Noble Corporation Plc

Jeffrey L. Chastain - Vice President of Investor Relations David W.

Williams - Chairman, Chief Executive Officer and President James A. MacLennan - Chief Financial Officer and Senior Vice President Roger B.

Hunt - Senior Vice President of Marketing and Contracts

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division Waqar Syed - Goldman Sachs Group Inc., Research Division Ian Macpherson - Simmons & Company International, Research Division Edward Muztafago - Societe Generale Cross Asset Research Todd P.

Scholl - Wunderlich Securities Inc., Research Division Gregory Lewis - Crédit Suisse AG, Research Division David Wilson - Howard Weil Incorporated, Research Division Byron K. Pope - Tudor, Pickering, Holt & Co.

Securities, Inc., Research Division

Okay. Thank you, Brent, and welcome, everyone, to Noble Corporation's Third Quarter 2013 Earnings Call.

We appreciate your interest in the company. A copy of Noble's earnings report issued last evening, along with the supporting statements and schedules, can be found on the Noble website, and that's noblecorp.com.

Before I turn the call over to David Williams, I would like to remind everyone that we may make statements about our operations, opportunities, plans, operational or financial performance, the drilling business, or other matters that are not historical facts and are forward-looking statements that are subject to certain risks and uncertainties. Our filings with the U.S.

Securities and Exchange Commission, which are posted on our website, discuss the risks and uncertainties in our business and industry, and the various factors that could keep outcomes of any forward-looking statements from being realized, including the price of oil and gas, customer demand, operational, and other risks. Our actual results could differ materially from these forward-looking statements, and Noble does not assume any obligation to update these statements.

Finally as we typically note, we may use non-GAAP financial measures in the call today. If we do, you will find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation, on our website.

Okay. With that, I'll now turn the call over to David Williams, who's Chairman and President and Chief Executive of Noble.

Thanks, Jeff. Good morning, and welcome, everyone.

Joining me today on the call along with Jeff, are James MacLennan, our Senior Vice President and Chief Financial Officer; and Roger Hunt, Senior Vice President of Marketing and Contracts. Jeff and Roger are handling things from Houston today, while James and I are in London.

I'll have more to say about London and the company's pending migration to the U.K. from Switzerland later in the call.

It was another very busy quarter for Noble, and I want to open this morning by covering some of our accomplishments, each of which I think add to the long-term competitive position of the company and our ability to produce attractive returns for our shareholders. To begin with, I'll comment on our strong third quarter results, which continue to exhibit a favorable trend that became apparent earlier this year.

Compared to the results in the second quarter, third quarter contract drilling services revenues improved 7% supported by the better-than-expected commencement of operations of the new ultra-deepwater drillships Noble Don Taylor and Noble Globetrotter II. Also total operating downtime fell below 5% where it was last quarter to 4.6%.

Finally contract drilling services costs were essentially flat, despite the start of the 2 drillships. James will have more to say in the third quarter in just a moment.

Shipyard execution was a meaningful contributor to our third quarter results, and many of you have heard me say that I am delighted with our execution to date and believe that our ability to manage multiple projects simultaneously and transition the new assets from yard delivery through mobilization, client acceptance and to contract commencement is as good as it gets in this business. So congratulations go out to Scott Marks and his entire team in Korea and in Singapore.

In addition to the early starts in the Noble Don Taylor and Globetrotter II, we also delivered from the shipyard in August, the first of our 6 JU3000N high-specification jackups, the Noble Mick O'Brien, which should commence its contract shortly. As we look up over the remainder of October, we expect to deliver from the shipyard the ultra-deepwater drillship, the Noble Bob Douglas, and the jackup, Noble Regina Allen.

The Bob Douglas is expected to begin a 3-year contract with Anadarko with an additional stop in New Zealand to drill 2 wells, before it moves on to the U.S. Gulf of Mexico.

The Regina Allen will begin a transit to the North Sea to commence its 18-month contract in January 2014 with Gaz de France. To wrap up shipyard deliveries in 2013, we expect to take delivery of the Noble Houston Colbert by the end of December as expected.

The additional 30 days of time in Singapore noted in last Thursday in our fleet status report should not be interpreted as delivery delay. The rig will begin a winterization program as part of its preparation for the 10-month contract, all through Argentina, awarded by Total as reported last month.

We're better equipped to do this winterization project while the rig is still in Singapore. While I'm on the subject of last Thursday's fleet status update, I want to comment on the additional planned out of service time noted in the report.

As a company, we generally evaluate these events in conjunction with our annual budget process and well in advance of their occurrence. That does not mean that as we work through next year's operating plan, as we currently are, we may now discover that some project planning must change due to any number of circumstances.

For example, the Noble Amos Runner was scheduled for a regulatory inspection, which was planned to cover an estimated 30 days in the fourth quarter of 2013. It was recently discovered that the rig will require some steel replacements in the hull extending the duration of the project to an estimated 110 days.

The project is now scheduled for the first quarter of 2013 -- 2014. We intend to report out-of-service events as early as we can reasonably determine the scope, the duration and timing of each event.

Due to the nature of our business, there can be some surprises from time to time. As we roll in to 2014, we expect to deliver from the shipyard our last 2 ultra-deepwater drillships, the Noble Sam Croft and the Noble Tom Madden in addition to the final 3 JU3000N high-specification jackups.

Following the 2014 deliveries, we're left with only one newbuild, the CJ-70 ultra high-specification jackup for Statoil's Mariner Field announced last June. That rig is due for delivery in mid-2016.

These additions to the Noble fleet, which began in 2011, will total 14 by the end of 2014, with a 15th rig added by the end of 2016. I believe our 4 Hyundai ultra-deepwater drillships and 6 JU3000N jackups from Jurong, were arguably the best-timed rig orders placed in this industry in more than 5 years.

We began placing orders before the contracts were secured and while the fundamental outlook for our business was still evolving. But we proceeded with a high degree of confidence, and we now secured impressive contracts on all but 2 jackups, our last 2 JU3000N set for delivery in 2014.

These rig additions are driving an impressive earnings and cash flow growth profile and represent a major part of Noble's transformation to a premium fleet. The other significant part of the transformation is the divestiture of our standard specification fleet.

As you know, we defined 3 weeks ago how we intend to split our fleet into 2 distinct businesses representing premium and standard assets. I'll say more on this subject in my closing remarks.

I'll now turn the call over to James, who'll review our third quarter results.

Thank you, David, and good morning to everyone on the call. To begin this morning, I'll review the primary drivers behind our third quarter revenue and operating cost performance, as well as provide an explanation of certain P&L line items, which warrant comment.

I'll also comment on our liquidity position and certain balance sheet items as of the close of the quarter. As usual, I'll provide guidance for the fourth quarter, including revised planned CapEx for the remainder of 2013.

I'm happy to address items not covered in my prepared comments during the Q&A session of today's call. Noble reported 2013 third quarter net income of $282 million or $1.10 per diluted share on total revenues of $1.08 billion.

The quarter results reflect a gain on the sale of the Noble Lewis Dugger, which closed in July, as settlement relating to the 2010 acquisition of Frontier Drilling and also an impairment charge on our 2 cold-stacked submersible rigs. Together these items contributed $63 million in net income or $0.25 per diluted share for the quarter.

Putting these items aside, our net income per share would have been $0.85. The results compared to net income in the second quarter of $177 million or $0.69 per diluted share, on total revenues of $1.02 billion.

But as you will recall, results for the second quarter also included $18 million of revenue or $0.06 per diluted share relating to the cancellation of a contract by a customer for the newbuild jackup Noble Houston Colbert. And excluding the impact of that contract cancellation, second quarter earnings were $0.63 per share.

Contract drilling services revenues for the third quarter grew by $66 million or approximately 7% from the second quarter to $1.04 billion. The revenue improvement was driven primarily by the contributions from our 2 new ultra-deepwater drillships, the Noble Don Taylor and the Noble Globetrotter II, which added approximately $27 million in revenues, with both rigs having commenced operations during the quarter.

Adding to this, we experienced a further reduction in fleet downtime in the third quarter to 4.6% compared to 5.2% last quarter, as well as a reduction in unpaid shipyard days. The reduction in unpaid shipyard days resulted primarily from the semi-submersible Noble Tom van Langeveld and the jackup Noble Byron Welliver.

These 2 rigs continued shipyard programs in the second quarter. The reduction, both in downtime and in unpaid shipyard days, added approximately $33 million to revenues this quarter.

Finally the remaining increase in revenues resulted mainly from dayrate improvement as rigs transition to new contracts, and there was also one additional calendar day in the quarter. In comparing Quarter 3 to Quarter 2 revenues, the revenue improvements I just ran through were partially offset by the second quarter $18 million contract cancellation on the Noble Houston Colbert and also by the sale of the jackup Noble Lewis Dugger.

Contract drilling services costs in the third quarter decreased $4 million to $488 million compared to $492 million in the second quarter. The quarter-over-quarter decline reflects the Mexico VAT settlement in the second quarter of 2013, which added approximately $8 million to the second quarter costs.

Adjusting for that VAT settlement in the second quarter, contract drilling costs in the third quarter experienced a slight increase, due primarily to the commencement of full daily operating costs latent in Q3 on the 2 new drillships. DD&A for the third quarter was $224 million compared to $213 million in the second.

The increase quarter-over-quarter primarily relates to 2 newbuilds that we placed in service during the quarter coupled with one additional calendar day. G&A expenses of just under $34 million in the third quarter increased $7 million from the second quarter, and we're above guidance due primarily to professional fees for ongoing corporate projects and activities such as our migration to the U.K.

Interest expense, net of amounts capitalized, declined just less than $2 million to $23 million in the third quarter compared to $25 million in the second and was within the range of guidance provided on the last quarter's call. We capitalized approximately 57% of interest in the quarter compared to 56% in the second quarter.

Our effective tax rate for the third quarter of 2013 was 16%, reflecting favorable changes in the geographic mix of pretax income and the recognition of certain discrete benefits in the quarter. Moving next to CapEx.

Capital expenditures in the third quarter totaled $480 million, including capitalized interest, and well below our guidance of approximately $850 million. The lower-than-expected amount was due primarily to the timing of certain newbuild and major project expenditures.

The third quarter total spend included $270 million related to newbuild assets. This brought our total capital expenditures for the first 9 months of the year to $1.7 billion.

The components are: $1.02 billion for newbuild rigs; $442 million for major projects, including $55 million in subsea-related expenditures; $168 million for sustaining capital; and $92 million in capitalized interest. I'd like now to comment briefly on liquidity and on our debt level.

At September 30, cash and cash equivalents totaled $178 million. Liquidity, measured as the sum of cash and cash equivalents and availability on revolving credit facilities, totaled approximately $1.8 billion.

The amount available under our revolving facilities includes the new $600 million 364-day unsecured revolving credit agreement, which we entered into in August. Finally long-term debt at September 30 was $5.3 billion, up approximately $32 million from June 30, 2013.

The increase reflects additional borrowings against our short-term debt facilities to fund our ongoing capital expenditures. Debt to total capitalization was 37.5% at the end of the quarter.

I will now provide updated guidance for the fourth quarter and for the full year 2013, covering certain line items on the P&L, as well as capital expenditures. First operational downtime in the Noble fleet for the fourth quarter is projected to average 5.0%, roughly consistent with the first 3 quarters of 2013.

We are trimming further the range of expectations for full year contract drilling services costs from the previous range, $2.05 billion to $2.10 billion. Our new guidance range is $2.02 billion to $2.03 billion, reflecting our experience through the first 3 quarters of the year, which has run below expectations.

The Noble Don Taylor, Globetrotter II and Mick O'Brien will have a full quarter of operations in Q4, resulting in a higher level of operating costs as compared to prior period, and the Noble Bob Douglas is expected to exit the shipyard in October and begin initial operations in New Zealand in December. Additionally the Regina Allen and the Noble Houston Colbert commence operations in early 2014, and preparations for initial operations are well underway in the fourth quarter of this year.

Finally the Noble Roger Eason is expected to return to service in the fourth quarter. As a result of all of those factors, fourth quarter contract drilling services costs are expected to be somewhere between $555 million and $570 million.

DD&A for the full year is estimated to be in the range $870 million to $880 million. For the fourth quarter, DD&A is expected to be $230 million to $235 million.

Certain of our capital projects, including newbuilds, have been completed earlier than anticipated, resulting in higher DD&A. G&A is expected to total about $115 million for the year, with approximately 30 -- $13 million in the fourth quarter.

With several corporate projects ongoing, as I mentioned, we're seeing increases in legal and consulting fees as one would expect. Interest expense, net of capitalized interest, is expected to total $105 million to $110 million, slightly below our guidance from the last call.

The lower guidance is due to the higher capitalized interest associated with the new CJ-70 jackup and our other capital projects. Net interest expense in the fourth quarter is expected to be $30 million to $35 million, higher by $10 million as previously forecast.

The minority interest line on our P&L representing the Shell share of the Bully I and Bully II joint ventures is now expected to total $65 million to $70 million for the year, and an increase from previous guidance of $60 million to $65 million and remains approximately $15 million for the fourth quarter of the year. The increase for the full year is the result of better-than-expected performance on the 2 Bully drillships.

We continue to expect our effective tax rate for the year to be in the range 17% to 19%, excluding the effects of further unanticipated discrete items. As you are aware, any changes in the geographic mix of sources of revenue or levels of profitability, tax assistance or settlements, or movements in exchange rates, all can affect this line.

And finally, we now expect our capital expenditures for 2013 to amount to approximately $2.6 billion with a decrease compared to our previous guidance of $2.9 billion, resulting from the timing of payments on newbuilds and certain major projects. About $200 million of this change relates to newbuilds and will therefore be incurred in early 2014.

I'll break this down by major spending category. In our newbuild program, we expect to spend $1.6 billion in 2013.

CapEx needed to complete the remaining newbuild projects is expected to be a further $1.85 billion in the odd [ph] years, with $1.4 billion of this amount expected to be spent next year, 2014. Major projects in 2013 are expected to total approximately $650 million.

Sustaining capital is expected to total approximately $280 million in the year, down slightly from previous guidance. And capitalized interest is expected to total $110 million to $120 million in 2013.

The third quarter number for capitalized interest should be an estimated $20 million to $25 million. And total capital spending for the fourth quarter is expected to be about $875 million, including $540 million for newbuilds.

That concludes my comments. Roger Hunt will now cover the market outlook.

Roger?

Thank you, James. Good morning, folks.

It has been a very productive quarter for Noble as a continuation of steady industry fundamentals produced numerous contract awards. Although most of the awards were for our jackup fleet, we do have one noteworthy fixture in the ultra-deepwater sector, which I will address later on.

Let me change things up a bit today by leading off with the jackup sector and give it the credit it deserves, and then speak to the deepwater sector. But first, let's do the numbers.

Our contracting successes in the third quarter helped to push our backlog at September 30, 2013, to $16.2 billion compared to $14.3 billion at December 31, 2012. When one considers that backlog burn rate of approximately $11 million per day, it's quite an accomplishment to increase absolute backlog by almost $2 billion over 9 months.

But more significantly, it speaks to the quality of Noble's position in the various markets. Embedded in this backlog statistic is a very strong suite of fixtures for our jackup rigs.

During the past quarter, we were awarded 9 contracts with durations ranging from 1 to 3 years. 2 in the Middle East region worthy of note.

Our 3-year extensions for the Scott Marks and Roger Lewis at dayrates of $257,500; and 1-, 2-year extension in the North Sea for the Hans Deul at $235,000. We were also awarded a 10-month contract for the Houston Colbert by Total to work offshore Argentina at a dayrate of $247,000.

The Colbert is the fourth of our 6 JU3000N high-specification jackups to secure a contract. The rig will be the only jackup of this type and capability in the region, so we expect to be in a prime position to address additional work from Total or others.

It might be -- it may be of interest for the audience to note that the average rate for the last 9 fixtures of Noble's JU2000 and 3000 fleet is $239,400 per day. But no less note, out of the recent 5 rig fixtures -- excuse me, 5 rig years of fixtures on 4 of our standard North Sea jackups at rates ranging from $168,000 to $175,000 per day.

As noted last quarter, we continue to observe high utilization and improving dayrates in the jackup rig sector, with strong opportunities for additional work in most regions. Stable crude prices continue to fuel demand, while limited availability of quality rig supply on a regional basis, incentivized several customers to seek longer-term contracts.

And yes, while we are very mindful of the constant flow, 2 to 3 newbuild rigs entering the market every month, we continue to experience strong demand and pricing for both our existing and our new assets. Beyond 2013, we remain confident of incremental jackup demand build in the Middle East, Mexico, India and Southeast Asia and believe many of the new deliveries will secure initial jobs in these locations.

We also expect new developments to be sanctioned in the North Sea. Noble currently has 83% of the remaining 2013 operating days in the jackup fleet committed to contracts, while 72% of the operating days are committed in 2014.

We are currently evaluating opportunities for our jackups with near-term availability, and we believe we will be successful in securing additional contract time on most, if not all, of the available rigs. I'd now would like to comment briefly on the ultra-deepwater sector.

During the fourth quarter, we count 13 contract awards for ultra-deepwater rigs, 5 newbuilds and 8 existing rigs, with dayrates falling mostly in the range of $550,000 to $625,000. We are currently experiencing a steady contracting environment in this sector, and there is nothing wrong with steady.

Steady is good. As we have said before, we believe potential catalysts are in place that could produce incremental demand and an improving dayrate environment.

In this environment of sound fundamentalists, Noble has agreed with Shell to add a 16-month extension on the Noble Danny Adkins in the Gulf of Mexico at a base operating rate of $614,000. The new contract is expected to commence in August 2014, at which time rates will be adjusted for cost escalation, if appropriate.

The contract also has a performance bonus feature. Ultra-deepwater rig availability is tight, and customers continue to evaluate ultra-deepwater rig needs for programs in 2014 and '15 showing a preference for the improved efficiencies, redundancies and superior load paths and mud systems of the industry's technically advanced rigs.

The number of uncontracted ultra-deepwater rigs under construction and with 2015 scheduled deliveries, has declined from -- to 13 from 18 at the start of 2013. We expect this number will continue to decline over the balance of 2013 and into early 2014.

We continue to see positive exploration results. Announced deepwater discoveries in 2013 are expected to run between 30 and 35, following last year's record of 53.

Exploration successes have been noted offshore 10 countries in 2013, and that does not include more recent announcements such as Statoil's successful efforts offshore Eastern Canada in the Flemish Pass. An increasing number of customers are evaluating new deepwater and ultra-deepwater frontiers such as South Africa, Northern Brazil, Newfoundland, and let's not forget about the Bering Sea and the growing interest in the Arctic.

We recently conducted an informal survey of customers who are taking delivery of new ultra-deepwater assets and ask them how they intend to use the rig. We found, of the 46 newbuild ultra-deepwater rigs identified, 65% will be assigned to exploration projects.

We believe exploration activity will remain robust while an increasing number of field development programs will be sanctioned over the next 5 years. My comments to this point have largely addressed industry dynamics for the new ultra-deepwater rigs.

So what is to be said about the less capable and more mature deepwater assets? Many of these rigs will be viable candidates for opportunities in areas such as West and East Africa, Mexico, Northern Brazil, Southeast Asia and Australia.

Some, however, will not be practical candidates due to, in part, limitations driven by age, technical features and the investment required to maintain a positive posture -- competitive posture, excuse me. Similar to what we're seeing in the jackup sector.

So let's refer to this as the normal evolution of the business. One thing is clear, there is expected to be an increase in the mobilization activity as owners of these rigs attempt to identify opportunities where rig technical features and well construction demands are aligned.

In 2014, Noble has 82% of the operating days in the 14 fleet committed to contracts, excluding the days associated with 2 cold-stacked floaters. We are already in advanced discussions in some of the rigs available during 2014.

In summary, solid industry fundamentals continue to provide contracting opportunities for jackups and floating rigs. Incremental jackup demand is expected in numerous regions and ultra-deepwater rigs remain a preferred asset as operators require greater efficiencies and technical features for future projects.

We continue to expect the deepwater sector to benefit from a heavy dose of exploration activity, followed by a long train of fuel development programs. I'll now turn the call back to David for his closing remarks.

All right. Thank you, Roger.

We have had a number of strategic efforts underway at Noble over the past 3 years that have received a lot of management attention. This comes with being a company that is in the middle of a major transformative period, resulting from a significant change in strategic focus.

I've already covered in some detail our very successful shipyard execution efforts. And as shareholders of Noble, you should have a high degree of confidence in our ability to complete the remaining 9 projects on time and on budget.

But further, a great deal of focus and discussion has been devoted to the operations execution. I'm very happy with the progress made to date on this front, and I hope you can appreciate the numerous systems and processes implemented over the last 18 months.

They are major catalysts for this improvement. As I mentioned earlier, our third quarter total operational downtime declined to 4.6% from 5.2% last quarter.

Our unpaid downtime in the third quarter fell to 3.5% from 4% last quarter. We've stated that the operations improvement is sustainable, and we believe that further improvement is possible as these new systems and processes have time to gel across the organization.

Before moving to your questions, I want to comment on 2 other areas of focus for Noble: Our pending spend of standard capability assets and our migration to the U.K. Pertaining to the divestiture, you should now know the split of Noble fleet between the premium and standard assets.

We made this information available following the initial approval by our board to proceed with the spinoff. We sought the board's approval ahead of the private letter ruling from the IRS because we had a high degree of confidence that the ruling was imminent, and that it was, as we had thought, treated as a tax-free spinoff to Noble shareholders.

The ruling is still outstanding, undoubtedly delayed by the government shutdown and furloughed employees, but our confidence remains high. What can you expect to receive as additional information in the near term?

Confirmation of the receipt of the private letter ruling, selection of a leadership team and a registration statement to be filed with the SEC. It is possible, each could be completed by the end of the fourth quarter or early in the first quarter 2014.

We expect to seek shareholder approval for the transaction as part of Noble's regularly scheduled annual meeting in April 2014. Due to the pending filing of anticipated -- filing anticipated in conjunction with this transaction, we will be taking limited questions on this particular topic.

As for our pending migration to the U.K., we announced last Friday, Noble shareholders had approved the migration. With this step complete, we're now in the process of completing the necessary steps in taking action to finalize the migration, a process that is expected to be completed by the end of the month.

I like where Noble is positioned today, but I like it even more where this company is going. It's gratifying to see a well-defined strategy come together.

By the end of 2014, we should complete the spinoff for our standard fleet, and all but one of our newbuild projects. We remain very optimistic about the long-term outlook for our industry and the growth prospects in both the ultra-deepwater floater and high-specification jackup segments.

Going forward, free cash flow should expand, and we'll continue to evaluate opportunities to acquire or build premium floating jackup rigs, although a more measured pace of growth is expected. Plus it remains likely that dividends will continue to increase.

With that, I'll turn the call back to Jeff.

Okay, David. Thank you.

Brent, we're ready to go ahead and begin the Q&A segment of the call. [Operator Instructions] Brent?

I wanted to ask you about your future newbuilding strategies. One of your competitors signed a contract this week at a pretty good IRR with a 5-year contract.

Are you guys seeing more of these opportunities underwritten by a contract? And how do you balance it now between the tradeoff of future spec building versus behind the contract?

Well, Matt, thanks for the comments on our quarter, and thanks for your question. It is a balance, and we do see opportunities for newbuilds that match other contracts, much like we did on the Mariner program, and we're continuing to evaluate some of those.

But keep in mind, we still have 9 newbuilds that we're still working on. We got a lot going on with the company.

We're still focused, primarily, on execution both from an operational perspective and as I hope you noticed in the third quarter, a rig delivery exercise as well. So we have a lot on our plate.

We have said all along that we would like to continue building the company, and we're looking for the right opportunities, but again it will be at a much slower pace. And stay tuned.

We've got opportunities that we're looking at all the time. We haven't seen anything yet that just jumps out at us.

But there are things going on in the industry, and the fundamentals of the business are still very good, we believe.

Okay. Great.

And a follow-up on Brazil. How many tenders do you expect out of Brazil, Petrobras and third parties there, maybe in the next 18 months or so?

Well we were pleased to see Petrobras come back into the market. I don't think our intel is any better than anybody else's.

We would expect them to take 1 or 2 rigs as a result of this process. Some might think that it's really just a way of keeping the current extension negotiations grounded, but I do believe that they'll take a rig or 2.

As to the presell programs, we've said before that, that will probably take about 24 months of lead time, so we're now down to less than 18 months. The Libra auction is scheduled for the 21st of October.

And given that the players appear to be incumbents in Brazil, that may result in a fairly quick lead time in terms of -- at intake. So we may see some results of that mid-next year.

I just wanted to focus a little bit on '14 and if so see if you have any preliminary guidance on the cost side? Or at least, directionally, if you can talk about what you're seeing in terms of materials costs, insurance costs, labors costs into '14?

Yes. This is James.

We really will not be completely able to describe where we see our costs going in 2014 until we're done with the budget process. We are right in the middle of that right now, so we really prefer to wait.

And so the fourth quarter call, which, of course, will happen in January, in order to provide detailed guidance. Having said that, we've done a preliminary review of baseline operating costs where we look at labor, repair maintenance and other daily costs.

Based on that, we're looking at an inflation level very similar to 2013, around 6% to 8% of the range. And when we provide the much more detailed guidance in January, well, we can firm this.

Great. And then just on the contract side, could you talk about the timing for Mexican demand when you see incremental jackup demand there materialize?

I think what we'd say to Mexico is, clearly, PEMEX's desire is to significantly increase their jackup fleet. I suspect their publication of wanting to build 10 additional jackups probably has more to do with their access to funding.

I believe 2 of those orders have been placed. It could be that we'll see some announcements on that in the near future.

But beyond that, I would think it's going to be limited to 3 or 4 rigs a year.

Roger, if there is a silver lining to the standard for the market that's softening a bit, I would say it's that, that part of the market, at least, is fairly consolidated with regard to a few major owners of those rigs. And I guess there, theoretically, could be some potential for rational competitive behavior.

What do you think the future holds over the next year or so with regard to the possibility of stacking rigs within your own fleet? And what do you think your main competitors might be thinking about with that dynamic?

Well, Ian, let me just confine my remarks to our fleet. We have 5 deepwater rigs that will have availability in 2014.

Frankly we see that as an opportunity. Of the 5 rigs, let me run through them quickly, the Ferrington has just started a campaign in Egypt.

It is only one well, but there is some hope that, that will generate additional work either for Total or for other customers, and we are in discussions now. Having a rig available in Egypt where it's already set out, the infrastructure is in place, is opportunistic.

The Disco [ph] would be the next one that rolls. What I would say there is we're confident of securing a long-term extension, and you should see something on that before too long.

The Driller midyear next year is available. That one will be challenged.

There's not a lot of projects in the Gulf of Mexico that suit the capabilities of that unit. So that is a candidate for relocation.

The Max Smith in Brazil. I think some folks saw that as a negative development.

It's available in August. Frankly there's a lot of moving parts in Brazil, both with Shell and others.

Fairly high degree of confidence that the rig will see continuous employment and stay in Brazil. And then the Paul Wolff.

You've noticed that we've got class work on that scheduled for 6 months, and we are in current discussions with Petrobras as to what the future of that rig might be.

That's extremely helpful. A follow-up question, James, with your tax rate.

You're thinking with 17% to 19% for your full year guidance, but you've accrued 16% year-to-date, so that you're -- unless I'm confused, that would seem to imply a higher -- a much higher rate for Q4? Have I misunderstood that?

Ian, no, you have not misunderstood that. We're in the middle of certain action steps related to the extraction of assets, which is part of what needs to be done relative to the spinoff.

We know of certain specific discrete costs that will arise as a result of that. When I say costs, obviously, I'm referring to taxes in this case.

And that will have the potential impact of pushing up the rate in Q4. So while it will be discrete items pushing up the rate, we are expecting that, and that's why we've left the overall rate the way we have.

I'm not sure how much you're willing to talk about this, but as we sort of think forward about the Spinco and the new Noble, can you sort of talk a little bit to what you're thinking about in terms of the potential for cost rationalization or efficiency improvement across the combined fleet?

Not in great detail. I mean, we are, again, we're in our budget process.

We're actually developing a budget for both companies. In terms of cost rationalization, I can tell you that, that we will be dividing up the management team from Noble, and some will go with Spinco, and while some will stay with Noble.

So there will be some allocation of resources from that perspective. You'll see some same thing along the lines of office allocation and resources and other things of that ilk.

We have a view of what it's going to take to run both companies from a G&A perspective, and there will be some -- maybe some additions in there. But in terms of cost rationalization, there are certain things that -- elements of our operations that are specific to our ultra-deepwater high-spec program.

Some of the operational interior elements that we put in place the last few years that will probably stay with Noble. And there are some other elements that will go with Spinco.

So as we move forward, it will become more apparent exactly what that's going to look like. So there will be some rationalization of management and costs, but it's going to take a little while to sort that out.

I might add to that. While, as David said, there will be some increase in G&A, which one would expect with the 2 companies and 2 audits and all, everything else that goes with that.

We would expect that any increase in G&A would be more than offset by reduced operating expenses on the Spinco side as that's going to be a very focused and very leanly run operation is what we plan.

Okay. That's somewhat helpful.

And I'll just add a follow-up that I've asked in prior calls. As we kind of think about the improvement for further reduction in downtime and unpaid shipyard days, can you sort of give us an update as to how much more you think you can achieve going forward?

Are we 50% of the way through? Are we now 75% of the way through?

Any thoughts there?

I wish I could. I mean, it's a little bit -- it's a little like how long is a line?

I mean, that money is our money, and it belongs to the shareholders, and I won't be satisfied until we get all of it. It's like safety.

We're always continuing to improve our performance in this regard, and downtime is going to be one of those things that you're always chasing a rainbow a little bit. As much as these rigs are becoming more sophisticated, we have a process and procedures in place to operate it more efficiently.

Anything built like man -- anything built by man is -- can fail at some point. And the notion that we'll get to 0 downtime is probably not attainable, but could we get to a very high degree of revenue efficiency?

I would hope so. Now there are certain places in the world where you're never going to get there.

Either you don't get escalation or if you're in working rigs and 1-year contracts, you don't really have those kind of -- or those opportunities. So as the contracts roll over, we try to improve our position, but you're never going to get to a purely efficient place.

But I mean, if we had 3.5% unpaid downtime in the third quarter, I'm actually pretty pleased with that, given where we were in the last 4 or 5 quarters. But there's still room.

How much room? 3.5% is what I would target.

I don't think we'll get 3.5%, but we still see upside.

Okay. Well, that gives us an absolute number that we can think about at least.

That was a long answer to an easy question. But of course, it's not an easy answer.

We're going to continue to chase it.

My question is, if you could comment on this, would be related to Spinco as well. My question is, have you guys looked at what kind of debt profile that you're considering for the company?

Do we expect a leverage ratio similar to what your own leverage ratio is? And then my next question would actually be a follow-up on the jackup market.

Yes. As what's stated in the prepared comments, we're going to be issuing a registration document at some point in the near future, and we're not going to go into that kind of detail at this point.

It's not that we haven't started looking at this. We're just not ready to talk about it.

And it will be covered in the document.

Okay. That's kind of what I thought.

I appreciate that. This question is actually for Roger.

You said that you believe the jackup market remains relatively strong, and it seems to be able to absorb the 2 to 3 deliveries a month that we've been getting. But it seems like in this quarter so far, we've kind of started to hear that there could some potential large orders both from contractors and potentially from some national oil companies.

I mean, does that concern you at all if those orders end up actually being placed? Would that kind of maybe change your opinion of the jackup market at all?

No. I don't think so.

Some of the talk is about national oil companies ordering assets for their own rights. We've been dealing with that in the industry for over 30 years.

We like what we see in the jackup markets that we operate in, particularly in such areas as the Middle East. I would watch what Aramco does closely over the next months.

I think we'll see news of some very long-term fixtures for jackups, possibly in the 5, 7 or 10 years. And that alone sends an interesting signal.

You know that if Aramco is locking in for 10 years, they've always been opportunistic consumers of rig time. Plus, they'll have demand on the margin as they continue their exploration work in the Red Sea, both deepwater and shallow.

That probably will beget additional demand. We like what we see in the North Sea.

Lots of discussions about some more development programs in high-spec areas in the Central North Sea, both in the U.K. and the Norway side, and then, of course, there's the Mexico story.

So we like the jackup space.

If I can, just one quick one. You commented on a couple of markets there.

Could you maybe comment about the Asia-Pacific market, what you're seeing there in terms of opportunities?

I would say that we ought to be pleasantly surprised what's happened in that jackup market because 85% of all new capacity added to the jackup market is being built right there in that backyard. And so a good part of that supply add has gone straight to that area.

But yet rates have been surprisingly healthy. They were, a couple of years ago, in the $130,000 range.

The recent fixtures were in the $180,000 range, so the market continues to be able to support the supplier.

Roger, could you talk about -- you mentioned some midwater opportunities potentially in Mexico, East Africa. Could you -- so when we think about these potential opportunities, are these tenders, are these more near-term opportunities, or are these things more, we should be thinking of potentially coming to market in late '14 or even beyond that?

Well, Greg, I think my remarks were more to do with -- there is a very high level of exploration going on, and we see more and more exploration. And even though a customer's preference might be for an ultra-deepwater rig, a lot of these programs are going on in midwater-type locations.

So that's what my point was, that we believe with exploration success that I would not be quick to write-off the midwater fleet. I think there's going to be a lot of opportunities for the right kind of equipment.

Okay. Great.

And then just my follow-up would be, I guess, earlier this week it looked like an unidentified African national company, I think that it sort of pointed to being [indiscernible] ordered a couple of newbuild [ph] drillships. Was it -- do you have any sense to whether [indiscernible] went out into the market and potentially offered some sort of opportunity to drilling contractors?

Or is this something that we think they kind of just went out and did on their own?

I think every oil patch has got its own example of either local businesses or national oil companies believing that there's a value proposition in owning and operating their own equipment. We've also seen over the years that more often than not, they realize that this wasn't as good an idea as we thought, and they end up either selling or have somebody operating it for them.

And frankly, I don't see this as any different to what we've seen time after time.

Roger, just on the deepwater market. Over the past quarter was there any contracting activity that changed your mind about the softness in dayrates either that the rates were not -- were softening as much or were deteriorating faster?

Anything you've seen out in the industry?

I'm going to answer by just basically repeating that we confine our remarks to what we see for our fleet. And I went through each of the rigs that are going to roll for us in 2014.

Other than the Driller, which is a little bit lower in spec terms of its water depth capability and the BOP system, I believe that it's going to be the right kind of project before us on each of these units. So I guess is that the rates should be quite attractive.

Okay. Great.

And then, David or James, just post the spend, does your views on debt levels change in relation to the type of assets that you will be retaining? Do you expect ultimately that the debt to capital be at similar levels pre-spend and post-spend or given the pending newbuild payments, it that going to change a bit?

Clearly the numbers will change as a result of the spinoff. But directionally, either with or without the spinoff, the answer kind of comes back to the same thing.

And that is because of the significant adds that we've made to the high end of our fleet, all of which will be in operation by mid-2016, most of which will be in operation in 2015, the significant increases in our cash flow over the next couple of years will enable us to reduce debt aside from any other uses of capital to which we decide to use.

Just one question for me. At your recent Analyst Day, you spent a fair amount of time talking about your margin protection, your principles and goals.

And as we and others think about modeling the Spinco versus pro forma Noble, my assumption is that there isn't any discernible difference between kind of some of the clauses and the language that's worked into those contracts as it relates to subsidy, repair and maintenance, and cost escalation provisions between the assets in Spinco versus pro forma Noble. So I just want to test whether that's a reasonable assumption?

Yes. I can take a shot at that.

The way I would think about it, Byron, is we are having -- on the longer-term fixtures, you are seeing improved quality of these types of provisions. And longer-term fixtures, by definition, tend to be with the ultra-deepwater units.

Now having said that, I mentioned Aramco, we've already got 3-year contracts with Aramco, and I look for them to go longer. But try as we might, you are not able to get escalation protection with Aramco.

That's been the case for the last probably 45 years. If that changes, please let us know.

So on the 1-year jackup fixtures, you will have to build up your anticipation of escalation in the rate. You won't see escalation protection there.

And then I'd look at those 2 extremes and say that you're going to get varying degrees of it depending on the asset, depending on the term.

Given that you are narrowing the guidance range for the OpEx, obviously, performing a little better than you were anticipating yourself, I was wondering if you could pinpoint a couple of things where you sort of perform better than you anticipated, when you gave the initial guidance? Are there any specifics?

Yes. I'll go first.

In general, we would characterize the reduction versus the original guidance as due to execution. We have put all kinds of programs in place over the last year, which have led to cost containment.

We have, at the same time, been increasing our activities, increasing people with the additions of a new asset, specifically the 2 deepwater ones in this past quarter. Having said all that, there will be some increase in the fourth quarter, as I pointed out.

There will be some increase in operating costs with those new assets coming on. That's unavoidable.

It's expected. And we're kind of happy to pay those costs and get the revenue.

Areas of specific savings versus the original forecast might be in -- the repair maintenance costs is one area where there is a chunk of money that is less than originally forecast. And I'm not going to go into other factors, aside from what I've mentioned, everything else is fairly small, but they tend to all to go in the same direction.

Okay, Brent. I think we're going to call it there.

Thank you, everyone, for participating in today's call. I'll remind you that the next call, fourth quarter call of '13, is scheduled for the 23rd of January, with earnings going out the evening of the 22.

For those of you left in the queue, John Breed and I will all be available today to take remaining questions, and we will be returning calls to you. Again, thank you for your participation.

Brent, thank you for coordinating the call. Good day, everyone.