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Executives

Richard A. LeBlanc - Vice President, Investor Relations

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

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

P. Jeff Saile - Senior Vice President

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

Mark Burns - President of ENSCO Offshore International Company

Analysts

Robin Shoemaker - Citigroup

Ian MacPherson - Simmons & Co.

Geoff Kieburtz - Needham & Company

Tom Curran - Wachovia

Dan Pickering - Tudor Pickering & Holt

Arun Jayaram - Credit Suisse

Pierre Conner - Capital One Southcoast, Inc.

Truls Olsen - Fearnley Fonds

Michael Drickamer - Morgan Keegan & Company, Inc.

Judson Bailey - Jefferies & Co.

Ensco International, Inc. (ESV) Q4 2008 Earnings Call February 26, 2009 11:00 AM ET

Operator

Good day and welcome to the Ensco International Fourth Quarter, Full-Year 2008 Earnings Conference Call. As a reminder, this call is being recorded, and your participation constitutes consent to its taping.

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

Richard A. LeBlanc

Thank you, Melanie. I'd like to welcome everyone to our earnings conference call this morning.

With me in Dallas are Dan Rabun, our Chief Executive Officer; Bill Chadwick, our Chief Operating Officer; and Jay Swent, our Chief Financial Officer, as well as other members of our executive management team.

This morning, we released our earnings announcement and we filed our 8-K with the SEC. I'd like to remind everyone earnings release is available on our website, www.enscointernational.com.

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

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

We refer you to our earnings release and SEC filings available on our website, which defines such forward-looking statements, state that the company undertakes no duty to update any such statement and lists risk factors which could cause actual results to differ materially from our expectations. I'd also like to remind everyone that with regard to our rig status, a detailed listing is provided on our website, and it's updated the middle of each month when we file our 8-K with the SEC. The last update was as of February 17. At the end of our prepared remarks, we will have time for questions.

With that, let me turn it over to Jay.

James W. Swent, III

Thank you, Richard. Good morning and thank you all for joining us today.

I will start our call this morning with an overview of full year 2008, then discuss fourth quarter results and close with some comments about our outlook for the first quarter and full year 2009.

We're pleased to report that 2008 was another record year for ENSCO. Net income increased nearly $1.2 billion, a 16% increase over 2007 and earnings per share was $8.11, a 21% increase. Approximately 80% of our year-over-year operating improvement relates to the stronger performance of our international jackup fleet in Asia-Pacific and Europe/Africa, where average day rates increased 16% and 11% respectively. We also realized a significant day rate increase on ENSCO 7500 in early 2008 while it operated in the Gulf of Mexico.

During the fourth quarter, we commenced segment reporting and our SEC filings will now provide separate financial information for our deepwater operating segment and three jackup operating segments. The deepwater operating segment will include ENSCO 7500 and all 8500 Series rigs. Our three jackup operating segments will be displayed on a geographic basis with segments for North and South America, Asia-Pacific and Europe/Africa.

Deepwater will become a major component of our business over time. So going forward, I will split my comments between the deepwater segment and the three jackup segments. Deepwater revenue grew 16% in 2008 to about 3.5% of total revenue.

ENSCO 7500, the only rig earning revenue in 2008 commenced preparatory work for mobilization to Australia late in the third quarter. And as a result, $36 million of day rate revenue was deferred in 2008 and will be amortized over the initial contract term once the rig commences operations in Australia. This is expected to occur in April 2009 at a day rate of $550,000 per day. Have ENSCO 7500 operated in the Gulf through the end of 2008, we would have seen a 65% increase in year-over-year revenue.

Revenue from our jackup segments increased by 17% in 2008, and operating income increased by 18%.

Turning out to our fourth quarter results, net income increased 26% from prior year levels to $299.8 million and earnings per share were up 29% to $2.14. Higher average jackup day rates across all regions contributed to this year-over-year improvement.

We had three unusual items impacting the quarter that merit discussion. First of all, we are negatively impacted by approximately $11 million, which reflects foreign currency losses and adjustments to measure our auction rate securities to fair value at year end.

Secondly, we are closely monitoring our receivable balances as well as the impact that the current economic climate may be having on our customers. After a thorough review, we increased our bad debt reserve by approximately $15 million. This additional reserve is reflected in fourth quarter contract drilling expense.

Finally, our fourth quarter effective tax rate was 13%. This rate reflects lower than planned earnings in our North and South America segment, which is subject to some of our highest statutory tax rates and also the final resolution of some outstanding tax matters.

Now let's discuss quarterly trends by comparing the fourth quarter sequentially to the third quarter 2008. Fourth quarter revenue decreased by approximately 2% from third quarter levels, slightly less than the 3% decline we had predicted during last quarter's call. As expected, fourth quarter revenue was adversely impacted by approximately $34 million of deepwater day rate revenue that was deferred to future quarters as a result of the mobilization of ENSCO 7500 to Australia.

Revenues from our jackup segments increased by about 3% during the period. Contract drilling expense increased by about 8% in the fourth quarter to $209 million. Excluding the increase in our bad debt reserve previously discussed, contract drilling expense increased by less than 1% compared to third quarter. This was less than our third quarter guidance of 4%, and reflects additional spending controls that we recently put in place.

G&A expense decreased by $3.1 million compared to third quarter, due to lower outside legal and financial fees.

Our cash generation on our balance sheet remains strong during the quarter with cash increasing by $342 million to 790 million. This increase is after funding a $118 million of capital expenditures, most of which related to our deepwater expansion.

Now let's look more specifically at fourth quarter results in each of our jackup operating segments. The average day rate for our Asia-Pacific segment was $159,100, a 1% increase compared to the third quarter, to principally the scheduled increases on our rigs working in Saudi Arabia and one in Qatar, offset by ENSCO 54 rolling to a lower rate under a new term contract in the UAE.

Asia-Pacific utilization was 94% compared to 96% in the third quarter, due primarily to ENSCO 53 entering the shipyard in October for life extension work.

The average day rate for our Europe/Africa segment increased by $1,600 to $227,700 in the fourth quarter. This was primarily due to ENSCO 71 rolling from a legacy contract to a new contract, at nearly double the day rate in early August. This was offset in part by ENSCO 85 going on to a temporary standby rate in early December.

Utilization on our Europe/Africa segment was 94% in the fourth quarter compared to 96% in the third quarter, due to a slight increase in maintenance and repair downtime. Day rates for our North and South America segment increased by 6% to an average of $115,000 in the fourth quarter, as about half of the fleet rolled to higher day rates. North and South America utilization was 99% in the fourth quarter compared to 98% in the third quarter.

Now let's look at the outlook for first quarter 2009. It's important to keep in mind that we will not have the benefit of any revenue from our deepwater fleet during the first quarter with ENSCO 7500 still mobilizing to Australia and ENSCO 8500 not yet on the payroll. The amount of deferred day rate revenue for ENSCO 7500 in the first quarter will be approximately $33 million.

We currently expect first quarter 2009 revenue to be down approximately 18% from fourth quarter levels. Part of this revenue reduction is due to our decision to defer booking revenue after late January on the ENSCO 69 contract in Venezuela, given the ongoing dispute with PDVSA.

Also, three of our Gulf of Mexico jackups will be in shipyards for preparatory work prior to mobilization and commencement of new term contracts in Latin America. ENSCO 68 will be mobilizing to Venezuela to work for Chevron and ENSCO 89 and 93 will be moving to Mexico.

Two of our Asia-Pacific jackup rigs; ENSCO 50 and ENSCO 56 entered shipyards following completion of contracts in the fourth quarter, and three other rigs either completed or will complete contracts during the first quarter of 2009 and are currently being marketed.

We anticipate first quarter contract drilling expense will decrease by approximately 10% from fourth quarter levels. The fourth quarter was adversely impacted by the $15 million bad debt provision previously discussed. We expect to begin realizing the impact of the stronger dollar on our international contract drilling expenses. Assuming the dollar remains strong, this impact should become more significant over the course of 2009, as we roll off existing foreign currency hedges.

We also believe the impact from our additional cost control measures will become more pronounced over the course of 2009, and I'll elaborate more on this in a moment.

Depreciation expense and G&A expenses are expected to be comparable to fourth quarter levels.

Now, a few comments about our 2009 full year out look. We expect the revenue contribution from our deepwater fleet to more than triple in 2009 to just over $300 million. ENSCO 8500 and ENSCO 8501 are expected to commence operations in the Gulf of Mexico in April and September 2009 respectively, and ENSCO 7500 should recommence drilling operations in early April.

We will be adding operating days for our deepwater fleet with the startup of ENSCO 8500 and 8501 during 2009. But we still expect a slight decrease in overall 2009 contract drilling expenses compared to 2008, as we adjust the lower expected activity levels on our jackup fleet.

Deepwater contract drilling expenses will increase by approximately $76 million with the addition of our two deepwater rigs and the higher cost associated with ENSCO 7500 in Australia. We expect this increase to be more than offset by an 11% reduction in contract drilling expense related to our jackup segments.

Fewer jackup rig operating days, a stronger dollar and cost containment initiatives would be the main contributors to our cost management.

One wildcard for 2009 will be insurance cost especially in the Gulf of Mexico. Early indications are that insurers are looking for large premium increases on all classes of assets operating in the Gulf.

Depreciation expense is expected to increase to approximately $213 million for the full year, with the addition of our two new deepwater rigs. We anticipate G&A expenses will be approximately $50 million for 2009, which represents a 7% reduction from 2008.

We expect our effective tax rate to be approximately 19% for the year.

As we discuss our 2009 capital spending plans, I should caution you that our enhancement and sustaining budgets maybe adjusted over the course of the year depending on business activity and prospects. For that caveat, we currently expect 2009 capital spending will be approximately $740 million; somewhat less than the $772 million spend in 2008. 515 million of this amount will be spend on our six new deepwater rigs now under construction and the recently delivered ENSCO 8500. We also expect to spend about $125 million for rig enhancement projects and 100 million for sustaining projects.

In conclusion, we expect the year to be challenging, but we have an excellent track record of managing our business through these cycles. We entered 2009 in excellent financial condition and with backlog of $4 billion, of which more than $1.7 billion covers 2009.

In an environment where cash is king, we have strong liquidity, with $790 million of cash at the end of 2008 versus $292 million of debt. Half of our debt is not due until 2027 and our repayments on the balance are less than $20 million annually. In addition, we have an undrawn $350 million revolving credit facility.

We expect to fund this year's capital cost from operating cash flow and existing liquidity, just as we did in 2008.

We recently completed a thorough review of all operations and major prospects and we plan to aggressively manage cost to protect margins as we move through the year. Although we cannot necessarily influence the marketplace, we can't ensure that we will remain one of the most efficient drilling contractors and that gentlemen will be our focus in 2009.

With those comments, I will now turn the call over to Dan.

Daniel W. Rabun

Thanks, Jay and good morning everyone. First, I'd like to make a few introductory comments about 2008. We completed another very successful year and achieved a number of important milestones.

We took delivery of ENSCO 8500, the first of our seven ultra-deepwater rigs in the ENSCO 8500 Series. ENSCO 8500 is currently undergoing deepwater sea trials in the Gulf of Mexico, and we expect the rig to commence operations in April. This is an important strategic initiative for the company, as we transition from what was once considered largely a pure jackup company to now being a hybrid driller with a meaningful presence in both shallow and deepwater.

We believe the significant investment that we are making in deepwater will become more widely recognized and valued as we continue to take delivery of our ENSCO 8500 Series semis.

We continued our emphasis on safety performance in 2008 and our results were very positive. The safety of our employees is a core value of our company. Our total recordable incident rate was equal to our record performance in 2007, the best in the history of the company, and it was 25% better than the industry average.

We were also pleased that the severity of incidents continue to decrease as well. Our people are to be commended for their efforts in this critically important area. We plan several initial initiatives in 2009 to continue the improvement in our safety performance.

We also added to our contract backlog over the last 12 months with additional deepwater term commitments and contracts on three of our Gulf of Mexico jackup rigs in Latin America. Our total backlog increased to $4 billion as of February 2009, a 5% improvement from a year ago. We will have the opportunity to add to our backlog with our yet to be contracted three deepwater rigs and with prospects for additional jackup rigs to Mexico.

As we indicated in our last earnings conference call, we did not purchase any of our stock during the fourth quarter. We remained very concerned about the credit markets and the lack of options to access capital if we were to take advantage of any opportunities. Accordingly and as stated in our last conference call, for the time being, we have suspended stock repurchases, but we will continue to evaluate repurchases in light of the health of the credit markets.

While it is more satisfying from our perspective to look back at our record year in 2008, the reality is everyone is focused on what 2009 and beyond will bring. Let me begin by addressing matters we believe are at the top of everyone's mind. As we and our customers adjust to lower commodity prices, tight credit markets and a global rescission, we believe ENSCO is better positioned than those to maneuver through the challenges.

As Jay mentioned, we ended the year with $790 million of cash, our balance sheet remains one of our strengths and gives us great flexibility. We have consistently achieved among the highest operating margins in the industry in good times and not so good times. We have always operated one of most cost efficient fleets in the industry and this will be a point of continued emphasis in 2009.

We are aggressively reviewing and addressing our CapEx expenditures and cost structure to better align with the new level of business activity. The earnings from deepwater investment should serve as a buffer to the weakness in the jackup markets.

As mentioned, the first of our 8500 Series rigs is expected to commence operations in early April 2009. ENSCO 8501 is expected to be delivered in June, and we anticipate it will be on contract late in the third quarter. ENSCO 7500 is expected to recommence drilling operations in Australia in April at a day rate of $550,000 per day, a significantly higher rate than it was receiving last year in the Gulf of Mexico. In addition, when the rig commences operations, we will begin to recognize $70 million of deferred day rate revenue over the life of the ENSCO 7500 contract.

We expect contributions from these rigs will begin to meaningfully impact our results later this year and even more so in 2010. Deliveries of ENSCO 8502 and ENSCO 8503 are expected to follow in 2010, and the remaining three rigs in 2011 and 2012. So we expect to show significant future growth in our deepwater revenue.

I recently returned from a trip to Southeast Asia and the Middle East and had the opportunity to visit the Keppel shipyard in Singapore, where our new semis are being built. Construction of our 8500 Series rigs is going very well. The lessons learnt while constructing ENSCO 8500 have been applied to the other rigs and I'm pleased with the progress we are making.

It is important to note particularly in these unsettled times that our deepwater expansion is being financed with internally generated funds, preserving our balance sheet for other uses.

I know I'll get the question about M&A opportunities in the call, so I would like to address this upfront. Several of the newbuild contractors are experiencing liquidity issues and are seeking alternatives. We have seen opportunities in both the jackup and deepwater sides of the business. We will continue to evaluate possible transactions to grow our business, but as usual we will be very cautious about protecting our balance sheet. These opportunities are evolving as the drilling and credit markets continue to be volatile, and it is too early to make any predictions about whether any deals will get done.

In my personal opinion, I believe the price expectations that currently exist are not reflective of current market conditions and valuations and therefore the timing is not yet right.

While in Asia and the Middle East, Mark Burns, who heads up our international operations and I had the opportunity to visit with many of our customers. Although it is clear that some are deferring or curtailing drilling programs due to the dramatic reduction in oil and gas prices. There are others that will continue to drill through this cycle. Several of the majors have announced that they are not curtailing drilling programs. It should be noted however that competition is intense as rigs complete contracts and new rigs are delivered into the market without contracts. There is no question that 2009 will be challenging in the Asia, Middle East market and jackup rigs including some of ours will be without contracts for some portion of the year.

We are evaluating market opportunities for our idle rigs and we will not hesitate to stack our rigs to reduce our carrying cost, if we do not see any near-term prospects for work.

With those general comments, let's review our operations and markets as we do every quarter. I refer you to our monthly contract status report filed nine days ago for specific rig details.

Starting in Southeast Asia/Pacific Rim, as I alluded to, some operators have declined to exercise contract extension options and have delayed or cancelled drilling programs. But there are several programs that are planned to commence later in the year or next year in Indonesia, Vietnam and China. We currently have two rigs that have completed programs and are being marketed in the region. In both cases, we are pursuing opportunities for work starting in the second quarter and beyond.

We visited all of our markets in the Middle East and India during the trip. There are several opportunities on the horizon, most notably in the UAE and in India. But some tenders have been cancelled or postponed.

In Saudi Arabia, Saudi Aramco is cutting back on oil drilling given the much publicized OPEC cutbacks and recently released two of our rigs. We believe that Saudi Aramco will require more gas rigs, but that will not be enough to make up for the expected reduction in oil drilling.

In the North Sea, the market is still fairly balanced with currently only one industry rig stacked. There are number of outstanding enquiries for work starting in the second half of the year. Unfortunately, there are not many term work opportunities announced to-date, as several of the independents have curtailed drilling in light of lower commodity prices and the failed credit markets.

We are starting to see some rate pressure in this market, with some standard duty work now below $200,000 per day and heavy duty work somewhat above that level. The ENSCO fleet is generally committed into the second half of 2009. The Med, where two of our jackups are located is currently balanced as well although leading edge day rates are off their highs. We see further indications of softness particularly in the second half of the year.

Turning to the U.S. Gulf of Mexico, we continue to see the supply of premium jackups decrease as rigs move to Mexico and other markets. We expect that the number of premium rigs will be reduced to 17 in the next few months, with more departures likely. Gulf of Mexico jackup demand continues to fall, given lower natural gas prices and budget cutbacks by many of the independents. As a result, the market is choppy with some rigs idle and the day rates softening.

With regard to Mexico, we were awarded work for two of our 250-foot Gulf of Mexico jackups and we're the low bidder on two other PEMEX requirements. We expect a final decision by PEMEX on the two latest rigs by early March. PEMEX is expected to be out for an additional 10 rigs this year with a tender for five of these rigs expected in March.

In Venezuela, we recently announced that our customer, a subsidiary of PDVSA, failed to honor its payment obligations under the drilling contract. We understand that generally all oil service companies operating in Venezuela have similar issues. We continue to work with PDVSA to reach a satisfactory resolution of the matter, but we do not have anything new to report to you at this time. This is obviously a very large issue, both for the oil field services industry as a whole and the production of oil and gas in Venezuela, which cannot remain unresolved from an indefinite period.

Fortunately, our PDVSA exposure is limited to a single rig.

Now let's turn to the deepwater market, where we are optimistic with several opportunities developing and major discoveries being announced. The first appraisal well confirm that the Liwan field in China is a major deepwater gas discovery. In Brazil, BG and Devon have deepwater wells underway in the prolific pre-salt areas with significant reserve potential. And Petrobras, ExxonMobil, Repsol and Anadarko recently have reported more discoveries there.

In the deepwater Gulf of Mexico, Chevron recently announced a significant lower tertiary discovery. And Mexico, PEMEX just the other day announced plans to drill eight to 10 wells a year starting in 2010 and will look to international oil companies to assist in this effort.

We also see deepwater rig opportunities in India, Ghana, and Angola. ONGC is at a tender currently for four additional rigs for long-term work. Given this level of activity and success, we are confident of the opportunities for our three un-contracted semis.

We continue to hear rumors that previously announced newbuild deepwater rig construction is being canceled or delayed due to lack of funding. This is raising concern for operators and several have expressed their desire to work with only well established drilling contractors going forward. We believe our strong balance sheet and liquidity are significant advantages in the marketing of our three available 8500 Series rigs.

In closing, the macro environment has certainly worsened from what it was last year when we achieved our record results. Given that fact, we are proactive in addressing our cost structure and aligning our operations with the current business climate. There are positives however. Our significant deepwater investment will begin to pay dividend starting this year and we have this... have had success bidding rigs into Mexico for term work.

We have one of the strongest balance sheets and liquidity positions in the industry. We are in good position to weather the current environment.

With that as an overview, our entire management team is available to answer your questions. Richard, I'll hand the call back to you now.

Richard A. LeBlanc

Melanie, we are happy to take questions at this time.

Question-and-Answer Session

Operator

Thank you, Mr. LeBlanc. (Operator Instructions). And our first question will come from Robin Shoemaker with Citigroup.

Robin Shoemaker - Citigroup

Thank you. Good morning. Jay, I was wondering if your comment about the 11% cost reduction for the jackup in 2009, it included I think as you said some fewer rig days, operating rig days. But in terms of a generic kind of cost trend with respect to wages and insurance and all the other cost that go into that, what is that trend on a year-over-year basis roughly?

James Swent, III

Well, I think Robin, I'd say, of all the expenses as I kind of highlighted in my comments, insurance is probably the one that people are likely to see big increases in year-over-year. I think we haven't made any firm decisions yet relative to wages, and as I always say, we operate in the market, we have to be competitive. So we will follow whatever the market does. At the moment, it's not looking like there's going to be any huge increases in labor, so. But in terms of where we expect cost to come out, there is always work to be done looking at rigs and trying to find more efficient ways to run them and we're doing that. We're also... obviously, there is fewer rig days as you said, there is a lot of moving pieces as you note from my comments in the first quarter. But at the end of the day, we will have fewer rig days unless the market turns back up and that's a big component of the savings as well.

Robin Shoemaker - Citigroup

Okay. And Dan, I was going to ask you about your strategy or the current state of your conversations with potential customers for the three 8500 Series rigs which are not yet contracted. And obviously, they are a little more than two years away from completion of the first one. But are we likely to see anything in that respect this year or is it in ENSCO's interest to wait for a better market environment perhaps in 2010.

Daniel Rabun

Good question. We continue to be pleasantly surprised by what's going on in the ultra-deepwater market with these major discoveries being announced. We have fairly substantial customer engagement and interest in these rigs. So, it's really difficult to predict. But, at the time if we have an opportunity, we're not going to hesitate to contract, I mean not just to judge by what the term and the rate maybe. But yeah, it's difficult to predict whether it will be this year or when in this year it will be or next year. But I will say the interest is extremely high.

Robin Shoemaker - Citigroup

Okay. If you are successful in your... in what you expect to bid into Mexico again this year, are you -- how many rigs would you anticipate could potentially end up in Mexico from your Gulf of Mexico fleet, given this 10 rig tender package you are anticipating?

Daniel Rabun

Probably out of the Gulf of Mexico fleet, probably a couple more.

Robin Shoemaker - Citigroup

Okay. So then the other rigs bid for PEMEX would come from Middle East part probably?

Daniel Rabun

Would come from other markets, that's correct.

Robin Shoemaker - Citigroup

Okay all right, thank you.

Daniel Rabun

Thank you.

Operator

And our next question will come from Ian MacPherson with Simmons & Co.

Ian MacPherson - Simmons & Co.

Hi good morning. Could you indicate which of your rigs were the latest low bidders to PEMEX and what the day rates look like or do they have the index terms as others have recently or?

Daniel Rabun

Jeff Saile who runs that business is here; let me let him address that.

P. Jeff Saile

It's two of the 250s ENSCO 90 and 93 and the rate, the terms are not indexed, or the rate is not indexed. And the rights will be... and they are in the low 100s, in the teens, so well in teens.

Ian MacPherson - Simmons & Co.

Okay. Following up again on the cost guidance for this year with lower activity expected. Does that implicitly assume cold stacked time for certain rigs or how exactly does lower activity in your jackup fleet manifest itself?

Daniel Rabun

I guess Ian, I would say at this point in time we haven't made any firm decisions about cold stacking any rigs. As you can tell from my comments, we have rigs coming off of contract and being marketed. And so, they're going to be in a warm stacked condition for some period of time. And we will evaluate cold stacking at some point of time. So our guidance at the moment at the end of the day assume some level of cold stacking, but we can't be very specific at this point in time.

Ian MacPherson - Simmons & Co.

Do you have a... I imagine you've done this in your planning process, I don't know if you will be willing to share with us today or not, sort of a bracket of possible utilization outcomes for your jackup fleet this year based on what you see in the market?

Daniel Rabun

You're right. I think I'll stay away from that question.

Ian MacPherson - Simmons & Co.

All right, thanks.

Daniel Rabun

Thanks, Ian.

Operator: And our next question will come from Geoff Kieburtz with Needham & Company.

Geoff Kieburtz - Needham & Company

Thanks. Good morning. I am actually going to start out with a little bit of a repeat there. Just to understand your guidance in terms of OpEx for '09, you said down 11%. Some of that is reduced operating days, but it wasn't quite clear in your last response there, you are including in that the assumption of some cold stacking?

James Swent, III

There is some assumption of that in there, yes.

Geoff Kieburtz - Needham & Company

Okay.

James Swent, III

And that's probably about as specific as I can be for you. The only thing Jeff, I forgot to really talk about is, obviously labor staff of our cost, the other half is repair and maintenance and other third-party cost, if you will. Everybody is getting price pressure and we're in the process of putting pressure on our vendors as well and we think that will yield some additional savings as well.

Geoff Kieburtz - Needham & Company

What are you thinking operating cost per active rig day is going to do in '09 versus '08? Is that going to be flat or down?

James Swent, III

I would say, it's probably going to be flat.

Geoff Kieburtz - Needham & Company

Okay. All right, that's helpful. And Dan, you touched on this, you acknowledged that we're going to ask about M&A. So I guess what I'd like to

Daniel Rabun

Well, I knew I couldn't get away from that question.

Geoff Kieburtz - Needham & Company

Yeah, just flagging it isn't going to let you off the hooks.

Daniel Rabun

Not off the hook yet.

Geoff Kieburtz - Needham & Company

You've got, a lot of you emphasized several times the financial flexibility that ENSCO has. It's fairly self evident. Flexibility is only valuable though if you think you are going to use it. Are you saying that the flexibility is there, you are waiting to see a little bit more clearly how deep and how long this downturn is and then you will assess what's flexibility and what is really just an insurance policy? Or is it really being drive more by evaluation of the bid as spread in the market for either newbuild or existing assets?

Daniel Rabun

Well, kind of a combination of things. One, we definitely believe there're going to be opportunities. All we say is, as we sit here and speak today, what we've evaluated, we don't think the current... right now is the appropriate time now. Quite frankly, given the way these markets are moving, the volatility in the markets, that could change next week. So, it is such a rapidly evolving situation that it's hard to make any predictions about where it's going to go. So given the volatility, we remain real conservative with the balance sheet.

Geoff Kieburtz - Needham & Company

Got you. Okay. Any sense as to... I mean, do you have any sense yet as to when there might be a little bit more stability in the market, where you can start making a little bit more confident long-term plans? I think the answer is no, but I will.

Daniel Rabun

Well, we are trying to get over our chuckling first.

Geoff Kieburtz - Needham & Company

All right. And then just last question, you did say there's a lot of interest on the deepwater, the un-contracted 8500 rigs. Has there been any change in the body language or the tone of those conversations over the last thee months?

Daniel Rabun

Let me characterize it this way. I think as we look through the fall, things just dropped off the radar screen and so, to give an example, Petrobras just said we are not going to make any decisions on rigs because we need to figure out what our business plan is going to be. And I think all of our customers were doing the same thing. Now that people have recalibrated their plans, based on lower commodity prices, the interest level has picked up. So I would say, first quarter activity level compared to fourth quarter activity level could offset ends of the continuum. So, I think that's... so I would say, the body language has not changed. In fact, it's picked up quite substantially, so.

Geoff Kieburtz - Needham & Company

Okay, great. Thank you.

Operator

Our next question will come from Tom Curran with Wachovia.

Tom Curran - Wachovia

Good morning, guys.

Unidentified Analyst

Hi Tom.

Tom Curran - Wachovia

Another great quarter. Dan or Bill, curious the ENSCO 96 and 97, on which field did they spend the majority of their time with Aramco?

Unidentified Analyst

They were on Manifa.

Tom Curran - Wachovia

Both of them?

Unidentified Analyst

Yes.

Tom Curran - Wachovia

And that was throughout the majority of their contracts?

Unidentified Analyst

Yeah, I think the whole time they were on Manifa.

Tom Curran - Wachovia

And looking ahead from here, how many of its remaining jackups that are working on oil fields you expect Aramco to release?

Daniel Rabun

I can't answer that question, you need to ask Aramco that. All they have told us is, and we've even spend quite a bit a time with them a couple of weeks ago and they're under the same cost pressure as everybody in the world is in. So, our rigs were the first rigs to get into Saudi Arabia. They were the first one that's off their contract terms, so we were the most vulnerable. And as contracts come due, I think the Rowan rigs got released, they were coming due in April. You can probably look at whose rigs are working there and see when they come off contract and make your own assumptions about it.

Tom Curran - Wachovia

Sure. Can you sense that there is a method at work, other event first up for renewal first out? Do they seem to be factoring in the nature of the fields that the rigs are currently working on or spend most of their time working on?

Daniel Rabun

Yeah, oh absolutely. I mean, the least vulnerable are rigs drilling for gas and the most vulnerable are the rigs drilling for oil and in inverse order, if you're drilling in for light oil versus heavy oil. If you're drilling for heavy oil, that's the least marketable. So, when they meet their OPEC commitments, they've described us, they cutback on what's the least marketable which is heavy oil, and that's where we happen to be drilling.

Tom Curran - Wachovia

Right. And presumably that would mean not only Manifa but Safaniya?

Daniel Rabun

We are not there, so I can't really comment.

Tom Curran - Wachovia

But Safaniya is the other primary offshore field that's heavy. Right?

Daniel Rabun

Yeah.

Tom Curran - Wachovia

Okay. Great, thanks guys. I'll turn it back.

Operator

We'll take your next question from Dan Pickering with Tudor, Pickering and Holt.

Dan Pickering - Tudor Pickering & Holt

Good morning, guys.

Daniel Rabun

Good morning.

Dan Pickering - Tudor Pickering & Holt

Dan, you mentioned that there is no -- nothing new to say about the rig in Venezuela. I guess I'm just curious, is it actually operating now and Jay, are we incurring cost down there or is that a zero revenue, zero cost asset for you guys at this point?

William Chadwick, Jr.

Dan, this is Bill. The rig is operating, it's being operated by the subsidiary, so PDVSA is our customer. We still have our crew on board in a observation mode. So we are still incurring some cost for crew requiring shore base is still operational. And actually that's because we anticipate resolving this situation in the very near future and resuming operations under the contract. So we are still incurring some cost. We have curtailed those to the maximum extent possible. If this thing retracted for any great length of time, we'd have to take another look at that. But right now, it's our expectation that this thing will be resolved very soon.

Dan Pickering - Tudor Pickering & Holt

Okay.

James Swent, III

And Dan, my comment was that we've deferred recognizing revenue that doesn't necessarily mean we'd given up on it.

Dan Pickering - Tudor Pickering & Holt

Right. And I guess in the bad debt adjustment, I assume all PDVSA debt is still considered current. So in other words, there is no increase in bad debt assumption for PDVSA at this point?

James Swent, III

Oh I wouldn't jump to that conclusion.

Dan Pickering - Tudor Pickering & Holt

Okay, all right. So part of the Q4 cost would assume some PDVSA?

James Swent, III

Some of it was PDVSA, yes.

Dan Pickering - Tudor Pickering & Holt

Okay, thank you. And then just so I get my math correct, on the 7500 when it starts up in April, 550 is the day rate and we're going to be adding $70 million over 17 months on top of that number, is that correct?

James Swent, III

You got the math right, yes sir.

Dan Pickering - Tudor Pickering & Holt

Thank you. And then I guess conceptually the last question from me would be, on the deepwater side, Dan, I don't hear any hesitancy on the three newbuild rigs for late delivery. So there is no thought at his point of slowing down or stopping any work on I guess the 8503 through 06?

Daniel Rabun

If anything, we've talked about accelerating it.

Dan Pickering - Tudor Pickering & Holt

Okay. And what's the total spending today on those three rigs?

James Swent, III

Today, Dan, we've spent 1.7 billion, that would be as of the end of '08. The balance to be spent over all rigs through 2012 is about another 1.7 billion.

Dan Pickering - Tudor Pickering & Holt

Thank you very much, guys.

Daniel Rabun

No, it's 1.4 and 1.7. You said 1.7 as we spent.

Dan Pickering - Tudor Pickering & Holt

Okay 1.7 spent and 1.4 left?

James Swent, III

No. Let me start over, 1.4 has been spent as of the end of 2008.

Dan Pickering - Tudor Pickering & Holt

Okay.

James Swent, III

1.7 is left to go for a total of 3.1 billion.

Dan Pickering - Tudor Pickering & Holt

Got you. Thank you.

James Swent, III

Okay

Daniel Rabun

Thanks, Dan.

Operator

We'll take our next question from Arun Jayaram with Credit Suisse.

Arun Jayaram - Credit Suisse

Good morning, buys.

James Swent, III

Good morning.

Daniel Rabun

Good morning, Arun.

Arun Jayaram - Credit Suisse

Quickly guys, for the 8500 Series rigs, what kind of daily operating cost should we be thinking about, I think those are far more improved, I'm just trying to get a sense of the cost on those?

Daniel Rabun

The 8500 Series.

Arun Jayaram - Credit Suisse

Yeah?

Daniel Rabun

That's 75,000 a day.

Arun Jayaram - Credit Suisse

That's great.

James Swent, III

And remember Arun, we have full cost adjustments on all of those.

Arun Jayaram - Credit Suisse

That's right. Dan, interested in your recent trip down to a couple of fells. I just wondered if you could give us some comments on, if they're run into situation where customers are not paying them, what do you think they do? And could there be some opportunities for you guys to work with your strategic relations with them to increase your deepwater fleet?

Daniel Rabun

Interesting question. I don't think KFELS has a lot of exposure in that area, Arun. I think the yards that have exposure to other places. So no, I don't really see a lot of opportunities as of taking advantage of our good relationship with KFELS with some of these opportunities that exist. They just don't have a lot of exposure to companies that are having funding issues. I think there was one that was pretty well publicized. It's kind of now gone by the way, so.

Arun Jayaram - Credit Suisse

Yup, that's right. And last question, Dan, you know we do a lot of work in terms of on valuations looking at either the replacement costs of rigs and obviously the U.S. dollars appreciated versus some of the Asian currencies making maybe cheaper on dollars basis. Any sense from talking to KFELS, if you theoretically would build or to get a rig from them, what the cost would be versus some of the recent numbers in that 200 plus range?

Daniel Rabun

No, and I really haven't even asked the question. I mean I've got kind of an instinctive feel for what it might be, but I think to speculate it, it's obviously come down.

Arun Jayaram - Credit Suisse

What's your instinct tell us?

Daniel Rabun

Sorry.

Arun Jayaram - Credit Suisse

What would it be your instinct?

Unidentified Analyst

It's come down.

Arun Jayaram - Credit Suisse

Okay, it's come down.

Daniel Rabun

I think I told you, it come down, I'm not going to quantify it. I mean half the cost or more than half the cost is equipment and NOV hasn't been real generous in lowering their prices yet. And so, really it's the cost of steel and just the Singapore dollar component of the labor to construct the rigs. So you can count on the back of an envelope, figure out what those might be.

Arun Jayaram - Credit Suisse

You are a well trained lawyer, Dan. Thank you very much. Appreciate it.

Operator

And we'll take our next question from Pierre Conner with Capital One South Company.

Pierre Conner - Capital One Southcoast, Inc.

That's me. Good morning, gentlemen.

Daniel Rabun

Hi Pierre.

Pierre Conner - Capital One Southcoast, Inc.

Hi. Want to ask you guys, in the past the strategy might have been to take potentially weaker markets to accelerate upgrades and modifications, and to the extent you've got a $125 million of CapEx planned for enhancement. In the current environment, do you -- would you anticipate accelerating potentially any other into this year if you had available time?

Daniel Rabun

I think Pierre, it's really a function of the rig and the geography it's in. I mean it's not a simple question. Obviously, we've always... when we've had time breaks in the schedule, we would use that to and not been afraid of spending money on the rigs. I think as we've said, we view cash as a precious commodity right now, and so we're going to be very judicious in how we spend it.

But if we have a rig that has good work prospects and need some work done before it goes to the next contract, we're not going to be bashful about spending money on it. Obviously, if you are looking at a rig that you're going to have to spend lot of money on it, has no work prospects, we're going to spend a lot more time thinking about that.

James Swent, III

And Pierre, you were breaking up as you asked the question, but I think what you asked, is there possibility if we have rigs that are idle that we would accelerate CapEx?

Pierre Conner - Capital One Southcoast, Inc.

That's correct, and I believe that's not.

Daniel Rabun

I think the answer to that is no quite frankly, because if you look at our fleet, we've pretty well completed our upgrade program. We've got a couple of projects that we've identified that are included in that budget that Jay mentioned and quite frankly, there is not any other major upgrades that we could make to our rigs, quite frankly.

Pierre Conner - Capital One Southcoast, Inc.

Okay. Well that was my sense, you're pretty much done.

Daniel Rabun

Yeah.

Pierre Conner - Capital One Southcoast, Inc.

Okay.

William Chadwick, Jr.

More than anything that would be contract specific.

Daniel Rabun

Yeah, so I mean if we're able to get some other rigs down to PEMEX or something like that, yeah.

Pierre Conner - Capital One Southcoast, Inc.

I understand. Same kind of question around the potential stacking and so, I know the math could be done. But what is that timeframe that would cause you, is it a six-month window that is not of an opportunity for a contract that says here's a cold stack opportunity?

Unidentified Analyst

Pierre, it's just not a bright line analysis which you can put to that. You've got to look at all the factors with regard to each specific rig. So, it's really hard to answer that question. As we've said, as Dan said, we are not going to be bashful about stacking rigs, but we also recognize it's actually you are taking a rig out of the market particularly in this market, is probably out of the market for a long period of time. So, you have to weigh up all of those factors to come to a conclusion.

Pierre Conner - Capital One Southcoast, Inc.

Okay. Another one, it's probably a general answer too. Dan, you did say about the M&A: I guess I've heard it, one rig contractor is beginning to market a partially build rig for less than they contracted to build it. So, they're coming down. But is your sense that bid ask spread, has it increased or is it beginning to close, admittedly not there yet?

Daniel Rabun

I think it's beginning to close, but I don't think it's quite there yet.

Pierre Conner - Capital One Southcoast, Inc.

Okay. So the direction is better?

Daniel Rabun

The direction is going better, that is correct.

Pierre Conner - Capital One Southcoast, Inc.

Okay.

Daniel Rabun

Is I would like to say, I don't need to talk to the equity holders, I need to be talking to the creditors, and that's when it will be an opportune time.

Pierre Conner - Capital One Southcoast, Inc.

Right. Okay. I think the rest was answered. Thanks, gentlemen.

Unidentified Analyst

Thanks, Pierre.

Operator

Our next question will come from Truls Olsen with Fearnley Fonds.

Truls Olsen - Fearnley Fonds

Yes, thank you. Few quick questions really in here. On your fleet status report of late, I've noticed that there's been some I don't know should I call it, fluctuations or variations on contract terms, on some of your jackups that have been, the term has been shortened quite substantially, where there has been sort of no comments into the when the contracts have been shortened or I think it did prior the date of it should be roughly, shortening or cutting short a contract there. Any particular reason for this occurring, it's been sort of on the five, six, seven contracts over the last three, four or five these latest reports.

Daniel Rabun

Truls, sometimes we complete the work earlier than expected, sometimes the operator doesn't pickup options. We've definitely shown the expected duration in the status report, but we don't have a lot of color to that. I think there is five contracts as to what the difference might be.

Truls Olsen - Fearnley Fonds

Okay. Just as an arbitrary example there. The ENSCO 97 was in the January report, which stated being on contract till October '09 and in the February contract it stated to be on contract in March '09.

Daniel Rabun

That's the rig that they gave us notice 30 day notice as they were canceling the contract.

Truls Olsen - Fearnley Fonds

Okay...

Unidentified Analyst

In that case say, they had exercised a one year option, but it had a 30-day termination clause in it.

Truls Olsen - Fearnley Fonds

Any other contract with termination clauses?

Daniel Rabun

Yeah, there would be other contracts that had notice periods for termination in various contracts.

Truls Olsen - Fearnley Fonds

Except in Mexico?

Daniel Rabun

I mean it's different in every market we operate, which is the same for every other drilling contractor as well. I mean so it's kind of hard to generalize.

Truls Olsen - Fearnley Fonds

Okay. I don't know, my other questions have been answered. Thank you

Daniel Rabun

Thank you.

Truls Olsen - Fearnley Fonds

Thank you.

Operator

Next question will come from Mike Drickamer with Morgan Keegan.

Michael Drickamer - Morgan Keegan & Company, Inc.

Hey, good morning guys. Have you been approached yet by customers looking to renegotiate terms of the contracts, perhaps they extend term for day rate?

Daniel Rabun

There have been -- yeah, there have been several conversations with customers and customers are willing to extend term, we'll talk to them about day rate. I don't think we've struck any deals with anybody, certainly had the conversations.

Michael Drickamer - Morgan Keegan & Company, Inc.

I mean is it still very early in the conversations or something likely to happen there?

Daniel Rabun

It's impossible to predict. Needless to say, if we've got a firm contract and somebody wants us to reduce rate, we obviously want something in consideration for it.

Michael Drickamer - Morgan Keegan & Company, Inc.

Sure. And my other question was on cold stacking cost. Assuming you guys perhaps cold stack some rigs this year, what should we look at as cold stacking cost, maybe as a percentage of our out righted cost or active cost?

Daniel Rabun

Well fortunately, we don't have much experience in the history of this company of cold stacking rigs. So I can only tell you, we've got ENSCO 1 that's coal stacked, our barge rig over in Singapore. And right now, its OpEx is $5,000 a day. That includes a pretty healthy allocation of overhead. So I think it's the true cost is somewhere 2,500 to $3,000 and we really don't have experience in what it's like on the jackup spread, I'll imagine it's a whole lot more now.

Michael Drickamer - Morgan Keegan & Company, Inc.

Okay, that's it. Hey guys, thank you.

Richard LeBlanc

Probably we've time for one more question.

Operator

Great. We'll take our next question from Judson Bailey with Jefferies & Co.

Judson Bailey - Jefferies & Co.

Thank you. Good morning. A follow-up to the comments on Mexico. If you are awarded those two contracts, I apologize if I missed this, did you say when those would start, and how long those rigs might be out of service in the Gulf to prepare for that work?

Daniel Rabun

I'll let Jeff handle that one.

P. Jeff Saile

Well one could be mid-year and the other will be some September timeframe.

Judson Bailey - Jefferies & Co.

And would they need to be out of service for some amount of time to do some upgrades or work on the rig?

P. Jeff Saile

It would be a modest amount of contract specific work, it has to be done and it would probably take around 45 days and like that.

Judson Bailey - Jefferies & Co.

Okay. And my follow-up; Dan, you covered all the markets pretty well in your prepared comments. Could you maybe give us a bit more color on the North Sea and what your customers are saying? I believe you said that there your indications are down below 200, it's pretty... could be a wide range. Do you have any sense on where things could re-price by say mid-year this year?

Daniel Rabun

I'd tell you, let me let Mark answer that one because he's been dealing with all the customers over there.

Mark Burns

Joseph (ph), this is Mark Burns. As we see it today, the North Sea is surprisingly holding up very well. It still remains a very balanced jackup market. We are -- our mixture is between majors and independents. Obviously, we've seen some of the independents delay or cancel some of their planned programs for the back half of 2009. So we're in discussions with them. But we remain fully utilized in the North Sea. However, we expect to see some softness later in the back half of 2009. But we're pleased with where we are at there.

Judson Bailey - Jefferies & Co.

And any sense on rates where some of your other rigs might re-price as they come up for renewal throughout the year?

Mark Burns

No, not really. None other than what Dan mentioned in his opening comments.

Unidentified Analyst

I've one comment, we can't say, it is hard to say it several times. That is somewhat of a unique market in terms of the demand supply equation of rigs. There's not a lot of rigs that can move into that market or all are being build as newbuilds that can move into that market. So, it's got a different dynamic towards the Asia-Pacific and the Middle East. So, it's clearly and has some pressures as commodity prices stay at these depressed levels, but it's really hard to say.

Judson Bailey - Jefferies & Co.

Okay. That's all I have got. Thank you. I appreciate it.

Daniel Rabun

Thank you.

Richard LeBlanc

Thanks, Jud. I would like to just thank everyone for joining us today. And we look forward to talking again on Thursday, the 23rd of April for our first quarter earnings conference call. With that, Melanie, I'll turn it back to you.

Operator

This concludes today's conference call. Thank for joining us and have a wonderful day.

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Source: Ensco International Q4 2008 Earnings Call Transcript
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