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Diamond Offshore Drilling Inc  (NYSE:DO)
Q1 2019 Earnings Call
April 29, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2019 Diamond Offshore Drilling Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder this call is being recorded.

I would now like to introduce your host for today's conference, Samir Ali, Vice President, Investor Relations and Corporate Development. Please, go ahead.

Samir Ali -- Vice President, Investor Relations and Corporate Development

Thank you, Sarah. 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, Executive 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 the time of any 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're 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 filings 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 a reconciliation to GAAP financials on our website.

And now I'll 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. In the first quarter of 2019, Diamond Offshore posted a loss per share of $0.53, this compares to an adjusted loss per share of $0.16 in the first quarter of 2018. The decline year-over-year was primarily driven by a change in our contract mix, two special surveys and four rigs undergoing new contract preparations in the first quarter of 2019. Partially offsetting the year-over-year revenue decrease was a decline in our operating costs as we focus on controlling expenses across the organization.

Despite lower revenue year-over-year, we believe offshore drilling day rates have found a bottom and are beginning to recover. We expect that the moored semisubmersible segment will continue to lead the recovery given that it has seen the most attrition since the downturn began over five years ago, and remains an important component of our clients' future investment portfolio. Diamond Offshore has a strong position in this segment, where the market has clearly tightened in the UK sector of the North Sea and is beginning to tighten in Australia.

I will further discuss our moored rig strategy later in my prepared remarks, but first I will build on my commentary from our last earnings call, with specific reference to our ultra deepwater drillships. Over four years ago, realizing that the drillship category was becoming the most distressed asset class in offshore drilling, we embarked on a strategy to differentiate our assets in a manner that made them unique and more desirable to our clients. To this end, we introduced a number of services that were and remain today differentiated and are focused on allowing Diamond Offshore to reduce the cost of drilling through reliability and efficiency gains.

We remain the only offshore driller that solved the BOP stacks on our drillships back to the original equipment manufacturer and subsequently leased them based on equipment availability and reliability. Bringing the original equipment manufacturer to the table and giving them skin in the game was without exception applauded by our clients worldwide, as it brings tangible efficiency gains to our customers. Although, we remain unique in our industry today as the only offshore driller operating under this construct, which we call Pressure Control by the Hour, it is something that was very common in other industries such as aviation and power generation.

Next, with input from the regulator in the Gulf of Mexico, we developed a true virtual twin of the BOP stack, that enables us to simulate up to 10,000 failure modes and without the need for human debate, we can immediately establish whether a service shutdown and unplanned stack pull is required. This service is called Sim-Stack and once again it is unique to Diamond Offshore and also brings proven efficiency gains to our clients.

We are also exploring the use of blockchain and other exclusive initiatives that will lower the cost of deepwater drilling for our clients, when they use Diamond rigs. I have previously spoken to the tangible benefits of this differentiated strategy. This includes driving subsea reliability to as low as 0.7% non-productive time in the most highly regulated and prescriptive operating environment in the world being the Gulf of Mexico.

I have spoken about consistently drilling complex wells up to 54 days ahead of schedule and drilling some of the most challenging wells in the world to 28,000 feet in as few as 38 days. But while these are indeed good data points and should be of interest to the investment community, they are meaningless unless they translate into real value creation to both our clients and our investors.

Again, I have previously spoken about how this differentiation has helped a client in the Gulf of Mexico. As publicly reported by this customer and according to a recognized industry database, Diamond Offshore has drilled three of the top four most efficient wells here in the Gulf. This has helped to deliver the development project six months ahead of schedule and more significantly $1.2 billion under budget. But differentiation as a strategy can only be successful, if we are able to share some of this value creation with other stakeholders too.

And so today I am pleased to announce that Diamond Offshore has secured over four years of additional work across two of our drillships with Woodside in Senegal. The Ocean BlackRhino is expected to commence its contract with Woodside in late 2020 and the Ocean BlackHawk is expected to join the program at the beginning of 2022. Our differentiated product offering is now widely recognized within the industry and the efficiency gains and cost savings we have delivered are readily transferable to other projects on a worldwide basis.

Consequently, all of our drillships are now contracted until 2022 and beyond at rates that are meaningfully higher than the current spot market and recent short, medium-term fixtures. In the past nine months alone, we have added over nine years of backlog to our drillships, the asset class, that remains the most distressed in today's market.

Also during this past quarter, BP selected the Ocean BlackLion as the second rig to join the Ocean BlackHornet as part of their forward drilling requirements. Recall that this relates to the two-year contract with BP that was announced last year. The Ocean BlackLion is expected to commence its contract in the second quarter of 2020. Again the day rate for this work is also materially higher than work recently awarded in the market to other contractors. Additionally, during the quarter Diamond Offshore was able to secure a new award for the Ocean Apex with BP in Australia. This contract covers approximately three months of work, which will run in direct continuation with the Woodside campaign.

Now, allow me to give a brief update on the Ocean GreatWhite, which went to work West of Shetland during this past quarter and has since successfully commenced the drilling of its maiden well. We are pleased to announce the rig has been awarded a follow-up fixture for a leading UK operator that last approximately three months, and will run in direct continuation of the Siccar Point contract. This new award is further proof that our strategy to move the rig to the North Sea is producing solid benefits for the Company. The market in the North Sea remains robust and we are optimistic that this rig will continue to have further follow-on opportunities.

So, now let me return to our strategy relating to the moored asset category and to give you further color on the reactivation and upgrade of the Ocean Onyx. Our projection suggested that the asset class that we'll recover before the ultra deepwater drillships would be the moored rigs. To this effect, we can confirm that as of today, each new fixture that we are renewing on our moored fleet is without exception at a higher day rate than the prior contract. This has been driven by the fleet attrition in this asset category, as much as it has been by a definitive recovery in demand.

A third party survey on operators' forward intentions released last year, suggested that the asset category that would see the most growth, when compared to all other categories was indeed that of the moored floater fleet. We only have to point to the transparent increase in demand in the North Sea and Australia as proof positive.

The day rate we have secured for the Ocean Onyx initial contract upon reactivation is higher than the current spot market for drillships, and it should be no surprise that its operating cost as a moored rig is substantially lower than that of a drillship. Marketed utilization for moored assets is higher than for dynamically positioned floaters and the hydrocarbon resource at water depths between 400 feet and 1,500 feet is not going away. A snapshot of the pipeline of all upcoming deepwater project sanctioning suggests that up to 50% of projects may require some form of mooring.

Once again, our strategic focus is somewhat unique. We are the only company that has contracted all of its ultra deepwater drillships until 2022 and beyond. We are also the only drilling company that is investing in the underserved moored asset category.

Recently, we have returned three moored rigs to work effectively as almost new assets. The Endeavor was reactivated with an upgrade following interest from three clients. The Apex will shortly return to work in Australia after a shipyard stay to address its special survey and an upgrade to its offline capability. And the Onyx will return to work early next year following a significant upgrade, while also having garnered interest from multiple clients.

So allow me to stay with the Onyx, and suggest that this upgrade and reactivation is also further allowing us to differentiate our fleet. When the rig leaves the shipyard at the end of the year, it will be double the size of the original Victory class design. The original Victory class rigs had a displacement of 24,000 long tons. The Ocean Onyx will go to work for Beach Energy at 48,000 long tons. Similar to the Apex, these two rigs will be particularly suited to our environments such as Australia and West Africa, where supply chains can be stretched and logistics problematic. From an engineering perspective, the remaining working life of the Ocean Onyx is over 20 years.

Over the past five years, we have transformed Diamond Offshore from one of the largest commodity deepwater drillers to a company that is uniquely differentiated and is able to command a premium for its services.

Now allow me to provide some commentary on the overall offshore market, which continues to show some green shoots of a recovery. The number of offshore projects that are awaiting sanction is forecasted to more than double on an annual basis moving forward. And our clients have communicated a significant increase in exploration budgets year-over-year.

Our clients are generating cash flows that are close to the peak of 2011 and which are expecting to only grow further in the coming years. Hydrocarbon demand remains robust, and while shale production growth here in the U.S. may remain an overhang, there is still uncertainty as to how much shale can continue to grow.

Considering these factors, we believe that we are in the early days of a recovery in the overall offshore market, and the moored asset class is leading this recovery. We have seen continued attrition in this particular segment, and we have always positioned around the advantages of having a broad portfolio of deepwater assets. We continue to maintain one of the most diversified and capable float of fleets in the industry, positioning us well for the opportunities that the eventual recovery will bring.

As to our forward capital allocation strategy, we have had a busy year by investing in the moored rig fleet and taking a number of assets through their special surveys. However, we will continue to evaluate the contribution opportunity of our cold-stacked rigs being the Ocean Rover, the Ocean Confidence and the Ocean America. Though we have not elected to remove them from the fleet at this time, it is unlikely that they will be reactivated in the near-term. Further, we decided that the Ocean Guardian did not fit into our forward rig strategy, and we have chosen to remove it from the fleet.

With that, I'll turn the call over to Scott, and then I'll have some closing remarks. Scott?

Scott Kornblau -- Senior Vice President and Chief Financial Officer

Thanks Marc, and good morning everyone. As always I'll give a little color on this past quarter's result, and then I'll provide some guidance for the upcoming quarter.

Earlier today, we reported a net loss of $73 million or negative $0.53 per share for the first quarter of 2019; this compares to our fourth quarter 2018 adjusted net loss of $58 million or negative $0.42 per share. The quarter-over-quarter decline was primarily driven by higher operating expenses, as we began recognizing previously deferred costs, which were partially offset by the Ocean GreatWhite commencing operations in the North Sea.

Now, let's take a closer look at the quarter-over-quarter variances. First, contract drilling revenues of $227 million during the first quarter of 2019 was relatively flat, compared to the fourth quarter of 2018. An increase from prior quarter was contributed by the Ocean Valor working the entire first quarter 2019, compared to working half of the fourth quarter 2018 as the rig was completing its special survey. In addition, the Ocean GreatWhite successfully kicked off its maiden drilling campaign during the latter part of the first quarter of 2019. Offsetting these increases was the Ocean BlackHawk, beginning its special survey and upgrades in March, compared to operating the entire fourth quarter 2018.

Contract drilling expenses of $167 million are $7 million higher in the first quarter compared to the fourth quarter and were below prior guidance. Most of the favourable variance to guidance relates to the timing of shipyard expenses for the Ocean Endeavor, Ocean BlackHawk, Ocean Apex and Ocean Onyx. The increase in the first quarter 2019 compared to the fourth quarter 2018 is mostly attributed to the costs associated with the start-up of the Ocean GreatWhite along with the rig's amortizations of previously deferred mobilization and contract preparation cost discussed on last quarter's call. Partially offsetting the increase were lower costs on the Ocean Guardian upon the completion of its contract during the fourth quarter 2018.

First quarter depreciation expense of $87 million, G&A expense of $17 million, and net interest expense of $28 million; all came in at previous guidance. Our first quarter effective tax rate of 5% resulted in an income tax benefit of $4 million and was in line with our previous guidance.

And finally, as Marc mentioned earlier during the first quarter, we decided to sell the Ocean Guardian and as a result have reclassed the rigs from fixed assets to assets held for sale on the March 31st balance sheet.

With that let me provide some thoughts on the second quarter of 2019, but before I do, I will remind you to refer to our fleet status report, which was published earlier today for contract details, as well as known and projected at a service time for the remainder of the year.

We expect contract drilling expenses for the second quarter 2019 to come in between $225 million and $235 million, which includes approximately $50 million of non-cash amortization of previously deferred contract preparation and mobilization costs, mostly related to the Ocean GreatWhite and Ocean Apex. Due to US GAAP accounting rules, we are required to amortize these costs over the initial contract after the mob and shipyard work is complete. Because of the relatively short duration of both of these initial contracts, the amortization will be quick and will occur primarily in the second quarter. Excluding this, contract drilling expenses are expected to come in between approximately $175 million and $185 million. Most of the increase from prior quarter is driven by the second quarter special surveys and upgrades for the Ocean BlackHawk and Ocean Courage.

Also contributing to the quarter-over-quarter increase is the timing of certain expenses relating to the completion of the Ocean Endeavor and Ocean Apex shipyard stays as both rigs are expected to commence operations during the second quarter. Also, for the second quarter 2019, we expect depreciation, G&A and net interest expense to remain relatively flat at $88 million, $17 million and $29 million respectively. Additionally, during the second quarter, we expect to recognize a gain on disposition of assets of $10 million to $15 million upon the closing of the Ocean Guardian sale.

And finally, we anticipate our effective tax rate to be between 5% and 10% during the second quarter of 2019. Of course, the rate may fluctuate up or down based on a variety of factors including, but not limited to, changes to the geographic mix of earnings, as well as tax assessment, settlements or movements in exchange rates.

And with that, I'll turn it back to Marc.

Marc Edwards -- President and Chief Executive Officer

Thank you, Scott. I'm extremely pleased with the contract awards and substantial backlog increase we have just announced. With over $450 million of backlog added since our last call, it is clear our differentiated strategy is working. We will continue to focus on providing innovative and class leading operational performance that adds value to our customers and our stakeholders.

And with that, I'll turn the call over for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Jud Bailey with Wells Fargo. Your line is now open.

Judson E. Bailey -- Wells Fargo Securities -- Analyst

Thank you. Good morning, guys.

Marc Edwards -- President and Chief Executive Officer

Hi, Jud.

Judson E. Bailey -- Wells Fargo Securities -- Analyst

Hi, question if I could on the two contracts on the Rhino and the BlackHawk. Can you maybe talk a little bit about, kind of, the rate structure and how to think about that given that one is a three-year contract, one is one-year and they start at different times, so if we can do the math on the average rate, which I think probably comes out around 290 or so. But can we -- can you help us understand is there escalation at three years or the difference between a three-year and one-year contract?

Ronald Woll -- Executive Vice President and Chief Commercial Officer

Good morning, Jud. This is Ron. So thanks for the question, that was an important, I think, win for us in the quarter. So as we -- obviously, we're not going to get into the exact, sort of, rates here, I respect the math that you've done to kind of get close. We did of course contemplate the fact that this contract doesn't start today, it starts forward, so we priced it forward. It's a relatively clean number, I only can describe it in those frames. We of course did consider the staggered start times for those rigs, so we bake that into how we thought about that contract with Woodside.

Scott Kornblau -- Senior Vice President and Chief Financial Officer

I'll just add here, that the reason for that stagger and the way it dovetails with the opportunity it presents is it quite closely dovetails well with the current commitments of the rig. So it was very fortunate that the opportunity for three and -- one rig to go to work for three years and the other for one year fell into our lap, because it actually provides not quite, but almost continuous work from where we are today.

Judson E. Bailey -- Wells Fargo Securities -- Analyst

Okay. So can you say if those three, on the Rhino is that a firm rate fixed for three years? Or is there any variability over the course of the three years?

Ronald Woll -- Executive Vice President and Chief Commercial Officer

Yeah. So we've, you know, Jud, we thought about of course how to price that work and of course thinking that forward. What I would say is we have contemplated a rate that works for both parties, it also though provides for both -- I think both parties have thought through the fact that the rigs have performed very well in the Gulf of Mexico. And so we're looking forward to the fact those contracts do contemplate there's a reward for performance.

If you look at the history of those rigs have here in the Gulf of Mexico with the two leading operators, they really distinguish themselves, I think quite, quite well. And I would say that we're eager to see those rigs work now outside the Gulf. I think the rates although we have thought about, as Marc said, the staggered start window that correlate to the both the program and the rigs availability, but we've also again contemplated how performance may tie in and there will be I think some rewards tied to that.

Judson E. Bailey -- Wells Fargo Securities -- Analyst

Okay, all right. I appreciate the color on that. And then my follow-up is, can you help us on giving us some color on what operating costs are for those rigs in Senegal? And is there any -- how do you treat taxes? And are there any other services provided with that top line rate?

Ronald Woll -- Executive Vice President and Chief Commercial Officer

So Jud. This is Ron, let me just start with the services piece. So really to answer that question it's a clean rate that we have not -- we have not a bundled sort of different scopes of work into those contracts, as I know, it does exist elsewhere in the marketplace. So from an integrated services standpoint, I would describe those contracts as relatively clean.

Judson E. Bailey -- Wells Fargo Securities -- Analyst

Okay. And then what about on taxes or just op cost for that country?

Scott Kornblau -- Senior Vice President and Chief Financial Officer

Hey, Jud. It's Scott. Yes, so the way the contract is structured, the vast majority, and I mean, 95%-plus of the taxes are on the operator, so not on us. And OpEx, Senegal versus Gulf, I would say, it's Gulf of Mexico-ish, maybe just a hair higher, but right in the ballpark.

Judson E. Bailey -- Wells Fargo Securities -- Analyst

Okay. All right, I appreciate the color. I'll turn it back. Thank you guys.

Operator

Thank you. Our next question comes from the line of Sasha Sanwal with UBS Security. Your line is now open.

Sasha Sanwal -- UBS -- Analyst

Thank you, guys. And good morning, and congratulations, and you have the new contracts, very good to see.

Marc Edwards -- President and Chief Executive Officer

Thanks, Sasha.

Sasha Sanwal -- UBS -- Analyst

Yes. So maybe kind of building off of Jud's question, could we get maybe some more color on just the BlackHawk and the BlackHornet contracts, were these kind of direct negotiations? And maybe can you give us some color on how to kind of think about at a high level the rate premium that you might be getting for Pressure Control by the Hour and Sim-Stack? And if I could just stack on to that as well, for the GreatWhite, would it be fair to, kind of, think about a day rate with a two handle without kind of getting into details, rate can be at least assume a two-handle?

Ronald Woll -- Executive Vice President and Chief Commercial Officer

Sasha, this is Ron. So well framed questions on your part. So now let's start with the ships first. So, this work was competitively bid, there's no question about that. There was a hard, sort of, earned victory on our part. I would say that we had a number of things working in our favor, so the rigs were hot, you know, are hot and so they have a strong working history that I think shrinks the peer group considerably. They have strong resumes over several years that include bragging rights in some of the deepest most complex world in the Gulf of Mexico.

I think the Black ship crews themselves were also closely knit and highly proficient. And I know operators often stress the premiums were tied to the man-machine combination, not just the iron by themselves. You know, layer on top of that, I think some of the subsea reliability, and our success as Pressure Control, Sim-Stack that really have afforded us I think some good results and all that adds up to a -- I think a strong contract win for us. I would describe these rates as confidently above the spot market, certainly I think a pricing high in this cycle for us. But again, it's tied in many ways, I think back to the fact these rigs are both hot and performing, so I think we're quite pleased.

In terms of -- you asked a question on the GreatWhite. So, obviously that rig in many ways, I think proved out our strategy on how to think about that harsh environment rigs. We moved to the North Sea, she of course is under way now with our first contract. We're pleased to see a second contract now in our hands and I'd say probably more to follow in 2020. So, we're quite pleased. I think broadly speaking -- although the numbers are not the kind of detail we'll get into today, but I think broadly speaking, you're thinking the right way with each contract, and as Marc said, the market is improving in the moored space, I think in particular for harsh rigs. So we see those rates improving, I think with each contracting term, so it's going in the right way.

Marc Edwards -- President and Chief Executive Officer

I think a lot of the attention on this call obviously is the win we've had here and achieving somewhat premium pricing for a premium service on our drillships. But let's not lose sight of the fact that the Ocean GreatWhite has just drilled its maiden well without a hitch, and so it is very important for us to get to -- to get that one back working, drill its first well and start building a reputation in the North Sea as a very, very capable rig, and a rig that is delivering a differentiated service similar to what we have in other aspects of our fleet. So we're very pleased with the performance of the GreatWhite.

Sasha Sanwal -- UBS -- Analyst

Great. Thank you for that color. Very helpful. And maybe kind of as a follow-up. This is for you Marc. You mentioned, again look, I mean, the -- so rig availability is kind of tightening up, it's a good problem to have, but you were also pretty specific in saying that there are no immediate plans to reactivate any of the idle rigs. So as we -- maybe if we could kind of get your color around M&A specifically in the context of optimal fleet size and then specifically kind of two of the rigs going to Africa at this point maybe just kind of comment on regional scale, and how that comes into your thinking as well?

Marc Edwards -- President and Chief Executive Officer

Well, we're very comfortable in our own skin with what we've got. We don't have any specific urge to merge. It's all about providing the correct returns to our shareholders. And we're continuing to look at opportunities out there. But in terms of the market recovering in the ultra deepwater drillships space, we've clearly shown that we've been able to garner some premium in our rates moving forward, and it will be very important that any assets or perhaps activity in the merger space that we can undertake comes with the fleet that we could do the same as to what we've currently done with our own fleet.

Now, I think it's apparent to all that our CapEx spend this year is much higher than it was last year. We're very aware that moving forward that number is likely to come down. We're in no rush to activate other assets -- reactivate other assets in our fleet. We're very, very comfortable with the assets that we've got in place. And so we'll be continuing to look at opportunities very, very carefully moving forward as it relates to our own capital allocation strategy. So, right now, this particular moment in time, we're likely to see CapEx moving back down next year, and we'll just be looking at opportunities that might present themselves moving forward.

Sasha Sanwal -- UBS -- Analyst

All right, thank you. I'll turn it over.

Operator

Thank you. Our next question comes from the line of James West with Evercore ISI. Your line is now open.

James C. West -- Evercore ISI -- Analyst

Hey, good morning, guys.

Marc Edwards -- President and Chief Executive Officer

James, hi.

James C. West -- Evercore ISI -- Analyst

So, Marc you mentioned, it's a comment around exploration, I thought were very interesting, Schlumberger, is that something similar when they reported, I mean, you heard it from maybe some of the seismic providers too. But the spend around exploration budgets, I guess, has been doubled. Where is that -- geographically where is that capital and where is the go in or where is the interest? I can imagine, of course, the opening of Mexico, maybe Sub-Saharan Africa, but the other areas where you're seeing some heightened exploration activity?

Marc Edwards -- President and Chief Executive Officer

I think it's little over, James. I think people are very familiar with what's going on in Brazil, with the ISCs (ph) going down there, there's a number of exploration wells that have been backed up pending regulatory approval with AMP down there, you know, that in itself is somewhat of a tortuous exercise. But those will come through eventually.

In the Gulf of Mexico, we're also seeing some opportunities, as you mentioned Sub-Saharan Africa. But in truth it's not one specific location, and the point that I want to bring to the table here is it's not related to ultra deepwater only. There are opportunities in the midwater space that are becoming apparent too. This is not just the recovery, as I said somewhat in my prepared remarks, it's actually perhaps coming to us first, and more of the midwater space and then following on from that in the ultra deepwater space. We've got quite a pipeline of FIDs coming to sanction moving forward. And some of our own research suggests that the number is going to appreciably increase in the next three years certainly and maintain its runway moving forward. So we're quite optimistic on the number of FIDs that are just over the horizon, that are about to come back over the horizon. But, as you'll see in our new investor deck, we've actually pinpointed where exploration budgets are moving on a company by company basis. And in terms of any recovery in our space, we absolutely needed exploration to start recovery.

James C. West -- Evercore ISI -- Analyst

Agreed, agreed. Okay. So, not really -- exactly a follow up from me, Diamond Offshore has always been a very astute and capital disciplined company, and provider of capital, the -- over its history and certainly, as you come on board from all the other very astute capital companies out there, as you look to kind of upgrades, moored assets, and you've made strategic decisions along the way as well, versus say new build, regular future things of that nature, how do you -- I guess, how should we think about the return profile on these upgrades versus the return profile, for say, something more innovative or M&A, I mean, it must be much higher, much higher threshold?

Marc Edwards -- President and Chief Executive Officer

Yes, we're more comfortable with reactivating the moored rigs that we've already done so. As I pointed out during my prepared remarks again, many people still classify the Apex and the Onyx, for example as a Victory class rig. These are not Victory class rigs anymore. And in terms of the displacement, the Onyx is double the displacement long tons of its original design, it looks nothing like it. And in essence, these rigs come out of the shipyards after these upgrades as essentially new rigs, and they should be classified as new rigs. The remaining working life on the Onyx is 20-plus years. The reason we have to put a plus on it is because the engineering algorithms that we use to determine life don't go beyond 20 years, so the Onyx and the Apex have substantial time left in them.

And in terms of client interest, we have a number of clients that have asked us to bring these particular rigs back and they bring a certain features along with them as it relates to deck space, VDL, costs relatively cheap to run that as I said positions them well in areas where you've got logistical challenges and long supply chain. So those rigs are commanding a return, that today and in terms of the forecast moving forward, suggests that, that allocation of capital is better for us as a company and our shareholders today, than it would be in terms of chasing distressed assets in the yard today.

Now, something else that you just brought up on the call of course, a number of years ago, we looked at again in terms of how we drive efficiency gains to lower the cost of ultra deepwater drilling. We looked at the floating factory. The floating factory file has been laminated, stuck in the draw and is pending a time that the recovery in the market truly is with us, and we can bring it out and take a look at it. But as of today, the floating factory is not an option for us, and the current position we find ourselves in this market.

James C. West -- Evercore ISI -- Analyst

Okay. Got it. Thanks, Marc.

Operator

Thank you. Our next question comes from the line of Kurt Hallead with RBC Capital Markets. Your line is now open.

Kurt Hallead -- RBC Capital Markets -- Analyst

Hey, good morning.

Marc Edwards -- President and Chief Executive Officer

Kurt, hi.

Kurt Hallead -- RBC Capital Markets -- Analyst

Hey, so Marc maybe, kind of start off question for you. In the context of how you've already referenced your capital allocation strategy, I think it was pretty clear. So, maybe looking for some additional insights on how you are looking at the prospect for investing for growth relative to potentially returning cash to shareholders? And maybe at what point in time in the future might you be in such a envious position to be able to think about those two options?

Marc Edwards -- President and Chief Executive Officer

Good question. Obviously, our long-term goal is to start -- is to be in a position where indeed we can return cash to shareholders. We're not at that stage yet. In terms of growth and what we can do with the fleet itself, we will continue to be opportunistic moving forward and see what opportunities are out there. But, it has to stand the long-term test in terms of shareholder returns. By contracting these assets at a day rate that we've just announced, which is as transparent to everybody is much higher than where the current market is. We have shown that we can differentiate the fleet with the assets that we have.

Now, it's important that these assets remain working, the service that they provide, the premium service that they provide is recognized by our clients, which I think, we have done. And therefore, as the market recovers, I think that we will be able to maintain a premium above that which the market commands, moving forward for when these assets get recontracted further down the road. Now, the first rig starts at the end of 2020, but remember that by the time 2023 comes around, these assets will be very, very desirable and the market will have repositioned itself and we'll ride that upside once more.

Kurt Hallead -- RBC Capital Markets -- Analyst

Got it. Now, the other comment you mentioned in terms of oil companies cash flow now back at 2011 peak -- 2011, kind of, peak levels, I would have to imagine that at some stage here irrespective of the current utilization dynamics that day rates have a pretty good shot at getting at least halfway back to where they were in that 2011 level. So, I guess what I'm really trying to get out here, as you talk positively about the demand dynamics for the moored semis, maybe a less robust outlook for the ultra deepwater drillship market, yet you have a number of FIDs come in, you got more demand than supply ultimately for your offshore market, and you got free cash flow for the oil companies of '11 levels, I would think that would all translate into pretty substantial momentum overall for anybody involved in the offshore drilling business. So again, you're involved with it day-to-day, what's your perspective on that?

Marc Edwards -- President and Chief Executive Officer

Yes, I think, you brought up an interesting point there. We're still somewhat concerned about the ultra deepwater drillships and that really relates to simple supply and demand factors that exist in that space. I think, in terms of the sixth and seventh generation assets out there, we've only seen one sixth generation drillship scrapped during this downturn. And so the overhang exists in terms of supply. Demand will come back and it will give us all an opportunity to push day rates higher. But, we still need some of those assets to be scrapped, so that we can get to a more equilibrium in terms of supply and demand.

Why we're more comfortable with the semi space and particularly the moored semi space, is that we've seen in terms of marketed utilization, the number of assets that are out there has been reduced by about half, so -- with all the scrapping that's been taking place. So that market is fixing itself correctly. We're seeing demand come back and we're seen attrition in terms of the assets that are available.

In the ultra deepwater drillship space, yes we're seeing demand come back, but we still got an overhang in terms of supply. And that might translate to somewhat of a drag on recovery and day rates in that specific market, which was why some four years ago three, four years ago, we embarked on this differentiated strategy for our drillships. We wanted to command a premium through service excellence, through providing a standard of that is a benchmark for all others to follow. And I think if you've just seen on the results that we've delivered in the Gulf of Mexico, that has come to fruition, but importantly in terms of the contract award that we've just had with the customer, who I might add is one of the more sophisticated customers in terms of their own supply chain and procurement processes. I think that we have demonstrated to everybody today that we're able to command a premium for our assets when we deliver a premium service.

Kurt Hallead -- RBC Capital Markets -- Analyst

Got it. That's great, that's great color. And if I may have one housekeeping item for Scott? You guys referenced generally speaking -- I don't know, if you did or not, I din't pick up on it if you did, the CapEx expectation for 2019, can you give us some sense on that Scott. And then, as we get into 2020 assuming you have no additional rigs coming out of stack mode, what's kind of a baseline CapEx that we should be thinking about?

Scott Kornblau -- Senior Vice President and Chief Financial Officer

Yes, Kurt. So last quarter, I guided full year CapEx between $340 million and $360 million, nothing has changed to this point. So that will still be our 2019 guidance. And yes, we're still not even into our 2020 forecasting period yet. But, yes, your thesis is right. It should be less, we wouldn't expect based on some of the commentary that Marc had, we will be at least looking at reactivation. So absent that, I would say, it will definitely be a declining CapEx in 2020.

Marc Edwards -- President and Chief Executive Officer

Yes. Just to reiterate, what I've already said on the call, it's -- we do not have any plans currently to reactivate any other rigs.

Kurt Hallead -- RBC Capital Markets -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Ian Macpherson with Simmons. Your line is now open.

Ian MacPherson -- Simmons & Company -- Analyst

Thanks. Good morning, everyone, and congratulations on Woodside Senegal, that's a nice big award for Diamond and well earned. There are -- I think we've talked a lot about those contracts. One thing that I don't -- forgive me, if it was addressed, I didn't hear it, there are options behind the firm period. Have you described what those entail in terms of term and whether fixed or floating et cetera?

Marc Edwards -- President and Chief Executive Officer

So there are options that are available on this contract. This is a wells contract of which according to ourselves and the client, the term is just over four years. There are a further six wells that the client is looking to procure a long lead time items for, and then there's a couple of wells that come after that. So the primary term -- sorry, the primary well award is 18 wells, with a further six -- at least a further six options with possibly one or two more after that.

Ian MacPherson -- Simmons & Company -- Analyst

Thanks, Marc. Are they fixed price?

Marc Edwards -- President and Chief Executive Officer

No, it's unpriced.

Ian MacPherson -- Simmons & Company -- Analyst

Unpriced, OK. Well, thanks. So BlackRhino has what looks like maybe a four to seven month window between finishing same (inaudible) next year and then going to Senegal. Is that a window of time that you expect you could fill substantially or how much time should we think about in terms of transit? And then any other prep time for that rig before it switches onto its long-term commitment in Africa?

Ronald Woll -- Executive Vice President and Chief Commercial Officer

Ian, this is Ron. You know, fair question. Certainly that schedule gap is one we're focused on, it would have to fit, I think, the right sized program, so we're looking at what might be available to us. But certainly we are going to respect and we're going to, of course, meet the Woodside commencement. So anything we can look at has to fit within that time frame. There are some possibilities out there, nothing we'll talk about today, but we're -- now that we have this substantial Senegal program, we're looking at what -- how do we fill in some of the blanks in between.

Ian MacPherson -- Simmons & Company -- Analyst

Okay. Thanks, Ron. And then last for me, I'm looking at again sort of rollovers for next year, and when Courage and Valor roll, I guess, it's unclear for me so far what, you know, what the future holds for DP semis in Brazil, but assuming that those are going to go to a different customer maybe, maybe not. Are those rigs that could be candidates for mooring upgrades or adaptations for moored, you know, just given your market outlook for the moored market including in the Eastern Hemisphere?

Ronald Woll -- Executive Vice President and Chief Commercial Officer

Yes. This is Ron. So good question. So now with the drillships contracted into 2022, I think one of the next, I think highest nails on the board represents the Courage and Valor. They've been doing well. Of course, with Petrobras in Brazil, I think your -- kind of your thought sort of gift (ph) on you, could there be a candidate for mooring? That's a possibility. I think the comment on the rigs that are stacked today probably won't attract a lot of capital. But I think the possibility of investing in those rigs, that's real for us. I would point out that in the last couple of months, Petrobras has run a number of tenders down in Brazil that include moored, DP moored, drillships as well. So there's a fair amount of activity under way down there. So certainly, I think the Courage and Valor, I think now represent what's next for us to pay attention to. I think the notion of investing in those as part of the recontracting is certainly a possibility and that is a -- it's good work ahead for us.

Ian MacPherson -- Simmons & Company -- Analyst

Appreciate the color. Thanks, Ron. I'll pass it over.

Operator

Thank you. Our next question comes from the line of Sean Meakim with J.P. Morgan. Your line is now open.

Sean C. Meakim -- J.P. Morgan -- Analyst

Thanks. Good morning.

Marc Edwards -- President and Chief Executive Officer

Sean, hi.

Sean C. Meakim -- J.P. Morgan -- Analyst

Just to clarify -- hi, Marc. Just to clarify, the BlackHawk, I think is getting CMC upgrade. Did the BlackRhino require any upgrades on the contract? I think that CMC upgrade is $15 million to $20 million. And just how we think about upgrades in the context of the negotiated rate on the rigs, how that kind of factors into your bid?

Ronald Woll -- Executive Vice President and Chief Commercial Officer

Yes, this is, Ron, good morning. So certainly the CMCs for both rigs is what we see ahead, that's certainly true. We've long, I think, to Marc's prior point, thought about these rigs, and how do they both preserve and then even widen the kind of gap to the market. So investing in those by way of performance makes a lot of sense, and so those rigs will certainly have those kinds of upgrades. I don't know, if we've gotten into the exact details of what they cost, but you should think about them with those -- that kind of capability.

Marc Edwards -- President and Chief Executive Officer

Yes. So as we've set the benchmark for performance, it's very clear to us that our competition is ourselves and we're not going to rest on our laurels. We want to continue to drive efficiency gains on these rigs. So we have some interesting technologies around automation and tripping speed that will also be over the course of the next few years adding to these Black ships, so that we actually either gap ourselves in terms of performance or just drive the bar higher. So it's not just CMCs that we're adding to this rig, it's not material CapEx that's required for these investments, but they will be added to the rigs themselves as well.

Sean C. Meakim -- J.P. Morgan -- Analyst

Right, thank you for that. Should we -- are there other bonus opportunities or other factors we should consider over the term of these contracts (Multiple Speakers) like that?

Scott Kornblau -- Senior Vice President and Chief Financial Officer

Yes. Ron, kind of, alluded to that in one of his earlier contracts, there is an opportunity with Woodside moving forward, to include some financial remuneration as it relates to the performance of the rigs. But at this stage, we're not disclosing that, right now.

Sean C. Meakim -- J.P. Morgan -- Analyst

Got it. Thank you. Just one last piece. How about in terms of any revenue to offset the mobilization or anything else we should think about in terms of that factor?

Marc Edwards -- President and Chief Executive Officer

No, mob is not considered in this rate. But understand, this is a very short mob from the Gulf of Mexico across the Atlantic to the -- to West Africa, it's not like the vessels need towing. So it really is just fuel to get us across. So the mobilization is included in the clean rate. But, my point here is that it's not a significant mobilization, it's much shorter than getting from Europe down to Brazil or indeed from the Gulf of Mexico down to Brazil.

Sean C. Meakim -- J.P. Morgan -- Analyst

Understood. Thanks a lot, Marc.

Operator

Thank you. Our next question comes from the line of Taylor Zurcher with Tudor Pickering & Co. Your line is now open.

Taylor Zurcher -- Tudor Pickering & Co -- Analyst

Hey, thanks. Good morning and congrats on the contract announcements this morning. Marc, maybe starting up with the moored market, you've spent a lot of time on the call talking about. Once again, how things on that side of the business are continuing to improve. And so I realize it's a older rig, but the Guardian, I was wondering, if you can give us some more color on why you decided to sell that now, and then as we think about the cash proceeds from that sale, whether or not those will be material or how much you expect to get, I guess here in Q2?

Marc Edwards -- President and Chief Executive Officer

So, Scott in his prepared remarks mentioned about the gain on the sale of the Guardian. It's not insignificant, but it's not really material. But yes, so the moored market is definitely coming back. But what I alluded to in the call, as I said, we've transformed the business from one of the largest commodity deepwater drillers into a business that is much more focused on differentiation. And when we look to the Guardian and to how it might fit in our fleet strategy moving forward, we felt that it was somewhat of an outlier. We've got a -- we had a special survey coming up on it next year. The rig was probably moving toward the bottom of the deli line in terms of moored-rig desirability. And when we looked at the opportunity to upgrade it from a CapEx perspective and the returns that it would likely throw off as a result, we just felt that this was perhaps a bridge too far and we had an offer on the rig from a third-party that we decided to take, because in that swing between the gain on the sale and the CapEx we would have to invest, just didn't really sit well with us. So basically that's the reason why we've elected to remove it from our fleet.

Taylor Zurcher -- Tudor Pickering & Co -- Analyst

Okay. That's helpful. And then maybe thinking two to three years out or right in the middle when these Woodside contract start up, I appreciate the different supply demand dynamics in the moored market in the sixth and seventh gen market today. But it feels like the moored market at least from a daily margin perspective is probably more healthy today. But looking at these rates you've gotten with Woodside, should we expect two, three years out that or is it your expectation that two, three years out that the ultra deepwater market particularly sixth, seventh gen side of things, means our margins per day and just on a gross margin percentage basis, are going to be at a level that, that part of the business looks more attractive than the moored segment again out in early 2020?

Ronald Woll -- Executive Vice President and Chief Commercial Officer

Yes. This is Ron. Good morning. So I think, over time, we do expect that the drillship space will improve, I think pricing will improve over time, there's no doubt about that. I think to Marc's earlier comments, we're seeing I think some of those forces reveal themselves first in the moored space, but I think the drillship space will follow as you look at a few years. But I think Marc pointed on the key feature, which is we're going to have to see if things -- those assets, I think the part in the supply side of the equation, which we haven't seen that really in large force. We've seen it a lot on the moored space, not so much on the drillship side of the market. So I think we do see the right, I think, ingredients or at present we see better economics, better commodity pricing, I think but the important, I think should we get the drop is anything around the supply side happening in the drillship space. But, I think over time, I think you'll see the ships that perform as Marc pointed out that have differentiated elements to them as our drillships do, I think they will command, I think some premium rates, but over time we expect that, that will improve.

Taylor Zurcher -- Tudor Pickering & Co -- Analyst

Great, thanks guys.

Operator

Thank you. And this does conclude today's question-and-answer session. I'd now like to turn the call back over to Marc Edwards for any further remarks.

Marc Edwards -- President and Chief Executive Officer

So, thank you for participating in today's call and we look forward to speaking with you once again next quarter.

Operator

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, you may all disconnect. Everyone have a great day.

Duration: 58 minutes

Call participants:

Samir Ali -- Vice President, Investor Relations and Corporate Development

Marc Edwards -- President and Chief Executive Officer

Scott Kornblau -- Senior Vice President and Chief Financial Officer

Judson E. Bailey -- Wells Fargo Securities -- Analyst

Ronald Woll -- Executive Vice President and Chief Commercial Officer

Sasha Sanwal -- UBS -- Analyst

James C. West -- Evercore ISI -- Analyst

Kurt Hallead -- RBC Capital Markets -- Analyst

Ian MacPherson -- Simmons & Company -- Analyst

Sean C. Meakim -- J.P. Morgan -- Analyst

Taylor Zurcher -- Tudor Pickering & Co -- Analyst

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