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Transocean Ltd (RIG) Q4 2018 Earnings Conference Call Transcript

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Transocean Ltd  (NYSE: RIG)
Q4 2018 Earnings Conference Call
Feb. 19, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Quarter Four 2018 Transocean Earnings Conference Call. Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Bradley Alexander. Please go ahead sir.

Bradley Alexander -- Vice President, Investor Relations

Thank you Molly. Good morning and welcome to Transocean's Fourth Quarter 2018 Earnings Conference Call. A copy of our press release, covering financial results, along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures are posted on our website at deepwater.com. Joining me on this morning's call are Jeremy Thigpen, President and Chief Executive Officer; Mark Mey, Executive Vice President and Chief Financial Officer; and Roddie Mackenzie, Senior Vice President of Marketing and Contracts.

During the course of this call, Transocean management may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts. Such statements are based upon the current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for more information regarding our forward-looking statements including the risks and uncertainties that could impact our future results. Please, also note, that the company undertakes no duty to update or revise forward-looking statements. Following Jeremy and Mark's prepared comments, we will conduct a question-and-answer session.

During this time, to get more participants an opportunity to speak on this call, please limit yourself to one initial question and one follow-up.

Thank you very much.

I'll now turn the call over to Jeremy.

Jeremy D. Thigpen -- President and Chief Executive Officer

Thank you Brad, and welcome to everyone participating in Transocean's Fourth Quarter and Full Year 2018 Earnings Call. I'd like to start today's call with a recap of 2018. As reported in yesterday's earnings release, for 2018 the company generated adjusted normalized EBITDA of $1.1 billion on $3 billion in adjusted normalized revenue. Resulting in an industry-best, adjusted normalized EBITDA margin of 36%. As you well know, for the past three-plus years, Transocean has been acutely focused on; enhancing the quality of our fleet, driving operational excellence through continuous improvement in safety, uptime and drilling efficiency, expanding our position as our customer's universal first choice and extending our liquidity runway by adding to our industry-leading backlog, converting a higher percentage of that backlog to cash and prudently bolstering our balance sheet through timely transactions.

In 2018, we took several steps to further each of these objectives. Looking first at our fleet, we added 20 assets with an associated $4.5 billion of backlog through two corporate acquisitions and added another high-specification, harsh environment floaters through the formation of a strategic joint venture. In January, we closed Songa Offshore, the first of our two corporate acquisitions. Through this transaction, we acquired seven rigs including four high-specification harsh environment semisubmersibles on long-term contract with Equinor.

These assets were backed by almost $4 billion of high-margin contracts extending into 2024. This acquisition was strategically important to us, as it enhanced our harsh environment fleet, added scale in the strengthening market of Norway, increased our exposure to a target customer, and through a significant backlog provided visibility to strong future cash flows which as you know is critical in the current market.

Our second acquisition was Ocean Rig, which we just closed in December. With this acquisition, we added 13 rigs to our fleet and almost $750 million of backlog. The Ocean Rig fleet consisted of 11 high-specification ultra-deepwater ships that are less than eight years old, including two of the most technically capable rigs in the industry, which are still under construction. This transaction was strategically important to us, as we acquired more of the high-specification, ultra-deepwater assets that our customers prefer, providing us the opportunity to capitalize on what we believe to be the beginning of a market recovery in the ultra-deepwater space.

In between these two corporate transactions, we formed a joint venture to acquire the high-specification harsh environment semisubmersible, the Transocean Norge. As all of our top tier, harsh environment assets were already contracted, the investment in the Norge provided us with the opportunity to further increase our exposure to the continued recovery in the Norwegian market.

We just recently took delivery of the Norge and are in the process of mobilizing her to Norway, where she will commence operations on her maiden contract working for Equinor. We currently expect the Norge to go on contract in July, at which point Transocean will have eight active rigs operating in the Norwegian waters.

Also in furtherance to our fleet strategy, we announced the retirement of eight, older, less marketable assets in 2018 and just recently announced our intention to retire the Ocean Rig Paros, and as of yesterday, we have decided to also retire the Ocean Rig Eirik Raude.

During our initial due diligence of Ocean Rig, we inspected their assets and assumed that the reactivation cost associated with the Paros and the Raude would be prohibitive. As such, we ascribed virtually no value to them on our purchase price. Now, after spending a bit more time assessing each rig, we believe that the reactivation cost for the Paros could approach $250 million with the Eirik Raude, likely to exceed $100 million.

Assets, we will now move forward with recycling these assets in an environmentally responsible manner. The removal of these two rigs from our fleet will bring our total number of recycled assets since the start of the downturn to 49.

Through the continued location of our strategy to assemble the most capable fleet of assets, we now have 53 rigs with an estimated backlog of $12.2 billion. 49 of these rigs or approximately 92% are considered high-specification, ultra-deepwater and/or harsh environment assets. The type of floating rigs with the strongest long-term demand characteristics and therefore the greatest opportunity for day rate escalation.

Moving from fleet quality to operational excellence, I'm pleased to report that in 2018, despite two extended downtime events to start the year and one extended weather related downtime event to end the year, we managed to deliver another year of strong uptime performance across our global fleet with uptime greater than 96% and revenue efficiency exceeding 95% for the fifth consecutive year.

While our ultimate goal is to deliver 100% uptime for our customers, given the headwinds we faced in 2018, which I will now outline, I'm pleased with the result. In 2018, we welcomed a newbuild the Deepwater Poseidon into our fleet and commenced operations in the Gulf of Mexico. We also reactivated three rigs, mobilized five rigs to new jurisdictions and/or new customers and added almost 4000 new employees, primarily through our strategic corporate acquisitions or to support new operations in new markets.

So, delivering 90% uptime for the year was quite an accomplishment. More importantly, we delivered this uptime performance by keeping our people safe, navigating the entire calendar year without a lost time incident. I'd like to take this opportunity to thank the entire Transocean team for its unwavering commitment to delivering exceptional uptime performance for our customers, while striving to maintain an incident free environment, all the time and everywhere.

Part of our uptime success in 2018 can be attributed to our OEM healthcare contracts, which cover the most critical components on our rigs. These agreements support our goals of reducing operating costs and more importantly continuing to improve equipment reliability and safety. As we move into 2019, we will continue to explore opportunities to leverage our OEM relationships as well as our proprietary data analytics tools to better evaluate the real-time health of our equipment.

Due to improved visibility, we are now afforded, we can quickly detect degradation of components or systems such that we identify potential failures in a more timely manner and proactively schedule maintenance to avoid unplanned downtime events. In addition to improving equipment reliability and uptime in 2019, we intend to expand our capability to deliver even greater drilling efficiency for our customers.

As many of you know, we are now two years into the launch of our proprietary efficiency dashboard. As a result of this dashboard and the improvements that we have made to it over the past 24 months, we have increased the efficiency and consistency of our operations across crews and rigs, meaningfully reducing the time required for our customers to construct their wells.

In fact, the tool is so successful that one of our IOC customers has opted to discontinue its long-standing relationship with a third-party providing commercial rig performance monitoring services, in favor of supplementing their own internal performance monitoring tools with our efficiency dashboard and we are in conversations with other customers who are seriously considering a similar transition.

Needless to say, we view this as a true testament to the value of the tool, our customers' confidence in its accuracy and capabilities and their trust in Transocean. In addition to focusing on process improvements, utilizing the efficiency dashboard, we are also beginning to leverage digital twin technology to perform a rig floor machine analytics to help us bridge the gap between actual and optimal machine performance across our rig fleet.

Through this process, we will continue to reduce the time required to construct a well, while driving further consistency of performance across our global fleet. And finally, we recently announced that we have entered into an agreement with Equinor to install automated drilling control systems on five additional high-specification harsh-environment semisubmersibles, currently on contract in Norway.

Since 2017, we have operated the ADC system on the Transocean Enabler and the improvements that we have realized in drilling efficiency, well quality, well integrity and safety have been material. As such, we will soon be deploying the ADC system on the Spitsbergen, the Encourage, the Equinox, the Enabler and the Norge as we continue our quest to deliver, safer, higher-quality and lower-cost wells to our customers.

Through the ongoing enhancement of our fleet and continuous improvements in safety, reliability and drilling efficiency, we believe that we will further advance our position as our customers' universal first choice. As evidence that our strategy is working, despite the challenging market conditions in 2018, Transocean won 37 new floater contract awards, far more than any of our competitors.

This represents a 44% increase year-over-year. Furthermore, these supports contributed over $1.8 million to our industry-leading backlog. This is more than twice the backlog, we added in 2017 and our largest total, since 2014. Of particular significance is the five-year $830 million contract we signed with Chevron in late December to construct, deliver and operate the industry's first ultra-deepwater 20,000-psi drillship.

The drillship incorporates state-of-the-art technology including 20,000-psi blow-out preventers, a derrick with gross hoisting capacity of 3.4 million pounds, a variable deck load capacity of 24,000 metric tons and an enhanced dynamic positioning system. Additionally, during 2018 we were pleased to sign master service agreements with Equinor, ExxonMobil and ConocoPhillips. And unsurprisingly, all quickly led to contracts that further contributed to our backlog.

After signing the MSA with Equinor, we exercised multiple options for the Transocean Spitsbergen and secured the maiden contract for the Transocean Norge.

In the case of ExxonMobil, we reactivated the semisubmersible Development Driller III, which is currently on its way to Equatorial Guinea to begin its campaign. And I'm pleased to report that just yesterday ExxonMobil exercised its first six-month option on this contract. And assuming they exercise their remaining two options, this rig would remain on contract for the next two years with escalating dayrates that would generate significant cash flow.

Finally, after signing the MSA with ConocoPhillips, we booked some relatively long-term work for the Transocean 712 in the U.K. Focusing specifically on the fourth quarter, in addition to the five-year contract for the 20,000-psi drillship with Chevron, we added fixtures for the KG2 in Australia, where Chevron required a second rig for their Gorgon Stage two campaign. We also earned an extension on the Discoverer India with CNR in the Ivory Coast, picked up a contract with BP in UK for the Paul B. Loyd, added two short-term fixtures for the Arctic in Norway and secured options for the Leiv Eiriksson in Norway and the 712 in the UK.

And just recently, we secured a new 120-day contract for the Transocean Leader with Premier in the UK with an estimated $30 million in backlog, and we're awarded additional options on the Leiv Eiriksson in the Norway with Lundin and the Ocean Rig Poseidon in Angola with Eni. Looking now to the macro oil market, the end of year decline in oil prices certainly dampened the enthusiasm that we felt throughout the first three quarters of 2018. However, it's important to remember that much of what drove that enthusiasm around the long awaited market correction remains unchanged.

Break even economics for our customers' offshore projects are now consistently below $50 per barrel with the most imminent project at or below $40 per barrel. Due to a lack of investment over the past four years, reserve replacement ratios continue to decline, and our customers have generated significant cash flows from operations, which they can use to service debt, return capital to shareholders and if they so choose, invest in longer-cycle projects, including long-delayed greenfield projects which help to drive incremental --.

Per a respected independent industry group, in 2019 as many as 90 offshore projects FIDs could materialize. This will represent a significant increase from the 51 FIDs that were sanctioned in 2018, and further supports our contention that the offshore market is in the early stages of a recovery. Across the global market and across our broad customer base, we continue to see multiple opportunities in the ultra-deepwater market. In the U.S. Gulf of Mexico, we are excited about the green lighting of the 20,000-psi work for Chevron.

This contract represents the culmination of multiple years of planning and dedication by both Transocean and Chevron and is a project that they see, as vital, to their longer-term production. This however, may be just the beginning for high-pressure ultra-deepwater production. There are additional opportunities requiring 20,000-psi rated equipment in the lower tertiary area of the U. S. Gulf of Mexico.

Therefore, we will not be surprised to see incremental demand for this game-changing technology in the months and years to come. Additionally, for the first time in years, we are engaged in conversations with multiple customers around upcoming projects in the U.S. Gulf of Mexico that would actually require incremental rigs returning to work in this critically important market.

In Mexico, we're proud to have drilled the first ultra-deepwater well for an international operator, BHP in the Trion-field with the Deepwater Invictus. And we have recently mobilized our second ultra-deepwater drillship, the Deepwater Asgard into the region for Murphy. Additionally, it's likely that we will move a third quarter of our drill ships into this previously untapped portion of the Gulf of Mexico to begin drilling for a supermajor before the year ends.

In Brazil, we're pleased to see Petrobras tendering multiple projects with start dates beginning as early as the second half of 2019. We are hopeful to win some of this work and have multiple rigs drilling for Petrobras by year-end. We are also encouraged to see incremental demand in the region being driven by the international players which are starting to move forward with their programs.

Moving to West Africa, as evidenced by the extension on the India in the Ivory Coast, the new contract for the DD3 in Equatorial Guinea and the conversations that we continue to have with customers in the area, it is clear to us that demand is picking and larger scale opportunities are emerging. While projects in West Africa are always more sensitive to oil prices, the continued reduction in ultra-deepwater project cost has enhanced the viability of projects here as well.

In the Asia-Pacific region, we now have both our KG1 and KG2 drillships operating, along with two of our semisubmersibles the DD1 and the Nodulus, and we continue to be encouraged by opportunities in India, Malaysia and Australia. Importantly, as it relates to the ultra-deepwater market, we are starting to arrest and reverse some of the trends that emerged during the downturn. Specifically, we are experiencing a shift from tendering to direct negotiations, which we view as a positive sign.

In select circumstances, we are now asking for and receiving mobilization fees. With certain customers and programs, we are successfully negotiating downtime banks (ph), which all but disappeared over the past four years. We are actively engaged in conversations with customers about paying for reactivations, special periodic surveys and upgrades, and perhaps most importantly, we are starting to lift dayrates in ultra-deepwater markets. The combination of all of these factors suggest that we could be progressing to a more sustainable business environment.

Moving from the deepwater to the harsh-environment markets, of Canada, Norway and the UK. The market for high-specification assets in both Canada and Norway continues to be tight. In fact, with virtually no remaining marketable supply in these two regions, we could see base dayrates, which have been temporarily capped around $300,000 per day before bonuses, move higher as we progress through the year and into 2020.

And in the UK, as evidenced by the signing of the Transocean Leader, the market for highly efficient semisubmersibles remains constructive. As we proceed through 2019, we believe that the attractive project economics in these basins, coupled with a demonstrated ability of operators in these regions to compress the time to first oil, should result in solid demand and activity for the foreseeable future. So, overall, we remain encouraged by the outlook for 2019 and beyond.

While there is no doubt that the decline in oil prices at the end of 2018 was disheartening, it's important to focus on the following: Offshore project costs and returns are competitive with shale. As an industry, we have materially compressed the time to first oil for offshore projects. Our customers have generated record cash flows and can now comfortably service debt, return cash to shareholders and invest in longer cycle projects.

And reserve replacement is a real challenge. We are currently replacing just one of every two barrels currently produced offshore, and that number decreases to one of three barrels when averaging production over the last three years. With estimates for annual worldwide oil demand growth, generally ranging between one million and 1.5 million barrels per day, the current level of offshore activity must increase materially to keep pace. In conclusion, today's outlook is not without its near-term challenges, but we have prudently positioned Transocean to outperform throughout the cycles.

As we move through 2019, we will continue to execute the strategic plan that we established almost four years ago, which includes enhancing our fleet through addition, subtraction and upgrades. Identifying and realizing opportunities to improve operational efficiency, including safety, uptime and the streamlined delivery of our customers wells.

Identifying and realize opportunities to improve organizational efficiency through continuous improvements in our operations and our processes and taking the necessary actions to further bolster our balance sheet so that we can continue to invest in differentiation, including our assets, new technology and our people.

Before turning the call over to Mark, I would just like to thank the entire Transocean team for your performance in 2018. And may our focus on safety, customer service, fleet quality, operational excellence and organizational efficiency continue to serve us well in 2019. Mark?

Mark Mey -- Executive Vice President and Chief Financial Officer

Thank you Jeremy and good day to all. During today's call, I will briefly recap our fourth quarter and full year results and then provide guidance regarding the first quarter, as well as the full year 2019, which includes the Ocean Rig acquisition for the first time. Lastly, I will provide an update on our liquidity forecast through 2020. As reported in our detailed press release, for the fourth quarter 2018, we reported a net loss attributable to controlling interest of $242 million or $0.48 per diluted share.

After adjusting for unfavorable items, primarily associated with discrete tax items and impairment charges related to the previously announced floater retirements, we reported adjusted net loss of $171 million or $0.34 per diluted share. Further details are included in our press release. Contract revenues decreased $68 million sequentially to $748 million, due largely to few operating days as well as unexpected (inaudible) downtime on two of our harsh environment rigs off the coast of Canada, resulting in approximately $21 million in lost revenue.

In addition, the quarter was also unfavorably impacted by the completion of the recognition of the Clear Leader early termination revenue in October, resulting in a $24 million decrease, and an unfavorable $21 million impact from the plan-and-extend contract reextension on the Petrobras 10000.

This was partially offset by the increase in revenue of approximately $15 million from the three working rigs acquired in the Ocean Rig transaction and better revenue efficiency than the previous quarter. In addition to the successful acquisition of Ocean Rig, highlights for the fourth quarter include; fleetwide revenue efficiency of 95.7%, an adjusted normalized EBITDA margin of 34% that continues to lead the industry and showcase the strength of both our industry-leading backlog and operational performance and cash flow from operations of $238 million.

For the fourth quarter 2018, our operating and maintenance expense of $497 million that includes $15 million from the Ocean Rig fleet, as well as higher-than-anticipated shipyard cost and fleet maintenance costs.The shipyard costs are mainly due to the DD3 project, incurring certain expenditures forecast for the first quarter 2019 in 2018. Fleet maintenance costs include, the payment of uptime bonus related to no unplanned BOP pause in 2018, associated with one of our OEM healthcare agreements. Speaking of reactivation, let me briefly recap our reactivation history.

We are very disciplined in our reactivation strategy ensuring that all our investments are either repaid within the initial contract or short term thereafter. For example, the Henry Goodrich and the Transocean barrels investments will repay within 18 months. For the DD3, we expect to recover approximately 75% of its reactivation costs by the end of its third option or two years after initial contract commencement. Turning to the cash flow and balance sheet. The effective tax benefit for the fourth quarter was a negative 82.6% compared to an effective tax rate of 6.7% for the prior quarter. To that effect, cash taxes paid for the fourth quarter 2018 and full year 2018 were $19 million and $119 million respectively.

We ended the fourth quarter with a total liquidity of approximately $3.2 billion including cash and cash equivalents of $2.2 billion and $1 billion of undrawn revolving -- from our revolving credit facility. Earlier this month, we completed successful cash tender offer in which we repurchased a total of $509 million of debt maturing between 2020 and 2023. After this cash tender offer, we accessed the debt capital markets by issuing $550 million of senior notes, attributable to Deepwater Poseidon with a 2027 maturity.

Looking at our 2018 results, we delivered another year of strong financial results under challenging market conditions, all directly attributable to Transocean's continued commitment to operational excellence and revenue efficiency. We will continue to be disciplined in our approach to extending our liquidity runway, by both enhancing our cash position and/or addressing our near and midterm debt maturities.

Let me now provide an update on our 2019 financial expectations. For the first quarter of 2019, assuming revenue efficiency of 95% on our active fleet, we expect that total contract revenues to be down approximately 5% quarter-over-quarter. This forecast includes the impact of scrapping the Jack Bates and the Transocean 706 both of which completed contracts in the fourth quarter, and the absence of the amortization of early termination revenue associated with the Discoverer, Clear Leader.

Our revenue forecast includes approximately $45 million of quarterly non-cash contract intangible amortization which will reduce our revenue each quarter in 2019 as a result of the above-market value backlog acquired in the Songa and Ocean Rig transactions. Additionally, we will also recognize a quarterly non-cash step (ph) day rate adjustment or approximately $12 million related to the average difference in day rates of the current Skyros contract with Total in Angola and its follow-on options would start in October 2021.

We expect first quarter O&M expense to be approximately $517 million. This includes reimbursable expenses of approximately $23 million. This sequential increase in O&M expense is due to a full quarter of Ocean Rig as well as two shipyard projects. During the first quarter, we performed the Chevron contract preparation for the DD1 and a routine 35-year SPS for the Sedco 712, which we expect will result in a total of 30 days out-of-service time. We expect G&A expense for the first quarter to be approximately $47 million. The sequential decrease primarily relates to the reduction of Ocean Rig onetime acquisition costs from the fourth quarter. Net interest expense for the first quarter is expected to be approximately $155 million.

This forecast includes capitalized interest of approximately $9 million and interest income of approximately $8 million. Capital expenditures, including capitalized interest for the first quarter is anticipated to be approximately $84 million. This includes approximately $34 million for the four new drillships under construction, which consists of approximately $31 million for the two Jurong drillships, including preparation for the Chevron 20,000-psi contract and approximately $3 million for the Ocean Rig Santorini and Ocean Rig Crete.

The financing arrangements for these two assets are set that our final payments are not due until 2023, and 2024 respectively. Our cash taxes are expected to be approximately $23 million for the first quarter and approximately $90 million for 2019. Looking now at full year 2019. Full year 2019 contract drilling revenue is expected to be approximately $3 billion. Operating and maintenance costs for 2019 are expected to be between $1.8 billion and $2 billion assuming no speculative rig reactivations. We expect G&A expense in 2019 to range between $185 million to $195 million. Our depreciation expense is estimated to be approximately $880 million and net interest expense to be approximately $620 million.

This includes capitalized interest of approximately $44 million and interest income of $28 million. Capital expenditures in 2019 are anticipated to be approximately $440 million. This includes approximately $280 million in (inaudible) CapEx, including $168 million for the two Jurong drillships, mostly associated with the Chevron contract mentioned above and delivery preparation of $112 million for the Ocean Rig Santorini and Ocean Rig Crete. Maintenance CapEx should approximate $160 million and includes $70 million for the build-out of our new office building and several new innovation technology in IT projects.

In addition, we anticipate spending approximately $50 million to replenish our major spares inventory and for the seven SPSs which we discussed in detail on our third quarter earnings call. As we indicated in our third quarter call, we are providing additional guidance regarding the current treatment for our investment at Transocean Norge. The high-specification harsh-environment semisubmersible in which we own a 33% joint venture interest. We have made a $50 million shipyard installment payment in the first quarter of 2019 plus $9 million for contract preparation with a final installment of approximately $33 million to be made in the first quarter, 2020.

Transocean will operate the Norge and therefore its current backlog of $85 million and future contract backlog will be fully reflected in our overall backlog. The Norge is scheduled to commence operations in July and we anticipate quarterly revenue of approximately $25 million. Assuming 95% revenue efficiency related to its maiden contract with Equinor. As contract operator, Transocean will generate approximately $1 million of quarterly operating income, in addition to other income reflecting our 33% investment in a company that owns the rig.

Turning now to predicted liquidity. At December 31, 2020. Including our $1.1 billion revolving credit facility, which matures in June 2023, our end of year 2020 liquidity is estimated to be between $900 million and $1.1 billion.

This liquidity forecast includes estimated CapEx of $440 million discussed above for 2019 and 2020 CapEx of $1.3 billion. The 2020 CapEx includes $1.1 billion related to the two new drillships at Jurong, $86 million for the two former Ocean Rig newbuilds at Samsung and maintenance CapEx of $115 million. Please note that our CapEx guidance excludes any speculative rig reactivations. Despite our industry leading liquidity, we continue to carefully monitor the market recovery. As you are aware, we continue to have multiple levers available to further bolstering our balance sheet. These include, but are not limited to, unencumbered assets with long-term contracts and substantial capacity to issue additional priority guaranteed notes.

This concludes my prepared comments.

I'll now turn the call over to Brad.

Bradley Alexander -- Vice President, Investor Relations

Thanks Mark. Molly, we're now ready to take questions. And as a reminder to the participants, please limit yourself to one initial question and one follow-up question.

Questions and Answers:

Operator

Thank you. (Operator Instructions) We will take our first question from Ian MacPherson of Simmons. Please go ahead, your line is open.

Ian MacPherson -- Simmons -- Analyst

Thanks. Good morning everybody. Mark when you guided full year revenues to $3 billion -- do you have -- could you give us what that figure is on your adjusted normalized basis that strips out the non-cash amortization effect?

Mark Mey -- Executive Vice President and Chief Financial Officer

Yes. So for 2019, we have $178 million of intangible amortization and $63 million of adjustment the step (ph) day rate adjustment, which I discussed previously.

Ian MacPherson -- Simmons -- Analyst

Got it. Thank you. I also wanted to ask about the automated drilling technology upgrades on the Norway rigs. If you could maybe expand a little bit about how -- what percentage-wise, what the efficiency gains have been on the Transocean Enabler that have been measured over the past couple of years? And also, if you could talk a little more about any economic impacts to you, as you apply these technology upgrades to the five additional rigs going forward? In terms of -- is there a day rate adjustment, is there a CapEx consideration et cetera? Thanks.

Roddie Mackenzie -- Senior Vice President, Marketing, Innovation & Industry Relations

Thanks Ian. Hey Ian, this is Roddie here. So yes, really pleased to the announce that and to answer your question. Basically the stuff that Jeremy talked about before at our dashboards and those kind of things, those all work on what we call the flat-spot parts of the whale curve that essentially shorten the non-drilling time. The ADC system is all about optimizing the actual drilling time. So we achieve higher rigs penetration and essentially that's done through measurement of the -- or highly accurate measurement and application of the drilling systems.

So, things like RPM, (inaudible) circulating pressures those kind of things. So, the long and short of it is the investment that we made in this was basically a partial capital investment on equipment across the rigs and what we get in return is a pretty significant bonus opportunity. So, you asked a question about what improvements we expect to see? Well, we have seen up to 25% to 30% increased rig penetrations on certain drilling sections and the overall expectation on the impact to the entire well curve is somewhere between 5% to 10%, and it could go up to perhaps 15%.

Now, if we realize the base case, then our return on the capital investment will be approximately four-fold, five-fold over a five-year period and if we see the real upside of the potential of the technology fulfilled, that could be almost tenfold over that five-year period. So, it's a very interesting technology. It's pretty solid economic model from our point of view, but our customer saves a tremendous amount of time and thereby expense. So again, it's just one of the steps that we wanted to take in partnership with Equinor to make sure that we are driving the cost of offshore drilling down and making it as competitive as possible.

Ian MacPherson -- Simmons -- Analyst

Very interesting. Thanks Roddie. So, in effect you are getting an incremental bonus revenue opportunity associated with these upgrades?

Roddie Mackenzie -- Senior Vice President, Marketing, Innovation & Industry Relations

Absolutely. And it's on contracts that are on long-term -- signed deals with (inaudible). So, this is actually a way of making incremental revenue.

Ian MacPherson -- Simmons -- Analyst

And is the technology expandable beyond this customer? Or is there an IP exclusivity that confines it to Equinor?

Roddie Mackenzie -- Senior Vice President, Marketing, Innovation & Industry Relations

No. Absolutely expandable. And in fact, we would expect to see that implemented elsewhere around the world.

Ian MacPherson -- Simmons -- Analyst

Good. Good stuff. Thanks as always for all the information on the call.

Operator

Our next question comes from James West of Evercore ISI. Please go ahead.

James West -- Evercore ISI -- Analyst

Hey good morning guys. Jeremy lots of good details on the deepwater market and how things are changing there. Curious to know though, as you talk to customers as you guys are negotiating these contracts which are obviously -- you're talking more about low-cost et cetera. Is there a sense of urgency building within the customer base about securing rigs for late this year to 2020?

Roddie Mackenzie -- Senior Vice President, Marketing, Innovation & Industry Relations

Yes I think I'll take that one. Basically, what we see is for the higher-specification rigs that's absolutely the case. So, when we think about harsh environment, well that's very obvious. We're essentially sold out of the high-spec rigs and there's the kind of the next tier down is now being put to work at extremely healthy dayrates with big bonuses. You asked specifically about ultra-deepwater. So, for high hook load assets, we're seeing a very similar thing.

So, obviously evidenced by the Chevron contract having the very high specification is extremely useful for a long-term view, but we have a couple of very high-specified, current state-of-the-art rigs that we expect to continue work through 2019 and then into 2020. So, we see that market tightening and actually the number of high hook load rigs available in 2020 should be very small indeed. In fact that, that may actually encourage some commitments on the other Jurong rig we have that is one of the ultrahigh hook load rigs.

James West -- Evercore ISI -- Analyst

Okay. That's great color Roddie. And then, on these assets as dayrates do move up here, which is pretty clear they are going to; are you with the new day rates and the big bonuses will you now get to a -- at least cost of capital maybe above return on the assets?

Roddie Mackenzie -- Senior Vice President, Marketing, Innovation & Industry Relations

Yes. I think when we look at the Chevron fixture as an example that basically gets us there -- it gets us to returning the cost of capital and tied asset plus the upgrades and what have you. But, in the rest of the market where we have more of the lower-spec ultra-deepwater ships, we're not quite there yet, but we're moving in that direction. In fact, we kind of saw a lot of kind of cash break-even fixtures last year, but now we're already posting a couple of fixtures and extensions that are beginning to return healthier margins. So, we're really encouraged by seeing those commitments.

James West -- Evercore ISI -- Analyst

Perfect. Thanks guys.

Operator

Our next question comes from Kurt Hallead of RBC. Please go ahead.

Kurt Hallead -- RBC -- Analyst

Hey good morning. So Jeremy, hey, I just wanted to follow up -- you mentioned there could be as many as 91 offshore projects being sanctioned this year versus say the 50 or so last year. I'm just curious, when you map that out to potential incremental rig demand, how many rigs does that you think that equates to? How many ultra-deepwater rigs does that equate to?

Jeremy D. Thigpen -- President and Chief Executive Officer

So, I don't know that we've gone to that extent. We have put together what we think could -- rig count could look like by the end of the year. And if you factor in all the rigs that rolled on contract this year and all the new opportunities that we think are available out there, we could see an exit rate for 2019 between 5% and 10% higher than where we exited 2018.

Kurt Hallead -- RBC -- Analyst

Great, appreciate that. And the other commentary that I think Roddie just talked about of having contract extensions for some of these ultra-deepwater ships that previously have been running about cash break even. What I'm really trying to get a feel for here is, as you look out at potential contracting opportunities whether they late 2020 or into 2021. It appears to me that the ultra-deepwater rate structure -- the discussion should start somewhere between $250,000 and something over $400,000 a day. Can you just kind of dial me back if needed or how do you see things evolving with respect to contracts for that 2020-2021 time period?

Jeremy D. Thigpen -- President and Chief Executive Officer

So we have -- I wouldn't dial you back and what I would say is we have two proxies out there, if you will. So, if you look at the harsh environment market, we saw over a nine-month period dayrates move from about $150,000 to $300,000 a day plus bonuses for the highest-end assets. So, what Roddie was saying about the ultra-deepwater market, if you look at the those really high-end assets with the high hook load capacity, we think you could see similar movement in day rate, maybe it's not quite that fast maybe it is. So, what you're thinking about -- it's not out of realm of possibility, just based on recent data that we've available to us in the harsh environment market.

The other data point I would address you to or direct you to is the recent signing of the 20k rig with Chevron. So, if you look at that rig and you back out the 20,000-psi blow-out preventers, and you kind of back that out of the dayrate, you're looking at a dayrate somewhere between $350,000 to $375,000 a day for a premium seventh-gen rig with 15,000-psi and that's a -- starting date in 2021. So, I mean our customers have the advantage right now, there's no doubt about that.

So, in Chevron's mind, I can't speak for them but you would say listen a $360,000 $375,000 dayrate on a premium ultra-deepwater rig in 2021, they think they're getting a discount at $350,000 to or $375,000 a day and so I think that bodes well in terms of thinking about day rates. So, I can't tell you what day rates are going to be but we do have some data points out there that would point to somewhere in the neighborhood that you're talking about.

Kurt Hallead -- RBC -- Analyst

Hey, that's great color. Thanks so much. Appreciate that Jeremy.

Operator

Our next question comes from Scott Gruber of Citigroup. Please go ahead.

Scott Gruber -- Citigroup -- Analyst

Yes. Good morning. I wanted to start with a question on the Norge. Jeremy, how are you thinking about the possibility of buying out the remaining interest in the rig? And if you think that's likely, can you comment on the timing. Is that this year, next year?

Jeremy D. Thigpen -- President and Chief Executive Officer

I mean, I think ultimately that's the end game, but I think we're going to need to see another fairly healthy contractor extension behind the current one before we make that decision. But, I think both parties in the joint venture agree that, that ultimately market conditions support it, that Transocean will ultimately own that rig outright.

Scott Gruber -- Citigroup -- Analyst

Got it. And just following Kurt's question on the face of demand recovery, Brazil seems to be a key region in terms of the outlook for demand recovery here, with Petrobras now adding some more rigs and the majors pick up on a number of new plots. Can you just comment on the Brazilian floater count specifically, where you think that could end now at the end of 2019 end of 2020 end of 2021, if you want to go out that far. Kind of, how do you think about Brazil specifically?

Jeremy D. Thigpen -- President and Chief Executive Officer

Sure. We've said on previous calls and I'll turn it over to Roddie in just a second. We said on previous calls, that we think the more normalized rig count if you will, if anything's normalized in this market could be somewhere approaching 40 active rigs with 30-ish probably run by Petrobras and another 10 to 15 by the internationals. And so, we think we can get to that point again. Unfortunately, with all things in Brazil things kind of pushed to the right, never happen according to the timetable that we would like. But, I think if you get out a couple of years, you could certainly see a rig count of that magnitude. And Roddie, I don't know if you want to add any more color?

Roddie Mackenzie -- Senior Vice President, Marketing, Innovation & Industry Relations

Yes absolutely. So, when we think about just 2019, the near term, we're expecting that Petrobras is going to make somewhere in the region of five to seven fixtures in 2019, which is great because that brings them up bottom and starts building their rig count a little bit. But, in addition to that you get another five to seven fixtures from the IOC's in Brazil, so that's a pretty healthy outlook. The real interest is probably, as you had stated toward the end of 2020 and 2021 where things really start to push on. So, we're just looking at the tenders that are out there just now and we think that, that rig count in Brazil is going to increase over the next 12 months to 18 months and I think after that, it could increase quite sharply.

Scott Gruber -- Citigroup -- Analyst

And if I could squeeze one more. Can you just comment on the types of rigs that are being demanded, in the contracts, particularly with the majors, but also with Petrobras just in terms of the quality step up? There seems to be one, but just want to hear from your perspective what you're seeing?

Roddie Mackenzie -- Senior Vice President, Marketing, Innovation & Industry Relations

Yes. Absolutely. So specifically to Brazil that is what we're seeing is there's a variety of tenders. So Petrobras, in particular are very good at parsing out kind of categories of tenders. So, in the deeper water tenders they are demanding much higher specification rigs, so that's kind of lowering the average age and raising the higher spec -- the average spec of the rigs in Brazil. But then, you also have some of the newer (ph) tenders that are for obviously a little bit older rigs, but less capable. So, there seems to be a pretty good spectrum of demand across the different rig specs in Brazil, but certainly a push for higher-spec rigs and primarily more efficient rigs is where we see it going.

Scott Gruber -- Citigroup -- Analyst

Okay. Thank you.

Operator

Our next question comes from Sasha Sanwal of UBS. Please go ahead.

Sasha Sanwal -- UBS -- Analyst

Thank you and good morning. Jeremy, maybe the first question for you, just to kind of follow up on some your market commentary. I was intrigued by some of the comments you were making about, right, ship tendering through direct negotiation we've seen that in the past cycles as well and then some of your commentary just about potentially negotiating some of the shipyard. Essentially, surveys for some of these reactivations. Can you kind of comment or maybe give us more color on just how broad-based this is across regions and then maybe in some of these discussions, is the contract term that's under discussion also lengthening?

Jeremy D. Thigpen -- President and Chief Executive Officer

Yes sure. I'll let Roddie field that one.

Roddie Mackenzie -- Senior Vice President, Marketing, Innovation & Industry Relations

Yes sure. So, as we think about direct negotiations, so what we're seeing is there are more direct negotiations, particularly around extensions of existing rigs. But what we're also seeing is when a tender goes out, there in the beginning I think the replies now are there are far less assets available that are highly desirable. So typically you'll see an operator just selecting the one or two that are available and going direct with those contractors which is obviously very positive for us.

You asked about durations. So, that's actually one of the key themes that -- we do a snapshot year-on-year. So, in January 2018 versus January 2019 and we're actually seeing the length of the projects has more than doubled.

So, if you take the average length of a project, it's doubled. It basically demonstrates that things are looking much better for the long-term. And then, I think just in general as we go around the world, you see that the direct negotiations clearly in Norway -- in the North Sea are prevalent now where everything was tendered, previously I think that's basically more often than not the case. And certainly for the high-specification units in the ultra-deep water side of things, there's a lot of direct negotiation because again the supply of the best-spec units is pretty tight.

Sasha Sanwal -- UBS -- Analyst

Great. That's helpful. And maybe just a follow up, just wanted to see if we can get an update on just potential reactivation cost for the rest of the Ocean Rig asset. Just any change there?

Jeremy D. Thigpen -- President and Chief Executive Officer

Sasha, no change to that yet. We're still working through that. You've obviously seen our comments on the Ocean Rig Santorini and Crete. But at this stage, we haven't completed our analysis in updating our previous guidance of about $35 million for those rigs.

Sasha Sanwal -- UBS -- Analyst

Okay, thank you. I'll turn it over.

Operator

Our next question comes from Greg Lewis of BTIG. Please go ahead.

Jeremy D. Thigpen -- President and Chief Executive Officer

Greg?

Greg Lewis -- BTIG -- Analyst

Were on contract.

Jeremy D. Thigpen -- President and Chief Executive Officer

Sorry Greg. We missed the question.

Greg Lewis -- BTIG -- Analyst

Yes sure. So I guess my question is around the Chevron 20k spec rig contract and really how we should be thinking about that on the dayrate curve because just -- I mean, if I think about that rig that seems like a one-off kind of biggest best rig in the world.

Jeremy D. Thigpen -- President and Chief Executive Officer

Right. So, I'll just kind of go back to what I said previously, if you back out the upgrade cost from the dayrate, you get to a 15,000-psi kind of gen-seven rig with high-hook load capacity, there's no doubt. In the $350,000 to $375,000 day range. So, I think that's the only market that we have out there today and so I'm thinking somewhere in that range as we get into 2021 for that type of asset, maybe a little north or maybe a little south, but I think something of that range is fairly reasonable.

Greg Lewis -- BTIG -- Analyst

Okay great. And then just -- and then, I guess when the two rigs the Ocean Rig, the Paros was I guess decided to be retired was -- how much equipment was able to be taken from that rig and sort of put back into inventory or sort of thought about? I mean, just thinking about the BOPs, the pipe -- was there sort of any numbers we could throw on that?

Jeremy D. Thigpen -- President and Chief Executive Officer

Zero probably. I mean that rig was -- that rig have gone through some pretty tough times with an owner that had gone bankrupt, but not invested in the asset at all. That were no records of any maintenance or original equipment documents. It had been cannibalized for parts and it was in pretty bad shape.

Greg Lewis -- BTIG -- Analyst

Okay. All right guys. Hey, thank you very much for the time.

Operator

Our next question comes from Taylor Zurcher of Tudor, Pickering and Holt. Please go ahead.

Taylor Zurcher -- Tudor Pickering Holt -- Analyst

Hey good morning. Thank you. Jeremy, in the past, I think you've talked about potentially reactivating one to potentially two of the Ocean Rig floaters per year moving forward. And so my question is, is that still the assumption or fair assumption to make today and I assume the $3 billion revenue guidance for 2019 there is effectively nothing embedded in there for rigs that on the Ocean Rig side that aren't currently contracted today?

Jeremy D. Thigpen -- President and Chief Executive Officer

Well the pace of reactivation is going to depend on the contracts. And so, to the extent that we can secure contracts that are deserving of reactivating the asset, then we'll make that decision at that point in time. But, I mean given what we're seeing in the marketplace, it's probably not unreasonable to think that -- what was the second part of the question? Go ahead Mark.

Mark Mey -- Executive Vice President and Chief Financial Officer

Let me just add to that. So we have included no reactivations into our guidance. We had revenue albeit OpEx or CapEx. Just to remind you, with Ocean Rig does have two warm stacked rigs that are sitting in (inaudible) so those are the first two assets more likely than not to get reactivated through a contract.

Roddie Mackenzie -- Senior Vice President, Marketing, Innovation & Industry Relations

Yes. I think, I would also add that, we're at the point in the market now for the right assets that I don't believe we any longer have to fund the mobilizations or the reactivations ourselves. So, think a lot of stuff that our customers will see us bid in the market is basically inclusive of them paying those cost. And essentially, as Jeremy had indicated, the operators delivering record level cash flows doesn't make sense really for us to be funding those reactivations, at this stage. Certainly, maybe a few fixtures that were made in the past will include that, but I think going forward, see much less of it.

Taylor Zurcher -- Tudor Pickering Holt -- Analyst

Okay. Thanks for that. And if I heard you correctly in prepared remarks, you talked about a third drillship likely being mobilized to Mexico for one of your ISC customers. Is that -- if I heard that correctly, is that a rig that's currently contracted or is that a rig that would be currently idle today?

Jeremy D. Thigpen -- President and Chief Executive Officer

No, it's a rig that's currently contracted and operating in the U.S. Gulf of Mexico.

Taylor Zurcher -- Tudor Pickering Holt -- Analyst

Okay. Got it. Thanks. That's it from me.

Operator

Our next question comes from Eirik Rohmesmo with Clarkson. Please go ahead. Your line is open.

Eirik Rohmesmo -- Clarkson -- Analyst

Thanks. Could you just discuss a bit more around the second newbuild at Jurong in terms of your mentioned potential opportunities. Is it fair to assume that, that rig will be the one chosen for other high-spec opportunities in the U.S. Gulf of Mexico and in terms of additional CapEx, would that be in the same kind of range?

Roddie Mackenzie -- Senior Vice President, Marketing, Innovation & Industry Relations

So, there's certainly interest for that asset across multiple customers, and so, we're obviously in conversations on that rig right now. But, in terms of further upgrades to that rig, we don't have anything planned at this juncture. We did upgrade it to the three million pound hook load, which certainly differentiates it in the class of rigs. And so, it is going to be, we think a rig that will be in high demand once it's delivered. Yes. Certainly the high hook load and a few other key features that are on that rig make very interesting for -- the really difficult, deep wells in the Gulf of Mexico. And also as Jeremy said, next time we're not planning to do it proactively, but certainly with the contracts, it would be an ideal candidate for a second 20k rig.

Eirik Rohmesmo -- Clarkson -- Analyst

All right. Thanks. And just a quick one on the Ocean Rig transaction. Is there any update on the estimated synergy effects on that or is the number still $70 million or so?

Mark Mey -- Executive Vice President and Chief Financial Officer

Eirik, we're going to stand behind our $70 million and as I have mentioned previously, we expect to get that all in 2019.

Eirik Rohmesmo -- Clarkson -- Analyst

All right. Perfect. Thanks.

Operator

Our next question comes from Colin Davies of Bernstein. Please go ahead.

Colin Davies -- Bernstein -- Analyst

Good morning. I wonder if you could give us a little bit color on master service agreements you mentioned in the prepared remarks, sense of how rig-specific is it, pricing, term. Just a little bit more color would be helpful. Thank you.

Roddie Mackenzie -- Senior Vice President, Marketing, Innovation & Industry Relations

I'll take that one. So, the master service agreements that we enter are actually a vehicle for which to contract very expeditiously. So, standard terms and conditions like liabilities, indemnities and such are then kind of memorialized in that master service agreement and the piece that does get negotiated each time is often a service agreement that is attached to it that deals with the rig-specifics, so which particular asset it is, how long the program is, when it starts, those kind of things.

Colin Davies -- Bernstein -- Analyst

That make sense. That's helpful. Thank you. And then, just on further scrappage, obviously the Paros was an interesting one, as you said fairly degraded sixth-gen. Do you think that's kind of a one-off special situation or do you think the industry and perhaps Transocean specifically is now taking a harsher view on perhaps some of those earlier sixth-gens that are still sitting there?

Jeremy D. Thigpen -- President and Chief Executive Officer

The Paros was definitely a special circumstance. As I said, the owner went through bankruptcy and became virtually non-existent, and didn't invest anything in the asset. And so, it was just -- it was basically just a hold that remained, and so that was a very special circumstance. With respect to our fleet strategy, I think we have been pretty clear and consistent over the course of last four years. We are focusing on that high-end, high-specification ultra-deepwater drillships and harsh environment semisubmersibles. But no, I don't think you're going to see a big push to eliminate sixth-gens from the global fleet. Still very marketable assets, very capable assets.

Colin Davies -- Bernstein -- Analyst

Yes. That's helpful. Thank you.

Operator

We will take our last question today from Sean Meakim of JPMorgan. Please go ahead.

Sean Meakim -- JPMorgan -- Analyst

Thank you. Hey good morning. I think we can maybe -- just talk a little bit on contact strategy today? How are you thinking about managing fixed-price options? Are we factoring in escalators, variable indexing, just thinking about new contracts, is it different than maybe how you thought about that a year ago and to some extent if drilling efficiencies lead to contract impairments, how does that sit near term, if ultimately those results are helping to drive potentially incremental opportunities with customers?

Roddie Mackenzie -- Senior Vice President, Marketing, Innovation & Industry Relations

Yes. I'll handle that one. I think in terms of impairments for higher performance, we definitely don't see that. I mean what we see is a great performing rig, gets recontracted and actually helps the operators justify picking up additional rigs because their cost per well goes down. So, that's really the direction to push into.

Jeremy D. Thigpen -- President and Chief Executive Officer

And with respect to the longer-term contracts where we definitely have a different view today than we had 12 months to 18 months ago, as it relates to the ultra-deepwater market and are unwilling to lock up our best assets in longer-term contracts at today's dayrates and so anything beyond the next six-months to 12-months, we're going to have escalations built in for any term beyond that or we're just not going to accept or not going to...

Roddie Mackenzie -- Senior Vice President, Marketing, Innovation & Industry Relations

Absolutely. And I think you'll see us really keeping validities much shorter and obviously honoring offers that we've made in the past and I'm sure many of our competitors will, but going forward there's a much less willingness to offer options because they create some uncertainty as to availability and the pricing now (inaudible) much higher levels for the future work.

Sean Meakim -- JPMorgan -- Analyst

Got it. It's very helpful. I appreciate that feedback. And then with respect to the rig automation updates, Equinor has been a trailblazer in a number of these areas for a long time. Are there other operators as focused on efficiencies, are there specifics that make these rigs more amenable? Just thinking about what the addressable market is for you for ADC upgrades?

Roddie Mackenzie -- Senior Vice President, Marketing, Innovation & Industry Relations

Absolutely. There is -- ADC is actually several components pulled together and those components are of great interest to others around the world. So, it just so happens that we kind of jump first to Norway, but in the Gulf of Mexico here, we've got several of our major customers are very interested in technology and efficiency upgrades. So, I think you can see it translate very quickly to Gulf of Mexico side. But then, to be quite honest, any rig that would benefit from it is a candidate.

Sean Meakim -- JPMorgan -- Analyst

Okay. Fair enough, thank you.

Operator

This concludes today's question-and-answer session. Mr. Alexander, I will now turn the conference back to you for any additional or closing remarks.

Bradley Alexander -- Vice President, Investor Relations

Thank you everyone for your participation on today's call. If you have further questions, please feel free to contact me. We look forward to talking with you again when we report our first quarter 2019 results. Have a good day.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Duration: 59 minutes

Call participants:

Bradley Alexander -- Vice President, Investor Relations

Jeremy D. Thigpen -- President and Chief Executive Officer

Mark Mey -- Executive Vice President and Chief Financial Officer

Ian MacPherson -- Simmons -- Analyst

Roddie Mackenzie -- Senior Vice President, Marketing, Innovation & Industry Relations

James West -- Evercore ISI -- Analyst

Kurt Hallead -- RBC -- Analyst

Scott Gruber -- Citigroup -- Analyst

Sasha Sanwal -- UBS -- Analyst

Greg Lewis -- BTIG -- Analyst

Taylor Zurcher -- Tudor Pickering Holt -- Analyst

Eirik Rohmesmo -- Clarkson -- Analyst

Colin Davies -- Bernstein -- Analyst

Sean Meakim -- JPMorgan -- Analyst

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