Valaris Limited (VAL) Q1 2015 Earnings Report, Transcript and Summary

Welcome to Ensco Plc's First Quarter 2015 Financial Results Conference Call. [Operator Instructions]. I will now turn the conference 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 2015 conference call. With me today are Carl Trowell, CEO; Mark Burns, our Chief Operating Officer; Carey Lowe, EVP; 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. 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, we issued our most recent fleet status report on April 15. Now, let me turn the call over to Carl Trowell, CEO and President.

Thanks, Sean and good morning, everyone. First quarter results were highlighted by strong operational safety and financial performance. As noted in our Press Release, we had 99.6% operational utilization for jack-ups, record safety results and an 18% increase in earnings per share, adjusted for expenses to refinance debt. Our offshore crews and onshore personnel are to be commended for this performance which is consistent with our number one ranking in customer satisfaction. Strong rig utilization drove our top-line results, along with fleet high-grading since last year, with the addition of three new ENSCO 120 Series jack-ups and three upgraded floaters that rejoined the operating fleet. Disciplined expense management also contributed to our bottom-line results in the first quarter, as Jay will describe in great detail. Looking ahead, we believe there are opportunities for significant incremental cost savings, as we described on our last call. I'm pleased to report that we're on track to achieve a 9% reduction in unit labor costs for offshore workers, plus $27 million in annual savings from streamlining our onshore workforce beginning in the second quarter of this year. We're also reducing costs through expedited stacking of rigs. As previously reported, we're completing the preservation process for ENSCO 8501 and ENSCO 8502. We expect the rigs will be cold-stacked by the end of the second quarter. These steps will reduce operating costs until market conditions improve, at which time we will reactivate the rigs. As a reminder, we believe this is a prudent approach, since six out of seven of these rigs have uncontracted time this year, primarily in the U.S. Gulf of Mexico, where there is a significant supply/demand imbalance. ENSCO 8501 and ENSCO 8502 just happen to be among the first six gen floaters in the U.S. Gulf rolling off contract this year and we expect other drillers will be making similar stacking decisions. Finally, in terms of our expense management plans, we have also been working with vendors and suppliers to lower costs and improve equipment reliability. Turning now to capital management. We further improved our financial position by refinancing near-term debt maturities with 10- and 30-year notes that we issued during the first quarter. As a result, we now have no significant debt maturities until the second quarter of 2019. Both S&P and Moody's recently reaffirmed our investment-grade credit rating and we continue to have significant liquidity and capital management flexibility with a fully available $2.25 billion revolving credit facility, $1.6 billion of cash and short-term investments on the balance sheet and revenue backlog of about $8.4 billion. Now, in terms of the market, as we noted on our last call, most customers are reevaluating their portfolios in light of lower commodity prices. Drilling demand in deepwater remains very low and there have only been a handful of new floater fixtures announced so far this year. For shallow water, average commodity price hurdles to support drilling are generally lower than deepwater. As such, we're seeing some customer activity in shallow water, although competition for these opportunities will be intense. While we continue to believe the current market conditions and excess rig supply will extend into next year, we have seen some positive developments that will ultimately help to rebalance the market. First, as we had predicted in second quarter last year, we have seen several announcements regarding floater scrapping that is taking rigs out of the system, plus cold stacking of older floaters and jack-ups that will likely lead to future scrapping. David will cover this and other aspects of rig supply in great detail, including potential newbuild orders cancellations in Brazil. Second, we continue to see signs that the offshore sector across the supply chain is taking major strides to become more efficient and cost-effective which will make offshore programs more competitive and lower the commodity price hurdles necessary to support additional drilling. And third, we believe there are meaningful opportunities to improve the quality management process across the supply chain in offshore drilling which should ultimately lead to better equipment and workforce reliability. During the last upturn, as all aspects of the supply chain were rushing to meet increasing demand, including hiring to fill new positions, inefficiencies crept into the system. Quality suffered. Average experience levels of offshore crews declined and the result was unacceptable levels of downtime. Now we're in an environment where more attention can be placed on enhancing quality and crew competency which should lead to meaningful efficiency gains that will also support our sector. The recent M&A announcement by two E&P companies highlighted that they believe deepwater will continue to be a strategic high-growth and profitable piece of their business, one that is projected to see significant future investment, particularly in Brazil which has the largest offshore reserves of any country in the world. While the near-term focus by most market participants has been on pressures from current commodity prices, it's positive to see this endorsement and investment by some of the largest E&P companies in the deepwater sector. In closing, I'd like to say thank you to our Chairman, Dan Rabun, for his dedicated service to Ensco. Dan served as Ensco CEO for more than eight years, saw the company grow its fleet and geographic presence significantly under his leadership. Dan is retiring as Chairman at our annual shareholders meeting next month and we wish Dan and his family all the best. Paul Rowsey, our Lead Director, who has been proposed for reelection to the Board, is expected to be appointed nonexecutive Chairman following the shareholders' meeting. Now I will turn the call over to David.

Thanks, Carl. In terms of customer demand, we have seen a limited number of incremental contracting opportunities since our last conference call. During this phase of the cyclical downturn, however, it is not uncommon to see low levels of tenders and inquiries. We believe most well programs continue to be delayed rather than canceled and we expect that declining production will prompt future drilling demand. Given our global presence, we're actively pursuing nearly every outstanding tender and inquiry for floaters and jack-ups. Looking out longer term, it is encouraging to see recent lease sales drawing interest from several major customers. This includes international frontier plays such as Uruguay and established basins like the U.S. Gulf of Mexico, where the most recent lease sale saw successful bidders invest more than a half billion dollars on new acreage. I believe Ensco's strengths, including our number one ranking in overall customer satisfaction and safety, give us a competitive edge as new contracting opportunities arise. In terms of global supply, we recently took delivery of ENSCO DS-9 and the rig is now undergoing customer-specific enhancements for its initial contract. Since our last earnings call, more postponements have been announced for newbuild floaters scheduled for delivery in 2015. As a result, approximately 20 new rigs are now scheduled for delivery by the end of 2015. More than half are contracted. Ensco's next drillship delivery, ENSCO DS-8, is among these contracted rigs and we expect the rig to commence its initial contract in the fourth quarter of this year. It remains to be seen if the other uncontracted deliveries will be delayed in anticipation of a better contracting environment in the future. Recently, there have been many news stories regarding the Build in Brazil program. In total, this program was initially expected to add 29 floaters to the global supply by 2020, with all but one of these rigs working for Petrobras on their Pre-Salt development. Recent reports suggest more than half of these rigs may not be delivered and the remaining rigs are likely to be delayed. Two of the newbuild floaters currently scheduled for delivery in 2015 are built in Brazil rigs. An additional eight are scheduled for delivery in 2016, but may be delayed due to financial, shipyard and other issues. If these units were to be delayed or canceled, this could result in demand for rigs from the international market as Petrobras looks to meet production targets. Carl mentioned recent merger and acquisition activity by some of our customers which is not only a strong indication of their commitment to deepwater, but also to Brazil in particular, where Ensco has extensive experience. I should add that upcoming lease rounds in Brazil and planned divestitures by Petrobras may lead to more customers entering this market. Moving to the order book for competitive jack-ups, there are approximately 50 newbuilds with expected deliveries by year-end 2015, all of which are uncontracted. More than 60% of these uncontracted deliveries are with companies that do not currently operate a rig, so it remains to be seen whether these 30-plus units will be able to compete effectively. We have already seen the cancellation and delays of many newbuild jack-ups. This will likely continue as companies who order these rigs need to put off large milestone capex payments given limited contracting opportunities. This in turn would put more pressure on shipyards that will have to assess continued investment in the construction of partially completed rigs. Turning now to scrapping and cold stacking of floaters and jack-ups, it's reasonable to assume that offshore drillers will continue to rationalize their fleets to reduce expenses and preserve capital during the downturn by scrapping older rigs with limited contracting opportunities that require capex to keep them certified to work and cold stacking other rigs that do not have recontracting opportunities. Since September, offshore drillers have announced they will scrap 33 floaters. Over the same time period an additional 20 floaters have been cold-stacked. We believe that the majority of these will also be scrapped. In total, these 53 rigs represent approximately 17% of competitive global supply. Additionally, more than 40 floaters with similar age and technical characteristics to the 33 scrapped rigs I just mentioned are currently idle or will see their contracts expire in 2015. All will be likely candidates for scrapping and/or cold stacking and, as a group, they are double the approximately 20 floaters currently scheduled to enter the market by year-end. We anticipate the scrapping and stacking trend will continue which will help to improve the supply and demand balance. Similarly, on the jack-up side we expect stacking to accelerate. Here is the picture for competitive jack-ups, defined as independent-leg cantilever rigs; 46 are stacked and older than 30 years of age; another 66 working rigs that are 30 years of age or older have contracts expiring in 2015. Major regulatory surveys to recertify these older rigs which must take place every five years, can be very expensive and involve tens of millions of dollars in upgrades. In a tight cash flow environment, especially for smaller undercapitalized drillers, these rigs may be scrapped, cold-stacked or converted to non-drilling units. Additional information on the global supply of rigs, including details on newbuilds, scrapping and stacking, is provided in our investor presentation on our website. As previously reported, we received an early termination notice for convenience for ENSCO DS-4 that requires the customer to make an estimated cash payment of $160 million, thereby accelerating most of the rig's remaining contract backlog into the third quarter of 2015. We're now marketing this rig for new opportunities following the expected July termination date. We negotiated reduced day rates for several jack-ups with customers in the Middle East and the North Sea, as disclosed in our recent fleet status report, in order to continue the contracts. In closing, we remain focused on winning as many contracting opportunities as possible. We expect to win business by leveraging Ensco's differentiated technology, our operational and safety track record, our highly capable offshore and onshore personnel and a reputation among customers as the best offshore driller. Now, let me turn the call over to Jay.

Thanks, David. Today I will start with our first quarter financial results, our second-quarter 2015 outlook and then I'll wrap up with a discussion of our financial position and some closing comments. As noted in our press release, earnings from continuing operations, adjusted for other expense of $0.11 per share to refinance debt, increased 18% from last year to $1.49. Total first quarter revenue increased 9% to $1.16 billion from a year ago, primarily due to more operating days as we added three new jack-ups and reinstated three upgraded floaters. These results reflect the strong operational and safety performance and expense management that our offshore crews and onshore personnel delivered during the quarter. Floater segment revenue grew 7% to $695 million versus prior year as the ENSCO 5004, 5005 and 5006 returned to the operating fleet after completing shipyard upgrades. As a result, reported floater utilization increased to 86% from 75% a year ago which more than offset a 9% decline in the average day rate to $425,000 per day. Operational utilization for the floater segment which adjusts for uncontracted days and planned downtime, was 93%, compared to 95% a year ago. Jack-up segment revenue grew 7% to $428 million as we added ENSCO 120, 121 and ENSCO 122 to the active fleet. These jack-ups had exceptionally high uptime performance of nearly 100% in the first quarter. Reported utilization for the jack-up fleet was 87% compared to 86% a year ago and the average day rate increased 7% to $144,000. The addition of three ENSCO 120 series rigs to the fleet contributed to the increase in average day rates. Operational utilization for the total jack-up fleet was an impressive 99.6%, the highest level that we've achieved in the past three years. First quarter total contract drilling expense decreased to $518 million from $520 million a year ago. Proactive expense management, including lower compensation and repair and maintenance costs, more than offset $45 million of additional contract drilling expense related to growth in our operating fleet. Depreciation expense increased $6 million to $137 million, in line with our expectations, due to adding rigs to the active fleet. General and administrative expense for the quarter was $30 million, also in line with our outlook and $8 million less than a year ago, primarily due to lower discretionary compensation and disciplined expense management. As detailed in our press release, other expense increased to $73 million from $29 million a year ago for two key reasons. Costs related to refinancing our 2016 debt maturities increased other net by $27 million, as shown in our earnings release; and interest expense was $18 million higher year to year, mostly due to our $1.25 billion debt raise during third-quarter 2014. Now, let's turn to our outlook for the second quarter. Total revenues are expected to decline from first quarter results of $1.16 billion as lower reported utilization and average day rates across the fleet are expected to more than offset a full quarter of operations for ENSCO 5006. For our entire fleet in continuing operations we expect reported utilization to be in the high 70% range, compared to 86% in the first quarter. Average day rates are projected to decline by approximately 5% from first quarter levels of $244,000. We anticipate second-quarter contract drilling expense will increase approximately 2% from $518 million in the first quarter, primarily due to more operating days from ENSCO 5006; and approximately $18 million of upfront expenses to cold stack rigs which will reduce operating costs on these rigs in future periods until they are reactivated. Here is a breakdown of costs to complete the preservation process for cold stacking. Approximately $2 million in total for four jack-ups, plus approximately $8 million each for ENSCO 8501 and 8502. These costs are significant because our stacking process for these floaters involves careful preservation, including dehumidifying key equipment and preventing corrosion of the hull. We expect second quarter G&A expenses to be in line with the first quarter. Depreciation expense is expected to increase to $141 million as ENSCO 5006 operates for a full quarter. In total, other expense is estimated to be $54 million in the second quarter. This breaks down as follows; interest expense of $51 million, interest income of $3 million and other expense of $7 million due to the retirement of the remaining 2016 maturities that were not fully tendered during the first quarter, plus the retirement of some smaller debt maturities. Now, I will provide an update on the cost reduction plans announced on our last call. The cold stacking process for ENSCO 8501 and 8502 is expected to be completed by the end of the second quarter, at which time cash costs for these 8500 series rigs will be less than $10,000 per day. Cash savings will be approximately $120,000 per day. The cold stacking process for four jack-ups, three in the U.S. Gulf of Mexico and one in the Middle East, is also expected to be completed by midyear. Once cold stacked, cash costs for these rigs are expected to be less than $5,000 per day with cash savings of approximately $40,000 per day. We remain on target for a 9% reduction in average offshore unit labor costs from 2014 levels beginning in second quarter 2015. As a reminder, this will translate into meaningful cost savings since about half of 2014 contract drilling expense of $2.1 billion was offshore compensation. Earlier this year we reduced onshore personnel by 15% company-wide. Annualized savings from this workforce reduction is expected to be $27 million beginning in second quarter 2015. We're also negotiating cost reductions with vendors and suppliers that are expected to reduce expense and capital expenditures going forward. So let's wrap up with a review of our financial position. We have the highest credit rating among the major offshore drillers, with investment-grade ratings from both S&P and Moody's; $8.4 billion in revenue backlog based on contracts in place; $1.6 billion of cash and short-term investments; a net debt-to-cap ratio of 31%; and, by virtue of our recent debt refinancing, no significant debt maturities until 2019, plus a fully available $2.25 billion revolving credit facility, giving us sufficient liquidity and capital management flexibility. We expect capital expenditures for the remainder of 2015 to be approximately $1.7 billion, including $1.35 billion in newbuild capex, $175 million for rig enhancement projects and $175 million for sustaining projects. As we look ahead, we project total 2016 capex to be less than $1 billion. In conclusion, I want to emphasize our focus on the controllable aspects of our business during the current downturn. We remain committed to proactive cost control, including an aggressive expense- and cash-management program that will drive sustainable cost reductions. For example, we will continue to stack rigs rolling off contracts that do not have near-term contracting opportunities with customers. Our recent actions in the capital markets have further strengthened our liquidity and capital position, giving us more flexibility to navigate the downturn. We have maintained our strong investment-grade credit ratings, something that Ensco has always believed is strategically important, especially during a downcycle; and we're the highest rated company in our sector. This will allow us to focus on further improving operational, safety and financial performance, better positioning Ensco in the near term and for the inevitable up cycle. So with that, I'll turn the call back over to Sean.

Okay, Operator, we'll now open up the line for questions, please.

[Operator Instructions]. Our first question is Ian Macpherson from Simmons. Please go ahead.

I'm curious what the outlook and maybe the strategy is for contingency planning with the DS-10 delivery next quarter? And also what you're thinking about in terms of cost loading that rig when you do take delivery, assuming you do take delivery of it on time?

I think last quarter what we actually announced was we would take a decision during Q2 on whether we were going to take delivery or defer DS-10. And that's still the same position, so we're not going to give a firm answer today because we're going to take the decision during this quarter. We're marketing that rig and we're also in negotiations with the yard, so we'll let you know on that position probably at the end of this quarter.

My other question was about the recent repricing with Saudi Aramco. Some of the other companies have indicated they have revisions that span 12 months. Yours appear to be between, I guess, March 15 or through January of 2016. Do you have any retroactive adjustments as well, going back to the beginning of the year, that we need to think about in terms of resetting our models from Q2 onward or should we just read your reported day rates as given in the fleet status?

Ian, this is Jay. There is nothing retroactive in that agreement.

I'll just add something. The good thing about that is that we now have reached finished negotiation with Saudi Aramco, so we can now go forward knowing what those contracts will be and the rigs we'll be working in the Kingdom.

Our next question is Praveen Narra, Raymond James. Please go ahead.

I was thinking on the Aramco renegotiations, how do you think about the 2016 rates on those? They were left alone, but how do you think about the potential for those being renegotiated down the road?

Well, at the moment, the agreement is that we've negotiated a price reduction for 2015. I think we'll just have to see where we're and where we end up at the end of the year.

Okay. And then acknowledging that the 8500s, can be a little bit different, when you're weighing a cold stacking decision on a true DP rig, how do you think about the future reactivation costs and the amount of time it would take to actually go through the process of reactivating a DP rig?

So we're not giving from guidance on what that would cost because partially it depends rig to rig and also location and where it has to mob to. But then the timing, the whole process of how long it would take to bring back the rigs, the engineering process we go through has been very carefully modeled, plus the costs and we build that into the cost-benefit analysis. I think what we've clearly stated is that if you look at the stacking costs and the cost to remobilize them, the way you should view this is we would not take this decision unless we felt the rig was going to be stacked out for at least 12 months.

Okay. On the reactivation, is nine months a good amount of time to bring that back or is that--

That would be far too long. It would be much quicker than that.

And I think the only other thing to reemphasize here, as I said in my comments we're spending $8 million per rig to do this and that is to make sure the rigs are very well-preserved and that we minimize our reactivation costs to maximum extent possible.

Our next question is Gregory Lewis, Credit Suisse. Please go ahead.

Jay, if you could just expand a little bit on the 8500 stackings. I believe in the prepared remarks from last quarter, there was mention of potentially removing components from the rig to put them in temperature-controlled environments. Was that something that through the process that has been ongoing? Was that something that was deemed to be required to stack these assets? And has that been taken into account for in the stacking costs that you've been guiding us to?

It's definitely taken into account in the guidance we're giving and I think the view is, as I said, we're doing everything that we think is required to minimize the reactivation cost of the rigs and a lot of this equipment is very temperature humidity sensitive and needs to be treated accordingly.

Okay.

Greg, I'll just add a little bit extra to that. So the reason to do this is -- well, first of all I know there has been a degree of speculation amongst the market commentators about whether it is possible to stack out a 6-gen floater, be it a semi-sub or a drillship. And I think what we would say is, yes, it is possible, we worked this engineering process very carefully. What we've done in the process of doing this is look very carefully at the preservation of some of the critical equipment and also the ease with which we can bring it back. And a lot of that has led us to make the decisions of removing some of the critical equipment and put it in temperature-controlled environments and to take off with a bit of critical equipment. And we have power to the rig to dehumidify certain areas. But in the process of doing this, we've actually, from our first estimates, dropped the cost to stack these rigs by about $3 million to $4 million per rig. So as we've gone through this and refined the process, it hasn't actually led to an increase in cost, we've been able to bring it down somewhat.

You should probably put a white paper out. I'm sure a lot of your competitors would want to get their hands on that. And then just one more from me on a bigger picture question. I mean, clearly as we look around and I'm not going to talk rig by rig, but clearly as we look around, whether it's Ensco's fleet or other companies' rigs that are rolling off contract, there is not a lot of contract new tenders out in the market. Is sort of the expectation, at least on Ensco's part for the industry, that as some of these rigs roll off, really the best opportunity for employment will be in a well extension here, a well extension there, is that how we should be thinking about utilization for a lot of rigs that have roll-offs in the next, call it, six to 18 months?

So let me just back up a little bit on the big picture. I mean, it is absolutely clear that we're in the midst of a really significant downturn for the sector which is hitting the whole of the E&P sector but is exasperate for the offshore drillers because of the new capacity that's coming to the market. And the pace and aggressiveness with which customers have backed off programs and cut capex is quite unprecedented. But that said, we find ourselves at the moment in the marketplace exactly where we thought we would be, not better, not worse than we saw at the quarter or two quarters ago when we took some of the decisions that you saw and you've seen us do on strengthening the balance sheet and the decision we took on the dividend. Now as we said in the prepared statements, what we have seen in the market is we've seen little bits of activity, some activity in the shallow water jack-up market, some early indication of inquiries in tender rig inquiries for later in 2015 and going into 2016. But these are -- I don't want to overplay that, they are -- it's small and spread around the world and competition for those will be fierce. In the floater market, we've seen almost nothing new. The number of placements and the opportunities that are out there that everyone knows about have been around for quite a while so there's nothing materially new developed. And we believe these market conditions are certainly going to last through 2015 and as we go into 2016. Now I think as we move into the second half of the year and hopefully if we see oil prices Brent stabilized a bit or even up a little bit from where they are, we will see clients begin to do little bits of work. And your proposal that we might see shorter-term one-off to three-well extensions, things like that, I think is a reasonable assumption for the activity you might see in 2015.

Our next question is JB Lowe, Cowen and Company. Please go ahead.

I was just wondering if you could give a little more color on your commentary about the significant supply/ demand imbalance in the Gulf of Mexico? In particular, how it relates to those 8500 series that are rolling off. Are you seeing any sort of additional inquiries as to any more tenders than the ones that are currently out there perhaps coming later this year?

Let me make an initial comment and then I'll hand over to David who could maybe be a bit more specific on the Gulf of Mexico. I think if you just go by what I previously said, we're really seeing worldwide, very few incremental opportunities in the floater and deepwater market. And that's led us, in the light of all of this and what I've just said about the macro market, I think what you've got to do and we're doing as a company, is looking that straight in the eyes and saying, Look, we have to take some difficult decisions. And that's why we've decided to stack out the 8501 and the 8502, because we just simply do not believe there will be enough tender activity and opportunities to support all of the floaters that are currently in the Gulf of Mexico and will be coming off contract as we go through the remainder of the year. So maybe if I hand it to David he could tell you a little bit more about the details.

So there is precious little incremental opportunity at the moment. However, as we stated last call as well, we're actively looking at a number of opportunities in the intervention from an abandonment space which may present opportunities for us for some future employment there. So I think you're probably aware of, again, all the major opportunities that are out there and there aren't many.

[Operator Instructions]. Our next question is Daniel Martin, FBR Capital Markets. Please go ahead.

I'm looking at the two opposing forces. So on the one hand I have cost controls and improved operational efficiency. On the other hand, I have rigs rolling off contract and demand that is still weak. So what do you think will be the net impact of those two opposing forces to utilization margins for the rest of 2015 as it pertains to you at least directionally?

Well, I think our position and that of the whole sector will be generalized by lower average day rates and utilization as we go through 2015. Now if we jump out further on, as I said earlier on, I think a lot of those market conditions will go over into 2016. When we start to see a turnaround, when we start to see enough incremental pickup in client activity to start to absorb some of the additional capacity is an open question, but I think it will be driven by two key drivers. The first one and that reason should be obvious, but the first one is oil price in so much as it pertains to free cash flow for our customers, increasing free cash flow for customers and also sentiment. And the second one is the degree and the speed with which we see rig retirement and stacking and, to some extent, company failure or consolidation. I think the rate with which those two things happen will very much depend on when we see a pickup. And in our view, we don't foresee that much before mid-2016. But it could happen earlier if we see more rapid action. Now as we've said, if you start to look a little bit longer term, we do see some positive actions in the sense that the rates of retirement for rigs has really started to pick up in the last quarter or two and we think that will continue. There's a significant number of older rigs, both in the floater segment and the jack-up segments, rolling off contract during 2015. These are very old rigs and we would expect most of these to be retired and probably ultimately never returned to the marketplace. As we've said in the pre-prepared statement, it's one event but I think it's significant in that the first piece of M&A activity we've seen in the E&P space has been basically driven by a view of the profitability of deepwater in particularly Brazil. I think the data points that are out there are still positive. And we've taken a long, hard look at this and we truly believe that the offshore production is going to play a major part in the world's energy supply going forward. It currently makes up 7% of global supply. I don't believe that can be and will be replaced by something else. It has the potential to grow and that the major reserves that have been discovered over the last decade or so will be developed. We will see eventually an upturn in activity and we will see a return to offshore and deepwater drilling.

And I actually have a follow-up on your answer, so we're talking about the supply/demand balance and you address the supply side of it and the pickup and cold stackings and everything. On the demand side, however, do you think it's fair to think that we might not see an uptick in demand, at least until the E&Ps go through their budget cycles late in 2016 and into -- I'm sorry, late in 2015 and into 2016?

A lot will be dependent -- we certainly have seen some projects which have been deferred and pushed back into 2016 or 2017 and I don't expect we will see those resurface until 2016. We have seen some others which have been sort of temporarily deferred and pushed back which could come back on the table later on in the year if we see a stabilized or slightly increased oil price. But just to reiterate what I said, I think, certainly from our position, we're not planning on a major material upturn in demand until we get into 2016 at the earliest.

Our next question is David Smith, Heikkinen Energy Advisors. Please go ahead.

Kudos on your management of the cold stacking process for the 8500s. I think it's rare to see those kind of cost estimates get revised downward. And I was just wondering if you could talk about the differences in costs or ability to take a similar approach to a modern drillship? And not that you're pressed to do so, but you handled the 8500s better than I would've guessed. Maybe I'm wrong about the challenges to cold stack a drillship.

Okay, David, I'll make an initial comment and then maybe I'll hand to Mark if he wants to add something to it. There is a difference between stacking an 8500 semi-sub and a drillship. There's been a lot of debate and discussion about whether it's even feasible to stack a drillship and our view, from the work we've done, is yes, it is, although you may choose not to. And, it's likely to be -- I mean maybe a bit more complex and a little bit greater expense. One of the issues you've got to find is the location to be able to stack the rig. But if you think about it in this terms, many companies at the moment are deferring out the delivery of their new drillships and effectively that is cold stacking in the shipyards. And the process you would go through would be not greatly dissimilar. But I think, just to be clear, we had the early termination on DS-4, but at this stage we're not going to cold stack the DS-4. We're going to continue to market it which we have the right to do under the termination agreement. So we have not taken the decision to cold stack a drillship yet. Mark, do you have anything to add?

The only other thing I would say, Dave, is you have to look at the design of a semi-submersible versus a drillship. A semi, you can, a lot of times, set that unit on bottom. You can remove your thrusters and set the unit on bottom, whereas a drillship, obviously, you can't do that. So a drillship, the long-term stacking, if you will, will be a different process and there is different dynamics involved. The main thing is you must have a good, detailed, comprehensive plan and execute that plan and then where you can remove some of this sensitive equipment and put it in an environmentally controlled area, obviously that's a positive. Make sure you're using good inhibitor fluids and good dehumidification devices to protect the sensitive equipment. So a lot of the processes are the same between the two rig designs, but then there will be a lot of significantly different procedures that you need to do as well.

And it sounds like one of the significant differences is how to secure the hull if all the systems have been turned off and prepared for being mothballed. And that's the part I was curious about is how to secure the hull. If it's not that dissimilar from a newbuild delivery being delayed, then is that solution you secure the hull at a shipyard that has -- are there enough spaces with enough draft at the shipyards to accommodate some real cold stacking for the industry? Not for you all?

Well, certainly that is something that needs to be looked at and considered, but as Carl just stated, we have no plans at this point to cold stack one of our drillships. Hull protection is a very important question. You don't want your sea chests and that type of thing, you need them sealed up and properly protected. So that's just all part of your long-term cold stacking plan.

I think the key thing is it can be done. You may choose not to and you may look at the cost balance of it but it can be done. And a lot of the complexity and the cost will also depend on how long you feel it will be stacked and if you are short-term stacking it out, it will be a pretty different process from if you were going to -- if you felt it was going to be stacked for a very long duration and you wanted to bring it back.

Probably something more than a year of idle time that you'd do that for, I'm guessing. I really appreciate the color on this. Thank you.

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

Well, thank you, everyone, for participating on our call today. We greatly appreciate your interest in Ensco. For listeners in the UK, we want to draw your attention to a documentary that is actually airing this evening on BBC at 9 PM. It describes life on a rig in the North Sea, including one of Ensco's premium jack-ups. Thank you again and enjoy the rest of your day.

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