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Diamond Offshore Drilling Inc (DO)
Q2 2018 Earnings Conference Call
Jul. 30, 2018, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 Diamond Offshore Drilling, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference, Mr. Samir Ali, Vice President of Investor Relations. Sir, you may begin.
Samir Ali -- Vice President, Investor Relations & Corporate Development
Thank you, Joel. Good morning, everyone and thank you for joining us. With me on the call today are Marc Edwards, President and Chief Executive Officer; Ron Woll, Senior Vice President and Chief Commercial Officer; and Scott Kornblau, Senior Vice President and Chief Financial Officer.
Before we begin our remarks, I remind you that the information reported on this call speaks only as of today. And therefore, you are advised that time-sensitive information may no longer be accurate at any time of replay of this call. In addition, certain statements made during this call may be forward-looking in nature. Those statements are based on our current expectations and include known and unknown risks and uncertainties, many of which we are unable to predict or control, that may cause our actual results or performance to differ materially from any future results or performance expressed or implied by these statements.
These risks and uncertainties include the risk factors disclosed in our filing with the SEC included in our 10-K and 10-Q filings. Further, we expressly disclaim any obligation to update or revise any forward-looking statements. Please refer to the disclosure regarding forward-looking statements incorporated in our press release issued earlier today, and please note that the contents of our call are covered by that disclosure.
We will be referencing non-GAAP figures on our call today. Please find the reconciliation to GAAP financials on our website.
And now, I will turn the call over to Marc.
Marc Edwards -- President and Chief Executive Officer
Thank you, Samir. Good morning everyone and thank you for joining us today. For the second quarter of 2018, Diamond Offshore announced earnings of minus $0.50 per share which includes restructuring costs and the non-cash impairment charge related to the sale of the Ocean Scepter. Excluding these adjustments, our earnings per share for the second quarter of 2018 were minus $0.33.
The offshore drilling market remains challenged. However, the decline quarter-over-quarter was primarily driven by the previously disclosed out of service time on the Ocean Courage and Ocean Valiant. We do not expect either of these events to repeat in the third quarter of 2018.
In prior calls, I've spoken to a series of innovations that helped reduce the cost of deepwater drilling for our clients. These have included the Floating Factory, Pressure Control By The Hour, Sim-Stack Service and our Helical Riser system. And in this past quarter, we have further provided thought leadership to our industry by introducing our Blockchain Drilling Service. This is one of the first publicly disclosed Blockchain technology applications in upstream activities and will be used to drive efficiencies across the entire value chain.
Blockchain technology shines when there are multiple parties to a single longitudinal transaction, which in offshore drilling is the manufacturer of a well. The technology will provide an immutable platform for the optimization of well construction activities including drilling-related services, material and the supply chain, both offshore and shore-based.
Current tracking systems rely on a unidirectional flow of data from outside sources onto a central database, instead the Blockchain Drilling Service enables a bi-directional flow of data between all nodes in a system, which is then confirmed using consensus algorithms.
By enabling automated actions and removing the lag associated with updating currently available databases, Blockchain has the ability to make the exchange of goods and services associated with the manufacturer of a well quicker, more efficient, more reliable and more automated. Greater resolution on activities encourages greater accountability which then further enables pricing to be better structured around performance. This would not only be the case for transactions between Diamond and the operator but also for other third-party service providers and the operator on any of Diamond's Blockchain enabled rigs.
Diamond will commence the installation of this service in the fourth quarter and will plan to take it fleet wide in coming quarters. Initial customer response has been very positive and further helps differentiate our fleet from our peers.
I've previously spoken at length on the success of our prior innovations but please allow me to provide a very brief update. In this past quarter alone, three of our drillships achieved 100% operational efficiency. One of these drillships manufacturing wells to 32,000 feet here in the Gulf of Mexico operated with only nine hours of subsea downtime in the 12-month period, while another is currently at three hours of downtime year-to-date.
This is differentiated and class-leading performance pushing Diamond Offshore's assets to the front of the deli line of desirability, which provides a segue into recent contracting activity here at Diamond Offshore. I am very pleased to announce that we have secured an additional net five years of backlog for our drillships. The asset class, which I have repeatedly stated is the most distressed. This additional backlog is with two major deepwater players being BP and Anadarko.
As I have just explained, our drillships are consistently delivering class-leading performance and the confidence both BP and Anadarko have in our assets is reflected by this significant success. So, let me discuss the Anadarko award first.
We have agreed to extend the Ocean BlackHawk sixth-generation drillship from June 2019 until April 2021. The operating day rate will be $495,000 per day through April 2020 whereupon, it will be adjusted to a rate that is significantly above current market rates and is subject to a one-time capped increase based on the then prevailing market rate, should it be higher.
Staying with Anadarko, we have agreed to an early release of the Ocean BlackHornet, which will be effective when the Ocean BlackHawk completes its regulatory maintenance and equipment recertification estimated to be in the second quarter of 2019. This then allows the Ocean BlackHornet to be contracted with BP for a term of at least two years plus two one-year options.
Further, BP has also agreed to contract a second drillship, which will be named at a later date also for a term of at least two years, plus two one-year options. The operating day rate for each contract will be within an agreed range of day rates that are materially higher than current market day rates and will be determined within the range based on then-prevailing market rates.
Further, we have agreed with BP to early terminate the Ocean GreatWhite contract effective July 1st, 2018, and for BP to pay Diamond a fee that will be recorded in Q3 of 2018. The existing contract was due to expire in January 2020, and we are now free to secure new work for the rig.
Further to my prior commentary and related to this early contract termination, BP has agreed to either pay Diamond Offshore $135 million through a series of designated payments through 2019 to 2023 or contract one or more additional Diamond rigs, so that we receive a gross margin at least equal to this designated amount. None of the above is included in our current backlog.
The Ocean GreatWhite has left its mooring in Malaysia and is currently in a shipyard in Singapore where it is being prepared for work in the North Sea. It will begin its mobilization to the North Sea at the end of Q3 so that it will be ready to commence work at the beginning of Q2 2019. We are in advanced discussions with an operator to put the rig on contract next year and remain optimistic that this asset will stay employed in the harsh environment sector of the North Sea for many years.
All of our sixth generation drillships are working for Tier 1 clients and we believe that in what remains a tough market for this asset class, our differentiated strategy through thought leadership and innovation and best-in-class operational performance is proving to be a success in terms of securing additional backlog.
Now, allow me to provide some commentary on the market. Our customers are not looking at spot oil prices, but instead are focused on the futures curve and we have finally begun to see the back end of the curve pickup. The five-year futures Brent oil price has found some stability above $60 a barrel, which should help increase demand for offshore drilling in 2019 and beyond.
This increase coupled with supply rationalization has led to some tightness in the moored asset class. We believe this segment is inflecting and we are seeing slight pricing increases in certain markets. The tightening is not limited to the North Sea as we are also seeing it in other non-harsh environments.
Customers are looking to locking capacity for 2020 and beyond as they see the coming recovery of the moored asset class. However, although demand for sixth generation dynamically positioned assets is clearly picking up, this particular segment remains well over-supplied, and we are yet to see an inflection in market day rates. Yet our ability to secure additional backlog at rates that are materially above the current market rate is a testimony to the hardworking people here at Diamond Offshore, both shore-based and on the rigs.
Our strategy has not changed. We will continue to focus on providing class-leading operational performance that helps oil and gas companies lower their total cost of ownership, a strategy that has clearly pushed our fleet to the top of the list of desirability. At the same time, we will continue to look at opportunities that present themselves with respect to growing our fleet. As these opportunities materialize, however, we will remain disciplined around the future allocation of capital with a focus on maximizing that future capital efficiency.
So, with that, I would turn the call over to Scott to discuss the financials for the quarter and then I will have some closing remarks. Scott?
Scott Kornblau -- Senior Vice President and Chief Financial Officer
Thanks, Marc and good morning, everyone. Earlier today, we reported a net loss of $69 million or negative $0.50 per share for the second quarter of 2018. Our second quarter results include an impairment related to the sale of our last remaining jack-up and further restructuring costs.
Excluding these items, Diamond has an adjusted net loss of $45 million or negative $0.33 per share. This compares to our first quarter adjusted net loss of $21 million or negative $0.16 per share. The quarter-over-quarter decline was primarily driven by lower revenue associated with previously announced second-quarter out-of-service time, partially offset by a number of rigs going back on contract.
Before I go into our second quarter results, let me provide some additional color on the Anadarko and BP deals. Let's start with Anadarko and the Ocean BlackHawk extension. As Marc mentioned, the rate will remain at $495,000 per day until April 2020 and then reduce to a significantly above current market day rate for the final year.
The cash flow will follow the contracted rates, however, accounting rules dictate that we recognize the revenue at the weighted average blended rate, which is in the low 400s over the entire term of the contract from June of 2018 until April 2021.
Now moving to BP. The $18 million fee owed by BP as part of the termination of the Ocean GreatWhite will be recognized in its entirety as revenue during the third quarter of 2018. Also in the third quarter, we will recognize the remaining unamortized revenue and expense of $11 million and $16 million respectively, which was previously being amortized over the original contract term and relates to pre-contract mobe and customer requested upgrades.
As for the $135 million margin commitment Marc discussed, payments received to compensate Diamond for any portion of the margin that is not earned through drilling contract by the end of each commitment period will be recognized as revenue during the final quarter of that period. There are a lot of moving parts as it relates to the accounting treatment of these deals, so I ask anyone who may have related questions to please follow up with our IR team over the coming days.
Now turning to our second quarter 2018 results. Contract drilling revenues of $265 million was 8% lower compared to the first quarter of 2018, the decrease was mostly driven by out of service time associated with the special survey and upgrades to the Ocean Valiant and maintenance to the Ocean Courage, both disclosed during our last call.
In addition, the Ocean Apex rolled up contract toward the end of the first quarter and is currently in the shipyard preparing for its next job with Woodside in Australia. The revenue decrease from prior quarter was partially offset by the Ocean Monarch, Ocean Patriot, and Ocean Guardian, all working the entire second quarter while being idle for most of the first quarter.
Contract drilling expense of $189 million stayed relatively flat quarter-over-quarter and was below the low-end of our guidance primarily due to the timing of costs associated with the Ocean Courage maintenance projects. So the projects were completed during the second quarter, about half of the cost won't be expensed until the third and fourth quarters of 2018 due to our ability to use inventory on hand during the maintenance period.
In addition, the timing of expenses related to the Ocean Endeavor's reactivation and special survey were pushed into later periods as we focused on the most cost-efficient way to perform these projects.
G&A cost of $18 million decreased slightly from the first quarter and came within guidance. Also, as expected, we took an additional $1 million restructuring charge during the second quarter as we continue to execute our restructuring plan implemented at the end of last year. Depreciation expense of $82 million and net interest expense of $28 million both came in at previous guidance.
During the second quarter, we executed an agreement to sell the Ocean Scepter, which was classified as held for sale and as a result, took a non-cash impairment charge of $27 million to write the carrying value down to the net sales price. The transaction closed at the end of last week.
And finally, during the second quarter, we recognized a tax benefit of $10 million for an effective tax rate of 13%, normalizing the rate for the impairment and restructuring charges discussed earlier resulted in an effective tax rate of 12%.
Now let me provide some thoughts on the third quarter of 2018. While I don't normally provide revenue guidance, I will remind you to consider the impact the third quarter revenue of the Anadarko and BP deals discussed earlier and to refer to our fleet status report which was published earlier today for known and projected out of service time during the quarter.
We expect contract drilling expense for the third quarter to come in between $210 million and $215 million including the acceleration of the Ocean GreatWhite's unamortized expense of $16 million discussed earlier. Net of this, third quarter contract drilling expense should increase $5 million to $10 million from the second quarter, driven mostly by the Ocean Valor special survey and contract preparation for its two-year job in Brazil commencing later this year and the ramp-up of the Ocean Endeavor's special survey and reactivation. Partially offsetting the increase was the completion of the second quarter special survey of the Ocean Valiant.
We project G&A expense to decrease again in the third quarter to about $17 million as our restructuring initiatives continue to reap benefits. Depreciation and interest expense should remain relatively unchanged at $82 million and $28 million, respectively.
We anticipate our effective tax rate to be between 10% and 15% during the third quarter of 2018 but, as always, it may fluctuate up or down based on a variety of factors including, but not limited to, changes to the geographic mix of earnings, further clarification around tax reform, as well as tax assessments, settlements or movements in exchange rates.
During the quarter, we continued to demonstrate that we can provide best-in-class performance while managing cost and the contracts we announced earlier today go a long way to improving our already strong backlog and liquidity profile. With these contracts now in place and with over $1.9 billion of liquidity, we are even better positioned to take advantage of strategic opportunities that may present themselves over the next few quarters.
And with that, I'll turn it back to Marc.
Marc Edwards -- President and Chief Executive Officer
Thank you, Scott. So I'm extremely pleased with the contract awards and backlog increase we have announced this past quarter. Clearly our strategy to provide a differentiated product is working. Not only are we able to secure new work for our fleet, we also believe that the unique innovation we are providing through Pressure Control by the Hour, Sim-Stack Service and now Blockchain Drilling, provides an element of stickiness when work rolls over.
Our current client backlog includes, among others, Total, BP, Petrobras, Chevron, Shell, Hess, Anadarko, and ExxonMobil. We are well positioned with Tier 1 clients on a global basis. As I mentioned, the market remains challenged but we are beginning to see some improvement. We remain focused on charting, for all stakeholders, the best course to the market recovery.
And with that, I'll turn the call over for questions.
Questions and Answers:
Operator
Thank you. (Operator Instructions.) Our first question comes from Jud Bailey with Wells Fargo. Your line is now open.
Judson Bailey -- Wells Fargo -- Analyst
Thanks. Good morning. Wanted to just start -- ask my first question and follow-up your comments, Marc, on the moored rigs market. You gave some pretty positive commentary toward inflecting. I was hoping, could you give perhaps just a sense of what you're seeing in terms of rate movement from wherever you are comfortable saying and just, is it strong enough that you would consider reactivating any of the other stacked moored assets that you have? Just a little more color on that topic would be great.
Ronald Woll -- Senior Vice President and Chief Commercial Officer
Jud, good morning, this is Ron Woll. In terms of moored rates, there's no doubt, they are, I think, creeping up, they are nudging up favorably quarter-over-quarter. I think it's more pronounced in markets that favor the moored class like the UK to be sure, Australia here to some extent as well. At this point though, I wouldn't extrapolate too far to say that, that extends to reactivation of rigs that don't have firm work ahead. Now of course, we've done some good work with our Ocean Endeavor to bring her back in terms of reactivation. I think that's a specific and successful case for us, but I think it's probably too soon in the cycle to extrapolate too far to say that there is going to be sort of blanket reactivations of more rigs.
Judson Bailey -- Wells Fargo -- Analyst
Okay. I appreciate that. And then, I guess moving over to the GreatWhite, a couple of questions there. Number one, could you just comment on kind of the marketing opportunities for that rig, as you're seeing within North Sea, I would imagine the prospects for work are pretty good. And just (inaudible), add-on to that is, you kind of walked through the different moving pieces of the contracts fairly quickly. I just want to confirm, are you going to be basically getting the same economics on the remaining term on the BlackHawk, that's just going to transfer over to a combination of the BlackHornet and another drillship starting in 2020?
If you could just walk through that again, I'd really appreciate it.
Marc Edwards -- President and Chief Executive Officer
Sure. As it relates to the rates, we've chosen not to disclose the rates other than the stated. They are significantly and materially above where current rates are today. I think more to the point, the rates for both BP and Anadarko awards moving forward represent where perhaps we believe day rates for drillships will have progressed in the initial years of a solid market recovering.
And if the market recovery surprises to the upside, we have the ability to reset those rates accordingly. They are not at all reflective of where the market is today and do provide for a healthy return. As to the Ocean GreatWhite, obviously in the mix that we've got here, recontracting the Ocean GreatWhite will be key moving forward, which is why it's in the yard in Singapore today and why in a few months we'll be taking it to the North Sea.
We are in advanced negotiations with the client to put the rig to work possibly at the end of Q1 next year, and as I said in my prepared remarks, having just returned myself from client visits to the North Sea, I believe that this rig will have opportunities for work for many years to come.
Judson Bailey -- Wells Fargo -- Analyst
Okay, all right. I appreciate the color. I'll turn it back. Thanks.
Operator
Thank you. Our next question comes from James West with Evercore ISI. Your line is now open.
James West -- Evercore ISI -- Analyst
Good morning, guys.
Marc Edwards -- President and Chief Executive Officer
Good morning, James.
James West -- Evercore ISI -- Analyst
So Marc, with the BlackHawk and the BlackHornet, I understand you don't want to let us know exactly what the day rates are, but how, I guess in terms of kind of coming into an idea of a day rate or coming to negotiating a day rate for those rigs, what were the factors at play? How did you guys decide kind of what you thought the market would look like at that point? And I respect you have an option there to raise if the market is better than you originally think it would be, but it's obviously materially higher than the pretty challenged day rates we have today.
Marc Edwards -- President and Chief Executive Officer
Sure. Thanks for the question, James. Look, the reason why we are not disclosing the rates is -- perhaps some obviously is for sensitive competitive reasons. As of course, we do continue to bid other work over the same time horizon. I think our competitors are looking for data points, and -- as it related to specifically how we went through the negotiations, one of our clients has actually told us the premium we could command based on the operating performance that we're providing, so these assets are very attractive. In prior calls, I've spoken to the fact that we are consistently delivering wells significantly ahead of schedule, and this is one of the reasons why Anadarko worked with us actually to enable us to take one of the drillships on contract with them and give it to BP.
So look, the takeaway from the story here is that by differentiating our assets, by innovating and delivering clearly superior operating performance, we now have demonstrated that our strategy is able to achieve these kind of results. After all we are talking about five years of backlog here, James, being awarded to us that is being awarded in what quite frankly is the most distressed asset class, at rates, once again, I'm stating this again, are substantially above where the current market sits today, and I think in anybody's good book, that's pretty good.
James West -- Evercore ISI -- Analyst
Got it. Okay. And then I had a question with the blockchain technology you guys have rolled out here recently. Is that currently in use on your rigs today or is it something we'll see in the next few quarters?
Marc Edwards -- President and Chief Executive Officer
Yes, it's -- so we've announced the technology, we wanted to make sure that once again we got the thought leadership in this space here. We've been working for a period of time now with a partner called Data Gumbo here in the Gulf of Mexico. And we're looking at rolling it out, it's not rolled out right now, but we are working with one or two clients to see how their blockchain activities dovetail with what we're doing.
And then looking at rolling it -- well, introducing it to the fleet in Q4 and then rolling it out fleet wide during the course of 2019. And it's -- I think as you probably can imagine, it's -- there's a lot of interest, a lot of interest that we've received from all of the majors and independents that are out there to include some NOCs as well to see what we can actually achieve in this space.
James West -- Evercore ISI -- Analyst
Got it. Great. Thanks, Marc.
Operator
Thank you. Our next question comes from Jim Wicklund with Credit Suisse. Your line is now open.
James Wicklund -- Credit Suisse -- Analyst
Good morning, guys.
Marc Edwards -- President and Chief Executive Officer
Jim, good morning.
James Wicklund -- Credit Suisse -- Analyst
The tail-end of your discussion, you're positioned to take advantage of potential opportunities. About 90% of the questions we get asked from the offshore drillers overall is the outlook for M&A. You guys, obviously getting five more years of backlog gives you visibility, that makes it easier to do something strategic next.
Your shareholding is famously concentrated and most people don't think that that ownership would like to suffer dilution. So that puts you guys in a different box, at least as it goes to investors' minds. Can you talk about the range of possibilities you see overall in the industry over the next couple of years in M&A and where Diamond fits?
Marc Edwards -- President and Chief Executive Officer
James, thanks for the question. I think -- Jim, sorry, I think as it relates to our shareholder, you'll have to ask the question to them. However, I think you will see some more consolidation in the industry. I think what's holding it back perhaps today is relative valuation.
And as I mentioned in my closing remarks, for us at Diamond Offshore, all opportunities are on the table, however, we will ensure that when we deploy our capital moving forward, that we have given a significant diligence to that task, and we'll make sure that it's accretive to shareholders in some form or another. So it really is all around relative valuation, and as we progress through this downturn tomorrow is one day closer to the recovery, but I think what's probably holding this up today is relative valuation.
I think one of the positives that we have is that you've just seen us today announce a significant backlog increase to our fleet. So as we sit today, we're comfortable having secured that backlog that we can look at opportunities perhaps, whether it's distressed assets or participating in M&A, we can explore those with the secure backlog and secure liquidity, as opportunities materialize.
James Wicklund -- Credit Suisse -- Analyst
Okay, that's very helpful. I appreciate that. My follow-up, if I could, you are pricing these -- you know, the opportunity to price these things, however the market is in a couple of years, the rates that you've negotiated so far, like you say are significantly above the current level. When do you think we'd start to see material changes in utilization in the deepwater market? Is this an '19 event or '20 event or a '21 event? You rattled off a number of major oil companies that you work for and like 10 of those companies who are 70% in deepwater spending. I'm just curious with your conversations with these companies, do you think the material improvement is going to be '19 or '20 or '21? Nobody has a crystal ball but yours is much better than mine.
Marc Edwards -- President and Chief Executive Officer
So, yes, I mean, we have positioned ourselves vis-a-vis our client portfolio, extremely well as it relates to deepwater moving forward and that wasn't by accident. The -- clearly, the moored market is tightening faster than what we're seeing in the DP segment. The DP segment is suffering still from significant over supply, which once again is why securing this five years of backlog was so important to us and our stakeholders.
Let's be clear, the work that we are tendering today is for activity at the back-end of 2019 and into 2020, and day rates in the market are still suppressed for the DP assets. So when you're talking about the DP assets, the rate recovery is not going to happen before 2020 or 2021. For the moored assets, as we explained somewhat in our prepared remarks here, we have seen an inflection and that's not just limited to the North Sea, it's other basins in the world, we're starting to see a point of inflection and certainly some opportunity to push pricing.
Now, it's still going to be a while before we get back to rates that we were used to some three or four years ago, but perhaps one could say the moored asset class will see an increase in rates, albeit slow in 2019. But I believe that it's going to be '20 or '21 for the DP asset class to include the sixth generation drillships.
James West -- Evercore ISI -- Analyst
Everyday we get closer, you're right. Marc, thank you. Gentlemen, thank you very much. Best of luck.
Marc Edwards -- President and Chief Executive Officer
Thank you, Jim.
Operator
Thank you. Our next question comes from Ian Macpherson with Simmons. Your line is now open.
Ian Macpherson -- Simmons -- Analyst
Hi, thanks, good morning. Marc, can you speak to the -- I know the GreatWhite is a harsh environment rig for Southern Australia. Do its harsh environment criteria match that of the North Sea or do you envision that it will require some capital upgrades in order to prepare for the work that you are targeting there?
Marc Edwards -- President and Chief Executive Officer
Yeah, good morning, Ian. Another good question. So it was built for the Great Australian Bight. There are some small capital upgrades, nothing major, nothing that is enough to report on specifically. But for example, the rig is in Singapore, right now, it is -- some of the windows have to be replaced, it's that kind of upgrade.
So it's not a reactivation in any sense of the word. The Australian safety case is not unsimilar to the UK safety case. So of course it had an Australian safety case, so it's just a case of dusting off the file and submitting it to the UK authorities. But we expect the rig to be on the toe beginning of September and it will go into the yard and nig [ph] for some minor customer requested upgrades and then we should be all things -- if all things pan out, we don't have a contract ink, let me be clear on that. But our expectation and the timelines we are working to is having the rig working in the North Sea end of Q1, beginning of Q2 next year.
Ian Macpherson -- Simmons -- Analyst
Okay. And just to clarify, your payout from BP on the GreatWhite is completely independent from the separate work that you -- that the rig can gain in the future, correct?
Marc Edwards -- President and Chief Executive Officer
That is correct, it's completely independent. And once again let me just be clear on the BP deal. The $135 million of -- perhaps if you want to call it, a gift card, is applicable to gross margin on contracts that we may win further down the road, but it's not included in any backlog figures that we've released today.
Ian Macpherson -- Simmons -- Analyst
Right, right, right. And then thanks, last one from me, you've definitely spent a lot of time for consideration and strategy around differentiating the Blackships in several ways. So, can you speak to how you have tried to incorporate those differentiated features into your sort of repricing. In fact, you didn't use the word index, you told that there's an index-related pricing reset, and how you evaluate the peer group and how you will price off the peer group for those rigs.
Marc Edwards -- President and Chief Executive Officer
Sure. So one of the clients that we are working for today has indicated to us, the premium that they believe our Blackships have on other assets out there. I'm not going to share that with you obviously for competitive reasons, but what we did is we kind of worked with our clients, we looked at what we believe based on projections that we've garnered from working with various consultants in this space as to what demand will look like, what the subsequent dayrates will look like a few years into a recovery and we've set the pricing around that accordingly.
Now, to be clear, it's not indexed, the pricing is not indexed, but we have a one-time opportunity to reset the market dayrate within a band should the market rate actually recover faster than what we predict today.
Ian Macpherson -- Simmons -- Analyst
Okay. Good. Well, a lot happening, congratulations, look forward to learning more offline with you guys later on these new contracts.
Marc Edwards -- President and Chief Executive Officer
All right. Thanks, Ian.
Operator
Thank you. Our next question comes from Sean Meakim with J.P. Morgan. Your line is now open.
Sean Meakim -- J.P. Morgan -- Analyst
Thanks. Good morning.
Marc Edwards -- President and Chief Executive Officer
Sean, good morning.
Sean Meakim -- J.P. Morgan -- Analyst
So with the moored rig pricing starting to move and you're mentioning even outside of the North Sea. Can you talk a little about where else you're seeing the most tendering activity? Are you going to be competing with stacked rigs looking to reactivate? And then maybe how the pace is going to improve in some of these markets outside of the North Sea?
Ronald Woll -- Senior Vice President and Chief Commercial Officer
Yes, Sean. This is Ron. Good morning. So, as you noted there, there North Sea is certainly very active for us and others, so that's certainly I think leading the moored asset class. Australia has, I think, also a good level of activity, although I'd say for both markets right now the attractiveness of stacked rigs to operators is still pretty cool and I don't see that being sort of a true sort of supply force at this point.
We are seeing some good signals kind of elsewhere in Asia and Southeast Asia, of interest in moored rigs. We're seeing some potential nibbles in Mexico but nothing are described as in force as of yet. I think Gamma is still largely a kind of a DP space right now today. So I mean we like the North Sea overall as a place to lead more, I think Australia is close behind, other markets not far off, but I would have to echo kind of March comments, Sean, that moored is leading, I think, the improved tendering activity. Pricing tends to be a little bit better, it's a little smaller kind of class compared to the kind of rates you're seeing in the oversupplied DP side of the house.
Sean Meakim -- J.P. Morgan -- Analyst
Thanks, Ron. That's really helpful. And then Marc, I was thinking as you talked about your outlook out for the next couple of years for the sixth gen drillships, operating performance and lack of downtime for your rigs, you're certainly running ahead of drilling programs pretty consistently. How do you think about that improvement as an impediment to rebalancing the market?
So in other words, you clearly need to compete to deliver that performance but to what extent do these improvements to the extent that you see more of it across the fleet, make it difficult for the market to rebalance and for rates to eventually move higher?
Marc Edwards -- President and Chief Executive Officer
Sean, that's something that we're looking at ourselves. At the end of the day, the big kahuna [ph] is that how do you reduce the total cost of ownership for development of these projects. And if you can speed stuff up, then clearly that makes projects that may be sitting over the horizon or on the horizon more economic.
So it actually brings them back over the horizon, so there is more work for us to go and attack, especially when our clients had choices from that future capital expenditure as well, be it onshore or offshore. So at the end of the day, we've got to make costs lower for deepwater development and that means drilling wells faster, quite frankly, that's it in a nutshell.
And so -- OK, that does have an impact on projects that have already been sanctioned but it doesn't have an impact on the future projects that are waiting to be sanctioned. And there's a lot of reserves still out there in deepwater that will need to be developed over the next decade and a half that we need to bring over the horizon, so our clients invest in them.
And as I mentioned again in my prepared remarks, we've positioned ourselves very well, with as Jim suggested with 70% of the work that's out there, from our client perspective. So, yeah, it's, one could say it's an impediment to a recovery certainly for the ultra-deepwater assets but I don't see it that way.
I see it as a way of bringing the reserves that are currently locked because they're not economic, I see it as a way to make them more available to us and so increase that pie. And as I've been stating throughout this call this morning, our strategy is paying off. So we seem to be very attractive. Let's just look at the Sim-Stack service alone. That service which is hours and hours alone at this moment in time was awarded a best available safety technology award by the regulator here in the Gulf of Mexico.
So how attractive is having a drillship that has been given an award recognizing safety and technology to clients working here in the Gulf of Mexico. I would argue it's very, very attractive. So by continuing to do this, by continuing to innovate, by continuing to give thought leadership, by continuing to differentiate our assets, we will be at the top of the deli line as these reserves get unlocked, because we make them cheaper by doing things more efficiently. So I'm not worried about that, Sean, so to speak.
Sean Meakim -- J.P. Morgan -- Analyst
That's all. Fair enough. Thanks a lot. I appreciate it, Marc.
Operator
Thank you. Our next question comes from Scott Gruber with Citigroup. Your line is now open.
Scott Gruber -- Citigroup -- Analyst
Good morning.
Marc Edwards -- President and Chief Executive Officer
Scott, hi.
Scott Gruber -- Citigroup -- Analyst
Marc, just to clarify the option to raise rates if the market is better than expected in a few years time, that applies to both the Anadarko and BP deals?
Ronald Woll -- Senior Vice President and Chief Commercial Officer
This is Ron. Good morning, Scott. Indeed, it does.
Scott Gruber -- Citigroup -- Analyst
Got it. And are you able to say if the undisclosed rates on both deals, are they in the same ballpark?
Ronald Woll -- Senior Vice President and Chief Commercial Officer
Yes. This is Ron. That's a fair question. So I think the answer is, broadly speaking, yes. I mean, as Marc said, they're well above market for today and they also reflect kind of our outlook for an improved market beyond 2020 but, yes, they're in the same ballpark.
Scott Gruber -- Citigroup -- Analyst
Got it. And just turning to the floating factory. You guys mentioned that obviously that the moored market is starting to inflect here, the harsh environment market is already inflected. Are you able to reengineer the floating rig concept and design an eighth gen rig for application in the midwater or in the harsh environment?
Marc Edwards -- President and Chief Executive Officer
Yes, absolutely, yes. I'm an engineer by trade, I cut my teeth working on the -- actually on rig flaws, as I started my career. So absolutely, when I say yes, it can be done. The big question is though, is that from a financial perspective, the gains aren't quite as substantial because one of the largest components to driving efficiency with a floating factory was the tripping speed getting up to well over 6,000 feet per hour. And so when you are in ultra-deepwater, clearly that has a major contribution or that is a major contribution to driving efficiency gains.
In the midwater space, that's not -- that advantage is -- let's just say smaller because you're not tripping to the same depth. The wells are typically less deep, you don't have so much water rise there to trip through. So the efficiency gains on a midwater unit are less and at this moment in time we're not looking at that, as it relates to the floating factory technology itself we believe in it, our clients believe in it. Clearly, the market doesn't justify building those assets. So frankly, everything has been laminated, stuck in a file and is sitting there awaiting a better day perhaps.
Scott Gruber -- Citigroup -- Analyst
Got it. I appreciate the color.
Operator
Thank you. Our next question comes from Kurt Hallead with RBC. Your line is now open.
Kurt Hallead -- RBC -- Analyst
Hey, good morning.
Marc Edwards -- President and Chief Executive Officer
Kurt, hi.
Kurt Hallead -- RBC -- Analyst
So, I wanted to follow up, just real quick. In the fleet -- fleet status in the commentary this morning, where you talked about BP having the -- contracting another rig to be determined. I am safe to assume it's one of the existing rigs you have that are probably working for a different oil company at this juncture, one of the other of the two black rigs. Is that fair or are you indicating here the potential for a new build asset?
Ronald Woll -- Senior Vice President and Chief Commercial Officer
Hi, Kurt. It's Ron. Good morning. Thanks for the question. So of the two rigs that we have pointed toward BP, one is named today as you well know, the second rig is not yet named, and it could come from a rig that's working elsewhere here for other clients. But the way the agreement is structured, it also allows us to deploy a rig of equivalent capability and it could be one we don't own today. I wouldn't go so far to say a rig we build, I think that's probably a bridge too far but it can be one that we own today or one that we own in the future.
Kurt Hallead -- RBC -- Analyst
Interesting. Okay, got that. So the other question I had for you then, when you guys discuss the dynamics for a better, substantially higher than market rates, just wanted to calibrate a couple of things. So the DP drillship market depending on the asset, where it's located, the rate ranges that I've heard of late have been somewhere between $135,000 to maybe approaching $200,000 a day. Just wanted to see if that's consistent with what you've been hearing about the current market rates for the DP drillship market?
Ronald Woll -- Senior Vice President and Chief Commercial Officer
Yes. Again, this is Ron. I think, we are well aware of where the market is today. I think what we're describing here though is where the market is going to be several years from now, which of course is really a stronger figure than where our current market is.
So, I'd look at where the market is today here and I'd then kind of work past that figure into where both we and our customers think we're going to be.
Kurt Hallead -- RBC -- Analyst
Right, OK. So, but the -- I just wanted to get a firm handle on where we thought the starting rates were today obviously, so that's a helpful answer, I appreciate that. And then just lastly, if I may follow-up here then is on the North Sea harsh environment rates, again Marc, as you go into next year, when you talk about multi-year type of dynamics is, is this a sense you're getting from a particular customer or is this a sense you're getting from a number of different customers, which is suggesting not only strength but breadth of market interest in these assets in the North Sea?
Marc Edwards -- President and Chief Executive Officer
Yes, I think I've mentioned earlier in one of the Q&As or perhaps even in the call and in the prepared remarks. I did spend quite a bit of time over in the North Sea a couple of weeks ago and I was actually quite surprised at the messaging that I got from those client visits, which was consistent and perhaps the key is that, if you look at our client's CapEx alternatives on a global basis, through simplification, standardization, and scope, all our clients that I met suggested that the North Sea competes very effectively today with other alternatives on a global basis to the extent that capital invested in that area does compete well with that -- that's available elsewhere on a worldwide basis, and that includes West of Shetland.
So, I left quite optimistic that the GreatWhite as an asset in the North Sea and possibly other harsh areas, perhaps Eastern Canada will be active for a period, a considerable period of time.
Kurt Hallead -- RBC -- Analyst
Okay. I appreciate that added color. Thank you.
Operator
Thank you. Our next question comes from Sasha Sanwal with UBS. Your line is now open.
Sasha Sanwal -- UBS -- Analyst
Yes, good morning.
Marc Edwards -- President and Chief Executive Officer
Sasha, hi.
Sasha Sanwal -- UBS -- Analyst
We don't have all the dayrate these new contracts to give you guys much more flexibility to go out and look at M&A. So in that context, can you give us your thought on the confidence level in diligencing the value of floaters that have been cold stacked for extended periods of time and can you bring sans [ph] potential reactivation?
Marc Edwards -- President and Chief Executive Officer
That indeed is a very good question and something that obviously we spend a lot of time considering ourselves here. It depends on the asset itself. I do believe that there are sixth generation DP drillships that are in the market today, not necessarily being marketed, but perhaps are cold stacked that will not see the light of day again because obviously the longer these assets sit, the more expensive that it will be to reactivate an asset.
And something else that I think that we have been speaking to is -- one has to understand what is the true cost of reactivation, in other words what is the cash cost to a company of bringing a sixth generation drillship that may have been idled for four or five years, possibly six years back into the market because it's not just the reactivation cost alone of switching the lights back on the rig, you've got to mobilize it, you've got to do customer requested upgrades, you've got to do a special survey, you've got to recertify the riser, the BOP, and so on and so forth, and then toe it to location before you're generating cash.
So the cost of these assets is going -- to reactivate them, is going to be more expensive than I think the industry truly realizes, and therefore there will be a barrier to reactivation. In that, dayrates will have to rise, so there's a cost of marginal supply, if that's what you want to call it. Dayrates will have to rise to such a significant level that it makes it possible to reactivate some of these older assets, put the cash into them, on the understanding, you are unlikely to have a contract for them in the first place.
So the diligence you have to put into in terms of valuing an asset that is likely to have been cold stacked of four or five years is significant and therein lies the rub, what is the value you put onto that asset. So it's a very good question.
Sasha Sanwal -- UBS -- Analyst
Great, thank you. And as a follow-up in the past you guys said that your optimal fleet size is significantly larger than the current composition. Can you share your latest thoughts? Thanks.
Marc Edwards -- President and Chief Executive Officer
Well, if we are going to maximize shareholder returns in the next recovery because the recovery is coming, it's just we don't know when, it would be helpful if we had more assets in the fleet. However, it has to make sense financially. And we're not going to overpay for assets, we are comfortable with our fleet as it exists today, we can ride the wave when it returns, however, is there an opportunity to increase the size of the fleet, and therefore a benefit from -- more from a recovery to provide better returns for our shareholders, when that recovery comes.
So, absolutely, let me be clear, we're -- there's no urge to merge or anything like that. We are very comfortable with our fleet size. We've taken the correct investment over the past few years to be successful as we've shown. The key at the moment is keeping the assets working, which we are doing, as we've shown and should the right opportunity materialize, then we'll work with our shareholders to make sure that it is accretive moving forward, on the metrics that we choose to measure it on.
So, yes, we'll be opportunistic, but it has to be something that makes sense in the long run.
Operator
Thank you. Our next question comes from Haithum Notka with Clarkson. Your line is now open.
Haithum Notka -- Clarkson Platou Securities -- Analyst
Hi, good morning.
Marc Edwards -- President and Chief Executive Officer
Good morning.
Haithum Notka -- Clarkson Platou Securities -- Analyst
Sorry to beat, I guess the dead horse here, but just on the rate for the new work that you've booked today, announced today. Marc, you described them as rates that you would expect in, I think, the early part of a recovery. I just want to confirm if that's kind of your view of those rates and would they be below what you would envision as a "mid-cycle rate" for these assets.
Marc Edwards -- President and Chief Executive Officer
So yes, once again, these are rates which we believe specifically for DP drillships will have progressed in the initial years of a solid market recovery. So I just want to reiterate for everybody, these are not today's market rates of which a suggested band [ph] has been put forward in one of the key questions already. So, it's -- we're very pleased with these rates.
Haithum Notka -- Clarkson Platou Securities -- Analyst
Okay. But they are below what you would kind of envision as mid-cycle or something that would incentivize new build construction or anything like that. Correct?
Marc Edwards -- President and Chief Executive Officer
I wouldn't suggest they are below mid-cycle, I think they are getting pretty close to mid-cycle, but not certainly not at a rate that would incentivize new builds.
Haithum Notka -- Clarkson Platou Securities -- Analyst
Understood. Thanks. I will turn it back.
Operator
Thank you. This does conclude today's Q&A session. I would now like to turn the call over to Marc Edwards for closing remarks.
Marc Edwards -- President and Chief Executive Officer
Thank you, everybody, for participating in today's call and we look forward to speaking with you again next quarter.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone have a great day.
Duration: 61 minutes
Call participants:
Samir Ali -- Vice President, Investor Relations & Corporate Development
Marc Edwards -- President and Chief Executive Officer
Scott Kornblau -- Senior Vice President and Chief Financial Officer
Judson Bailey -- Wells Fargo -- Analyst
Ronald Woll -- Senior Vice President and Chief Commercial Officer
James West -- Evercore ISI -- Analyst
James Wicklund -- Credit Suisse -- Analyst
Ian Macpherson -- Simmons -- Analyst
Sean Meakim -- J.P. Morgan -- Analyst
Scott Gruber -- Citigroup -- Analyst
Kurt Hallead -- RBC -- Analyst
Sasha Sanwal -- UBS -- Analyst
Haithum Notka -- Clarkson Platou Securities -- Analyst
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