize out of Brazil following its current contract with OGX. We have identified opportunities for ENSCO 5002 in Brazil, as well as other markets, like the Mediterranean and Mexico, when the rig completes its contract in November. Brazil had a very successful lease sale in May, which bodes well for future high-spec floater activity as successful bidders come to market for rigs to drill their new exploration acreage in a couple of years. We expect independent oil companies to be the primary customers for increased drilling activity from the May lease sale. In fourth quarter 2013, Brazil is planning to have a lease sale that will include several pre-salt blocks, which should also generate more drilling demand in the future. Moving to the North Sea. The U.K., Danish and Dutch sectors of the jackup market remain tight with demand exceeding supply, driving customers to lock up rigs well in advance of the start of their drilling programs. We continued adding backlog with repeat customers to our fleet, adding 2 years of work for ENSCO 70, 1 year for ENSCO 72 and 8 months for ENSCO 92. Earlier this year, ENSCO 121 was awarded a contract with Wintershall for a 2-year term. And we have some very good prospects under consideration for Ensco 122, our last 120 Series newbuild. We continue to see new tenders entering the market, reinforcing our expectation for a continued tight market in the Northwest Europe jackup sector. Supply and demand remain in balance in the U.K. floater market, and we expect there will be opportunities for incremental harsh environment floaters in the region over the next few years. In the Mediterranean, I mentioned the multiyear work for ENSCO 5004. Additionally, 2 new floater tenders emerged during the quarter for commencement in the third quarter 2014, which may create opportunities for our rigs. In the Middle East, all but 1 of our 9 marketed jackups is under contract into 2014 or beyond. Bid activity during the second quarter remain steady as tender process has commenced on projects in Abu Dhabi, Saudi Arabia and Qatar. We expect these tenders to contract up to 8 incremental rigs for multiple year terms for standard and high-spec rigs. In India, we extended the contract for ENSCO 54 for another 6 months to the mid-140s. As we mentioned on our first quarter call, ONGC contracted additional rigs as expected, adding 5 rigs during the quarter and increasing their total fleet to 38 units. As expected, ONGC recently entered the market to add up to 10 incremental jackups to their fleet. The Asia-Pacific jackup market remained strong and continues to support increases in backlog and day rates. We added backlog on several rigs during the quarter, and we also experienced a significant increase in the number of tenders received. We continue to see evidence of high activity, and we are evaluating multiple opportunities for follow-on work for all of our rigs. We expect the region to continue to be balanced through the end of 2014. The floater market in Asia Pacific also continues to present new opportunities. We are working on numerous opportunities for ENSCO 5005 when it becomes available from the yard in first quarter 2014. Additionally, work is being tendered for Vietnam, Myanmar, Indonesia, Australia and China for moored floaters, and we expect Indonesia to add a deepwater floater in the future. Regarding a worldwide order book for floating rigs, we count approximately 42 new rigs to be delivered before the end of 2014, of which about 18 are uncontracted. Of the 18 that are uncontracted, we believe about 13 are in negotiations with operators, and we expect forthcoming contract announcements. In addition, 8 of the 25 floater deliveries in 2014 are not scheduled until the fourth quarter. Based on our estimates of the number of active and expected tenders, we believe all of the newbuild floaters will be absorbed into the market as they are delivered. On the newbuild jackup side, we count about 64 new rigs to be delivered before the end of 2014, of which approximately 47 are available. Based on our estimates of the number of active and expected tenders, we believe all of the newbuild jackups will be absorbed into the market as they are delivered. So in summary, we maintain our positive outlook in terms of customer demand for both deep and shallow water offshore markets. Based on visible demand from customers, we expect the market to be fairly balanced for the foreseeable future, even with the additional rig supply from newbuild deliveries. Now let me turn the call over to Jay.

Thanks, Kevin. Today, I'll cover highlights of the second quarter results, our outlook for the third quarter 2013 and our financial position. So let's start with second quarter results versus prior year. As noted in our press release, second quarter earnings per diluted share were $1.55 compared to $1.47 last year. This growth was driven by record revenues and record net income of $361 million in the second quarter as we grew our fleet and benefited from higher average day rates. Total revenue for the quarter was $1.25 billion compared to $1.07 billion a year ago, a 17% increase year-over-year. Floater revenues increased to $823 million, growing 22% from the prior year due to the addition of ENSCO 8506 and DS-6 to the active fleet and a full quarter of operations for ENSCO 8505. These additions to the fleet, as well as rate increases for several existing rigs, drove a 13% increase in the average day rate to nearly $400,000 per day. Jackup segment revenues increased 7% due to a 16% increase in the average day rate to $122,000. Utilization for the jackup fleet in the second quarter was 83% compared to 90% a year ago. As I mentioned on our first quarter call, we had more planned shipyard days during second quarter 2013 versus last year as we prepared several rigs for long-term contracts. Adjusted for the planned shipyard days in the second quarter related to upgrades and scheduled survey work, as well as cold stacked rigs that are not being marketed, utilization was 98%. At this point, we have completed the majority of our planned jackup shipyard days for 2013, and we expect the jackup segment reported utilization to significantly increase in the second half of 2013. Total second quarter contract drilling expense for all segments was $607 million, up from $494 million in the second quarter of 2012. Last year's contract drilling expense benefited from $22 million in favorable settlements. Adjusted for this, contract drilling expense was up 18%, primarily related to a growing active floater fleet and an increase in labor cost as expected. As a reminder, most of our long-term contracts have some form of cost-escalation provisions for items, like labor and insurance. Depreciation expense increased $17 million to $153 million due to more rigs in the active fleet. General and administrative expense for the quarter was $36 million, the same as last year, even with significant growth in our business year-over-year. Effective tax rate was 12% for the second quarter, in line with our guidance, which remains approximately 12% for the balance of the year. Now let's discuss third quarter outlook. Third quarter revenues are expected to increase approximately 4% sequentially. Looking at each segment, floater segment revenue is projected to be approximately even with the last quarter as higher day rates offset lower utilization from the mandatory survey work for ENSCO 5000 that Kevin mentioned. Jackup segment revenue is projected to increase 14% from the second quarter, primarily due to fewer planned shipyard days in the third quarter as utilization is estimated to increase significantly to approximately 90%. In addition, we expect an increase in the average day rate for the jackup segment. Moving to expenses. We anticipate third quarter 2013 total contract drilling expense will increase about 2% from the second quarter. This includes mobilization cost to move ENSCO 5000 to South Africa. We anticipated depreciation and G&A expense to be on par with second quarter levels. Other expenses anticipated to be approximately $32 million, comprised of $37 million of interest expense, partially offset by interest income. Before I move on to our financial position, let me make a few comments about OGX. Currently, we have 2 rigs with OGX, that's ENSCO 5002 and ENSCO 5004, both of which are contracted into November of this year. ENSCO 5002 is currently assigned to Repsol into September. Second quarter results include recognition of revenues earned during the period for these rigs, $18 million of which has not been collected to date. Our revenue outlook for the third quarter that I just provided includes $27 million of OGX revenue backlog related to the ENSCO 5002 and ENSCO 5004 contracts, both operating in Brazil. As Kevin mentioned, ENSCO 5004 is scheduled to move to the Mediterranean since we are in final negotiations with a customer for work following its current contract with OGX. Now turning to our financial position. We ended the second quarter with $490 million of cash and cash equivalents, a 28% leverage ratio, a fully available $2 billion revolving credit facility and $11 billion of contracted revenue backlog. Total capital spending for full year 2013, which is focused on growth, is forecasted to be $1.9 billion, up a bit from our last call, primarily due to ordering the ENSCO DS-10. The $1.9 billion breaks down as follows: $1.3 billion for newbuild rigs, $370 million for rig enhancement projects and $250 million for sustaining projects. We have already invested $600 million through June 30, so remaining capital expenditures are estimated to be about $1.3 billion for the balance of the year. With our new order for DS-10, we have updated the outlook for remaining newbuild capital spending in 2014 and 2015. Our outlook is $1.3 billion for 2014 and $600 million in 2015. This is based on the 8 rigs that are currently under construction, 3 of which are scheduled for delivery this year, 3 next year and 2 in 2015. While we have not completed our budgeting process for 2014, currently approved capital expenditures for upgrades for our existing fleet is approximately $380 million. More than $125 million of this amount will be reimbursed by our customers. To recap, we're very pleased with our second quarter accomplishments. We had strong financial results. Newbuild rigs that entered our active fleet have had excellent uptime performance, and we've made further investments to our fleet. We remain very optimistic about the future. We plan to continue to grow earnings as we deliver on our 8 rigs under construction, and we remain committed to high-grading our fleet by upgrading our existing rigs to increase their marketability. Now I will turn the call back over to Sean.

Thanks, Jay. And now operator, please open up the line for questions.

[Operator Instructions] The first question comes from Jud Bailey of ISI Group.

I appreciate the market color you guys gave. I had a couple of follow-ups, if I may. First on Mexico. Kevin, could you give us the timing of the mid-water tender that Pemex has? And on the ultra-deepwater requirement you mentioned, is that a tender that's upcoming or something you -- or something that's currently out and what would be the timing of adding another ultra-deepwater rig to Mexico?

The mid-water tender, the bids were turned in last Friday. It should be awarded mid-August. And the deepwater work is something Pemex is planning, so they haven't published a time line for it yet.

Got it. And then on the jackup side, you mentioned wanting to add another 5 to 10 rigs to the existing fleet. How do you -- what's your updated thoughts on how you see that market playing out? There's obviously a lot of newbuilds being built that are going to be dedicated to Mexico. Is Pemex looking to add additional newbuilds? Or are they trying to contract some existing rigs into Mexico as well?

No, I don't think they care where they get them. They're drilling demand is going up so much, they need to up 10 more rigs. So they'll look at all sources.

Got it. And then just another kind of broader question, just on your labor costs. Industries absorbed a lot of newbuilds this year. They got a lot more to go next year. You all have done a very good job at kind of keeping cost in check. Could you just give us an update on how you see the cost and kind of labor environment as you continue to add rigs? Are you seeing any more inflationary pressure than you have in the last couple of years? Or is it kind of a status quo?

Well, I think -- Jud, this is Jay. Obviously, there's been pressure all year long. We signaled last quarter, we thought we're going to be in the 8% range. I think we're looking at probably 9% inflation this year. And we have to watch the market very carefully. There's been a lot of movement in all markets, I think, over the last several months. So I think it's -- you have to watch it every quarter. But right now, we feel pretty comfortable it's in the 9% range. We're -- obviously, there's a lot of people required to build or to crew up all of these rigs, and we're very actively engaged in making sure that we've got people when we need them to crew the rigs up. It's a challenge. But so far, we've been able to meet the demand. And we've really picked up resources in our HR organization to make sure we're doing all the strategic recruiting that we need to do.

The next question comes from Robin Shoemaker of Citi.

Kevin Robert, I wanted to ask you, of those deepwater tenders you're talking about where there's been an increase, curious as to how many of those specify a dual-BOP capability, which then leads to my broader question of, how are you guys feeling about that now and is there any possible change in direction for you?

The only place we're seeing the 2 BOPs mentioned in tenders is the U.S. Gulf of Mexico, and that's in direct response to changes in the regulatory environment that are affected between well maintenance. So operators are making that evaluation.

Okay. So no change in your view on the value or investment economics of dual BOPs on new rigs?

No. No, the operator -- we look to the operator to run that exercise.

And as you know, Robin, the DS-7 through the DS-10 can accommodate the second BOP, so that flexibility is built into those drillships.

Right, okay. And I wanted to ask on the -- as you mentioned the DS-2 contract in your initial remarks, you mentioned a number of other variables around that contract, which influenced the day rate. And wasn't sure I quite understood all those factors, but could you just -- since there was a lot of focus on this DS-2 contract, if you could explain that a little more?

Yes, Robin, this is Dan. DS-2, this was shortly after the acquisition needed to go into the shipyard. And quite frankly, with long lead items, with OEM manufacturers, quite frankly, when we needed to go in the shipyard, it didn't coincide -- it didn't mesh with the end of the contract terms. So we went to the customer and said we need to extend the contract, so that we can accommodate this shipyard project, and they accommodated us. Otherwise, we would have ended the contract to go to the shipyard and not have our long lead items in. So it was really interrelated to the shipyard project that just had really long lead items, and it's really, quite frankly, that simple.

The next question comes from Gregory Lewis of Credit Suisse. Gregory Lewis - Crédit Suisse AG, Research Division: I guess over the last couple of weeks, there has been a couple of well incident -- natural gas well incidents in the U.S. Gulf of Mexico with -- and I guess what would say our smaller or private-type entities on the shelf. As we think about this going forward over the next couple of years, do we think we're going to see more increased regulation and maybe a little bit of -- will it become more difficult for smaller private entities to do exploration and development on the shelf? How should we think about that?

This is Steve Brady, Senior VP of the Western Hemisphere, so with responsibility for Gulf of Mexico. I can't comment on the specific situations recently on the Gulf, but I can say that Ensco treats its shallow water operations with the same safety focus that we give our deepwater operations. And also, I think you'll note that Ensco thrives in environments with strict regulations. We know how to operate there. Our systems are generally in compliance or exceed the standards that are set, and that's true in the Gulf of Mexico. As demonstration, we recently had an audit by the BSEE, that's the regulator there. And they complimented us on the work that we had done to comply with the latest regulations and are holding us up as a potential standard for other contractors. So I can't predict what's going to happen with the regulations in the Gulf. But quite honestly, we're prepared for whatever comes that way, and we will do a good job of it.

I think, Greg, for the smaller players, obviously, it's not going to get any easier. I can't speak to whether it's going to get any harder. But certainly, it's not going to get any easier with time. Gregory Lewis - Crédit Suisse AG, Research Division: Okay, great. And then just real quick follow-up on the mid-water tender in Mexico. Just to sort of try to gauge what -- how Pemex is thinking about it. You mentioned that it was 1,000 feet of water. But in terms of -- were there any minimum requirements beyond that in terms of -- or maybe they're looking for a little bit newer generation type mid-water rig even though they sort of scaled down to the 1,000-feet minimum requirement?

No, there wasn't. That's a fairly straightforward program for a typical 1,000-foot moored rig.

The next question comes from Ian Macpherson of Simmons. Ian Macpherson - Simmons & Company International, Research Division: I'm looking at the mid-water rigs in Brazil that are the 5000 and the 5002 and the 5004, that maybe a couple of those are going to be relocating. Could you provide us some sort of expectation for how much transit or downtime we might want to contemplate over the next -- the back half of this year and into next year as those rigs get resituated?

Well, the 5000 will go South Africa for its scheduled shipyard and recertification, and we'll look at market opportunities from that standpoint from that location. The 5004, when it finishes its contract, will in direct continuation mobilize out into the Med for a multiyear contract, and the 5002 has opportunities in Brazil. We already talked about the opportunity in Mexico, and we have opportunities in other parts of the world, like West Africa and the Med. 5005, we decided to focus on the Asia-Pacific market with that because there's half a dozen good-quality opportunities for that rig. So I think everything in our fleet, at least, has a place to go and a purpose. Ian Macpherson - Simmons & Company International, Research Division: Okay, good. Kevin, and the 5004 in the Med, is that going to start Q1 or Q2 of next year?

We'll make an announcement on that as soon as we finish the contract. Ian Macpherson - Simmons & Company International, Research Division: Fair enough, okay. Quick follow-up, Jay, I think you said that as of now, you've authorized upward of $380 million for upgrade CapEx next year, $125 million of which is to be reimbursed by the contracts for some of these rigs. And then should we think of your sustaining CapEx of $250 million this year as being similar or materially different next year?

I think you should think of it being in the same range.

The next question comes from Mike Urban of Deutsche Bank.

You guys expressed a positive view on the jackup market, I think, globally, really, which I certainly tend to agree with here in the near term but also a longer-term positive view as well as signified by your continued orders of jackups. And just given the backdrop that we all know about in terms of deepwater discoveries being far in excess of shallow, is the positive long-term outlook more a function of just the increased bifurcation we're seeing? Do you think we've finally reached the tipping point from an attrition standpoint? We'd just love to hear your thoughts on kind of the longer-term view on the jackup market.

I think you start with the fact that we still have a huge reserve base in shallow water. Even though a lot of those resources are mature, they take a lot of drilling activity. And if you look at the total rig years of demand in the jackup market compared to what it was a couple of years ago, you were up by 60 or 70 rigs. So we're at an all-time high in demand. And I think as long as the commodity price environment stays the way it is, the geologists with improved seismic are trying to squeeze more out of every reservoir, and it's a really bright outlook for the shallow water market. So I think that's the major driver. It's just fundamental demand and good drilling economics. The deepwater side has had the larger reserves additions because it's a less mature play, and it's very interesting. There's been a number of studies out lately, looking at the different theories on what zones and what structures to drill. And the exciting thing there is our wildcat exploration success is up more than double what it was 15 years ago, and the development work is again squeezing more and more out of every well. So also on the deepwater side, it's very positive, and our clients continue to discover new basins and new trends. So that's really the driver. You overlay all of that with the need for energy, and that's why we have a bright outlook.

Got you. And then specific to the attrition story on the jackup side. I mean, it's been talked about for quite a while. You have seen a pickup in rigs dropping out of the market. Do you feel like that is something that will continue? I mean, have we finally reached this tipping point that we've been talking about here for maybe 10 years or so?

That's a tougher one. If you look at the historical attrition, it has ticked up quite a bit. Some of that certainly is age-related. At the same time, with the really strong jackup market, we've seen a lot of the rigs that were on the beach, so to speak, come back into the market. So I think we'll continue to see rigs that are not well maintained struggle to economically compete. If you noticed, again, we talked about this, our fleet is all working. We've kept up with our rigs year in and year out, and it pays off. If you haven't done that, it's very expensive to keep an older rig working.

The next question comes from Rob MacKenzie of Iberia Capital Partners.

Kevin, I wanted to explore a topic for you related to your comments on the DS-2, but more specifically, kind of the emerging tender requirements, at least there in West Africa, but also around the world. And recognizing that this is 1-rig-specific contract, but how do you see kind of the trend towards rigs with more capable BOPs from pressure rating 5 rams, 0 discharge, all of the things you listed, affecting the market for, call it, modern rigs versus those that need some upgrading?

We've seen a bifurcation in the jackup market that's pretty well documented. The same thing happens in the floater market. And you see it maybe spurred also by going deeper, bigger hydraulics, the desire of our clients to get more out of each well, especially as day rates go up and cost go up. So that's the reason for bigger trees. I think the 5 ram minimum BOP on a DP rig is a little bit of extra safety issue, and that's with us to stay. And certainly, environmental requirements around the world, they've always been present in a lot of markets. And I think where you see it coming in places like West Africa, they're frankly catching up with the rest of the world. So none of this is a surprise. Again, I think that's why you've seen us invest in our fleet, try to keep it modern. That renewal strategy is in response to specifications always changing.

Right. And would you say West Africa is kind of the lagger there? Are there more regions, say, the Far East, to come with stricter specs coming up?

West Africa and the Far East, from a deepwater standpoint, are strong markets, but they are also less mature than the Gulf of Mexico or the Brazil markets. So certainly, as you have more discoveries and look at all the new countries, where you have new deepwater basins, so they've got to get their arms around what kind of specifications they need. And it's not to be ignored that our clients are all multinational clients. So what they're doing in one market, they're certainly going to consider doing it in other market. So you're right, that the trend is a global trend, and it's something that we have to keep up with.

And I guess, a final follow-up along those questions. One of the headlines in the wake of the recent U.S. Gulf blowout was, in essence, another BOP failure. With the government currently working on new BOP regs for the deepwater, have you heard anything or any talk that there might -- those might be stricter rather than more lenient and what would that look like, if anything?

Yes, this is Dan. I don't think anybody really -- we need to sit tight and let the appropriate authorities do and conduct a thorough investigation to determine what the cause of the accident is. One thing that we know from many, many years of experience with speculation about what caused incidents often times has nothing to do with what the incident in the end. So I think we need to just sit and wait and let the appropriate authorities conduct their investigation.

The next question comes from JB Lowe of Cowen and Company.

I just had a kind of similar question in regards to Brazil on the rig specifications that Petrobras is going to be asking for or you also said that a lot of the customers were going to be independents. What type of rigs are they looking for to do this, this -- needed to lease awards from this recent post salt sale?

The post- salt specs could be anything from moored semis. The water depths went from shallow water to deepwater, so they could be anything from a moored semi to a high-spec floater. All the pre-salt blocks are basically looking for the same spec rigs as we have in the deepwater Gulf of Mexico.

Right, okay. And turning to the Gulf, you said that the DS-9 and DS-10 were looking to be rigs that you could put in there for some requirements that are coming up. You didn't mention the DS-8 though. Where are you in terms of negotiations for that rig and where are you looking to put that?

We don't comment on ongoing negotiations, so I can't comment on DS-8.

The last question for today will come from Ryan Fitzgibbon of Global Hunter Securities.

Dan and Kevin, I believe in your prepared remarks, you outlined some planned downtime for next year. And Jay, it looks like upgrade CapEx for next year is shaping up where it is this year. As you look out at this juncture, would you expect your 2014 planned downtime to be at a similar level to 2013?

We haven't given that level of guidance for 2014. Well, obviously, typically, what we do is after we finish our budgeting process, we would give you that level of detail.

Okay, fair enough. And then, Kevin, in terms of Gulf of Mexico jackup day rates, you mentioned some of those contracts you signed there recently. How do you view pricing power in the back half of this year? You're already pretty close, if not above last cycle's high. Just curious how much momentum you think is left in that market for jackup?

Well, we have a continued undersupply of rigs given demand, and we see demand still growing. So our expectation is for us to continue to see a favorable market. It's hard to predict how far you can push it, given the economics, but at least the conditions are favorable.

Okay. And then one last one for Jay. Appreciate the Q3 cost guidance. Would you still expect full year cost to come in up 19% year-over-year, so $2.4 billion?

We just provided you an update in terms of our outlook for a third quarter contract drilling expense, but we haven't provided it for 4Q or the full year. We'll give you the fourth quarter when we have our third quarter earnings call.

Okay. If there are no more questions, thank you, everybody, for your interest. We greatly appreciate it. And we'll talk to you on our next earnings call. Thanks very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.