Nov 2, 2017
Executives
Bradley Alexander - Transocean Ltd. Jeremy D.
Thigpen - Transocean Ltd. Mark Mey - Transocean Ltd.
Roddie Mackenzie - Transocean Ltd.
Analysts
Angie Sedita - UBS Securities LLC Gregory Lewis - Credit Suisse Securities (USA) LLC K. Blake Hancock - Scotia Howard Weil Ian Macpherson - Simmons & Company International Scott A.
Gruber - Citigroup Global Markets, Inc. Haithum Nokta - Clarksons Platou Securities, Inc.
Kurt Hallead - RBC Capital Markets LLC Waqar Syed - Goldman Sachs & Co. LLC Eduardo B.
Royes - Jefferies LLC J.B. Lowe - Bank of America Merrill Lynch
Operator
Good day, and welcome to the Third Quarter 2017 Transocean Earnings Call. Today's conference is being recorded.
And at this time, I'd like to turn the conference over to Bradley Alexander, Vice President of Investor Relations. Please go ahead, sir.
Bradley Alexander - Transocean Ltd.
Thank you, Levi. Good morning, and welcome to Transocean's third quarter 2017 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 Roddie Mackenzie, Vice President of Marketing and Contracts.
During the course of this call, management 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. When we get to our question-and-answer segment of the call, to give more participants an opportunity to speak, please limit your questions to one initial question and one follow-up question.
Thank you very much. I'll now turn the call over to Jeremy.
Jeremy D. Thigpen - Transocean Ltd.
Thank you, Brad. And a warm welcome to our employees, customers, investors and analysts participating in today's call.
Before delving into the quarter, I'd like to introduce and welcome Roddie Mackenzie to our call today. As many of you know, Terry Bonno, our long time Senior Vice President of Marketing and Contracts recently moved into the newly created role of Senior Vice President of Industry and Community Relations, where, among other things, she will help me to lead Transocean's effort around corporate sustainability.
In her place, Roddie, who has served in numerous technical, operational and marketing roles over his nearly 20-year tenure with Transocean, has now assumed the role of Vice President of Marketing and Contracts, and will support Mark and I during the question-and-answer portion of today's call. I'd like to begin by thanking the entire Transocean team for delivering another quarter of strong operational results.
As reported in yesterday's earnings release, for the third quarter, the company generated adjusted normalized EBITDA of $349 million on $709 million in adjusted normalized revenue, resulting in a third quarter adjusted normalized EBITDA margin of 49%. These results were driven by a combination of solid uptime performance with revenue efficiency of 97.1% in the quarter, and continued cost control.
Needless to say, we're again pleased with our operating results as they reflect our unwavering commitment to continuous improvement across the enterprise, including creating an incident-free workplace, high grading our fleet, maximizing uptime performance for our customers, reducing the time required to construct a well, and as evidenced by our strong and consistent EBITDA margin performance, doing all of this while realizing efficiencies in every aspect of our business. Let's start with safety.
I'd like to recognize the entire Transocean team for achieving what is now approaching 19 consecutive months without a single lost time incident. Because of your focused efforts, we continue to improve our safety performance, which was, according to the International Association of Drilling Contractors, already industry-leading in both the first and the second quarters of this year.
In addition to continuous improvements in safety, we also continue to improve the overall quality of our fleet. In August, we entered into an agreement to acquire Songa Offshore and its fleet of seven floaters, including four new harsh environment, high-specification Cat-D semisubmersibles.
As a reminder, these Cat-D rigs were designed in collaboration with Statoil and are currently contracted to Statoil with a total backlog of approximately $4 billion, which extends into 2024. It's important to note that this $4 billion in backlog does not include the follow-on multi-year options, which could add an incremental 12 years of work for each of the four rigs.
Since the transaction will add four new harsh environment assets to our fleet, in a target market with a strategic customer, while also adding to our industry-leading backlog, we are excited to finalize the combination and to welcome Songa Offshore to Transocean. While the Songa Offshore acquisition is keeping us busy, we continue to evaluate additional opportunities to upgrade our fleet through both corporate M&A and individual asset purchases.
However, as previously stated and as evidenced by the Songa Offshore transaction, we will continue to carefully consider both rig capability and the impact to near term liquidity when assessing any prospect. In addition to acquisitions, we continue to high grade our fleet with the delivery of newly constructed rigs.
The Deepwater Pontus recently arrived in the Gulf of Mexico, where she has just commenced operations on her 10-year contract with Shell. The Deepwater Poseidon will arrive in the Gulf of Mexico in the coming months, where she too will begin a 10-year contract with Shell early next year.
Of note, the Deepwater Pontus and the Deepwater Poseidon are the fourth and fifth contract-backed newbuild drillships delivered to our fleet in the past two years. With the addition of these five new builds and the four Cat-D Songa rigs that will soon become part of our fleet, we will have a total of nine assets contracted with investment grade operators for terms extending through at least the end of 2021 and as far as 2028.
Continuing the focus on our fleet, you may have read in our latest Fleet Status Report that we agreed with SembCorp Marine's Subsidiary Jurong Shipyard, to enhance our two remaining newbuild drillships with an industry-best 3 million pound hook load. As many of you know, some wells in the Gulf of Mexico and other deepwater plays around the world, require very heavy casing strings, which in turn necessitate higher hook load capacities.
These two rigs will be the only rigs in the industry capable of running the heaviest big strings while maintaining spare over-pull capacity. These upgrades also position these rigs to be excellent candidates for future 20K conversions.
While certainly not as exciting as acquisitions, newbuilds, or upgrades, purging some of our older assets remains vital to assembling the strongest fleet in the industry. As such, during the third quarter, we announced our intent to remove six additional assets from our fleet, including five ultra-deepwater assets, which we deemed to be challenged.
This will bring the total number of rigs retired from our fleet since the start of the downturn to 39. As previously demonstrated, we will continue to objectively evaluate our assets, and we will continue to recycle rigs that, we believe, will struggle to compete as the market recovers.
As a result of these retirements and upon completion of the Songa transaction and the delivery of our two remaining drillships in the shipyard, 40 of our 49 assets, or about 80%, will be either ultra-deepwater or harsh environment floaters with 25 of those being delivered since 2007. Additionally when looking specifically at our ultra-deepwater assets, we will own 9 of the 28 most capable drillships in the world.
And when looking at harsh environment assets, we will own 6 of the 28 most capable assets in the world. Through this high grading of our fleet, we are better positioning Transocean for further improvement, including maximizing uptime performance for our customers and reducing the time required to construct a well.
Regarding uptime, we continue to consistently deliver excellent uptime performance, ranging between 96% and 98%. However, we know that there's still more that we can do.
As such, we recently entered into two additional care agreements: one targeting the life extension of the thrusters supplied by Rolls Royce on 14 of our dynamically positioned rigs; and the other focused on improving the uptime on top drive equipment, supplied by MH Berg (07:54) on nine of our floaters. These represent the fourth and fifth care agreements that we've executed with some of our core suppliers, designed to maximize uptime while simultaneously reducing the total cost of ownership over the life of the asset.
We now have long-term agreements in place that cover BOPs, risers, critical drill floor components, including iron roughnecks, draw-works and top drives and now thrusters. These agreements align us around the common objective of improving equipment-related uptime and performance predictability, and ensure reduction in the number and frequency of overhauls, thus driving down and normalizing our maintenance and repair cost over the contract period.
Moving from reliability to drilling efficiency, we continue to be pleased with the impact of our performance dashboards. Across our fleet, we are operating at an average of 111% of our previously established key performance indicators.
As a reminder, we established KPIs for each phase of the well construction process and established benchmark targets, which at the time, represented our top quartile performance fleet wide. Now, as a result of the improved visibility and focus, we are experiencing reduction in well construction times such that the vast majority of the fleet is now outperforming what was previously our top quartile.
While extremely encouraged by the results thus far, there is more that we can and will do as we continue to add to the functionality of the app and find additional ways of leveraging it to further compressed well construction times and drive consistency of performance across our global operations. In summary, from an operational standpoint, as we await the market recovery, we continue to improve upon those things that are within our control, driving down the cost of well delivery, which should ultimately help to facilitate our customers' future investment in offshore drilling.
Speaking of the market, oil prices have become more constructive over the last few months, with Brent reaching a two-year high near the $60 mark, both at the end of the third quarter and again over the last week. With our customers continuing to tout breakeven cost at or below $50 a barrel in many deepwater basins around the world, we continue to have a favorable long-term view of the market.
Candidly, we are already seeing signs of improvement. As stated last quarter, our market outlook today is far more optimistic than it was 12 months ago.
Floating fixtures awarded in 2017 to-date have already exceeded last year's total by approximately 40%. In fact the deepwater drilling industry has experienced six consecutive quarters with increasing floater contracting activity.
Adding to our optimism, we have seen operators in multiple basins now contracting ultra-deepwater assets for multi-year projects for the first time in over two years. As evidence of this phenomenon, we recently announced a new two-year contract with BHP for the Deepwater Invictus, which includes dayrate adjustments for any changes in the operating location, and three additional one-year options with escalating dayrates, including market rate adjustment in years four and five.
While we would not be so bold as to suggest that the ultra-deepwater market is in full recovery, it is encouraging to see customers demonstrating more conviction by locking up high-specification assets under multi-year contracts. In addition to the new work we disclosed in the fleet status report last week for the Deepwater Invictus, the Deepwater Nautilus, and the Paul B.
Loyd, we are pleased to have secured another contract with Woodside in Myanmar for the KG2, which starts in May for a firm three-well campaign with options. This program should last between 150 and 400 days depending on the exercise of options.
We're also close to securing contracts on several other programs that could be awarded before the end of the year. As we look across the globe, we see a handful of near-term opportunities in the Gulf of Mexico driven by the independents.
As you might expect, most of these opportunities are for short to medium-term durations and are likely to be very competitively bid. Nevertheless, they could help to bridge the gap to the next long-term opportunity as we work towards an eventual market recovery.
We also see some opportunities throughout Latin America, which includes Mexico, where we anticipate the second licensing round for deepwater blocks to occur in December, as well as Trinidad, Colombia, Guyana, Suriname, and of course Brazil. Focusing on Brazil, with its large volume of undeveloped reserve, a reduction in break-even levels below $40 per barrel on most projects and favorable legislation, which includes a reduction in local content requirements and the extension of the special customs regime, we are seeing growing interest in Brazil from both the majors and independents, which we believe will drive a sizable increase in tendering activity in 2018 and 2019 for projects then commencing in late 2019 and 2020.
Moving to the Eastern Hemisphere, in the UK and Norway, we continue to see strengthening demand for midwater and more specifically for harsh environment assets. As a testament to the tightening market, dayrates for high-specification units have increased more than 50% from where they were a year ago.
With rising customer demand, driven by $30 per barrel break-even levels and a limited number of harsh environment assets available in the market, we would expect to see dayrates for the higher-specification harsh environment assets continue to improve. In Africa, we were encouraged to see longer-term contract awards in Nigeria, as they represented some of the first multi-year awards in West Africa in almost three years.
In Angola, Sunangol is taking steps to improve its petroleum and natural gas legal framework to support further development of Angola's natural resources. And we see the potential for future demand in Ghana, Côte d'Ivoire, Equatorial Guinea, and East Africa.
In short, we are anticipating an increase in activity from several different operators in several different markets in Africa. In the Asia-Pacific region, we've seen multiple awards in India, Myanmar, Malaysia and Australia.
And we expect to pursue what we believe to be multiple floater opportunities in this region over the next 12 to 18 months. In conclusion, we are generally excited about the opportunities in the UK and Norway, where we're witnessing a tightening of supply and demand for midwater and harsh environment asset, which is leading to ongoing dayrate improvement.
We are encouraged by some of the opportunities that are surfacing in Australia and other parts of the Asia-Pacific region. And for the first time in three years, we're actually seeing multi-year awards in the Golden Triangle.
To be clear, dayrates in the deepwater markets remain under extreme pressure today. However, as activity begins to tick up and asset availability becomes tighter, especially for those higher-specification, more efficient drilling machines, we fully expect to see dayrate improvement over time.
While today's outlook is certainly more encouraging than it was 12 months ago, we recognize that we are still in the midst of a downturn. And since the price – precise timing and trajectory of the eventual recovery is still uncertain, we continue to take the necessary actions to best position Transocean.
As an example, just last month, we opportunistically accessed the market and issued $750 million of unsecured priority debt, which effectively addressed all unsecured bond maturities coming due before 2020. And as Mark will discuss in just a moment, we have other levers that we can and will pull as we continue to extend our liquidity runway.
Before turning the call over to Mark, I would just like to, once again, thank the entire Transocean team for your efforts so far this year. We have significantly improved the overall quality of our fleet.
We are making substantial strides in creating an incident-free workplace. We are moving closer to our goal of 100% uptime.
We are delivering wells for our customers more efficiently than ever before. As evidenced by our strong normalized adjusted EBITDA margins, we are managing our business more efficiently than ever before.
And because of our consistent and efficient operating performance and the great work by our finance and legal teams, we have the liquidity to continue to invest in our people and our assets despite the challenging and uncertain market conditions. Well done and thank you.
Mark?
Mark Mey - Transocean Ltd.
Thank you, Jeremy and good day to all. During today's call, I will recap our third quarter results and discuss our balance sheet and liquidity position.
I'll also provide an update to our 2017 guidance, an early look at our 2018 cost expectations and discuss our liquidity forecast. Finally, I will provide an update on the Songa Offshore acquisition.
For the third quarter 2017, we reported net loss attributable to controlling interest of $1.42 billion or $3.62 per diluted share. As detailed in our earnings press release, third quarter results included net unfavorable items principally related to our previously announced $1.39 billion impairment on the retirement of six floaters.
Excluding the net unfavorable items, adjusted net income was $64 million, or $0.16 per diluted share. Contributing to these results was another stellar quarter of revenue efficiency at 97.1%.
We've now delivered 95% or better revenue efficiency for 14 of the last 15 quarters. This consistent trend in our uptime performance has enabled a successful conversion of our industry-leading backlog into operating cash flow.
As mentioned earlier, our adjusted normalized EBITDA margin was 49% for the third quarter, unchanged sequentially and for the year. Recognizing that we are now in the fourth year of this industry downturn, this is very impressive.
We ended the quarter with liquidity of $5.7 billion, including our $3 billion undrawn revolving credit facility. In early October, we successfully accessed the debt markets, issuing $750 million of priority guaranteed senior secured (sic) [unsecured] (16:57) notes with a 2026 maturity, receiving net proceeds of $742 million.
Approximately $550 million of these net proceeds will be used to meet our 2017 and 2018 debt maturities. The excess proceeds are expected to be used for the Songa acquisition.
We will continue to take advantage of opportunities to enhance our liquidity and strategically address our near-term and mid-term debt maturities. As you are aware, we have both unsecured and secured financing options available to us in addition to our aforementioned RCF.
Since June of 2016, we have reduced our net debt position by almost 25% or $1.4 billion, while consistently maintaining a healthy cash balance of more than $2 billion. I will now provide an update to our financial expectations for the fourth quarter of 2017.
Our fourth quarter of 2017 revenue efficiency guidance remains at 95%. Other revenue for the fourth quarter 2017 is expected to be approximately $35 million, which includes customer reimbursables and approximately $25 million of revenue primarily associated with the previously announced early termination of the Discoverer Clear Leader.
The remaining termination fees on this rig will be recognized in 2018. Fourth quarter O&M expense is expected to range between $380 million and $390 million.
This represents no change from our prior quarter's full year guidance. The approximately $50 million increase over the third quarter's O&M is mainly due to the reactivation and contract preparation costs related to Development Driller I and the Deepwater Nautilus, the commencement of operations on our latest newbuild drillship, Deepwater Pontus, timing of certain maintenance cost planned for prior quarters, and recycling costs associated with previously announced rig retirements.
These recent rig reactivations represent strategic decisions to bring assets back into the market, where they have won new contracts, we believe, have a strong long-term competitive advantage. We expect fourth quarter G&A expenses to be approximately $45 million, which excludes costs associated with the Songa acquisition.
The sequential increase is due to timing of certain costs, including IT system enhancements and corporate support. Fourth quarter 2017 net interest expense is expected to be approximately $125 million, reflecting our recent debt transactions.
This amount includes capitalized interest and interest income. Depreciation expense for the fourth quarter is expected to be approximately $185 million.
We expect a portion of our consolidated earnings attributable to non-controlling interest to be approximately $8 million for the fourth quarter. Capital expenditures, including capitalized interest for the fourth quarter of 2017, are expected to be approximately $125 million.
$110 million associated with our newbuilds, including final shipyard payments on Deepwater Poseidon and $15 million for maintenance and other capital expenditures. Now for an early look at 2018's (20:12) cost projections.
These estimates exclude the acquisition of Songa Offshore as we are yet to close that transaction. We'll provide updated guidance, including Songa, on our February 2018 earnings call.
Operating and maintenance costs for 2018 are expected to be approximately 3% lower than our full year 2017 O&M expectations, consistent with year-on-year percentage reduction in operating days. The 2018 guidance includes full year operations of ultra-deepwater newbuilds Deepwater Pontus, which commenced operations late last month and Deepwater Poseidon, which is expected to commence operations in the first quarter of 2018, and completion of the contract preparation and mobilization to Australia of the ultra-deepwater semisubmersibles of the DD1.
These costs are offset by reduced activity in cost savings across the remainder of our fleet. We expect our G&A expenses in 2018 to be in line with our 2017 expectations.
Full year 2018 net interest expense is expected to be approximately $520 million, reflecting our recent capital market transactions and reduction in capitalized interest. This includes capitalized interest of approximately $50 million and interest income of $15 million.
Capital expenditures in 2018 are anticipated to be approximately $140 million. This includes approximately $75 million in newbuild CapEx and $65 million for maintenance CapEx.
Turning now to projected liquidity as of December 31, 2019. Excluding any assumption for a new extended revolving credit facility to replace our current RCF expiring mid 2019, our end of year 2019 liquidity pro forma for both Songa transaction and the October debt issuance is estimated to range between $1.8 billion and $2 billion.
As I mentioned in our previous call, renewing or extending our RCF remains a priority, which we expect to complete during 2018. Also similar to our secured financings executed on Deepwater Thalassa, Proteus and Conqueror, we plan to utilize Deepwater Pontus and Poseidon to secure additional estimated $1.4 billion of secured financing.
Consistent with prior financings, we expect to use the proceeds primarily to retire debt maturing prior to 2023. In 2019 we expect total CapEx to be approximately $190 million, split evenly between newbuild CapEx and maintenance CapEx.
I would note that both 2018 and 2019 CapEx guidance exclude any speculative rig reactivations. This strong liquidity position combined with our industry-leading contract backlog, positions us very well for the future, even if the downturn lasts a few more years.
Before I conclude, I'd like to make a few brief comments regarding acquisition of Songa Offshore. We received all required approvals from the antitrust authorities and we've completed our internal due diligence process without any material findings.
In connection with the U.S. regulatory process, in October, we filed both an S4 Registration Statement and a preliminary proxy statement.
These filings were reviewed by the SEC as is customary for these types of transactions. We are in the process of responding to SEC comments, which we anticipate occurring in the coming days and we expect final approval shortly thereafter.
Subsequently, we plan to hold our Extraordinary General Meeting most likely in mid-December and expect to close the transaction before year-end. Meanwhile integration planning is well advanced enabling full realization of the previously discussed synergies in 2018.
This concludes my prepared comments. I'll now turn the call over to Brad.
Bradley Alexander - Transocean Ltd.
Thanks, Mark. Levi, we're ready to take questions now.
And as a reminder to the participants, please limit yourself to one question and one follow-up.
Operator
Thank you. And we'll take our first question from Angie Sedita with UBS.
Angie Sedita - UBS Securities LLC
Hi, good morning, guys.
Jeremy D. Thigpen - Transocean Ltd.
Hey, Angie.
Angie Sedita - UBS Securities LLC
Hi, Jeremy. So on the North Sea, could you talk a little bit – I mean, it's become a tight market and can you talk a little bit about what you're thinking or what you're hearing on the dayrate side as far as where we could be moving forward going into 2018?
And then, part two of that is if we think forward about other rig categories or regions of the world, there certainly will be other markets that start to tighten before the general market. So if we think through either on a region specific basis or a rig specific basis, where do you think would be the next segment that we could start to see tightening and eventually some dayrate power?
Jeremy D. Thigpen - Transocean Ltd.
Thanks, Angie. I'm going to let Roddie answer that for us.
Roddie Mackenzie - Transocean Ltd.
Hi, Angie. Thanks for the question.
Okay, so your first question was around the North Sea and Norway. So specifically to dayrates, so while we can't speculate on what we would bid, I can certainly tell you what happened recently.
So what we've had in Q2, we saw rates around the 200 (25:35) mark for the high-specification units. And that's increased in Q3 to – the latest fixture, that was at 250 (25:43).
So will we see an increase in Q4? We believe you will because you're simply seeing a tightening of the availability of the high-specification units.
And then, as we think about the other regions around the world, which one is tightened. So, the first thing that we see is more the very specific niche markets, where you're requiring a different type of rig.
So, for example, where you require a DP and a moored rig all in one, places like Australia and what have you, that will begin to tighten up first. And then after that, I think as Jeremy alluded to, we're just seeing a general increase in tendering activity.
We're seeing a marked increase in fixtures being made compared to last year, so we think overall markets will tighten, but certainly the niche markets are the first ones to go.
Angie Sedita - UBS Securities LLC
Okay. Okay.
Thank you. That's helpful.
And then I know it's been not a millisecond that we've seen $60 Brent, and we need to see some duration to that before we see much change in behavior. But has there been any change in the conversations with your E&Ps?
Has there been any pickup or change in tone with the conversations now that we're moving into this level of Brent?
Roddie Mackenzie - Transocean Ltd.
Yes, there has. So I think what we're seeing now is you'll see many headlines where the operators are talking about essentially their ex-E&P costs, so their economic investment thresholds being anywhere from in the 20s and 30s, up to the $50 (27:20) mark.
And certainly, I think all of them have been discussing over the last two years of how do you make the business viable and how do you make offshore drilling an attractive investment at $50 or below, and I think many of them have gotten themselves in that space, particularly through the higher efficiencies that we're seeing on the rigs, and particularly things like our KPIs that Jeremy alluded to, and also the overall lower spread costs are delivering them much better value. So certainly we're seeing that going in the right direction.
Angie Sedita - UBS Securities LLC
Okay, thanks, guys. I'll turn it over.
Jeremy D. Thigpen - Transocean Ltd.
Thanks, Angie.
Operator
And we'll take our next question from Gregory Lewis with Credit Suisse.
Gregory Lewis - Credit Suisse Securities (USA) LLC
Hey, thanks, and good morning, guys.
Jeremy D. Thigpen - Transocean Ltd.
Good morning, Greg.
Gregory Lewis - Credit Suisse Securities (USA) LLC
Just like a two-part question just because clearly you made the decision to upgrade the newbuilds to 3 million pounds hook loads. I guess, I'm just wondering if you could provide a little color on the decision to do that and just with that, you also, earlier this year, you announced that you were going to upgrade the India.
And just so, is this something where this is the cost of doing business? This is what customers want?
Are they just wanting more of everything? And with that, are we getting any sense that they're going to be willing to pay for that?
Jeremy D. Thigpen - Transocean Ltd.
Yeah, thanks, Greg. In the current market, are they willing to pay for it?
Probably not. In the current market, they can have their choice of high-specification assets at really competitive dayrates.
We've taken a position, we've talked about this before on past calls, where we've gone through and we force ranked every asset in the world. We've then taken a position that, hey, when we get back to a more normalized market, whatever normalized is in this industry, how many floaters do we think the industry will need.
We've segmented that by ultra-deepwater and harsh environment. And so we took a really, I think, thoughtful view about this, a very sober view of this, and we looked at our own fleet and we said, all right, if the – this new normal is only going to be somewhere between 180 and 220 floaters in the world, how do we make sure that we have the highest quality fleet to fit into that new market?
And so as we've looked around, we've looked at some of our existing assets like the India, and we said, listen, we can move this, which, I think, we had it right in the 70s range (29:41), we can move this significantly up the chain with just a relatively small investment and some upgrades. We took a similar view of these newbuilds that are currently in Jurong Shipyard, and so these are all just a better position, our fleet as we come out of the – come out of this downturn.
In the beginning it will be about market share, obviously, and then as dayrates start to improve, we will be able to command premium dayrates for these assets.
Gregory Lewis - Credit Suisse Securities (USA) LLC
Okay, great. And then just as we look forward through year end, I guess we have the KG1 rolling off in Brazil.
Is – was there any sort of color you can provide on the potential for that asset? Is that something we should expect to be moved out of Brazil as we move forward into 2018 for better opportunities?
Roddie Mackenzie - Transocean Ltd.
So, Greg, I'll take that one. Yes, so we do have several opportunities for the rig, and it's possible that she would leave Brazil but it's also possible she would stay there.
So you're probably aware there are several tenders in Brazil, but there's also ones elsewhere. So we're cautiously optimistic that we'll be placing the KG1 in 2018.
Gregory Lewis - Credit Suisse Securities (USA) LLC
Okay. Perfect.
Thank you for the time.
Jeremy D. Thigpen - Transocean Ltd.
Thanks, Greg.
Operator
And we'll take our next question from Blake Hancock with Howard Weil.
K. Blake Hancock - Scotia Howard Weil
Thanks. Good morning, guys.
Roddie, welcome to the firing squad. Jeremy, maybe first off, you mentioned some of these long-term contracts that have been signed here in the last, call it, six months or so.
Just wanted to get your opinion, is that kind of you guys signaling that the rates are going to be here at these levels for the next two or three years, A. And B, just kind of the approach to why one of your better assets for up to five years and how you're thinking about the fleet from a portfolio perspective?
Jeremy D. Thigpen - Transocean Ltd.
Yeah, so I'll answer the rig question first. I don't think you should read anything into it in terms of what we think about rates going forward.
We've seen contracting activity, generating activity pick up over the course of the last 12 months. We expect that to continue as we get into 2018 and 2019.
As you see more of that, you see more of the higher specification rigs going back to work, we would hope to see dayrate improvement as we get into 2019, but we don't know that yet. So that's kind of how we feel about rigs going forward.
Increasing activities as we move into 2018 and 2019 with dayrates then moving up. With respect to the Invictus in particular, we were responding to three different tenders simultaneously.
All three operators, one of our best assets, which they can demand now. All three wanted to lock them up for at least two years plus additional two to three years in options.
So as we looked across that, there was only one opportunity, where we actually had the ability to move dayrates upward in a meaningful way in the outer years. And so we aggressively pursued that opportunity and we won it.
And we did not aggressively pursue the other two opportunities. So this one was the best way to keep one of our best assets on contract with an operator that that rig has been with since it came out of the shipyard.
So there were a number of factors that led into that one, but certainly still maintaining some optionality with some of our other better assets.
K. Blake Hancock - Scotia Howard Weil
That's great (32:45).
Roddie Mackenzie - Transocean Ltd.
I would also – Blake, I'll also add a little color there. The other part of this was it's a multi-jurisdiction possibility on that contract.
So it's very interesting for us because we've not only did Gulf of Mexico but Trinidad & Tobago as well. It's probably the first location for it.
But most interestingly it could lead into a segue into Mexico for us, which should be a very good way for us to enter that market.
K. Blake Hancock - Scotia Howard Weil
That's great. Thank you.
And then, Mark, maybe one for you on the 2018 cost guidance. Can you kind of give us some color on how you guys are thinking about it?
It looks like it would kind of assume that rigs that are working today are kind of recontracted at some point next year, but it doesn't seem like there is a whole lot of cold stacked rigs getting reactivated in that number. Can you just kind of walk through how you guys are thinking about that?
Mark Mey - Transocean Ltd.
Yeah, sure, Blake. So you're right.
As I mentioned, we don't include any rig reactivations in that. What we do assume is that some speculative revenue and associated costs associated with rigs that will roll over next year, so you could assume that we included about 20% of operating days associated with those rigs.
And that's included in the guidance I provided you earlier.
K. Blake Hancock - Scotia Howard Weil
That's great. Thank you guys.
I appreciate it.
Jeremy D. Thigpen - Transocean Ltd.
Thanks, Blake.
Operator
And we'll take our next question from Ian Macpherson with Simmons.
Ian Macpherson - Simmons & Company International
Hey, thank you. Jeremy, I wanted to ask another question about the 3-million-pound hook load upgrades.
If could expand a little bit on, just from a technical or engineering perspective, what that entails to get that level of capability. I assume it's not a retrofittable quality for the other rigs in the world, if you could comment on that.
And whether this was pooled by specific customer requests or if it's an innovation that you're trying to take the lead with.
Jeremy D. Thigpen - Transocean Ltd.
Ian, you're asking me an engineering question? I'm going to defer to Roddie to answer that one and I'll chime in as well.
Ian Macpherson - Simmons & Company International
All right.
Roddie Mackenzie - Transocean Ltd.
All right. Thanks, Ian.
Yes, so your first question was about what do you have to do to enact that. So basically there is modifications that you make to the draw-works and, obviously, the traveling equipment.
But essentially that the rigs are in a stage of construction, where there is an option for us that's relatively cost effective way of doing it. In terms of a retrofit to other rigs, that's quite tricky especially if the derricks will be finalized, there will be equipment in place, then they will not be rated to that kind of levels, but, yeah, so for us it's an opportunity to really put a marker out there and be the first 3-million-pound rigs in the world.
Jeremy D. Thigpen - Transocean Ltd.
And it wasn't driven by a specific customer rig, as we (35:29) see what's happening in the marketplace, and we know that this would be of value, especially in the Gulf of Mexico. We also believe that at some point in time there will be a 20K opportunity, and this would definitely position those rigs as leading candidates for that opportunity.
Ian Macpherson - Simmons & Company International
Okay. And then I think you've kind of spoken with your wallet here with regards to staying committed to those rigs.
Small but incrementally spending a little more to make them more capable. But the go forward CapEx, including all of this here and the next three years is still, I think, about $600 million of the $800 million for those rigs.
And so the return thresholds for those assets compared to the M&A marker that's out there today, it's a wide gap. So, I guess, how do you get comfort with the return profile of these newbuilds on the go-forward capital compared to your opportunity set in the M&A environment?
Mark Mey - Transocean Ltd.
Ian, this is Mark. And you're absolutely spot on.
We could certainly go out and buy uncontracted newbuilds at a very high specification level today at the shipyard. However, we have to bear in mind that we have very strong contracts from both sides' perspective with regard to those two newbuild drillships.
So those contracts will be honored by Transocean irrespective of the fact that it's going to cost us a little bit more. But remember, these are 30 to 40-year assets.
So we're not looking out over the next three years for return profile. We're looking out over a 30-year horizon.
And we feel highly confident that over that period, that would return a level of cash flow that would justify the decisions to build those high-specification assets, especially given the fact that we do have a lead in the market right now with regard to any kind of really deep wells in the Gulf of Mexico given the increased workload.
Ian Macpherson - Simmons & Company International
Good. I appreciate that.
And, yeah, the idea of honoring contracts is sometimes a long forgotten ideal. Thanks for the answers.
I'll pass it over.
Operator
And we'll go next to Scott Gruber with Citigroup.
Scott A. Gruber - Citigroup Global Markets, Inc.
Yes, good morning, gentlemen.
Jeremy D. Thigpen - Transocean Ltd.
Good morning, Scott.
Scott A. Gruber - Citigroup Global Markets, Inc.
You guys have done a great job in reducing maintenance spending through your various initiatives. When I look at your fleet, though, you have a number of sixth-gen rigs that were delivered in 2009 and 2010.
How should we think about the costs of the second five-year surveys on those assets under your new maintenance regime?
Mark Mey - Transocean Ltd.
So Scott, one of the initiatives, which John and Keelan and the team have put in place at Transocean over the last couple of years was to eliminate out-of-service days and associated costs with regard to five-year surveys. And I want to say about a year ago, we managed to succeed with our initiatives.
So then we challenged the organization: can we do this with our 10-year surveys as well? And I'm very pleased to announce that recently we've just done that on one of our assets.
So not only have we reduced the cost of the survey, we reduced out-of-service time associated with that, so you could imagine the overall costs associated with these 5 and 10 year surveys is now significantly less. Bear in mind, we've just gone on to have the first two BOP care contracts – care agreements at least.
Next year when the rest of them come into full force, you can see they've been driven even lower as these care agreements get exercised and executed by the organization.
Scott A. Gruber - Citigroup Global Markets, Inc.
Can you provide some rough guidance on how much the 10-year survey would cost?
Mark Mey - Transocean Ltd.
I'm not going to go to that level of detail at this stage.
Scott A. Gruber - Citigroup Global Markets, Inc.
Would you be willing to offer how many surveys are included in your maintenance guidance for 2018 and 2019?
Mark Mey - Transocean Ltd.
So for 2018, we don't have any surveys of any magnitude. In 2019, I think, we have two that are included in that.
Most of these we see coming due in 2020 and 2021.
Scott A. Gruber - Citigroup Global Markets, Inc.
And would you be willing to provide any rough guidance on maintenance then in 2020 as more of the surveys kick in? I know we're getting a few years out, but...
Mark Mey - Transocean Ltd.
Yeah, we're getting a little far out there for our guidance.
Scott A. Gruber - Citigroup Global Markets, Inc.
Okay. Okay.
That's it for me. Thank you.
Mark Mey - Transocean Ltd.
Thanks, Scott.
Operator
We'll go next to Haithum Nokta with Clarksons Platou Securities.
Haithum Nokta - Clarksons Platou Securities, Inc.
Hi, good morning.
Jeremy D. Thigpen - Transocean Ltd.
Good morning.
Haithum Nokta - Clarksons Platou Securities, Inc.
Jeremy, I think I just wanted to ask a couple of quick clarifications. Did you say a new contract for the KG2?
And then also around the Invictus options, did you say that those were escalating rates with the market links in year four and five?
Jeremy D. Thigpen - Transocean Ltd.
So yes on both. So KG2 with Woodside in Myanmar, which we just completed their campaign, a very successful campaign with Woodside, and so they're picking her up again.
And then, yes, to the question around the Invictus.
Haithum Nokta - Clarksons Platou Securities, Inc.
Okay. And did you say a term for the new contract for the KG2?
Mark Mey - Transocean Ltd.
Yeah.
Jeremy D. Thigpen - Transocean Ltd.
Oh, yeah. It was – it should last between...
Mark Mey - Transocean Ltd.
150 and 400.
Jeremy D. Thigpen - Transocean Ltd.
150 to 400 days, yeah.
Haithum Nokta - Clarksons Platou Securities, Inc.
Okay. Very nice.
Okay, I wanted to ask about the strength you're seeing in harsh environment. And I'm trying to see – is that something – the mechanics that are driving those rates higher, is that something that could be transferable to the deepwater market down the road?
And is it as simple as harsh environment is two or three years ahead [Technical Difficulty] (41:08) a factor there driving rates in harsh environment?
Jeremy D. Thigpen - Transocean Ltd.
Sure, you broke up a little bit in the question there, but I think what you're asking was could we see the same kind of dayrate progression in ultra-deepwater that we've seen here recently with harsh environment. And the answer is yes.
The question is around timing. And so if you look at the harsh environment market, you go back a year ago, I mean, we were bidding at $150,000 a day.
And you listened to Roddie's comments, the last fixture awarded was a $250,000 a day plus a $50,000 a day performance bonus. So I mean, really, you're looking at almost a $300,000 a day dayrate for some high-specification harsh environment assets.
If we were sitting here 12 months ago, you wouldn't have believed that that kind of dayrate appreciation was possible, and I'm not sure that we would've. But it's really an indication of there are only a few really high-specification assets that are out there in harsh environment.
You could make a similar argument for the high-specification ultra-deepwater rigs, and as customers start to see those rigs locked into longer-term contracts, all of a sudden they become a little more valuable. And that's when you can start to push dayrates up.
Haithum Nokta - Clarksons Platou Securities, Inc.
Yeah, naturally. Okay, and then just on the $1.4 billion of new financing that you expect for the last two Shell rigs, would it be safe to assume those are going to be bonds or other kind of tools on the table for secured financing?
Mark Mey - Transocean Ltd.
Haithum, that could be anything, because we're sitting right now on probably 20 different proposals to finance those assets. So we're got to look at a combination of advanced rate, the cost of the financing, the amortization associated with that and the security package beyond just the rig to make those decisions.
And you can see us active doing this in early 2018.
Haithum Nokta - Clarksons Platou Securities, Inc.
Great. I'll turn it back.
Thank you.
Operator
And we'll take our next question from Kurt Hallead with RBC Capital Markets.
Kurt Hallead - RBC Capital Markets LLC
Hey, good morning.
Jeremy D. Thigpen - Transocean Ltd.
Good morning, Kurt.
Kurt Hallead - RBC Capital Markets LLC
You guys are getting me all jacked up, so to speak, good to hear. You're a little bit different tone than some of your other peers earlier this week.
But it does seem like things are starting to at least improve at the margin. So kudos to how you've managed through the downturn.
Jeremy D. Thigpen - Transocean Ltd.
Thanks, Kurt.
Kurt Hallead - RBC Capital Markets LLC
Sure. My question relates to prospective M&A and further consolidation.
I know you've been very active on that front and you have the Songa transaction coming to a close here at year end. Just kind of curious at this juncture with prospective demand improving, you think the M&A push is going to stall out as some of your competitors get a little bit more optimistic about the market?
Jeremy D. Thigpen - Transocean Ltd.
Yeah, a good question, Kurt. I'm not sure what our competitors are going to do with respect to M&A.
From our standpoint, we continue to look at opportunities to hybrid our fleet, and specifically focusing on ultra-deepwater and harsh environment. So we, again, have taken a position on how many floaters the industry's going to need in a more normalized environment.
We want to have a significant portion of the high-spec assets that fall into that. And so we're looking around at certainly at different assets, whether they be distressed assets in the shipyard or corporate opportunities.
But for us it really is, it's rig capabilities, it's technical capability in the ultra-deepwater and harsh environment side, but it's also the impact that the acquisition would have to near term liquidity. We are more optimistic today than we were a year ago, but we still don't know when we're going to be able to pull out of this downturn.
We're seeing it in harsh environment. We're seeing positive signs in ultra-deepwater, but it's still really competitive out there.
And so as we look at any acquisition, it's really around asset quality and the impact to near term liquidity, and we've got a – we'll only pursue opportunities that fit that criteria.
Kurt Hallead - RBC Capital Markets LLC
Okay, great, great. And then just in the context you mentioned a lot of the operators have been able to get their cost levels down to sub $50, you referenced $30 in the North Sea.
And now the dayrates are at depressed levels, which in prior cycle dynamics, this was the turning point of the cycle when operators would take advantage of low rates and try to lock them in. It sounds like some of that is starting to happen.
I'm just curious from where you sit, like do the operators still need to get an element of conviction that a $50 or $60 handle on crude is more sustainable than what they've seen for this year? Or do you think the operators are now at that level and with dayrates coming down this is really the start of that push to get all these companies to lock in rates at current levels.
What's your take?
Jeremy D. Thigpen - Transocean Ltd.
Yeah, it's a good question, Kurt, and I think you have to segment it by customer. So I think if you look at our independents, those customers are actually looking at the current oil price, and they're looking at their cost per barrel and they're thinking, gosh, this is a great opportunity to go and capitalize on some lower dayrates and lower service costs and they see great opportunity there.
But if you look at the majors, they've made a commitment to the Street to fund the dividend out of cash flow from operations, reduce their CapEx requirements, and then their spend for 2018. And so for them they've set their budgets for the most part for 2018.
My belief is unless we see a material change upward in oil prices, that the activity with the majors is going to be few and far between, but the independents and the NOCs would expect to ramp up. And I think that, Roddie, is that consistent with what we're seeing?
Roddie Mackenzie - Transocean Ltd.
Yeah, I think so. And when we track the contracting activity, basically at the moment half of it is coming from the independents, which is disproportionate to the number of leasees (47:00) the world.
So clearly you see those guys a bit more nimble moving first. But I think we'd also look to see that the indicators in places like licensing rounds in Brazil and Mexico are beginning to see a lot of the majors dive back in again.
So I think we've seen around 1.4 in (47:21) Mexico, and then the second and third (47:25) in Brazil, I think you're seeing the majors heavily investing basically seeing it as time to reinvest in deepwater offshore drilling. So I think you'll see that translate into contracts for us in the next year or two to three years.
Kurt Hallead - RBC Capital Markets LLC
Yeah, that's great color. Really appreciate it.
Thanks.
Jeremy D. Thigpen - Transocean Ltd.
Thanks.
Operator
As a reminder, we do ask that you please limit yourself to one question and one follow-up. We'll go next to Waqar Syed with Goldman Sachs.
Waqar Syed - Goldman Sachs & Co. LLC
Thank you for taking my question. In terms of Gulf of Mexico, could you guide us what you see in terms of activity into 2018 and 2019?
And also, just want to ask that, we are seeing rig efficiency improvements being about companies able to drill wells a lot faster. So if we were to drill the same number of wells that we drilled back in 2014 in the ultra-deepwater, how many fuel rigs would be needed to do that given the rig efficiencies?
Thank you.
Jeremy D. Thigpen - Transocean Ltd.
Waqar, thanks for the question. I'll let Roddie answer the question about the Gulf of Mexico and activity that he is seeing.
But just to your question around how many floaters would you need to deliver the same number of wells as 2014, I'm not sure if we've gone through that thoughtful of an analysis on that in particular. But I'd tell you, we did think about that as we were trying to set our expectations for what a more normalized floater count could be, and we segmented that by ultra-deepwater and harsh environment.
And we certainly factored into efficiency gains when we came down to that lower number. I mean, if you remember back to the peak in 2014, I think there were 270-ish floaters under contract and operating around the world.
We're now saying that we think that that range could be somewhere between 180 to 220. We'll be wrong, but just a lot of that is based on the more efficient drilling machines and better operations.
I'll turn it over to Roddie to answer the specific question about Gulf of Mexico activity over the course of the next couple of years.
Roddie Mackenzie - Transocean Ltd.
Sure. So right now in the Gulf of Mexico, it's the independents that are carrying the torch.
So the BHPs, (49:16), Noble Energy, and those guys. And I think by the nature of the large investment hurdle that you saw in the Gulf of Mexico long-term, it became the domain of the majors.
But what you see now is the efficiencies and the ability to bring the products to market is improving substantially, and that's where the independents are really beginning to move first. Obviously, as we mentioned before, the higher efficiencies combined with the lower spread costs is getting their ex-E&P costs right where they need them.
I would say on that, though, that for the long-term we think the majors will return. Simply the size of the prize in the Gulf of Mexico makes that a very attractive place to invest capital once you've overcome your kind of shorter-term liquidity issues.
So reserve replacement will take hold in the next couple of years and we are encouraged to see majors like Total getting involved and buying up some acreage in the Gulf of Mexico.
Waqar Syed - Goldman Sachs & Co. LLC
Thank you. Just to follow-up, Jeremy, this 180 to 220 rig number that you have versus 270, that assumes the same number of wells being drilled as in 2014, or it assumes higher or lower number of wells being drilled?
Jeremy D. Thigpen - Transocean Ltd.
I'm not sure if we've got that scientific, so I'm sorry, I can't answer your question.
Waqar Syed - Goldman Sachs & Co. LLC
Okay. I appreciate that.
Thank you so much.
Operator
And we'll go to our next question from Eduardo Royes with Jefferies.
Eduardo B. Royes - Jefferies LLC
Hey guys, good morning.
Jeremy D. Thigpen - Transocean Ltd.
Good morning.
Eduardo B. Royes - Jefferies LLC
Question for you, as I think about your overall floater fleet, obviously, the market remains quite over supplied, but I think we've seen over the last year or so, so there's a lot of nuisances and niches that we can't see and all of a sudden a rig that we may be overlooking comes back out. I guess, I'm curious if you think that there's still – are there still some opportunities within your fleet, for, again, rigs and maybe we didn't think of as being particularly niche and coming back out.
And I ask because it helps us think about maybe the longer-term earnings power, some of these rigs can come back after being down for a year versus a couple more years, or something like that. So really, I think of rigs like bringing out the Goodrich, and the rig going to Australia, do you feel like there's more opportunities along those lines, or should it be a little bit more straightforward with rigs like the Asgard, being rigs we'd obviously look for getting employment in the relative foreseeable future?
Jeremy D. Thigpen - Transocean Ltd.
Yeah, I'll answer that in this way. We've been very active, I think, in terms of retiring rigs that we thought would be challenge to really compete in the market recovery.
And so – it's been 39 to-date. We said on this call and in previous calls, we continue to evaluate our fleet on an ongoing basis.
And as we look at rigs, as they roll off contract or as we kind of look at future prospects, if we think that they're not going to be able to compete for whatever reason that this market recovers then we recycle them. And so I think there are certainly a few more in our fleet that are currently on contract that may not be able to earn kind of a next contract.
And in that case, we'll evaluate and we'll retire them. So, we'll just continue to look at the fleet and those rigs that we don't think will be competitive, we'll recycle but I'd say anything that we have that we've invested in back in to-date, it's because we think they're going be marketable rigs.
Eduardo B. Royes - Jefferies LLC
Got it, thanks. And then, I guess, just a quick one.
It's probably more for Mark. You mentioned the step up in the fourth quarter guidance, curious – I think you mentioned retirement costs or something like that, if you could give any perspective on the impact of the different components that lead to that step up sequentially in the fourth quarter?
Mark Mey - Transocean Ltd.
So, Eduardo, I mentioned four reasons why the O&M costs will be increased from the fourth quarter but bear in mind, this is not an increase from our previous guidance for the full year. So we do have the startup of the Deepwater Pontus, we have the reactivation costs associated with two rigs, we also have certain timing of maintenance costs that are due to be spent in the third quarter, and in some cases, a little earlier.
And we expect to catch up in the fourth quarter. So all of that combined, would be actually about a $15 (53:32) million quarter increase in quarter on quarter O&M costs.
Eduardo B. Royes - Jefferies LLC
Yeah. I mean, I guess, do you have a sense – is the reactivation portion of that is more or less how much?
Are you willing to get (53:44) -
Mark Mey - Transocean Ltd.
It's about half of it.
Eduardo B. Royes - Jefferies LLC
Okay.
Mark Mey - Transocean Ltd.
And then half of the – of the other half is going to be the Pontus for the quarter.
Eduardo B. Royes - Jefferies LLC
Got it and everything else. Okay, great.
Thank you. I'll turn it over.
Operator
And we'll go to our final question from J.B. Lowe with Bank of America Merrill Lynch.
J.B. Lowe - Bank of America Merrill Lynch
Hey, guys. Thanks for fitting me in here at the end.
Jeremy D. Thigpen - Transocean Ltd.
Hey, J.B.
J.B. Lowe - Bank of America Merrill Lynch
How you doing?
Jeremy D. Thigpen - Transocean Ltd.
Good.
J.B. Lowe - Bank of America Merrill Lynch
I just wanted to get a quick clarification, I think, Mark, on your OpEx guidance for 2018. Did you say that that assumes that – of the rigs that are rolling off of the end of this year and the eight or nine that are rolling off next year, that you assume 20% uptime for the non-contracted times?
Is that what I understood?
Mark Mey - Transocean Ltd.
Yeah, so what I indicated we that we have about a 3% reduction in operating days from 2017 forecast to 2018 budget. And that 3% reduction translates into about a 20% of the days that are uncontracted on rigs that do come with contract over the next 12 months, getting recontracted at lower dayrates.
J.B. Lowe - Bank of America Merrill Lynch
Okay, perfect. And then my other one was just of the retirement candidates that you have and making the decision between whether you're going to retire them or not, if you were to decide to reactivate some of the rigs, do you think that they would require upgrades like we've seen some other people in the market doing in terms of an extra BOP or putting some extra functionality on them?
Or do you think they would be able to come out just kind of as is?
Jeremy D. Thigpen - Transocean Ltd.
I think they'll be able to come out as is. Now we have identified in addition to the India, a few other candidates that have similar profile, which we could add to their marketability with a few enhancements.
But for the most part, the rig that we have stacked is just the reactivation cost and mobilization to get them back out.
J.B. Lowe - Bank of America Merrill Lynch
Okay. All right, guys.
Thanks very much.
Jeremy D. Thigpen - Transocean Ltd.
Thanks, J.B.
Operator
And that concludes today's question-and-answer session. Mr.
Alexander, at this time, I'd like to turn the conference back to you for any additional or closing remarks.
Bradley Alexander - Transocean Ltd.
Thank you to everyone for your participation and questions today. If you have further questions, please feel free to contact me.
We look forward to talking to you again next year when we report our fourth quarter and full year 2017 results. Have a good day.
Operator
This concludes today's conference. We appreciate your participation.
You may now disconnect.