Diamond Offshore Drilling Inc. (NYSE:DO) Q4 2017 Earnings Conference Call February 12, 2018 8:30 AM ET
Executives
Samir Ali – Vice President, Investor Relations and Corporate Development
Marc Edwards – President and Chief Executive Officer
Ron Woll – Senior Vice President and Chief Commercial Officer
Scott Kornblau – Vice President and Acting Chief Financial Officer
Analysts
Kurt Hallead – RBC
Jud Bailey – Wells Fargo
Sean Meakim – JPMorgan
James West – Evercore ISI
Ian Macpherson – Simmons
Haithum Nokta – Clarksons Platou Securities
Greg Lewis – Credit Suisse
Waqar Syed – Goldman Sachs
Daniel Boyd – BMO Capital Markets
Operator
Good morning, ladies and gentlemen and welcome to the Q4 2017 Diamond Offshore Drilling Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] And as a reminder, today’s conference call is being recorded. I would now like to turn the conference over to Samir Ali, Vice President, Investor Relations and Corporate Development. Please go ahead.
Samir Ali
Thank you, Candice. Good morning, everyone and thank you for joining us. With me on the call today are Marc Edwards, President and Chief Executive Officer; Ron Woll, Senior Vice President and Chief Commercial Officer; and Scott Kornblau, Vice President and Acting Chief Financial Officer.
Before we begin our remarks, I remind you that the information reported on this call speaks only as of today. And therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay of this call. In addition, certain statements made during this call maybe forward-looking in nature. Those statements are based on our current expectations and include known and unknown risks and uncertainties, many of which we are unable to predict or control, that may cause our actual results or performance to differ materially from any future results or performance expressed or implied by these statements. These risks and uncertainties include the risk factors disclosed in our filing with the SEC included in our 10-K and 10-Q filings. Further, we expressly disclaim any obligation to update or revise any forward-looking statements. Please refer to the disclosure regarding forward-looking statements incorporated in our press release issued earlier today. And please note that the contents of our call today are covered by that disclosure. We will be referencing non-GAAP figures on our call today. Please find the reconciliation to GAAP on our website.
And now, I will turn the call over to Marc.
Marc Edwards
Thank you, Samir. Good morning, everyone and thank you for participating on our call today. For the fourth quarter of 2017, Diamond Offshore announced a loss of $0.23 per share, which includes restructuring and other one-time charges. Excluding these charges, our adjusted loss for the fourth quarter of 2017 was $0.05 per share. Although we are beginning to see tangible signs of a demand led recovery in certain deepwater markets, dayrates do remain suppressed. As a result, we have taken a hard look at our corporate structure and indirect costs and have taken measures to further reduce expenses. Our significant restructuring efforts are ongoing and we expect to take additional charges in the first quarter of 2018. Scott will provide color in his prepared remarks.
Allow me now to provide some highlights from this past year as it relates to Diamond Offshore. Not only did we secure approximately 88 months of additional backlog, we also made several key strategic decisions to help ensure Diamond Offshore is best positioned for the eventual recovery. Recall during the past summer, we elected to refinance our 2019 bonds. Given the continued uncertainty in the offshore drilling market, it was prudent to bolster our already best-in-class liquidity. With no newbuild capital expenditures and attractive debt profile as our next bond maturity is not until 2023, Diamond Offshore remains well-positioned to weather this ongoing downturn. Additionally, we have an untapped revolver and continued to build cash on our balance sheet.
Also in 2017, the Ocean GreatWhite and the Ocean BlackRhino began their respective 3-year contracts with Tier 1 clients at solid dayrates. The Ocean BlackRhino joined her sister rig, the Ocean BlackLion on Hess’ Stampede development program here in the Gulf of Mexico. Both rigs are now in full development mode and with the unique to Diamond Offshore, Pressure Control by the Hour construct, continued to progress this clients’ program ahead of schedule and under budget. In 2017, Diamond Offshore’s Pressure Control by the Hour model started to pay dividends for all stakeholders. When we first implemented this service, our rolling 12-month subsea nonproductive time was not only unacceptable to ourselves it was also unacceptable to our clients. And this was on equipment that has just been delivered as new from the original equipment manufacturer.
By moving to Diamond’s Pressure Control by the Hour construct, unplanned downtime has been significantly reduced. In this past quarter alone we experienced only 0.65% of sub-sea non-productive time equivalent to just 14 hours per drillship in the entire quarter. This has tangible benefits for all stakeholders. The client maximizes the ability to progress the well, Diamond maximizes revenue opportunity by avoiding unplanned downtime and the original equipment manufacturer maximizes revenue opportunity by ensuring product availability. Not only do we have that maintenance personnel permanently onboard the rigs, we also have direct input into their enhanced design for reliability ethos and component upgrades. This class leading reliability now differentiates ultra-deepwater drillships from their peers and uniquely positions us in terms of product desirability. In an oversupplied market this type of performance will make a difference when it comes to finding new backlog for these rigs. When they start to roll-off their current contracts in just under 2 years not only will these rigs be hot, but they will also have class leading reliability. We are still working with the original equipment manufacturer on further component upgrades, but I can report that our two clients are very pleased with their current rig performance. Importantly also in this past year we were able to achieve the best safety performance in the company history. We still have room to improve as our goal is to have zero incidents, but with this achievement it proves we are moving in the right direction. I would like to take this moment to applaud our rig crews as they have worked tirelessly to uphold our safety pledge in order to reach this new milestone.
Now turning to our contracting activities since our last call, Diamond has secured approximately 48 months of backlog across five rigs the Ocean Valiant, the Ocean Guardian, the Ocean Apex, the Ocean Monarch and the Ocean Valor. All of the backlog secured on these rigs will generate positive margin which is a testament to the quality of our assets and our customer service in a continually challenging market. The fourth generation Ocean Valiant was extended by Maersk for approximately 550 days keeping the rig contracted until February 2020. Not only were we able to keep the rig on contract, but also the extension was awarded at a premium to the already solid dayrate. And the third generation Ocean Guardian was awarded a 120-day contract by Chevron in the UK. This contract will commence immediately following the [indiscernible] campaign. And with this win the rig has secured work for the 2018 drilling season in the North Sea. We are pursuing other opportunities for the rig in both the winter and next season and are optimistic on her outlook. Both the Guardian and Valiant operate in the North Sea, which is primarily a moored market and is starting to show signs of a recovery. Diamond Offshore is well positioned to take advantage of this recovery with 3 rigs operating in theater and access to additional moored harsh environment rigs such as the Ocean Endeavor.
Looking now to the Australian market, the Ocean Apex entered into a paid option during the fourth quarter of 2017. The option provides Woodside the ability to contract the rig for works starting in the second quarter of 2019. The option fee is non-refundable and Woodside must declare their intentions by April 2018. We view this as a win-win situation for both Diamond and our client where we are paid for the availability of the rig in 2019, while our client ensures access to a premium moored asset with an established Australian safety case, a requirement to work in this region of the world. To touch on another rig currently in the Australasia region, the Ocean Monarch will soon be mobilized to the Bass Strait to begin her program for Cooper Energy, which will keep the rig occupied until later this year. After completing the campaign with Cooper Energy, the rig will begin a 60-day program for ExxonMobil also in the Bass Strait. In the fourth quarter of 2017, Origin Energy sold their assets in the Bass Strait to Beach Energy. As a result, Beach Energy reviewed their newly acquired acreage and elected to delay the drilling campaign.
Moving to Brazil, we have come to a resolution with Petrobras regarding the Ocean Valor. This contract represents the first award made by Petrobras to a major international driller for almost 2 years. As many people on this call will know, Petrobras continues to release rigs and we are pleased that despite this fact, Diamond was able to secure 2 additional years of work keeping the Ocean Valor contracted until late 2020. With this new agreement, Petrobras is able to reduce nonproductive spend in the near-term and Diamond Offshore was able to add $144 million of backlog in a mutually beneficial resolution to this matter. So, allow me now to provide an update on the Ocean Endeavor. The rig is currently cold stacked in the Mediterranean. However, we are likely to reactivate this rig during the course of this year. At this moment, we do not have a firm contract in place, but given the level of interest in the endeavor over the past few months, reactivating the rig is a prudent use of our capital. We are also considering putting her through an early 5-year special survey.
Now, turning to general commentary on the offshore drilling market. There have been some improvements with major operators such as ExxonMobil, Total, Shell and BP sanctioning new offshore developments. More specifically, we are witnessing a recovery in demand in certain mode asset category segments such as the North Sea. Utilization is improving with positive implications for an eventual recovery in dayrates. I believe dayrates for the moored asset class will recover before those of the high-end dynamically positioned sixth generation drillships. Of the almost 100 floaters that have been scrapped since the beginning of this extended downturn, over 85 were in the moored asset class. This alone will help to incubate a recovery and utilization in a market segment that has now started to tighten at current oil prices and explains why we are looking to proactively reactivate the moored fifth-generation Ocean Endeavor.
Further, we are also seeing a trend, whereby clients are looking to fix moored assets on term work of between 2 and 3 years. However, we still view the recovery in the sixth-generation DP drillship market as being somewhat over the horizon. 25 drillships are expected to roll-off contract in the next 12 months and there are not enough opportunities currently in the pipeline to absorb these rigs. Utilization in this asset category will likely track down another peg this year, that being said, although the number of tenders for drillships has increased, the competition remains fierce as indicated by recent fixtures at below cash breakeven. I have long maintained that the most distressed asset class is that of the sixth-generation dynamically positioned drillships and this is still the case, which is one of the reasons we embarked on Pressure Control by the Hour. We needed to push our drillships to the top of the deli line of desirability. I have long advocated about the benefits of having a mixed asset fleet and the contract awards we have announced this quarter are further testimony to the strategy.
Longer term, we believe in the viability of offshore as onshore alone cannot meet the looming supply gap. The curtailment in offshore drilling and the subsequent decline in sanctioning will eventually lead to a supply shortfall. In 2016 only 11 billion barrels of production was sanctioned globally. This compares to total global consumption of 34 billion barrels. This deficit in project sanctioning will eventually lead to increasing rig demand. We estimate that over 550 rig years of work will be required between 2021 and 2025. This is very close to the number of years demanded during the last peak from 2010 to 2014. Offshore drilling is a cyclical business and this downturn is without precedent. However, we are starting to see some signs of a recovery and continued to work to best position Diamond for when that time does come.
So with that, I will turn the call over to Scott to discuss the financials for the quarter and then I will have some closing remarks. Scott?
Scott Kornblau
Thanks Marc and good morning everyone. This morning we reported a net loss of $32 million or $0.23 per share for the fourth quarter of 2017 compared to third quarter net income of $11 million or $0.08 per share. These figures include the restructuring costs Marc referred to earlier and other one-time charges I will discuss later. Excluding these charges, our net loss for the fourth quarter was $7 million or $0.05 per share. Before I go into our fourth quarter results, I would like to briefly touch on the Ocean Valor agreement with Petrobras. After further analysis of the accounting rules around revenue we did not book a $20 million charge in the fourth quarter as previously expected. As a reminder this charge was to adjust for the third quarter of 2017 different between the revised standby rate of $190,000 per day and the previous standby rate. This in addition to a similar treatment in the fourth quarter results in approximately $40 million that will be applied as a credit during the extended term from October 2018 to September 2020. Said in another way, Diamond will book $190,000 per day from January 2018 until September 2018 and then $289,000 per day left the pro rata credit from October 2018 until the end of the contract in September 2020.
Now turning to our fourth quarter 2017 results, first, contract drilling revenues of $338 million during the quarter decreased 6% from the third quarter, mostly driven by the Ocean Patriot and Ocean Monarch coming off contract during the fourth quarter. This decrease was partially offset by nearly a full quarter of operations on the Ocean Courage which if you recall was undergoing BOP upgrades for much of the third quarter. Contract drilling expenses of $204 million came in 3% higher in the fourth quarter compared to the third quarter, but were still within the lower end of our guidance. The quarter-over-quarter variance is primarily driven by the fourth quarter modes of the Ocean Onyx and Ocean Scepter. Depreciation of $86 million was slightly higher than guidance due to normal year end adjustments. G&A cost of $20 million came in slightly above guidance as a result of a one-time non-recurring engineering charge. Net interest expense of $29 million came within our guided range and increased slightly quarter-over-quarter reflecting a higher interest rate on our 2025 senior notes issued during the third quarter compared to the 2019 senior notes retired during the same period.
Also during the quarter, we recorded a gain of $8 million related to the sale of five rigs previously classified as held for sale and an impairment charge of $28 million related to the Ocean Scepter. As for the restructuring mentioned earlier, we booked a $14 million charge during the quarter associated with employee severance and amicable termination of a foreign agency agreement. As discussed on our past quarterly calls we continued to proactively manage our cost structure and in the fourth quarter we made some difficult decisions to further align our company with the ongoing market realities. We will continue to evaluate innovative ways to further streamline the organization and expect to take any additional restructuring charge in the first quarter of 2018.
And finally, full year 2017 capital expenditures of $140 million came in approximately $15 million above guidance as we started ordering equipment for the Ocean Valor’s 2-year extension with Petrobras. The rig will undergo a similar upgrade as was performed on the Ocean Courage in the third quarter of 2017. We plan to complete this upgrade by October 2018 prior to commencement of the additional 2 years of work in Brazil. Unlike the Courage, we will not have to take any unpaid downtime during the Valor’s upgrade as it will be performed during the paid standby period.
Now, let me provide some thoughts on the first quarter of 2018. We expect contract drilling expenses for the first quarter to come in between $195 million and $200 million. The sequential decrease from prior quarter is a result of the Ocean Scepter rolling off contract during the fourth quarter and the fourth quarter mobilizations of the Ocean Onyx and Ocean Scepter partially offset by the first quarter startup of the Ocean Guardian and Ocean Patriot both in the North Sea. We estimate our depreciation expense to be approximately $82 million for the first quarter of 2018. The sequential decrease from fourth quarter is primarily driven by the suspension of depreciation on the Ocean Scepter as the rigs now classified as held-for-sale.
G&A costs are expected to be between $15 million and $17 million during the first quarter and will likely decrease in future quarters as the impact of the restructuring flows through. We also expect to take an additional restructuring charge between $2 million and $3 million during the first quarter related to the cost saving efforts discussed earlier. Net interest expense on our current debt and bank line of credit is projected to remain flat at approximately $29 million for each quarter of 2018. We anticipate our effective tax rate to be between 10% and 15% during the first quarter of 2018. Of course, the rate may fluctuate up or down based on a variety of factors, including but not limited to, changes to the geographic mix of earnings, further clarification around tax reform as well as tax assessments, settlements or movements in exchange rates. For our CapEx guidance, we estimate that we will incur maintenance capital costs of approximately $220 million for the full year 2018. The increase year-over-year is primarily driven by the likely reactivation of the Ocean Endeavor and BOP upgrades on the Ocean Valiant.
Now, let’s turn to the tax reform. As the sole remaining major U.S.-based offshore drilling company, we welcome the tax reform act as the lower U.S. income tax rate and territorial tax regime gives us the opportunity to compete on a more level playing field with our inverted competitors. Over the long-term, we anticipate a lower effective tax rate and an improvement in cash flow as a result of the new law, but won’t be able to immediately reap the benefits until we return to profitability in the U.S.
In the fourth quarter of 2017, we recorded a net one-time provisional tax expense of approximately $1 million related to tax reform. This provisional expense is primarily attributable to the mandatory deemed repatriation offset by the revaluation of our net U.S. deferred tax liability at the newly enacted lower tax rate of 21%. Currently, we do not anticipate any cash tax cost associated with the mandatory deemed repatriation. We will continue to monitor developments in this area and if necessary will adjust our estimates throughout 2018 as additional guidance and clarification becomes available.
To close, I want to reiterate the strength of our balance sheet. We have taken several strategic steps over the past few years to position Diamond for sustainable long-term success. At year end, we had approximately $375 million in cash and cash equivalents and currently have an undrawn $1.5 billion revolver with no significant planned expenditures ahead of us and no debt maturities until 2023 Diamond Offshore is expected to be cash – free cash flow positive which gives us the ability to deploy capital in a variety of ways.
And with that I will turn it back to Marc.
Marc Edwards
Thanks Scott. So in 2017 Diamond proactively strengthened both our balance sheet and increased our liquidity. We put all our final two newbuild rigs to work and extended the Ocean Valor contract with Petrobras. We have all of our six generation rigs contracted until mid-2019 and beyond and have secured additional work for several of our moored assets with yet more opportunities currently in the pipeline. Although we still face market headwinds in the near-term to medium-term a path to recovery is starting to take shape. We will continue to demonstrate our ability to innovate and drive thought leadership in the industry to improve both efficiency and lower the total costs of deepwater drilling. While at the same time with a strong balance sheet and liquidity position, we do have strategic options available to us and remain focused on the most efficient forward allocation of capital.
And with that I will turn the call over the questions.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question comes from Kurt Hallead of RBC. Your line is now open.
Kurt Hallead
Hey, good morning.
Marc Edwards
Hi.
Kurt Hallead
Hey Marc, I think you did a bigger job in kind of spelling out the differentiation of what’s going in the marketplace between the moored assets and the DP assets and in that same context you also referenced activating the Endeavor from cold stack mode, so there seems to be some element of thawing in the marketplace through certain extent, what – could you envision potentially activating another cold stack rig maybe before year end or is there sufficient enough demand in your mind that’s starting to build for you to start thinking about that?
Marc Edwards
That’s a good question Kurt, thanks. Thanks for planning on that. The moored market is definitely tightening. Many of the – well, in fact all of the recent pictures that we have got have been well above cash breakeven and although we haven’t had to fix the sixth generation DP assets in the recent past, if you just look at some of the data points in the market that clearly isn’t the case for DP assets. We have a number of other moored assets that are cold stacked. And when I look at the – as I just said on my prepared remarks when we look at the future allocation of capital and capital efficiency in total that does give us options to either go out into the market and look at other distressed assets or indeed further investments in some of our own fleet that is currently cold stacked and indeed bring those forward and back into the market. But right now what we have got on the table and what we are looking at imminently is the reactivation on early 5-year survey of the Ocean Endeavor.
Kurt Hallead
Okay. And you think I know you may mentioned it in your prepared commentary you are thinking Endeavor – you think in your mind Endeavor will have or be on contract before the end of the year or was it more likely that it will get start to work in early ‘19?
Ron Woll
Kurt, this is Ron Woll, good morning. Yes. So we are pleased of course to be bringing Endeavors back from cold stack given the tightness in the moored market makes a lot of sense. I would say that although we have announced kind of exactly where she will go, who she will work for, we have had several operators that we have expressed significant interest in that rig and so we are confident that she will go to work let’s say in the next 15, 18 months is quite high, so whether it’s the end of this year, starting next year, it’s probably in that time zone right in that timeframe. But still a pretty I think deliberate reactivation a path ahead for her, it’s not just flipping a switch as you will understand, but certainly I think if you think around a year plus or minus we would expect her to be back on a job at someplace.
Kurt Hallead
And just one maybe quick follow-up on that, so the increase in spend as mentioned was related to the Endeavor, that differential look to be roughly $20 million, so is that in total what you think it will cost to activate Endeavor?
Scott Kornblau
This is Scott, Kurt. If you take a look at our CapEx ‘17 versus the guidance I gave on ‘18, I mean the delta is greater than $20 million. I am not going to give a specific number on the reactivation of the Endeavor, so I will say we have in the past kind of guided to $50 million to $100 million range to reactivate a cold stacked rig. And we are going to be in the midpoint of that give or take a little.
Kurt Hallead
And that’s…
Marc Edwards
So Kurt just on that, I mean when you look at the cash trying to reactivate a rig, you don’t just look at the CapEx to bring cold stack. You have got – you have got cash burn on the OpEx guide regarding getting the crews up and running. You have got recertification of BOPs rises. You have got certain upgrades to the client might require. So reactivation costs, you got to understand what you are totally looking at from a cash burn perspective. And I think in general they will be higher than what the market is – is somewhat positioning around today.
Kurt Hallead
Okay. Thanks for that color. I appreciate it.
Operator
Thank you. And our next question comes from Jud Bailey of Wells Fargo. Your line is now open.
Jud Bailey
Thanks. Good morning. A follow-up on the Endeavor, if we take just the midpoint of the reactivation cost that you highlighted between $50 million and $100 million, can you talk to us a little bit on how you are thinking about contract terms to spend that amount of money, how you think about duration and do you think of it in terms of some sort of payback over number of years or how do you think about that?
Ron Woll
Yes. Jud, good morning, this is Ron Woll again. We think about reactivating a rig, we will maintain several of our stack rigs could come back further into the cycle. As we think about that decision, we look for sustained utilization potential not just kind of hunting around for one job. Certainly the tightening market – moored market makes that more credible it was say a year ago. But we think beyond any single job although we do look for a strong launch program to bring a rig back. So we think that kind of based on where the moored market is that launch job maybe out there. And so it makes sense to do what we have done.
Jud Bailey
Okay. And if I could, I will just follow-up and you referenced at a couple of times in prepared comments, but the tightening in the moored asset class, it seem realistic that we could see upward pressure on rates in 2018 or 2019, do you think it’s realistic and would it be primarily in the North Sea, if that were to occur?
RonWoll
Yes. Again this is Ron here. So what I described from a rig standpoint in the North Sea where the moored market is tightest today, I would say that’s rates have come off their bottoms of 2016, 2017, so it is sort of modestly better than it was although keep in mind we are comparing to a pretty painful baseline. I think we are at to point now where rigs that work in the sweet spot of the North Sea drilling season kind of the spring, summer, late summer season, those rigs can go to work at above marginal costs and sort of do well for our customer, make a decent margin and keep going. I would argue that in the non-preferred part of the season and the winter months were pretty challenging, so that’s – there is no easy relief there. But I would make a broad statement on that sort of easy times are here on rates. I think in a very specific market, in a very specific timeframe of the year we can work kind of above marginal cost, but I would be cautious on extrapolating too far beyond that.
Jud Bailey
Okay. And just to make sure we are thinking about it, the correct way Ron and we say offset the below ‘16 and ‘17 would like 10 or 15 [indiscernible] be a reasonable way to think about the type of bump we are seeing?
RonWoll
Yes. I am probably not going to quite go for that sort of that part of the conversation. It’s moderately better, but it’s not sort of a screaming improvement, it’s slightly better.
Jud Bailey
Got it, understood. Thanks a lot.
Operator
Thank you. And our next question comes from Sean Meakim of JPMorgan. Your line is now open.
Sean Meakim
Thanks. Good morning.
Marc Edwards
Good morning, Sean.
Sean Meakim
So Marc, I was wondering if you could just elaborate a little bit more on where you think you are in the cycle with respect to customers, still being more focused on trying to shed legacy drilling contracts, compared to eventually making that turn towards being required to take on multi-year contracts in the floater market, can you just give us sense of kind of where you think we are moving from the downward slope of that cycle to the other side?
Marc Edwards
Yes, sure. I think clients tending to shed legacy contracts. Most of those legacy contracts that needed to be addressed have been addressed in one shape, matter form or another. And as we are moving through, as we continue to churn through this downturn, I think clients are now beginning to look at contracting rigs certain in the moored asset class at longer term – on a longer term basis than what we have typically seen in the past. So as it relates to the moored asset class, we are seeing terms of 2 and 3 years come back on to the table. We have extended the Ocean Valor contract by 2 years. You have seen that on the Monarch, we have got a paid option to keep the rig ready for work in 2019. And also if you look at the Valiant in the North Sea, we have put that rig back for 550 days at a higher price than what it was already working at. So, just building on the prior commentary from Ron, we have seen that rates in the moored asset class are ticking up slightly and term is coming back into the vernacular.
Now, the market is somewhat bifurcating, because we haven’t seen that same progress certainly in the dynamically positioned sixth-generation drillship asset class, whereby we saw a rig be terminated early during this past quarter and we have also seen some fixtures go at a dayrate that is below cash breakeven certainly here in the Gulf of Mexico. So, the market is somewhat bifurcating. And then from that, I think one can deduce right, okay, the moored asset class is somewhat fixing itself and we are see seeing a path to recovery, but that’s primarily built on the fact that 85 floaters have come out of that asset class. When you look at the DP asset class, the same hasn’t happened. And therefore, one can deduce from that, that we do need some of these sixth-generation drillships to leave the market. And I would argue as I have done in the cost that, that will happen through extended cold stacking of these rigs. And indeed what will happen, the way I see this moving forward is that the rigs, those are kept working, those rigs that are perhaps some suggest that are classified as seventh-generation rigs, but the more capable DP drillships will certainly continue in the market. We might see some recovery and pricing around those that sub-asset class that will rise to a level that then might bring some of the cold-stacked rigs back into the market, but I would suggest you all that there are some sixth-generation drillships sitting out there today that will not work again.
Sean Meakim
Thank you. That’s very helpful. And I guess just a smaller question I don’t think I heard anything in the prepared comments around the LOI that you will sign with Rockhopper Exploration for the Sea Lion program. Is there anything you can – any additional commentary you can offer on that?
Marc Edwards
Yes, before I pass it over to Ron, we don’t generally comment on LOIs, but I will let Ron fill you in.
Ron Woll
Yes, this is Ron here. So, we of course are there I say well familiar with that document. So, we are certainly sort of well aware of that topic. We don’t sort of get into things pre-contract, but I will say we have worked with Premier for quite some time in the North Sea, know them well, they know us well, good relationship, lot of trust there. We have also worked before on Falkland, so we know that field well. And so I think there’s a lot of things to like there and you can connect the dots from there.
Sean Meakim
Okay, fair enough. Thank you, both.
Operator
Thank you. And our next question comes from James West of Evercore ISI. Your line is now open.
James West
Hey, good morning guys.
Marc Edwards
James, how you are doing?
James West
I am doing well, Marc. Thanks. Marc, you have been one of the more realistic prognosticators I think in the offshore drilling arena in the last several years. Admittedly, it’s primarily – it is not going to be good, but there is a little bit better tone I think this morning obviously the moored rigs and that’s understandable. But with the sixth and seventh generation assets and understandably some of these never going to work again, how many do you think or do have a sense of how many need to come out of the market to create a better market environment for that asset class?
Marc Edwards
That’s the $69,000 question. If you look at the DP asset class, there is still 22 drillships that have to come out of the shipyards as another staying with the DPs, there is another about 11 semis that have to come out of the shipyards as well. So, we have got that kind of headwind that’s already in front of us. Never mind, the rigs that are cold-stacked and indeed warm-stacked that don’t have any work today and it’s a substantial number. In terms of where the market is going, I think my commentary has to be somewhat careful here, because we do believe that between 2021 and 2025, the market bounces back significantly and even the majority of the sixth-generation assets will find work at good pricing. Nevertheless, there is still close to 100 – well 180 sixth-generation assets that will be in the marketplace and perhaps a steady state market will be 110 to 230 that will be working. So, I would suggest around 60 would probably have to come out of the market. Now, obviously there is quite a variance on that particular number, but it’s not hard to see that I could names many of the assets that are already out there, I won’t, but certainly the early fifth-generation assets that are somewhat less technically capable and I am suggesting a single direct 1 BOP, perhaps not such a high hook load as what is available in the market today. Those assets that will have been stacked for 4 or 5 years will require quite a large reactivation fee and they certainly won’t be reactivated when dayrates are certainly where they are today, but I would argue perhaps anything below $300,000 a day. And so from that aspect I think you will see assets leaving the market, but really due to the fact that dayrates won’t get back to a level that will allow the asset owners to invest in money on a reactivation fee and bring them in the market, which just propagates the fact that cost will continue to go up and these assets ultimately will not come back to work. So, I think you will see bifurcation in the moored – sorry in the DP asset class as well that will help rates recover in that spaces similar to what we are beginning to see in the moored asset class. I mean, I think what is different to earlier commentary and I do believe that we have been perhaps more realistic than our peers in discussing the market, I think we can now visualize and map a path to recovery in the moored asset class. I am not sure we are there yet with the DP asset class.
James West
Okay, that’s very helpful. So if we are not talking about recovery in DP until the 21 to 25 time period, which is still the ways away from now, so we have we got 3 more years of minimum of rust and lack of care. Does that naturally cause at the rate I guess it should, I mean, do you see a pathway for natural attrition to take care some of this?
Marc Edwards
Well, to my earlier point, James, I think that’s exactly what we will be seeing, because the cost of reactivation will simply get to a level that dayrates won’t support unless we see dayrates moving up. So, it’s like the marginal cost per rig of bringing it back into the market and let’s face it, saltwater is one of the most corrosive environments to store sales. So I think in general the market is underestimating the total cost of bringing back a drillship after it’s been stacked for 4 or 5 years and it’s not just the CapEx on the reactivation itself like I say, there is cost relating to certification BOPs, Riser, etcetera, etcetera. you have got to bring the crew back on board, you have got to get the crew trained and you have got to reposition the drillship to wherever it might need to go in terms of mobilization cost.
And the other thing that is critical here, we have spoken about Pressure Control by the Hour and I will reiterate that number that we got to in Q4 0.65% of MPT on our subsea systems across all 4 of our drillships, which is absolutely class leading. You cannot test the stack, the sub-sea stack of a drillship without it first being on contract, simply because there is no wellhead that you can sail up to and test the drillship or test the sub-sea stack, before it goes on contract. So our customers will always prefer a hot rig over cold rig. So it kind of propagates the issue of the cold stacked rigs, especially the more complex ones having to cross the hurdle to get back into the market and then get a contract. So I think you will see that market bifurcate and the rigs are keeping working, we will keep working as those are the cold stack. We will find it more and more difficult as time progresses to come back into the market.
James West
Got it. Okay, great. Thanks Marc.
Operator
Thank you. And our next question comes from Ian Macpherson of Simmons. Your line is now open.
Ian Macpherson
Hi. Thanks. Good morning.
Marc Edwards
Hi.
Ian Macpherson
Hi Marc, I had to imagine that another of your more likely candidates for reactivation would be the Onyx, which you have repositioned in Malaysia and could you compare the state of that rig and the scope of reactivation possibilities and the parameters cost and timing, I would have thought that one might be a little bit less cold and maybe little quicker to market and little cheaper to market than Endeavor, would that be a fair characterization or not?
Ron Woll
Good morning, Ian. This is Ron. Ron here, so I think both the Endeavor and the Onyx are two I think pretty likely candidates for reactivation. We have talked about that before as the moored market got better. Those made the most sense. They were the kind of last off the line, came off with good strong programs the Endeavor in the Black Sea, the Onyx close the Gulf. So they were both in – I think they both sort of came off the line in very good shape with sort of good resumes in that way. And not having them cold all that long, kind of make good sense to come back. They both had good useful lives get ahead. Endeavor was their strong, call large deck space rigs desirable for large development programs. The Onyx of course is both good for exploration and development. We in fact have introduced kind of both those rigs to a number of clients in across multiple regions. Obviously, we are talking moored markets here, but I would say not just the North Sea for both those rigs. And so it would be our – it would be certainly welcome for us and something that we certainly work towards to see both those rigs come back in this part of the cycle. And again, it’s been interesting to see customer reaction to those rigs. Those reactions have been quite favorable, which is tell me more talking about your activation plans are. And so they are looked at I think very well, I think with proper scrutiny given that it work today. But I would describe those conversations to be quite favorable and pragmatic. And so I would not at all be surprised to see both of those rigs come back in this cycle.
Ian Macpherson
Okay. Thanks Ron. This is a kind of the different – different type of question, but we have seen recently two significant transactions, I don’t know if those have been fully consummated, but announced transactions regarding harsh environment rigs stranded newbuilds that have been picked up non-standard players and coincidentally, both of them are rigs that look at least by rig design like the GreatWhite and they have reportedly moved at pretty high prices that we have seen, we have seen asset transaction prices that imply five – maybe $500 million and maybe even up to $600 million for a fully delivered price for those assets and I wonder Marc what your thoughts are on that asset pricing level for rigs like the GreatWhite and what that suggest to you about your longer term options with that rig the GreatWhite and the entry of those stranded newbuilds into its competitive domain?
Marc Edwards
So first of all the longer term options for the Ocean GreatWhite. Ron has spoken about having customer discussions regarding the Onyx and the Endeavor. The Ocean GreatWhite is still on the contract with BP for another 2 years. The rig is not currently drilling right now, its in a standby mode for BP. However, having said that, we have also had a number of inquiries as it relates to putting the Ocean GreatWhite back to work, but then of course that comes with the caveat that there is a discussion with BP there as well. As it relates to the pricing that some of our peers and others have undergone in terms of picking up very similar bricks to the Ocean GreatWhite, that is for them to comment on as to whether they feel that price was acceptable or not. Nevertheless, I think from our perspective, we are very comfortable to have the Ocean GreatWhite in our fleet. We are very optimistic as it relates to its future. The Ocean GreatWhite of course is a hybrid rig. It can work in the DP space, all the moored space, but as it relates to the efficient use of capital moving forward. In this current market, I would say that the arbitrage for us between what some have paid for high-spec harsh environment semis is a little bit too high from us when we look at how we plan to spend our capital moving forward and allocated accordingly. So, I feel that the pricing that is paid in that market is perhaps too high, but nevertheless we are very happy to have the Ocean GreatWhite in our fleet at the same time.
Ian Macpherson
Great. Thanks, Marc.
Operator
Thank you. And our next question comes from Haithum Nokta from Clarksons Platou Securities. Your line is now open.
Haithum Nokta
Hi, good morning Marc.
Marc Edwards
Hi.
Haithum Nokta
On the moored rig market tightening, I think it’s pretty well understood that the North sea and Australia as well have been – are pretty unique, but are you starting to see those same characteristics in more benign markets like West Africa, Southeast Asia or South America?
Marc Edwards
So, yes, we have Australia, of course, we are looking at the Falklands there is an opportunity for a couple of moored rigs. Well, there is more than one opportunity there is a couple of opportunities in Latin America and also in West Africa, which is very benign market at this moment in time. So, it’s the North Sea is tightening significantly and we are beginning to see certain timing of what is a very low base let’s make sure we understand that in other markets around the world. So, as we have been consistently saying throughout this call, we are seeing a path to recovery in the moored asset class.
Haithum Nokta
Okay. And it seems rig reactivations will seemingly be your primary use of capital for call it the next year to 18 months or so, can you maybe remind us where like the floating factory of projects or sixth-gen acquisitions or the high-spec sixth/seventh-gen acquisitions fall for you, I mean, if you are talking about a recovery in that market in 21 to 25, I assume it’s not on the front burner, but just any additional commentary would be appreciated?
Marc Edwards
Sure. I think what we do need to see is we need to see a tightening in dayrates in that market. We are somewhat concerned about the assets that are in the yards that are still going to come to market. So, we haven’t seen the supply and demand equation somewhat start to fix as it relates to the number of assets that are in the market that are coming to the market and the available opportunities for them at this moment in time. The floating factory would take a 4-year build. We obviously have the design complete. We have been in negotiations with vendors in the shipyards, but we have not pulled any triggers as it relates to what decisions we are going to make moving forward. We are still building cash. We build cash close to well over $90 million in the last quarter. So, we are building up a war chest and we will when we come to execute as to how we will renew the fleet moving forward, do a project that comes with a lot of diligence behind it, because I have always been consistently saying the allocation of each capital is one of the major things we are looking as a management team here in Diamond Offshore. So, the options are still there. We can still pull various triggers. We are keenly monitoring all opportunities that exist in the marketplace and we will execute only after a significant amount of diligence and comfort that we are allocating capital efficiency.
Haithum Nokta
Appreciate that. So, just to be clear any kind of decision on floating factory wouldn’t put a delivery before ‘22 or ‘23 at this point?
Marc Edwards
Right. So right now it’s at least 4 years out before the rig would be able to start generating revenue in anger.
Haithum Nokta
Got it. Thank you.
Operator
Thank you. And our next question comes from Greg Lewis of Credit Suisse. Your line is now open.
Greg Lewis
Yes. Thank you and good morning.
Marc Edwards
Greg, hi.
Greg Lewis
So we saw the extension on the Valor, congratulations. I think one of the big issues that Diamond has been facing, the great backlog over the next 2 years which is giving your comments about a rig recovery in 2021 through 2025 for the ultra-deepwater market, is there conversations that the company is having with its two customers around potential blend and extends on any of the black rigs?
Marc Edwards
So one of one of the important things that we have always looked at here, Diamond is when – well, just under 2 years time when the black ships roll-off contract, how we are going to keep them working and I alluded to the fact that earlier in the call that we needed to put these rigs in an oversupplied market to the top of desirability when it comes to performance and differentiate them through process. And we have been successful in doing that. These rigs are performing extremely well for the clients that are working for now. However, I think it’s fair to say that one of the client’s drilling program come the end of its current project, will be curtailed. So what we are doing is we are already establishing communications with other interested parties who have an interest in taking these rigs on. They will be hot. Their performance as it stands today is outstanding and there is no reason to assume that if that will continue. So these rigs are somewhat attractive in a market that is usually oversupplied. So we are quite optimistic at this time in rolling these rigs over. Some of them will stay with their current clients I believe, but maybe two will move on to another opportunity that may manifest itself in the not so distant future. So I think the best thing we can do as a company is control what we can control and that is differentiated rigs, make sure they are performing at the highest level that enhances our ability to get them contracted once they roll-off of this. So I am relatively optimistic that these rigs will keep working.
Greg Lewis
Okay, great. And then Ron, you mentioned opportunities for the Endeavor maybe inside the North Sea, but maybe outside North Sea, I guess just two questions on that, one is as we think about the North Sea clearly that’s even a two-tiered market with the South – Southern North Sea being a little bit more looser than the North Sea, I am curious where you see the Endeavor working in the North Sea and then if you could sort of maybe on a percentage basis talk about what type – on a percentage basis is 50% of the work that the Endeavor is being looked at potentially doing outside the North Sea in other basins, any sort of color around that would be super helpful? Thanks?
Ron Woll
Yes. This is Ron, I guess the answer is yes, which is she is looking at programs that are as you would say in the kind of maybe a little bit easier part of the of the pool there in the Central, south part of the North Sea. But you can also crush programs further north that are much more aggressive. And operators I think look to her and I think take comfort knowing that she could handle some pretty tough programs in pretty tough weather. At the same time given her large deck space, there are operators outside the North Sea, including West Africa, who have expressed interest in her. And so I think the answer is yes and yes. Now, of the multiple opportunities that she is looking at, which one is going to hit and what sequence, I won’t sort of forecast or guess at that, but the nice thing about her is that operators as they think about bringing her on to a program know that she can handle a variety of challenges in not just on calm easy days.
Greg Lewis
But the work she will be doing will be term one when she comes back into the market, so she is going to be moving around so to speak?
Ron Woll
We wouldn’t – this is Ron again, we wouldn’t reactivate a rig and then have her chase kind of well-to-well work. So the kind of jobs we are looking at obviously have some term tied to them and that makes a lot of sense. The customers would expect that rig to work kind of on their program for more than just a short while.
Greg Lewis
Perfect. Thank you very much.
Operator
Thank you. And our next question comes from Waqar Syed of Goldman Sachs. Your line is now open.
Waqar Syed
Thank you. Marc, typically we find that as things start to get better, demand starts to pick up. We started to see costs not to creep up. Is this something we should expect as well on daily operating costs as you modeled out for next year and beyond that those will start to pickup either from labor or repairs and maintenance or anything else?
Marc Edwards
Waqar, thanks for the question. No, we are not seeing any cost inflation in our space at this time in actual fact perhaps there was a little bit of cost deflation right now.
Waqar Syed
But I was thinking more like when we start to see noticeable pickup in demands and you start to see more rigs go back to work industry-wide, should we start to assume that time next year or beyond that cost OpEx starts to pickup?
Marc Edwards
I don’t think so Waqar at this particular time, there is still a lot of slack in the business. This is a North American shale story by any sense of the imagination. We don’t have bottlenecks as it relates to cost of goods or anything like that. This is really – our largest cost back it was always labor. And I don’t see that there is any cost inflation there. I think one of the challenges that we are going to have moving forward is looking at how we want to spend our cash as it relates to reactivation of the rigs themselves and how we allocate or what we actually do to the rigs in terms of upgrading them. I think that’s more of the question or uncertainty rather than cost inflation certainly for the next of couple years. I don’t see cost inflation on our space in ‘18 or ‘19.
Waqar Syed
Okay. And then for CapEx we should assume that ‘17 was kind of the low point in CapEx for this next cycle?
Marc Edwards
Good question. For us, I think we were unique amongst our peers. We didn’t have any new build CapEx going on or we weren’t differing delivery from shipyards etcetera, etcetera. So really let’s say in ‘17 most of our CapEx was maintenance. So I think that my trend up a little bit of course I think our guidance is now 220 and some of that does of course include the reactivation of the Endeavor. So, if we look at reactivation of the Onyx etcetera, etcetera, I think moving forward, we are going to see a little higher CapEx number than traditionally you saw for us in ‘17.
Waqar Syed
Okay, great. Thank you very much.
Operator
Thank you. And our next question comes from Daniel Boyd of BMO Capital Markets. Your line is now open.
Daniel Boyd
Hi, thanks. I just want to follow-up on the Endeavor reactivation. Clearly, you are seeing some positive signs in the moored asset class and I am assuming you expect rates to increase, but how are you thinking about the payback period potentially for that type of an upgrade, you have talked about 2 to 3-year opportunity, so let’s say there is a 3-year opportunity. You historically I think the industry has looked at sort of 80% or so cost recovery during initial terms. Is that something you think is in the realm of possibility or just given the starting point is going to be a little bit tougher to get there?
Marc Edwards
Dan, that question already has come up somewhat during the Q&A session, I am not going to be drawing on how we look at amortizing reactivation costs. Suffice to say, clearly, we are not going to do it if the market is somewhat transactional moving forward. We are going to do this with contracted term work. And again, just staying with the Endeavor, we have a number of clients that are chasing the Endeavor and we believe that if we reactivated, for example, for a 2-year or 3-year term, there will be immediate follow-on work after that. So – but as it relates to the specifics of how we amortize the reactivation and what time we amortize it over, I am not drawn on that in this public forum.
Daniel Boyd
Okay, thanks. Of this 75, how much of that is CapEx versus the other cost that you discussed and that might fall into OpEx?
Scott Kornblau
Yes, hey, Dan, this is Scott. The majority of it is CapEx. As Marc said, if we reactivate it we will also do a special survey, which historically we have expensed, but I would model in the vast majority as being CapEx.
Daniel Boyd
Okay. Thanks, guys. Just thought, I will try.
Operator
Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Marc Edwards for any closing remarks.
Marc Edwards
Thanks very much for participating in today’s call everybody and we look forward to speaking with you again next quarter.
Operator
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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