ENSCO International Inc. Q3 2008 Earnings Conference Call Transcript

Oct.23.08 | About: Ensco PLC (ESV)

Ensco International, Inc. (NYSE:ESV)

Q3 FY08 Earnings Call

October 23, 2008, 11:00 AM ET

Executives

Richard A. LeBlanc - VP, IR

Jay W. Swent III - Sr. VP and CFO

Daniel W. Rabun - Chairman, President and CEO

William S. Chadwick, Jr. - EVP and COO

Analysts

Daniel Boyd - Goldman Sachs

Ian MacPherson - Simmons & Co

Arun Jayaram - Credit Suisse

Tom Curran - Wachovia Capital Markets

Robin Shoemaker - Citigroup

Pierre Conner - Capital One

David Smith - JP Morgan

Geoff Kieburtz - Weeden

Michael Urban - Deutsche Bank

Brian Uhlmer - Pritchard Capital

Mike Drickamer - Morgan Keegan

Robert Mackenzie - FBR Capital Markets

Operator

Good day, everyone and welcome to the ENSCO International Third Quarter of 2008 Earnings Conference Call. As a reminder, this call is being recorded, and your participation constitutes consent to its taping.

I will now turn this conference over to Mr. Richard LeBlanc, Vice President of Investor Relations, who will moderate the call. Please go ahead, sir.

Richard A. LeBlanc - Vice President, Investor Relations

Thank you, Diana. We'd like to welcome everyone to our third quarter conference call. With me in Dallas are Dan Rabun, our Chief Executive Officer; Bill Chadwick, our Chief Operating Officer; Jay Swent, our Chief Financial Officer, as well as other members of our executive management team.

This morning we released our earnings announcement and we filed our 8-K with the SEC. We also expect to file our 10-Q later today. The earnings release is available on our website, www.enscointernational.com.

As usual, we'll keep our call to about an hour. Jay will first provide a financial overview. Then Dan will discuss our markets and operations.

I'd like to remind everyone that any comments we make today about our expectations of future events are forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995. All such statements are subject to risks and uncertainties and many factors could cause actual results to differ materially.

We refer you to our earnings release and SEC filings available on our website, which defines such forward-looking statements, states that the company undertakes no duty to update any such statement and lists risk factors which could cause actual results to differ materially from our expectations.

I'd also like to remind everyone that with regard to our rig status, a detailed listing is provided on our website, and it's updated the middle of each month when we file our 8-K with the SEC. The last update was as of mid-October. At the end of our prepared remarks, we will have some time for questions.

At this time, let me turn it over to Jay.

Jay W. Swent III - Senior Vice President and Chief Financial Officer

Thank you, Richard. Good morning and thank you all for joining us. Today's call is a bit unusual for us because I will be describing a business as usual third quarter and what we believe will be largely a business as usual fourth quarter, while at the same time recognizing that we're in a period of unprecedented economic uncertainty.

I'll review the current business details and conclude with some comments about how we are financially positioned for 2009. Dan will then review his thoughts about the current and future business climate. So, let's get started. We're pleased to report another solid quarter despite some weather related and non-operating issues that adversely impacted results. I'll talk more about these items in just a moment.

Income from continuing operations increased 16% from prior year levels to $301.2 million and earnings per share from continuing operations were up 20% to $2.13. Our year-over-year operating improvement reflects higher average day rates for our jackups across all regions and for the ENSCO 7500 semisubmersible rig as well as higher utilization from our North and South America and Europe jackup fleets.

We reported a $0.13 per share loss from discontinued operations during the quarter. This relates to the loss of ENSCO 74 as a result of hurricane Ike in September. The rig has not been located and has been assumed to be a total loss for insurance purposes.

We recorded a $23.5 million net loss on disposal of the rig offset in part by a $4.6 million net income that the rig earned during the quarter prior to its loss. In connection with the loss, we expect to receive insurance proceeds of $50 million sometime during the fourth quarter. This matter is detailed more fully in our SEC Form 10-Q that is being filed today.

The U.S. dollar appreciated against the Singapore currency during the third quarter which resulted in approximately $10 million of exchange losses related to our Singapore dollar denominated investments. These investments are being held to fund a portion of our deepwater rig construction obligations that are denominated in Singapore dollars. Exchange gains or losses incurred on these investments will be offset in the future by a corresponding increase or decrease in the U.S. dollar cost of these rigs.

During the quarter, we repurchased 2.2 million shares of a total cost of $148 million or an average price of $68.20 per share. Since inception of our share repurchase program on March 2006, we have repurchased $16.5 million shares at a cost of $938 million or an average price of $56.79 per share. At this time, we have $562 million remaining under our total $1.5 billion share repurchase authorization.

Now let's look more closely at third quarter specifics. Here we will compare third quarter 2008 sequentially to second quarter 2008 and these comparisons will exclude ENSCO 74 for both periods. Third quarter revenue increased by approximately 2% from second quarter levels less than the 5% growth we had predicted.

Third quarter revenue was adversely impacted by approximately $16 million of revenue, that was deferred to future quarters as a result of two rigs waiting on weather prior to commencement of new contracts in New Zealand and by 18 days of repair downtime and mobilization on ENSCO 7500.

Contract drilling expense decreased by about 8% in the third quarter to $193.4 million. As indicated on our last conference call, the second quarter included an unusual level of rig inspection and repair cost related to our Asia Pacific jackup rig fleet. These expenses return to more normal levels during the third quarter resulting in a contract drilling expense decline.

The quarter-over-quarter decline was greater than expected because other jackup rigs for fleet repairs planned for the third quarter were not completed and it slipped into the fourth quarter. G&A expense increased by approximately $1.5 million compared to the second quarter due to an increase to outside legal and professional fees and costs associated with our corporate branding initiative.

Our third quarter effective tax rate was 19% consistent with the second quarter and inline with our earlier guidance. Our cash generation on the balance sheet remains strong during the third quarter. We generated $349 million from operating activities of continuing operations. We utilized this amount plus cash on hand to fund $239 million of capital expenditures, those of which related to our deepwater fleet expansion and the repurchase of $148 million of stock.

Now let's look more specifically at third quarter results in each of our major geographic markets. The average day rate for our Asia Pacific jackups was $157,000, a 3% increase compared to the second quarter as we realized day rate increases from contract rollovers or contractual cost escalations on approximately half of our Asia Pacific fleet.

Asia Pacific jackup rig utilization was 96%, an increase from 91% last quarter as several rigs returned to work after undergoing repairs or inspections during the second quarter. The average day rate for our Europe/Africa jackup fleet increased to $226,100 from $217,700 in the second quarter. This was primarily due to application of contractual cost escalation provisions and ENSCO 71 rolling off a legacy contract to a new contract at nearly double the day rate in early August.

Utilization in our Europe/Africa fleet was 96% on the quarter, with little change from the 97% second quarter level. Day rates for our North and South America jackup rigs increased 14% to an average of $108,200 in the third quarter compared to $94,800 in the second quarter. North South America jackup rig utilization was slightly lower in the third quarter 98% compared to 100% in the second quarter as ENSCO 82 was idle for approximately three weeks during hurricane season.

ENSCO 7500 worked during the third quarter with an average day rate of 362,000 per day, generally inline with the second quarter. Utilization decreased to 87% in the third quarter from 98% due to downtime associated with VOP repairs.

Let's now turn to the outlook for the fourth quarter 2008. We currently expect fourth quarter revenue to be down approximately 3% from third quarter levels. ENSCO 7500 will be mobilizing to its new contract in Australia during the entire fourth quarter and even though we will receive day rate at the old contract rate, we will defer revenue of almost $33 million in the fourth quarter until the rig commences operations early next year.

In addition, ENSCO 53 will be in a shipyard for upgrade and life extension during most of the quarter. Partially offsetting these items, ENSCO 107 was finally able to establish location just last week and commencing new contract after 74 days of waiting on weather.

We anticipate fourth quarter contract drilling expense will increase by about 4% from third quarter levels as we complete repair and maintenance projects that were not completed during the third quarter.

Depreciation expense is expected to increase slightly to $50 million in the fourth quarter and we expect our effective tax rate to be approximately 18%, slightly below our third quarter rate of 19%.

Thinkable comments on 2008 CapEx. 2008 capital spending should be approximately $820 million. $670 million of this amount represents interim payments on our six new deepwater rigs now under construction and the recently delivered ENSCO 8500. We also expect to spend about $40 million for rig enhancement projects and $110 million for sustaining projects. This is an increase of $95 million versus last quarter and primarily represents the initial payment for ENSCO 8506 which was ordered on August 15, 2008.

Total capital expenditures at the end of the quarter were $654 million, leaving $166 million for the balance of the year. We are in the process of finalizing our 2009 budget and currently expect CapEx will drop to $720 million in 2009. We expect to spend approximately $490 million on deepwater construction, $120 million on enhancement projects and $110 million for sustaining projects.

This includes provisional funds to prepare a number of rigs for international service, but we will only make these expenditures if we are awarded new international contracts.

So, given the current economic uncertainties, I would like to conclude with a few comments about our financial position. We ended the third quarter with more cash than debt. $486 million of cash and short-term investments at the end of the third quarter versus $300 million of debt. Half of this debt is not due until 2027 and our repayments on the balance are less than $20 million annually.

We expect to end the year with a very strong cash position based on our current outlook and the contemplated receipt of $50 million related to the ENSCO 74 loss. In addition, we have an undrawn $350 million revolving credit facility.

We have not repurchased any shares during the fourth quarter and you should not read anymore into this other than an abundance of caution on our part. We are currently evaluating how best to manage our cash balances in these unprecedented times. So, for the time being we will probably deemphasize share repurchases.

We have approximately 95% contract coverage for our projected fourth quarter revenue and our expense levels are relatively firm at this point. So, our 2008 outlook seems to be in good shape. Looking at our backlog for 2009 and beyond, 85% of our customers are investment grade companies or national oil companies with a strong incentive to drill.

We expect about 15% of our 2009 revenue to come from the Gulf of Mexico jackup market. So, our geographic exposure is reasonably well balanced. As noted in our latest rig status report, we recently signed some term contracts in the Gulf of Mexico and customers continue to approach us regarding term work there.

With these comments, I'll now turn the call over to Dan.

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Thank you Jay, and good morning everyone. I'm going to depart from my normal earnings call format and begin by addressing matters we believe that are top of everyone's minds. We believe ENSCO is well positioned to maneuver through the many challenges facing all global businesses. ENSCO historically has been physically conservative in good times and in bad.

We have always believed that a strong balance sheet is especially critical in a cyclical industry such as ours. As Jay highlighted in his remarks, we have more cash than debt and our cash generation from our existing backlog remains strong. We believe our financial position allows us to manage the current capital market situation and to take advantage of any opportunity that may arise as a result of existing and future market conditions.

We have been using internally generated funds to grow our deepwater fleet, while at the same time maintaining one of the industry's least levered balanced sheets. We have been discussing drilling programs with our customers. Much of the discussion about changes to the drilling program centered on reductions in U.S. insured gas related activities.

As of today, we have not seen much impact on the offshore market and customers and international markets continue to discuss increases in spending for 2009. Much of the incremental demand is from national oil companies that have a strategic imperative to drill. The mega majors are challenged to grow productions and they've continued to pursue major multi-year projects that are predicated on lower commodity prices than we are experiencing today.

We would expect that some of the small independents, however, make defer programs and then they tend to more dependent on cash flow and or leverage. But that is likely to impact mostly short-term programs. While we are encouraged by the dialog with our customers, we continue to remain vigilant, and understand their outlook and programs may change, and we maybe required to respond accordingly.

In some markets, such as the Gulf of Mexico, we have seen an increase in premium jackup day rates and term work, which appears to be driven more by the lack of premium drilling rigs and not affected by current commodity prices. I'd like to point out that the long-term fundamentals that have been driving new oil markets for the last several years have not changed that dramatically in the last few months.

We've seen some reductions in demand for oil, and reasonably would expect additional reductions in demand if the global economic cycle continues to slow. All the forecasts that we've reviewed still point to a diminishing supply of hydrocarbons over the longer term, which can only be addressed by increased drilling activity.

However, we clearly recognize the long-term fundaments maybe disrupted in the short-term by troubled world capital markets. We're being very proactive in monitoring our customers and suppliers to determine any effects the current environment may have on their business.

With regard to new industry entrance and speculative new building, a number of these companies were built on the premise of easy access to capital, and this clearly is not the current environment. If this environment persists for an extended period of time, we would expect that a number of these assets will not be built or if built, then would end up in the hands of drilling contractors with less exposure to leverage.

I know this subject will likely draw a number of questions, and all we can say at this point is that there are a number of rigs being marketed, and it remains too early to make any predictions.

Now let's review our operations and market reports. I'll refer to our monthly contract status report of eight days ago for specific rig details. Starting with Eastern Hemisphere, in Southeast Asia-Pacific Rim area, numerous contracts have been awarded, and multiple requirements are outstanding.

In some cases, industry newbuild jackups have had to discount day rates to get work. But this has not significantly impacted the market today. We still see opportunities to command leading edge rates for our highest deck rig as most operators see contractors with proven safety records and equipment as an advantage.

The ENSCO fleet is fully contracted to 2008 with the exception of ENSCO 56. On completion of this drilling program under [ph] of late this year, we plan to mobilize the rig to shipyard for late repairs. We are actively marketing ENSCO 56 and we are in the process of finalizing contract works... contracts for following work where several of our other Asia Pacific rig after contracts are completed in 2009.

In the Middle East, several tenders are outstanding for term work in Saudi Arabia, UAE, India and Qatar with the exception of ENSCO 53 which is entering shipyard for upgrade and life extension and ongoing customer discussions for following work for ENSCO 50. Our Middle East jackup fleet would anticipated contract extensions is well committed through 2009.

In the North Sea, there is continuing strong interest in demand for jackups in 2009 and beyond, especially for standard day rates of the UK and U.S. sectors. The ENSCO jackup fleet has only limited availability in the second half of 2009 with a number of options still to be declared.

The heavy duty jackup remains firm and we expect our highest deck rigs will be contracted through 2009. We are encouraged by the level of additional enquires for drilling in the Mediterranean. We have two jackups committed to this market with good prospects for continued work.

Turning to the Western Hemisphere, the U.S. Gulf of Mexico jackup market has recently shown improvement. Operators are contracting premium jackups for extended terms put up substantial decrease in the size of the jackup fleet in recent years. Following the recent loss of two premium jackups, three if you could the diamond rig which is now serving in a support role due to the damage from hurricane Ike and the departure of two rigs offset by one newbuild entry, there are only 20 premium independently cantilever rigs in the U.S. Gulf of Mexico.

We expect the market will remain firm with the likelihood that additional premium jackups will move to Mexico, Venezuela or Brazil. We have been adding backlog and as evidenced in the our recent contracts status report day rates have increased.

With regard to PEMEX, we were the low bidder on the recent tender for two jackups. We have been formed by PEMEX that we can expect to hear the results of that tender very shortly. PEMEX recently was out with another tender for four jackups in the deepwater rig, but that request was withdrawn the same day.

PEMEX representatives have informed us that they needed to work due to internal processes and that they will retender for these rigs in the next few weeks. PEMEX has also informed us that their current intent is to tender for more incremental rigs later in the year.

Now let's turn to the deepwater market. We are encouraged by the level of dialog with customers for our three available newbuild rigs. We continue to see an increase in deepwater discovery being made in Brazil, West Africa, India, Malaysia, Australia and U.S. Gulf of Mexico.

As mentioned earlier, the current worldwide liquidity situation is beginning to impact speculative rig contractors. Industry speculation indicates some operators may now need to seek alternative assets as some of the speculative newbuild rigs are cancelled or delayed. We have not seen any drawback in programs as a result of the current commodity price environment, but we will continue to closely monitor developments.

We continue to make good progress on our deepwater newbuild program underway Keppel FELS shipyard in Singapore. ENSCO 8500, the first in the series of seven for deepwater semisubmersibles departed from Singapore on September 23rd, and it is expected to arrive on the Gulf of Mexico in mid-December when it undergo deepwater sea prowls and final out on a date.

We expect that drilling operations will commence in mid-February 2009. ENSCO 8501 is progressing well and we anticipate delivery in the second quarter of 2009. The rig will then mobilize to the U.S. Gulf of Mexico and operations are expected to commence in the third quarter.

On to ENSCO 8502, we're successfully joined and removed from drydock just last week and ENSCO 8503 continues on track with plan propone [ph] to launching in April 2009. Jay gave some color into our 2009 outlook. Our deepwater investments will begin to make a meaningful contribution in 2009.

ENSCO 7500 will commence for a new contract in Australia at a day rate of $550,000 per day. With the revenue deferred during mobilization, the actual recognized revenue from this contract will exceed $600,000 per day. In addition, we expect that ENSCO 8500 and ENSCO 8501 will be on the payroll in 2009 adding to our financial results.

Our global diversification of assets continues to service well. In some markets, it experience a flatting in day rates. We'll see other market experiencing growth.

In closing, as we have stated, the current business environment will be challenging for all global businesses, but we believe ENSCO is well positioned. We will continues to be conservative in our business approach and should market conditions worsen, we can and will adjust business operations accordingly.

As strategic opportunities arrive, we believe we have the financial flexibility to respond. However, we will continue to preserve our conservative balance sheet. In addition, we have excellent growth expectations with our deepwater fleet expansion which may count any market softness elsewhere.

Before opening the call to questions, I want to acknowledge our newest addition to our senior management team, Carey Lowe joined the company in August 2008 as Senior Vice President. His responsibilities includes safety, health and environmental matters, capital projects, engineering and strategic planning.

Prior to joining the company, Carey served as various capacities at Occidental Oil & Gas, Sedco ForEx and Schlumberger Oilfield Services. We look forward to his contributions.

Jay and I are available now to answer your questions. Additionally, several other members of management are also available to address questions regarding the respective areas.

Richard, I will now hand the call back to you.

Richard A. LeBlanc - Vice President, Investor Relations

Yes, Diana, we're happy to take questions at this time.

Question And Answer

Operator

Thank you sir. [Operator Instructions]. And we'll take our first question from Dan Boyd with Goldman Sachs.

Daniel Boyd - Goldman Sachs

: Hi thanks. Dan, throughout your comments you did mention the challenges that you see out there for the market globally. But then when we went around each market, everyone... every single market for every single asset type seems actually very bullish. So can you help me reconcile where you are actually seeing the challenges or where you might expect the market to weaken. Should oil prices hold, these levels are lower.

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Yes. Dan, that's the... I think Jay said it when he started his remarks. When you look at our business and we've talked to our customers, and we got back from a two-week trip around the world talking to our customer, build goodwill [ph] with out customers.

There just seems to be a complete disconnect between the health of the business and what's going on the marketplace. So our market reports are pretty bullish because quite frankly that's where our customers continue to be bullish on their program. So its kind of --

Daniel Boyd - Goldman Sachs

I guess, with that outlook and given the dislocation that really I guess you are implying is really in the stock price. Do you think this is a point where you will get more aggressive than at buying back shares unless this is the only reason why you're really stopping the share repurchases so that you can be opportunistic and potentially making acquisitions down the road.

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Dan, there's two points. One, there were probably several people in our last conference call that aren't on this conference call today's because the financial institutions they work for don't exist any longer. That was the cost of carrying different business cards than we were last quarter. So we are dealing with some fairly unprecedented financial times. So I think it is an opportunity to be a little conservative. That having been said, there are a lot of opportunities. So we are going to try be opportunistic as well.

Daniel Boyd - Goldman Sachs

Could you help us understand some of the opportunities that might make more sense for ENSCO for me to understand JVs might not make the most sense as well as it doesn't seem like drill ships really fit in your portfolio. So is there something where you would want to go in and take and go overlay existing rigs been built or do you prefer to hopefully see those actually cancel then you've take over the shipyard slot.

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Dan, we've said that we were going to be well aggressive in building out our deepwater rig. I think any of those... any opportunities that come up in that area, we'd take a look at.

Daniel Boyd - Goldman Sachs

Okay. Thanks. I appreciate that.

Operator

And we'll move on to Ian MacPherson with Simmons & Co.

Ian MacPherson - Simmons & Co

All right, Dan, just to follow-up on that question regarding opportunities for using your cash. If you're, I guess more cautious with buying back your own stock down here, it's a below half of the average prices of what you bought in the third quarter. Are there external investments that would compete with that opportunity to buy your stock at 33 for example?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

There are a number of opportunities to reinvest in the business right now that didn't exist a month ago.

Ian MacPherson - Simmons & Co

Okay.

Daniel W. Rabun - Chairman, President and Chief Executive Officer

That are very attractive.

Ian MacPherson - Simmons & Co

Okay. I guess changing over to PEMEX, I just want to clarify, did you say which rigs was announced a little better on the recent award.

Jay W. Swent III - Senior Vice President and Chief Financial Officer

87... 89, things we did were a little bit better.

Unidentified Company Representative

All right. And it's worth 160

Jay W. Swent III - Senior Vice President and Chief Financial Officer

A little north of 160 and 155.

Ian MacPherson - Simmons & Co

And both of those rigs will be going to Mexico?

Unidentified Company Representative

Correct.

Ian MacPherson - Simmons & Co

Okay.

Unidentified Company Representative

The awards --

Ian MacPherson - Simmons & Co

Okay. And then you said that you expect the recently retract tender to reemerge in the weeks to come as well as further incremental rigs beyond that later this year. Is that correct?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Yeah. And that's what PEMEX has advised us. They have countered technical division without tender retracting at the same days. Its kind of a internal technical process.

Ian MacPherson - Simmons & Co

Okay. Do you know how many rigs you're talking about in the second one?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Are you talking about the one that they just pulled?

Ian MacPherson - Simmons & Co

The one that you expect to follow after that.

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Four. We think it's going to be four additional jackups. 300 players.

Unidentified Company Representative

300 players.

Ian MacPherson - Simmons & Co

Okay. To replace that rigs or incremental to their aggregate fleet, do you know?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Well, the 300 rigs would not replace the net rates because there aren't any 300 foot mat down rigs that maybe possibly won, I'm not sure. It would be incremental.

Ian MacPherson - Simmons & Co

Okay. All right. Thank you very much.

Operator

And we'll move on to Arun Jayaram with Credit Suisse.

Arun Jayaram - Credit Suisse

Good morning, guys. Jay, I want to ask you, on the ENSCO 8500, you have the $20 million lumpsum payment. I wanted to understand what the timing of that was and how you will counter for that $20 million payment.

Jay W. Swent III - Senior Vice President and Chief Financial Officer

Well, they can't really be down against deferred over the life of the contract like any other deferrals. The timing on the payment is sometime during the fourth quarter.

Arun Jayaram - Credit Suisse

Okay.

Jay W. Swent III - Senior Vice President and Chief Financial Officer

So even though we'll get the cash early, the recognition will be over a long period of time.

Arun Jayaram - Credit Suisse

Okay. Second question guys, in the most recent ODS offshore rig monthly, they've put out some commentary looking at each individual market and they sited the 15 rig jackup excess in the Asia Pacific market. So obviously, I want to get you're comments on that because that's a pretty big market for you guys?

Jay W. Swent III - Senior Vice President and Chief Financial Officer

You're talking about including the newbuilds coming in?

Arun Jayaram - Credit Suisse

They don't specify, but I think that would be inclusive of those newbuilds.

Daniel W. Rabun - Chairman, President and Chief Executive Officer

We've said, Arun, for some time that the one market that has some exposure would be the Southeast Asia market, while those rigs are being built. You are seeing those rigs marketed elsewhere in the Middle East and Africa and other markets. So I think that trend will continue. And I don't think that ODS is really.... I don't know that that has changed that much from our prior forecast. I think they always have expected maybe some surplus in that market.

Arun Jayaram - Credit Suisse

Have you seen any negative pricing points in that market or some of your competitors getting a little bit more aggressive on pricing given the change in the marketplace?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

What we've seen, we've seen some of newbuilds discounting some more to be able to get work because they still have to do to get the work. It really unaffected us. I'd say its clearly not going north and certainly flattened out, if you will. But we have a lot of opportunities out there. When you look at the opportunities that we have, there is quite a few projects that we're tendering our rigs into.

Arun Jayaram - Credit Suisse

Where would you put, Dan, for a 300 foot premium jackup, something like the ENSCO 56. What is the range of opportunities in terms of day rates that you're seeing in that market?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

That's always difficult because the tax rate is out there because rates could really vary pretty widely. So I think, fairly consistent with where... whereas shooting out of New Zealand right now. That's a pretty high rate. And Bill, what would you say?

William S. Chadwick, Jr. - Executive Vice President and Chief Operating Officer

Well, excluding the premium for Australia and New Zealand, I think rates are somewhere in the 165-185 range.

Arun Jayaram - Credit Suisse

Okay. So you obviously haven't seen any decline, if that's the rates that you are seeing?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

No, the ODF that you're looking at, I haven't looked that real close. I don't know, maybe it will go rigs, three of those are starting to go up in China which is... I don't know if that was contemplated in that data.

Arun Jayaram - Credit Suisse

Okay. I'll say that we talk perhaps offline. Thanks a lot.

Operator

And we'll move on to Tom Curran with Wachovia Capital Markets.

Tom Curran - Wachovia Capital Markets

Good morning fellows.

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Good morning Tom.

Tom Curran - Wachovia Capital Markets

Dan, you had just mentioned that there are number of attractive opportunities to reinvestment in the business that didn't exist just a short time ago. I was hoping you could share some color on what's leading those opportunities to emerge in terms of how much of it to the extent that you can discern it seems to be arising from issues arising with regards to the construction project and the shipyard, perhaps rookie or inexperienced owners will startup yards getting it over their heads.

How much of it is related to the global credit crisis? And then how much perhaps to the owners becoming concerned about the outlook for the market?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

I would say its 100% related to the credit crisis.

Tom Curran - Wachovia Capital Markets

100% financing related?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Yeah.

Tom Curran - Wachovia Capital Markets

Do you still see the potential for some engineering or construction related mishaps to potential lead to some blood in the water that you could opportunistically jump on as well?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Yeah. The answer of the question here its all related to the credit crises, newer projects.

Tom Curran - Wachovia Capital Markets

Okay.

Daniel W. Rabun - Chairman, President and Chief Executive Officer

There are projects that are midstream that are having financing problems and I don't know where... I don't if any shipyards are having any issues, but clearly while the newbuild guys are having and grows.

Tom Curran - Wachovia Capital Markets

Okay.

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Yeah, a lot of these companies appeared to be I don't know that much but all. They were accessing the credit markets or capital markets as the payments came due and payments are coming due, there is no credit market or capital market. And they are finding it difficult.

Tom Curran - Wachovia Capital Markets

Great. Turning to the North Sea, could you tell us what percentage of your rigs there are currently drilling natural gas prospects versus oil. And then if I were to look at the fleet status report and go down the line of expected early survivalability by rig, for which rigs might there be conditions that can lead it to becoming available earlier and why?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

I've got the rig status report here. Everything drilling in the southern gas basin in the... that's oil gas. Most of the rigs that is drilling for oil and early survivalability, just out at rig status where you can figure it out.

Tom Curran - Wachovia Capital Markets

Okay. But in terms of your early survivalability, are any of the rigs working on programs where the operator has some sort of early cancellation provision or it's well to well in terms of the results or the economics and therefore the incident of releasing it earlier than the availability indicates.

Daniel W. Rabun - Chairman, President and Chief Executive Officer

All these markets have different dynamics. The North Sea markets, the contracting dynamics have always been in the North Sea. They have some sort of termination provision with overall period of time. Those periods... 120 days, 180 days. So they're all over the map in that market. But that's a fairly common contracting strategy, just like in the some of the LOCs in their 30 days cancellation provisions.

Tom Curran - Wachovia Capital Markets

Okay. And last question here, Jay. And I'm sorry if I missed this, with the two jackups that were waiting on whether in New Zealand and had the revenues deferred, were the operating cost associated with those rigs also differed in terms of recognition.

Jay W. Swent III - Senior Vice President and Chief Financial Officer

Yes.

Tom Curran - Wachovia Capital Markets

Great. Thanks guys. I'll turn it back.

Operator

And we'll move on to Robin Shoemaker with Citigroup.

Robin Shoemaker - Citigroup

Thanks. Good morning. I wanted to ask you about the North Sea specifically. Some of the major service companies that have held conference calls here in the last few days have said that one of the international markets that's slowing or likely to slow is the North Sea as it has in past periods of weaker oil prices. Of course, your perspective is would be that the jackup market seems to be quite different. But your fleet status report shows you are working for some of the U.K. independence or the North Sea independence who are the ones more likely to cut back. Are you seeing any signs at all that beyond '08 on renewal that some of the U.K. independence maybe slowing down?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

No. Quite the contrary. That's probably, I would say the strongest market we've got right now.

Robin Shoemaker - Citigroup

Okay. I guess it's just a different perspective from what we've heard from others. I wanted you ask you that secondarily about the investment in the newbuilds. This year you mentioned that your investment is 670 on the six new rigs. So as we go into 2009, I believe that number comes down and probably comes down a little more 2010 as you finish up the program. But roughly could you give us some idea of what those outlays on the newbuilds are next year?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Let me try to give it to you in a different form rather than... the total program for all the rigs is about 3.1 billion. By the end of the year, we will spend about 1.3 billion. So that will leave us about $1.8 billion to go over the life of the project. And that probably, it breaks out between 2009-2012 and its pretty evenly distributed over those years.

Robin Shoemaker - Citigroup

Okay.

Unidentified Company Representative

We're filing the Q here in just an hour or so. It's all in there.

Robin Shoemaker - Citigroup

Okay, fine. Sure. All right. Well, I guess that's all for me. Thank you

Operator

And we'll move on to Pierre Conner with Capital One.

Pierre Conner - Capital One

Good morning gentlemen

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Good morning

Pierre Conner - Capital One

Dan, relative to the fleet in the Middle East and what type of prospects they're working on, and it's pretty obviously... your Roche gas rigs, for Roche gas for LNG gas. But tell us the rigs drilling for Saudi at 84, there is oil drilling or does internal gas consumption. What are those rigs working on? Do you know?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Three, oil. One, gas.

Pierre Conner - Capital One

What is your perspective on that, given the commentary in Saudi and potential OPEC cuts, you've got some options on those rigs, potentially just net with them. How do you feel about those, Dan?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Well, the options are still price available at the current markets. So, everything Saudi [ph] has told us has been fairly consistent. They are increasing their onshore production and moving rigs from their onshore programs to their offshore program.

Pierre Conner - Capital One

Okay

Daniel W. Rabun - Chairman, President and Chief Executive Officer

And they continue to make the same indication. So we do have, I think we got a couple coming off contracts late in the year

Pierre Conner - Capital One

Right

Daniel W. Rabun - Chairman, President and Chief Executive Officer

October timeframe. So we still have options on their price well below current markets.

Pierre Conner - Capital One

Current assumptions they execute those given where the rates are.

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Yeah, I would think so.

Pierre Conner - Capital One

Yeah. Next question going back to the deepwater construction program and either for you or somebody. But given that you might have some of the shipyards having projects cancelled, things should be loosening somewhat, what if any of the current contracted price for construction might have some variable cost in it, maybe we should have Pete this on his call earlier. But is there any opportunity there or we should we think about these outlays as fixed.

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Well, there are full priced and we're committed to have contracts on. So there is no real variable cost in there.

Jay W. Swent III - Senior Vice President and Chief Financial Officer

Yeah, I mean, I think obviously Pierre that cuts both ways. I mean there are fixed price contracts, the shipyard contract is fixed price, virtually all of the third party equipment is fixed price. So it doesn't go upward or down in this kind of time period.

Pierre Conner - Capital One

Right. Okay. So then when you contracted. And then thanks. Actually a follow-up Jay. Just a clarification. The quantification of your customers, was that calculation based on numbers of customers or percentage of revenues possibly.

Jay W. Swent III - Senior Vice President and Chief Financial Officer

We're talking about the same...

Pierre Conner - Capital One

Got it.

Jay W. Swent III - Senior Vice President and Chief Financial Officer

And when you... we are looking at backlog but if you just go down list I mean it's amazing, as Dan said, we've done it top to bottom look at both vendors and customers to make sure we feel comfortable in what the situation going forward, and even I was quite surprised by just the line, just look at the line item by line item, virtually all of our customers other than some of the independents in the North Sea and Gulf of Mexico are very strong investment grade.

And a lot of our customers that are in those other markets if not investment grade are still very strong companies. So, I think we feel pretty good about their wherewithal. And I think we're pretty conservative so to extent that we're ever dealing with customers are smaller a question. But we're usually getting a fair amount of securities, so that we're comfortable, we're going to get paid. But that's different in getting the contract. But we're using pretty good shape on receivable.

Pierre Conner - Capital One

Okay. And then Jay, if you think about sort of cash flow generation of the fleet in the future and trying to reconcile that with the current equity evaluation and try to think about what's the maintenance CapEx required to keep. You've got 110 million in sustaining projects this year, next year. Given the renewal you've gone to with the fleet, is this what the number we should think of relative to what maintenance CapEx would be?

Jay W. Swent III - Senior Vice President and Chief Financial Officer

Well, I think you have to look at the maintenance plus the others. So it's probably 150 and that's in a world that's just looking at our jackup fleet. I don't think we have any basis yet to tell what the maintenance CapEx will be on the semis once you're up and going.

Pierre Conner - Capital One

I understand. Very good. Thanks gentlemen.

Jay W. Swent III - Senior Vice President and Chief Financial Officer

Thank you.

Operator

We'll move on to David Smith with JP Morgan.

David Smith - JP Morgan

Hi, good morning.

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Good morning.

David Smith - JP Morgan

Could you tell us which, if any, are the deepwater newbuilds and your program having cut still yet?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Dave, 5 [ph] and 8506.

David Smith - JP Morgan

Okay. And I'm asking this as a big fan of the newbuild program but are there any cancellation clauses for those rigs that haven't begun construction?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

No, I mean in all of those rigs there is a pretty substantial upfront payment and those are non-cancelable contracts.

David Smith - JP Morgan

Okay. And a follow-up question is you mentioned the contract cancellation provisions with your clients from the North Sea. Does that include some level of a make whole provision?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Specifically they've got to give us I think 120 to 180 days notice or pay in lieu of that.

David Smith - JP Morgan

Okay. So if you had a contract going through the end of '09, they could give you a notice tomorrow and 120 days we should be looking at if that is maybe kind of the firm fixed backlog.

Daniel W. Rabun - Chairman, President and Chief Executive Officer

I think it's the right way probably to look at.

David Smith - JP Morgan

Okay, I appreciate it. Thank you.

Unidentified Company Representative

Certainly.

Operator

And we'll move on to Geoff Kieburtz with Weeden.

Geoff Kieburtz - Weeden

Thanks. I just had a background question on the opportunities comment that you made, Dan. I'm assuming what you're talking about here is projects, newbuild projects are in some stage of not being complete and there is some financial difficulty. Who is responsible for making the decision to sell? Is it the shipyard or is it the owner or is it some combination?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

No, it's the drilling contractor.

Jay W. Swent III - Senior Vice President and Chief Financial Officer

I guess at some point, it's conceivable, that its the shipyard, but that's after they haven't been paid and they're foreclosed on the asset and then so, I think that weighs out. I think the conversations right now and the conversations for the foreseeable future will be with the contractors himself, the drilling contractors themselves.

Geoff Kieburtz - Weeden

Okay. All right. That's it. Thanks.

Operator

And we'll move on to Mike Urban with Deutsche Bank.

Michael Urban - Deutsche Bank

Thanks, good morning. You'd mentioned a couple of times that some of the spec newbuilds have come into the market but those guys have had to discount pricing to get in and hasn't really had a spillover effects to you guys as an incumbent. Does it at some point though have an impact on any kind of rates or contracts that are indexed to the market for you or some of the other incumbents and that has a potential downward effect over time.

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Its not that. Other than the PEMEX contracts, we really don't have any index contracts. I mean, it's not really a contracts of index [ph].

Michael Urban - Deutsche Bank

Right. But some of your competitors don't expect you to know what those are or not. But if you've... some of the incumbents have index contracts and that starts to come down. I was just wondering if that could potentially have an impact.

Daniel W. Rabun - Chairman, President and Chief Executive Officer

The way that most of these indexings work out. They are global indexes. And it's usually keyed off the highest rate, not the lowest rate. So, let me answer your question. I mean its not going to have any effect on us.

Michael Urban - Deutsche Bank

Okay. That's great. Thank you.

Operator

Moving on to Jeff Siddle [ph] with Majestics White Sugar [ph].

Unidentified Analyst

Hey, good morning guys. Touching on the foreign exchange market, I know you've talked a little bit about the currency hedging on the manufacturing program for the newbuilds. Can you quantify if anything what the foreign exchange impact is you are seeing in terms of cash operating cost right now?

Unidentified Company Representative

We've put in place forward hedges for a large portion of our non-U.S. dollar denominated costs and typically we're hedged fully one quarter out and then it steps down from that as you go over time. So in the near term, I mean for example we have hedges in place against Sterling, there are close to $2 and obviously Sterling is down on the 160 range now.

So we will get some minor benefit of that in the current quarter. But for the most part our cost, they are fixed at the $2 rate. Obviously, as the currency have moved and we are doing hedging transactions further out, we are averaging down.

Unidentified Company Representative

It will take a couple of quarter to work through the system.

Unidentified Analyst

Okay, understood. And then I guess the 85, 05, and 06 have you started to implement any forward hedges in terms of currency exposure there?

Unidentified Company Representative

The same dollar exposure I was talking about is really against that whole program.

Unidentified Analyst

Correct.

Unidentified Company Representative

Most of how we've hedged that is just by holding Sing dollars. We do have some forward contracts as well. They tend to be pretty inefficient way to hedge that just going forward points on the Sing dollar. So we have a small portion of our total Sing dollar exposure that is un-hedged right now but it's a... I have to get the number but its probably less than 20% of the total amount that's due over the whole life of all of the rigs.

Unidentified Analyst

Okay. Thank you.

Unidentified Company Representative

You're welcome.

Operator

[Operator Instructions]. And we will move on to Brian Uhlmer with Pritchard Capital.

Brian Uhlmer - Pritchard Capital

Good morning guys.

Unidentified Company Representative

Hey Brian.

Brian Uhlmer - Pritchard Capital

I had a question on what your strategy going forward would be if you have a market downturn. Could you talk about what your strategy is versus the stacking rigs and cutting rates and how you make those decisions?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

How we make a decision to stack a rig?

Brian Uhlmer - Pritchard Capital

Yeah. If market turns down or your contracts, your customers are asking you to cut rates, substantially at one point do you make a decision versus taking a cut rate and not stand discipline with your rate versus stacking your rig and lowering the supply out there.

Unidentified Company Representative

Brian, fortunately we haven't had to confront that here recently. Historically, you go back to some of the other cycles, there's a point in time when you have to make a decision that you're not leading the deterioration of rate, but that you're going to have to participate in it in order to keep the equipment working. The ultimate decision comes to cash flow breakeven. We haven't had to make those kind of decisions for a lot of years. We don't see them coming in the future but ultimately that's what it comes down to.

Brian Uhlmer - Pritchard Capital

Okay. Unfortunately, I'm receiving that question, I don't see it happening either. But I think some people are hearing that question. Thanks.

Daniel W. Rabun - Chairman, President and Chief Executive Officer

Sure.

Operator

We'll move on to Mike Drickamer with Morgan Keegan.

Mike Drickamer - Morgan Keegan

Good morning, guys. Dan, it seems to me that the market has kind of historically drove your preference for building out the deepwater rigs to being more of a build versus buy scenario. Has that changed? Has your preference now perhaps more buy versus build?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

We'd say its changed. We really feel like we have a competitive advantage with our 8500 Series and cost effective to builds and cost effective to operate. So, that clearly has been our preference and where we've invested heavily. And with respect to the uncommitted rigs, the marketing business continue at nearly fairly brisk pace. The alternatives in terms of buying are really being driven more by opportunities that are arising as a result of the credit market not for us out seeking those alternatives. So we are pressing ahead with our program and... but we're taking a look at these alternatives that continues to evolve.

Unidentified Company Representative

I think one thing I'd add to that too is that there is a huge efficiency that comes from having one rig and fleet in terms of spars and training and support and everything else. So while we wouldn't rule it out or certainly we're pretty happy with the one class approach that we have to this right now.

Mike Drickamer - Morgan Keegan

All right guys. Thanks a lot.

Operator

And moving to Robert Mackenzie with FBR Capital Markets.

Robert Mackenzie - FBR Capital Markets

Thank you. My question has been answered.

Operator

And we'll move on to William Mansfield with Millennium [ph].

Unidentified Analyst

Hi gentlemen, I just wanted to follow-up on this issue of the opportunities that you kind of discussed, there might be appearing in the market given the credit crisis here. One issue I was curious about is there a timing element to that. Do you guys think from your own perspective, you need to see there is stability in the financial markets or in the oil market before you'd move forward or is it actually possible, you'd put out an announcement next month or the month after, hey we've just bought a rig in near bankruptcy type of thing?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

I think there is a lot to do with pieces to this and it's moving at pretty fast pace. So after this it is really easy to answer to that question and the opportunities that tends to... seems the multiplying by the day here. I would say generally speaking, we're going to be real conservative looking at these alternatives. So I would expect that it's going to take a while for it to walk through the system.

Unidentified Analyst

And presumably the conservatism would also play through on your pricing dynamics you'd want material discounts to weather construction cost or fair value or whatever?

Daniel W. Rabun - Chairman, President and Chief Executive Officer

We think we have a competitive advantage with un-levered balance sheet and we intend to use that advantage.

Unidentified Analyst

Okay. But... okay. Thank you very much.

Unidentified Company Representative

Diana, we have time for probably one more question.

Operator

Thank you sir. [Operator Instructions]. And it appears there are no further questions, sir.

Richard A. LeBlanc - Vice President, Investor Relations

Okay. We'd like to thank everyone for joining us today and we certainly look forward to talking with you again. Our fourth quarter and full year 2008 earnings conference call is scheduled for Thursday, February 26. Thanks.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. .

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