Feb 23, 2017
Executives
Bradley Alexander - VP, IR Jeremy Thigpen - President & CEO Mark Mey - EVP & CFO Terry Bonno - SVP, Marketing
Analysts
Blake Hancock - Howard Weil Greg Lewis - Credit Suisse Haithum Nokta - Clarksons Platou Securities Ian Macpherson - Simmons Colin Davies - Bernstein David Smith - Heikkinen Energy Advisors Sean Meakim - JPMorgan
Operator
Good day everyone and welcome to the Transocean Limited Fourth Quarter 2016 Earnings Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Brad Alexander. Please go ahead, sir.
Bradley Alexander
Thank you, Dana. Good day, and welcome to Transocean's fourth quarter 2016 earnings conference call.
A copy of the press release covering our financial results, along with supporting statements and schedules including reconciliations and disclosures regarding non-GAAP financial measures are posted on the Company's website at deepwater.com. Joining me on this morning's call are Jeremy Thigpen, President and Chief Executive Officer; Mark Mey, Executive Vice President and Chief Financial Officer; and Terry Bonno, Senior Vice President, Marketing.
During the course of this call, participants may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts. Such statements are based upon the current expectations and certain assumptions of management and are therefore subject to certain risks and uncertainties.
Many factors could cause actual results to differ materially. Please refer to our SEC filings for more information regarding our forward-looking statements, including the risks and uncertainties that could impact our future results.
Also, please note that the Company undertakes no duty to update or revise forward-looking statements. Finally, to give more participants an opportunity to speak on this call during the question-and-answer session, please limit your questions to one initial question and one follow-up question.
Thank you very much. And now, I'll turn the call over to Jeremy.
Jeremy Thigpen
Thank you, Brad, and a warm welcome to our employees, customers, investors, and analysts participating in today's call. Our performance in the fourth quarter after all of 2016 was exceptional, with adjusted net income of $239 million or $0.63 per diluted per share on $974 million in revenue.
For the full year, adjusted net income was $655 million or $1.75 per diluted share on $4.2 billion in revenue. During the quarter, our strong revenue efficiency of 100.3% along with the benefits we continue to see from our streamline cost structure and reduced operational and maintenance expenses, resulted in an adjusted normalized EBITDA margin of approximately 56%.
For the full year, the comparable margin was 46% which when considering the sharp year-over-year revenue decline is quite an accomplishment and stands as a testament to the excellence and dedication our people have demonstrated throughout the year. In addition to the strong financial results, we are pleased that our customers continue to recognize us for our operating performance.
For the second year in a row Shell recognized one of our rigs as its global floating rig of the year. The newbuild ultra-deepwater drillship, the Deepwater Proteus, which just entered the market in May of 2016, received this year's honor based on its HSC and operational performance.
We take great pride of this distinction especially with this being the rigs first year of operation. As you all know, historically, the industry has encountered teasing pain when introducing a new rig to the fleet, but through the close collaboration with our customers and the expert planning and execution of our newbuild project teams, our crews and our shore-based support, I am pleased to say that the three newbuilds the Deepwater Thalassa, the Deepwater Proteus, and the Deepwater Conqueror are all performing at extremely high levels.
For Transocean, the foundation for delivering strong operating performance is delivering strong safety performance. As such, I'm pleased to report that for the full year 2016, we delivered the lowest total recordable incident rate in the Company's long history, and we achieved this milestone while simultaneously delivering our highest annual average revenue efficiency of 98%, further demonstrating the direct correlation between safety, efficiency and shareholder value.
Last year, I discussed our efforts to further improve safety and operational performance in 2016. This included investing time and resources into enhancing our tools, procedures and training programs.
I'm proud to say that the global rollout was well executed, and as a result, we’ve driven more procedural discipline and consistency of performance across the entire fleet. In 2017, we will continue to upgrade our tools, procedures and training as we move closer to our goal of zero incidents and 100% up time.
Before moving on, I would like to take this moment to recognize and thank our off-shore and shore-based operations teams for their continued commitment and outstanding performance, as well as our HR and IT teams providing the tools required to facilitate the training. I would also like to thank our marking contracts team, which in 2016 despite intense competition when roughly a third of the contracted global floater fixtures.
The combination of our longstanding and deep customer relationships, our global footprint, our excellent operational performance and our internal confidence to offer innovative commercial models helped us to capture market share in this challenging market without bidding below cash breakeven dayrates. Of note, we were also able to secure contracts for two cold-stacked rigs when our competitors have hot rigs that were available.
Our supply chain and technical sourcing teams also did some great work in 2016. As many of you know, we recently executed long-term maintenance contracts with two large suppliers.
These agreements support our prior goals of reducing operating cost and more importantly continuing to improve uptime performance for our customers. For these new care agreements, we are more closely collaborating with our supply partners and leveraging our respected strength to further enhance our riser inspection and maintenance program, and proven optimized BOP performance, further improve the liability and reduce the total cost of ownership over the lives of the assets.
We will accomplish these joint objectives by migrating our service model to reflect actual use in lieu of a more traditional calendar-based approach to service and maintenance. This reliability centered approached has been approved by DNV and has been embraced by the respective OEMs.
Ultimately from closer collaboration, coordination and the aligning of incentives, we are confident that we can further improve rig uptime while reducing our operating cost. We look forward to expanding this effort to include more suppliers and more critical components in systems as we progress in 2017.
Finally, I would like to recognize and thank our finance and legal teams for their herculean efforts last year. During 2016, we successfully executed on several initiatives that improve the flexibility of the Company's balance sheet.
These included accessing the debt capital markets, deferring delivery of seven newbuild into 2020 and acquiring transition partners. These actions as a whole have both solidified our liquidity position through the decade and provided us with strategic optionality in a market that we believe could soon be ripe with opportunities.
Turning to the microenvironment, OpEx actions last fall appear at least to this time to set a floor on oil prices about $50 per barrel. This is certainly more encouraging than the $26 per barrel that we experienced in February of last year.
And this previously predicted, as we built this in an uptick in inquiries from national oil companies and independent operators, we have also projects to deliver acceptable returns at $50 per barrel. Unfortunately, without renewed interest from the IOCs, this recent uptick is unlikely to significantly impact the near-term outlook for the active global off-shore rig fleet.
While we and the rest of the off-shore drilling industry have done an admirable job of reducing cost through the downturn, the IOCs are unlikely to sanction new projects until we see a sustainable price per barrel in excess of $60. For 2017, we currently expect the IOCs to continue to preserve liquidity while the NOCs independent take advantage of the favorable drawing economics currently available in the market and move forward with some of their programs.
As we look towards 2018, we are increasingly encouraged. The IOCs which represent the majority of the off-shore and specifically the deepwater market recognized that their future is ultimately dependent on reserve replacement and production growth.
Yet, 2017 will represent the third consecutive year of reduced capital spending and under investment in core high return assets. As such, we expect the nature course of accelerating depletion to narrow the gap between the supply and demand of oil, and place upward pressure on its price, ultimately encouraged incremental activity.
Additionally by 2018, we as an industry will have further streamlined our organization and our processes, realizing additional performance improvements in cost savings that will result in even lower breakeven for our customers. Lastly, assuming oil prices continue to increase as expected, by 2018, our customers will have materially improved their balance sheet, providing them the liquidity that they require to sanction the projects.
While we wait those better days, we will continue to position ourselves for the upturn, this includes frequently reevaluating the global rig fleet and taking the necessary actions to high grade our already industry leading fleet. As discussed on past calls, we remained objective in assessing the market ability of our assets by forced ranking them versus all other rig in the industry.
This process has resulted in us recycling seven floaters in 2016, bringing our total to 31 floaters over the past three years. Offsetting these retirements, we have added 17 newbuild drillships and semi-submersibles to our fleet since 2008 with two more contracted drillships scheduled to join our fleet late this year.
Our continuous evaluation has also prompted us to recently approve a strategic upgrade to the ultra-deepwater drillship to Discoverer India. As part of the upgrade, we will be adding passive compensation, adding a syndicate angular and acoustic control to the BOP, and enhancing her capabilities to perform managed pressure drilling.
According to our rig ranking methodology, this would make the Discoverer India one of the top-tier ultra-deepwater rigs in the world, which will make her more marketable as the demand ticks up. Still with approximately 315 floaters in the current market which include those under construction, we as an industry remain oversupplied even when considering the more optimistic estimates of recovery.
Although, we cannot accurately predict what other will do as the market unfolds, we will continue to be very pragmatic in evaluating both our rigs rolling up contract and our asset that are currently stacked. As we have identified the rig that no longer fulfils our fleet strategy and does not best address what we believe to be our customer specific demand, we will continue to quickly make the decision to recycle it.
In addition to retiring less marketable assets, there is a significantly number of high specification rigs either in the possession of straight market participants or shipyards that could enhance our overall fleet and competitive position. We will continue to evaluate these assets and remain ready to act under the right circumstances.
Before I hand the call over to Mark, who will provide you with additional comments on the Company's financial performance, I will take a moment to stress that even though the industry is showing early signs of recovery, the active deepwater floater count is now levels few envision. To mitigate this ongoing challenge, we at Transocean will continue with the approach of managing those things within our control.
These include continuing to improve upon our safety and operational performance, keeping the Company lean, but responses and high grading our fleet and crews. Customers expect the periodic execution and our ability to distinguish Transocean in these areas will keep our rigs working and allow us to build upon our reputation as the industries preferred contract driller.
With our $11.3 billion backlog which far exceeds all other competitors in the industry, both side and duration and our $6.1 billion of liquidity, we have the platform that we need to emerge from this downturn in a much stronger leadership position, and I have every confidence that we will. With that, let me hand it over to Mark.
Mark Mey
Thank you, Jeremy, and good day to all. During today's call, I will recap the fourth quarter results and provide an update to our 2017 guidance.
I also plan to update our liquidity focus through 2018. For the fourth quarter 2016, we reported net income attributable to controlling interest of $226 million or $0.60 per diluted share.
These results included royalties disclose and other income of $39 million associated with the settlement reached during the quarter related to our drilling activity technology. As detailed in our press release, fourth quarter results included $13 million or $0.03 per diluted share in net unfavorable items.
Excluding these items, adjusted net income was $239 million or $0.63 per diluted share. Contract drilling revenue decreased $93 million sequentially the $793 million due largely to reduce activity and lower dayrates.
The fourth quarter had 255 few operating days in the prior quarter into less re-contracting opportunities. As Jeremy mentioned, we achieved another impressive quarter of revenue efficiency of 100.3% with full year 2016 averaging 98%.
This was primarily attributable to often execution by operational and technical teams worldwide, but also included a favorable settlement associated with previously disputed revenue. Other revenue increased $161 million sequentially to $181 million due to the previously announced lease termination of the Discoverer India.
Fourth quarter operating and maintenance expense decreased $93 million sequentially to $314 million. Fourth quarter's O&M expense benefitted from following four items; recoveries associated with litigation matters, lower cost during the quarter related to the Transocean Winner incident, certain expense credits that would not expect to reoccur in the first quarter 2017, and a timing on the certain maintenance projects.
G&A expense for the quarter increased sequentially $4 million to $47 million due primarily to acquisition cost related to Transocean Partners merger and restructuring costs. Our adjusted normalized EBITDA margin which includes the aforementioned royalty income was 56% in the fourth quarter.
This compares to 52% in the third quarter of 2016. The fourth quarter effective tax rate excluding discrete items was 11.6% compared with 18.2% in the previous quarter.
The decrease was due to changes in adjusted pre-tax income and mix of operating results from certain restrictions. For the full year, we paid approximately $110 million in cash income taxes.
Cash flow from operations increased to $193 million sequentially to $633 million. The increase was due to a collection of previously invoiced payments with the Company's contracted and delivered newbuild drillships.
Capital expenditures in the fourth quarter were $272 million and were largely related to scheduled trip to our last time payment associated with the Deepwater Thalassa. We entered the fourth quarter with cash and cash equivalents of $3.1 billion.
We'll now provide our financial expectations for the first quarter and then the full year 2017. Although, revenue for the first quarter of 2017 expected to be approximately $45 million, which includes customer reimbursables and approximately 50% of the revenue associated with the early termination of the Deepwater Asgard, the remaining portion will be recognized mainly in the second quarter.
We expect first quarter 2017 O&M expense to range between $360 million and $375 million. The increase over the fourth quarter when excluding litigation matters is largely associated with a full quarter of cost on our latest newbuild drillship of Deepwater Conqueror and contract preparation cost associated with the Transocean Barents.
We expect first quarter G&A expense to be approximately $35 million to $40 million, as we should receive the full benefit of our internal restructuring. Capital expenditures including capitalized interest for the first quarter of 2017 are expected to be approximately $130 million, mainly associated with the contracted newbuilds.
For the full year, we reiterate our 2017 revenue efficiency guidance of 95%. Other revenue for 2017 is expected to be approximately $110 million, which includes customer reimbursables and the revenue associated with early termination of the Deepwater Asgard.
Operating and maintenance cost for 2017 are expected to be between $1.4 million to $1.5 million, a decrease for approximately 23% year-over-year and about 5% lower than our preliminary guidance. We expect the overall reduced operating activity in 2017 to be partially offset for the full year effects of our three newbuild deepwater drillships.
Currently, we’re committed to one reactivation in 2017, and for the contract preparation and mobilization with the Transocean Barents. Also related to our long-term BOP and riser agreements, we expect to deliver lower maintenance cost over the 10-year to 12-year contracts duration.
The majority of these cost reductions however are associated with periodic certification expenses, which occurred five year intervals. We expect G&A expense in 2017 to decline to a range of $145 million to $155 million, a reduction of approximately 12% year-on-year.
Full year 2017, net interest expense is expected to be between $445 million and $455 million. Net interest expense includes capitalized interest of $135 million and interest income of approximately $15 million.
For our tax guidance for 2017, we believe it's more meaningful to focus on cash taxes paid than effective tax rate. We expect to pay between $85 million and $100 million in 2017.
Remember as pretax income decreases during the down cycle, the effective tax rate increase significantly and therefore becomes less useful. Full year 2017 depreciation expense is expected to be approximately $130 million.
Capital expenditures in 2017 are anticipated to be approximately $500 million. This includes $430 million in new book CapEx, largely associated with the ship truck payments of the Deepwater Pontus and Deepwater Poseidon.
Maintenance and other CapEx will focus to be approximately $70 million, which includes the expected cost of upgrading the Discoverer India. Turning now to our financial position, we access the deep capital markets in the fourth quarter successfully placing in two separate transactions $1.25 billion of senior secured notes with 2,024 maturities.
These funds we used to partially finance the ultra-deepwater newbuild drillships, Deepwater Thalassa and Deepwater Proteus. Those ships are working on 10-year contract with Shell and the U.S.
Gulf of Mexico. The aggregate 2016 financing transaction lengthened our liquidity runway and strengthened our balance sheet.
In total, we issued approximately $2.5 billion of debt maturing in 2023 and 2024, while removing $2.3 billion maturing between 2016 and 2022. As Jeremy indicated, we will continue to evaluate opportunities that would enhance the closure of fleets.
We are in excellent financial position to be proactive should the right situations present themselves. Regarding M&A, we reacquired the outstanding interest in Transocean Partners eliminating both administrative costs and our quarterly cash distribution totaling between $35 million and $40 million annually.
To complete the all equity merger, we issued $23.8 million --23.8 million Transocean Limited shares. Turning now to projected liquidity, considering our recent capital market transactions, we now expect liquidity at December 31, 2018, in the range of $4.2 billion to $4.6 billion, including impact of the senior secured notes we issued in the fourth quarter.
Our operating assumptions remain revenue efficiency of 95%, a limited number of new contracts with dayrates assumed to be at or near cash breakeven costs throughout 2017, with marginal dayrate improvement in 2018; and those speculative reactivations. In 2018, we expect CapEx of approximately $325 million.
This includes approximately $100 million in newbuild CapEx and $245 million for maintenance and other CapEx. The strong liquidity position combined with our industry leading contract backlog of $11.3 billion positions us very well for the future.
This concludes my prepared comments. I’ll now turn the call to Terry who is suffering with the cold and has trouble talking.
Please bear with her during our prepared comments.
Terry Bonno
Thanks, Mark, and good day to everyone. Here we go again another cycle trough and we are beginning to see positive indicators of customers picking up their pencils and putting them to paper, conversations are becoming more genuine and actionable.
We are engaged in multiple discussions regarding consortium, our rig sharing clubs to facilitate one-off programs with smaller players. During our recent travels, we became aware of new supplies tendering opportunities for about to hit the market.
While IOCs our funding dividends, preparing balance sheet and our investing in easy barrels, we are beginning to see some investors suggest reserve replacement and production growth should become a priority, and these large reserves are only available off-shore with a big company participate. Finally, customers are now asking what the real rig supply is and how many of the rigs are ready to go.
We believe customers strategy will soon return for locking in contracts to take advantage of the low pricing environment and rebuild their reserve base, all of this as you know will take time. And 2017 will be a bit limited and providing meaningful opportunities for the global deepwater floater fleet.
The ramp up will be catchable but steady as energy demand continues to improve. Looking back at '16 even when opportunities were scarce, Transocean's worldwide teams developed multiple contracts totaling of $0.5 billion of contract backlog.
As Jeremy mentioned, our extensive customer relationships proven operational performance and flexible commercial model helped us capture approximately one-third of the 16 market share. Our backlog continues to be in industry leading $11.3 billion.
Looking in a few of the successful opportunities, the KG2 commence operation last week on the three appraisal wells that were ordered by Woodside in the fourth quarter. The program duration could be approximately one year, if the options are exercised.
We are excited about the opportunity of placing another rig in Asia-Pacific region to gain future potential market share. In the UK North Sea, Hurricane Energy recently exercised another option on the harsh environments semi-submersible Transocean Spitsbergen.
The rig is now scheduled to work in the UK North Sea through May 2017 and will then mobilize from a region North Sea for Repsol. This activity is proven mutually beneficial as our operating performance has allowed us to earn multiple bonuses while delivering our customers well ahead of schedule.
We have also extended the Paul B. Loyd with BP in a UK North Sea by one month with the potential for continued drilling for several additional months the options.
Additionally, we just extended the Andaman Contract with Chevron by approximately two months in Thailand. We are also in advanced discussions and expect to announce a few more contracts shortly as we wrap up ongoing negotiations.
As announced in our most recent fleet status report, the Deepwater Asgard was early terminated last month, disappointed by the cancellation. The Asgard is the highly capable drillship that completed its planned drilling program ahead of schedule and delivered stellar performance, routinely beating drilling curves for Chevron and its partners.
Further contract, we were compensated through a lump sum payout. The extremely efficient high specification design positioned her very well for the upcoming tenders.
As discussed, market continues remain challenged as we enter 2017, but with OpEx recent production cuts, our outlook has improved. Oil price has remained of the mid 50s for almost three consecutive months.
Longer term, the micro indicators still points to improve pricing as the overall supply both OPEC and non-OPEC production flattens and demand continues to trend upward. Additionally, the cheap unconventional on-shore barrel breakeven price is increasing, with service price inflation trending upward to 30%.
As with on-shore, off-shore cash breakeven is not a sustainable business with any player in the food chain. Efficiency gains and performance improvements are sustainable and differentiating for Transocean, as we continue to compete against the on-shore barrel.
Our customers continue to view their deepwater assets as important to their future production as off-shore necessary to replace large scale reserve depletion. With oil and gas discoveries at a 60-year low in 2016, production shortfalls may become in reality sooner than later.
As budget set for 2017, we expect the IOCs will represent the majority of the off-shore and specifically the deepwater market, to continue to preserve liquidity in the near-term. Assuming oil prices will continue to trend higher during the year, we expect conversations with IOCs to continue to improve.
As we discussed on the last call, new legislation in Brazil is expected to pay the ways for international investment by IOCs. Statoil, Chevron, Shell and Total are already looking at their portfolio of drilling opportunities there, and we will see wells being drilled in 2018 as evidence by recent tendering offerings.
There is more exciting news from Brazil with the upcoming three off-shore bidding rounds. Round one, which is the second of the pre-salt is expected to take place in June and will cover four unitization areas extended from existing discoveries.
In Sapinhoa, Carcara, Gato do Mato and Tartaruga Verde, no reserves in adjacent wells will allow players to bring these opportunities to market earlier. Round two, which is the 14th profile is expected in September, and we’ll be comprised of a 111 off-shore blocks in areas of Santos, Sergipe, Campos, and Espirito Santo.
Round three, the third of the pre-salt originally planned only for 2018 is now anticipated for November with blocks in the pre-salt area. Additionally, last night regulators approved to reduce local content by 50%, resulting in an 18% local content requirement for exploration and a 25% requirement for development programs.
This greatly improves Brazil's ability to attract new investment off-shore and ultimately improved the overall opportunities for off-shore drilling. India will soon announce their three rigs course for multiple years.
We understand a few companies have been disqualified and we are looking forward to successful results. We expect to see more deepwater tendering by both LNG and others for a future development work in '18.
India is also revising their off-shore licensing policies that will include deepwater blocks, much as the same as Brazil, the objective is to enhance domestic production, increase investment while growing employment. They're also moving to open acreage licensing, which flow our customers to license at anytime eliminating the need for official bidding round.
Turning to Mexico, we had a very encouraging turn-off for around 1.4, and we are encouraged by the profitability for a 2018 joint campaign, particularly with BHP with their 60% ownership for the producing Trion block. We believe they will quickly pursue this opportunity and begin drilling in 2018.
In the U.S. Gulf of Mexico, we are seeing interest from independents for their workovers, interventions, and plug and abandonment wells.
Traditionally, these opportunities were met by fortune, lowered and lower-spec lower DP rigs. However, our Development Driller III has the unique offering for this niche market and the customers are interest.
She has ability to utilize her active heave compensating crane to pull subsea production trees from the sea bed in place among the deck of the rig without engaging other vessels in the field to do this work. She is also dual activity and can be moored or dynamically positioned in shallower water, eliminating competition from drillships.
We expect to see more opportunities in the UK Norway in the coming month. We certainly see a bit more activity and interest in our fleet and are actively engaged on several opportunities for '17 and '18.
In conclusion, we will continue to position Transocean to win more than our share projects and deliver levels that exceed our customers' expectations. Together Transocean team is service focus, operations oriented in data driven, providing a differentiation strategy that will successfully positioned us for the inevitable upturn.
This concludes my overview of the market. So, I’ll turn it back over to Brad.
Bradley Alexander
Thank you, Terry. Dana, we are ready now to take questions.
Operator
Thank you. [Operator Instruction] And we will go first to Blake Hancock with Howard Weil.
Blake Hancock
Terry, this one is going to go to you, but I will let Jeremy answer to save your voice here. You discussed some tendering activities that were surprising that are out there, and then you talked about some that you are in negotiations with, that you hopefully announce sooner than later.
Can we maybe talk about both of those categories, and what regions of the world and duration? And obviously they're competitive, but are we still above cash break even?
Any color you can provide on that commentary?
Terry Bonno
Yes, we actually have been spending as we would guess a lot of time with our customers, and we did come up with the few surprising opportunity to come in the market. I really don’t want to talk about some of the specific opportunities because we don’t believe others are aware of that, which should give us a little bit of an advantage.
So that’s -- sorry that I can't share those particular ones with you. But the one that I've just come out recently and I think it sticks to the back at Brazil has become so interesting, is that in the last couple of weeks you will see three opportunities, tendering opportunities and that has been Chevron and has been Statoil and it's also been Total and Total came in yesterday.
So, again, we know that Total was interested in awarding the North blocks to Brazil, but now this is a new RFI for another opportunity in Brazil. So, they're very encouraging to see that we are seeing on back to back opportunities from the customers hitting and getting the market.
We think that we’re also being seeing more opportunities in Trinidad, it's become very interesting to our customer, and right now there is interest from Shell and BHP in that area. We already talked about Mexico.
We’re going to see the first well drilled by Vitalis in Mexico. And then we also believe with the rounds that have just in awarded that we -- as I said, we are going to see the 2018 opportunities there.
We’re waiting on certainly India has become very active. We’re waiting on announcements from the Reliance tender, which is currently being negotiated with a few of the remaining people that are in that tender.
So, from our perspective, the conversations have become more real. Our teams are working on tenders around the clock.
They are very focused, so that what's changed for me in the last month, I would say is that fact that everything has become a bit more crystallized and the conversations have been very enriching.
Blake Hancock
And then, Jeremy, one for you. You talked about acquisitions, and you talked about the bottom is nearing here.
When you are thinking about timing and funding, are you indifferent between cash to a shipyard or equity for what would be some public player, or how are you thinking about what's the best plan of attack here as we approach the bottom?
Jeremy Thigpen
Yes. I think all options are on the table, I'll pick it have to be either or and so as I said in my prepared remarks and Mark did as well, we’re pursuing all opportunities out there that we think to enhance the quality of our fleet.
Obviously we are looking at the rigs that have been standard and shipyard, we’re also looking at possibilities and equity for complete couple of transactions as well. So, I think everything is on the board at this point in time and it just it’s a function of timing that ask together and getting the right deal.
Operator
And we’ll go next to Greg Lewis with Credit Suisse.
Gregory Lewis
Mark, in your prepared remarks, you laid out the guidance around liquidity. Clearly the mid $4.2 billion to $4.6 billion in liquidity looks good.
You had a busy end of back half of 2016. As you look ahead to 2017 and how are you thinking about maybe bolstering liquidity?
How are you thinking about maybe potentially secured financings? I know you have a revolver that still has a little bit of time left on it.
If you could just talk a little bit about how you are thinking about Transocean's current liquidity position, and maybe how you are thinking about it, what you want to do this year for it?
Mark Mey
Yes. Thanks, Greg.
Appreciate the question. Yes, you are right.
We are certainly washing cash right now. We have over $3 billion of cash.
I’d like to take you back 12 months so the last year this time when oil was trading at $26 a barrel, capital markets were firmly struck for off-shore drillers, that’s what the change. So, we have a full capital market option available to us whether it's secured, unsecure or any other type of instrument that we’re going to put in the balance sheet.
So, I don’t feel that we’re under pressure at the moment to enhance liquidity. We will take opportunities as they provide themselves to us.
We believe all across they're going to be constructive, but as we know they're going to up in the straight line. As, that’s would be the opportunities for us to go back half and do some liability management and we’ll do that.
And we’re opportunistically raise additional funds as the opportunities out there. And really relates to the revolver that is something we do intend to address in the first half of 2017.
So, you can expect us getting to negotiation with our banks so looking through an extension on that revolver. As you know with unsecure at $2 million and to date it still unused.
Greg Lewis
Okay. Great.
And then my next question is regarding the Discoverer India. The decision to upgrade that, it seems like that's where the bulk of the maintenance CapEx, or upgrade CapEx, that you alluded to.
I'm just wondering, is it something specific about that rig? You have a couple other -- or is it timing?
You have a couple other that vintage drillship that you haven't made the decision to upgrade, and what I'm wondering is, as we think about that capital outlay in this market, is there a line of sight on that specific type of upgrade that is driving the decision to spend that additional capital at this point in the cycle?
Mark Mey
First of all the India came in contract not too long ago and we have several near term opportunities of customers that are interested in. So that’s one element, but the other element of it is as you rightly said as we go through our post rating of our rig and we have evaluate our assets vis-to-vis our competitors assets.
We have a few assets where with somewhat minor upgrades. We can move that toward the top gear of all the deepwater assets in the industry.
The India is one of the -- you are right in saying there are few other that have similar characteristics that we think could be upgraded similarly. And just to put in a perspective, we are talking a $25 million to $30 million investment here, and so it's not the bulk of the maintenance CapEx, it's less than half.
And so we think there is great opportunity to upgrade our -- it's in several assets in our fleet to make them competitive if the market turns around.
Operator
We will go next to Haithum Nokta with Clarksons Platou Securities.
Haithum Nokta
Congrats on a nice quarter of solid operations. I wanted to ask, you mentioned firmer inquiries, and sounding more genuine, and things like that, but you also mentioned how there's more noise about reserve replacement from the investor base for the IOCs.
I'm curious if you think, if it takes longer to get to $60 oil than maybe the market expects, could you see more sanctioning of projects, based on the IOCs looking at their internal production outlooks, and noticing this rather significant drop off that could happen by 2020, 2021?
Jeremy Thigpen
I think you are absolutely good. And if you can find already get those that was just already further even more.
But yes, I think it's the first time it's been in just over the last month or two where you have seen itself by the analyst, you have seen investors actively questioning the lack of investment by some of the IOCs in terms of reverse pricing. And so I think that will continue as the year unfolds.
My guess is that actually going great, we are going to see an increase in oil price as well, but even if we don’t, I think that as we get into '18 and certainly as you get into '19, the pressure to replace reserves is going to heighten.
Haithum Nokta
Very good. Maybe on the jack up market, you haven't been as a enthusiastic as some of your peers there, and obviously it's a smaller slice of your overall business.
But can you maybe just talk about your position in that market and how you feel about it going forward?
Jeremy Thigpen
Well, we did one expansion on one of our jack up for Chevron in Thailand, so we were certainly pleased with that. But there is no doubt, there is a lot of interest in jack ups at this point in time, activity is starting to pick up.
And we need jack up would pick up before ultra deepwater, the challenge that the entire jack up market base this year supply and demand. There is just an overwhelming supply out there and although demand is picking up they are more than assets out there to fulfill that demand.
And for the challenge, really is moving pricing forward. And so, I think it's going to be little while before we’re able to get meaningful pricing increase across the industry until we start to see that supply demand gap narrow.
Operator
We’ll go next to Ian Macpherson with Simmons.
Ian Macpherson
I had a question about the pricing dynamic. It is, you made the comment that you haven't necessarily had to bid below cash break even.
There have been sporadic instances where others have, not dramatically lower, but we're also seeing so many dayrates that aren't published. Your margins and the industry's margins today are still so high, surprisingly high and you have done so much with insulating your margins with cost improvements.
But these dynamics, when you put them all together, tell us that pricing and margins are just troughing at a much more benign level than we all would have guessed? Or should we be girding ourselves for lower dayrates from here, and maybe even lower for longer, given how much more economic trend there is to give, and the fact that the market is still going to be loose probably for another couple years?
Or maybe it won't be loose for another couple of years, if you have a different thinking on that.
Jeremy Thigpen
Right, I'll try to answer that. I think to try to back into what margins are going to do.
You really have to look at the overall backlog. I mean we’re very fortunate in that we have the full 10-year contracts with Shell that well above the market dayrates today.
And of course, the five year contract with Chevron. So, we have the good fortune of having that higher margin business already baked into our backlog and you coupled that with the fact that we’ve been able to drive so much cost throughout the business.
That goes well from a margin story. Having said that, then you have to look at all of the new contracts that are being added and assume that there is somewhere around cash breakeven for us so far we’ve been above cash breakeven.
But then you just kind of factor that two together. The good news for us again is the bulk of our backlog long-term contracts, high margin and what we’re bringing in today are relatively short duration even there are much lower margins the short duration and don’t have an big impact on a total financing results that may on others.
Mark Mey
Yes. And for us, and if you think about it, we probably peaked margin wise in 2016 because as Jeremy indicated and as Terry suspects, we’re going to see on lot more activity in 2017 and 2018 and that’s going to be a much lower EBITDA margins.
So, I would expect that the trend is going to be down for the next couple of years in margins, as we start to net rate improvement, which is now timeframe is sometime in 2018.
Ian Macpherson
I think that's really helpful. I appreciate both of your answers there.
I think the kernel of my question is, there's cash break even dayrates, and then there's stacking avoidance dayrates, which are presumably much lower, right? And the latter has not been commonplace, at least we haven't observed it as being commonplace, but is that a realistic risk as we go through the late innings of the trough, that rates aren't at $150,000 they're at $75,000 a day for good rigs?
That type of thing?
Jeremy Thigpen
Yes. It's always a risky as you know today we’ve had fairly decent discipline around the dayrates, because everybody knows its operating and safety and efficiently takes on money.
So, it has to be a certain amount of a dayrate to support that level of performance. But also I think that some of the modest stress drillers are being full to dark because customer recognized the potential associated with using a rig with maybe cash stock.
So they are being very careful around that, as we have heard this from many of our customers to date. So I’ll not say we won't see contracts to lower case breakeven, but as you mentioned in the last 18 months.
I can think about small handful that actually occurred.
Terry Bonno
Yes, just to add one more thing, Ian. There is obviously but not all of the fixtures have that been announced, but we do know opportunities that others have one.
And as Mark suggested we are being very disciplined, we don’t want to lock in of five contracts at a very, very low rate. It doesn’t make any sense for us.
So and we see the dynamics improving, we can obviously -- we are following our strategy and our competitors will follow their strategies. I talking in long for anything when we see them improving outside of Chicago we are going to do.
Operator
We will go next to Colin Davies with Bernstein.
Colin Davies
I would like to delve a little bit more into the scrapping decisions. You have a lot of rigs still on stack, and some rigs coming off contract.
You made a few remarks in the prepared remarks. I would just like to get a little bit more color, if I can, as you look at the fleet, how many more candidates are out there, because Transocean has been one of the leaders in terms of the scrapping pace so far?
Jeremy Thigpen
Yes, in fact just correct you little bit. We have been by far the later unfortunately scrapping.
We take in what we believe to be a very pragmatic approach there has been. And we have described before in terms of first ranking our rigs based on technical capability.
These will be rest of the worldwide fleets. And then we have take in a position in terms of being more normalize environment, whatever normalizes in the industry and more normalize environment, how many floaters in the near to midterm that we think the industry may actually need.
And so then slot our rigs in accordingly kind of drill the line. And anything that fell below the line for us, we then asked ourselves, okay, is there a customer specific or regionally specific application for this particular asset where we think we got a real near-term feature, as the market success.
And of course you've maintained those rigs and you stack them. Those that didn’t meet that or you couldn’t answer yes to those questions, we immediately scrapped them.
And that’s the kind of our mind set behind that. Now that changes, as factors around have changed, as customer sentiment changes, as market sentiment changes.
As a rig stake for a longer period of time, it looks like the reactivation may cause more than we initially said. That all factors then into the calculus and so just because of rig is stacked today, we think there is going to be market, we made that decision and maybe decision to invest in the preservation of that rig.
But every month, we constantly revisit, as we get new data points. And so, there could potentially be some rigs that are stack today.
That have three months from now, six months from now, nine months from now, we say, what the parameters have changed. And now, we think it's time to recycle that rig.
So, how many are there? I couldn’t give you that answer today.
It's just constantly evolving.
Colin Davies
Okay. That's very helpful.
Thank you. And just one follow-up, which is somewhat related.
As you start to look at transaction opportunities to further enhance the portfolio, it's a difficult question to answer, but how confident do you have to be at that market trajectory that you have been describing today, to be comfortable taking on assets that may be technically attractive, but are still effectively without work, and could be without work for an extended period?
Jeremy Thigpen
It's a delicate balance business because if you wait too long and everybody feels secured in the recovery of the market than they asked, it starts to get a little bit higher. And so, certainly, we like to have more certainties unless, but that we’re actively looking now.
So, we’re feeling is though we have the trough or sooner approaching the trough. But who knows, I mean this market is unpredictable.
Mark, can you add anything to that.
Mark Mey
No. there is sort of same thing, because you cannot wait too long because the opportunity may not be there for you.
So, we have to a pretty good strike. And I think Transocean given our marketing presence and marketing intelligence, we probably the best information out there and probably get as you look for most people do.
So, I think when we do decide the guidance, strike you can read that as a sign and we think the market is certainly trough and improving from there.
Operator
We'll go next to David Smith with Heikkinen Energy Advisors.
David Smith
Just following up on the upgrade question, regarding the 25 million to 30 million level upgrades, does that benefit from cost deflation at the yard, or the OEMs, and then maybe wondering if you have a sense of how much the India upgrade would have cost in 2014?
Jeremy Thigpen
Yes. That’s a great question, David.
We haven’t run that analysis, but you can assume just looking at margins in some of the OEMs that have come down quite dramatically that we’ve taken advantage of that. That certainly was not the motivation to go out and do this, we’ve had opportunities if we look at for our rig fleet that the few upgrades that we’re making to the India would position that rig very well for those opportunities.
So, recognize the point, but there wasn’t a motivational.
David Smith
Can I ask, if you expect to earn a payback on the upgrade and kind of the two to three year timeframe or how you think about the return on that?
Jeremy Thigpen
Two to three years, absolutely, yes.
Operator
We’ll go next to Vebs Vaishnav with Cowen.
Vaibhav Vaishnav
Good morning. And thanks for taking my question.
A question for Mark, you spoke about fuel factor driving lower than guided OpEx for fourth quarter. Can you help us quantify the bigger buckets that drilled OpEx from like almost 405 to like 345?
Mark Mey
As I mentioned there was really four areas and we have some recoveries with litigation that we’re going to that $13 million area. We have some cost on the Transocean Winner incident and that's in the mid teens.
We had some one-off credits in the quarter, also in the low teens and the rest of it is associated with the timing of maintenance projects would you know happens every quarter.
Vaibhav Vaishnav
That’s very helpful. And as we speak about the 360 million to 375 million OpEx for the first quarter, did you say you have like balance reactivation cost included in there, and if so how much?
Mark Mey
The balance reactivation costs are not that much. I would say that it’s a probably in the $20 million area.
There will be capitalized at about $40 million that will be expense.
Operator
And we’ll take our final question today from Sean Meakim with JPMorgan.
Sean Meakim
Just thinking about the upgrades to the Discoverer India, managed pressure drilling seems like a pretty nice way to differentiate a deepwater rig. Can you give us an update on your broader MPD exposure, and how you think about optionality from the fleet to maybe add more, if demand warrants it?
Terry Bonno
Hi, Sean this is Terry. I think you nailed it, but we’re seeing a lot of opportunities out there.
Certainly in Brazil and in West Africa and in Asia where the customer wants that, that type of capability on the rigs and it's something that we have the opportunity to do now on the India. And we will certainly take a look at that on some of our other fleet because again the markets going to support that upgrade and it's going to be a requirement, so that’s another reason to do it.
Sean Meakim
And it's pretty inexpensive on a relative scale, I imagine, right?
Terry Bonno
Yes, it's not terribly expensive, no.
Sean Meakim
Thank you. And I guess one other thing.
In Jeremy's prepared remarks, he talked about conditions based monitoring, and adding incremental critical suppliers and components this year. Maybe you don't want to call anyone out, I can understand that.
But just thinking about what are some of the areas that you focus on next as we go through the year?
Jeremy Thigpen
Well, so far we have addressed pressure control equipment with two large suppliers. There is certainly another out there that we would like to negotiate similar agreements with.
But then also as you look across, the drilling equipment package and especially these critical components where downtime just absolutely devastating and cost to maintain is high. And so, you are talking top drives and iron roughnecks and racking systems and draw works and so.
Across the spectrum, we would like to engage in the partnerships with our suppliers whereby we're lined around the same objectives, which is reducing the total cost to maintain the asset, but a likely a asset and improving that time for our customers. And so, I feel confident we will get there and look forward to the ultimate results there.
Operator
And at this time, I would like to turn the call back over to Mr. Alexander for any additional closing remarks.
Bradley Alexander
Thank you to everyone for your participation and questions today. If you have further questions, please feel free contact me.
We will look forward to talking with you again when we report our first quarter 2017 results. Have a good day.
Operator
Again, that does conclude today's presentation. We thank you for your participation.