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Transocean Ltd (RIG) Q3 2018 Earnings Conference Call Transcript


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Transocean Ltd (NYSE: RIG)
Q3 2018 Earnings Conference Call
Oct. 30, 2018 , 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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

At this time, I'd like to turn the conference over to Bradley Alexander. Please go ahead, sir.

Bradley Alexander -- Vice President, Investor Relations

Thank you, Brandon. Good morning and welcome to Transocean's third 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, 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. Also, please 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 Thigpen -- President and Chief Executive Officer

Thank you, Brad, and welcome to everyone participating in today's call. As reported in yesterday's earnings release for the third quarter of 2018, the company generated adjusted normalized EBITDA of $341 million on $816 million in total contract drilling revenues. This industry leading EBITDA was once again driven by the efficient conversion of our well-priced $11.5 billion backlog with strong up-time performance across our global fleet generating revenue efficiency in excess of 95%, and the continued focus on organizational and operational efficiency resulting in adjusted normalized EBITDA margins of over 42% in the quarter.

In addition to producing solid operating results, during the third quarter, we entered into a definitive agreement to acquire Ocean Rig and its fleet of 13 floaters. When we considered all of the possible options, but further high-grading our fleet of ultra-deepwater and harsh environment floaters without compromising our liquidity position, our balance sheet flexibility. Ocean Rig provided the right strategic opportunity for us. The Ocean Rig fleet is currently comprised of nine ultra-deepwater drillships, which are seven years of age or younger, two harsh environment semi-submersibles, and two high specification ultra-deepwater drillships; the Santorini, and the Crete, which are currently under construction. It's important to note that the shipyard has extended Ocean Rig, attractive financing terms on the two new builds. The Santorini has scheduled for delivery in 2019, with the final shipyard payment not due until 2023, and the Crete has scheduled for delivery in 2020, with the final shipyard payment not due until 2024.

According to our internal Rig ranking tool, upon completion of this acquisition, we will control 31 of the top 100 ultra-deepwater, and seven of the top 25 harsh environment assets in the world, strategically positioning us well ahead of the competition and better equipping us to capitalize on the market, as it continues to recover. Additionally, Ocean Rig will add approximately $743 million to our industry-leading backlog, with ongoing operations with strategic customers in Norway and West Africa. The Extraordinary General Meeting providing our shareholders the opportunity to vote on the proposed transaction has been scheduled for November 29th, and we anticipate closing the transaction in December. Once closed, we will work quickly to fully integrate Ocean Rig into Transocean and begin realizing the $70 million in annualized synergies that we expect to generate through this combination.

While we are pleased with the size, composition and quality of our floater fleet, we may consider future opportunities that would enhance our industry-leading position. Having said that, we will remain very consistent and disciplined in our approach, exclusively targeting top tier ultra-deepwater and harsh environment assets, as part of transactions that do not materially compromise our near-term liquidity position. As you'll remember, just over a year ago, we employed that disciplined approach when we entered into an agreement to acquire some of the offshore. With Songa, we acquired almost $4 billion in high-margin backlog and four new high specification harsh environment semi-submersibles at a time when demand for these assets was beginning to strengthen in Norway. Since that time, the market has continued to improve, driving a 40% increase in purchase prices for similar assets.

Today, we believe that the global, ultra-deepwater drilling market is on the verge of a similar recovery, which is why we made the decision to approach Ocean Rig. While the precise timing and trajectory of that recovery is still materializing, many data points clearly suggest that we are poised for an increase in demand and ultimately in day rates in the ultra-deepwater market. In support of that thesis, we recently executed a contract to the Petrobras 10000, Brazil, at incremental day rates that are well above the spot prices seen in the market over the past three years. In addition to this contract, we have witnessed a material increase in offshore contracting activity in recent quarters. And based on our frequent and direct conversations with our customers, we know that there were a number of ultra-deepwater projects on the horizon, across our customer base and in every major ultra-deepwater basin around the world. As such, we are confident that our acquisition of Ocean Rig provides us with a unique and timely opportunity to increase the number of modern high specification, ultra-deepwater drillships that we have in our fleet, better positioning us to capitalize on the market recovery.

Following the transaction, we will have five high specification ultra-deepwater drillships constructed within the past five years, which will be available for contracting in 2019, with three more available in 2020. Since these are the efficient drilling machines that our customers prefer, we expect them to be in high demand as the recovery continues to take shape. But we're certainly excited about the prospect of adding new high specification assets to our fleet, we've recognized that we must continue to evaluate the competitiveness of some of our older rigs. To that end, during the quarter, we identified and retired two additional assets; the C.R. Luigs and the Songa Delta. These retirements were executed because we determine that these rigs were unlikely to be competitive with the newer, more efficient assets, which have been recently introduced to the market.

Overall, we have now recycled 45 floaters, and when including our decision to exit the jackup market, we have divested a total of 60 rigs, since the start of the downturn. Considering the addition of the Songa offshore fleet, our acquired interest in the Transocean Norge and upon completion of the Ocean Rig transaction, we will have a fleet of 57 floaters, over twice the number of our next nearest competitor, of which almost 90% 90% are either characterized as harsh environment or ultra-deepwater. In short, we have completely transformed our fleet over the past three years into a much younger, higher specification fleet of floating rigs, designed to operate in the industries most challenging environments and most demanding applications.

Turning now to the market. Since our second quarter call, we have added $465 million of backlog, bringing our total contract awards over the past four quarters to approximately $1.5 billion. Over a trailing 12-month period, this is the largest quantity of backlog we've added since 2014, providing further evidence that we are in the early stages of that market recovery. Starting with the harsh environment market, in August, we extended the Husky contract on Henry Goodrich for 12 months through November 2019, adding $100 million in backlog, with an additional opportunity to earn a performance bonus, which would enhance our already solid margins on this rig.

You may remember that the Goodrich was the first reactivation we completed almost three years ago, and this profitable extension further justify the strategy we have employed at the company regarding the reactivation of our assets. Needless to say we're extremely pleased to keep this rig working in Canada, where it has a very strong operational reputation and a great market position. Additionally, in the harsh environment market of Norway, we have executed the maiden contract to the Transocean Norge. When we entered into the joint venture with Hayfin Capital to acquire the Norge, we were confident that we could quickly place her. Fortunately, we were able to contract, or even prior to our expected delivery in early 2019.

In line with the current base rates for assets of this capability, you earn a day rate of approximately $300,000, with performance bonus opportunities that provide additional upside for strong, safety and drilling performance. The contract is currently expected to commence shortly after acceptance and mobilization near the middle of next year. We have also added a three-well contract to the Transocean leader with Hurricane Energy that begins in February. This marks the third Transocean rig, that hurricane is contracted, since 2016, and demonstrates the confidence that Hurricane has in the quality of our fleet and our crews. The estimated value of this contract is approximately $27 million. Lastly, we begin contracted the Paul B. Loyd with BP and the UK for two-well contract beginning in March with four, one-well options. This is a very welcome reunion of BP and Transocean on the Lloyd building on our previous 24 years of activity with BP on this rig.

Turning to the ultra-deepwater market, we're pleased to have received the previously mentioned 26-month extension for the Petrobras 10000, which added approximately $185 million to our backlog. This work will commence in August of next year at the conclusion of the initial 10-year contract period with Petrobras. As previously noted, this contract is significant, as its daily day rate is well above the depressed pricing of previous fixtures and represent the tangible sign of strengthening in the Brazilian market. This contract also helps us to retain our continuity in country and maintain our long-standing relationship with Petrobras, both of which are important as we position ourselves to respond to their upcoming round of new tenders. It should also be noted that in addition to the headline day rate on the Petrobras 10000, we expect to receive approximately $16 million associated with the licensed use of our patented dual activity technology, which remains valid in Brazil, through 2025.

We also contracted the KG2 with CNOOC in China for a three-well term with two, one-well options beginning in February. This rig is just recently completed a very successful campaign in the Asia-Pacific region. So we are very pleased to so quickly be putting her back to work. It's important to note that we do not believe these pictures with Petrobras are seen to be outliers. Our Marketing and Contracts team is building more inbound customer request and they have since the start of the downturn, and the number of ultra-deepwater fixtures continues to increase throughout the world. As such we are growing increasingly encouraged about the possibility, we think are likely to emerge in the coming months for the assets in our fleet.

In preparation for what we believe to be an imminent recovery in the ultra-deepwater market, we are carefully assessing our fleet, determining the assets we believe our customers are most likely to contract first and fine-tuning our detailed reactivation plant, including our crew complement for each rig. With the assets that will be added from the Ocean Rig acquisition, we will soon have three warm-stacked ultra-deepwater drillships in our fleet. Naturally, these assets will be our top priorities, as we endeavor to place rigs on contracts with our customers, because the reactivation costs for such assets are comparatively low, generally less than $5 million with the majority of that cost associated with recruiting the rig. At this point, we do not intend to reactivate our cold-stacked assets on speculation, instead, we will closely monitor the market and reactivate our rig to fulfill contracts in which the day rates and contract terms reach the necessary levels to make the economics and the risk profiles more attractive.

Speaking of day rates, we believe that rates should begin to appreciate, as we move through 2019 and into 2020. We have this belief, because of the improving sentiment in the energy space. The increase we are seeing in contracting activity is not surprising, as Brent oil prices have remained steadily above $70 per barrel for most of the year, and recently climbed about $80 per barrel. These relatively high and sustained prices have meaningfully improved the cash flows and strengthen the balance sheets of our customers. Additionally, energy demand continues to show healthy levels of growth and the supply backdrop indicate the need for increased investment. This combined with current offshore break-even price per barrel economics for most projects at levels ranging from the 40s, to as low as the low 20s, is increasing our customers' level of optimism around future offshore developments.

In short, the combination of relatively high and sustained oil prices, low project break-evens, high free cash flows for our customers, and the need to replace reserves appears to be directly impacting contracting. As 40 deepwater contracts were signed in the quarter, an increase of almost 40% sequentially, with tenders increasing almost 10% sequentially to 117.

Needless to say, we are encouraged by the direction of the market. 12 months to 18 months ago, some analysts and investors question, whether the offshore market would ever rebound. Today, most agree the recovery is on the horizon, and are simply asking questions about the timing and shape. As we await the answers to those critical questions, we will remain focused on safety, equipment reliability, drilling efficiency, and our cost structure, while continuing to exercise discipline in contracting our existing fleet and evaluating strategic opportunities to further enhance it.

Before handing the call over to Mark, I would just like to thank the entire Transocean team for delivering another strong quarter. I sincerely appreciate your continued commitment and focus and as you maintain both as we close out the year. Mark?

Mark Mey -- Executive Vice President and Chief Financial Officer

Thank you, Jeremy, and good day to all. During today's call, I will recap our third quarter results, and then provide an update to our 2018 guidance, provide some early commentary in our 2019 cost expectations and discuss our liquidity forecast. Lastly, I'll provide an update on the Ocean Rig acquisition. For the third quarter 2018, we reported net loss attributable to controlling interest of $409 million, or $0.88 per diluted share. After adjusting for unfavorable items associated with impairment charges related to the previously announced floater retirements and a write-off of goodwill, we reported an adjusted net income of $30 million, or $0.06 per diluted share. Further details are included in our press release.

Highlights for the third quarter include an increase of 134 operating days on the fleet, relative to prior quarter, due to the commencement of a new contract with the KG1, a full quarter of operations from a Discoverer India, KG2, Transocean Enabler and Transocean Arctic. An increase in revenue from the prior quarter of approximately $27 million. Additionally, we had fleetwide revenue efficiency of 95%, they contributed to an adjusted normalized EBITDA margin of 42.7%, that continues to lead the industry and showcase the strength of both our backlog and operational performance. Operating and maintenance expense of $447 million was above our guidance, but consistent with the greater-than-expected increase in customer reimbursable costs. General and administrative expense was $35 million for the quarter, $17 million lower sequentially and in line with our expectations, as the second quarter was negatively impacted by the voluntary employee retirement plan.

Turning to the balance sheet and cash flow. Cash flow from operations totaled $214 million, compared with $3 million in the prior quarter. The increase was primarily due to the timing of interest in insurance payments. Additionally, we saw a decrease in the magnitude by income tax payments from the prior quarter. As we discussed on last quarter's call, we accessed the debt capital markets twice during the third quarter using the Deepwater Pontus and the Songa Enabler and Songa Encourage as collateral for two separate secured financings. The proceeds from these offerings were used to retire the Songa related debt, that we assume as part of the acquisition earlier this year.

During the third quarter, we optimistically repurchased $11 million of our debt due in 2022, in the open market. We ended the quarter with total liquidity of approximately $3.3 billion, including cash and cash equivalents of $2.3 billion, and $1 billion of undrawn revolving credit facility capacity. This is also in a reduction of our net debt position by approximately $100 million. Last week, we again accessed the credit capital markets issuing $750 million of priority guaranteed notes with a 2025 maturity, receiving net proceeds of $735 million. The net proceeds will be used to pay a portion of the cash consideration for the Ocean Rig acquisition. We will continue to be disciplined in our approach to maintaining our liquidity runway, evaluate opportunities to enhance our liquidity and strategically addressing our near and mid-term debt maturities.

Let me now provide an update on our 2018 financial expectations. For the fourth quarter of 2018, assuming revenue efficiency of 95% on our active fleet. We expect a total contract drilling revenues to be down approximately 11%. This forecast includes the impact of the recent Petrobras 10000 contract blend and extend, reduction of our determination revenue on the Discoverer Clear Leader and $30 million amortization related to the Songa contract intangible revenues.

We expect fourth quarter O&M expense to be approximately $454 million. This includes reimbursable expenses of approximately $22 million. In addition to the increased reimbursable expenses, this sequential increase in O&M expense is related to contract preparation, related to our recently announced reactivation of the ultra-deepwater floater, Development Driller III. The rig is expected to commence operations in Equatorial Guinea in the first quarter of next year.

We expect G&A expense for the fourth quarter to be approximately $43 million. The sequential increase primarily relates to increased professional and other fees offset by a recovery of legal fees in Norway, recognized in the third quarter, that should not reoccur. Net interest expense for the fourth quarter is expected to be approximately $152 million. This forecast includes capitalized interest of approximately $9 million, and interest income of $11 million.

Capital expenditures, including capitalized interest for the fourth quarter, are anticipated to be approximately $49 million, in line with the third quarter. Our fourth quarter cash taxes, are expected to be approximately $10 million. Looking specifically at the Transocean Norge, the high specification harsh environment semi-submersible, in which we own a 33% interest. We will not consolidate the rig-earning energy and our interest in the rig will be reflected at investment in unconsolidated affiliates.

We will however operate the Norge for the Transocean Energy and therefore include 100% of its backlog in revenue within our results. Due to the ownership of the rig residing with the joint venture, we will recognize income at both the operating and other income lines. We'll provide further detail regarding this joint venture on our fourth quarter earnings call. Although we will reserve providing our full 2019 cost guidance until after the closing of Ocean Rig transaction in December and the completion of the combined company budget, let me offer a few high-level comments. I previously guided you to expect annual maintenance expenditures to fluctuate by the number of special-purpose surveys we performed during each year.

For 2018, we have two SPSs; for 2019, we expect seven SPSs. We will complete routine five-year SPSs on the Deepwater Invictus and Deepwater Asgard; 10-year SPSs on the Deepwater Inspiration, Petrobras 10000 and Transocean Spitsbergen; and two 35-year SPSs on the Transocean Arctic and Sedco 712. Our estimated costs for these seven surveys in 2019 is approximately $50 million, of which 80% will be expensed and should result in 57 days out of service. Compared to historical costs for these number of surveys, this is particularly lower, a direct result of earlier planning before we portion of the work between survey dates and the benefits we are recognizing from our OEM care agreements.

The two five-year surveys and the 10-year survey on the Deepwater Inspiration are expected to be performed without any out-of-service days in a total cost of just over $2 million. The 10-year survey on the Petrobras 10000 is expected to result in only five out-of-survey days in the third quarter. The 10-year SPS on the Spitsbergen is expected to result in 21 out-of-service days in the third quarter where, in addition to the survey, we expect to enhance the rise attention in our system. This will enable us to work in roles with less robust volume-weight tolerances. Regarding our two 35-year SPSs, we're performing a routine survey on the Sedco 712 that we estimate will take 30 days in the first quarter.

Looking more closely at the survey on the Transocean Arctic, we expected to be out of service for approximately 21 days also in the first quarter. We will perform enhancements to the well control system along with certifications on the rig structure and propulsion system. We anticipate this will extend the service life by three years and permit us to capitalize the $35 million of costs, $28 million of which will be spent in 2019. We also note that in several countries where we operate, labor unions are successfully negotiating salary increases for offshore employees. We could see modest labor cost inflation in 2019 with cost escalation clauses in our longer-term contracts offsetting these costs.

Turning now to our projected liquidity at December 31, 2020. Including our new $1 billion revolving credit facility, which matures in June 2023, our end of year 2020 liquidity is estimated to be between $1.2 billion and $1.4 billion. This amount includes the $240 million we expect to close the Ocean Rig transaction coming from our current cash balances, but excludes any cash from Ocean Rig operations for the period in December post-closing. This liquidity forecast includes an estimated 2019 CapEx of $241 million, $86 million of which is related to the two newbuild drillships at Jurong. 2019 maintenance CapEx is expected to be approximately $155 million. This includes the implementation of a new ERP system and the buildout of our new corporate office building. Initially, we currently forecast 2020 CapEx to be approximately $1.1 billion. This includes the final payments of approximately $965 million on the remaining two newbuild drillships at Jurong and $115 million for maintenance CapEx. Please note that our CapEx guidance excludes any rig reactivations.

Before I conclude, I'd like to make a few brief comments regarding the pending acquisition of Ocean Rig. We received the required approvals from the Brazilian and Norwegian antitrust authorities and have filed both an S-4 Registration Statement and a joint proxy statement with Ocean Rig. These filings were reviewed by the SEC as discussed in transactions. As previously mentioned, the Extraordinary General Meeting is scheduled for November 29 at 5 PM Swiss Time at Transocean's offices in Steinhausen, Switzerland to vote on the proposed acquisition. We expect to close the transaction by mid-December. Meanwhile, integration planning is well under way, enabling full authorization of the previously discussed synergies 2019. I'd now like to turn the call back over to Brad.

I'll now turn the call back over to Brad.

Bradley Alexander -- Vice President, Investor Relations

Thank you, Mark. Brandon, 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) The first question will come from Eirik Rohmesmo with Clarksons. Please go ahead with your question.

Eirik Rohmesmo -- Clarksons Platou Securities -- Analyst

Thank you. Just taking up day rates, you're mentioning the Petrobras 10000 that's higher than the current spot market. Could we see this as a proxy for all the contracts starting in sort of the on them or is this a one-off? How would you think about that?

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

Yeah. Hi, Eric, this is Roddie. Yeah, that's exactly -- we see that as a trend. Certainly, we've been very disciplined in how we're contracting the fleet for long-term opportunities. So, I would say certainly, we should see among the market a much better discipline about keeping rates a bit higher and certainly a lot more profitable for the longer term contracts.

Eirik Rohmesmo -- Clarksons Platou Securities -- Analyst

All right. Thank you. And the second question, you had a couple of older rigs that are rolling off contract or have recently rolled off. Do you see opportunities for these further or should we expect these to get retired in the Norge?

Jeremy Thigpen -- President and Chief Executive Officer

I think wait and see, but we've long since said that we probably still have a few more assets in our fleet. So, as they roll off contract, we don't expect them to be marketable going forward. But as long as they are in the day rate today, that's not a decision we're going to make right now.

Eirik Rohmesmo -- Clarksons Platou Securities -- Analyst

All right. Thank you.

Operator

Thank you. The next question will come from Greg Lewis with BTIG. Please go ahead with your question.

Greg Lewis -- BTIG -- Analyst

Yes. Thank you, and good morning.

Jeremy Thigpen -- President and Chief Executive Officer

Good morning, Greg.

Greg Lewis -- BTIG -- Analyst

I guess, Roddie, as we think about the North Sea, we're heading in toward the winter season. It's typically a little bit slower. Just looking at a few of the rigs that were in the North Sea, it looks like there are some gaps between when they role off current contracts and when they go on the new contracts more in the spring time. How should we be thinking about the cadence and the tenor? So, like, if I look ahead to the 2019, 2020 winter, should we continue to expect some seasonality in the North Sea or are you seeing things that maybe convince you or you're thinking that maybe we're working through the winter this time next year?

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

Yeah, OK. Good question. So, let me tell you, from the Norwegian side, we're essentially sold out on high-spec rigs across the fleet and actually the industry. And what we've seen is that a couple of our rigs have been delivering well ahead of schedule, so they actually creating their own gaps by delivering the wells quicker. But in that market, the demand has been strong enough that so far we've been able to fill those gaps with additional wells. So, I think Norway is already looking very good for this winter and we would expect that the same would continue on for next winter. In the UK, it's really interesting. We always expect there'll be quite of idle rigs over the winter, but we're really seeing a rush of fixtures and awards and it's beginning to look like a sellout in the summer of 2019. So, the operators are now seriously considering winter program. So, we actually expect there will be a small amount of idle time this winter and certainly a lot of programs are going to either have to be pushed all the way to 2020 or we're going to see more activity in the winter of 2019. So, I think you're just getting away from that ability to pick and choose the exact timing and having to consider the availability of the rigs rather than just the demand for the services. So, we're quite positive about this winter being better than last winter and certainly very positive about the winter of 2020.

Greg Lewis -- BTIG -- Analyst

Okay, great. And then just one for me on activity in Brazil. I guess Petrobras has some existing tenders out there. Realizing that industry sources can be wrong, it doesn't -- it looks like maybe Ocean Rig is bidding into some of these like multiyear tenders, but it looked like Transocean's name was noticeably absent in a couple of those three-, four-year tenders. Just kind of wondering, is that a function of availability or like -- or should we be thinking about Ocean Rig and Transocean kind of as one going forward as we look at potential bidding by Transocean?

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

Well, certainly, at this stage, we are separate entities. So, going forward, that will only really be applicable from December onwards. But on those other tenders, you're right. Actually, this is a really exciting time because you're basically seeing Petrobras themselves going to award at least three tenders in the next six months, probably four rigs in total with two of them being for Libra. In terms of go-forward tenders, they also have another couple of tenders that are out there. We will be participating in and we actually think that Petrobras alone could award six rigs by the middle of 2019. So, very positive sentiment for Brazil. And the one thing I would say is about the elections in Brazil with Jair in place now. He had promised deregulization and then privatization of some of the Petrobras subsidiaries and essentially ensuring that they'll maintain the auction calendar for (inaudible). So, everything kind of points to paving the way for the investment and acceleration of awards in Brazil and that's even before we've discussed the IOC tenders. So, looking pretty positive there. In terms of your rumors about Ocean Rig's position, I couldn't comment on that, but if they happen to win some stuff in Brazil that's fine.

Greg Lewis -- BTIG -- Analyst

Okay, guys. So, thanks. Thank you very much.

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

Thanks.

Operator

Thank you for the question. The next question will come from Ian MacPherson with Simmons. Please go ahead with your question.

Ian Macpherson -- Simmons -- Analyst

Thanks. Good morning. Good quarter. Jeremy, you discussed the Ocean Rig Crete and Santorini pretty much upfront in your prepared remarks, which to me sounds like you're pretty sweet on those. But that's a lot of incremental capital to spend compared to all of the other money you're already spending on the open Ocean Rig fleet in your own available reactivation. So, would you walk us through the thought process for those two rigs in particular, as well as maybe the eventual full buy-in of the Norge at a later point in time?

Jeremy Thigpen -- President and Chief Executive Officer

Sure. I'll start, then hand it over to Mark for additional color. I mean, these are two of the most highly capable assets in the world and so we think they're going to be in demand as this recovery starts to take shape. We also believe assets of that technical spec. There's such a shortage of them that we believe day rates could move fairly quickly. And so as we kind of look at the profile here, take delivery of one in late 2019, the other in late 2020 and don't have final payments on those until 2023, 2024. And so got a bit of time to see how this market plays out and we certainly believe by that point in time that the contract terms and the day rates will certainly support the final payment in acquiring those assets. And I'll just I'll -- Mark, do you have anything to add to that?

Mark Mey -- Executive Vice President and Chief Financial Officer

No. That's exactly right. These are 2023 and 2024 final payments. So, that gives us a lot of breathing room with regard to seeing a real market recovery.

Ian Macpherson -- Simmons -- Analyst

Okay. Well, I think that's the answer. Thanks. My followup, you've been beating -- I mean, you've typically been beating analyst estimates a lot more times than not and revenue over delivery has been a fairly consistent theme. Can you discuss ballpark what you're capturing on your bonus opportunity across the contracts that apply? Because we can see your total fleet revenue efficiency that you report, but of course we never get the audit on what you're capturing on bonuses and that's one obvious explaining factor how you're doing better than we're modeling.

Mark Mey -- Executive Vice President and Chief Financial Officer

Great question, Ian. Let me add a few points here and then I pass it over to Roddie to explain the bonus part of that a little better. So, one thing that you know we got to do with the new revenue standard is include reimbursables in revenue. So, we have some of that every quarter. That's impossible to try and forecast. In addition, we've got 134 additional operating days in the third quarter. So, you're seeing more activity and you're seeing a pretty high level of revenue efficiency. And then, during the certain quarters you may have additional collections or you may have provisions put out for this -- creating fluctuations with regard to revenue recognition. So, there's a lot of things moving around. But the biggest part, as you've identified, is bonuses.

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

Yeah and I just add to that. So, we're relatively conservative in that regard in terms of projecting what we may or may not receive. But we have a variety of bonus schemes and some have a very large potential and some have smaller potential, but we also have corresponding likelihood of collection numbers associated with them. So, we tend not to give any guidance on that. But we have, on many occasions, picked up full bonuses and, of course, those other occasions where we have not. So, it really is a range of stuff all the way from contracts with zero bonus available to them to contracts that have 10% and 15% and sometimes 20% of revenue available.

Ian Macpherson -- Simmons -- Analyst

Okay. Thank you, gentlemen for the color there. I'll pass it on.

Operator

Thank you. (Operator Instructions) The next question will come from Sasha Sanwal with UBS. Please go ahead.

Sasha Sanwal -- UBS -- Analyst

Thank you, guys. Good morning.

Jeremy Thigpen -- President and Chief Executive Officer

Good morning, Sasha.

Sasha Sanwal -- UBS -- Analyst

Yeah. And so maybe, firstly, just to kind of get to the day rate question a different way. If I could ask about option, can you talk about whether the types of options that you are negotiating on current contracts are changing and whether they're priced or non-priced options? And is there any color you can share on discussions on further options being exercised?

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

Yeah, sure. So, as we mentioned previously, we are very cautious as we went through the downturn not to make extensive commitments at low rates. So, of the priced options that we do have, the one that extend out significantly are escalating options. They're moving up in rates. The other ones that extend out extensively are mutually agreed options, so that basically is a return to the negotiating table to see where the market is at that time. So, the discussions I would say are really shifting toward a lot more direct negotiations and tenders previously, so that's typically a sign that the assets that the customers really want are becoming in shorter and shorter supply, so they come to us directly. And I would say these triggering of options as we reported in the Fleet Status Report, we get quite a few of those. We've also had a couple of options that have lapsed for various different reasons, but it's -- the option game is kind of playing out now and our willingness to grant fixed-priced options going forward for any length of term is obviously diminishing sharply.

Sasha Sanwal -- UBS -- Analyst

Great. Thank you. It's helpful. And just an unrelated follow-up on reactivation. We're hearing some concerns about OEM capacity to deliver specifically on long lead-time items for reactivations kind of given cutbacks and service departments during the downturn, you could just share your thoughts there?

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

I mean, it's certainly something that the industry faces the derivative cycle. And so it's really going to depend on the pace of the recovery and how much demand is placed on the OEMs at a single point in time. From our standpoint, the healthcare agreements that we have with all of the major OEMs are proving to be very helpful as if they very -- connected collaborative approach with lot of good open dialog around planning and needs and so. As I mentioned in my prepared remarks we're going through the detailed reactivation plans on those assets we think are going to be in demand for reactivation first and working closely with the OEMs to make sure that we have schedules together where we don't have any significant delays.

Sasha Sanwal -- UBS -- Analyst

Thank you guys and great to see the traction on the new awards.

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

Thanks.

Operator

Thank you for the question. The next question will come from Taylor Zurcher with Tudor, Pickering, and Holt. Please go ahead.

Taylor Zurcher -- Tudor, Pickering, and Holt -- Analyst

Hi, thanks. Good morning.

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

Good morning, Taylor.

Taylor Zurcher -- Tudor, Pickering, and Holt -- Analyst

Good morning. Maybe one for you, Roddie. We've touched on Brazil, haven't talked about Mexico. You've got two rigs going to work there pretty soon here and just curious, if you could give us your updated thoughts, as it relates to how that market looks over the next 12 months to 24 months?

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

Yes. So we've been discussing Mexico for a couple of quarters now. And we've always been quite excited about it. And I think we're happy to report that we've got one rig heading there right now on -- with signature for the Asgard, we are taking that rig in the first quarter as well. So that's pretty good. There's also the possibility that another one of our rigs will be assigned to Mexico. So we could be bouncing between two and three rigs in Mexico next year, which is really positive. And one thing I would say is, you know, there was a lot of question marks about the change in government and whether that was going to hold things up and we're kind of happy to report the permitting is progressing very well. And in fact one operator was telling me that their permitting had gone much quicker than expected, in fact, they're now waiting on the rig contractors permitting. So, I think in terms of delivering what they promised, the government has stood up to that, and I don't think permitting is the issue that we thought it was going to be. And then kind of looking forward there are -- Petronas, Equinor, Repsol, among others are in tendering phase for Mexico and BP and Chevron are coming out soon. So, I think we're seeing that there is already plenty of activity. There's several awards made plus we see a lot more in the pipeline. So Mexico is looking pretty positive.

Taylor Zurcher -- Tudor, Pickering, and Holt -- Analyst

Okay. Thanks for that. And then specifically as it relates to the Discoverer Clear Leader, could you just give us a kind of a sense as to what the marketing strategy there is? I suspect that rig's well suited for some of these tenders coming out of Brazil and Mexico, and probably most places in the world, but any update there as it relates to the marketing strategy? Would you -- are you looking for short-term work more longer-term work, or how you're thinking about putting that rig back to work moving forward?

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

Yes, we're looking for the right opportunities to bring it back and --

Jeremy Thigpen -- President and Chief Executive Officer

Long-term work at high day rates.

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

So as Jeremy said, yes. But really -- yeah, measured approach, not just throwing onto every opportunity is out there. We are going to be avoiding the bottom of the market in terms of rates, and we're already seeing a good shift upwards in rates in all the basins around the world. So we'll be waiting for the right opportunity.

Taylor Zurcher -- Tudor, Pickering, and Holt -- Analyst

Okay. One more, if I could squeeze it in for the DD3 markets. Could you just frame for us how much of the reactivation of maintenance costs would be expensed Q3 versus Q4?

Mark Mey -- Executive Vice President and Chief Financial Officer

So Q3 was about $15 million, Q4 should be about double that.

Taylor Zurcher -- Tudor, Pickering, and Holt -- Analyst

Okay, great. That's it from me. Thanks guys.

Operator

Thank you. (Operator Instructions) The next question will come from Colin Davies with Bernstein Research. Please go ahead.

Colin Davies -- Bernstein Research -- Analyst

Hi, good morning. It seems interesting that some of the longer-term contracts that seem to be coming forward are predominantly from the NOCs or international NOCs. Can you perhaps give us some color as to the thinking going on in the majors versus the independents versus the NOCs, and what is the difference in willingness to engage in more aggressive pricing discussions?

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

Yeah. I think -- so the things you're probably not seeing are kind of the tenders that are not out there and a lot of the direct negotiations stuff, right. So one of the themes that we've been tracking very closely is that the mix between the majors, the NOCs and IOCs is really reaching a nice balance now. Previously, the majors were absent simply because they were long on rigs from the better times, but now they have returned with a vengeance. And we think about -- Angola is about to kick off. We understand that their Songa old stranded assets are close to being agreed and delivered, and that's expected in the first half of 2019. And in Angola alone, you've got Exxon, Eni, Total, BP, all getting ready to award work. And as we mentioned before in Brazil, and in Mexico, that's kind of dominated by the independents and the majors. So really I think it's a balance. And I think, we probably see that better than most just simply because that's the pipeline of work that's coming forward not just the announced awards.

Colin Davies -- Bernstein Research -- Analyst

That's encouraging. Thanks. And just sort of more strategic follow up. I was surprised and interested in your prepared remarks, you made some comments around still potentially looking at further opportunities, M&A opportunities, perhaps. Perhaps just a little bit more strategic conversation around how you see the end game of the industry. Do you see perhaps a window closing as the market improves around what the further potential consolidation could be?

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

I don't know that the window would close necessarily. But if the recovery -- the recovery does take shape the way, we think it will, then asset values will certainly increase. And so we made the comment about the timing of the acquisition of Songa Offshore, since that time, asset purchase prices have increased 40%, and it's because of the strengthening in the market that we've seen in Norway for high specification, harsh environment semi-submersibles. We believe that a similar recovery could take shape in the ultra-deepwater market now that the exact timing and trajectory is still somewhat elusive. But no, I think there will still be opportunities out there. For us right now, the most important thing is closing the Ocean Rig transaction and then recognizing the integration and synergies that we've committed to, and then putting those assets to work. And so that's our primary focus at this point in time.

Colin Davies -- Bernstein Research -- Analyst

That's great. Thank you. I'll turn it back.

Operator

Thank you. The final question will come from Ian Macpherson with Simmons. Please go ahead.

Ian Macpherson -- Simmons -- Analyst

Hey, thanks from letting me back in. Just quickly a bit of a little devil's advocate to end on a happy note. We've -- the speculative newbuild orders for harsh environment semi is doubled this quarter from one to two, not a big deal. But if we follow your optimism to its logical conclusion, how -- with respect to the -- a parallel cycle for ultra-deepwater drillships, how do we get comfortable with supply staying without the new build cycle coming sooner than later, if you guys are right on the shape of the recovery. And what are you seeing there with regard to animal spirits with some of the other players that you may see better than we do?

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

Yeah. Well, I mean, if you think about a speculative newbuild in the ultra-deepwater space right now, you're probably looking at what $600 million capital investment maybe more. And day rates are currently sitting between, I mean, average in the Gulf of Mexico is probably $150 million to $160 million, I don't think that supports new investment. You'd have to see day rates run pretty fast and hard to get up to a day rate that would justify a new build. There is still a number of assets out there that are available to go to the market. So I can't personally envision a new build in the near term. But I don't know if you guys would add.

Mark Mey -- Executive Vice President and Chief Financial Officer

If you're referring to harsh environment Ian, the rates there have improved quite dramatically and we -- within a half of their bonus you're going to quite easily see rates there right now around about 333, 343, 350 area. That too doesn't support a newbuild despite the fact that the ones you have seen ordered have been fairly lower-spec assets. Even these lower-spec assets are going to come out of the shipyard fully loaded with a price in the mid $500 million to $600 million. So even though that market's recovered, you don't have day rates supporting that. And the folks, sort of, could not order them on exactly household names. So I would have a little bit of skepticism toward that as to whether they're really here to stay or just an opportunistic approach to trying blocking the rig and perhaps flip that if the market recovers over the next few years.

Ian Macpherson -- Simmons -- Analyst

Okay.

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

Yeah. And Ian, one thing, I would add to the marketing site for ultra-deepwater is we are seeing a sharp uptick in interest for the very high-specification rigs. So there are several in the yard at the moment, including a couple of our own. So those super-high hook load dual BOP rigs, I think, you'll see them come out of the yard and go to work for improving day rates, you have to see that happen extensively before anyone turns their mind to newbuilds.

Ian Macpherson -- Simmons -- Analyst

Yeah. That all makes sense. Last one from me, before I sign off. I'm sorry, Mark, I fell behind a little bit when you were giving the fourth quarter revenue guidance. Could you run through that for me one more time, the total and then the components?

Mark Mey -- Executive Vice President and Chief Financial Officer

Sure. Let me just get back to that page.

Ian Macpherson -- Simmons -- Analyst

Sorry about that. Thanks.

Mark Mey -- Executive Vice President and Chief Financial Officer

Yeah. No problem. I said that we were going to be down 11% quarter-on-quarter. Part of that's because of the Clear Leader has been -- is going to be end of October. That amortization, it runs out. So that's the biggest struggle of that, and then we also got a couple of other contracts that are ending in the fourth quarter.

Ian Macpherson -- Simmons -- Analyst

Okay. And then for reimbursable and the Songa intangibles' amortization, did you give those as well?

Mark Mey -- Executive Vice President and Chief Financial Officer

Yeah. Songa's amortization is going to be right around $30 million per quarter.

Ian Macpherson -- Simmons -- Analyst

Okay. So that's flat?

Mark Mey -- Executive Vice President and Chief Financial Officer

Yes.

Ian Macpherson -- Simmons -- Analyst

Reimbursables?

Mark Mey -- Executive Vice President and Chief Financial Officer

I think as per -- that was $22 million.

Ian Macpherson -- Simmons -- Analyst

$22 million. Got it. Sorry about that. Hey, thanks guys. Good quarter.

Mark Mey -- Executive Vice President and Chief Financial Officer

Thank you.

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

Thanks.

Operator

This concludes the Q&A. Sir, I'll turn it back to you.

Bradley Alexander -- Vice President, Investor Relations

Thank you, Brandon. And thank you to everyone for your participation on today's call. If you have any further questions, please feel free to contact me. We look forward to talking with you again when we report our fourth quarter 2018 results. Have a nice day.

Operator

Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect your lines. Have a great day.

Duration: 50 minutes

Call participants:

Bradley Alexander -- Vice President, Investor Relations

Jeremy Thigpen -- President and Chief Executive Officer

Mark Mey -- Executive Vice President and Chief Financial Officer

Eirik Rohmesmo -- Clarksons Platou Securities -- Analyst

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

Greg Lewis -- BTIG -- Analyst

Ian Macpherson -- Simmons -- Analyst

Sasha Sanwal -- UBS -- Analyst

Taylor Zurcher -- Tudor, Pickering, and Holt -- Analyst

Colin Davies -- Bernstein Research -- Analyst

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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This article appears in: Personal Finance , Stocks
Referenced Symbols: RIG



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