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#<UNK>, thanks for the question.
Look, at the end of the day, this was our idea and we reached out to GE because they were already familiar with guaranteeing availability in other industrial segments.
And importantly, we had their subsea stacks, of course, on our new drillships.
If they were to have correct skin in the game from a financial perspective, we needed for them to have the total accountability that comes with owning the assets too.
So we've collected $210 million from the proceeds of the sale, but I'm not sure the OEMs will be willing to repurchase subsea stacks carte blanche.
So as a result, we have significant advantages that come with first-mover advantage and this is actually a huge vote of confidence regarding Diamond Offshore as a leading offshore driller, one that come from a corporation of the scale and sophistication of GE.
This is ---+ this was a difficult construct to put in the industry.
There was no precedent.
It's a combination of eight months of negotiation.
We're there now and our clients are applauding.
So we aim to bring uptime and availability performance improvements to the subsea stack similar to what was seen, for example, in other industries such as aviation and power generation with rotating equipment.
Let me not underestimate the difficulty of putting this in place.
What I wanted to do was I wanted to have the original equipment manufacturer to have total skin in the game.
So that involved selling the BOPs back to the OEM, back to GE in this case.
For us, we did it on our new drill ships because clearly that was, as you rightly mentioned, perhaps the best test case.
I see this rolling out across the industry.
The reliability of subsea stacks needs to improve if we're to drive the efficiency gains to make this more economic.
So to answer your question, yes, I think it will expand across the industry, but clearly we've got first-mover advantage in this particular case.
We got high marks from Exxon on the work the Endeavor did in the Black Sea, but really based on markets and just geology of what they found, that work is not extended in the Black Sea with Exxon.
So she's in Romania now where the derrick will be removed so we can take her back to the Bosphorus on a heavy lift.
We definitely see her as part of our fleet going forward, but there's no immediate follow-on work that we are announcing today.
Yes, we've got several months worth of work I think before we take her down to a cold-stacking status, so we've got to ---+ there's some work still ahead before we get there, but we'll minimize her costs and then see where the market takes us.
Not at all.
I see it actually quite different to that.
The near-term impact of this arrangement is not material to earnings.
This is a part of a long-term strategy that will address one of the Achilles heels of offshore drilling today.
The subsea downtime is huge in the industry and if you think of each day that we are down from drilling in order to do a stack pool, that's a loss of $1 million per ---+ for our clients on a daily basis.
A stack pool can be up to 20 days.
So in terms of drilling a well, you lose a subsea stack for whatever reliability issue.
Then that adds sometimes up to $20 million to the cost of the well.
The reliability just isn't there and buy incentivizing the original equipment manufacturer from a financial basis, and as I said in my prepared remarks, when ---+ the current status today, they do a direct sale and then they hand us a spare parts price list.
They are not really incentivized like the driller or the operating company to minimize downtime.
I'd like to think that they do have the design for reliability ethos, but by bringing them to the table so that they have financial skin in the game, then I can be certain that they are designing their equipment for maximum reliability and if you ---+ GE know this construct.
They do it for aviation turbines.
The GE90 engine, as we all fly across the Atlantic, we're riding with a GE90 engine on the 777.
That's a power by the hour philosophy.
And we're going to a similar philosophy here with the subsea stacks.
They do it for rotating equipment in compression plants and power stations.
So it's already well-known and if you actually study those industries, you can see that when you go to this construct, there is an improvement in reliability and any improvement in reliability puts money on the bottom line for Diamond Offshore and helps out my shareholders.
So really the construct here is to have more uptime over the fleet itself based on dragging the original equipment manufacturer to the table with skin in the game.
This is what our clients want.
This is not a technology push from a Diamond Offshore perspective.
This is a demand pull from my clients.
The Scepter, I think, was a good arrangement between us and Pemex, but I would probably not connect the dots to the Ambassador.
I think it's quite likely here that she will be winding down in 2016, so I wouldn't model the Ambassador beyond where she is today.
The relationship effectively stays the same.
Obviously, our customers were involved, as we were getting to the finish line on setting up the agreement with GE, but both customers were very, very positive and as I go around the industry and I visit the executives in charge of drilling not just for my own customers, but for other E&P operators out there, they are very positive on this construct.
They say it is a win for everybody in deepwater drilling.
You pretty much hit it on the head there, <UNK>.
Yes, we'll have less depreciation.
Of course, the agreement with GE will be treated as an operating lease, so costs will increase there, but they will be offset by cost savings by us for things that we no longer have to provide for for that BOP maintenance.
So at the and, as Mark said in his opening remarks, we don't see it having a great bottom-line impact or very material, particularly when you factor in our expected increased utilization on the rigs.
So let me just reemphasize one point here.
[Drill] no subsea downtime is the Achilles' heel of our industry.
I've used that expression quite a bit.
These four Black ships now effectively go to the front of the deli line in terms of desirability from our clients.
This is ---+ yes, it's helped us from a liquidity perspective for sure, but more importantly our assets become extremely attractive as it relates to future contracting opportunities moving forward.
We're the first to do this in our space.
Is there a possibility of further rolling it out throughout the fleet.
I would say that there is.
I'm not saying at this time that we're going to do it, but this is all about competitive differentiation and I believe that our four Black ships now, frankly, in a market that is oversupplied have become very, very attractive assets from the client perspective.
So, yes, thanks for that question.
As we put thought leadership in the industry here, it's very important to be focused on the immediate future.
We've positioned the Company early for an extended downturn, both from a backlog, liquidity and an operating cost perspective.
And we are executing very well on the short-term strategy, but it's also important not to lose sight of the longer term either.
So as much as we listen to our clients' needs on pressure control by the hour, we're also listening to clients' needs as it relates to efficiency gains.
For example, on the 80% of a time, a rig is actually over the wellhead and not drilling.
The conundrum is how do we lower cost through efficiency gains and here, at Diamond, we continue to ask ourselves such questions and we have some neat answers that we share with our clients.
They like what we're saying.
But I bring you back to the capital allocation conundrum.
My management team and I are laser-focused on maximizing shareholder value over the long term and in this respect, it's important that we have a series of strategic options that are available to us.
We've pulled the trigger on pressure control by the hour, but ---+ and that's somewhat of a no-brainer.
However, I cannot say it's the right time to declare on other strategies, for example.
The important thing is to have as many alternative options available, frankly, as possible and the floating factory is simply yet another option that I have on the table.
But, first and foremost, I have to review everything in the context of long-term shareholder value and right now, at this moment in time, frankly, we're just keeping that on the table as an option for further down the road.
So, <UNK>, that is correct.
Just to be specific here, what happens today is if the subsea stack goes down for performance-related issues around reliability, etc.
, and we have to pull the stack, then, from the client's perspective, obviously, they are not progressing the well; yet they are still paying for the spread costs.
From our perspective, in the most part, we go off day rate, because, again, we're not pursuing the well.
The OEM, the manufacture of the stack, doesn't suffer at all.
So part of this construct moving forward is I am paying a daily rate for pressure control moving forward.
When I have to pull the stack, I no longer pay that daily rate, so I'm off rate, the OEM is off rate and the operator is suffering the cost of the spread that he's paying for for the other services.
So I'm still off rate, but I'm no longer paying for the BOP stack on a daily basis and if during the course of the year the OEM performance is below a metric that we're already at today then not only are they off day rate, but they pay me a malus payment for poor performance.
So effectively what GE have agreed to do is guarantee performance backed up by financial consequences.
So for the first time in the industry, the OEM is sitting at the table when we have problems as an equal stakeholder, as the driller, the operator and of course the OEM.
That's a good question.
Part of the reason the negotiations took so long was to actually sort out and get agreement on reliability.
In essence, there's no real change to the liabilities moving forward.
At the end of the day, the manufacturer of product liability remains in place as do other liabilities, so there's no real change moving forward.
But that was an extensive part of the negotiations that we undertook with GE.
Yes, okay, so this is an industry first.
It made sense that we looked at our brand-new rigs.
Well, in essence, they are brand-new.
One of them has been ---+ a couple of them have been drilling for well over a year now.
It was easier to convince the OEMs to buy back the BOP stack, the subsea stack, on equipment that was relatively new.
If it's equipment that was sold to a driller let's say five years ago, I think that conversation will be a much harder discussion because obviously the passage of time creates an understanding of just exactly how well was the stack maintained and then you've got further discussions around the true valuation of the BOP.
One of the things I insisted moving forward was this was not just a standard maintenance contract.
I didn't want to do that.
I needed these guys to truly sit at the table with skin in the game and I wanted them to own their performance, which included owning the stack.
This is perhaps something that's easier to do on new drill ships as they come out, but what made it a little bit more complicated is I needed to sell the BOP stack back to the OEM and that's actually harder than you'd naturally think.
I think it will be even harder on stacks that are older than the stacks we've got on our drill ships, take it from me.
Well, I can't speak for what their budgets are, but right now at this moment in time we're planning to deliver the GreatWhite as planned and to move forward.
The GreatWhite was supposed to be delivered in December of last year, but we've known all along and have been in communication with our client that there will be let's say a six-month delay on it, but our contract is quite robust and the rig called for a delivery before the end of this year and we're still on target.
We've got a lot of wiggle room on that to deliver it accordingly.
Yes, that is an interesting question.
A lot of things actually came together quite well for us to kick this off.
First of all, GE understands this kind of concept.
I spoke about how they approach the aviation industry and the industrial products they sell in there.
I spoke about what they do with rotating equipment and compression power and power plants.
So they already get it.
We looked at when GE introduced let's say power by the hour to the aviation industry.
We looked at how the uptime improved once they were on that construct.
Then we ---+ our newest assets in the fleet also had GE stacks on them.
So it came together quite well and, yes, we did approach GE.
We wanted to ---+ if you stand back and you look at the issues in our industry and you look at it from an economic perspective, this isn't just about day rates.
This is driving efficiency gains.
This is what I did in my prior life when we were developing unconventionals here in North America.
It's about efficiency gains.
And you've got to bring efficiency gains to deepwater drilling to make the ---+ to make it economically viable at this kind of oil price.
We know the oil price is going to come back up.
And then the other thing we need to do is differentiate Diamond from the rest of the fleet that's out there, and I think everything came together well.
GE understood what we were looking at.
We had long and detailed discussions over the course of what is an eight-month period to put together this construct.
There was no precedent.
But we knew what we wanted to do, GE got it and their CEO really came to the table on this, GE Oil & Gas and gave us a vote of confidence that we're the people that they wanted to bring this to the market to as well.
So it all came together due to the fact that GE knew what we wanted, that we had the assets already on our new drill ships and so here we are.
I'm not sure I've got an easy answer for that one, but, every quarter, our Board meets to consider the dividend.
We agreed that our balance sheet is relatively strong and we're comfortable with our liquidity.
But let me put it this way, there will be winners and losers in offshore drilling as we progress through what is frankly a super cycle.
And we are positioning Diamond to be one of the winners by enabling us to take advantage of the right opportunities if and when they materialize.
And I spoke about many different strategic options that we're considering right now.
And whether it's a floating factory, whether it's distressed asset purchase, whether it's consolidation through M&A, it's all on the table.
But my management team and myself are positioning us that when the cycle starts ---+ we start exiting the down cycle, that Diamond Offshore is one of the best, if not the best positioned company to take advantage of the wave so that we ride that wave when it comes back because perhaps let me answer the question in this way.
Deepwater drilling will recover; of that I have no doubt.
What I can't tell you is when.
And to that point ---+ well, let me reiterate, in the past, we have not given future guidance as to our long-term dividend policy and we've not changed that stance.
So that's as much as I can say.
Yes, both very, very good questions.
Now I will remind you that the near-term impact of the arrangement is not material to earnings.
So that's as much as I'm going to say here from a competitive perspective because I don't want to broadcast exactly what's going on here.
<UNK> pointed out what will happen in terms of how it looks on the financial statements, but be careful around suggesting this is going to be hugely incremental or decremental to earnings moving forward.
And as to uptime, this is not ---+ we're not switching a light switch here and then tomorrow automatically we suddenly have improved reliability.
This is a journey.
This is a journey that's going to see incremental improvement and the same happened in aviation, the same happened in power generation that over the course of time will improve subsea downtime.
We looked at how much money we lost in 2014 relating to subsea stack pulls and it's significant.
It's a very, very large number.
If I can improve or reduce that number by 50%, then it's material to my shareholders.
So it's an incremental improvement and what it means is we will be ---+ our revenue uptime will improve moving forward and my partner, in terms of the OEM providing the subsea stacks, will have a stake in the game from a financial perspective.
So, yes, it's going to be beneficial from revenue, but I would admit it's going to be hard to model for you guys right now.
I will remind you that with our current status and reliability, if that doesn't improve on our subsea stacks then the OEM is already paying us a malus payment.
So they're expecting it to improve moving forward.
We're expecting it to improve moving forward and our clients are applauding our efforts.
Let me take the first half of that question first.
In terms of from a contract renegotiation standpoint, look, the current market provides ample incentive for operators to try to renegotiate contracts.
Any even observer in the market can see that today, so we get that motivation.
That said though, we do believe in the validity of our contracts and we are willing to work with customers to find mutually agreeable trades that help both parties.
We did that with Petrobras earlier in 2015 on the Courage and rotating out some older rigs.
We did that with other clients along the way.
So those trades are things that we have, I think, a history making where they are good for both parties.
But I have to emphasize though we do stand behind the contracts and what they mean.
Where we could help a partner solve their problems and help our shareholders at the same time, that's good.
But absent I think one customer with Pemex that has some unique rights, absent that though, we do stand behind our contracts.
So from the second part of the question, yes, it's a 10-year agreement.
I don't think deepwater drilling with sixth-generation assets is going to disappear.
I would argue, however, that you have this kind of construct and I really believe that not all sixth-generation assets are going to be able to do this.
Let me just say that we have the highest ---+ we share the highest credit rating amongst all offshore drillers who are still investment-grade.
We received another $210 million of liquidity moving forward.
I can't say that every OEM is going to do that with all of my competitors.
Now, to that point, within the contract, there is an ability to ramp down the costs and reduce the services being provided if the rigs go idle.
But when my rigs come back for contract renegotiations, we all know that deepwater drilling is still going to exist.
My rigs will be ---+ let's say the expectation is they will be very, very attractive in the market because of this construct and they will go to work.
So I don't think that there's much risk at this time of these assets becoming idled moving forward.
And that's the key issue here.
What we have done is we've differentiated our assets.
I would like to remind everybody once again this was not a liquidity issue for us.
This was to lower downtime, improve efficiencies of deepwater drilling, lower the costs for my clients and make my drill ships or my assets more attractive than the others that are out there in the industry.
Well, I don't want to give too much away, but basically it goes down to the cost of borrowing.
The other costs go to zero.
So <UNK>, this is as it relates to the BOPs we have on the rig itself.
These BOPs are actually very, very heavy items.
It's actually quite difficult ---+ well, it's not difficult, it's just a huge logistic issue to transfer a BOP off a rig and get a new one on there.
But BOPs are modular, so part of the construct here is actually we'll be first in line from modular upgrades to the BOP stack itself all in terms of driving reliability forward.
So this is not sailing around the world and picking up a new BOP.
This is a continuous conditioned maintenance type contract moving forward where GE as the OEM is continually incentivized to improve availability and uptime at the BOP stack over and above where we are today in the industry.
So again, one of the things of partnering with GE on this deal is because they have a huge global footprint, so we're not really worried about their ability to service us as we pick up contracts around the world.
But I don't expect we will be switching BOPs on and off the rig on a carte blanche manner.
This is about continuous upgrades, modular improvements to the BOP stack over the course of time that just continues to drive availability and uptime.
So again, I'm going to be very, very careful here because I don't want to broadcast ---+ I don't want to give our competitors a leg up on adopting this construct should they so desire.
This is an expensive negotiation over a long period of time.
All I'm going to say, again, is that the near-term impact of the arrangement is not material to earnings, so draw your own conclusions from that.
It's not a significant impact on cost for us.
There's various elements of the deal itself as it relates to how we reward GE for leasing or the service arrangement moving forward, however you want to put it in the construct.
But from the perspective of your models moving forward, we're hoping to see an improvement in revenue in the long run, but the cost, the incremental cost to us, as you can imagine, if it's not material to earnings is de minimis moving forward.
Okay, so we pay a day rate for pressure control.
When the stack is down for maintenance reasons or reliability issues then we don't pay that.
Then on the top of that, there is a construct that enables us, if GE doesn't provide an uptime metric, which again I'm not going to share with you all, then a malus payment is due.
If, however, they provide a standard, which is much higher than we're at today, then, of course, we provide them a bonus payment because we will more than be rewarded by having additional revenue uptime on these rigs.
<UNK>, is your question regarding the renewal of the GE arrangement.
Yes, yes, fair enough, yes.
So do have the ability to renew that agreement before the 10 years is up.
We'll have, given the complexity and what it means to continue or not, I think there's a pretty substantial leadtime in the agreement, so we have to declare our intentions.
But, yes, there are provisions to renew that agreement.
It addresses some of the pricing topic.
It's not pre-wired in that sense, but, yes, that is a topic, which, obviously, pricing something 10 years in the future is not an easy undertaking.
So it's addressed conceptually, but it's not an arithmetic calculation.
So thank you for participating in the call today and we look forward to speaking again with you next quarter.
