Valaris Limited (VAL) Q1 2014 Earnings Report, Transcript and Summary

Sean P. O'Neill - Vice President of Investor Relations & Communications Daniel W. Rabun - Chairman, Chief Executive Officer and President David Ethan Hensel - Senior Vice President of Marketing James W. Swent - Chief Financial Officer and Executive Vice President Steven Joseph Brady - Senior Vice President of Western Hemisphere Patrick Carey Lowe - Senior Vice President of Eastern Hemisphere John Stokes Knowlton - Senior Vice President of Technical

Robin E. Shoemaker - Citigroup Inc, Research Division Ian Macpherson - Simmons & Company International, Research Division Gregory Lewis - Crédit Suisse AG, Research Division Robert J. MacKenzie - Iberia Capital Partners, Research Division Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division David Smith Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division Darren Gacicia - Guggenheim Securities, LLC, Research Division John Booth Lowe - Cowen and Company, LLC, Research Division Todd P. Scholl - Wunderlich Securities Inc., Research Division

Good day, everyone, and welcome to Ensco plc's First Quarter 2014 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.

Welcome, everyone, to Ensco's First Quarter 2014 Conference Call. With me today are Dan Rabun, CEO; Mark Burns, our Chief Operating Officer; Jay Swent, CFO; David Hensel, our Senior Vice President of Marketing; as well as other members of our executive 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 that the company undertakes no duty to update forward-looking statements. As a reminder, our most recent Fleet Status Report was issued on April 16. 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 for the first quarter. David will then comment on the state of our markets, and Jay will review our financial results and outlook for the second quarter. Starting with highlights from the first quarter. We achieved 96% operational utilization, a major improvement from 90% last year and our best performance over the last 8 quarters. Our contracted jackups rigs led the way with 99% operational utilization for the first quarter. Our 8500 Series rigs also had 99% operational utilization, highlighting the many benefits of our standardization strategy. This improvement in our operational performance is a reflection not only of equipment and process standardization, but also our efforts to further reduce unplanned downtime by working even more closely with our vendors, our customers, regulatory authorities and industry groups, to improve the quality and reliability of equipment. While unplanned downtime has been a significant issue for our industry over the last few years, we are seeing consistent improvements on our operational performance from our efforts and initiatives. Our safety performance, as measured by our total recordable incident rate, was the best ever for our first quarter at 0.37, building up on our record-setting performance in 2013. There is nothing more important to us at Ensco than the safety of our employees. We believe that operational and safety performance like this is what differentiates Ensco's contract drilling services versus our competitors. And during the first quarter, we received the #1 total customer satisfaction ranking for the fourth consecutive year from Energy Point, an independent research firm. The technological capabilities of our jackup fleet took another step forward during the first quarter as ENSCO 120, the first of our 4 jackups in our ENSCO 120 Series, commenced drilling operations in the North Sea over a month ago. Operations have gone very well, and there has been almost 0 operational downtime to date. This level of performance is a real complement to the careful planning of our employees in the start-up of this rig. While we commenced our initial contract later than expected due to a historically harsh weather pattern in the North Sea that delayed our ability to get on location, the delay actually underscores one of the major advantages of our ENSCO 120 Series rig design: that is, once these rigs get on location, our patented cantilever advantage technology that allows customers to drill large multi-well programs more efficiently with fewer rig moves, which provides substantial cost savings to customers over time. As a reminder, the first 3 ENSCO 120 Series rigs were contracted well ahead of their delivery dates, and we are already working on follow-on contracts commencing in late 2015 and 2016. Replicating the approach used to create the ENSCO 120 Series rig design, which incorporates detailed market analysis, as well as technologies that we think can differentiate our rigs and give us a competitive advantage, we recently ordered 2 ENSCO 140 Series jackups. These rigs will be able to drill in most of the shallow water basins around the world. However, we believe they will generate especially strong customer interest in the Middle East with their being built by Lamprell in their newest shipyard in the United Arab Emirates. ENSCO 140 and ENSCO 141 will be significantly enhanced versions of the LeTourneau Super 116E jackup design. These rigs reinforce our standardization strategy since the equipment packages will match much of the proven technology used across our premium jackup fleet. The rigs will offer major cost advantages for our customers. Features like enhanced crane capability, liquid mud storage and living quarters with 140 beds will translate into significant logistics efficiencies and expense savings, plus these rigs will also feature our patented cantilever advantage technology that is on our ENSCO 120 Series jackups. We have worked extensively with Lamprell over the years on a major upgrade projects for our jackup fleet, and we're confident ENSCO 140 and ENSCO 141 will be delivered on time and on budget. In total, we now have 8 rigs under construction that will grow our business well into the future. Similar to our ENSCO 120 Series and ENSCO 140 Series jackups, our newbuild drillships are designed to provide customers with significant cost efficiencies. Features like heave compensated cranes, riser storage in the hull that gives customer more available deck space and fully retractable thrusters and a streamlined hull design for greater fuel efficiencies, save our customers money on their well programs. These features are particularly important given the customers' increasing focus on capital discipline and cost management. We believe the value-added enhancements to our newbuild rigs will continue to draw interest from customers and differentiate Ensco from competitors. An example during the first quarter was our contract with ConocoPhillips for ENSCO DS-9, a very competitive bid that Ensco won. ConocoPhillips has been a long-term customer of our jackup rigs, and we look forward to growing our ultra-deepwater business with this important customer. Similarly for ENSCO DS-8, we expect to announce an initial contract soon for a multi-year term with an important customer based primarily on the significant advantages that our rig design provides. We also continue to make good progress in the divestment of our older assets in an orderly and disciplined manner rather than using a spin-off or other transformational transaction to continue to high-grade our fleet. Since the beginning of this year, we have sold 3 additional rigs, bringing our total to 14 rigs since 2009. Before I turn it over to David, I'll make some high-level comments regarding the markets. First, we still believe the recent downturn in the floater market will have a relatively short duration, and our recent order of 2 ENSCO 140 Series jackups reinforces our commitment to the shallow water market, where we continue to see positive customer demand. Second, the vast majority of the revenue outlook we provided for 2014 on our last call is supported by contracted revenue backlog, so Ensco is very well positioned for 2014. And third, I think Ensco is better positioned than any offshore driller to weather any softness we see going forward. As an example, we recently contracted an ENSCO 8500 Series rig at a lower rate of $375,000 a day for a short-term contract. Given the advantages of our rig design, standardization and cost structure, plus the economies of scale of our shore-based operations, the margin we expect on this contract is still well above the average of what many of our competitors earn for their ultra-deepwater fleets. Also, given our lower-than-average newbuild cost for these rigs, the same is true for returns on capital. And as you might recall, current rates are more consistent with rates we anticipated than when we made our initial investment decision in these rigs. As a reminder, during the past year, our 8500 Series semi set the new record for drilling the deepest well ever in the U.S. Gulf of Mexico, so customers receive exceptional drilling services at a great value. Finally, let me conclude by saying that the CEO search is very much on track with the timeline that our board set out when we made our announcement in November. We anticipate a very smooth transition as the new CEO will take the reins of the company that I firmly believe is the best offshore driller in the market. Now I'll turn the call over to David.

Thanks, Dan. This morning I will present our outlook for the floater and jackup markets and recap some of our contract signings that occurred during the quarter. Let me start by saying that we continue to believe customer demand going forward will be positively influenced by the following: stable commodity prices that are well above breakeven levels for our customers to continue drilling; healthy E&P spending that is necessary for customers to achieve their production targets; appraisal and development drilling that will follow successful new discoveries over the past few years; favorable activity in terms of new offshore lease sales, including the most recent round in the U.S. Gulf of Mexico; and longer term, the emergence of new markets, such as Mexico, in terms of deepwater opportunities. We saw continued customer demand for our floaters and jackups during the first quarter with a slight increase in tenders and inquiries relative to the fourth quarter of 2013 levels. Nevertheless, we have seen the floater market soften this year, including some floaters going out of lease recently in certain regions as the supply of new rigs coming into those markets and delays in customer drilling programs have affected the balance of supply and demand. However, the jackup market, in general, has remained fairly strong. Now as we look at specific regions, the West African market continues to show increasing customer demand across several countries, including Angola, Ghana and Nigeria. There are currently 5 open tenders for multi-year terms, and we have bid ultra-deepwater drillships and semisubmersibles into these opportunities. The announcement of regulatory approval for block 32 offshore Angola is a very positive recent development. We expect that more opportunities will emerge in the region later this year and into 2015. In addition, several operators have exploration programs planned in East Africa and South Africa. We anticipate that many of the new discoveries in East Africa will result in significant development programs over time. We also see open tenders for 2 to 4 jackups in West Africa for terms of 1 year or more. Turning to the North Sea. Customer demand for jackups remains strong. During the first quarter alone, we added 4 years of backlog in the region. We signed a 3-year contract with Premier for ENSCO 100 at $185,000 per day, up $20,000 from the previous day rate. And Maersk exercised the 1-year option for ENSCO 71 in the low $170,000 per day range. At this time, we only have 1 jackup, ENSCO 72, with 2014 availability in the North Sea, and we expect Maersk will exercise an option to work the rig into 2015. ENSCO 120 recently commenced its initial contract with Nexen, and ENSCO 121 and 122 will commence their initial contracts later this year. We continued to have strong customer interest for ENSCO 123, our fourth ENSCO 120 Series rig, which is not scheduled for delivery until 2016. We are already having conversations with customers for ENSCO 120 and ENSCO 121 when they finish their initial contracts in late 2015 and 2016, respectively, another example of strong customer interest in the operational efficiencies of our ENSCO 120 Series design. Also, in Europe, we see opportunities for jackups offshore Italy. In the U.K. floater market, supply and demand continue to remain balanced, and we believe there will be opportunities for incremental harsh environment rigs. ENSCO 5004, a 1,500-foot water depth floater, is in the Mediterranean undergoing a shipyard project before commencing a multi-year contract in the third quarter of this year. We believe that there are opportunities for additional floaters in this market, including Egypt and Israel. In the Middle East, on the jackup side, we executed a 1-year extension to the Saudi Aramco for ENSCO 58. We are optimistic that Saudi Aramco will renew all of their jackups with contracts rolling over in 2014, including 5 of our rigs. We see additional opportunities for up to 8 rigs from other customers in the region, particularly in the UAE for high-standard and high-spec rigs for multi-year terms. As Dan mentioned earlier, we ordered ENSCO 140 and ENSCO 141 to meet customer demand for our differentiated technology and contract drilling services, and our primary target market is the Middle East. These rigs will include our patented cantilever advantage technology, which has been a major driver of customer interest for ENSCO 120 Series rigs, plus other design features that will provide cost advantages for customers and Ensco. In India, ONGC has a tender outstanding for up to 11 jackups. We expect most or all of these requirements are against incumbent units, but this tender may absorb 1 or 2 incremental rigs. Opportunities also exist for jackups with other customers in the region. We've seen floater demand in India as well. The Asia Pacific jackup market remains balanced. We signed a 3-year contract with PTTEP in Thailand for ENSCO 108 and an increase of $20,000 over the previous day rate. We expect that customer demand in Malaysia, Thailand, Vietnam, China and Australia, as well as a recent lease sale in Myanmar, will lead to additional rig requirements. However, we expect the jackup market in the Asia Pacific region to remain competitive as uncontracted newbuilds increase rig supply in the region. On the floater side, there are several contracting opportunities, including programs in Australia, Indonesia, Myanmar, Vietnam and South Korea. We are in advanced discussions with a customer for ENSCO 5005, which will finish its shipyard upgrade in Singapore in June. In the U.S. Gulf of Mexico, on the jackup side, we signed a 4-well contract with ExxonMobil for ENSCO 86. We also contracted ENSCO 90 with Talos for 4 months. Both rigs were contracted at the top end of day rates for comparable units in the market. While we expect the jackup market in the U.S. Gulf to remain largely imbalanced, we have seen terms on new opportunities shorten in duration, which may put pressure on rates and/or create some gaps in contracting for certain rigs in the market. With respect to floater activity in the U.S. Gulf during the first quarter, we signed a 3-year contract with ConocoPhillips for ENSCO DS-9 at $550,000 per day, plus a mobilization fee and cost escalation. ConocoPhillips, a long-term customer of Ensco's jackup rigs, is a new floater customer. We view ConocoPhillips as an important strategic customer, especially since they have been increasing their lease holdings in important deepwater basins, particularly in the U.S. Gulf of Mexico and Angola, 2 of our largest regions. We also added term to 3 of our 8500 Series rigs that have rollovers in 2014. We signed a 3-well contract with Talos for ENSCO 8502 at $530,000 per day. Anadarko and Eni exercised the 1-year option to extend the contract for ENSCO 8500 into September 2015, and we contracted ENSCO 8505 with a new customer, Deep Gulf Energy, on a program that is expected to take approximately 6.5 months. Discussions are ongoing with customers for ENSCO 8501, ENSCO 8502 and ENSCO 8503 for both in the U.S. Gulf, as well as other regions, such as West Africa, the Mediterranean and Southeast Asia. In Mexico, Pemex finalized an agreement to add 5 additional jackups, including 2 newbuild rigs. We expect Pemex to continue to grow their jackup fleet. And as I mentioned earlier, energy reform in Mexico is expected to open the market to more floaters in the coming years. Moving to Brazil. While Petrobras looks to increase presalt drilling, they are also focused on maintaining production in the Campos and Santos Basins, which require work over units. Petrobras had an outstanding market inquiry for 1 or more rigs that we expect will absorb incremental rig supply. We also expect them to come back to the market for at least 1, if not more, 2,400-meter water depth rigs. In addition, we understand Petrobras is still negotiating to renew ultra-deepwater rigs with contracts expiring in 2015. An encouraging development is that we have seen tenders and inquiries from customers other than Petrobras, many of whom are already major customers. This activity relates to leases that were acquired during the 2013 bid rounds. We expect more opportunities to arise. We believe that this positive development will result in additional future prospects in Brazil. Regarding the worldwide order book for floating rigs, we count 22 competitive new rigs to be delivered before the end of 2014, of which 14 are uncontracted. At this time, we believe at least 4 of these uncontracted rigs are already committed. As previously mentioned, we contracted ENSCO DS-9 during the first quarter, and we feel confident that we will finalize the contract for ENSCO DS-8, our only remaining floater to be delivered in 2014. The newbuild order book for competitive jackups shows 27 to be delivered by year end 2014, of which 22 are uncontracted. We believe at least 3 of these uncontracted rigs are already committed. While customer demand remains positive, the presence of uncontracted newbuild deliveries has created supply pressure in the market, which we believe will result in an increasing number of older jackups and floaters being retired. Since the beginning of 2011, 36 jackups have been removed from the global supply. On average, these rigs were 30 years of age. Among floating rigs over the same period, 3 rigs with an average age of 36 years have been removed from the global supply. Another 15 floaters are currently cold stacked. And with an average age of 37 years and water depth ratings less than 5,000 feet, the cost to reactivate these rigs may lead to their retirement. There are an additional 11 warm stacked floaters with an average age of more than 30 years that may eventually become cold stacked, and less capable floaters that are challenged to find contracts in the current environment may soon become warm stacked as well. As a reminder, 55% of the global jackup fleet and 37% of the floater fleet are more than 30 years old, and we believe that many of these rigs, including some of the cold stacked and warm stacked floaters that I just mentioned, are candidates for retirement. Now let me turn the call over to Jay.

Thanks, David. Today, I'm going to cover highlights of our first quarter results, our outlook for the second quarter and our financial position. Now let's start with first quarter results versus prior year. As noted in our press release, certain discrete tax items influence first quarter 2014. Excluding these discrete tax items, our earnings would have been $1.31 per share. Prior year earnings were $1.36 per share. Total revenue for the quarter was $1.19 billion, up 3% from last year. This was driven by a 14% increase in our total average day rate to $239,000, which was partially offset by a decline in total utilization to 78% from 86% a year ago. Utilization measures the amount of time in days that a rig does not receive day rate due to a combination of factors, including: uncontracted time; planned downtime related to upgrades and surveys; and unplanned downtime caused purely by operational matters, such as mechanical issues. The decline in utilization year-to-year was driven solely by nonoperational factors, primarily uncontracted rigs and planned upgrade projects. In fact, our operational performance improved significantly as highlighted by our 6 percentage point increase in operational utilization, which adjusts for uncontracted time and planned downtime to 96%. Floater revenues increased 3% to $741 million from the prior year due to the addition of ENSCO DS-7 to the active fleet, a full quarter of operations of ENSCO DS-6 and increasing day rates for several other floaters. Year-over-year, the average day rate for the floater segment grew 18% to $447,000. Reported floater utilization declined to 68% from 83% a year ago due in part to planned shipyard upgrades. As noted in our press release, ENSCO 5004 and ENSCO 5006 will be completing shipyard upgrades in preparation for multi-year contracts commencing later this year. 3 rigs, ENSCO 8503, ENSCO 5002 and ENSCO 5000, that had operated a year ago were uncontracted for much of the first quarter. Operational utilization for the floater segment improved significantly to 94% for the quarter compared to 85% a year ago when we experienced unplanned downtime related to replacing connector bolts following a vendor notice from GE. Jackups segment revenues grew 5%, primarily due to a 12% increase in the average day rate to $131,000. Reported utilization for the jackup fleet declined to 84% from 88% last year, as 10 jackups had planned downtime for upgrades or inspections compared to 7 jackups in the first quarter of 2013. Operational utilization for the jackups was 99%, an excellent performance that equaled last year. Contracts of backlog for our jackups reached a record $2.9 billion at quarter end or more than $68 million of backlog per rig on average, a 12% increase from a year ago. As noted in our press release, gains from the sale of 2 jackups, ENSCO 69 and the Wisconsin, reduced first quarter contract drilling expense by $24 million. Adjusted for this, total contract drilling expense increased $67 million year-to-year, mostly due to the addition of ENSCO DS-7 and a full quarter of operations from ENSCO DS-6, as well as an increase in unit labor costs and higher repair maintenance costs. Depreciation expense increased $11 million to $160 million due to our growing active fleet. General and administrative expense for the quarter was $38 million, unchanged from last year. The effective tax rate was 17% for first quarter 2014. As noted in our press release, tax expense included $13 million of certain discrete items and $5 million of tax expense related to a gain on the sale of ENSCO 69 and Wisconsin. Looking ahead, we expect our effective tax rate for full year 2014 will be approximately 15%. Our outlook includes the impact of first quarter results and recent proposed changes in U.K. tax law that are scheduled to become law later this year. Now let's turn to the second quarter outlook. Total revenues are expected to increase about 4% compared to the first quarter 2014. We will have a full quarter of operations for ENSCO 120 and a partial quarter for ENSCO 121. We anticipate second quarter 2014 total contract drilling expense will increase approximately 2% from $604 million in the first quarter. This comparison is influenced by the previously mentioned $24 million pretax gain on sale of ENSCO 69 and the Wisconsin during the first quarter and a $10 million pretax gain on the sale of ENSCO 85 in the second quarter. Adjusted for these gains, which reduce contract drilling expense in both quarters, contract drilling expense for the second quarter is expected to be in line with the first quarter. Depreciation expense should increase by approximately $4 million due to the addition of ENSCO 120 and ENSCO 121 to the active fleet. G&A expense will be roughly in line with $38 million in the first quarter. Other expense is anticipated to be approximately $33 million, comprised of $36 million of interest expense, partially offset by interest income. Our current outlook for 2014 capital spending is forecast to be $2.1 billion. This includes $1.2 billion in newbuild CapEx with final payments for ENSCO 122 and ENSCO DS-8, as well as milestone payment for ENSCO DS-10 and the initial payments for ENSCO 140 and ENSCO 141, plus $570 million for rig enhancement projects and $300 million for sustaining projects. As a reminder, more than 1/3 or approximately $200 million of our rig enhancement CapEx will be funded by our customers. We project newbuild CapEx beyond 2014 of $1.6 billion, approximately $1.2 billion in 2015 and the remaining $400 million in 2016, as we deliver our final rigs under construction. Newbuilds support the future growth of our business and these rigs are a key component of our high-grading strategy. Our newbuild program now consists of 8 rigs, 5 premium jackups and 3 ultra-deepwater drillships. Continuously high-grading our fleet is a key reason we were able to earn the #1 in customer satisfaction rating for the fourth year in a row. We have delivered 12 newbuilds since the beginning of 2010, including 5 of our ENSCO 8500 series semisubmersibles, 5 DP3 drillships and 2 of our ENSCO 120 Series jackups. Sales of less capable rigs are another important part of our high-grading strategy. We sold ENSCO 69 and the Wisconsin during the quarter, as I mentioned earlier. We also sold ENSCO 85 last week for $64 million, well above its book value of $54 million. Since 2010, we have sold a total of 14 rigs at a pretax gain of approximately $90 million, and we've reinvested the proceeds back into our fleet. We ended the first quarter with a strong financial position, including $10 billion in contracted revenue backlog, which provides us with significant visibility into our revenue outlook for 2014 and 2015. We had a 27% leverage ratio. We had $173 million of cash and short-term investments and $2 billion of fully available revolving credit facilities. In summary, we continue to have a very strong financial position that fully supports our dividend commitment of $3 per share annually. By virtue of doubling the dividend last year, we now have one of the highest dividend yields in the S&P 500. We believe that our dividend yields, combined with the potential for growth from 8 newbuild rigs and our strong balance sheet, makes Ensco a compelling investment. Now I'll turn the call back over to Sean.

Okay. Operator, you may now open it up for questions.

[Operator Instructions] Our first question is Robin Shoemaker from Citi.

I was wondering, David, if the DS-8 contract or likely contract you mentioned, would the timing of that would be such that the rig could start operations in 2014, or should we think about it starting sometime after that?

It's unlikely that, that will start in 2014.

Okay. On another topic, there was some news recently on the ENSCO 8506 in the Gulf of Mexico incident or something. Is that rig in operation or...

Hi, Robin. This is Steve Brady, the Senior Vice President of Western Hemisphere. ENSCO 8506 is operating. We did have a brief incident. We were hit by some weather. And the rig briefly off the clock, but it is back on day rate now and has been working ever since. So it was actually a pretty minor incident that got reported.

Okay. And just one other thing for me. David, I think you mentioned the Gulf of Mexico jackup market being soft and with some pressure on rates. Is -- do you have any kind of backdrop or kind of broader context for that? Is it something that's just occurred here recently? And is it perhaps due to some changes in property ownership, some transactions that have occurred? Just curious as to what -- how you would put that in context.

Well, Robin, I don't think I described it as being soft. I think it's a little bit different than it has been. The pressure that we're seeing, if you would call it pressure, is really more associated with the impending hurricane season and the locations that are accessible and supportable during hurricane season. You mentioned that the change in properties. That is 1 factor, but it doesn't seem to be affecting us significantly.

Our next question is Ian Macpherson from Simmons. Ian Macpherson - Simmons & Company International, Research Division: Can you talk to us about your bidding strategy for the 8500s with regard to your willingness to stack one or more of those rigs and preserve a day rate more or maximize utilization at whatever price? That's sort of the broad question. And then also could you talk about how the international bidding opportunities for those rigs are shaping up? And what type of contract term visibility you would need to justify moving one or more of those rigs out of the Gulf?

Well, our contracting philosophy is really, we look to combine day rate operating costs and other factors to maximize our returns, and we've been able to do that successfully over the years. We are in a fortunate position in the Gulf of Mexico, in particular, to be able to operate those rigs at lower rates than what the market has previously supported and still generate superior returns. With respect to international opportunities, we're looking at opportunities, primarily in West Africa and Mediterranean and Brazil. With respect to the amount of term that would be required, I would say it will depend on the specifics of that particular opportunity. But in general, maybe a year or more. Ian Macpherson - Simmons & Company International, Research Division: Okay. And follow-up, I guess, what is the outlook for 1 or more year term contract opportunities right now in the various markets you mentioned? And then any update with regard to the 7500, and whether that rig has different opportunities in Brazil to get to work on later this year or next year?

There are several opportunities of 1 year or more, both in West Africa and in the Mediterranean. So we're actively looking at those. With respect to the 7500, we continued to have extended and substantive conversations with a customer for the 7500 in Brazil, and we're also actively marketing her for other international prospects.

Our next question is Greg Lewis, Crédit Suisse. Gregory Lewis - Crédit Suisse AG, Research Division: In just sort of keeping with the thought process behind continually renewing and upgrading the fleet, you mentioned previously in the prepared remarks about strength and opportunity in the North Sea potentially for mid-water -- new mid-water equipment. Does it make sense at a certain point for Ensco to get involved, and if they are weighing in the North Sea with potentially placing some mid-water semi orders for that market?

Yes. Greg, this is Carey Lowe. You're right. There is potentially an opportunity for harsh environment semi in the North Sea. We're watching that very carefully, and we're looking at various designs. Gregory Lewis - Crédit Suisse AG, Research Division: Okay. And then just -- and thinking about the constant renewal process, and you had placed the 2 newbuild jack orders. We're hearing that there's opportunities for rig resales out of the yards. Is that something that Ensco is actively pursuing, or it's simply, yes, there's -- there are new rigs being built at these yards but these aren't the type of rigs that Ensco is looking for.

Yes. They're generally not the rigs that we're looking for. We're -- part of our philosophy has always been the standardization of equipment and the asset throughout the fleet. And we evaluate all of these opportunities, but I can't say that we've found a whole lot that we're interested in.

Our next question is Rob MacKenzie, Iberia Capital Partners.

Actually, I wanted to follow up a little on the last question, if I may, guys. Once you get the DS-8 under contract, what would be the thought or the appetite perhaps for a further spec newbuilds in the probably DS-11, the later delivery to use some of the excess free cash on the out years?

I think, at this point, Rob -- this is Jay. We had an option on DS-11. We let that lapse. And I think, for the time being, we're on the sidelines, but always keeping an eye on the market obviously.

Okay. So then coming back to your comments about the methodical high-grading or upgrading of the fleet, would it be more likely then to see further additions along the jackup side than the deepwater side?

Well, I mean, you've certainly seen that of late, and I think we feel like we've got a lot in the pipeline right now. And the age and complexion of our jackup fleets says that we're going to always be selling a few rigs and buying a few rigs every year. So I think you're going to always see us making investments in that fleet. Our floater fleet's a lot newer. And so obviously, probably less investment there in the near term.

Okay. And that leads me to my final question, Jay. So a fair amount of comments there on the call about the age of the floater and the jackup fleet, potential for retirements there. What is Ensco's view about participating either on the sale of retirement of your floater fleet? You've been pretty active in the jackup side, but not so much on the floater side. Any kind of view as to what -- how you stand on the older assets in your fleet?

Well, I think we, like everyone else, will certainly look at some of the old or the really older rigs and the mid-water rigs that are less competitive. I think the reality is if you look at the number of floaters that have been sold in the last several years, the number is pretty low. So trying to figure out where there is a market and how to access it, I think, is going to be a problem for everybody. But clearly, we've -- we're looking at that.

Our next question is Clayton Kovac from Tudor. Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: So first question, are you guys seeing any increase in sublet activity on any of your contracted floaters?

No. I wouldn't say relative to what we've experienced over the last 12 to 24 months, we're not seeing an increase, no. Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Okay. And then second question, it seems like there's been a lot of talk about incremental rig demand in West Africa, but it just hasn't materialized. So what's your take on the root cause of the bottleneck in deepwater rig tenders for the region?

Well, the root cause, things always take longer than we would like them to in West Africa. And I think that's a number of different reasons, whether it's regulatory approval, getting final investment decision approvals for the operator partners -- operating partners. Those are probably the 2 primary reasons.

Our next question is David Smith, Heikkinen Energy Advisors.

A couple of quick questions regarding the 8500 Series, in particular. If the client wanted 1 of those rigs in saltwater depth, what's kind of the minimum depth that you would feel comfortable operating in DP mode? And second, if the client really wanted the 8500 rig, but needed it to be moored, what would be the all-in cost in superior time to accommodate that?

This is -- David, this is John Knowlton. So the water depth kind of varies a lot -- quite a bit depending on where you're operating, but somewhere around 1,500 foot is sort of the minimum water depth for DP. But it can be stretched either way depending on the weather. We've also -- can put more up the 8500 series, and we are looking at that, and there is a potential to do that. And probably -- we'd rather not talk about what the total cost is, but it's not significant money to do it.

But in terms of maybe downtime preparation, I guess that might be the bigger factor, and how could we think about the out-of-service time to accommodate that?

Yes. There would be some out-of-service time. But again, it's not really very significant, a matter of months, few months.

Okay. I appreciate that. And a follow-up question was on the ENSCO 5000. I thought I heard from the last call that you had stacked that rig in 4Q 13. The fleet status -- full service status was 1 stacked. I wanted to ask, how should we think about that rig in terms of marketability and cost compared to the other mid-water rigs?

Well, the rig is stacked. And while we continue to market it, it's a challenging market for that particular rig. So that's where it stands.

So incurring, generally, full crew cost of -- et cetera that you normal incur?

No, no. We are not incurring full cost -- full crew costs.

Our next question is Matt Conlan, Wells Fargo.

Just a little bit clarification on the DS-8, which you hope to have a contract announced soon. That rig, I believe, has been committed for some time. When you do announce the contract, will that day rate reflect the current market conditions, or was that rate agreed to a long time ago? Could you just help us put it in proper context?

Well, Matt, good morning. As usual, we're not going to comment on the day rates. So just leave it at that.

Can you comment on the timing of the day rate agreement?

No. I'd rather not. Thank you.

Our next question is Darren Gacicia, Guggenheim.

So in your initial comments, if I -- just to make sure I heard the numbers right, we talked about the floater downturn maybe having a shorter duration. And I believe you said there are probably about 11 floaters subject to potential cold stacking, which kind of from the follow-on comments seems like cold stacking means they may permanently go away. If that's happening, and we're thinking about the market balance, what does that mean for the rig? If -- and you're seeing kind of more activity starting to come or potentially coming in the back half of this year and the next. When does the market turn in terms of the balance? And what's the order of magnitude that we need to see happen to make that turn? Because if you have 11 rigs going down, I don't know where do you think the theoretical oversupply is. What's the turning point?

Well, only time will tell, Darren, how long the current dynamic -- current market dynamics will be in play. As we said, we still have the perspective that it's shorter term in nature. The current fundamentals are still strong. So with respect to the rigs that will ultimately be stacked and/or retired, again, time will tell there with respect to what our competitors will do on those rigs.

Does that mean -- do you think that the rates -- that rates firm and maybe strengthen in '15? Is that where that kind of -- where that leads us? Because it seems like a lot of the questions on the call, and there are good questions about kind of what the near-term contracting impact is that of having kind of choppy market's one thing, but understanding maybe kind of the exit rates and maybe that coming in '15 is probably -- is equally as important. And that's what I'm trying to sort of identify in terms of what the thought process is, especially if you think about duration of near-term contracts and how to play that into the market.

Well, I think -- Darren, this is Jay. The problem is nobody really knows the answer to this question. And we can speculate as much as anybody else, but the reality is we don't know. I think the one thing that we feel really good about is that we -- as David said, we have a real cost advantage in all markets that we operate in and, certainly, with the 8500 Series fleets. And so at the moment, we are focused on utilization, keeping those rigs working and generating good rates of return. And as we see the market right now, we feel very comfortable about our ability to continue to generate good profitability with those rigs. And the market will turn when it turns, and we will react accordingly.

Yes. Just a couple of points on perspective. I don't think we've ever seen a sustained drop in rates for deepwater rigs with probably commodity pricing. So as you see a moderation in day rates, you will probably see operators take advantage of that and snap up rigs. And you could see -- you could visualize a scenario where this could be a very short duration.

Great. Well, one follow-up. Just on the -- it seems like you're -- all of the commentary is moving a little bit on the opposite direction on the jackup side given some fear with the kind of overhang of newbuilds coming to market. Is that sort of a cautionary tone that we should be reading into when we think about what rates may get printed over the next 12 months on the jackup side?

No, not necessarily. Again, time will tell with respect to what the -- what rates the market will support. But certainly, we're keeping an eye on the supply side with the continued delivery of units on the jackup side.

Our next question is J.B. Lowe, Cowen and Company.

You guys have given guidance for full year 2014 on your last conference call. Are you guys kind of sticking with those numbers that you provided a couple months ago?

Well, I think we've given some guidance -- updated guidance with respect to the tax rate. So that's going to have an impact on the full year versus what we've said before. And I think we're certainly a little bit light on revenue. So I think you can expect that we're down a bit, but not dramatically.

Okay. And in those numbers, what kind of assumptions are you making for the rigs that you have that are currently stacked? Are you assuming that some of those will go back to work? Are you assuming that all of those stays stacked for the remainder of the year?

A little bit of both.

Okay. And then on the DS-8, does that -- if the project of that rig gets signed too, it doesn't start until later in 2015. Would you guys be willing to look for -- stick in the short-term contract in between the delivery and the start-up of -- maybe it's multi-year term?

Certainly, we would. J.B., this is David. Yes. Certainly, we would.

Okay. And then just lastly, I'm just curious as to how you guys are looking at the South American market outside of Brazil. I know there are some opportunities in Uruguay and Colombia. Have you guys been hearing any sort of pickup in activity from maybe some other countries outside of Brazil down there?

Yes, we are, and we're looking at opportunities in various countries. If you remember, several years ago, we sent a rig down to French Guiana. So we're are looking at all of the countries in South America.

Our next question is Todd Scholl, Wunderlich Securities.

I just had a question relating to your decision to build the 140 Series jackup. You guys had previously in an analyst event kind of talked about building 130 Series jackups. It seemed like they would be more appropriate -- built for appropriate in the North Sea. What was the decision like -- what was the process that you guys kind of went through to decide to build rigs more suited for the Mid East versus the North Sea, particularly given the fact that you do have a number of rigs that are going to be rolling off contract in the next 2 years or so in the Mid East, where you seem to have a little bit more term with the existing rigs in North Sea?

Right. I think the reality is, the 130 Series is a great design, but we haven't found a lot of customers that really have enough need to justify building them yet. And we're still in touch with a lot of customers around that, so I wouldn't say we're never going to build one. But I think we felt like given the breadth of the market in the Middle East and the appetite in Saudi Aramco and other customers there, that having some renewed rigs to address that market was going to be a real competitive advantage for us. And more of one than a couple of 130 Series rigs might be in the North Sea at the current moment. But we're still talking to customers about that rig.

Okay. And as far as the new rigs, the 140 Series rigs, should we think of those as going to be -- as rigs being incremental to the fleet? Or should we think of them as probably being replacement for some of the older rigs you have in the Middle East?

I think, over time, they play out as replacements.

Okay. And then one last question kind of on the Middle East. You guys have said that the 5 jackups that you have that are rolling off contract this year with Aramco, you're already in discussions, and you're hopeful that those rigs will be retained. Are you thinking that you'll actually be able to push pricing with those rigs? Or should we expect those rigs to remain at around the same levels?

Well, again, Todd, we don't typically comment on rates.

This concludes our question-and-answer session. I would like to turn the conference back over to Sean O'Neill for any closing remarks.

Thank you, operator, and thank you, everyone, very much for your interest in Ensco. Have a fantastic day.

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