Nick Georgas - Ensco Plc Carl Trowell - Ensco Plc P. Carey Lowe - Ensco Plc Jonathan Baksht - Ensco Plc

Gregory Lewis - Credit Suisse Securities (USA) LLC Ian Macpherson - Simmons & Company International Samantha Kay Hoh - Evercore Group LLC Eduardo B. Royes - Jefferies LLC Vaibhav Vaishnav - Cowen & Co.

LLC Jacob Ng - Morgan Stanley & Co. LLC

Welcome, everyone, to Ensco's first quarter 2017 conference call. With me today are Carl Trowell, CEO; Carey Lowe, our Chief Operating Officer; Jon Baksht, CFO; as well as other members of our executive management team.

We issued our earnings release which is available on our website at enscoplc.com. Any comments we make about expectations are forward-looking statements and are subject to risks and uncertainties.

Many factors could cause actual results to differ materially. Please refer to our earnings release and SEC filings on our website that define forward-looking statements and list risk factors and other events that could impact future results.

Also, please note that the company undertakes no duty to update forward-looking statements. During this call, we will refer to GAAP and non-GAAP financial measures.

Please see our earnings release on our website for additional information. As a reminder, we issued our most recent fleet status report on April 24.

An updated investor presentation is also available on our website. Now, let me turn the call over to Carl Trowell, CEO and President.

Thanks, Nick, and good morning, everyone. The offshore drilling sector continues to face extremely difficult market conditions, and day rates and utilization of the global fleet remain under pressure.

As such, we remain laser-focused on what we can control, namely operational excellence and cost management. Our offshore crews and onshore employees continue to deliver high levels of operational up time and safety to customers.

During the first quarter, we achieved operational utilization of 99% across our fleet and our safety results were in line with last year's record-setting performance. While safety and operational excellence are important at all times, service quality to our customers has heightened the importance given the current environment.

This is why we were honored to be recognized by our customers as the number one rated offshore driller in overall satisfaction in the annual EnergyPoint Research survey, our seventh consecutive year to win this award. Importantly, we also took top ratings in several of the categories including safety in the environment, performance and reliability, and job quality to name a few.

Turning now to market conditions. As we mentioned on our last earnings call, we're in the midst of arguably the worst downturn this sector has ever experienced, but we feel that we are now in a different phase of the cycle.

We feel even more confident in this view today as we have seen a broad-based pickup in customer activity especially for Jackups, albeit off a very low base. For example, during the first quarter the number of new contracted rig years awarded globally increased sequentially for the third consecutive quarter.

Tenders and inquiries which are a leading indicator of future contracts are up year-over-year for both Floaters and Jackups. On a trailing six-month basis, the total number of tenders and inquiries and rig years required for these opportunities has doubled as compared to a year ago.

As long as current commodity price levels are sustained, we believe this trend will continue. However, we still believe that the recovery in the offshore drilling sector will be protracted, phased, and challenging.

We expect activity in the shallow water Jackup segment will recover first as evidenced by our recent contract awards and extensions plus tenders for activity in late 2017 and 2018. As such, we feel confident that the recovery in the Jackup market is well underway and we expect to see upcoming contract awards in several markets around the world.

Whilst the Floater segment of the market has seen a moderate pickup in activity of late, it is not enough to offset rigs that are scheduled to finish contracts during 2017. And as a consequence, global floater utilization is likely to fall over the remainder of this year.

Competition for contracts is fierce and current pricing, particularly in the Floater segment, is unsustainable in the medium and longer-term. The current structural over-supply of rigs must be resolved through attrition and higher levels of customer demand before material pricing power can return.

In this environment, companies with excellent operational performance and strong financial positions are winning a disproportionate amount of the available contracts, and we believe Ensco is in a unique competitive position to capitalize on this trend. Recent contract awards support this view, and over the past six months we have secured nearly 20% of all new contracted rig years globally.

This recent contracting success has contributed to a 10 percentage point increase in Ensco's fleet utilization while industry utilization has flattened over this time period. Moving forward, our diverse rig fleet and global footprint put us in a position to capitalize on new contracting opportunities as they emerge.

We will continue to target short and long-term contracts with strategic clients in key growth markets so that we improve utilization across our rig fleet. As the recovery progresses, we intend to maintain our strong competitive position.

We have the financial wherewithal to not only persevere but to continue making targeted investments in our fleet and technology. We have the operational track record, service quality, and financial strength to win more than our fair share of new contracts, protecting our franchise and bridging us to better market conditions.

Now, I'll turn the call over to Carey.

Thanks, Carl. During the first quarter, Ensco was once again recognized by our customers as the industry leader in customer satisfaction in an independent survey by EnergyPoint Research.

In addition to total satisfaction, our customers rated Ensco as the top offshore driller in 11 other categories including ultra-deepwater wells, deepwater wells, and shelf wells as well as several other technical and geographical categories. These results are a reflection of our commitment to delivering the highest levels of service, quality, and operational excellence to our customers and the wide range of capabilities that our rig fleet offers to clients.

Our customer satisfaction results and improved operational and safety performance benefited from targeted investments in our systems, processes, and technology over the past several years. Our proprietary Ensco Asset Management System which was developed in-house and implemented across our fleet last year has been instrumental to our improved rig uptime and consequently has delivered lower non-productive time for our customers.

As we continue to leverage data analytics and condition-based monitoring technologies, we're expanding our in-house expertise and capabilities with the goal of optimizing the deployment of our resources while maximizing performance and reliability over the life of our assets. We believe that getting the most out of our equipment is a core competency for Ensco and a significant part of our value proposition.

In this regard, our results validate our in-house approach, and we view the continued enhancement of our Ensco Asset Management System as a true competitive advantage. In order to further differentiate our rigs, we're focused on finding innovative ways to improve the drilling process, and we have expanded our library of intellectual property by filing 20 patents since 2015.

This intellectual property library includes technology that creates efficiencies for customers. One example is our patented Canti-Leverage Advantage technology which gives our ENSCO 120 and 140 Series jackups enhanced hoisting and setback capacity at the farthest reaches of the cantilever.

This enhanced loading capacity allows customers to better optimize their well designs, platform layouts, and field developments. Also included in our IP library is our Going on Location Computer which helps to optimize jackup moves and reduces downtime spent waiting on weather, resulting in further cost savings for our customers.

Cross-functional teams are working on additional projects that can help us expand this portfolio and to implement these innovations on our rigs to further distinguish them from the competition. As Carl mentioned, we continue to leverage our operational and safety track record to win more than our fair share of work in today's highly competitive market, including new contracts representing 20 rig years of backlog since October.

In the North Sea, ENSCO 92 had its contract extended by more than four years and is now expected to work into late 2022. This outstanding operational performance delivered by the crew and our long-standing relationship with the customer were critical factors in securing this extension.

We have worked for this customer in the region for nearly three decades and continuously since 2005, demonstrating that consistent outstanding performance can lead to additional work. Also in the North Sea, ENSCO 121 received a new short-term contract and ENSCO 101 was awarded a contract extension, and we now expect both rigs to remain on day rate for most of 2017.

While we do not have a final agreement at the moment, we expect ENSCO 120 to work in the region for at least three years beginning in the third quarter. Moving to the Asia Pacific region, ENSCO 106 was awarded a four-well contract that commenced in March.

This work will absorb most of the rig's available days in 2017 before it begins a five-year contract that is expected to commence in early 2018. ENSCO 107's customer has already exercised three options that will keep the rig under contract in Australia through the middle of this year and has three remaining options that could keep the rig working into the fourth quarter.

ENSCO 8504 has now completed its mooring upgrade and we're actively marketing the rig and its versatile moored DP configuration for opportunities in the Asia Pacific region. In the Gulf of Mexico, we signed several short-term contracts.

Our three marketed jackups in the region, ENSCO 68, 75, and 87, have secured incremental work that will keep the rigs on operating day rates into the second half of 2017. Finally, semi ENSCO 8503 won multiple contacts in the Gulf that will keep it working for most of the year, including a three-month job in Mexico that will mark our entrance into the country's promising floater market.

Turning to global rig supply, offshore drillers have announced the retirement of 75 floaters since the beginning of the downturn. There are approximately 70 additional floaters that we consider as retirement candidates, all of which are over 30 years of age and idle or scheduled to roll off contract by the end of 2018.

This is approximately three times the number of new builds currently scheduled for delivery over the same time period, excluding rigs in Brazil with questionable deliveries. Similarly, there have been 31 competitive jackups retired since the start of the downturn, and we see approximately 160 retirement candidates based on age and contract status.

This compares to approximately 90 new builds currently scheduled for delivery by year end 2018. The majority of these new build jackups are being built by speculators who have repeatedly delayed acceptance of these rigs, highlighting the uncertainty of when and if these rigs will be delivered into the competitive market.

While scrapping announcements have slowed recently, we believe that there is silent attrition occurring as companies do not have to and, in many cases, are not incentivized to announce when they no longer plan to return a rig to the active fleet. Furthermore, many of these older assets that are idle or soon-to-become idle will require significant survey work which will likely prove to be cost-prohibitive, keeping these rigs from returning to the global fleet.

As a consequence, we expect further rig attrition and new build delivery deferrals or cancellations will help improve the current supply imbalance. On the demand side of the equation, we continue to see signs of improvement with higher oil prices as compared to a year ago and a corresponding increase in customer activity along with lower offshore project costs creating a more favorable environment for new contract awards.

In closing, our recent contracting success demonstrates that our high levels of operational and safety performance, diverse rig fleet, and financial strength matter to customers. We believe that the recent customer preference for established drillers when contracting offshore rigs will continue during the early stages of the market recovery.

As customer activity increases and future contracting opportunities arise, we will be ready to capitalize and solidify our position as the offshore driller of choice. Now, I'll turn it over to Jon.

Thanks, Carey. Today, I'll cover first quarter 2017 financial results, our outlook for the second quarter, and a summary of our financial position.

Starting with the first quarter results versus prior year, a loss of $0.09 per share compared to earnings per share of $0.74 a year ago. As detailed in our press release, first quarter 2017 results included $8 million of discrete tax expense and $6 million of other expense to complete a previously announced debt exchange.

Excluding these items, an adjusted loss per share of $0.04 compared to earnings per share of $0.74 a year ago. Total first quarter revenue was $471 million versus $814 million last year.

In the Floater segment, revenue was $285 million compared to $513 million in the first quarter 2016 primarily due to a decline in reported utilization to 47% from 64% a year ago and a decrease in the average day rate to $337,000 from $365,000 last year. The sale of ENSCO 6003 and ENSCO 6004, both of which operated during the first quarter 2016, also contributed to lower year-to-year revenues.

Operational utilization for the Floater segment which adjusts for uncontracted days and planned downtime was 99%, equal to a year ago. In the Jackup segment, revenue was $172 million compared to $278 million a year ago due to a decline in the average day rate to $86,000 from $118,000 last year and fewer rig operating days as reported utilization declined to 64% from 66% a year ago.

Operational utilization for the Jackup fleet was 99.2% compared to 99.8% a year ago. Total contract drilling expense declined to $278 million from $364 million last year as lower personnel and other activity-based expenses due to fewer rig operating days more than offset rig re-activation and contract preparation costs.

First quarter contract drilling expense was $22 million lower than guidance primarily due to the deferral of certain repair and maintenance projects, lower personnel costs, and lower rig re-activation costs. Depreciation expense declined to $109 million from $113 million a year ago due to the extension of useful lives for certain contracted assets.

General and administrative expense increased to $26 million in the first quarter of 2017 from $23 million a year ago as higher accrued performance-based compensation was partially offset by lower personnel costs from organizational restructuring and other expense management actions. Interest expense in the first quarter of 2017 was $59 million, net of $17 million of interest that was capitalized compared to interest expense of $65 million in first quarter 2016, net of $12 million of interest that was capitalized.

First quarter of 2017 other expense included a $6 million loss to complete a previously announced exchange offer for $650 million aggregate principle amount of senior notes. Tax expense declined to $24 million in the first quarter of 2017 from $71 million a year ago due to lower profitability.

As mentioned previously, the first quarter of 2017 tax provision was influenced by $8 million of discrete tax expense. Now, let's compare first quarter 2017 to fourth quarter 2016 sequentially.

Revenue declined 7% due to a decrease in the average day rate to $156,000 from $177,000 last quarter. While day rates declined, we saw a meaningful increase in utilization quarter-over-quarter as first quarter utilization improved by 7 percentage points to 58%.

Industry utilization was unchanged over the same time period, highlighting the flight to quality trend we have seen recently from our customers. The increase in utilization was primarily driven by our Jackup fleet which improved by 10 percentage points with Floater utilization also increasing by 3 percentage points from the prior quarter.

Total contract drilling expense declined $11 million sequentially mostly due to upfront preservation stacking costs incurred in the fourth quarter of 2016 for two floaters and lower costs for ENSCO DS-7 following the previously announced termination for customer convenience. Depreciation expense and G&A expense were approximately in line with the prior quarter.

Other expense increased by $11 million primarily due to a $9 million gain in the fourth quarter of 2016 related to a debt-for-equity exchange and a $6 million loss in the first quarter of 2017 to complete the debt exchange noted in our press release. Moving to our outlook for second quarter 2017.

We anticipate that total revenue will decline by approximately 4% as average day rates are expected to decrease to $152,000 from $156,000 in the first quarter. Utilization is expected to be 58% in the second quarter, equal to first quarter utilization, as a full quarter of operations for jackups ENSCO 122 and ENSCO 106 are offset by rigs that are expected to roll off contracts during the quarter including floater ENSCO 8505.

We anticipate second quarter contract drilling expense will be between $270 million to $280 million. This includes approximately $8 million of rig re-activation and contract preparation costs.

Second quarter depreciation expense is expected to be in line with the first quarter and we expect G&A expense will increase to $28 million due to the timing of certain annual incentive-based grants. Total other expense is expected to be $54 million, a $4 million decline quarter-to-quarter primarily due to the $6 million loss to complete our first quarter debt exchange.

We expect our second quarter tax provision will be approximately $20 million. As I mentioned in our prior conference call, in periods of declining profitability our income tax expense may not decline proportionally with income which could result in higher effective tax rates.

Additionally, we may continue to incur income tax expense in periods in which we operate at a loss. Finally, I'll provide a summary of our financial position.

As of March 31, cash and short-term investments totaled $2.1 billion. This represents an approximately $180 million decline as compared to our pro forma year end 2016 cash and short-term investment balance of $2.3 billion which was adjusted for the completion of our January debt exchange.

Capital expenditures during the quarter of $283 million, inclusive of the milestone payment for ENSCO DS-10, were partially offset by approximately $105 million of cash generated from operating activities. We now have $4.3 billion of liquidity composed of $2.1 billion of cash and short-term investments and a fully available $2.25 billion revolving credit facility available through September 2019, and $1.13 billion of which is available from September 2019 to September 2020.

In addition to this liquidity, we have $3.3 billion of contracted revenue backlog. Over the past six months, we have added approximately $500 million to our backlog, winning almost 20% of rig years awarded globally during this period, representing 6,918 contracted days for jackups and 275 contracted days for floaters.

While revenue consumption exceeded backlog additions in the first quarter, this trend has slowed considerably and the sequential quarter percentage reductions in backlog over the last two quarters are the lowest we've experienced since the downturn began. While we expect market conditions will remain extremely competitive, we believe that we will continue to see a flight to quality as customers award more work to offshore drillers with established operational and safety track records and strong balance sheets.

In terms of more recent capital management actions, we opportunistically repurchased approximately $39 million of debt maturing between 2019 and 2021 on the open market, the majority of which occurred in April. We now have $1.1 billion of debt maturing over the next seven years with no major debt maturities until 2019.

Moving to our capital expenditure outlook, for the remainder of 2017 we expect total CapEx will be approximately $140 million inclusive of rig enhancements and minor upgrades and planned investments in patented technology to increase drilling efficiencies that we're testing on some of our new builds. Following the ENSCO DS-10 milestone payment in January, we now have just $300 million of contractually obligated payments remaining to shipyards.

In closing, our strong liquidity position and manageable debt maturities and capital commitments give us financial flexibility to evaluate investment opportunities to best position Ensco for a recovery in the offshore drilling sector. These opportunities include targeted investments in our own fleet to meet increasing customer demand.

We'll continue to evaluate these opportunities in a highly selective and disciplined manner with a focus on delivering the highest return to our shareholders. Now, I'll turn the call back over to Nick.

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

Yes. Thank you and good morning.

Good morning, Greg.

Good morning.

Carl, you mentioned in your prepared remarks about pickup in tendering and inquiries for Floaters and Jackups. Just as we think about that and the pace of these tenders and inquiries, are these for near-term work or are customers generally looking for rigs and they're exploring for rigs, but maybe they don't need these rigs until the back half of 2018 or even longer?

Any sort of color you could give around that would probably be helpful.

Greg, it's a real mixture. We have some for the latter half of 2017 and we're actually seeing quite a lot for 2018 at the moment.

And then we have a few tail ends into people who are looking for starts in 2019. It's approximate but maybe if it helps, I would say that we're looking at probably sort of 30-odd percent of them being for 2017, 40% to 50% of them being in 2018, and 20% in 2019 if that makes sense.

But that's just really to give some broad guidance. The area we're seeing the greatest number of newer inquiries is for 2018.

Okay. Great.

And then just another thing that I think has been happening. Clearly, during the down cycle a lot of customers and rig operators – for various reasons, contracts were terminated and negotiations were done.

As we start to see some sign of recovery, is there sort of customers and rig companies are sort of kissing and making up and, hey, we had to walk away from a contract but we have you in mind for that next rig we need. Are we seeing any signs of that, whether it's specific to Ensco?

Or maybe even, hey, you were out-bidding on some work that you thought you had a good chance of winning but some history sort of kept you out of potentially winning some of that work?

No. I mean, I think we are seeing some customers begin to come back and look for rigs.

I think the overarching trend which we've tried to draw attention to here is that there is a tendency for them to go to the Tier 1 established drilling companies, those that have got good operational performance and certainly those with good financial strength. There's certainly some – not talking about Ensco-specific – there are some maybe some raw relationships there on the back of some very hard negotiations and some issues in the overall marketplace.

We are not seeing that ourselves. I think we're seeing the opposite which is where we have been cooperative, collaborative, we've been flexible with clients, we are seeing them come back to us.

We're seeing them give us chance at contracts. So we are seeing a little bit of quid pro quo where the relationship has been collaborative on our basis.

I think the trend that we would draw your attention to is that customers are looking very carefully at the survivability and the financial wherewithal of their counterparties when they come to contracting.

Well, hey, that's really good news for you guys given your position. So, hey, guys, thank you very much for the time.

Thank you.

Hi. Thank you.

We've had a couple of interesting jackup transactions lately between Borr's investments and now more recently Shelf Drilling picking up three jackups for reportedly $225 million. I wonder if you could comment on those data points?

And maybe on the more recent one, indicate whether or not that was something you had a look at and whether you have any comment or opinion on that deal from an attractiveness standpoint to Ensco?

Ian, by the latter one did you mean the Shelf transaction?

Yes. Yes, Carl.

Okay. I think probably the first thing to say is that it's been Ensco's long-stated strategy to be a hybrid driller, in that we are in both the shallow water jackup segment and the deepwater, and I think that we still intend to continue that strategy certainly at this point in the cycle where we feel exposure to the jackup market is a positive.

And so accordingly, we have been having a look at the various opportunities that have been coming up around assets. However, we are not in the mode of just chasing any deal even if it just looks like it's cheap or a bargain.

We have in mind certain asset types that if we saw them come available for the right price we are very much looking at if we're going to target individual assets, that they are ones that we feel really will be at the front of the queue, that meet our own criteria that we've put together for competitiveness, capability, and also the cost to put the rigs in full working order. And so accordingly, we're not just chasing every single deal that pops up.

We're quite targeted at what we've been looking at and none of those have really reached our investment criteria yet. A while back, if you go back a few quarters or a year or two, what we did say was at that point we were not prioritizing individual assets.

I think as we said in our prepared remarks, we feel we're at a different point in the cycle which means we are a little bit more prepared now to have a look at individual assets but we are very selective on those. I think we would have to see that they enhance the rig fleet and composition without them just being a good deal.

And of the, not necessarily the two transactions that you described, but broadly looking at some others, what we haven't yet found is rigs that we think are at the kind of higher end, the top quartile in terms of capabilities for the right price yet.

Okay. That's a good comprehensive answer.

Thanks. I was wondering if I could ask on a separate topic.

It's been a while since we've heard anything either from, well, mainly from the industry press which reported on your drillship opportunity in Brazil a couple months ago. Could you comment at all on that opportunity, whether the Upstream article was directionally factual in its content or what your expectations are in terms of the timeline of progressing towards a major award there?

Ian, generally we don't speculate around potential awards until they're made. We released our latest fleet status report on Monday and you'll see that for our drill ships, the ones that you referenced, we haven't reported any new awards.

But as a matter of just clarity and principle, we err on the precautionary side which means that we don't announce deals until we actually have full signed-off contract in hand, that we're confident about the start, and we'll keep with that policy. For those of you that are a little bit sharp-eyed have noticed that in our fleet status report and in our comments we actually do reference to the ENSCO 120.

The reason we've done that is because we do actually have a contract in hand for that rig. The contract doesn't become fully effective until we get the work call-off order which we're expecting imminently.

So we've sort of hedged that a little bit but we do have the contract in hand. So it's worth understanding that that's how we'll do it.

So as and when we get contracts and we formally have them, we'll announce them then. In addition, what I would add is, and this probably adds a little bit more clarity onto our first quarter CD&E, last quarter we said we were going to be investing in some of our rigs that we will have some re-activation charges in Q1.

Well, that did occur. We did it.

We spent about $16 million in Q1 and that's within the CD&E expense on re-activation and contract preparation for rigs in anticipation of future contract awards in the second half of the year. And so we have $16 million baked into our Q1 CD&E which was not for ongoing work.

It was in preparation for the future. As far as Q2 is concerned, we will do further re-activation work and we have announced today $8 million of further re-activation, and that is within the CD&E range that Jon gave you earlier of the $270 million to $280 million for Q2.

Got it. Thanks, Carl.

Hi, guys. Thanks for taking my call.

I think I would like to start in the Gulf of Mexico. We saw a peer of yours announce yesterday that a customer has requested to take a rig off standby.

And I was just kind of wondering if you could give us a little bit of color in terms of, directionally in the Gulf, do you think that drilling activity has maybe starting to find a bottom? And then also if you could talk a little about the competitiveness of the jackup market as well where you have such a strong position right now but isn't an area that you have really been in more recently?

Hey, Samantha. This is Carey Lowe.

The jackup market in the Gulf of Mexico, the market has picked up. It's been very busy but it's one to two-well type work and it strings along a number of jobs together to keep the rig working.

We think that this will continue, and the number of tenders coming out right now leads us to believe that it will. The floater market, as you can see, ENSCO 8503 has work that will take it through the end of the year.

This is indicative of a number of jobs that have strung together including new work in Mexico for us. At ENSCO 8505, we have some bids that we're working on, that a number of tenders are out for, again, one to two-well type work and some longer work has also come up.

So I wouldn't necessarily call it the bottom but it surely has picked up quite a bit, and the number of tenders gives us some hope that we're starting to see something at the end.

Yeah. Samantha, what I would add is that thus far what we see is probably more shorter to medium-term opportunities for the type of work that the 8500s are doing, so well interventions, sidetracks, P&A, step-out wells, than we do any kind of major return to FID development drilling.

There are a couple of projects out there where clients are committed to do them and we've got a couple of tenders that are either out there now or are likely to come for bigger FID drilling. But the area we've seen the early kind of signs of response is people going back to what we've sometimes referred to as in-field drilling which is work around existing infrastructure, existing fields to be able to maintain production levels.

Okay. Great.

That kind of leads me to my next question which is regarding a lot of the increase in tender and inquiries for 2018 in particular. Do you see a preference for customers to go back to rigs that they have worked with, operators that they have a strong comfort in all of their service quality and all that good stuff.

But I'm kind of curious how they're looking at the new builds that are coming out. You mentioned that you were actively marketing the ENSCO DS-10 last quarter and I'm just kind of wondering if operators are open to maybe working with the new rigs or if they just really want something that's been hot or, well, active right now?

I'll maybe make a comment and see if Carey wants to add anything to it but I think it's very much a mixed bag. We see some customers who have got a preference for rigs that are certainly working within their own fleet at that time or they've worked with before, but it's not significant.

I think when it's a fresh start, it's a new contract, I think people are open to look at any new rigs. So a past relationship doesn't necessarily carry any great weight.

What does matter, though, is operational excellence and capability and safety. And as we've said, there is a bit of a flight to quality and I think what we are certainly seeing is that a lot of customers have got a choice of a huge range of rigs and suppliers at almost equivalent price points, and what we're seeing is that they are very much in the process of them going down to short list, narrowing down to a smaller number of quality players.

And I think that that's the more relevant issue than whether they worked with a rig necessarily before a particular rig. I think it's much more around the quality of the operator.

Now in reference to the new builds, I think it's very mixed. We have got some customers who are very happy to look at new builds.

We've got others that said they want rigs that are already out and working. I think for us, we feel extremely confident that we can bring a new build-out on how they go to work at the type of operational levels an uptime that we see across our standard fleet to the extent that we're prepared to guarantee that and backstop it with a contract terms with the client.

Yeah, this is Carey. I'd just like to add that I think it really comes down to reputation with a particular client and we've had some repeat customers for new builds with the ENSCO DS-7 and ENSCO DS-8 and the excellent startup record we've had on those rigs.

Impressive downtime statistics and performance goes a long way to ensuring that there is not necessarily a reluctance to picking up a new build with Ensco.

Yeah. We feel confident about this.

And so to the extent though where we do feel as we go through the cycle, we are going to be able to bring out our new builds and we're going to be able to bring out our preservation stacked rigs as swing capacity. And I think as we go through the next couple of years, I think we're going to be able to demonstrate that.

Actually, can I squeeze in one more? I'm curious about the in-house analytics that you guys are working on.

And, Carey, if you could just give us a quick background of how long that has been in development and how many rigs that has been implemented in and just how the tick up is like on the customer side?

Sure. Yeah.

When we commenced the design and build-out of the Ensco Asset Management System, we were already considering a move towards condition-based maintenance which uses data such as vibration and temperature measurements, oil analysis and so on to predict the requirements for maintenance. The Ensco Asset Management System was rolled out last year and was a result of over four years' worth of work to develop it completely.

A lot of people think an asset management system is just buying a packaged software, well it's more than that. It's also modifying your preventive maintenance routines and so on.

And in fact, the software was just a very small part of the overall cost of the program. Since we've completed the asset management system last year, and we're starting to see some good results which I think has played a pretty significant role in our 99% operational utilization, so this year we decided that we were going to start moving heavily into the next portion of the program which was condition-based maintenance.

And so far, what we've done is assessed some commercially available data analytic software that we will use as the tool to perform the analysis. And we've done some backtesting on that to see whether it actually could've predict some failures we've had in the past, and we've been pleased to see that it can.

And in addition to that, in parallel we've started the process of modifying our maintenance protocols which will be required to make use of the data and drive maintenance decisions. And this will be a multi-year program, maybe two to two and a half years, but we believe that this will be another step change improvement in our asset management system.

And we also believe that this is something that should be a core competency of a drilling contractor, and we'll do this in-house. This will be another in-house project.

Yeah. I'd add a little bit more to that.

As Carey indicated, we're up sort of four-plus years down the road of building the platforms on which we're now adding more data analytics. And I think that that's often misunderstood as to what the core investment is required in setting up the platforms, both the IT platform and some of the processes and infrastructure for it.

Now, we're chasing two key areas in analytics. We're doing it around the condition-based monitoring and maintenance of our equipment and uptime; and we're also on the drilling process, exactly how we can optimize the drillings for the client.

And I think we feel that we're a long way down that path and we can now accelerate because of the investment we've made over the past four years.

Thank you so much.

Hey, guys. Thanks for taking my question.

If you could talk a little bit about, obviously not getting into numbers and day rates and all of that, but as we think about as you guys maybe start booking some more longer-term work like you've seen obviously in the North Sea on the jackup side of things, can you talk a little bit about what your sort of preference is assuming that the negotiating power is mostly on the operator's court in terms of being able to build in cost escalation – not cost escalation but just market index rates or maybe linked to the oil price? Or if maybe, again, that contracts is about all you can hope for and if you lock in for three years at the bottom then it is what it is?

But maybe more importantly, if guys are looking for out clauses you'll say, look, we'll give you the bottom rate. Right now, it's pretty low but we're not going to give you a right to terminate.

Any sort of perspective on how, again, assuming this is an evolution and we're going to move ahead and we're going to see more long-term contracts in the next couple of months, how is that maybe changing maybe some of the Ensco preferences, what you guys really want? What's ideal there?

Okay. Maybe let me start with the big picture which is that we're very much in the mode of building back our utilization and maintaining a core active fleet, particularly for contracts in the sort of the next 18 to 24 months.

And so that's very much a primary driver of our marketing. Now that said, we are not in the mode of trying to lock in a large number of long-term contracts.

Where there are long-term contracts, where possible, we are trying to get them where they have some price escalations in or performance escalations when they're sort of longer than, say, a 24-month period. Now as you've probably seen, there aren't as yet too many contracts that are very long-term.

And we're also – in balance with this, we are running a portfolio approach which is that we are as happy as we can be in the current market but we are happy to put some of our rigs away on long-term contracts that we know are working, that are cash-generative, and that we then have them working. We would not lock away all of our rigs like that.

So we are running a bit of a balanced approach when it comes to long-term contracts.

Okay. Great.

Thank you. And then as a follow-up.

Carl, you alluded to it in terms of maybe the assets out there. Obviously, you're going to be very selective; you're not just chasing anything.

I guess if you could give any more perspective in terms of, maybe, even more from a rig spec feature or something, like, that's harder for guys in our seats not being in the industry to understand. But any more color or perspective you can offer on what, in this environment, in what feels like a very commoditized industry today with just a bunch of new drill ships running around that, on paper, all look very similar.

How can we think about what may actually be a little bit better or worse or what can make the cut of being differentiated enough? Because it's obviously, from our seat, there's three shipyards and they all allegedly build pretty good rigs for a bunch of contractors.

It's hard for us to see that, the differences.

If you don't mind, I'm going to dodge that question a little bit because it's almost impossible to answer because there are different needs in different places. And also, what's been happening in the market is people have been jumping on various things of what the latest contract request did and saying, well, that's the only thing that's going to get contracted in the future, and it's not so.

There are a range of different specs and of rigs required, and the other thing is that there are different tools for different jobs. So I think the first one is to say that we are happy that we have a diversified fleet with different rigs of different types and capabilities because clients have different fields, different water depths, different requirements.

And having the ability to serve them in multiple areas I think is going to be very useful going forward, and I think you see that in some of the contracting success we've had. There are certain attributes and capabilities around rigs that we internally value and we're not going to signal it too obviously outside because, for competitive reasons, we don't want to signal which type of rigs we might be pursuing.

And so if you don't mind, I'm going to – and then the other is that whatever I say, someone else will come around and say it's different or wrong or something like this. And so it's a no-win answer to that question.

Okay. No, that's totally fair.

I thought I'd try. Thank you.

I'll turn it over.

Hey. Thanks for taking my question.

I wanted to touch on OpEx. If you can help me walk through the OpEx guide maybe starting from last quarter?

OpEx guide for first quarter was higher than expected, then came in below, and now the midpoint for 2Q implies $275 million versus $290 million guide earlier. Does it mean you have, like, deferred some reactivations that you were anticipating earlier or where's the decline coming from?

Yeah, yeah. Sure.

Happy to address that. I think Carl hit on this a little bit earlier.

Let me just expand upon it a little bit. So we did beat our guidance for Q1 by $22 million for the first quarter.

As we mentioned in the remarks, that was attributable to some deferral of R&M which of that $22 million about half of that was that amount, so about $11 million. And those are projects that are now scheduled to take place later this year or into next year.

And so that's spend that will just be deferred out. The remainder, the other half, the $11 million, Vebs, was attributable to a variety of items across several rigs.

But to summarize it a bit, we delivered on the planned reactivation that we had announced last quarter and we took part of in Q1, so that was work that we did within our scope and under budget. And then across the fleet, just disciplined operational cost management so that it all added up to $11 million on the quarter.

So I would characterize half of it as just very disciplined operations. Now, just to expand upon just the Q1, how to think about how much of this is just running the rigs versus the reactivation, so $16 million of the first quarter CD&E was re-activation and it was across multiple rigs.

And, again, that was work that we anticipated doing and achieved the scope that we intended under budget. As you look towards Q2, I guided to a range of $270 million to $280 million, but inclusive in that number is $8 million for rig re-activation and contract preparation across multiple rigs.

So if you take that out, the $8 million, that would be the range for just running the fleet.

Okay, okay, okay. And a few quick ones.

On ENSCO DS-10, let's say if you were to get an award, how soon can it be delivered?

It could be delivered, leaving the shipyard, within three months.

Three months. Okay.

And on ENSCO DS-4, it's stacked. How long does it take for you guys to re-activate, let's say, a ENSCO DS-4?

We've given guidance in the past that we can re-activate a rig within 120 days and that includes the depreservation, catching up on deferred maintenance, and any testing or trials that we would do prior to saying that we're confident that it's re-activated.

Okay.

Now, without reference to – sorry, I was just going to add something there. Without reference specifically to ENSCO DS-4, but one of the reasons we have taken some costs in Q1 and we're going to take a little bit more in Q2 is to be able to fast-track some of these times that we've been talking about.

Got it. Okay.

And last one for me, and I apologize if you mentioned this earlier. ENSCO 104, did you guys mention how much was the termination payment?

No, we haven't done and it's not material. So it hasn't affected the quarter and won't materially affect next quarter.

In fact, there is a possibility just by the nature of how this has worked that although we've received the termination contract, there is the possibility that the rig will continue on to further work, and we'll know more about that over the next few weeks. So we've not guided to it and because it's not material we haven't put it in.

All right. That's all for me.

Thank you.

Thank you and good job on the quarter. Schlumberger recently announced an investment in a new offshore drilling start-up.

I wonder if you could share your thoughts around replicating a performance-based drilling services contract model more extensively offshore and would this integrated approach be something you'd consider in order to improve your competitive position?

Well first of all, that is probably some questions you should ask Schlumberger directly. But I think today we do see some contracts which are sort of either you could fall into the book here of being called integrated or bundled contracts.

In many cases, they're not performance-based. They're really a form of kind of management of services or bundling.

The number of truly potential integrated offshore contracts at this point are very limited. It's potentially an area that could grow.

We don't see a huge amount of client pull for it at this point outside of one or two places, but we would definitely be willing to participate in that either as a lead or a joint partnership or alliance with one of the big service companies, and we have pursued those contracts and we are doing. And I think if you know my background, I know this business very well and, of course, we would naturally look at it.

But as of today, that market is not significant and it's not big enough today to build a company or an approach off it. I think we all have to see where it goes and how it develops.

Got it. Thank you.

My follow-up is I just noticed here in your 10-Q that you're in discussions with the SEC regarding an extension of tolling agreement. And I just wonder if you could also share an update on communication as it relates to the Department of Justice around the ENSCO DS-5 contract?

Yeah. There's nothing really much to add that isn't in the filing.

It's pretty customary, it's normal, and we had a tolling agreement and it's just a customary extension of that tolling agreement.

Got it. Thanks.

Thank you, Denise. I want to thank everyone for your interest in Ensco and for participating in our call today.

Have a great day.