Sean P. O'Neill - VP – IR and Communications Carl Trowell - CEO and President David Hensel - SVP - Marketing Jay W. Swent III - EVP and CFO J. Mark Burns - EVP and COO.

James West - International Strategy & Investment Group LLC Ian Macpherson - Simmons & Company Judson Bailey - Wells Fargo David Smith - Heikkenen Energy Advisors Thomas Curran - FBR Capital Markets Praveen Narra - Raymond James & Company Robert MacKenzie - Iberia Capital Gregory Lewis - Credit Suisse.

Good day, everyone, and welcome to Ensco's Third Quarter 2014 Earnings Conference Call. (Operator Instructions). Please note this event is being recorded. I would now like to turn the call over to Mr. Sean O'Neill, Vice President of Investor Relations, who will moderate the call. Please go ahead, sir..

Welcome everyone to Ensco's third quarter 2014 conference call. With me today are Carl Trowell, CEO; Mark Burns, our Chief Operating Officer; Jay Swent, CFO; David Hensel, our Senior Vice President of Marketing, as well as other members of our executive management team.

We issued our earnings release which is available on our website at www.enscoplc.com. Any comments we make about expectations are forward-looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially.

Please refer to our earnings release and SEC filings on our website that define forward-looking statements and list risk factors and other events that could impact future results. Also please note that the company undertakes no duty to update forward-looking statements. As a reminder we issued our most recent fleet status report on October 16th.

Now let me turn the call over to Carl Trowell, CEO and President..

Thanks, Sean and good morning everyone. Since our last earnings call much has been said and written about the challenges facing the offshore market, especially as oil prices have declined over the past month. We'll give you our latest assessment of the deepwater and shallow water markets in a moment.

But first I'd like to recap our major accomplishments and actions during the last quarter. Performance in the third quarter was very strong, including record revenue and record earnings before interest, tax and depreciation.

Our results were better than the outlook we provided on our last call and out performance was driven by excellent operational execution with operational utilization of 99% for the jackup fleet and 94% for the floater fleet. The floater segment did well with several drillships achieving bonuses for outstanding operational performance.

Our 8500 series rigs lead our floaters with uptime performance of 98%. This high level of achievement distinguishes Ensco and these rigs in the market and gives us a leg up when competing for new business.

Our 8500 series rigs have a well-earned reputation as being among the most reliable floaters on the market, consistently recording operational utilization in the high-90% range. Our marketing teams also did an excellent job contracting our rigs, especially in light of current market conditions.

Since our last call our 8500 Series semis were awarded three new contracts, the most important being a two-plus-year contract for Ensco 8503 with Stone Energy, one of our many repeat customers. Ensco 8503 has the distinction of drilling the deepest well ever drilled in the Gulf of Mexico.

It will also become one of the most versatile Sixth Generation semis when we complete an upgrade to add mooring equipment, allowing the rig to serve customers in mid to ultra-deepwater.

Customers view this as a big advantage when their offshore leases straddle different water depths, permitting them to switch from dynamically positioned to moored on the same well program as requirements dictate. We plan to add hybrid moored-DP capabilities to additional 8500 Series rigs in the future.

The ability to engineer rig and drilling solutions such as the hybrid mode for our 8500 series is possible because of the strength of our engineering group and our understanding of the markets where we operate.

Our Ensco 120 series rigs have continued their successful entry into the high-end North Sea jackup market, and are another example of our differentiated drilling solutions. During the quarter, Ensco 122, the third rig in the series, was delivered to the North Sea before the planned commencement of its initial contract in the fourth quarter.

The economic returns for this series of jackups are far superior to other rigs ordered the same timeframe. This is driven by technological advances such as the patented cantilever system that saves money for customers by drilling more wells from a single location at the highest levels of efficiency.

While newer rigs typically get the most attention it's important to remember that the mature rigs in our fleet have been well-maintained and have undergone upgrades and life extensions. These rigs are often a more cost-effective solution for customers.

Five of our jackups recently earned multi-year contracts and as a result, we now have record backlog in our jackup segment. These multi-year contracts include four renewals with Saudi Aramco and a new contract with Chevron in Angola, placing a jackup in West Africa and further diversifying the geographic footprint of our jackup fleet.

Our ability to contract these older jackups for multi-year contracts demonstrates that rig quality, operational performance and customer knowledge are often more important than rig age. As a result of our recent contracting success in both the jackup and floater segments we've been able to maintain $11 billion in contract revenue backlog.

We also stepped up our fleet high-grading strategy through additional asset dispositions. At the end of September we completed a sale leaseback of four aged jackups in Mexico at a gain well above book value as noted in our most recent fleet status report.

We believe our strategy of continuous high-grading has been more advantageous than bulk divestitures.

The sale of these jackups, coupled with our proactive decision to sell five floaters last quarter, reinforces our strategy of staying ahead of the curve in terms of fleet management, an advantage that is especially important when market conditions become more challenging.

With respect to the five floaters in discontinued operations we have completed cold stacking four of these rigs. The fifth rig, ENSCO 5001, recently completed operations and is now warm stacked.

While we have been able to reduce ongoing expenses for these rigs, we will incur some incremental cost during the fourth quarter as we complete the cold stacking process. But we expect further cost reductions in early 2015. We also conducted several visits on our rigs held for sale during the third quarter with prospective buyers.

Our operational performance, marketing success, and cost control during the quarter illustrates how we intend to manage through current market conditions, and our focus remains on differentiating Ensco from the competition.

In terms of capital management, during the third quarter we raised $1.25 billion of new capital through a debt offering, and we extended the term and increased the amount of our revolver.

We believe the debt raise was a prudent step given our upcoming uses of capital, including newbuild CapEx milestone payments, a $1 billion debt maturity in early 2016 and our annual dividend commitment of nearly $700 million.

We remain confident in our ability to meet our dividend payment given contracted revenue backlog of $11 billion, which is frontend loaded and matches up well with our CapEx commitments in 2015 and 2016.

Now let me make a few comments about the offshore markets before I hand over to David, who will drill down on each region; followed by Jay, who will cover our financial results and our outlook for the fourth quarter. Since our last earnings call, oil prices have declined markedly. Customers are currently in the process of setting 2015 budgets.

We will not know whether planned activity will be cut until the end of the fourth quarter. We expect that 2015 will be challenging in terms of utilization and day rates, especially for older floaters coming off contract, and there is uncertainty around 2016 activity.

It is fair to presume that the dropping oil price and the surrounding uncertainty means that an upturn in demand is less likely before 2016. It is important to remember that there are two major offshore drilling markets, jackups and floaters; each with their own distinct regional submarkets.

As evidenced by our record jackup revenue backlog, demand for shallow water rigs continues to be healthy overall and we expect this to continue even in the current lower oil price environment. The issue in the jackup market is new rig supply, not a lack of demand.

The new supply is something we are paying very close attention to and we encourage investors to consider the following points. The impact of new supply will not be instantaneous and much of it is coming from speculators or new entrant companies.

Since our last call we have contracted five Ensco jackups for multi-year terms, four of which are more than 30 years old. This obviously begs the question, why aren't customers contracting the available newbuilds being delivered? The answer is that customers are not focused solely on new iron.

They want complete drilling solutions from dependable contractor drillers with proven operating systems. As we mentioned last quarter, more than half of the newbuild rigs on order are from inexperienced speculators, and none of their newbuild rigs have yet to be contracted.

Part of the reason for this is that many of our customers exclude these types of inexperienced companies from their tender processes. It's also important to note that many of these speculator rigs do not meet the technical requirements to work in regions like the North Sea, with higher barriers to entry.

Therefore these speculator rigs will have a limited set of contracting opportunities when they enter the market. So I think there is another important bifurcation theme that is overlooked and that is the contracting success of established drillers versus inexperienced speculators.

Finally, as we described last quarter, the rapid aging of the global jackup fleet means the older rigs will be taken out of supply, something Ensco has done over the past few years as we've sold older jackups with any being converted into accommodation units. Our investor presentation on our website provides more details on these points.

So while we fully realize new jackups will be entering the market and put pressure on utilization and day rates we believe there are several factors that will temper this effect on Ensco relative to what some market commentators are predicting.

In fact in the near-term we see our jackup segment as an important buffer against recent weakness in the floater market. Turning now to the floater market; this segment has been pressured by a pullback in customer demand as we discussed last quarter.

While the recent decline in oil prices will likely add to this pressure in the near-term, our current assessment is that customers are not canceling projects, but rather deferring them as they assess ways to more efficiently and economically manage their exploration and development programs.

Similar to the jackup market, there are a large number of floaters worldwide that are older than 35 years of age. We took steps last quarter to address five semis that are now held for sale and we will also cold-stack ENSCO DS-2.

If other drillers take similar steps with their fleets we will see marketed supply decline, which would help to lessen the impact of newbuild floaters being delivered.

The sharp drop in oil price over the past month may prompt our competitors, especially those with large numbers of older rigs, to dispose of or stack rigs more quickly in order to reduce expenses and preserve capital. Therefore the decline in oil price may act to trigger a more rapid supply demand rebalance.

So to quickly recap, for the quarter, operational and marketing performance was strong. We are seeing the benefits of work done over several years. Fleet high grading continued with the delivery of ENSCO 122 in the North-Sea and the sale of four more jackups, bringing our total to 16 jackups sold since the beginning of 2010.

We took prudent steps to raise additional capital and extend our revolver during the quarter, which gives us even greater capital management flexibility. And given our strong balance sheet position and conservative payout ratio, coupled with the $11 billion of revenue backlog, we reaffirm our commitment to a $3 per share annualized dividend.

Our aim in the coming quarters is to manage the company with a laser focus on operational excellence, generating cash flow to support our dividend, while continuing to position our fleet for future customer demand. Now I will turn the call over to David..

Thanks, Carl. This morning I will present our outlook for the floater and jackup markets and recap some of our recent contract signings. Since our last earnings call we have added more than $1 billion to our revenue backlog. While commodity prices have pulled back in recent months we have not experienced a similar reduction in terms of customer demand.

In fact jackup demand in general has remained fairly strong as evidenced by our setting a new record for contracted revenue backlog at more than $3 billion for our jackup fleet. We do however continue to see challenges for the floater market, including some rigs going idle recently in certain regions.

New rigs coming into those markets compounded by a decline in tenders and inquiries have created a supply and demand imbalance. As we look at specific regions, the West African market continues to show increasing customer demand across several countries including Angola, Ghana and Nigeria.

There are currently four open deepwater tenders for multi-year terms in West Africa and we have bid ultra-deepwater drillships and semi-submersibles into these opportunities. We see demand for our ENSCO 8500 series rigs in West Africa as more customers look for high spec semis that can drill in both moored and DP mode.

On the jackup front we recently signed ENSCO 109 to a three-year contract with Chevron in Angola at $172,000 per day. The rig will mobilize from Singapore and is expected to commence its contract in early 2015. Angola is a new jackup market for Ensco and we see demand for additional jackups in West Africa for multi-year terms.

Turning to the North Sea, with the exception of Norway, customer demand for jackups remains strong. Customers are looking to secure rigs in the region for work in 2015 and we expect customers will exercise contract options for our jackups with contracts rolling over during 2015.

ENSCO 122 is now in the North Sea before commencing its multi-year contract with Shell NAM; and ENSCO 120 and ENSCO 121 have continued to deliver high levels of uptime performance after commencing their initial contracts earlier this year.

These positive operational results have led to customer interest for ENSCO 123, our fourth ENSCO 120 series rig, which is scheduled for delivery in 2016. In the UK floater market, supply and demand remains relatively balanced. But available supply from the Norwegian sector of the North Sea may put pressure on the UK side.

In the Mediterranean we believe that there are opportunities for additional floaters, particularly for rigs with higher technical specifications and proven operational track records. In India, we believe that the ongoing ONGC tender may absorb up to 12 jackups from the global supply.

Moving to the Middle East we secured three-year extensions for four of our jackups this month with Saudi Aramco, a long-term customer that trusts our offshore crews to consistently deliver outstanding operational performance.

We see additional opportunities for up to nine rigs from other customers in the region, particularly in the UAE, for standard and high spec rigs for multi-year terms starting in the first half of 2015.

We expect customer demand for differentiated technology and contract drilling services to remain strong in the Middle East in the years to come, and that ENSCO 140 and ENSCO 141, with our patented Canti-Leveraged Advantage technology, plus other design features that provide cost advantages for customers and Ensco, will draw significant customer interest in the market.

In the Asia-Pacific region, on the floater side, there are a number of contracting opportunities, including opportunities in Australia, Vietnam, and Malaysia, although these opportunities are shorter in duration. The Asia-Pacific jackup market has remained balanced.

We signed several contracts in the region, including a three-year extension with Murphy for ENSCO 52; a nine-month contract with CPOC for ENSCO 106, and a multi-well contract with SapuraKencana for ENSCO 104.

We expect several tenders to be issued in the coming months for multi-year programs in Malaysia, Vietnam and in Indonesia that will commence in 2015. However, we expect the jackup market in the Asia-Pacific region to become more competitive as un-contracted newbuilds are added to the rig supply. In the U.S.

Gulf of Mexico, on the jackup side, we were able to find short-term work to fill gaps in utilization during hurricane season. We recently signed a six-month contract with Talos for ENSCO 75 at $130,000 per day that starts in early 2015, and we see some opportunities for longer-term work beginning next year.

However, the overall jackup market in the U.S. Gulf may prove challenging in 2015 as more rigs have gone idle, putting pressure on rates and utilization especially for less capable units. Floater supply and demand dynamics in the U.S. Gulf remain challenging with several newbuild rigs entering the market to begin exploration programs.

Past exploration success and new discovery should lead to incremental appraisal and development in the region over time. We signed ENSCO 8503 to a three-well contract with LLOG and more recently at two-plus-year contract with Stone Energy at $350,000 per day commencing in the second quarter of 2015.

ENSCO 8503 will support Stone's multi-year deepwater drilling program in the Gulf, operating in hybrid, moored and DP modes. We also signed a one-well contract for ENSCO 8501 with Noble Energy for $350,000 per day.

In fact, if you look at the new contracts signed in the US Gulf this year, ENSCO has won half of these jobs on the strength of our operational and safety track record in the region, particularly with our 8500 Series rigs. As Carl mentioned, we will outfit additional 8500 Series rigs with mooring packages.

This flexibility makes these rigs ideal candidates for multi-year well programs in varying water depths. Especially when coupled with the technological capabilities and operating track record our of our 8500 Series rigs.

Discussions are ongoing with customers for our 8500 Series rigs for upcoming work, both in the US Gulf and other regions such as West Africa, the Mediterranean, and Southeast Asia.

In Mexico, we expect Pemex to continue growing their jackup fleet and energy reform within the government is expected to open the market to more floaters in the coming years. Moving to Brazil, we expect that Petrobras will contract at least two ultra-deepwater rigs for work in the pre-salt beginning next year.

In addition, we understand Petrobras is finalizing renewals for ultra-deepwater rigs with contracts expiring in 2015. Petrobras may also come to market for ultra-deepwater rigs for work beginning in 2016, which would be another source of incremental demand.

We also expect to see tenders and inquiries from other major customers in Brazil to begin drilling on leases acquired during the 2013 bid rounds. We believe that this will translate into more contracting opportunities in the future.

Looking at the worldwide order book for floating rigs, six new rigs will be delivered before the end of 2014 of which three are un-contracted. Conversely, Ensco's next two floaters to be delivered, ENSCO DS-8 and DS-9, already have secured multi-year contracts at attractive day rates.

We continue to have conversations with multiple customers for our third and final newbuild floater ENSCO DS-10. The newbuild order book for competitive jackups shows 12 to be delivered by year-end 2014, 10 of which are un-contracted.

The presence of un-contracted newbuild deliveries has created supply pressure, which we believe will result in an increasing number of older jackups and floaters being stacked or retired.

Based on the population of the competitive independent cantilever jackup fleet, we estimate that currently there are more than 50 jackups that are 35 years of age or older. And that this age group will nearly triple in the next three years. By September 2017, 30% of the global jackup fleet will be 35 years or older.

A full five years beyond the useful life assumption for a new jackup. Capital expenditures required to keep these aged rigs compliant with classification requirements may be cost prohibitive, especially for jackups that have not been well maintained over their useful lives.

The global fleet of competitive floaters may experience a similar phenomenon, as approximately 60 floaters, or roughly 20% of the global fleet, are at least 35 years of age.

With customers’ preference for newer rigs that provide drilling efficiencies and with less capable floaters challenged to find contracts in the current environment, many of these floaters may face extended periods of time without work. Drillers may look to reduce costs on older assets by stacking these rigs.

Reactivation costs for these floaters, depending on the condition of the rig and the length of time the rig has been stacked, may prove too costly and force them into retirement. Given Ensco's continuous high-grading strategy, our fleet is well-positioned to win more than its fair share of new business both in the floater and jackup markets.

Now let me turn the call over to Jay..

Thanks, David. Today I'll start with highlights of our third-quarter financial results, our outlook for the fourth quarter, and then wrap up with a discussion of our financial position.

As noted in our press release, earnings from continuing operations were $1.93 per share, reflecting the strength of our operational performance during the third quarter. Total revenue was $1.26 billion, a new record for Ensco, and above the outlook we gave on our last conference call.

As Carl mentioned, excellent operational results coupled with performance bonuses for better uptime and more contracted rig days than expected, led to our revenue outperformance for the quarter. Floater segment revenue increased 7% to $745 million versus prior year, due to the addition of ENSCO DS-7 to the active fleet.

Reported floater utilization increased to 83% from 81% a year ago with the addition of DS-7, and the return of two rigs that completed shipyard upgrade projects. For the floater segment, operational utilization, which adjusts for planned events like surveys and upgrades, as well as un-contracted time, was 94%. Good performance that equaled last year.

Jackup segment revenue jumped 12% from last year to $499 million, a new record, due to ENSCO 120 and ENSCO 121 commencing operations and higher day rates for several rigs. These factors also increased the average day rate for our jackups by 9% to $137,000 per day.

Reported utilization for the jackup fleet increased to 91% from 89% last quarter as more jackups went back to work following planned surveys and upgrades. Operational utilization for our jackups was 99%, our third consecutive quarter at this impressive level.

Total contract drilling expense was $531 million, an improvement from $534 million a year ago and also better than the outlook from our last earnings call. As detailed in our press release, certain impact or certain items impacted the year-to-year comparisons. Adjusted for these items, contract drilling expense increased 3%.

Depreciation expense increased $8 million to $141 million also due to the addition of ENSCO DS-7, ENSCO 120 and ENSCO 121. General and administrative expense for the quarter was $29 million, an $8 million reduction from a year ago, and a bit better than our outlook.

The effective tax rate was approximately 13% for the third quarter 2014, slightly better than our outlook. We expect our fourth-quarter tax rate to be approximately In line with the third quarter.

Turning to our outlook for the fourth quarter, total revenues are expected to decline somewhat from third quarter levels mostly related to un-contracted time for idle rigs already in our most recent fleet status report.

We anticipate total fourth quarter contract drilling expense will increase approximately 6% from $531 million in the third quarter, primarily due to the following. $14 million in charter fees associated with the sale leaseback of the four jackups we recently sold, and these rigs are now reflected in our other segment.

The commencement of ENSCO 122's initial contract during the fourth quarter, and a full quarter of operations for ENSCO 5004 and ENSCO 5005, that returned to the active fleet during the third quarter following upgrades.

Depreciation expense should increase approximately $3 million to $144 million in the fourth quarter, mostly due to ENSCO 122 joining the active fleet. G&A expense for the fourth quarter is expected to be roughly in line with third-quarter levels.

Other expense is anticipated to be approximately $51 million in the fourth quarter, comprised of $53 million in interest expense, partially offset by interest income. The increase in interest expense versus third quarter is due to the $1.25 billion debt offering we completed in September.

Our current outlook for fourth-quarter 2014 capital spending is approximately $400 million. This includes $175 million in newbuild CapEx, plus $140 million for rig enhancement projects, and $85 million for sustaining projects.

As we look ahead we project 2015 CapEx to be approximately $2 billion and then less than half that amount in 2016, when we deliver our final rigs under construction. Final CapEx budgets will be completed at the beginning of next year, so we'll have a more detailed 2015 guidance on our next conference call.

Now let's move onto a review our financial position. During the quarter, we raised $1.25 billion through a debt offering of 10-year and 30-year notes. We also amended our revolving credit facility increasing, the size to $2.25 billion and extending the term into 2019. Both actions improve our capital management flexibility at attractive rates.

In terms of future uses of cash, we have approximately $2.4 billion of projected cumulative CapEx through the end of 2015, mostly for newbuild rigs that should drive future earnings and cash flow growth. We have an annual dividend commitment of approximately $700 million and a $1 billion debt maturity in early 2016.

Given the current market challenges, we've taken other proactive steps this year to manage capital, including placing five rigs in held for sale status, reducing upgrade CapEx on floaters where prudent and selling seven jackups as part of our continuous high-grading strategy.

So today, we have a very strong financial position including $11 billion in contracted revenue backlog, which provides us with significant visibility into future cash flows. We have the lowest leverage ratio of our major competitors at just 33%.

We have more than $1.4 billion of cash and short-term investments and $2.25 billion of fully available revolving credit facilities.

This strong financial position supports our dividend commitment of $3 per share annually, and the proactive steps that we've taken in terms of fleet management and capital management places us in an excellent position given current market challenges. Now I'll turn the call back over to Sean..

Thanks, Jay. And now, Operator, please open up the line for questions..

Thank you. We will now begin the question-and-answer session. (Operator Instructions). At this time we'll pause momentarily to assemble our roster. Our first question is from James West of ISI Group. Please go ahead..

Hey, good morning guys. Congratulations on a solid, well executed third quarter. Maybe first question for Jay. You just wrapped up on the solid liquidity you have, the great state of your balance sheet. You've got a buyback authorization out there, but it seems to me you haven't been active.

What's the rationale behind not being active? And do you plan to, as we did through your CapEx cycle here, be more active in buybacks?.

James I'll take that, its Carl here. So certainly with the debt rate that we've done we've increased our capital flexibility.

And it's important for me probably for me to say that the principal driver for us to do that, where we felt it was a prudent timing for us to raise additional capital given the future commitments that we have for the newbuild stage payments on the currently contracted newbuild vessels, a debt retirement that we've got at the beginning of 2016, and also the $700 million commitment we've got towards returning capital to shareholders currently through the dividend.

So it doesn't signal a major change in capital strategy. And of course the capital strategy that we have is subject to Board approval. And so we principally -- we haven't changed capital strategy here during this quarter and accordingly haven't bought shares in a buyback.

And we will of course be looking at that and that it is something we will address with the Board each quarter going forward. So, no change as of present, but it is something we will keep looking at..

Okay, thanks Carl. And just one unrelated follow up for me. The ONGC ongoing tender -- I believe you mentioned that 12 jackups could be taken out of the market.

When that is expect to be awarded?.

This is David Hensel. It's an ongoing process, a bit more protracted than we expected. Some of those, a good number of those, are for incumbent rigs or against incumbent rigs. I would expect over the coming quarter that will get awarded..

Okay, perfect. Thanks, David. Thanks, guys..

Our next question is from Ian MacPherson of Simmons. Please go ahead..

Thank you. Carl, when we were speaking one quarter ago, the outlook entailed improving demand elasticity for deepwater, especially with the independents such as Stone, who took 8503 with lower day rates. But now we've got a 20% correction in crude, which militates against that.

So marking to market your demand barometer today with lower day rates, but also this crude correction, how do you see the outlook for the Gulf of Mexico really for deepwater and for jackups in 2015, if what we see is what we get with crude prices?.

Okay. Look, if you don't mind, I'll just step and make, use the opportunity to make a bit broader market comment. And then maybe we can come down to the Gulf of Mexico specifically..

Okay.

We could talk forever today on the market implications of the drop in crude, which is the big change since we last reported. I think what's fair to say, and important to say, is that, as of yet during the quarter in Q3, we've not seen any of response or material movement from our clients to the oil price moves. But neither would we expect to.

Because it's not just an instant reaction. In fact, during the quarter, we actually saw market tenders and inquiries go up over Q2. That admittedly is coming off a low base, but at least it was a slightly positive sign during the quarter.

Combined with the fact we saw what is probably best to describe as a bit of a logjam in tender awards that have been building over Q1, Q2, and Q3 start to unblock a little bit, and you will have seen that in Hess Stampede award, our awards and renewals in Saudi Aramco, and various other things.

I think that, that logjam is going to unblock a little more as we go through Q4, Q1 as well. So we are seeing a little bit of soak up of some of the capacity that we were all anticipating, but just wasn't happening because it was getting stalled out a bit.

The other thing that we've seen and anticipate, as we said in the prepared statements, is that we're not seeing customers cancel contracts. We're seeing more projects, but defer them somewhat. So there is no instantaneous reaction to the oil price drop.

And the other element of this is that, at this time of the year, we would usually expect to have a pretty early indication of what our customer spending for the next year would be. But the oil price drop has happened just as most of our customers have been going into their annual budgeting cycles.

So that's why the in pre-prepared statement we said that we would not really be able to give a clear view on what impact on 2015 was until we really went through Q4. And I think that some of our customers, certainly in conversations we've had, are going to maybe even wait a little bit longer into Q1 to see where oil prices stabilize.

And they will definitely be looking to wait to see what happens in November at the OPEC meeting. So I think it's a little bit premature to make bold statements about it. What I do believe is that the -- and this is if you take the Gulf and Mexico now, is that the big long-term projects that are there are still going to go ahead.

So some of the major tendering that's happening now and will happen in the Gulf of Mexico will still continue because these are long-term commitments and our customers looking at them through cycle. There is of course the issue of what happens to some of the peripheral activity and the elasticity we talked about.

As of today we are still talking and seriously to a series of customers that fall into that bracket that are reacting to the lower rig prices and are considering doing well programs that they might not have done 12 months ago. Now some of these might be one- and two-well programs.

They, of course, are vulnerable if oil price stabilizes very low or drops further. But I don't see them today dropping off the table completely. We might see some of them drop off, but I don't think all of them are going to disappear..

Thank you. I appreciate that deep perspective. Just a quick follow-up. Jay, I think that you basically said that you expect your CapEx for 2016 to be less than half of the $2 billion for next year for total CapEx.

Is that correct?.

That's correct. Obviously -- and we haven't done the full detailed budget on that -- but that's really based on $400 million of newbuild CapEx and some amount of sustaining CapEx on top of that..

Got it. Thanks. Congrats on the quarter..

Thanks, Ian..

Our next question is from Jud Bailey of Wells Fargo. Please go ahead..

Thanks; good morning. Question either for Jay or for Carl on thinking about your operating costs over the next 12 months or so, or even in 2016. With the market environment weak, you guys are obviously -- you've been aggressive in stacking and trying to get your costs down in that way.

Are there any other levers that you can pull on the operating cost front to help improve your operating cost even more? I imagine the labor market is still fairly firm, so I just wanted to get your perspective if there's anything you can do further to maybe help lower the cost structure for next year?.

Sorry -- Jay, I'll take it first and then I'll hand it off to you, okay?.

Okay..

So the first one is, we definitely saw during this quarter the results of some of the initiatives that we took during Q2. And I think they will continue through and we'll see the effect going forward of some of those.

There are further levers we can pull, but what I would guide you to look at is, remember that some of that is going to be -- you're not necessarily going to see that just in a quarter-on-quarter drop in contract drilling expense.

Because we're also going to have the addition of new rigs coming in both from the newbuilds coming into them, back into the fleet; but also the rigs that have been undergoing major upgrades during 2013 and 2014 reentering the active fleet. And it's not necessarily going to be linear. But we do have opportunities to address some of the cost base.

Now the obviously big one is, offshore labor cost, which we're going to have to balance very carefully versus a competitive market.

Jay, do you want to add anything?.

I think Jud, the only other thing I would add for you is, we're obviously were right in the throes of the budget process and we will intend to give a lot more guidance on the next call as to how we see 2015. Might not have a lot to say about 2016. And I would just amplify what Carl said.

I mean, we've got levers we can pull, but as you say, we have practical realities of a strong labor markets and still rigs actually continuing to come into the Gulf. So we have to recognize that as well..

It's fair to add that, Jud, it's just fair to add as we described in the last quarter, and I think as you've seen this quarter, the cost management is something we're going to be very strongly focused on..

Okay; thank you for that. And my follow-up is just on broadly on the jackup market. You guys are, I think you're pretty unique position because you've got the widespread very geographically diverse jackup market across a number of different asset classes.

And I'd just be curious, as you have discussions with your customers for next year -- Carl, you noted how different each market can be.

I'd be curious, are you sensing any differences, whether it be demand or just inquiries across the different markets you operate in -- has anything jumped out at you in terms of any trends that may be different between maybe the North-Sea or Southeast Asia or Mexico or any other markets?.

Yes, definitely. And it's probably a longer conversation than we've got time for today. But let's go through it simply. We -- and David actually alluded to a lot of this in his prepared statements -- but we see some key markets that we still think are going to be robust and growing in the future. I'd pick out the Middle East, Asia area as one of those.

The North-Sea in the areas we complete still remains robust. The Mexico is going to grow in all areas over the next few years on jackups initially, then leading to floaters as the energy reforms kick in and we actually see the licensing rounds happening. And you'll probably see a renewal of the fleet in places like Mexico moving.

There has been a lot of very old rigs there and I think there will be a move toward newer rigs, which is also one of the reasons we took the decision we did on the lease buyback -- sorry, the sale and leaseback decision on the four rigs in Mexico that we took this quarter.

The Gulf of Mexico still remains a big question mark with a lot of uncertainty over what will happen. It was weak during the hurricane season and we were expecting to see it pick up probably stronger than it did post-hurricane.

We haven't been able to find some fixtures there, but I think that, that is potentially a weak market going forward and probably a little bit more spotty then we would've thought three, four months ago. And Asia Pacific is clearly going to be the one where the new rigs arrive first and are bid first.

So I think that's going to be competitive although the actual demand there is still pretty strong. But we've taken the opportunity to actually reallocate a rig out of Asia Pacific into MEA and we will maybe look to do that if we see the opportunities again. So we'd be able to adjust our fleet to where we think the best long-term contracts are..

Great, I appreciate it. I'll turn it back, thanks..

Our next question is from David Smith of Heikkenen Energy Advisors. Please go ahead..

Good morning, thank you, and congratulations on the quarter. I have a couple quick questions just regarding the stacking of DP drillships.

Could you talk about the differences in cold stacking a DP drillship compared to an older semi? Particularly any differences in costs, as well as the potential effort in cost of reactivation?.

Probably Mark's best placed to answer this one..

Yes. This is Mark Burns. Very different Marine units, a DP drillship and a DP semi. Obviously, a DP drillship has more marine equipment on board the rig. It's very technical equipment, not unlike a DP semi. However, just the greater amount of equipment will add complexity. I think you have to have a long-term plan.

Obviously, we have not reached a time in the market where we see this happening, so we're going to continue to watch that. But there is a there is a difference in complexity between both units..

I think probably a simple answer on this one is, that as Mark said, because the equipment differences, there's a bit more complexity as you actually go through the process. Actually finding places where they can be moored alongside, quayside becomes a little more difficult.

But once the process has been done, there's not much difference in the ongoing cost if they're fully cold stack. And the process of bringing them back on is not materially different..

Okay; so for the DS-2, for example, probably going to the Canary Islands.

Just thinking about the average cost, OpEx, for that going forward? And your thoughts on how long until that may or may not come back to market?.

So on the cost, I think, if you went into it, I wouldn't assume it was drastically different from a stacking point of view, either end high-end semis.

And on how long it's likely to be stacked, I think this is something I'd prefer to discuss another quarter or so out, when we get a feeling on where the market, oil price stabilizes and we understand the budgets. I think we are certainly going to assume that it will remain stacked during 2015..

Appreciate it. Thanks for your time..

Our next question is from Tom Curran of FBR Capital Markets. Please go ahead..

Good morning, guys. Carl or Jay, I wanted to turn to the M&A landscape.

How would you characterize the opportunities that are out there right now? How they've evolved, let's say, over the last three months from individual asset purchase opportunities all the way through possible corporate acquisitions? What are you seeing out there? And then, how would you describe your own appetite at this point?.

Okay. So, firstly, the current market conditions, as we go through this cycle, are going to throw up opportunities for both asset and company acquisitions. And the landscape that we're in today, I don't think, and the structure we're in is not how we will be in, say, three years' time. We're alive to that.

Today we don't see a compelling option on the table. Of course the material thing that's happened in the last quarter has been the drop in oil price. And accordingly share prices have come down with it. I think you'll have to see some of the marketplace get comfortable with the new share prices before you'll start to see much activity here.

And there is nothing material to turn around and say that anything has changed in the sense that there are more opportunities on the table or something material has come around. I think you will see things going forward.

Now, as far as we're concerned, and we've stated before, if you look at the assets that are out there available under a -- been currently built, particularly by speculators, a lot of this, these rigs do not look attractive to us. The majority of them don't because of the nature of the specifications and quality under which they've been built.

And certainly the quality control. There are a handful of assets out there which probably would fit our portfolio and we'll watch those very carefully. But nothing material that we're looking at the moment..

Okay..

Go ahead, sorry..

Well, I was just going to ask, to the extent that just on an asset model and specs basis, you would consider something? And this might be a better question for Mark.

While adhering to your longtime emphasis on standardization, and that's obviously bared a lot of fruit for you, so it's understandable, while trying to adhere to those limits of standardization, which specific designs, both for jackups and floaters, do you find the most attractive?.

Yes, Tom, that's a very complex question that we probably can't get into right now. I just will say that our focus on standardization continues to pay dividends for the Company..

Okay. Thanks, guys; I'll get back in the queue.

As we go forward we would be really looking very carefully at not a particular single design. It's -- they're a suite of asset class that we think is going to be, have a strong position in the market and differentiation for the Company going forward.

Now, the backdrop of course against all of this, we still have seven new rigs to be delivered between now and the end of 2016.

So we have a really good fleet high-grading and refresh ongoing anyway, which means that we're not compelled to do anything particular, which is a nice position to be in, which means we can sit and be really critical about what might come along..

Understood. Appreciate the additional color, Carl..

Thank you..

Our next question is from Praveen Narra of Raymond James. Please go ahead. .

Hey guys, good morning. I had a quick question. With water day rates coming down, it's been pretty clear just given the weakness, but I'd guess that operators are also getting a little bit more stringent on other terms and language of the contract.

So if you could give us a sense of how contract language has changed outside of day rates during this weakness in the cycle?.

I'll make the first comment and then I'll maybe hand over to David. The principal thing that's happening is day rate and term duration; I think they're the two important things that are happening in the cycle. And the pressure on some of the other core terms and conditions is not great. We're still seeing mostly the core Ts and Cs being on hold.

So just to reiterate that point, the major effect we're seeing is day rate and term duration, which is shortening.

David, do you want to add anything?.

I think you've hit the nail on the head, Carl. The other comment that I would add are, there are some terms and conditions where we or the operators have more flexibility when you look at a shorter-term contract versus a longer-term contract.

So overall, no, the Ts & Cs, the terms and conditions that we are contracting under are not substantively different..

Okay, perfect. Most of my other questions have been answered. Thanks and congratulations on the strong quarter..

Thank you..

Thank you..

Our next question is from Rob MacKenzie of Iberia Capital. Please go ahead..

Thank you. Most of my questions have been answered.

But I was trying to see if I could get some help understanding how an $8 million gain gets translated to $0.06 per share?.

Yes, Rob there's a reason why you're confused about that, which is that there's a gain on the sale, but there was also a tax benefit which you normally wouldn't expect on a transaction like that. So there was a gain, which should've generated a tax charge that actually generated a tax benefit the way that, that transaction worked out..

Okay and how much was that, Carl?.

Well the total, as said, the net gain of $0.06 that we showed in the press release, includes the tax benefit, as well as the gain on sale..

Okay. That's great; thank you very much..

You're welcome..

Our next question is from Gregory Lewis of Credit Suisse. Please go ahead..

Yes. Thank you and good morning, guys. I realize the call has been running a little bit long, so I just had a general question. So earlier this week BP stated that they're delaying Mad Dog II in hopes that they can get lower drilling day rates.

Is this something where they -- I guess my question is, have they actively been seeking a rig and this is what they've figured out? Or are they just kind of looking at headlines and extrapolating that they think day rates are going lower?.

I may be wrong here, but I think the spin you put on that is a little bit different to what actually what BP said. BP had been reconsidering Mad Dog Phase II for quite a while. And they've been doing a major reappraisal of the whole way the development plan. So it's not that they had a plan and they were waiting and waiting and waiting, holding out.

It's been part of a bigger program, a very strategic program BP to look at this development. And now as a consequence they are getting ready, I believe, for approval and what's added to that, of course, is that they can come out and contract in the current marketing and get good rig rates. And now so I think that's the way to view that one.

There has been commentary on it being taking an additional rig. I think that may happen; you may also see BP use one of the current rigs they've got on contract to do that. So I think you have to be careful about some of the commentary that's been put on that.

Now as a general statement, what you've seen BP do here is actually indicative of a trend that's going on more broadly. We've seen TOTAL do it in Block 32 in Angola. You've seen some of the developments in the North-Sea, which were challenged under economic returns, under their original proposed development plans.

And a lot of the major IOCs have gone back and have been reworking development strategies, standardizing, reappraising tie-back versus FPSO, et cetera. And as a consequence, several of these are now coming back to the table with more refined development plans, at lower cost per barrel development costs.

And at the same time they're able to reap the benefit of the current market rates on rigs, so that makes them even more attractive. So I think what you will see is a series of announcements as we go forward over the next year or two of these developments that were deferred coming back around again.

And that's possible even at the current oil price, assuming it doesn't take a bigger nosedive..

Okay thank you for that, Carl. That was actually very helpful. Have a good day..

Thank you.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. O'Neill for any closing remarks..

Just want to say thank you, everyone, for participating on our call today. We greatly appreciate your interest in Ensco. And have a fun and safe Halloween tomorrow. Thank you..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..