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Atwood Oceanics, Inc. (NYSE:ATW)

F4Q08 (Qtr End 09/30/2008) Earnings Call

November 25, 2008 11:00 am ET

Executives

Jim Holland - SVP and CFO

John Irwin - President and CEO

Analysts

Collin Gerry - Raymond James

Tom Curran - Wachovia

Arun Jayaram - Credit Suisse

Jud Bailey - Jefferies & Company

Waqar Syed - Tristone Capital

Robert Spivy - The Abernathy Group

Operator

Good day and welcome to today's program. It is now my pleasure to turn the program over to Mr. Jim Holland. Go ahead, sir.

Jim Holland

Good morning and welcome to Atwood Oceanics conference call and webcast to review the company's operating results for the year and quarter ended September 30, 2008. Speakers today will be John Irwin, President and CEO; myself, Jim Holland, Senior Vice President and CFO.

Before we commence our financial and operational review, let me as usual remind everyone that during the course of this conference call, we may make forward-looking statements based upon managements' current plans, expectations, estimates, assumptions, and beliefs concerning future events impacting us and therefore involve a number of risks and uncertainties.

We caution that forward-looking statements are not guarantees and actual results could differ materially from those expressed or implied in the forward-looking statements. The words believe, estimate, impact, intend, anticipate are predictive of uncertainties of future events or outcomes. Undue reliance should not be placed on these forward-looking statements which are applicable only on the date hereof.

Before John provides the comments on the company's current operations, let me comment on some events that impacted results for the quarter. Earnings per share for the quarter and the year ended September 30, 2008, were $1.16 and $3.34 respectively with an effective tax rate of 14% for the quarter and 12% for the year. Total drilling costs for the quarter was approximately $56 million.

In our last conference call on August 8, I stated at that time we believed that the total drilling cost for the fourth quarter will be around $57 million with an effective tax rate for the quarter of approximately 11%. During the fourth quarter, we incurred higher than expected income taxes in Australia due to the impact of a stronger US dollar and in Malaysia due to the impact of drilling one 425,000 per day well during the quarter.

Compared to 2007, drilling costs in 2008 increased 14%, which is 2% below our guidance. Our operating costs for the quarter on an individual rig basis, the average per day cost for all of our operating rigs were at or below guidance with only other costs exceeding guidance due to currency exchange loss.

During the quarter, we incurred no planned zero rate days. The only unplanned zero rate days during the quarter were four days incurred by the Atwood Eagle.

Following John's comments, I will provide our current guidance on operating costs and cover some other items that will impact operating results for the first quarter and fiscal year 2009.

Before I turn the call over to John, based on new information this morning, I need to provide two updates to our fleet status report filed yesterday. This report indicated that the current well being drilled by the Atwood Beacon was estimated to extend to June-July 2009. The current well it is now expected to extend to May-June 2009.

For the Richmond, the report reflects that the completion of its current well was February 2009. However, this well is now expected to be completed in January 2009.

I will now turn the conference call over to John.

John Irwin

Good. Thank you, Jim, and good morning, everyone. Yesterday, we filed our fleet status report with contract day rate and cost information. I am not going to repeat all of that, but I would like to comment as always on certain highlights and some additional items. We will be pleased of course to respond to any questions at the end of the call.

During our fourth fiscal quarter, we achieved 100% utilization of our fleet and our results, as Jim said, reflected favorable performance again this quarter in terms of planned and unplanned downtime.

Our existing eight operating units continued to be leveraged to key deepwater and international markets. Our current estimated contract backlog in terms of available rig days is approximately 75% for fiscal '09, and 45% for fiscal 2010.

Currently, we have approximately $2 billion of revenue backlog compared to approximately $1.5 billion of estimated capital commitments for three new units we are constructing. Two of these units are for deepwater and this will further increase the deepwater leverage of our fleet.

Out of our eight units currently working and three drilling units currently under construction, five have current contract commitments that extend into 2011 or later. One, the Seahawk has options which are expected to be exercised and if exercised will extend the contract through fiscal year 2010.

Four units, the Southern Cross, Beacon, Vicksburg, and Richmond have current contract commitments which expire during fiscal '09 and one unit, an ultra deepwater unit under construction with no contract will not be delivered until mid-2012.

Now some comments on certain of our units starting with the Atwood Hunter which finished its program for Petronas in Mauritania on October 16, and commenced mobilization for its commitment with Noble and Kosmos in the Mediterranean and offshore West Africa. Now, this with a combined term of four years of operating rates from $511,000 to $545,000.

The Atwood Hunter arrived in the eastern Med on November 16 for the first well of this four-year program and this first well is at a day rate of $511,000 and has expected duration of 80 to 160 days. The Atwood Hunter will then return to West Africa for the balance of its four-year contract. All day rates are subject to adjustments pursuant to cost escalation provisions. The clients are also to provide all tow vessels and pay a day rate of approximately $460,000 a day during all mobilization periods.

The Atwood Southern Cross is currently working at a day rate of $350,000 under a one well commitment in Mauritania that should extend into December 2008. We are currently pursuing additional work for this unit but have not secured work for the rig immediately following the completion of its current drilling commitment.

Accordingly, there is a possibility that the rig could incur a period at zero rate without a contract. Should there be a downtime period after demobilization on day rate, we will use this opportunity for planned maintenance. The Atwood Southern Cross has been performing well in terms of meeting the needs of its clients.

The Atwood Beacon has commenced drilling its final well at an operating day rate of $133,500 under its current contract offshore India. Currently estimated, this well could extend as Jim mentioned earlier, until May or June 2009. We are currently pursuing and discussing additional work for this unit outside India at day rates higher than the existing contract.

The Vicksburg has a current contract commitment offshore Thailand at a day rate of $154,000 that extends into June of 2009. We are currently pursuing and discussing additional work for this unit, this current area of operation in Southeast Asia.

Our only rig in the US Gulf of Mexico, the Richmond has just completed one well at a day rate of $75,000 and moved to its next well at a day rate of $78,000. This current well is expected to be finished in January 2009. The Richmond then has a further one well commitment at a day rate of $85,000 which should keep it committed until mid to late March 2009.

Further, there's an option outstanding for one well at mutually agreeable day rates. The Richmond has been highly utilized in the Gulf of Mexico for many years and we expect high utilization of this rig during fiscal year 2009.

Our ultra-premium jack-up, Atwood Aurora, currently under construction in Brownsville, Texas. It has been awarded a two-year contract offshore Egypt. This contract provides for a day rate of $165,000 with an option to extend the commitment to three years. Total day rate for the two-year program will be around $170,000 including mobilization amortizations.

The rig is currently targeted to commence operation in mid-February 2009 following mobilization by dry transport. And the dry transport vessel is currently expected to commence loading the Atwood Aurora sometime in December following targeted delivery of the rig.

In addition to the Atwood Aurora, we also have two new deepwater semisubmersibles being constructed at Jurong Shipyard in Singapore. Both units are of the ExD Millennium semisubmersible design. Our construction of these two units is based on a proven design being built at a proven, experienced shipyard and with effective use of our own resources.

The first of these two new construction semisubmersibles are conventionally for more units to be provided to Chevron Australia for a three year contract with the right to extend the firm period to six years. The contract provides an operating day rate of approximately $470,000 if the firm commitment is three years and $450,000 if the right is exercised to extend the firm commitment to six years. These day rates in this contract are also subject to adjustment pursuant to cost escalation provisions of the contract.

This first unit is expected to be delivered in early 2011. Progress is on schedule with our project team having been in place since early this year. Detailed engineering is progressing well. Approximately 90% of new equipment has been ordered and first steel has now been cut. The new rig will be able to conventionally mooring to up to 6,000 feet of water and will become our 10th company-owned mobile offshore drilling unit.

Our second new semisubmersible being constructed at Jurong in Singapore is also a Friede & Goldman ExD Millennium design unit, in this case a dynamically positioned rig to be built and equipped for a water depth rating of 10,000 feet. The second semisubmersible is scheduled for delivery in mid 2012. We continue to see the outlook for ultradeep water drilling to be strong. This rig will become the 11th company-owned mobile offshore drilling unit.

Financing for the construction of both semisubmersibles will be provided from a combination of ongoing cash flows and debt as necessary. We have just closed today on a second credit facility of $280 million, which brings our total borrowing capacity under our two facilities up to $580 million. Based upon our current capital commitments and backlog cash flows, we do not expect our debt to total capitalization to exceed 30%.

Now, our ongoing fleet major upgrade, new construction capital program, which started in '97, has put the company in a strong position to meet the drilling needs of our clients over the longer term and to take advantage of attractive international markets. Today, execution is a key focus for us, both in terms of our existing fleet or our existing operating fleet and delivering as planned on our current new construction program.

We will remain opportunistic in the longer term in terms of identifying value-enhancing growth at the right time. However, we have no immediate plans for growth in addition to the three units we are now constructing. Our strategy for meeting our clients' needs with safe quality services, premium equipment and by leveraging our activities to attractive international markets in deeper water has served us well and continues to guide us forward.

Our second new semi for ultra deepwater and the 11th unit is an incremental step in terms of increasing our capability and leverage to deeper water depths for longer-term opportunities. We remain well positioned to the future, firmly focused on execution and are working to continue building a strong leading company with the goal of creating value over the longer term. Actively developing our organization and our people for the future continues to be high on our agenda.

Thank you all for your time and for your interest. I'll be available to answer questions after Jim's remaining comments. And now, I'll turn it back to Jim for him for the balance of his remarks.

Jim Holland

Thank you, John. Before we open the conference call to questions, let me address some items that will have an impact on the operating results for the first quarter and fiscal year 2009.

As John stated, the Southern Cross expects to clear its current commitment around mid December, and without immediate ongoing work being secure, it will commence a period of zero rate. Therefore, there is current uncertainty on the rig's ultimate impact on the results for the remainder of this year, 2009.

If the rig is idle after completion of its current work, we expect its current operating costs around $100,000 per day could increase during the March 2009 quarter to around $120,000 per day due to certain maintenance and equipment repairs that we expect to be performed during this idle period.

Thus far in the first quarter the Atwood Hunter incurred 15 days of day rate at $240,000 during the completion of its commitment in Africa and 40 days at day rate of $460,000 during its location to offshore Israel. For the rest of the quarter, it should earn a day rate around $511,000 plus day to amortized revenues around $16,000.

As John has stated, the Atwood Aurora is expected to commence operations around mid February. All costs to transfer this unit to Egypt will be capitalized to the cost of the rig and depreciated, which will result in its total capitalized basis being around $180 million.

The only planned or unplanned downtime that we have incurred thus far in the first quarter of 2009 was three days of zero rate time for the Atwood Beacon for its required regulatory inspections. Besides the Atwood Beacon, we expect the following drilling units will incur planned zero rate days during the fiscal year 2009.

The Vicksburg, we expect to incur 30 days of zero rate time in June or July for an estimated $30 million equipment upgrade. The Atwood Falcon could incur two to four zero rate days during the second quarter for required regulatory inspections. Atwood Hunter could incur 10 zero rate days during the fourth quarter for required regulatory inspections. The SEAHAWK could incur three to five zero rate days during the second half of the year for maintenance.

In addition to these planned zero rate days that could be incurred during fiscal year 2009, unplanned zero days can occur any time. During the previous four fiscal years, we've incurred approximately 1% to 2% of unplanned zero rate days per year related to equipment issues. In planning our downtime maintenance and inspection periods, our goal is to maintain our fleet with a focus on minimizing downtime and achieving longer-term returns.

We currently expect total drilling costs for the first quarter to be around $56 million, same as the previous quarter, and total drilling costs for the year to be around $260 million, which will result in approximately 20% increase from fiscal year 2008 of which the addition of the Atwood Aurora to our fleet is expected to account for around 6% to 7% of this (inaudible).

On a rig-for-rig basis, our expected per day operating cost levels for the first quarter of fiscal year 2009 is as follows; Atwood Hunter, $90,000; Atwood Eagle, $220,000; Atwood Falcon, $85,000; Atwood Beacon, $50,000; the Seahawk, $65,000; Atwood Southern Cross, $100,000; the Vicksburg, $45,000; the Richmond, $40,000, other costs around $15,000. We expect that the initial operating cost of the Atwood Aurora when it commences operating in February will be between $55,000 and $60,000 per day.

We currently expect general administrative expenses to be between $8 million and $9 million for the first quarter. Depreciating expense is expected to be around $8 million for the first quarter, $36 million for the year with the addition of the Atwood Aurora to our fleet. We currently expect our effective tax rate for fiscal year 2009 will be approximately 15%, which is a 3% increase over our effective tax rate for 2008 due in part to additional tax expected in Australia.

With three rigs now under construction, I will now comment on expected capital expenditures for the fiscal year. We currently have $200 million outstanding in our $300 million five year revolving credit facility. With our new $280 million five year revolving credit facility, we now have approximately $380 million of current borrowing capacity.

We expect to have outstanding debt of between $400 million and $500 million at the end of fiscal year 2009. We expect to incur between $550 million and $600 million of capital expenditures during the year.

I will now open the conference call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). We will take our first question from Colin Gerry with Raymond James. Your line is now open sir.

Collin Gerry - Raymond James

Thanks. Good morning, guys.

John Irwin

Hi. Good morning, Collin.

Collin Gerry - Raymond James

I just wanted to hone in a little bit more on the Southern Cross. You mentioned that it's coming up for renewal and we could see some downtime here. I guess you talk to us a little bit about the marketing behavior, what's going on there. Are there some contracts further down the line and it's hard getting something here near-term or just maybe a little bit more color on how you see the Cross over the next three or even 12 months?

John Irwin

Yeah. Okay, Collin. First, the rig, I believe has been performing well, so certainly in terms of longer-term, meeting needs of clients for that 2000 foot market, we still think it's a great rig. Some of the programs in that part of the market in the area in which it's been working, clients who may have and some of these tend to be smaller clients than what we would see for our deeper water markets or let's say the ultra deepwater markets.

Some of those programs, we haven't seen any cancellations as such. But some clients looking at the timing of their programs and some that may have been earlier in or later this year, maybe move into '09 or they are still deciding on timing and some of those things still being looked at. Let's say as to timing of programs in accordance with let's say probably cash flow needs and budgets and things of that nature.

We are currently and have been talking to clients Mediterranean, West Africa, and actually within our organization, we are able to market worldwide and looking at markets outside. So, I think it's something we continue to work on. It's hard to put any timing on the next work for the rig, but certainly we continue to work and talk to all clients about potential work next year, Collin.

Collin Gerry - Raymond James

Okay. So if I had to just kind of ballpark guess, what kind of downtime you think a quarter, two quarters worth of zero rate downtime or maybe even longer? Is there any kind of ballpark maybe you could steer us in?

John Irwin

No, I hate to avoid that question and it wouldn't be, it imply more than we know or have plans for at this point to try and put anything more on it than that. Certainly, where we are at is, if we have some downtime, we're going to take advantage of that, as I said, to get caught up on the planned maintenance that we need to do to the rig and have the rig ready to go with a great crew and ready in all respects.

So, our focus right now is really keeping the rig active and pursuing all opportunities and trying to move as quickly as we can, Collin. So, I realize that doesn't answer your question as to timing, but I really couldn't. It would be guessing at this point and I just want to convey from our own point of view, we are certainly planning on doing maintenance and keeping it crewed and ready to go and that's as of today. That's where we stand.

Collin Gerry - Raymond James

Okay. And then just switching gears a little bit to the jack-up market; with energy prices falling as they have and certainly we've had a little bit of fear in the jack-up market for about a year now. You've got some renewals coming up. Tell us about kind of how those conversations, characterize those conversations. Are people looking pushing back on day rate or is there still ample demand? I mean just kind of characterize the jack-up market for us.

John Irwin

Yeah. First and let me say when the Atwood Aurora joins us or joins the fleet, we will have three really ultra premium or premium jack-ups. The Beacon and the Vicksburg are both rigs with very experienced crews, great track records and in the case of the Beacon of course, it has worked 350 feet nominally a 400-foot unit and the Vicksburg has also got an outstanding track record and very experienced crew as well. So, these are rigs that we believe stand out in the market compared to some other rigs that are out there.

We are talking to clients for future work. As you know, the rate for the Beacon today is on the, we are actually on the lower side, $133,500 and we are still looking for higher rates for rig of that caliber and certainly the commitments that we've seen even in recent times in the current environment for a rig of that caliber have been higher.

And I can't, naturally, when you are working and talking to people about day rates, you can't say too much until you [touch the] land because when you are actively working on something, you might be in competitive situation. But the Vicksburg, currently looking at the current area it's in and other opportunities in Southeast Asia, the current rate for the rig is in the mid 150s, which was a leading edge rate.

The water depth rating for this rig is not quite as high as or deep as the Beacon, but an outstanding rig for cantilever unit for what it does. The downward direction on rates from where we are or the direction on rates from where we are is currently downward, although we, to this point in time, have continued to see some stable and positive fixtures.

Collin Gerry - Raymond James

Okay. That's it for me. Thanks, guys.

Jim Holland

Thank you.

Operator

Now we'll take our next question from Tom Curran with Wachovia. Your line is now open, sir.

Tom Curran - Wachovia

Good morning, guys.

John Irwin

Good morning.

Jim Holland

Good morning, Tom.

Tom Curran - Wachovia

Returning to the earlier line of questioning on the Southern Cross, heretofore you had indicated that when you looked at the Mediterranean-Northwest-African region, you saw a lull in opportunities starting around the end of the third quarter and then continuing into early '09. But that from, let's say, around the end of the first quarter '09 forward, you saw a pickup and that you would be focused on just trying to bridge that period with shorter term work.

Do you still see the same magnitude of pickup? Do you still see many of the same opportunities you had seen up until now?

John Irwin

Tom, of course, our focus in the short-term is what we have said for awhile would be on bridging into next year or really obtaining shorter-term work in next year and to take us into a period where we may see things develop further and maybe see some of that clarify as to future work during '09.

So, one, first the thrust is on the shorter term early next year and bridging, and clearly to bring work forward, should there be work that that will be at clearly lower rates than where we are now. As to the balance of the year, there have been people who have talked about programs. And the timing for those programs and some of the timing for those programs still has to be set, and I still think that when that may occur, it still remains to be seen when we see some of those programs firm up in those particular areas.

As I said, we're still continuing to look at marketing in areas outside those markets, a couple of markets in particular. So a number of discussions with people, but as to their precise timing, I think for the balance of '09 that still needs to be set and I think some of those plans still have to be finalized in the future, Tom.

Tom Curran - Wachovia

Okay. That's helpful. Have you seen any of those programs either get canceled or deferred?

John Irwin

I don't recall any. I haven't seen any that I would characterize as having been canceled. Certainly, people looking at the timing of their programs and you characterize that as deferred, then people looking at different timing than what they might have been initially looking at a month or two ago, certainly there's that aspect, yes.

Tom Curran - Wachovia

Okay, that's helpful. And then, turning to the Beacon, as of a few months ago, the most recent update I recall is you were optimistic about it rolling over at a new day rate in a range of 150 to 180. Do you still see that range as realistic at this point, and if not, how would you adjust it?

John Irwin

Yes. Tom, as I said earlier, when you're marketing units and still negotiating day rates or discussing day rates, it's hard to comment more precisely. In terms of the market itself for rigs of the caliber of the Beacon up until this point in time, certainly recent fixtures depending on length, we're still seeing fixtures in that range.

I couldn't comment much more on the BEACON other than to say at this stage up until where we're seeing here recently in the markets we've been competing for the units of the caliber of the BEACON, and once again, depending on the period of time, certainly we're seeing some fixtures at those levels.

Tom Curran - Wachovia

Right. And then, Jim, turning to other drilling costs, we saw that come in at a level over twice what seems to have been the recent quarterly run rate, and apparently that's solely due to the impact of foreign exchange losses. I was hoping you could revisit where exactly you have that FX exposure, and then speak to what the impact would be on other drilling costs in fiscal '09 if exchange rate levels held where they are today.

Jim Holland

Yes, Tom. The primary exposure done in Australia, that's been where we've had a lot of volatility in the A dollar versus the US dollar. Back in the early part of the year, we had a sizable gain there because of the A dollar strengthened now in the last, especially this last quarter and even the previous quarter we've had, we've kind of given it all back. We have now had a loss which is as I said, indicates the primary reason for the large expense.

Obviously the dollar has firmed up some. If that stays the case and we get a little bit of flexibility and no consistency here on where we are. We don't have discontinued volatility, we've have had for definitely in '08 and we would not anticipate a lot of exposure to foreign exchange in '09.

Again, our primary exposure is where we have dollars in a country which has been in Australia and although it's our policy as a general statement to flow those all these dollars to the US and that's what we've tried to do; again, with the Eagle high rate, we've had there as we have had some buildup in currency. But that has come down some and we anticipate that would be the case.

So, I don't anticipate hopefully not having as much currency fluctuation in this first quarter and hopefully in '09, so we think that will mitigate out and kind of level out some. So, we again, historically have not had a lot of currency exchange exposure.

In fact, if you look at the gains we had, the gains we had in the first part of the year pretty well got wiped out totally by the second half of the year. We end up only have a small loss for the year which is historically where we've always been. So, we would not anticipate that changing in '09 and hopefully with this crisis hopefully beginning to mitigate some over time here that we wouldn't have a fluctuation in the quarter to impact and so we still believe that that would be the case.

Tom Curran - Wachovia

Okay. I appreciate the color and insights. I'll turn it back guys.

John Irwin

Thank you.

Operator

And we will take our next question from Arun Jayaram, Credit Suisse. Your line is now open.

Arun Jayaram - Credit Suisse

Good morning, guys.

Jim Holland

Good morning, Arun.

Arun Jayaram - Credit Suisse

Jim, I was wondering if you – yeah, thanks. Jim, I was wondering if you could go through both credit facilities, give us a sense of the interest costs on that and maybe some details on the bank group you are with?

Jim Holland

I'd be glad to do that. Well, the first facility, $350 million facility we've had since October of '07. We are currently paying a interest rate of 70 basis points over euro. It goes from 70 to 125 over euro based on our EBITDA ratios are currently at the low end of that and we expect to stay there.

The new facility which we closed today, this morning, is 150 basis points over the euro rate. It is a five-year facility, but first the $300 million does not require any pay down except when it matures.

This current, this new facility does require probably starting, it's based on when we get our first semi out and some period after that, but we expect starting in June of '11. We will start paying $7 million a quarter pay down on that one. So, not substantial pay down, but again, each facility is secured by a different set of rigs.

The first facility is backed up by the Hunter, Eagle and Beacon and the new facility has the Falcon, Southern Cross, and the Atwood Aurora when it comes out. We will be backing or collateralizing that unit, that facility. So, we believe both facilities give us adequate funding now to complete our building program and any other general needs we may need, so we feel good about that.

Now, the current facility, I think almost any facility that was probably entered into in the last month or few months here since we've had the credit freeze and the financial crisis does allow the banks in the event they have what they call a market disruption and they cannot determine euro rate or if their internal costs if they have to pay to get capital from other banks exceeds the 150 basis points and they have a mechanism where they could for a short period of time increase that if you, I don't know what that would be.

That could increase it a little bit. It's again not for the entire five-year period of time and that mean, now we've up until now we've never seen that used but I mean you never say never I guess in the world we meant today.

But right now, we still believe that's a pretty good facility, well priced in the world we're in today and feel very happy we've got there's a place today and gives us the capital we need. We'd probably go and finish out and adequately have many times paying capital through our construction programs. So, anyway, that's kind of a summary of where we are in those two facilities.

Arun Jayaram - Credit Suisse

That's helpful Jim. I wanted to elaborate a little bit on the operating costs. I was right and these can't connect quickly. Did you mention that the cost on the Eagle, what was the cost that you mentioned on the Eagle?

John Irwin

The cost on Eagle $120,000, it's come down a little bit than what we've had and expected in the last quarter. Primarily we are getting some positive impact of the currency issue there with the strength of the dollar. So that's helped us a little bit there.

Again, I only talk about the first quarter because every quarter we'll rethink where we are going. Obviously, we've had salary increase here in September, and again, that's something we have to monitor. And so, costs would probably continue to be impacted on the upward side from the standpoint of our personnel side.

Again, nothing dramatic right now, we are beginning to seeing some positive impact on the equipment side and maybe there are some positive trends that say costs maybe, at least, leveling off if not declining a little bit there. We'll have to monitor that throughout the year and see how much of an impact that it gives us. But anyway, right now, we expect about $120,000 for the first quarter on the Eagle.

Arun Jayaram - Credit Suisse

And then, for the full year you expect 260, is that correct?

Jim Holland

260 right now is our best guess today. Again, we'll have to monitor each quarter, but 260, which is about a 20% increase over where we ended up in '08, but again, about 6% to 7% of that will be the addition of the Aurora when it commences in February. So about 14%, 13% increase year-to-year on our existing units at this point. The people side will be the big factor that will determine ultimately where that will land, I believe.

Arun Jayaram - Credit Suisse

Okay. I hate to ask you something so trivial, but how much interest will you be capitalizing, Jim, on a quarterly basis next year with the two rigs under construction?

Jim Holland

Well, virtually all of our interests that we'll be incurring will be capitalized. You know what we capitalized last quarter. It's going to be coming up some, but maybe $0.75 million per quarter or something like that, maybe up to a million. It will obviously go up as we borrow funds obviously and the rate is going to go up.

Because part of the agreement on being able to keep our $300 million facility at the current pricing was that we agreed that once we closed in the $280 million, we would exhaust that facility before we go back, and if we need to get the $100 million left under our $300 million facility. So our costs will go up a little bit as we go from a 70 basis point to 150 basis point borrowing.

Arun Jayaram - Credit Suisse

Okay. To make sure I heard you correctly, you have no zero interest expense on the income statement because you're capitalizing all the interest. Is that correct?

Jim Holland

Yes. That will be a little bit of interest expense. You can't capitalize 100% of it. But we believe our interest income would offset that. So, yes, our view right now will be basically zero net impact on P&L as far as interest expense goes.

Arun Jayaram - Credit Suisse

Okay. Final question is regarding the Southeast Asian jackup market. John, obviously a lot of capacity additions coming. What's your sense of the demand side of the equation, and is there enough visible demand in your opinion to soak up the un-contracted capacity additions?

John Irwin

I guess, first, just to maybe answer it more directly from our own point of view we have two rigs that are operating. And as I said, we've got experienced crews and the rigs have great track records. As you would imagine, we would be wanting to capitalize on that and we believe that puts us in a little different situation than rigs that are entering the market without having had that same track record or the experience.

But my own feeling, just personally, longer term based on energy demand and where the business is today with what's been going on financially and the other things that we're all very aware of these days, that's put a damper on new construction and putting question, you know, some rigs really help the longer term. And just based on energy demand, I believe that it's still positive for the rigs that are being built.

In the shorter term, when you have new rigs entering the market, there can be some impact, and certainly, while to this point I think we've seen rates, the reports on rates and the fixtures have been positives, and as we all watch that closely, if anything, then we would see if there is a direction, it's a downward direction. But that's one that we will continue to monitor and certainly try to position ourselves where we are at the highly utilized, hopefully, at the premium end in terms of day rates.

Arun Jayaram - Credit Suisse

All right, guys. That's very helpful. Thank you.

Operator

We'll take our next question from Jud Bailey with Jefferies & Company. Your line is now open.

Jud Bailey - Jefferies & Company

Thanks, good morning.

John Irwin

Good morning.

Jud Bailey - Jefferies & Company

A couple of follow-up questions, first, on the Beacon. I want to clarify. Is the firm work through May of next year, did I hear that correctly?

John Irwin

Jud, the contract itself goes through the end of January. The Beacon is now on what is expected to be its last well. It has been drilling very long wells. At this point the best estimate we have of the well in progress at the end of January, the current well will carry it is May or June next year '09.

So that's really an estimate based on how long we think this current well will be and that's just the best estimate we can make as of today. That of course could change, but that's we are trying to put out what we know today, Jud.

Jud Bailey - Jefferies & Company

Okay. And could you remind me, are there options behind that the firm contract?

John Irwin

For the existing contract, there are no remaining options. When the rig finishes this current well, it will be available to other parties.

Jud Bailey - Jefferies & Company

Okay and my follow-ups are on your new build semi. First of all, could you maybe give a little color on your conversations with customers? Have they slowed down or have they changed their desire for the rig given the current commodity price environment?

And the other question is you are at Jurong; there's a couple of rigs and there is one in particular that could be canceled I believe. Would you move up in line if a rig in front of you were, did not go through? Could you actually get an earlier delivery date?

John Irwin

First and of course when we committed to build our 11th unit and the second semi at Jurong, which is an ultra deepwater unit, I think we have said throughout that our, that we weren't in a hurry. We weren't rushed.

We saw this as a longer-term move and that we were in a strong position to be able to market the rig and speak to all the potential clients in conveying to them what sort of rig we are building and over the right period of time they could make the right decision onto whom we would commit the rig.

So, one, we haven't been pushing to try and contract. It haven't been under pressure to do that, and certainly in making the commitment and building it, we didn't want to be in that position and we are not.

Now, Alan Quintero is here with me and I know he and our other people have been visiting with all our key clients and basically the course of those discussions is really letting them know about and these are people we've known for a long time about the characteristics of the rig and why we think it will be a very efficient, great rig for the longer-term and really then just talking to them about their future clients.

So, one, that's kind of the ongoing discussion there. Second part of the question, could you just repeat that very briefly?

Jud Bailey - Jefferies & Company

Yeah. It was basically if a rig under construction at that yard, if the order were to be canceled, would it be possible or would you have the desire, could you move up, could the delivery of the rig be moved up? Is that feasible?

John Irwin

Okay, yes, I now remember. I'm sorry. I slipped my mind there momentarily. Our slot for building the rig with the shipyard basically does not change. If the slot before us was not used, that would not change our slot as such because of the plan. Now having said that, of course, we are working hard to and our teams are working hard in terms of planning and delivery of equipment and progressing the rig to deliver it as early as we can in 2012.

Right now, our best estimate is mid-2012 but if there's a way we can bring it on online earlier, certainly, our guys are very much focused on that plan. And in terms of looking at the long lead time deliveries and trying to bring those forward to the best time possible.

Jud Bailey - Jefferies & Company

Okay, great. Thank you.

Operator

We will take our next question from Waqar Syed with Tristone Capital.

Waqar Syed - Tristone Capital

Good morning. Most of my questions have been answered. I just have one question on insurance rates given that some rigs were damaged recently although in the Gulf of Mexico, are you seeing any pressure on insurance rates for the Richmond and in general for some of the other rigs that you have internationally?

John Irwin

We have of course renewed earlier in the year our renewal on our package policy and what we do is basically back in July, so we work on that earlier in the year. We only have one rig in the Gulf of Mexico and that market of course is the one that's certainly been very influential in determining insurance rates.

The Richmond really in renewal this year was done as part of the package policy very positively both in terms of rates and in terms of the retention or the deductible. And once again during this past hurricane season, we had a hurricane run right over the top of it and the rig was not damaged, did not move.

I don't think we lost any day rate and that's really once again enhanced the availability or the attractiveness of the Richmond to parties who particularly working in shallow water and doing deep drilling. So, no, I haven't seen any impact there Waqar and we won't be looking at those until our renewal next year.

Waqar Syed - Tristone Capital

Thank you very much.

John Irwin

Good. Thank you.

Operator

And we will take our final question from [Robert Spivy] with The Abernathy Group.

Robert Spivy - The Abernathy Group

Thanks, Jim. All of my questions were answered. We will follow-up with you offline.

Jim Holland

Okay. Thank you.

John Irwin

Good. Thank you.

Operator

All right. It appears we have no further questions at this time.

Jim Holland

Okay, appreciate it. Thank you for your interest in Atwood.

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Source: Atwood Oceanics, Inc. F4Q08 (Qtr End 09/30/2008) Earnings Call Transcript
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