Q4 2023 Noble Corporation PLC Earnings Call

Participants

Ian MacPherson; VP of IR; Noble Corporation Plc

Robert Eifler; President & CEO; Noble Corporation Plc

Richard Barker; SVP & CFO; Noble Corporation Plc

Greg Lewis; Analyst; BTIG, LLC

Eddie Kim; Analyst; Barclays Bank PLC.

Fredrik Stene; Analyst; Clarksons Platou Securities AS

Kurt Hallead; Analyst; The Benchmark Company, LLC

David Smith; Analyst; Pickering Energy Partners Insights

Noel Parks; Analyst; Tuohy Brothers Investment Research, Inc.

Presentation

Operator

Thank you for standing by, and welcome to the Noble Corporation Q4 earnings call.
I would now like to welcome Ian McPherson, Vice President of Investor Relations to begin the call. Ian, over to you.

Ian MacPherson

Thank you, operator, and welcome, everyone, to Noble Corporation's Fourth Quarter 2023 earnings conference call. You can find a copy of our earnings report along with the supporting statements and schedules on our website at noblecorp.com. This conference call will be accompanied by a slide presentation that you can also find located at the Investor Relations section of our website.
Today's call will feature prepared remarks from our President and CEO, Robert Eifler, as well as our CFO, Richard Barker. Also joining on the call are Blake Denton, Senior Vice President of Marketing and Contracts, [Angelika Larg] Senior Vice President of Operations.
During the course of this call, we may make certain forward-looking statements regarding various matters related to our business and companies that are not historical facts. Such statements are based upon current expectations and assumptions of management and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially from these forward-looking statements, and Noble does not assume any obligation to update these statements.
Also note, we are referencing non-GAAP financial measures. On the call today, you will find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation in our earnings report issued yesterday and filed with the SEC with that, I'll now turn the call over to Robert Eifler, President and CEO of Noble.

Robert Eifler

Good morning. Welcome, everyone, and thank you for joining us on the call today. I'll begin with opening remarks on our results in commercial activity and then provide some market outlook commentary before passing the call to Richard to discuss the financials after our prepared remarks, we look forward to taking your questions.
The team delivered another solid operational quarter with Q4 adjusted EBITDA of $201 million, bringing full year adjusted EBITDA to the upper end of the guidance range and Q4 free cash flow of $165 million, excluding asset sale proceeds, which also punctuated a good free cash flow contribution for the full year. These fourth quarter results were achieved despite later than expected contract commencements for both the Globetrotter one and the Intrepid due to delays related to weather and permitting issues. So otherwise, we saw very strong uptime and cost of running the heavy lifting associated with our merger integration is now substantially behind us, and our offshore teams continue to execute at a high level to perform safe and efficient drilling operations for our customers around the world. Our Board declared a $0.4 dividend for the first quarter of 2024, consistent with last quarter and we also repurchased $15 million of shares in Q4. This brings total capital return to shareholders since the Q4 2022 merger close through the first quarter of 2024 to $337 million. As previously stated, you can expect mobile to continue to prioritize the return of the substantial majority of free cash flow to shareholders going forward. Between dividends and buybacks, which we recognize as a top priority for investors and one of the key pillars of our First Choice offshore ambition, our outlook for our business over the next several years continues to look very promising, especially on the deepwater side, notwithstanding some lingering whitespace confronting a handful of rigs over the near term, despite a recent short-term downtick in the number of deepwater contract awards industry wide during the fourth quarter, we have been pleased to announce several contract fixtures since late December that have meaningfully augmented our 2024 backlog. As I list these here in a moment, I'll just say that we consider all of these recent fixtures to represent current market pricing. Although we are only disclosing day rates for customer approvals will allow us to do so.
First, the Noble Discoverer was awarded a 400 day contract with Petrobras in Colombia that set to commence in Q2 2024 following the rig's 10-year survey. This contract includes a priced option for an additional 390 days. Next, Sonoco Voyager was awarded a one-well contract plus one option well with Petronas in Suriname that commenced earlier this month with an estimated firm duration of 130 days plus a 70 day option. So the Voyager is now firmly booked into June with the option period extending into August of this year or next, Noble Valiant received the six month extension from a log in the US Gulf of Mexico, extending that engagement from July into January next year. This day rate remains at $470,000, excluding additional fees for the use of managed pressure drilling for next, the Noble Jerry de Souza received a nine month extension with Total Energies in Nigeria, continuing the program out to November 2024 place within the floater fleet, both of the Globetrotter drillship ongoing contracts with Shell in the Gulf of Mexico have been extended into early May. And then on the jackup side, the Noble Intrepid had an option exercised by Harbour Energy for a well intervention program in the UK North Sea, which commenced in January at a dayrate of $120,000. This job started a few weeks later than planned due to challenging weather conditions. Also, the Noble innovator received a one-well extension. It's estimated 90 day duration from BP at a day rate of $140,000 scheduled to commence in September 2024 BP, subsequent priced options on innovator have been restructured into smaller components, which if fully exercised, would extend into Q2 2026.
And finally, the Noble. Resolute has recently received an additional 60 days with Petrobras at $145,000 per day scheduled to begin in March 2025 and direct continuation of the rig's existing backlog. Collectively, these recent fixtures contribute an additional firm backlog value of $515 million, excluding mobilization, MPD revenue and option periods, our total backlog currently stands at $4.6 billion, essentially flat versus last quarter. However, excluding the six rigs we have operating under long-term contracts in Guyana and Norway, which don't typically replenish backlog frequently. The remaining backlog across our other 23 marketed rigs actually increased by 10% over the past three months. Richard will go into the guidance in a few minutes but as a quick preface, 92% of our midpoint, 2024 EBITDA expectation is supported by firm backlog currently as reflected on our new fleet status sheet. The remaining 2024 or [five] space for Noble's floaters sits mostly now with the two Globetrotter drillship and the six gen semi level developments. These three units are being marketed for both spot work and longer-term opportunities, although practically speaking, the near term opportunity set is more focused around short term spot work.
One additional update that I like to call out on the fleet status is the revised timing of the estimated contract commencement for the Noble phaco, Zach in Brazil, which had slipped from a prior estimate of March through a current estimate of July first. The original driver of this delay was the rig's preceding contract with analog in the Gulf of Mexico running about 30 days longer than initially expected, which impacted our planning and preparation time line for the Petrobras work. Subsequently, the shipyard program for the cause XSPS. and contract preparation is unfortunately taking longer than planned, primarily due to protracted delivery lead times from some critical equipment shifts. These delays have been exacerbated by the disruption of global shipping channels, but we're doing everything we can to complete this major project and get to work with Petrobras by midyear.
Now turning to the broader industry outlook, I'd like to go through our semi annual review of the global deepwater market supply and demand picture overall, we continue to see very encouraging indicators for continued steady growth in the offshore drilling markets. Offshore upstream CapEx is expected to be up again by a low to mid double digit percentage this year. And I would mention here that while Noble's 2024 revenue outlook is somewhat more muted in this range, this is due to a heavy slate and scheduled maintenance and contract preparation related to downtime across our fleet, which is more heavily weighted to the first half of the year, whereas we expect to be comping much better on an annual top-line growth rate basis in the second half of this year. Additionally, various other leading indicators from subsea tree orders to offshore FIDs and international license bid rounds are all flashing green for the 24 to 26 visible horizon, assuming in on the EDW market, 2023 average contracted demand of 91 rigs was up nine rigs or 11% over the 2022 average with current contracted demands of 92 rigs, representing 95% effective utilization of the immediately marketable fleet following 15 drillship reactivations in 2022 that have been completed or are still underway. There now remain 7 to 10 viable high-spec seventh generation drillships and sideline capacity, including cold stacked and shipyard assets. These sidelined rigs have capital requirements of $100 million to over $300 million per rig with minimum one year reactivation lead times to deploy. We continue to expect the majority of these including our drillship, the Meltem to be pulled into service over the next couple of years based on expected demand levels at which point high NUDW. capacity would be fully exhausted. Perhaps the most striking statistics that we observe today relates to the sharp inflection in open demand for floaters. The current tally of public tenders and three tenders represents 108 rig years of open floater demand. This figure is up by over 50% compared to last year and is also at a decade high by a wide margin Additionally, the average duration of each job opportunity within this 108 rig years of open demand is now 18 months, which is up 40% versus a year ago. And 70% higher than the prior 5-year average lease statistics on open demand, by the way have been updated since taking the total 10 new drillship job off the board. This represents an important step change in longer-term visibility for our business. I would also mention that measurable open demand and public tenders is not by any means a complete picture in Novell's case specifically. In fact, the vast majority of floater backlog that we have booked over the past several years has come via direct awards and extensions rather than from public tenders that these aforementioned steps described looking out over the next one to two years. We see late in UDW. demand growth of 10 or more rigs. Again, similar to the number of remaining rigs and sideline supply. However, between here and there, we do expect the combination of supply constraints and perfect alignment between rig availabilities and demand requirements to result in some continued utilization inefficiencies over the near term. Overall, this results in a generally firm, but balanced market until the sidelined capacity is substantially absorbed as opposed to a scarcity situation. But certainly with opportunities for situational pricing increases along the way, which is similar to the dynamic that we've seen in recent months.
From a geographic perspective, the fulcrum of demand strength through UDW. rigs continues to be South America and Africa, primarily starting with South America. There are currently 29 new DW. floaters under contract in Brazil with a further six units contracted to start up over the course of 2024. Petrobras currently has open demand for five rigs on 2.5 to 3 year contracts with 2025 start dates. Although these five tenders appear likely to be more renewals against expiring contracts and incremental units, Guyana remains a core market for Noble for activity remains at six UDW. rigs, including four of our drillships. Of course, we have not experienced any change or interruption in operating conditions in Guyana over the past few months following Venezuela's territorial challenge over the SKU by region, nor do we anticipate any likely disruption in the background. It has been encouraging to see a successful bid round in Guyana recently with offers on eight of 14 blocks in contracts expected to be finalized now sit, which could be supportive of additional activity outside of the Scarborough field in the years ahead, Ternium has vacillated between zero and three deepwater rigs in recent years and has recently increased backlog to one rig within Noble Voyager's startup with Petronas exploration activity in both the shallow and deepwater could support modest incremental demand and serve them throughout 24 and 2025 call FID for the country, its first major field development represents an additional demand for two floaters on multiyear contracts expected to commence in 2026. Colombia will similarly soon be back up from zero to one deepwater rig with the commencement next quarter of Noble discovers 400 day contract and there's a handful of additional potential exploration wells with other operators that could materialize for an additional unit of demand in Colombia over the next one to two years.
Moving to West Africa utilization is 100% on 18, regionally marketed floaters, including seven in Gallup, four in Namibia and three in Nigeria. West Africa is a region with particularly strong demand visibility with current tenders and three tenders representing 20 rig years of demand, including for unique multiyear rig requirements with late 2024 through 2025, targeted start dates, all of this again is net of the total 10-year job that has just recently come off the board. Overall, we believe West Africa could grow to 21 to 22 floaters over the next year. This does not factor in any potential rig adds in Mozambique, which could represent two to three additional units of multi-year demand from 2025 and 2026 in the Gulf of Mexico, including the U.S. and Mexico. Deepwater demand has ranged between 22 to 25 rigs over the past couple of years and currently stands at 24 with three idle marketed rigs resulting in 89% utilization. Initial demand is expected to remain approximately flat with some short term variability around contract rollovers. So this is where we are seeing somewhat more white space, particularly among a few of the 60 units. We're optimistic about some opportunities to add additional work this year for all of our Gulf of Mexico rigs. However, the Globetrotter drillship from the developer are likely to experience lower utilization than the rest of our floaters. Outside the Golden Triangle, the Mediterranean and Black Sea are showing a positive uptick in activity with 10 contracted floaters currently up from six throughout the first half of 2023 and regional utilization at 100% with continuing demand strength from Egypt. The Black Sea in Libya activity in this region is expected to range between 10 to 12 floaters throughout 2024 and 25. India has three UDW. drillships currently, although two of these are wrapping up contracts soon and are expected to leave the region. However, despite India shedding a couple of rigs in the near term, the government's recently announced aggressive 5-year investment plan of $67 billion to develop its natural gas resources appears more likely than not to support a revival in floater activity over the next few years.
And then finally, the Asia Pac and Australia region as for units of demand, 100% utilization and a healthy number of short, medium and long term programs on the horizon for late 2024 through 2026, which suggests a potential upward bias to the region.
So tying all this together, we remain quite optimistic about the upward trajectory of the deepwater market. Demand growth will be linear. Never is and supply constraint is a governing factor as well. But overall, this is a market that should see continued upward pressure on day rates as demand grinds higher. And as the last several units of high end sidelined capacity get absorbed, there will absolutely continue to be bifurcated pricing between the top in the existing rates in the market for some rigs that are being reactivated from sideline into multi-year contracts that's well established and economically predictable. But overall, the trend for both day rates and contract duration is upward now on the jackups, although this is still a smaller percentage of our earnings mix picture for our non Norway, harsh jack-ups continues to quietly improve, especially for mid 2024, all once the Regina, Allen and resilient get back to work. In fact, the steady improvement in market balances and day rates in the North Sea over the past couple of years has been quite a positive and still developing story. Demand in the non Norway North Sea has ranged between 18 and 22 jackups over the past two years and currently stands at 22 with three idle rigs resulting in utilization of 88%. Two of the three idle units are ours. The Noble Highlander and Noble interceptor, both of which have limited 2024 work visibility at this time. But with the overall market firming up from the demand side, Germany dayrates in the North Sea have improved to the $130,000 to $150,000 per day range, up from $100,000 to $135,000 per day a year ago and the goal of $70,000 to $90,000 a day a few years ago, we have decent visibility towards signing up additional backlog at healthy rates. This year. And looking out past 2024, there's interesting demand optionality from additional CCS activity, which has just begun in 23 with our involvement in project Greensand, the Norway jack-up market remains subdued for 2024 with eight rigs of demand compared with historically normalized demand of 11 to 12 jackups, the Noble integrator and level Invincible continued to perform extremely well for Aker BP. We do not envision redeploying of third CJ. 70 rig into Norway before 2025. Although customer dialogue for next year is more constructive than it has been in a while. So we will see how that develops, but we'll certainly be ready and well-positioned with the right assets and team when that demand improvement does materialize. So that's it for the market overview. I would like to turn it to Richard to discuss the financials.

Richard Barker

Thank you, Robert, and good morning or good afternoon all in my remarks today, I will briefly review the highlights of our fourth quarter and full year 2023 results before touching on our outlook for 2024, contract drilling services revenue for the fourth quarter totaled $609 million, down from $671 million in the third quarter. Adjusted EBITDA was $201 million in Q4, down from $283 million in Q3. Cash flow from operations was $287 million. Capital expenditures were $141 million and free cash flow was $165 million. Our full year 2023 results came in towards the high end of our guidance range with full year revenue of $2.6 billion and adjusted EBITDA of $810 million.
Turning back to the fourth quarter. As anticipated, revenue and adjusted EBITDA decreased from third quarter levels due primarily to lower utilization of our floater fleet and market utilization decreased to 75% in the fourth quarter, down from 92% in the third quarter. Scheduled contract gaps with renewable FE Kodak and the Noble Voyager. The delayed start for the Noble Globetrotter one and commercial whitespace for renewable developer were primary contributors to this sequential downtick, which more than offset an increase in average floater day rates from [404,000] per day in Q3, up to [437,000] per day in Q4. Our 13 marketed jackups were utilized 61% in the fourth quarter, consistent with the third quarter, with the average day rate improving to 148,000 in the fourth quarter, up from 141,000 per day in the third quarter. During the fourth quarter, we received cash proceeds of $21 million in the form of a deposit for the sale of the Noble Explorer, which essentially represents the net proceeds to Noble from the sale. We expect to close the sale later in Q1 or Q2 of this year. As summarized on page 5 of the earnings presentation slide. Our total backlog as of February 23rd stands at $4.6 billion. Current backlog includes approximately $1.94 billion that is scheduled for revenue conversion during 2024. As a reminder, our backlog excludes reimbursable revenue as well as revenue from ancillary services. We are firmly into the final stages of integration. We currently have realized nearly $150 million of run rate synergies and are raising our total synergy target from $125 million to $150 million. Both the quantum and the pace of synergy realization have exceeded expectations.
Referring to page 9 of the earnings slides, we are providing full year 2024 guidance as follows. Total revenue within a range of $2.55 billion to 2.7 billion, which includes a little over $100 million in other revenues such as reimbursable and contract intangibles amortization adjusted EBITDA between $925 million and $1.025 billion. And capital additions, which excludes reimbursements of between $400 million and $440 million. The midpoint of this revenue range is currently 92%, supported by Q1 to date, revenues plus firm backlog for the remainder of the year, excluding options. We currently estimate that a little over 60% of full year adjusted EBITDA will be weighted to the second half of this year. Our jack-up contribution is expected to increase in 2024, going from approximately 10% of our gross margin in 2023 to approximately 15% of our gross margin in 2024.
Second key contract startups are expected to drive an increase in EBITDA in Q3. Notably, the Noble pay come back in to drill the No. one discovery in Colombia and the Noble Regina Allen in Argentina, a key variable to our fourth quarter EBITDA exit rate will be the contribution from the three fixed fee rates that are currently showing quite safe monopoly status report. We currently have active conversations behind each of these available equity rigs and showing up work for these rigs will translate to an annualized adjusted EBITDA exit rate for 2024 at between $1.3 billion and $1.4 billion, assuming our other model assumptions hold. As a reminder, our 2024 CapEx budget reflects both the PC at the [USD10] assets and major projects across our fleet as well as the contract preparation expenditures going to we'll pay Kodak and mobile in February. The scheduling of this year's major projects currently indicate that just over half of our CapEx will be weighted to the first half of the year, some other elements to 2024 to consider AlixPartners. We expect cash taxes in the range of 10% to 12% of adjusted EBITDA and costs to achieve the final synergies related to the Merck transaction expected to taper off approximately $30 million in 2024. Additionally, our guidance reflects mid-single digit percentage inflation rates in 2024 on average across our total cost structure, including OpEx and CapEx. And then finally, we would expect the measure of net working capital build in 2024, driven by both top-line growth and a reversal of some favorable net working capital movements experienced in the fourth quarter. We do expect to see an increase in free cash flow for full year 2024 by 2023. Due to the aforementioned factors, we expect to be modestly free cash flow positive in the first half of 2024 or prior to any capital return to shareholders with nearly all of the free cash flow for the year weighted to the second half as we have said before, we were looking at substantial majority of our free cash flow to shareholders.
With that, I'll pass the call back to Robert closing remarks.

Robert Eifler

Thank you, Richard.
For just like wrap up here with a tremendous Thank you to Noble employees worldwide who have worked so hard to get the Company to the enviable position in which we find ourselves today, they had a sizable but ultimately an overwhelmingly successful integration effort. Last year, not only have we exceeded our synergy targets, both in terms of pace and size and also we have done some of our continuing to deliver outstanding and safe operations for our customers and strong financial results for investors. But next time we talk to you the book will be closed on integration.
Finally, I will reiterate that the multiyear outlook for our business remains highly encouraging, especially considering the recent inflection in open floater demand visibility for 2025 to 2026 as well as the continuing strong momentum in deepwater FIDs, which underpin longer-term drilling demand and the supportive demand signals are juxtaposed against a diminishing pool of spare rig capacity for Noble. The shape of the year ahead is reminiscent of the past couple of years as we expect to ramp into a meaningful increase in EBITDA from the first half to the second half of this year based on the sequencing of contracts. As this anticipated ramp and EBITDA and free cash flow materializes, you can look for Noble to continue to demonstrate industry leadership with growing capital returns to shareholders, which we see as core to our value proposition for investors.
With that, operator, we're ready now to open up the call for Q&A.

Question and Answer Session

Operator

The floor is now open for your questions.
To ask a question at this time, simply press star followed by the number one on your telephone keypad.
We ask that you, please limit yourself to one question and one follow-up question.
We'll now take a moment to compile our roster. Our first question comes from the line of Greg Lewis with BTIG.
Please go ahead.

Greg Lewis

Yes, thank you, and good morning, everybody, and thanks for taking my questions. On what Robert, on the clearly, there's there's been fits and starts in this market. As I look at the fleet, obviously, there's a lot of them have options attached to it. I mean, a handful of these rigs as we think about some of those options. Any kind of color you can give us in terms of what when those options, when do we find out if those options will be exercised? And then also any kind of rough guidance and how we should be thinking about on at least the price options, what type of step-up, if any, there is on some of those options?

Robert Eifler

Yes, sure. So that the options are tied to different things, I think in the contracts. But I think generally speaking, we tried to provide something like 90 days before the end of a contract, when will understand option pricing. We know ideally, we'd love more than that and sometimes we're able to get it. Sometimes they're tied to and reaching geospatial targets. Sometimes they're tied to end of well, and sometimes they're just tied to timing. So it's kind of hard to give an exact answer. And we have, of course, we've we are giving fewer and fewer priced options. And we have a couple of I think probably the highest profile you should think about maintaining kind of similar market market price levels in option period, although there's a couple of that have a step-up as well.

Greg Lewis

Okay, great. And then just as I think about as I think about the North Sea market, you know, we're kind of in a high. So we're kind of being like a transition period.
On the floater side, we've seen on some rigs actually exited that market, which looks to be tightening that market on realizing that on CJ 70s, our purpose built really for the North Sea, harsh-environment, Barnett, super-spec rigs. Maybe there's not a lot of opportunities for those elsewhere on that being said, are we starting to see any opportunities for potential rigs, super-spec rigs that could be outside the North Sea that could start to tighten that market?

Robert Eifler

Well, there's some there are two rigs that are leaving the North Sea in the end?
I think it's the question kind of has to answer is whether you're talking about Norway or non Norway. And we have seen non we excuse me, we've seen Norway leaves Norway rigs leave and go to non Norway, North Sea and back and forth. So that's been been of the trend a little bit we have not seen Norway rigs leave the North Sea and go elsewhere in the world. And I think that's a less likely scenario for a couple of different reasons. And then in the non Norway, rest of the North Sea. There are a couple of rigs that are leaving this year. And I do think that those rigs are likely to leave or come back to the North Sea to balance markets with rest of world.

Greg Lewis

Okay, great.
Thanks for the time.

Operator

Our next question.
Our next question comes from the line of Eddie Kim with Barclays.
Please go ahead.

Eddie Kim

Hi, good morning.
And just wanted to ask about what's embedded in your in your full year guide as it relates to contracting for the developer and the two Globetrotters this year, which I assume is the biggest swing factor that gets you to the high end or low end of your guide, depending on what happens there, what does the midpoint of your guide, so $975 million in EBITDA, assuming maybe a 40% utilization across those three rigs this year? Or how should we think about that?

Robert Eifler

Yes, it's a very good question.
And I think the way to think about it is, obviously, we expect and we have whitespace for each of those rigs and the ship, but we do have active dialogue but behind each of them. So I think I think you should think about our mid point of our guidance, assuming that there is incremental work for each of those weeks in 2024. I think that's as you think about our earnings profile through 2024 and into next year, obviously, with a contribution and from those weeks we'll be looking at an exit EBITDA run rate of, call it $1.3 billion to $1.4 billion of EBITDA.

Eddie Kim

Okay.
Okay. Got it.
Thank you.
And my follow-up is just on the seasonality announcement several weeks ago that you only have one jackup in the Middle East coming Qatar. So exposure is very limited. And I still wanted to get your thoughts on how you see kind of the Middle East jack-up market playing out and in 25 and 26, if Saudi chooses not to renew some of their and their jackups. Could we see rigs moving out of Saudi into other countries like like Qatar or the UAE or even outside the Middle East region entirely just the stuff would be great to get some some thoughts there.

Robert Eifler

Yes, sure.
And again, we are on a bit of an outsider right now on the whole situation. But I look my assumption is that the rig count is going to stay relatively flat. I think probably some some anticipated multi-rig tenders that we're potentially going to come out of people who are around 40 rig tender type type quantums are, of course, not going to happen at this point, seemingly, Tom, it rigs can move out and will move around the region as needed. But remember also there is a high cost of entry back in into Saudi Arabia because of some of the contract requirements. And so it's it's not a decision I would think to be taken lightly to move a rig out, um, and then because you don't know when you might get it back and then ultimately someone has to pay for that reentry costs for the contract upgrades unless you're lucky enough to get the exact same rig back. So like rig rig rigs are mobile, they're always going to move around regionally to fill demand but I think our best guess is that things stay relatively flat.

Eddie Kim

Okay. Got it.
Thank you.

Robert Eifler

Thanks, for the colour, and I'll turn it back.

Operator

Our next question comes from the line of Fredrik Stene with Clarksons Securities.
Please go ahead.

Fredrik Stene

Hey guys, hopefully you can hear me.
All right. And thanks for the comprehensive color both on the market and the and also for 2024. I wanted to touch a bit upon your seats and one of your competitors that have reported already. My impression is that for spec assets, there are no more and more opportunities that could make reactivations more sensible than before.
So my first question relates to just that, how are you now thinking about your two stacked drillships? Are you bidding them more actively. Are you on the looking at the Meltem for now or potentially both?
And second, you said that the next time we speak the Maersk acquisition is going to be because we're going to be closed on that one.
So are you planning any more major M&A steps when that's done?
Thanks.

Robert Eifler

Yes, sure thing. Thanks, Fredrik. First of all, on the on the drillships Meltem will be first. That's the one that we've selectively marketed. And I would not say that we've really changed our approach in marketing that rig. We're still looking for a full return on on the reactivation costs, which are around $125 million and take a year maybe slightly longer to carry out. So and that continues to be a smaller subset of opportunities. And I think we'll continue to market into into those opportunities is a lot of the if you just look at the publicly available information through Petrobras or whatever. I think so far, we've been less willing to provide substantial discounts off of market for that rig. And I don't see that we're necessarily going to change our approach of selectively marketing it into opportunities that fit the criteria for a reactivation and we will make we would not market disrupt go until the Meltem found a job so we'll just have to see I mean, it's a little bit hard to predict when that right job emerges for the Meltem, but we do anticipate that rig going back into the marketplace at some point on on the on your other question, we've said from the very beginning of the announcement of the merger with Maersk Drilling that this was going to be a transformational merger for both companies. And I think that that has absolutely proven out to be the case. We're extremely pleased with where we sit today. I think our 23 results in the midst of some of the really the bulk of the integration work really speak to the organization, the combined organization and everyone's willingness to lean into this and data and create some this is greater than the parts. So we just couldn't be more pleased. And we have also said that was going to be our transformational merger and from here, we will be selective. I think it's obvious that the combined platform could be a candidate for additional M&A. And but we are going to be picky always with the mind to our customers and our investors in what we look at.

Fredrik Stene

Thank you. That's very helpful. Just to follow up on the cold-stack tendering and reactivation thinking, I think you said in your your prepared remarks over that for now, at least there's some supply constraint or some it's mismatches in terms of where rigs are. And we are we are on markets that could make this a relatively balanced market, slightly trending upwards until the sideline capacity is absorbed. Both you and your peers are predicting, I think double-digit number of incremental rigs needed over the next few years. And so if that market is going to be balanced and you need a fine board capacity, how many do you have any idea of how many rigs can be brought back from the sideline per year just to see. Is there a chance that you will have demand outpacing the incremental supply that can be brought back just because of supply constraints, long-lead items, et cetera, that seems to be delayed or the more difficult to procure at this point and before.

Robert Eifler

Yes, it's a good question. I mean, we're going to see plus I think six this year, five or six this year, and we've seen a plus 15, I believe, from the very beginning of this upturn come in. So I think the numbers have come through in that kind of five, six seven at the most per year range, if I'm remembering correctly in that, that seems sustainable. It also kind of matches up where where we see increased demand incremental demand.
Excuse me, coming from?
I would say a lot of it depends on on the specific contracts. There are a couple of more reactivations that are going to occur in our contract startups from reactivations that are going to occur in 2024 than we were predicting in early 2023. And that's partly because some of the tenders extended their start date to allow time for reactivations. So to the extent that the programs that are out there that are two plus years to the operators of those programs decide to actively include reactivated rig time line that supports reactivated rigs. I would anticipate, as we said in the script, that many of the seven to 10 additional rigs are set up to take discounts to current market. I think this trend probably continues until most of them, if not all of them, but most of them are back back into the marketplace. So I could easily see and that's kind of why we've called for a balance our market over the next year or so. I could easily see the bulk of those seven to 10 getting announced through, say, mid next year. I mean, just picking picking a date out of thin air, but it's not at all impossible that that we see a majority of those reactivations getting announced. But the one thing I would say is we've been a little bit flat on as an industry on and UDW. rates over the last six months or so. But they're there. The rates have also kind of ticked upward even as reactivations have been announced and occurring. And I think that the flatness over the last six months is not necessarily attributable to all of these reactivations. I think it's a confluence of factors and all that's to say that we still do think that there is likely to be rate appreciation through that same period, maybe not at the same slope that we saw early on in this upturn. But we do think that there will be continued rate appreciation.

Fredrik Stene

So thank you. That's very comprehensive and very helpful. I think for me, thank you very much and have a good day.

Operator

Thank you.
Our next question comes from the line of Kurt Hallead with Benchmark.
Please go ahead.

Kurt Hallead

Hey, good morning, everybody and Kurt. I just wanted to do LA maybe extend the conversation off that off your prior answer there, right. So we've heard quite a bit that there's increasing duration, as you referenced, and others have restaurants in that longer duration contract period. And I guess also translated in terms of a longer negotiation period to finalize those contracts. So kind taking what you said about pricing thinking what's going on with respect to longer negotiation periods. I'm just kind of curious how much of that field it's a longer negotiation period is related to a bid-ask spread on pricing?

Robert Eifler

Oh, gosh, well, actually, I think what's happened here is in 2024, you had the dynamic I just mentioned where some some programs start dates were pushed back to allow for some reactivations. And we actually thought some of those programs were going to go to existing supply. And then at the same time, I think of several operators have recognized the discount in the market for longer term contracts and decided to trying to pull together their various different programs into a group contracts so that they can go out for more term. And so a few wells that may otherwise have been drilled in 2024, perhaps got pushed to 25 or later in order to group here for some term. And that's created a little bit of this of white space in 2024. And also the perceived kind of a longer negotiation period is a piece of that as well come in. I don't know that it's a significant bid-ask as much as the dynamics that I've just described.

Kurt Hallead

That's great. That's great color. Appreciate that. And my follow-up is on the synergies.
I'm just kind of curious where those synergies are going to land that can be mostly OpEx or G&A or some or G&A or some combination?

Robert Eifler

It's going to be both, candidly, I would say from a G&A perspective, you know most of that was probably what was realized in 2023. I think going forward, we've obviously increased the target from $125 million to $150 million. I think you should think about those incremental synergies sitting more in OpEx.

Kurt Hallead

Okay. That's great.
And then if I squeeze one more in, you mentioned supply chain bottlenecks. So Robert, when do you see those supply chain bottlenecks easing or from or not getting any worse?

Robert Eifler

Well, I mean, I think the same I mentioned the numbers of reactivations that were going through on top of that last year and this year for the industry or PSPS. years, and it starts to slow down a little bit next year and then more substantially in 2026. So I would anticipate that we're probably at peak bottleneck on the equipment side, but there's no there's strikes in Europe and obviously shipping issues. And so there's some some complicating factors as well. I think that are affecting 2024 and our specific situation right now on the FE Kodak that are out with just just the normal manufacturing supply chain issues.

Kurt Hallead

Got it. Thank you.

Robert Eifler

Thanks.

Operator

Our next question comes from the line of David Smith with Pickering Energy Partners.
Please go ahead.

David Smith

Thank you and good morning.

Robert Eifler

Good morning, David.

David Smith

I know a decent chunk of Norwegian semi work in the past have taken place in depth that CJ 70 could address. And with all of the SMEs that have left Norway. I wanted to ask if you're seeing an operator interest for programs in the next year or two of it, it might otherwise want a semi, but we'll take a jackup because that's what's available.

Robert Eifler

Yes, yes, there, it's a good question, David. There I would characterize it as there is absolutely interest. There is no tangible demand right now, and we have done a lot of work on using a CJ. 70 over subsea tin plate, and we are hoping to get showcased some of that at some point soon. But it's a little bit too early to claim a claim success in some of the work that we've done right now. But for sure, we have conversations all throughout the country and there is interest and in exploring that going forward, one thing I will say is that the floater type, the harsh floater tightness has been known for quite some time. And so I think there's been also a push by operators there not well to fill any white space they can with with the rigs they have under contract. So as not to lose a rig to use. So to the extent that perhaps we had an opportunity to go showcase the CJ 70 in some of this transition zone, we probably missed out on a couple of those because operators wanted to make sure they didn't lose access to preferred harsh floaters. So it's a continuing, although kind of yet to launch story. I think for the CJ CJ 70s, but but we remain hopeful.

David Smith

Appreciate that color. And the follow-up, I guess there's been some media reports that the operator using the know-how transfer off stuff. Conor might might want to release that early. Just wanted to ask if you could tell us anything about what kind termination fee that contract might have an whether and early release is contemplated in the guidance provided?

Robert Eifler

Sure.
So the customer their announced of a break in their drilling plans, which is what you're referring to for us, it is, of course, a kind of a classic. So story of the double-edged nature of a top performing contractor because we've drilled ourselves out of a job, so to speak. But to be clear, despite my last statement that there has been no contract termination announcement. Of course, we would put that out. And so what I would say is it's too early really to give definitive answer to what the the customer plans to do there, they have announced a drilling break. I can give the color that that Mark, that contract was signed in a in a substantially lesser market than than we find ourselves today. So the termination clause kind of follows with commercials there. But on the flip side of it, the rig has performed tremendously well, which is which is why we've kind of finished some of the plans up early and on there is the customer we understand does have more work in it. So it's a it's a contract signed at a different period of time. So we'll have to really kind of wait to see what what the customer decides do. There is in fact, we find ourselves marketing that rig The good news is that the revenue makeup would happen relatively quickly because the market's substantially higher today than the rates on that rig under firm contracts.

David Smith

Yeah, absolutely. Appreciate that color Thank you.

Operator

Our final question comes from the line of Noel Parks with Tuohy Brothers.
Go ahead, please.

Noel Parks

Hi, good morning.
Just a couple of quick ones. I apologize if you touched on this already, but it was encouraging to hear about the expected improvement in gross margins and jack ups, I think you said 16% from about [%10]. So just interested to hear what you think about that where that stands as a trend going forward?

Robert Eifler

So yes, so in 2023, obviously, that was a trough year for us for the jack-up contribution, if you will, to earnings or so, obviously, as we see improvements in the North Sea more broadly, that's why we had a 10% increase increasing to 15%. I think that we also not providing anything around 2025 at this stage, but I think we would expect to see that contribution continue to increase from 15% upwards once we get into 2025.

Noel Parks

Great. And done, I yes, I thought it was. I mentioned earlier in the call that, Tom, that sort of the light was flashing green and all sorts of fronting, including them some optimism on the supply chain. I think maybe Kris mentioned, but I think in a recent question, in your result, another reference to supply chain so just wondering if you could maybe just characterize what you're seeing on that side effect lessening is a factor in your in your planning or are still a bit of a challenge.

Robert Eifler

Sure.
Yes.
So the reference to supply chain in relation to the fate Kodak in some of our other SPS's was around some delays. We've seen really just in the Kodak we've seen around procuring some of the long-lead items, which is delaying our start ultimately in Brazil. And that's a function of shipping delays and strikes and everything I've mentioned as well as and the number of SPS. is happening globally across the jackup and deepwater fleet right now. That is that is separate from my reference in the script to subsea trees, which we consider one of the leading indicators, particularly well for deep for deepwater work, where a customer typically orders trees, which is a a long lead item for four drilling producing wells before they go into development project. So if you look at tree orders, typically you can anticipate that one, perhaps maybe closer to two years after that demand for our services would follow. And so we're seeing with the green flashing green, it's around leading indicators on the procurement side, only one we mentioned was trees, but then also FIDs. And then just just straight-up OpEx budgets for our customers excuse me, CapEx budgets for our customers are all up and are all positive and supportive of a multiyear upturn here.

Noel Parks

Great. Thanks a lot.
Thanks, Noel.

Operator

I would now like to turn the call over to Ian MacPherson for closing remarks.

Ian MacPherson

Thank you, everyone, for joining us today, and we look forward to speaking with you again next quarter. Have a good day.

Operator

This concludes today's call. You may now correct.