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Noble Corporation (NYSE:NE)

Q4 2008 Earnings Call

January 22, 2009 2:00 pm ET

Executives

Lee Ahlstrom - VP, IR

David Williams - Chairman, President and CEO

Tom Mitchell - SVP and CFO

Analysts

Byron Pope - Tudor Pickering Holt

Arun Jayaram - Credit Suisse Securities (NYSE:USA) LLC

Dan Boyd - Goldman Sachs

Kurt Hallead - RBC Capital Markets

Waqar Syed - Tristone Capital

Geoff Kieburtz - Whedon

Angie Sedita - Macquarie Capital

Alan Laws - Bank of America

Truls Olsen - Fearnley Fonds

David Smith - JPMorgan

Rob Mackenzie - FBR Capital

Operator

Good afternoon. My name is Christian and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter Earnings and Full Year for 2008 Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Lee Ahlstrom, VP of Investor Relations, please go ahead.

Lee Ahlstrom

Thank you, Christian. Welcome everybody to today's fourth quarter and full year 2008 Earnings Call. Before we begin, I would like to remind everyone that any statements today we make about our plans, expectations, estimates, predictions or similar expressions for the future, including those concerning financial performance and operating results in the drilling business are forward-looking statements and are subject to risks and uncertainties.

Our filings with the US Securities and Exchange Commission, which are posted on our website, discuss the risks and uncertainties in our business and industry and the various factors that could keep outcomes of any forward-looking statements from being realized.

Our actual results could differ materially from our expectations. We've included detailed balance sheets and income and cash flow statements with our earnings news release. Also note that we may use non-GAAP financial measures in the call today. If we do, you will find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure on our website and an associated reconciliation also on the website.

Also, you know the drill on questions. When we open up, I am going to ask you to stick to one question with one follow-up, simply because of the large number of folks we have on the line who would like the opportunity to have a question answered. We want to be fair to everyone.

With that I am pleased to turn the call over to David Williams, our Chairman, President and Chief Executive Officer.

David Williams

Thank you, Lee. Good afternoon and thanks for joining us today. We've had another great quarter at Noble, but it does necessarily look like great performance is always driving the stock. But having just come back from an analyst conference, we think we understand some of what's on your minds today and we'll do our best try to address some of the main issues.

After I make a few general comments, Tom Mitchell will walk through the fourth quarter 2008 full year results and offer some preliminary guidance to 2009. Then Kurt, VP of Marketing - Kurt Hoffman will make a few comments on the current state of the market.

First, even with oil hovering around 40 bucks and [unmet] credit environments and overwhelming concern about the economy, Noble is still performing well and delivering solid results. You can see that from the numbers we reported last night. But we understand there is much concern out there about what will happen in the next 12 months and beyond. So, let me try to give you some perspective from our point of view.

First, we are not in a panic. We have around 80% of our total fleet days booked for this year, and if you add in planned shipyard and mobilization days, that number rises to something closer to the mid 80s percentage wise.

For 2010, we are already about 40% contracted and that matches up pretty well with where we were on January 2008 call. So as you can see, we are pretty well contracted and so far have very little peer market exposure this year. That said, one of the most frequently asked questions we get focuses on how strong these contracts really are.

In the past few months, we have seen one small E&P company go bankrupt, and we have seen one of our competitors cancel a contract, because the operator did not meet some pre-funding requirements. But we haven't seen wholesale cancellation of contracts, nor have we seen bidding activities stopped.

In fact PEMEX and others continue to publish tenders for incremental jacket rigs, and we are in a number of serious discussions with high-quality operators about long-term work for our Globetrotter drillship.

My point is that your customer base is important, and we have a lot of confidence in ours, as we classify about 73% of our backlogs with National oil companies and super-majors. Another 24% is with large independents. So only a fraction is with smaller independents and we are monitoring those situations very closely.

I'm not telling you that any one can't be immune, especially if this current climate persists. If this environment does persist, it's possible that some operators could have cash flow problems and may come looking for help. What I can tell you is that the customer make up that constitutes a driller's backlog makes a difference, and all things being equal I like the customer base we've got. We've cultivated our relationships over the years with the National oil companies and the majors, along with some strong independents; and we expect those efforts to serve us well.

Another common comment we've heard is – sure, you look good now, but how are you going to look in 12 months? Generally speaking, we think we are ready to handle whatever the market throws at us. If oil rebounds to the $50 to $60 range say, by the end of the year, we think our share price will respond positively and our shareholders should benefit.

If oil stays in the $30s, it's going to get tough for some of these guys out there, and opportunities for us to grow the fleet and acquire assets will emerge and even improve from where they are today. We should get a good chance to grow the fleet just as we have over the past 20 years and again, our shareholders should reap the benefits of a diligent approach to managing this cyclical business.

Also at this most recent conference, one gentleman asked us repeatedly what our hurry is to make an acquisition. Let me just say, we've been focused on culling opportunities for about 24 months now, and we've run economics on bunches of deals through many different iterations. We've spoken about opportunities on every call we've had and at every conference we've attended. We are not in a hurry. If we were, we could have certainly picked up a deal somewhere along the way.

The fact is, we haven't seen the kind of value we are looking for yet, especially when you compare the available opportunities through a Globetrotter drillship that we can build for somewhere in the mid-to-upper $500 million range. We've been disciplined in our analysis and will continue to be disciplined. We might find something we like, we might not. We don't have to do anything.

The exciting thing about Noble is you are getting organic growth through our new build program. You may see us grow by acquiring assets as we've done throughout our history, and you’ve seen us return cash to shareholders by retiring about 8 million shares of our own stock in 2008. It's a good mix and given our balance sheet, cash positions, backlog and customer base, these opportunities are not necessarily mutually exclusive.

We are drilling contractors - we punch holes in the ground for money. There's nothing we can do about the oil price, there is nothing we can do about the credit markets. There is nothing we can do about the uncontracted new bills that are expected to be delivered this year, but what we can do and what we will continue to do is do what we do.

We've been here before and we're in a good place right now. We've run this company for margins and we are good at it. We'll keep our costs under control. We'll be disciplined in our valuation of opportunities and we'll still continue to provide value to our shareholders.

Now before I get into the financials, I first want to briefly say something about our safety performance over last year. As you may recall from our earnings call last January, we listed safety as an area we were targeting for improvement. After several years of continuous improvement, our safety results were where we wanted it to be in 2007, and we challenged all assumptions and practices and reoriented our program to focus more closely on the role every team member plays in ensuring an overall safe and injury free environment. Results are extremely encouraging.

As we mentioned in our press release yesterday, our 2008 safety experience broke all records as measured by Total Recordable Incident Rate or what the industry calls TRIR, representing a 30% year-over-year improvement over our 2007 performance.

As anyone who has followed the off-shore drilling industry can attest, this level of improvement is unprecedented particularly for a company like Noble where industry-leading safety results were almost a given. I know that many of our members on the team listen to these calls, and I would like to thank every Noble employee for their hard work, dedication and commitment over the past year.

We have a simple but important goal, and that is to make sure every single person working on a Noble rig goes home safe. You can look for safety to again be a focus for us in 2009, but for today, I think our team delivered truly commendable achievement for which I am personally very grateful.

With that, I will turn it over to Tom.

Tom Mitchell

Thank you, David. I would like to briefly report on our strong fourth quarter and full year 2008 results, before focusing our attention on preliminary guidance for the full year 2009. Last evening we reported fourth quarter net income of $419 million or $1.59 per fully diluted share on total revenues of $910 million.

Compared to the third quarter of 2008, net income was up about 9.4% and our per share earnings were up 11.2% from $1.43. For the 12 months ending December 31, 2008, our net income was $1.6 billion or $5.85 per diluted share on total revenues of $3.4 billion.

Compared to calendar year 2007, net income rose by 29% from $1.2 billion and our 2008 full year earnings per share were up 31% from $4.48. Contract drilling services revenues increased quarter-on-quarter by 5.7% to $883 million; and average daily revenues for the quarter were $190,000 compared to $178,000 in the third quarter, an increase of about 7%.

The increase was driven by four of our jackups moving to higher day rates during the quarter, as well as a full quarter of revenue at higher day rates on a number of rigs including the Noble Max Smith in Mexico and the Leo Segerius in Brazil. In addition, while our US Gulf of Mexico semi-submersibles still had some lost revenue during the quarter related to Hurricane Ike, revenues were for these rigs were up $13 million, as our operations recovered from the hurricane.

Certainly our biggest story during the quarter was our performance and control in contract drilling services cost. Quarter-on-quarter costs were up 4.7% to $266 million. This took our full year cost to $1.01 billion, and that's about $40 million below the bottom end of the guidance of $1.05 billion.

As you recall, we have spoken throughout the year about our focus on reducing costs. As the global environment worsened, particularly in the fourth quarter, we tightened our belts even further and eliminated some of the spending that we had planned. We are quite pleased with the results.

On a per day basis, full-year costs came in at about $53,500. This is only a 7.3% increase over a run rate from the fourth quarter 2007 daily cost, which are just under $49,900, and well below the 10% to 15% per day increase we expected coming into 2008.

Our contract billing margin percent for the quarter was 70% and slightly up from the third quarter, and for the full year, contract driven margin was 69%. That's just under 68% for the full year of 2007. Our DD&A expenses were roughly flat with the third quarter, and we ended the year at $357 million which is on the high end of the revised guidance.

SG&A expenses of $74 million for 2008 were below our full year estimate of $80 million to $85 million mainly as a result of our cost control focus. Capital spending of $350 million during the fourth quarter brings our full year total to $1.2 billion, about $200 million under guidance for the year.

The difference between actual and planned was mainly a function of timing on shipyard payments and lower spending on projects, some of which were eliminated as part of a cost control focus and some of which we carried into 2009.

During the fourth quarter, we also repurchased two million shares at a cost of $21.60 per share or $43 million. This brings our full year share repurchases to about 8 million shares at a total of $332 million. We have about 18.3 million shares remaining on our current board authorization.

Finally, we finished the year on a very strong financial position. Cash at the end of 2008 was $513 million and our debt-to-cap ratio was 14.9%. This increase to about 12.8% at the end of the last quarter is a result of the $250 million senior notes that we issued at a coupon rate of 7.375% during the fourth quarter. Factoring in the cash on hand, net debt to total cap is now down to 7.2% at year-end, from 9.4% as we exited last quarter.

In addition to our cash position, we have $600 million of undrawn capacity on our revolving credit facility. As some of you may be aware, our proposed Swiss reincorporation transaction creates a potential technical default under the credit facility. However, I am pleased to inform you that we have recently received from the lenders in our bank credit agreement, a waiver regarding this issue, without an opening up of the facility for repricing.

Let me now touch on the major element of guidance for 2009. First, let me remind you that our budget will be formally discussed with our Board next week, so this is preliminary. And second, let me also remind you that we issued a fleet status report on January 8th, which detailed our expected planned shipyard and stack days for 2009. We expect to continue our practice of updating the fleet's status routinely to not only reflect changes in additions to our contract status, but also revised actual and expected downtime.

For the full year 2009, our contract billing services costs are expected to range from $1.1 billion to $1.3 billion. And comparing this to 2008, there are three major items necessary to understand the change in cost year-over-year. First, the Noble Hans Deul entered service late 2008 and the Adkins, Scott Marks and Dave Beard are expected to enter service in 2009. These new rigs will contribute approximately $60 million in new costs as well as the additional revenue.

Second, the rigs entering service in 2009 and the Noble Jim Day would effectively enter service next year, all have associated start-up costs, which we expect will run about $35 million. This is an increase in start-up cost of about $20 million over what we experienced last year. These costs relate to manning, training and other similar costs incurred prior to commencement of new rig operations.

Third, we expect 2009 costs to include about $25 million of mob expense amortization, which is about $16 million higher than what we had in 2008. The mob costs are more than offset by mob revenue. So if you adjust for the new rigs entering service, related startup cost, and the mob cost, the percentage of increase in contract drilling cost for 2008 is in the single digits on an apples-to-apples basis.

Cost pressure is expected to continue in a number of different areas, labor, while moderating somewhat will continue to exert some pressure as 36 new jackups and 27 new floaters enter the fleet across this industry next year and those rigs will need crews.

We are also expecting an increase in insurance costs because of the impact of hurricane Ike on the insurance markets. Further, we have a heavy regulatory cycle in 2009, which is influencing our cost expectations. But despite this pressure, we will continue to maintain our customary focus throughout the year on managing our costs.

For the first quarter, contract drilling costs are expected to be in the range of $270 million to $280 million with some growth through the third quarter and then a flattening in the fourth quarter.

DD&A will be up this year primarily as a result of the new builds entering service. For the full year, we estimate something in the range of $400 million to $420 million. We expect that in the first quarter we'll run in the range of $90 million to $95 million, increasing, say, $5 million to $10 million each quarter as new rigs go to work throughout the year.

SG&A should grow only slightly in 2009, falling in a range of $75 million to $80 million, with costs in the first quarter between $20 million to $25 million, and falling back into the upper teens for the remaining quarters of the year.

Our effective tax rate is expected to increase slightly to 19%, but this is solely a function of revenue distribution within the fleet. We expect to have more revenue in high tax market areas such as the US and Mexico, and lower revenues in low tax market areas like West Africa and the Middle East.

Finally, our capital expenditures are expected to be around $1.25 billion in 2009, at about flat with 2008 actual. The breakout is as follows: We will spend about $620 million on a new build program, including the Globetrotter. The next largest piece is $430 million on the reliability upgrades for the three drillships in Brazil, other major projects, which include things like upgrading jackup systems and repowering rigs and inventories, and other various items.

And finally, we will spend just about $200 million or so on sustaining capital, which includes the surveys I mentioned earlier, as well as major maintenance and general capital. Spending throughout the year is expected to be uneven with the third quarter being the lightest and the first quarter expected to come in somewhere between $340 million to $360 million.

That concludes my remarks and I will turn it over to Kurt to talk about the market.

Kurt Hoffman

Thank you, Tom. I want to make a few comments today about the broader market in general and where we are in our Noble Globetrotter discussions. There is no doubt that the precipitous drop in commodity prices has impacted how operators are thinking about their spending and activity levels.

You are all aware that we have seen a number of companies announce reductions in their capital spending. While much of the eliminated activity is focused on North American natural gas, and we really don't have much exposure to that market, there is no doubt that some operators are taking a wait-and-see approach. The Saudis for example canceled a tender and let it be known that they think they can retender at lower prices in the future. And in Nigeria, we have also seen operators go right up to a point just shy of awarding a tender, only to cancel it.

And of course there is a specter of approximately 25 new build jackups coming to the market without contracts in 2009 and more in 2010. As a result, some operators have pulled back and we haven't seen many jackup fixtures in the past few months.

I have already mentioned two market segments we believe will be challenging, West Africa and the Middle East. We see few opportunities in West Africa and a great deal of competition for those opportunities. As we have said consistently, the geology in West Africa will drive activity, but at these price levels and with the political issues in Nigeria, there has been no improvement in the region in terms of recent contracting.

As a result, we have already moved the Noble Roy Butler and Noble Carl Norberg out of Nigeria and into Mexico and we are actively bidding the Noble Tommy Craighead and the Noble Willie Noble into other opportunities as well.

We expect the Arabian Gulf to be choppy through 2009 as well, if commodities stay at their current prices. Some of the L&G related drilling in Qatar has come to its natural conclusion. Oil development is proceeding at a slower pace as a result of OPEC cuts. And the Middle Eastern markets are convenient markets for the new builds to break into. All of which will lead to increased competition.

So we are expecting to see some idle time between jobs, but we are still well-positioned with most of the fleet in these regions. However, there are some bright spots. In Mexico we have seen PEMEX continue to tender for incremental jackup requirements. We are also aware of a number of opportunities in India with a variety of operators and we think it is likely that Iran will absorb several of the new builds.

And again, as stated earlier, we are about 80% covered across our jackup fleet between contracts and planned shipyard days. So we are in a good position to weather this cycle.

Turning to deepwater, we haven't seen many recent fixtures either; but again, there aren’t many rigs available in the worldwide deepwater fleet. Nevertheless, it's important to remember that deepwater-focused operators are looking at a longer time frame for oil prices and it's their view that prices will recover from today's level over the next two to three years. Many may contract rigs and drill through the cycle. That's not to say they won't push back on rates, but it's been our experience operators push back on rates no matter where we are in any given cycle.

We are still having serious conversations on multiyear contracts for the Noble Clyde Boudreaux following its four-month extension with Shell at $605,000 a day.

And as far as the Noble Globetrotter goes, we are giving presentations to companies around the world, and we are in serious discussions with a number of operators. Nevertheless, we are taking a disciplined approach to contracting the drillship, and we don't believe that it's an overhang on the stock. We plan to secure a job for the first ship and then consider potentially exercising options for additional ships, depending on operator sentiment and broader market conditions.

With that, I will turn the call back over to Lee.

Lee Ahlstrom

Thanks, Kurt. Christian, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Byron Pope with Tudor Pickering Holt. Please go ahead with your question.

Byron Pope - Tudor Pickering Holt

Good morning, guys.

David Williams

Good morning.

Byron Pope - Tudor Pickering Holt

Just wanted to touch base on the Globetrotter options. If I remember correctly, you had those options that expired at various time intervals. And at this point, is there just the one option that was 150 days from the initial date that remains left?

David Williams

No. During the fourth quarter, as you correctly point out, the options were coming up at the end of last year. During the fourth quarter, we went back to the principal vendors, the shipyard enhancements on those deals were able to renegotiate option allowances and in some cases some price variances.

So actually the options for two, three and four are less expensive than they were previously, and we have really up until March on the first option to deal with it, and I think the shipyards will give us latitude. They are very interested in whether or not to go forward with that program. So I think we have continued latitude beyond actually March, hopefully.

Byron Pope - Tudor Pickering Holt

Okay. And so you referenced these are kind of lower costs and so that's where you get kind of the mid to upper 500s that you referenced in your prepared comments?

David Williams

The first one is 585. We've announced that, that's fully loaded. We've committed to build that ship. We're going to build it. And unless the yard is very efficient and our start-up process is very efficient, its going to be right around 585.

The next rigs will be closer to the mid 500s, 545 to 550 or so, and in that range. And again, those numbers are fully loaded. That guts, feathers and all it's crew costs, it's crew development costs, it's training, it's moving the rig, it's [Swedish payers], it's start-up cost, it's everything, capitalized interest thrown in that number.

Byron Pope - Tudor Pickering Holt

Okay. And then just one quick related follow-up, if I could. Just thoughts on from a timing perspective on the reincorporation to Switzerland to the extent that you can say?

David Williams

As it sits now, we are still looking for a March date. It's really in the hands of the SEC right now. They are reviewing the proxy, and depending on what their timing is we'll kind of run our timing, but right now we are still on track - sometime within the first quarter is what we are hoping.

Byron Pope - Tudor Pickering Holt

Thanks, guys.

David Williams

Sure

Operator

Our next question comes from the line of Arun Jayaram with Credit Suisse. Please go ahead with your question.

Arun Jayaram - Credit Suisse Securities (USA) LLC

Good afternoon, guys.

David Williams

Hello, AJ.

Arun Jayaram - Credit Suisse Securities (USA) LLC

Just kind of I want to elaborate a little bit more on what you are seeing in Qatar. I think they may have, at least near term, a moratorium on drilling until they assess the total geology of the north field. And I just wanted to say what you thought the prognosis was for keeping a couple of those rigs going in Qatar, because you do have some rigs that drill off in the near future.

David Williams

That's right, Arun. Most of the rigs that we have rolled off in the north field - as we said, they are finishing their current program. Certainly the major operators there are doing some geological evaluations to further develop the north field, but as far as we are concerned with our rigs, a few of them will be coming down.

But I think in the future, in the north field the drilling will again pick up with LNG projects and things such as that. I think as far as that region goes, we are really keeping an eye on are what the Saudis are going to do - Aramco in Saudi Arabia.

Arun Jayaram - Credit Suisse Securities (USA) LLC

Fair enough. Any sense how long this moratorium could last for?

David Williams

Arun, I don't have any idea.

Arun Jayaram - Credit Suisse Securities (USA) LLC

Okay.

David Williams

If we get a sense of it, we will let you know.

Arun Jayaram - Credit Suisse Securities (USA) LLC

Okay. And last question is that Petrobras just came out with a tender looking for deepwater rigs starting in 2012. I was wondering if you could give us. Kurt, your sense of what Petrobras does now that some or several of the new builds that were originally agreed to earlier in the year are having funding issues. And is that an opportunity for the Globetrotter?

Kurt Hoffman

It certainly is an opportunity for the Globetrotter. And just so there is no confusion, it's actually not a tender that's out at this point; it's what they call a market inquiry. And to your point, Arun, we believe that it may be trying to cover one of the rigs that they have recently contracted that may not be delivered. That's our sense. We don't know that for sure. It’s for a 20 meter DP type vessel.

Arun Jayaram - Credit Suisse Securities (USA) LLC

Fair enough. Thanks a lot, guys.

Lee Ahlstrom

Thanks, Arun

Operator

Our next comes from Dan Boyd with Goldman Sachs. Please go ahead with your question.

Dan Boyd - Goldman Sachs

Hi, thanks. David, I had a question for you on the rig acquisition market and how you think about that compared to buying back stock. You started to buy back stock this past quarter and essentially you are buying your own rigs at -- you can argue what the number is, but roughly 50% of replacement value. When you think about this, do you think the asking prices on the new deepwater rigs need to fall to these levels before acquisitions become more attractive?

David Williams

I think long-term assets have strategic value for 30, 40 years in the future. So I don't think you can look at it just on a pure equivalency basis. What I like about where we are, Dan, is we are not relegated to have and do one or the other, we can do both. Surely at our current share price, it is awfully cheap, and given what our backlog is, it's clearly in my mind undervalued and a good investment.

So you look at that as compared to what the opportunities to buy assets might be. It depends on the asset, it depends on the deal. Clearly we have not stumbled on a deal that we like better than buying our own stock yet. So, do they have to fall to at least half of the -- are we looking for something with a free handle? We would love to see it. I am not sure it's going to go that low, but clearly they have to come down off the current ask.

Dan Boyd - Goldman Sachs

It sounds like from our last conversation that the asking price is still above 500. Now in order to get a full handle on that, do we just need to see deepwater dayrates come down or do you think just the financial and credit markets will be enough to end up pushing some of those companies into a position where they will have to sell for those types of prices?

David Williams

I don't think rates on deepwater rigs are necessarily coming down to something that drives the value of those. I don't think that's what is driving the value of these rigs down. What's driving the value of the rigs down is going to be the credit market.

For those drillers who are well capitalized and have the inclination to do it, there's going to be opportunities, and it's not going to be the fact that the deepwater market is getting crummy. It's going to be the fact that these new build guys are not properly capitalized and can't fully fund our new build program. So it is a pure opportunity for those of us that have cash and have the wherewithal to go chase them.

So my expectation is that you are not going to see rates fall to a point that makes these things uneconomic. I think it's an opportunity for those of us to buy, and I think there are limited buyers.

Dan Boyd - Goldman Sachs

Thanks. But one follow-up for Kurt on the Middle East market. You touched on Saudi being an area that could be a little bit weaker than expected. There's a lot of talk of them releasing some of the rigs that were off contract this year or that were up for auctions. Could you give us a sense, I am just trying to quantify how many based on your conversations you think that they might let go?

Kurt Hoffman

Dan, I don't know how many in terms of numbers, but we are hearing the same thing that when rigs roll over, they may not be renewing them in the near term. But as far as numbers go, I don't have that answer.

Dan Boyd - Goldman Sachs

All right, thanks a lot.

David Williams

There's a lot more rumor than there are facts coming out of there right now.

Dan Boyd - Goldman Sachs

Okay.

Operator

Our next question comes from the line of Kurt Hallead with RBC Capital Markets. Please go ahead with your question.

Kurt Hallead - RBC Capital Markets

Hey. Good afternoon.

Lee Ahlstrom

Hi, Kurt.

David Williams

Hey, Kurt.

Kurt Hallead - RBC Capital Markets

Question I have for you relates to the -- if you look at the cost structure going out into 2009, you referenced it looks like it's going to be up single digits on an apples-to-apples basis. You referenced the rigs that are coming into the market and those being have to be staffed.

Given where we stand with respect to the oil prices, do you really think there is an opportunity that costs could come down further because there is going to be some placement of the existing jackup rigs. What probability will you put around that?

David Williams

I'll call it more of a possibility than a probability, Kurt. It depends on how the year develops. I mean it just depends on how the year develops. I think the single digit guidance that we are giving right now is reasonable. I think it's naive to assume that given the backlog of the equipment providers, NOV and others out there that provide equipment and how much backlog they have booked into the future, I think its naïve to assume that they're going to start giving discounts on stuff, and I think it's naïve to assume that these rigs that are coming out are not going to be crude.

So there is still going to be pressure on normal rope, soap and dope, maintenance items and I think there is still be some pressure on labor. If the climate that we are in persists then you see just a lot of rigs down, and that's going to ease labor and that is going to also ease the equipment. So I mean you could you see costs flatten a little bit more. I don't think you are going to see them go down.

Kurt Hallead - RBC Capital Markets

Okay.

David Williams

Except as a function of stacking rigs. I mean, if the market persists and you see a lot of people start stacking a bunch of rigs, then you may see - certainly those people will have the opportunity to reduce some costs just by slowing down operations and lay off hands and stuff like that.

Kurt Hallead - RBC Capital Markets

Okay. I understand there is always kind of a moving target on the bid ask prices for a lot of these assets that are out there in the market. Can you maybe handicap for us whether or not you think there is going to be a transaction this year, maybe not necessarily Noble, but are these asset players out there absolutely desperate and on their knees at this point?

David Williams

Well I would say the odds of an asset sale in 2009 to somebody are 100%. And I wouldn't call it necessarily a bunch of people desperate, but I think there are enough people who are in a bind that, I just find it inconceivable we go all of 2009 and something not be sold to somebody for something.

But I could be wrong, but just some of these rigs have fallen up for long and they don't have funding to finish them. Some have a multi-rig building program that they funded through whatever financial instruments to fund one or two but they can't build all of them. So there is a myriad of different – there are as many different rigs that are under construction, there are as many corresponding issues that each one of these guys have. They are not all in trouble. But many of them are. So I think it is likely you will see something get sold.

Kurt Hallead - RBC Capital Markets

Great, thank you.

David Williams

Thank you.

Operator

Our next question comes from Waqar Syed with Tristone Capital.

Waqar Syed - Tristone Capital

Hi. Good afternoon, great quarter.

David Williams

Thank you.

Tom Mitchell

Thank you.

Waqar Syed - Tristone Capital

My question is regarding PEMEX. Could you quantify their incremental demand for jackups that you are seeing from PEMEX. There have been two recent tenders, but what do you think would be the total incremental demand for '09 for them, for jackups as well as some floaters.

Kurt Hoffman

For '09, Waqar, this is Kurt Hoffman. For 2009?

Waqar Syed - Tristone Capital

Yeah.

Kurt Hoffman

The tender that we just participated in on Tuesday, just about all of those were incremental jackups. One of the 250s may have been replacing a 250-foot mat type rig. The previous tender, the week before on the 13th, that was for the 300-foot tenders that we participated in. That was all incremental for 2009 starts. So we know that was incremental.

What we are hearing is it that there will be additional incremental tenders coming out in the first quarter of 2009 also for rigs in Mexico for the year 2009. So it certainly looks to be a bright spot in the globe for incremental jackup demand, and based on the amount of depletion rates they have in their major fields, there is certainly a need for that demand is what we see.

Waqar Syed - Tristone Capital

Okay. And then for the semi, there was one on Tuesday, a tender for one semi. Are there any incremental beyond that that you see as well?

Kurt Hoffman

Not that we know of right now, but, of course, we are there with the Noble max Smith who is in their first deepwater drilling campaign and we expect if they have geological success in that campaign, that may lead to additional deep water demand within Mexico.

Waqar Syed - Tristone Capital

And then on the North Sea market, any comments there? What do you see there? I know you have a lot of -- most of the rigs are contracted. But in general, what is your feeling about that market?

Kurt Hoffman

We feel good where we are to your point. We are contracted through nearly all of 2009. That market, like the Gulf of Mexico shelf market is going to be dependent on what natural gas does certainly for central and southern North Sea where most of our business is. So if we think gas prices could stay at levels where they are at or marginally improve, then that market will stay balanced as it has the last two years. But as we know, if prices dip or if one or two rigs come off contract, then it can certainly change the supply-demand models.

Waqar Syed - Tristone Capital

Okay. And just one final question on the headquarters. Has any decision been made of whether you are going to move the corporate headquarters out of -- or the management is going to move out of Houston or stay in Houston?

David Williams

Well, that is still under evaluation. We are headed for re-domestication of the corporation. We do actually have an office in Switzerland now that we have maintained for a number of years. Whether or not we beef that up or not is still under evaluation.

Waqar Syed - Tristone Capital

Great. Thank you very much.

David Williams

Thank you.

Kurt Hoffman

Thank you Waqar

Operator

Our next question comes from Geoff Kieburtz with Whedon.

Geoff Kieburtz - Whedon

Good afternoon.

David Williams

Good afternoon, Geoff.

Geoff Kieburtz - Whedon

I'd like to go back to the operating expense topic, and I think when it was being discussed you mentioned there were some things that you cut out. I wonder if you can elaborate a little bit on what kind of things you were cutting out of your OpEx that had previously been planned?

David Williams

Well, there could be a number of things. There may be some planned upgrades that we may decide instead of replacing a piece of equipment, we will refurbish a piece of equipment. There may be some upgrade things we would enhance the capability of a rig, that we may decide to put off for a period of time. We may have extras working in the fleet to shore us up in the event of -- and one of the things we have looked at is the number of personnel we have in the fleet.

We have to work people to prepare for the new builds, but we may -- in some cases we worked other people for training positions and I think even though our turnover was about 8% for the year for the fleet-wide guys, we have let attrition kind of run its course and we haven’t replaced some of those extras.

So, there are a number of things you can do. I mean, when you bid a rig, one operator may want extra roughnecks, extra roustabouts and overtime. Those guys kind of get built into a rate. As you start a new contract, you may write those guys out of the document. And so there are lot of things you can do to affect costs as contracts roll and it's not all discretionary. Sometimes it's deferral. Sometimes it's belt tightening. There are lot of things you can do.

Not to imply that our costs were running rampant because I think our cost has always been under control, but when you are running 60 plus rigs and you've got as many people as we have on the payroll, there is always room for improvement and we are always looking for it.

Geoff Kieburtz - Whedon

When you talked about the amount under the low end of your full year guidance, it doesn't seem like that much, 40 million on a billion one, but most of that came in the fourth quarter. Is that -- I mean obviously you've given us guidance on the '09 OpEx, and so it's apparent that you think this is a sustainable lower level of OpEx, but was the fourth quarter just ratcheting things down very quickly in the context of the changing environment? Or was there something else going on there?

Tom Mitchell

No. This is Tom. Typically you will -- and we knew we were running low, but we didn't have complete confidence to drop at much lower than the bottom of that range. And a lot of times during the fourth quarter you get a lot of stuff that hits, it's been building up throughout the years as people evaluate their budgets.

So with the -- and focus on cost control, a lot of that just fell by the wayside and it came in -- it is a solid cost reduction. And there is really nothing in here where we can point to any one thing. We did have a little bit of help from FX, , but it wasn't enough to really mention an outline as a separate item.

Geoff Kieburtz - Whedon

Okay, great. And just on the asset you purchased. Are you indifferent between jackups and floaters as you consider potential asset opportunities? Or is it just purely an economic decision or is there a strategic dimension that would push you more into being interested in the floater versus jackup or vice versa?

David Williams

We are absolutely not indifferent. We are very heavily biased in favor of deepwater assets. Having said that, if we added -- deepwater rigs have a strategic benefit to this long term and that's our focus. Having said that, if jackups would get cheap enough, we might look at some, but they would have to come way off of what we have seen so far.

But without a doubt, the strength of the floater market and where we have been trying to take this fleet over the last several years -- that’s going back ten years really, it's headed toward more deepwater assets and more deepwater exposure and we are absolutely predisposed towards those type of strategic maneuvers.

Geoff Kieburtz - Whedon

Great, thank you very much.

David Williams

You bet.

Kurt Hoffman

Thanks Jeff.

Operator

Our next question comes from Angie Sedita with Macquarie.

Angie Sedita - Macquarie Capital

Thanks, good afternoon guys.

Tom Mitchell

Hi, Angie.

Angie Sedita - Macquarie Capital

First, David, I appreciate your opening comments. Certainly well said, but to go back to some of your earlier comments from Kurt on the Middle East and West Africa, certainly difficult markets with all the new builds coming out and low tenders. Is it fair, especially as you re-contract the Lloyd Noble and the Tommy Craighead and you have several others in the Middle East that are in the shipyard, that we could easily see maybe one to two quarters' worth of idle time just until we see the market free up?

David Williams

I think as we sit today, it is certainly possible we will see some idle time. You know one of the things that, again, Tom mentions, is a heavy survey year for us and these things come in cycles with 63 rigs. When rigs are built they go over five years and this is a heavy year for us. So we've actually got on the railroads, we've got a pretty heavy survey and refurbishment program we need to do to that rig.

So, even though it rolls in the early second quarter, late first quarter, early second quarter, we really got some work and need to do that rig and it's really not going to be available until some time late, second or probably early third quarter anyway. So we will use the time that we have to do what we need to do. But like I said in my comments, Angie, I don't think anybody is immune to what's going on.

If the price deck stays in the 30s, some of these guys are going to get stressed and clearly they are not going to have the cash flow that they would hope they have, and I don't think that we are any more immune to those market forces than anybody else is. I think we are better contracted than most of our peers are, and that gives us the confidence that we have got.

Angie Sedita - Macquarie Capital

Right. So I guess you are attempting to contract the Lloyd Noble and Tommy Craighead. What's the interest there, and then I guess more of a strategy question, you are focusing on supporting rates or working rigs?

David Williams

You've been doing this too long. Both, I mean it depends. I think it's important for those of us that have what we have to have the intestinal fortitude to do the right thing. But I can tell you having gone through this a bunch of times, if it gets ugly long enough, some of these guys are going to get squeamish and you are going to see rates fall. And once they start falling, it gets ugly in a hurry.

We can get ugly in a hurry. We are in a unique position. If you’ve got a script, a place for drilling contractor to be going into a period of complete uncertainty like we are now, Noble is very well-positioned to deal with whatever happens.

We may very well, if it stays like this -- you know West Africa, we've been waiting on a job as Kurt said, you got a job, you got a job, you got a job, also you don't get a job and one day they had their permits to have them and next day they don't. You just don't know. We bid both the Craighead and Lloyd Noble out of there.

We may continue to bid those rigs out of there. If push comes to shove and we don't see real opportunities, we may have to take a little more drastic action and we may cold stack them rather than -- it's hard to cold stack West Africa. We may down manage them to cut our costs and batten them down and hang on. It depends on how the year develops.

And the good thing about having rigs in good condition is, we can lay them up and we can batten them down if we have to, but we are not there yet. It's a little too early, I think, for us to start looking at which rigs we want to pull out and which ones we want to hang on.

Right now, if you lay out the availability of our rigs, there is a scenario for every one of them where they go to work. Once those start to dry out, you wake up one day and there's no scenario for half the fleet, then you’ve got a different problem. So we'll have to monitor as it goes.

But, again, with the strength of where we are right now, going into this cycle, I like where we are. I think we've got a great opportunity for strategic growth, which is all what Noble's always done. This is what we do. And if the cycles don't, if it doesn't cycle, you don't get a chance to recharge the fleet. And so this is a hell of an opportunity for us, I think. It's ugly, but I think that's where we have to look at.

Angie Sedita - Macquarie Capital

That's fair enough. Good answer. Just again a last final follow-up question. Regarding your opening comments you addressed a number of questions that clients often ask. One question you didn't address that's often asked is, are you seeing any customers trying to renegotiate terms? Or did your predecessor do some renegotiation last downturn. What's your stance there and have you had any customer coming to you trying to renegotiate terms.

David Williams

We have not had any customer come to us and threaten to walk a contract or say they are insisting on renegotiating terms. We have had, as we always do, a dialog with all of our customers talking about what their condition is, or what's going on, or what their future is, And we have had a couple of them indicate to us, if it stays like it is or if it gets worse, cash flows could become a problem.

And so they've made us aware of that, although we have not entered into discussions at any level about modifying terms or anything else. And I would say that in some of these cases, we may have actually instigated some of these conversations. So we are talking to our customers. Angie, if it stays like this, some of these guys are going to have problems, and we will deal with them as they come up.

Angie Sedita - Macquarie Capital

Great. Perfect. Thanks David.

David Williams

You bet.

Operator

Our next question comes from Alan Laws with Bank of America.

Alan Laws - Bank of America

Good afternoon.

Lee Ahlstrom

Hello, Alan.

David Williams

Hi, Alan.

Alan Laws - Bank of America

Going to start with a follow-up to Geoff's question on cost. You mentioned FX as being a pretty small hit. What would be the absolute dollar terms of that, because, most of the fleet is in areas where there has been 20% currency swings and most of your costs I would guess are in local currency. So do you win any in the translation effect there?

David Williams

First of all, you got to recognize that some of it's split between capital and expense, and then we have some costs that are paid in US dollars. For instance, anything that comes out of the US here. We got kind of a centralized materials management group that's paid in US dollars and then sent out to the area.

So it's not as straightforward as you might think. It wasn't substantial enough to set out. We don't want to go into the details, but it wasn't substantial enough to set out as an independent cost and I didn't want to take away from the cost control focus because that is really the underlying reason that the costs were down, as well as our ability to go into next year at what I think are some pretty low cost level increases.

Alan Laws - Bank of America

Okay. Would you say, though, that substantial amount of your revenues are also in local currencies to offset that as a natural hedge or is that not the case?

David Williams

The bulk of our revenues is coming in US dollars. We do have some local currency revenues, but the substantial portion of it is in US dollars.

Alan Laws - Bank of America

Okay, good, I like that.

David Williams

The other thing to recognize too is the currency changes. The material currency changes really only happened in this quarter. You've had a lot of volatility in the rates, but the bulk of the benefit has been just or probably starting in mid October.

Alan Laws - Bank of America

That will give you the tailwind going into '09, would it not?

David Williams

Right. I am not saying it's not helping, it's just not the underlying cause of why our costs are down.

Alan Laws - Bank of America

Okay, cool. That's good. The last question. Sorry to ask, backlog integrity question, but you have about 30% of your entire backlog tied up in Memorandums of Understanding with Petrobras. This is different language from other contracts in your status report and I just wondering are these LOIs, are they firm contracts, and can Petrobras walk away from these, or will have they have a penalty?

David Williams

Their board approved, by Petrobras -- the protocol of Petrobras is that you go this -- they will put out one of these expressions of interest or market inquiries and then now negotiate with whoever responds and they'll come to a Memorandum of Understanding, and when they come around to it, they will put the paperwork together.

So I think they just signed their contracts within the last week or so. It just takes a while to get it done. There is no reason to expect that the Board is going to walk away from this commitment. They are committed to it. They need the rigs.

They have a program for them. So, you know Petrobras has been focused on adding rigs because of the 12 LOIs that they issued. One rig is obviously cancelled and I think it’s unlikely they will get some of the other 11.

So, they have been focused on contracting rigs. I think they will get to the paperwork that backs them up here fairly shortly, and hopefully we get ours going ahead and papered quickly, but there is no reason to believe that they are in jeopardy.

Alan Laws - Bank of America

Okay, perfect. Like that answer. Thank you.

David Williams

Thank you.

Operator

Our next question comes from Truls Olsen with Fearnley Fonds

Truls Olsen - Fearnley Fonds

Yes, hi. Just looking at the market outlook today, I mean, it doesn't look very positive obviously. And you seem to be very moderately cautious in it in a way. But I mean what is going to stop your jackup rates from coming down pretty hard and pretty fast?

David Williams

Well, I mean what's going to stop them from coming down hard and fast is the fact they are 80% booked through the year. We are not immune to what happens in this market. If the rates start falling, we are a drilling contractor. You know, if some guy out there breaks ranks and the rates start falling and the rates are going to fall. The market is set every day by drilling contractors, negotiating deals around the world. So, if you’ve done this long enough, you see how they go up. You see how they go down. We always try to push them up. We always try to drag them down.

But for us, we are not panicked because of our contract position. If rates go to $30,000 a day, which I don't expect, then we are going to have some decisions to make about the 20% of the days that we've got hanging out there. But we will deal with that when it comes up. So far, we have been looking at this for a long time. We have been looking at the international -- we were been having international jack-up panic conversations for the last nine months. Our last 300-foot bid in Mexico, we bid $165,000 a day and our 250 bid the other day was what, 240?

Tom Mitchell

145.

David Williams

145. Those are panic day rates. So there is still demand out there. And we are fairly comfortable with where we are just by strength of the backlog and what we see from our customers.

Truls Olsen - Fearnley Fonds

Sure, but I mean obviously the day rates you can't take down. We have seen pretty significant roll overs on some of your competitors, at least. At what point, I mean where do you say the Craighead and the Lloyd Noble has been contracted at 160 - 170 level. I mean, when day rates are at -- at what point -- what would day rates need to be before you will consider managing the fleet in the sense of stacking units?

David Williams

We manage the fleet every day. I am not going to get into a debate about where rates have to be before we close stack rigs or before we pull them out. We are still bidding them right now, and again with 80% of our fleet booked, we are still pretty comfortable.

Some other guys may have issues. We don't have those issues largely, and so we will make that decision when we need to make that decision based on the opportunities that we see in the marketplace.

Truls Olsen - Fearnley Fonds

Okay. And then just switching to CapEx very quick. What is the remaining CapEx on your new build rigs?

David Williams

I am trying to think of what the number is. It is -- when you went through the numbers, Tom, in your discussion about what was…

Tom Mitchell

Are you asking what remains after the '09 budget?

Truls Olsen - Fearnley Fonds

Correct. Including your '09 budget as well.

Tom Mitchell

What we've got here for this year is $618 million. What rolls into next year is, I think, a small payment rolls on the day. We have a little bit that comes out on day and then it's all Globetrotter after that, as well as the drillship.

David Williams

The drillship upgrade. So there is still a good bit of capital projects out there.

Truls Olsen - Fearnley Fonds

But I mean, how much on the Globetrotter was paid in 2008 and will be paid in 2009?

Tom Mitchell

Globetrotter around $370 million next year in 2009. Beyond 2009, excuse me.

Truls Olsen - Fearnley Fonds

Okay. All right. Good.

Tom Mitchell

Thank you.

Operator

Our next question comes from David Smith with JPMorgan.

David Smith - JPMorgan

My questions have been answered. Thank you.

David Williams

Thank you.

Operator

Our next question comes from Rob Mackenzie with FBR Capital.

Rob Mackenzie - FBR Capital

Good afternoon, guys.

David Williams

Hi, Rob.

Rob Mackenzie - FBR Capital

David, I have a bit of a strategic question for you on Mexico. I mean it seems like that is one, if not the only bright spot in the jackup rig market this year. And you guys already have substantial exposure to Mexico. How do you think about when you have enough or may be too much exposure to Mexico from a business standpoint and also from a standpoint where it might start negatively impacting your stock's valuation.

David Williams

I can't imagine in Mexico it's going to start negatively hitting our stock. I mean everything else is hitting our stock. That's the only bright part out there, as Kurt had mentioned. We look at Mexico and you got to be concerned about the fact that PEMEX keeps its constitutional right available to them where they can terminate contracts with notice for the greater good of mankind and Mexico and it's something we have always been aware of.

As Kurt pointed out with the production declines they have and their position with the need for hydrocarbons. If there is anybody out there that you trust right now to go forward, it's PEMEX. We do have a lot of rigs there, but given our operating history there, which has been extremely good and given their need for rigs, and as you correctly point out again, given one or two bright spots, we are not there yet.

We bid the Tommy Craighead in. We have looked actually at not bidding this last tender or the 350 footer because of opportunity we had in other places. We decided at the last minute to go in and chunk in a bid just because West Africa is just so goofy. So, I think we will continue to pursue it as long as PEMEX acts professionally, as they currently are, and as long as we get paid right on time.

It's a great operation and they are a great customer. So as long as they continue to support us, we'll try and support them. And you are correct. We have a lot of exposure there and if PEMEX goes sideways it could be exciting, but we don't see that in the cards. We see that they need the rigs. And we have got a great partnership there.

Rob Mackenzie - FBR Capital

Okay. And then my follow-up to -- and thank you for your answer. My follow up to that is the indexed rates that have been on some of the jackets and I presume you are bidding on the new tenders. Can you give us more specific color on how the indexes work and what rigs – if specific rigs are tied to such that, are we going to see Mexico jackup day rates that fall if and when rates in other regions fall as well?

David Williams

Well, -- we only have three rigs that are indexing. The three rigs we bid earlier in the year. Three or four?

Kurt Hoffman

Four.

David Williams

Four rigs, I am sorry, that were indexed rigs we did earlier in the year. The most recent tenders have not been indexed. They have been fixed rates. And the indexed rigs that we have down there rolled up last time. So the way that they are monitored is through a formula where they monitor through seven different international markets for life equipment and they reprice according to contract every -- I think it is every quarter.

So yes, if -- if leading edge rates decline, then you can see some decline in those four rigs that we have and some of the other rigs, but to-date, they have actually rolled up, not down.

Rob Mackenzie - FBR Capital

Okay. Thanks. And then -- one more if I can. Southern sector of the North Sea, while not a huge market for you guys, the gas market there, what are you hearing from your customers about drilling for gas in the North Sea, particularly in the wake of the gas disruption we all are so aware of in Europe these days.

Kurt Hoffman

Rob, this is Kurt. You are right. What we have seen from our customers is what's going on between Russia and the Ukraine. Really it hasn't had an effect on drilling activities in the central or southern North Sea. So it's business as usual. Certainly watching the prices -- as you are all aware of, gas is not taken on the margin anyway - the same impact that oil has. So we are not panicked about the North Sea, as longs as gas stays where is it is at, we are comfortable with our position.

Rob Mackenzie - FBR Capital

Okay, thanks. Any possibility it could improve given concern over Russian market power or is that unlikely?

David Williams

No, I think that is very possible Rob, we like improvement.

Rob Mackenzie - FBR Capital

Thanks, I will turn it back.

David Williams

Anything is possible.

Lee Ahlstrom

All right. Christian, we are going to go ahead and end the questions there. We would like to thank everyone for joining us on the call today. Of course Kurt and I will be in the office to field any calls. We know there are some of you in the queue who weren't able to ask your questions and we just go ahead and ask you to call into us and we will get back to you as soon as we can. I look forward to talking to everybody in April when we do our first quarter results for 2009. And again, thank you for joining us.

Operator

Ladies and gentlemen, this concludes the fourth-quarter earnings and full-year 2008 conference call. You may now disconnect.

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Source: Noble Corporation Q4 2008 Earnings Call Transcript
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