Good day, everyone, and welcome to EnscoRowan PLC's First Quarter 2019 Financial Results Conference Call. [Operator Instructions]. Please note, today's event is being recorded. I will now like to turn the call over to Mr. Nick Georgas, Senior Director of Investor Relations, who will moderate the call. Please go ahead, sir.

Welcome, everyone, to EnscoRowan's First Quarter 2019 Conference Call. With me today are President and CEO, Tom Burke; Senior Vice President and CFO, John Bakst; and other members of our executive management team. We issued a press release, which is available on our website at enscorowan.com. Any comments we make today about expectations are forward-looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially from our expectations. Please refer to our press 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. During this call, we will refer to GAAP and non-GAAP financial measures. Please see the press release on our website for additional information and required reconciliation. As a reminder, we issued our most recent Fleet Status Report, which provides details on contracts across our rig fleet on April 29. An updated investor presentation is also available on our website. Now let me turn the call over to Tom Burke, President and CEO.

Thanks, Nick, and good morning, everyone. I'd like to begin by welcoming you to the conference call. Since this is our first call as a newly merged company, most of my prepared remarks will focus on EnscoRowan's company profile and an overview of our priorities in the coming months, then I will provide you with some commentary on the offshore drilling market, after which John will speak the financial results and outlook. As you know, we announced the merger at the beginning of October last year. We began detailed integration planning about a month later in November and our first day of combined company operation was 3 weeks ago on April 11, the day the 2 companies merged. I'd like to take a moment to acknowledge and thank our employees, who worked so hard over the last 6 months, the plan and execute a successful integration. Our first day in three weeks since we merged have gone well, we experienced no disruption to our offshore operation. This is a major milestone given the complexity inherent in such a large combination and is a testament to the detailed integration planning efforts and attention to detail by our operation team over the past several months. There is more work to be done from an integration standpoint, I'm extremely pleased with the progress that has been made since the merger closed. And I'm excited about our future as a larger and more diversified company. We'll not consider EnscoRowan's position in the industry. It is clear we have created the industry-leading offshore driller across lower depths and geographies. We have a high-quality rig fleet of ultra-Deepwater drillships, versatile semi- subs and modern jackups, along with a presence in virtually all major offshore basins giving us the ability to service a wide spectrum of customers…

Thanks, Tom, and good morning, everyone. I'm excited to speak to you on our first conference call as EnscoRowan, as this merger positions the pro forma company well to drive increased efficiencies and returns for our shareholders. I'd like to start off by thanking our employees for a successful start to the integration process and our shareholders and lenders for their overwhelming support. Given that this is our first conference call as EnscoRowan, our prepared remarks will be somewhat longer than usual in addition to providing a review of our first quarter 2019 financial results and our outlook for the second quarter, I'll also provide some high-level commentary on ARO Drilling. Full year 2019 CapEx guidance, a summary of our pro forma financial position as of March 31, and finally I'll provide an update on merger synergies and transaction costs. As a reminder, we closed the merger on April 11. Therefore, the first quarter 2019 results our press release reflected legacy Ensco's operations only, since Ensco was the legal entity required in the merger. First quarter 2019 results for Legacy Rowan were broadly in line with company's results in the prior quarter. Detailed first quarter 2019 results for Legacy Rowan will be filed in the coming weeks as part of the pro forma financial filings for EnscoRowan. As such, my first quarter 2019 commentary today is specific to Legacy Ensco results. First quarter 2019 financial results beat the guidance from the prior conference call by approximately $20 million with adjusted EBITDA of $36 million for the quarter. On a sequential quarter basis, total first quarter revenue was $406 million versus $399 million in the prior quarter. In the Floater segment, revenue increased to $233 million from $228 million in the fourth quarter, primarily due to contract startups for ENSCO DS-10,…

Thanks, Jon. at this time, please open the line for questions.

[Operator Instructions]. Today's first question comes from James West with Evercore ISI.

Congrats on closing the transaction. So Tom, if we think about the market right now, we're clearly in recovery mode on both shallow and Deepwater. You've got both parts of the -- both segments of the offshore market. How are you thinking about term versus short-term spot at this point, given the trend of higher day rates, I know you just logged in some term on Deepwater rigs, but how are you thinking about staying shorter market versus longer market?

James, that's a good question. I think as we completed the merger just 3 weeks ago, we're obviously spending a lot of time on our fleet strategy right now. But what's clear is that portfolio approach where we really look at the available assets and how attractive the contract is, certainly keeping our exposure to the upside. So we don't want to look into too many assets for too long, but also keeping our working assets working. So really kind of a portfolio of our available assets against the total contracts.

Okay. Fair enough. And then with respect to ARO Drilling, so 2 jackups here shortly. What should we expect as the cadence of orders going forward? Is it every 6 months, 12 months? How do you guys think about that?

Yes. That's certainly I'm on the Board of Rowan and obviously up to the ARO. But the business plan at ARO Drilling basically says every 12 months we're putting another there. So I would expect in order to come out very soon, and 1 every 12 months. While the shipyard is getting up and running, the portion of those jackups will be built in land So I expect the first rig certainly to be -- the first 2 rigs certainly to come out made a press release at the other December basically stating that they had an order from IMI, which is a shipyard. But I would guess every 12 months, James.

And next question today comes from Ian MacPherson of Simmons.

Congrats everyone on getting close to and started here. I wanted to also ask the first question about sort of the slope of day rate improvements for Deepwater. My understanding is that the total contract in Brazil is relatively low day rate, it's more about the recent spot environment as opposed to the rising up in 2020, 2021. But you have options, and I wanted to see if you could put any color on the pad with regard to the slope of day rate improving on the options behind that one or any other recent contract wins that illustrates the rising day rate from the spot to price options behind spot?

To comment on the DS-9, that contract obviously, I wasn't here, but what I understand about the contract, it was So it's not from a contracting process, it's actually happen over a period of time. So that's right, which us going on shortly is really quite some time ago. So I would tell you, we don't typically comment on option when there is across the fleet, there will be a number of different strategies as far as priced versus nonpriced. But I'll hand over to Carey, have a comment on that..

The options are increased rate.

On the DS-9.

On the DS-9. And then one thing I'd add just as you look at the options just across the fleet, as Tom said, some of these options -- I'm not speaking specifically around the DS-9 now, because there are several of our assets and the contract environment do have options in some cases especially ones that we contracted such as the DS-9 earlier in the cycle. Those could be price options, but some of the options that we have really just prized in market rates. So those are floating just based on where the market is at the time.

I understood. I wanted to ask my follow-up question just to do check on my notes on your cost guidance and check my roadmap from current OpEx to your fully optimized energized because burden at the end of next year. So if your contract drilling expense plus your G&A for Q2 is going to be just below 450, assuming constant activity by the end of next year and that won't be true, because activity should be higher. But it were constant activity then you would then be essentially $40 million on a quarter basis below the Q2 guidance for OpEx plus G&S, is that the right way to think about it?

Just doing the mental math. Roughly so, right. I think, Ian, we're not guiding beyond Q2 at the moment. We're still working on the full year plan but the way that you're putting together the numbers, we are guiding to 165 of synergies and if you were just to kind of take that by the quarter once you get to the run rate, it is a bit more than $40 million and that will come out of G&A and roughly of a 50% attributable to each one. We won't hit run rates until the end of 2020 on the synergies. So I don't want to it on the path that you should just start applying $40 million a quarter starting right away. It will take some time to get to those. We anticipate that we'll get to that 75% of that run rate about a year from now and full run rate by the end of next year is probably better way to think about it.

And our next question today comes from Connor Lynagh of Morgan Stanley.

Wondering if -- obviously, you made clear that you're not planning on reactivating any of the at the moment. Can you talk about the contracting strategy on the fleet? And just broadly can you help clarify not reactivating this year versus not marketing this year? Are you not bidding the preservation into work at the moment? Or is it just that you're not planning on them working in 2019?

That's a good question. We're definitely still in the middle of planning our marketing strategy and reacting as they come. We do obviously focused on the working assets and then followed by the warm stacked assets -- warm assets. So that is our real focus right now. We always keep in mind that the preservation stacked assets, what they certainly down on the floating assets. Jackups, obviously, as I mentioned in my prepared remarks, we either have everything has a contract or working on a contract. And so we are certainly looking at some opportunities, where we would carefully look at the returns and reactivate a jackup may be 1 or 2 this year, but not sure. And certainly a lot of scrutiny around allocation of capital to reactivation. Connor, did I help you with your question?

Yes. I think so. And on the jackup side on things, can you discuss how you think about the potential runway for how much more you could reactivate obviously the market asset is pretty tight at this point? Is there a need to go to the art and acquire new assets at this point? How do you think about that?

We have an excellent modern assets, which now sort of under the hood and really sort of understanding what we have on the month. And so excited about some of the modern jackups that Ensco has either built or has acquired. So we got some excellent modern assets. And so certainly we always keeping an eye on the shipyard and understanding what's going on there, understanding that. But certainly our focus would be the current assets that we have in our fleet and how we utilize them. And frankly, the assets that we have in the fleet that are warm stacked and modern warm are better than what is in the shipyard.

And our next question today comes from Sasha Sanwal of UBS.

Thanks for the commentary on a pro forma bidding strategy, something we've all kind of been waiting for some time. So maybe to follow up on Connor's question. Can you maybe give us an update on the reactivation cost, the preservation stacked rig? And then, Tom, you mentioned in your commentary about discipline returns on reactivating jackups, just wanted to get your sense of what the gating factors are in terms of how we should think about reactivation as well?

Well, one comment. I'll let Carey talk about the reactivation of the preservation stacked assets for a moment. And just one comment on the contracting strategy. So let me talk about a contracting strategy, it's not like we're sitting around and say we should do this rig and that rig. It's a lot more fire than that. It's really an overview of the market, really spending a lot of time building shared understanding amongst the new management team, about the supply and demand dynamics of what we think is going to happen and then using that as the lens to look at the reactivation of the contracting strategy. So we're in the middle of that, and it's a good process. It's a process that Ensco has historically, and it's a very good process. So we're working on that and certainly it's very thorough. As far as the reactivation of the assets, Carey, comment on that.

Yes. So we have a range of cost to reactivate our preservation stacked floaters of between $25 million and $35 million, and that the actual number depends on which rig it is. Some of the rigs are at the lower end of the scale, some are at the higher. This is a 120-day process. We have a very good handle of the condition of these rigs, and we continually update the reactivation cost. We got a track record with ENSCO DS-4 starting it up from preservation stacked under budget and under time and it went to work for in Nigeria and has performed very well coming out of preservation stacked. So we have a good handle on this, and we're confident of the cost and time to reactivate.

And when we think about -- to answer the last part of your question, when we think about capital allocation towards reactivation, what we are looking at is the supply and demand model. What we think will happen to this asset overtime, and so we fully apply capital. We want to have a good confidence back basically the money will be well spent, and it will have a return. So maybe it won't -- you call justify the reactivation on the first contract, but then do we have high confidence on the second contract. And actually, we have -- in the last 3 weeks, we had a lot of those conversations about here is an opportunity. Yes, we're willing to put this capital potentially on this, but we got to get this contract and this contract. So it's a pretty rigorous approach thinking about making sure that we are getting a good return on the reactivation capital.

Thank you for that color. Very helpful. And may be just as a follow-up, I'd like to get some context on just how you guys kind of think about essentially the regional mix. And so I think unless you spend a lot of time on day rates sometimes and you kind of miss in terms of cost. And so for example, you referenced DS-9 contract right spend quite some time ago, kind of think about regional cost in areas like Brazil, for example. I think the input cost per rig has gone up versus last cycle, right. And obviously things like scale in terms of share base cost also kind of coming into the mix. So may be beyond looking at day rates, when you think about rate margin for floaters at a high level could be kind of think about the opportunities at in terms of which regions might have a bigger focus for you guys?

Well, I think it's a good question. And I think one of the thing about the combined company is that the footprint has been, as I mentioned in my comment and as you know is in almost every major basin. And so the cost go into a new region, yes, there is a cost potentially on the rig to become compliant with customer or regional requirements, but there is also whole another cost, which is -- actually typically has a long time line which is getting set up in those countries. And so when we have a footprint in Australia, in Brazil, in Angola, in Nigeria, it actually allows the cost of entry and the ability to move assets from one region to another much more efficiently. And I have to tell you having worked at the Legacy Rowan, thinking about entering Nigeria or Brazil, the rig modification were the last -- weren't the highest thing on the list. It was getting set up in those countries in such a way that we did it -- we didn't expose ourselves to more regional risk. So I think that we have a very good position that we have a geographic footprint that's been, not in very offshore basin, but certainly the ones that we are focused on. And so as far as the mix of where we would see assets going, we're clearly in the floating assets it's in the Golden Triangle for the Deepwater assets. And I think the 2/3 of contracts today, I guess, between Brazil and West Africa. We also -- in the jackup side, clearly a lot of activity in the Middle East, but also we're seeing some good signs of activity in Southeast Asia. So I hope does that give you a bit of color on that regional mix.

Next question comes from Taylor Zurcher of Pickering Holt.

Tom, you just made a reference in your last response there to wealth of contracts that are coming out of Brazil and you clearly just placed DS-9 then. My question is, it feels like there is all sorts of numbers out there is where Deepwater rig count in Brazil could go in coming years, but it always feels like these things kind of shift to the right. And so wondering if you could give us your take as to, I don't know, maybe over the next 12 to 24 months? Where we could see Deepwater rig demand trend in Brazil in particular moving forward?

So I think as we think about the Brazilian market, there has perhaps been a lot of activity. I'm just looking for notes there from where it peak to where it is now, but it's obviously is a market with significant potential. As you think the ILC is going into that market, as I alluded to in my comments, it changes the dynamic a bit. And I think it's very positive, because not only will pick up assets, but also will pick up assets. We are seeing -- there are different needs in the market. There are low-end floaters, there are high-end floaters and clearly we have a combination of both. you said that the cost to modify and if the rig is not built in Brazil can be fairly substantial. So I think it's a market. It's hard to say, and we have our own proprietary model about what it's going to do as far as that market and we're not really that -- we're not sharing that. But what I would say is that we are a very positive on the Brazilian market. It's not going to recover overnight, and that is why we kept a good infrastructure there.

Okay. That's helpful. And just a housekeeing follow-up on ARO. You noted that the new build orders are likely to come soon at least for the first two, could you remind us how you're thinking about financing those first couple of orders? I know there is debt within and there is probably bunch of flexibility there...

Absolutely. So as far as the financing of new build ARO, we are -- there is an issue down payment. We haven't disclosed as of yet what percentage status of the total price, but we are more than able to cover it with cash on hand at I think obviously the award or the placing the order that will be a major milestone will announce that, but certainly the initial financing through -- the initial down payment will come from cash on hand, cash from operations from ARO. And then after that, we will look at the take out financing. We think we'll have a lot of opportunities given the length of the contract and the return profile.

And our next question today comes from Sean Meakim with JPMorgan.

So balance sheet management was noted as a key priority for in terms of capital to be deployed DS-13 upgrades cash out on restructuring, reactivation part of the calculus as well obviously. Just how do you think about free cash flow and your ability to impact that $1.1 billion of maturities coming in the next couple of years with cash flow versus terming them out?

Sure. I'll take that one. Sean, I think as I laid on the prepared remarks, we do have a bit of luxury with the position that we're in that we do have a very high cash position right now. We have a very flexible revolving credit facility and the maturity that we've got over the next 6 years of $1.1 billion. So to your point on the free cash flow and how does that fit into the mix, I mean, it's one of the sources or uses of capital depending on what we're talking very short-term or longer-term free cash flow and where those projections come in. But ultimately, we do have a lot of flexibility. And I think as we think about how we're going to manage the balance sheet, if you look at what we had done historically, we've been proactive managing the balance sheet due to the cycle. We're going to continue to do so. And the priorities, as I laid out earlier are going to be really focused on liquidity, on our maturity runway, reducing our long-term debt and lowering the cost of capital. And where that might fit today versus how we might think about 3 months from now, that does evolve. And so we'll continue to be proactive and we'll continue to monitor it based on looking at those priorities.

Okay. Fair enough. And one more on the synergies plan you laid out a lot of good parameters, where would you -- could you elaborate a bit? Where you see the biggest areas for upside versus points of concern? Or thing that you think will be longer and being able to procure?

I'll comment on that, and Jon you can cover of anything I miss when I But I'd say on the synergies, we feel very confident about the 165 and so I'm not -- there isn't anything too worried about on the downside. On the upside, the areas that we have set for competitive reasons, we couldn't get into as much, it's certainly around supply chain is one big area, because we obviously could not share pricing with vendors, but we had two separate companies. So it's a little hard to work out what the opportunity was even what the spend was. And so we spent time on that now, and I think there is some opportunities there. And in fact, we were quite conservative, very conservative around the supply side -- on supply chain side. The other area is the offshore costs. Again for competitive reasons, we are -- the operating cost of rigs, what we're paying for labor, what we're paying for services offshore, again it's not something we could share even though mining of the of the rigs is something a little bit -- certainly can only be available in clean room as we did the deal. So that's a big opportunity and frankly we were very conservative on synergies in that area. And Jon, anything to add?

One thing just to clarify the word when 165 comes from, as I laid out earlier, a lot of that is back office synergies. And so coming out of G&A and just based expenses. So kind of field offices that type of thing that will run through line. And so when you look at the rig base, it's really -- there is really not much accounted for from that aspect. So that is in areas that we will continue to scrutinize.

Yes. That's a really good point. So certainly our contract expense, our OpEx is broken into onshore and offshore and the majority of our synergies is planned synergies right now and 165 is from that onshore. So the offshore, really we've taken a conservative

And our next question comes from Howard Beale.

Congratulations on closing the deal. Just want to speak about what kind of jackup day rate improvement are you seeing in the market right now?

It really depends by market, and it depends by the class of assets. So we have ultra harsh, harsh and benign assets and obviously those can also be categorized around the age of them and frankly capability. So I think that certain markets certainly tighter and would be one of those. But there are other markets we're also getting that we talk about the North Sea, because it is getting sizable but we also talk about North Sea because we're not really that excited about talking about what's happening in other markets because we're trying to keep that to ourselves. So -- but we are seeing an improvement and it varies a lot by who the competitive is and how many competitors and how the customer thinks about their contracting strategy. And so it varies, but generally, I would say, we're not seeing pricing go down in any market. In fact, it's going up in all markets, but just it's a relatively different places.

And just piggybacking on Sean's question. So you have about, call it, $1 billion of debt maturities between now and 2022, a peer of yours like refinancing calling in bonds and the refinancing Is that one of the strategies that you guys are thinking? Or can you help me just how to think about what you're thinking about any maturities between now and 2022?

You just cut out slightly there. Could you just ask the question again.

Sorry about that. Just -- I was just wondering like how do you think about the debt maturities between now and 2022? Can we think about you guys calling those bonds? Or how should we think about those maturities?

I got it. I'll give you similar answer to Sean. We're not -- I'm not going to give specific guidance on what actions we may or may not take just given that people confront on any transaction that we might talk about. So it's not appropriate for me to provide that specific guidance. But in terms of what are the things we might do and I'll just point back things we've done in the past and things and will be proactive, but historically you point our -- some of our peers, I think, will be less focused on our peers and more of how we would manage things. And in the past, we have called back that we've done over the market repurchases. We've also done tenders. Those are all tools in our toolkit that we can utilize if we were to look at moving some of those maturities -- I'm sorry, moving some of the or reduce that. I should say, reducing some of the maturities between now and 2024, and it's something that we'll evaluate in our overall financial strategy.

Can you say like how much of secured financing capacity you have? Is that we can think about it?

I can be specific. It's all in our filings. We do have a lot of different debt at this point, I want to go, but the one which is the most significant clearly right now is the revolver. So on the revolver, our secured debt capacity is $1 billion, which we have not utilized. That is an increase from the legacy and scale revolver, which is $750 million. So that did go up as part of the upsizing process we did in conjunction with the merger.

And maybe last question from me on ARO jackups. So my understanding was those ARO jackups would be build in Saudi, the plus -- all 20 would be in Saudi. Is there any change in that strategy? And how should we think about the timing for the next 18 jackups? You mentioned should be anytime soon?

Certainly, the plan for those jackups is to build in the Saudi, but they're building shipyard right now. And so contracting with IMI, which is shipyard that is being built in Saudi or the company that is building up shipyard in Saudi. And IMI for the first may or will has given those orders to another shipyard, which is and also a partner. And if you got a directing to website a press release, I think, it's December 27 that they received an order from IMI to build 2 jackups basically for -- and the majority of them will be in Saudi. So I think it's a public statement that IMI and have made. Now with that will be -- the first 2 will be built in -- was giving an order to IMI, and IMI is going to build those assets or it might subcontract out the first few, but it would only be the first few like certainly the first few and beyond that remain to be seen.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Nick Georgas for any closing remarks.

Thanks, and thank you to everyone on the call today, for your interest in EnscoRowan. We'll be following up with those of you, who are still in the question queue later today, and we look forward to speaking with you again when we report second quarter 2019 results. Have a great rest of your day.

Thank you. Today's conference has now concluded, and we thank you for attending today's presentation. You may now disconnect your lines, and have a wonderful day.