Rowan Companies Inc. Q4 2008 Earnings Call Transcript

Rowan Companies Inc. (RDC)

Q4 2008 Earnings Call

February 26, 2009 10:00 am ET

Executives

Suzanne McLeod - IR

Matt Ralls, - President and CEO

Mark Keller - EVP, Business Development

Bill Wells - CFO

Analysts

Colin Gerry - Raymond James

Angie Sedita - Macquarie Securities

Waqar Syed - Tristone Capital

Ian Macpherson - Simmons & Company

Kurt Hallead - RBC Capital Markets

Jeff Tillery - Tudor Pickering & Co

Robin Shoemaker - Citigroup

Presentation

Operator

Welcome to the Rowan Companies Incorporated fourth quarter 2008 earnings results call. (Operator Instructions).

At this time for opening remarks and introductions, I would like to turn the call over to Ms. Suzanne McLeod. Please go ahead.

Suzanne McLeod

Thank you, William. Good morning. Welcome to Rowan's fourth quarter and full-year 2008 Earnings Call. Joining me on the call this morning are Matt Ralls, President and Chief Executive Officer, Mark Keller, Executive Vice President, Business Development, and Bill Wells, Vice President Finance and Chief Financial Officer, who will have prepared comments. Also in the room to respond to questions are David Russell, Executive Vice President Drilling Operations, Kevin Bartol, Vice President, Strategic Planning, and Dan Eckermann, President and Chief Executive Officer of LeTourneau Technologies.

Before Matt begins his remarks, I would like to remind you that during the course of this conference call certain forward-looking statements may be made within the meaning of the Private Securities Litigation Reform Act of 1995, including statements as to the expectations, beliefs, and future financial performance of the company that are based on current expectations and are subject to certain risks, trends, and uncertainties that could cause the results to differ materially from those projected by the company.

With that I will turn the call over to Matt.

Matt Ralls,

Thanks, Suzanne. Welcome, everybody and thanks for joining us this morning. I will begin with some brief comments and then turn it over to Mark Keller who will discuss the markets where we operate and other worldwide markets where we see opportunities for our jack-up rigs. After that, Bill Wells will provide more detail on our fourth quarter and year-end financial results and give some limited cost guidance for 2009.

First, I would like to say that I am excited to be speaking to you this morning in my new roll as CEO of Rowan. As a competitor and customer for 10 years I have known Rowan's reputation for its high-spec rigs, highly competent crews and operational excellence and I am thrilled to be here.

And having gotten to know them over the last few months, I am very much enjoying working with our strong Management team. I have also gained a much greater appreciation for what the company has been doing on the manufacturing side of the business and I see LeTourneau Technologies as a company with tremendous potential. LTI serves the global market with strong product side and we are working hard to be sure that they are well positioned to take advantage of the next up-cycles in the drilling and mining industry.

Much of the credit for the growth experienced in LTI and the vision to expand its product line and customer list goes to my predecessor Danny McNease, who retired at the end of last year. Beyond LTI, Danny contributed immeasurably to Rowan's success; leading its employees through some milestone transportation, including strategic initiatives to further diversify our activities geographically, expand our jack-up and land rig fleets, and develop our management talent, all while working to reduce costs. Danny has lot of friends here and we all wish him well in his retirement.

Now turning to the company's results and our corporate outlook; last year we had a very good fourth quarter operationally, capping off the second most profitable year in the history if the company, notwithstanding the nonrecurring gains and charges that Bill will discuss in more detail.

Our average day rates and utilization continued to strengthen in the fourth quarter, and LTI had a great quarter of shipment. As a result we recorded earnings for the quarter before nonrecurring gains and charges of $145 million or $1.28 per share, significantly exceeding consensus estimates.

Unfortunately, the impact of the recent dramatic drop in commodity prices and the worst credit crunch in my memory has resulted in multiple budget cuts by some of our customers affecting the 2009 outlook for both our drilling services and manufacturing operations. Specifically, in the case of LTI, this dramatic decrease in the outlook for drilling equipment sales resulted in our reporting a substantial non-cash adjustment in the carrying value of inventory and a charge to write-off the goodwill allocated to our manufacturing operations.

On the drilling side, we are seeing customers delay or in some cases even cancel projects and rigs are going idle in markets that were up until recently considered some of the strongest in the world. Our customers have being quite vocal about wanting to reset their costs of operations in this currently low commodity price whenever the opportunity presents itself.

Fortunately, we have 67% of our offshore rig days committed for 2009 and 86% of our budgeted drilling revenues committed when you include land rigs. While we are very confident of the enforceability of our contracts, we have had discussions with some of our customers about lowering day rates on existing contracts in return for more contract duration, but only on terms that we believe will give us a positive net present value and add to total backlog.

We are fortunate to have a very strong balance sheet, but will nonetheless be focused on managing our liquidity, given the substantial capital commitments we have made to expanding our fleet or perhaps more appropriately to rebuilding our fleet. Following the loss of four rigs in 2005 and another last year to hurricanes, we have been working on rebuilding our fleet and increasing our capabilities in the premium high-spec jack-up market to meet our customers requirements for safety, reliability and improved operational performance.

We delivered our fourth Tarzan class Rick to J.P. Bussell and our first 240C, the Rowan Mississippi last November. Construction continues on our second 240C, the Ralph Kaufman, which is scheduled to be delivered in the fourth quarter of this year. We are also currently building four EXL rigs, with the first three rigs scheduled for delivery in the second, third and fourth quarters of next year.

As announced last month we have suspended construction on the fourth of those rigs as well as a third 240C and our decision to go forward on those rigs will be based on market conditions and the availability of capital. As Bill will discuss further, we have already committed capital to each of these suspended rigs and our go forward capital costs would still be relatively attractive if other conditions are supportive. All these rigs will add to the company's reputation for having the most capable jack-ups in our industry and should help ensure that we would continue to enjoy industry-leading utilization and day rates.

In addition to our new build program we are also looking for opportunities to leverage our operational skills, to expand rigs under our control without committing significant capital, and will continue to look for ways to move the company into the deep water drilling market.

To wrap up then, we are in a very dynamic market environment that requires confident adaptation and a determination to maintain highest levels of safety, operational excellence, and cost effectiveness. There is no doubt that 2009 will be a difficult year for those rigs with un-contracted time, but there is also no doubt that as economies around the world recover, we will see a related increase in demand for hydrocarbons; it will ultimately fuel higher worldwide demand for drilling services and equipment.

With that I will now turn the call over to Mark.

Mark Keller

Thanks, Matt. I will now discuss Rowan's drilling operations and provide an overview of the worldwide markets in which we are currently operating. Rowan's offshore fleet of 22 jack-ups is currently contracted at 100% utilization, with an average rate of $172,000 worldwide.

Approximately 77% of our jack-up rigs are on term contracts; 12 of our 22 rigs are contracted to international markets, nine in the Middle East, two in the north markets, and one in West Africa. The remaining 10 rigs are located in the US Gulf of Mexico with one rig schedule to depart for Egypt and another to Eastern Canada in 2009. We are currently considering active jack-up tenders in India, the Middle East, the Mediterranean, West Africa, Mexico and the North Sea.

Turning to our onshore division, we have a fleet of 31 land rigs; we are currently marketing 28 rigs at a contracted utilization rate of 86%. Our current average day rate is $23,000. Approximately 71% of our marketed fleet is on long-term contract. 29 of our land rigs are located in Texas, one in Oklahoma, and one in Alaska.

We delivered land rig 86 during February of 2009 and we expect delivery of land rig 87 during March of 2009. The rigs are contracted for three years at $25,000 and $27,000 per day respectively.

According to ODS-Petrodata, there are currently 437 jack-ups worldwide. Demand is 371 rigs with utilization at 85%. We have not seen worldwide utilization at this level since the summer of 2004, which is also the last time that oil prices were at $35 a barrel. Driven by several months of macroeconomic events, there is no question that E&P spending is suffering a significant decline, jack-up rigs continue to roll off contract and go idle, additional new builds continue to enter the market without contracts and operators worldwide have begun to delay or cancel programs due to capital budget constraints putting pressure on the supply/demand balance for jack-ups.

Despite the current weakness in worldwide jack-up market, the combination of our fleet of high-spec jack-ups and our highly skilled workforce, coupled with our reputation for operational excellence worldwide, gives us confidence that we will continue to execute our strategic plan of diversifying our jack-up fleet on a global basis at above market day rates and utilization in 2009 and 2010.

According to the Land Rig Newsletter, the US land rig count had declined 45% from its peak of 2,374 rigs in October 2008 to 1,287 rigs in February 2009. Projections indicate that further market deterioration is probable until demand disruption slows and the pricing bottom materializes. However, the industry is hopeful that projected high decline in rates in the high yield unconventional sector will begin to erode the current supply of oil and natural gas allowing commodity prices to return to a level that is economic for our customers to resurrect drilling programs.

When the market begins its recovery we believe that a purging of the US land rig fleet will begin to occur. The high-spec, high efficiency rigs will be the first to go back to work and the older, more obsolete units will remain idle and perhaps be retired. Approximately 65% of Rowan's active on shore fleet is AC-powered, 2,000-horsepower high efficiency rigs. We are confident that our fleet of high-spec rigs will not only weather this current chop cycle, but will be poised to meet the technical challenges presented by our customer base to drill the horizontal and directional wells required in the future.

I will now discuss Rowan's geographical areas of operation. Let's begin with the Middle East. The supply in this region is 103 jack-ups, while demand is currently at 90 rigs and contracted utilization is 87%. A major shift in demand has occurred in the Middle East. Recently considered the strongest market in the world, the Middle East has seen several canceled tenders, project delays, and has significant percentage of its fleet rolling off contract in 2009.

There will continue to be an element of uncertainty in the region until Saudi Aramco announces their drilling plans for 2009 and 2010. Rowan has nine jack-ups operating in the region at an average day rate of $152,000. We have four 116Cs rolling off contract in April 2009. We are hopeful that Saudi Aramco will extend those contracts, but we are actively marketing the rigs on a worldwide basis.

We recently extended the contract at the Gilbert Rowe with Maersk in Qatar for one year at $100,000 a day. Despite the current decline in activity, multiple tenders remain active in additional projects with forecast for 2009. We believe that the Middle East market will continue to play a vital roll in worldwide jack-up demand and the region will remain an important focus on our business strategy.

Moving on to the North Sea, supply and demand of 35 jack-ups and contract utilization is at 100%. Sublet activity is increasing in the region and many drilling programs have been canceled or postponed in hopes of lower costs at a later date. So far Norway seems to be unaffected by the softening in the North Sea. Demand remains strong as evidenced by the utilization and day rate fixtures in the region. Today Rowan has two enhanced Gorilla class jack-ups operating in the North Sea, at an average day rate of approximately $282,000.

We are still in discussions with various operators for long term contracts utilizing our Gorilla class jack-ups and the new build 240C class jack-ups. These projects would most likely commence in 2010 and 2011.

The West African market has a supply of 26 rigs and demand of 21 rigs with 81% utilization. The region could see a dramatic decline in utilization in the first half of 2009, as approximately one-half of the fleet will roll off its current contract. The Rowan Gorilla 7 continues operations with Cabinda Gulf on its two year contract at a day rate in the low 330s, with an expiration date in April 2010. The region is projected to see a possible increase in demand in the second half of 2009 and into 2010, with several operators forecast to tender.

Finally, the US Gulf of Mexico, supply in the region is 77 jack-ups while demand is 45 rigs, with a contracted utilization of 58%. Despite the overall weakness of the market, all of Rowan's 10 jack-ups in the US Gulf of Mexico are currently contracted, and our average day rate in the region is approximately $152,000.

Five of our 10 jock ups in the US Gulf of Mexico are either on term or multiwell contracts. Earlier this week, the Rowan Gorilla 2 commenced operations for Devon Energy on a two year contract at $190,000 a day. The Rowan Gorilla 3 will mobilize to Eastern Canada in April 2009. The rig has an LOI with Exxon Mobil at $305,000 a day for approximately 90 days.

Following that commitment, the Gorilla 3 will commence operations with EnCana, $3,305,000 a day for an additional 200 days. The Rowan J.P. Bussell will also mobilize out of the region in the third quarter of 2009 for operations in Egypt. As preciously announced, Rowan has a letter of intent from Shell Egypt for approximately two years of work in the low 180s.

In addition to our current areas of operation, Rowan is constantly looking at opportunities around the world to further diversify our fleet. Most recently Mexico has become the driving force for jack-up demand worldwide. Seemingly unaffected by the current market conditions, PMEX moved forward with multiple tenders scheduled for 2009 to attempt to offset [11%] decline in production recorded in 2008, their lowest level of production since 1995.

Rowan is aggressively pursuing tender opportunities in the region to further diversify our fleet and return to the Mexican market. As previously stated, Rowan will continue to expand our international presence. The national oil companies currently control over 90% of the world's oil and gas reserves and Rowan's major focus would be to increase our market share with these operators in 2009.

This concludes our market overview. I will now turn the call over to Bill Wells.

Bill Wells

Thank you, Mark. As noted in our press release our results were, after impairment charges and other nonrecurring expense items, totaling $111 million or $0.68 per share. So I will start by providing more detail about those items.

We recorded a $62 million charge against surplus LTI drilling equipment inventories. LTI had grown drilling equipment inventories in recent years to expand product offerings, ensure availability of long lead time items and meet forecasted demand. The decline in commodity prices and the collapse of world credit markets has reduced our near term outlook to the extent that certain inventory items, those salable, may not be realized in the near term. Charge is almost 18% of LTI's drilling equipment inventories and was spread across all major product lines.

In addition, we recorded a $14 million charge to fully write off goodwill, most of which originated in our acquisition of the two Houston companies that provide most of LTI's drilling equipment. Another almost $12 million charge was recorded in steel products received for our fourth 240C project which has been canceled.

We also recorded $10 million of separation costs of which about 40% resulted from Danny McNease retirement and the balance from head count reductions in our drilling and manufacturing operations. Finally, $13 million was charged off in connection with the decision to suspend the LTI monetization process.

These charges were partially offset by $39 million of gains on assets disposals of which $37 million related to insurance recoveries in the loss of the Rowan Anchorage during hurricane Ike.

Our fourth quarter 2008 drilling revenues were $387 million, up by 4% from the prior year and 8% from last million, and slightly above our previous guidance. Both increases included the contribution of jack-up new builds, Rowan Mississippi and the J.P. Bussell beginning in November, which more than offset the loss of Rowan Anchorage in September. The sequential increase also reflected the return to service of the Rowan Middletown in August and the Gorilla V in October following shipyard time for upgrades.

Our full-year 2008 drilling revenues exceeded $1.4 billion, a 5% increase over 2007, resulting from net fleet additions and higher average rates between periods.

Despite the added rigs our fourth quarter drilling expenses of $147 million were 5% below the prior year and 10% below last quarter and well within our previous guidance. Both comparisons showed reductions in drilling overhead cost and rebuild expenses and reflected more favorable claims experience in the current period. Sequential decrease also included further reductions in maintenance costs between periods

Our full-year drilling expenses totaled $630 million or about 6% above 2007 amount on a 5% increase in available days between periods. We expect to continue reducing our average per day drilling costs in 2009 through further optimization of crew levels and reduced overhead maintenance costs. Thus despite and expected 6% increase in available rig days in 2009 we believe we can hold our 2009 drilling expenses at or below 2008 levels.

The wild card here is the cost of availability of insurance. Though we have begun renegotiating our April 1, policy renewal, it is too early to know what coverage we will end up buying or what that will cost. Our overall cost guidance reflects a 10% year-over-year in insurance costs to approximately $49 million increase in 2009. We will provide an update on our next quarterly call to the extent that our actual experience defers material from that estimate.

We expect that our first quarter of 2009 drilling expenses will be in the range of $150 million to $155 million or within 3% to 5% of the fourth quarter amount.

Our fourth quarter manufacturing revenues totaled $351 million including $125 million of arms length sales through our drilling division. External revenues were $226 million, an increase of 33% over the last quarter, but down by 10% from the prior year. Our fourth quarter drilling products and systems revenues totaled $258 million, including sales to our drilling division.

External revenues were $133 million and featured $39 million from land rigs and component packages, $36 million from five offshore rig kit products, $15 million from part sales and another $30 million from ad-hoc drilling equipment.

Our fourth quarter mining, forestry and steel products revenues $93 million included $50 million from shipments of mining and forestry equipment, $16 million from steel plates and $18 million from aftermarket parts.

Excluding charges our average margin on operating costs was 25% of revenues during the fourth quarter, up 20% in the prior year and 12% last quarter, with the increase due primarily to the higher share of mining equipment and part sales. Similarly our manufacturing operating income, excluding charges improved to 18% of revenues in the current quarter up from 15% in the prior year and 3% last quarter.

Our year-end manufacturing backlog was $1.1 billion, down by about 30% over the past three months with half of that decrease attributable to our cancellation of 240C number 4. The external backlog of $562 million included $304 million of land rigs and component packages, $79 million related to three offshore rig kit projects, $50 million of mining and forestry equipment, and another $ 69 million of drilling equipment.

Basing reduced liquidity certain of our customers have sought to modify existing orders by delaying deliveries and related payments or attempting to reduce or cancel orders all together. So we fully intend to enforce our contractual rights; such actions could adversely impact our results of operations and cash flows to the extent that collections are delayed and administrative costs are increased and we are otherwise unable to fully recover the in process attributable to such orders. We estimate that as much as 42% of our year-end 2008 backlog is at risk of being delayed or canceled.

Our fourth quarter depreciation expense totaled almost $39 million up by 7% from last quarter and by 19% over last year, primarily due to the rig fleet additions. For the full year depreciation totaled $141 million up by 19% over the last year. Our latest estimate for 2009 depreciation is in the range of $170 million to $175 million, including approximately $41 million to $42 million in the first quarter.

Our fourth quarter SG&A expenses totaled $29 million, up by 7% over the last quarter and by 6% over last year, with the sequential increase resulting from incremental incentive compensation costs and the year-over-year increase primarily due to fluctuations in manufacturing, selling and marketing costs.

For the full year, SG&A totaled $115 million, up by 21% over last year. Headcount reductions and other cost cutting initiatives are expected to yield an 8% to 10% reduction in 2009 costs to a range of $104 million to $106 million for the year, including approximately $26 million to $27 million in first quarter.

Interest expense net of interest capitalized was less than $0.5 million during the fourth quarter and just over $1 million for the year. Assuming no new borrowings, our 2009 interest expense should be in the range of $17 million to $18 million, most of which should be capitalized. Interest income totaled just shy of a $1 million for the quarter at $6.2 million for the full year.. We are expecting about half of that amount in 2009.

Our fourth quarter results included foreign exchange losses of $10 million, most of which resulted from the dramatic weakening of the Australian dollar during the period.

Our fourth quarter effective tax rate jumped to 36.5% following the goodwill write off. It would have otherwise between below 34%. For the full year our tax rate averaged 34.6%. Looking ahead we expect an annual rate of slightly below 34% in 2009.

Our CapEx totaled $201 million for the fourth quarter, which included $38 million toward completion of the new build jack-ups, J.P. Bussell and Rowan Mississippi, $28 million toward our second 240C jack-up Ralph Kaufman, $51 million for the first three EXL jack-ups, $23 million toward the last two land rigs, $21 million for the suspended jack-ups.

As previously reported we have recently suspended further construction of the third 240C rig and fourth EXL rig for which we had spent a total of $74 million through year end 2008. We currently estimate that another $353 million will be required to complete the rigs and we have commitments outstanding and are subject to certain cancellation fees totaling $56 million.

Thus, the difference between those two numbers of approximately $300 million is the amount of new capital that will be required should we proceed. And we believe $300 million is still a pretty attractive price for two new high-specification jack-up rigs that should average above market returns over the next 25 plus years.

Our decision to resume construction will depend primarily on our outlook for liquidity, including the availability of outside financing. Should we elect to cancel construction of either rigs we would probably incur a charge for a substantial portion of the $130 million of expenditures made and to be made.

Our 2009 capital budget has been set at approximately $560 million and includes $87 million towards completion of the Ralph Kaufman, $302 million for the EXL jack-ups, and $94 million for existing rigs, including contractually required upgrades. We currently anticipate fully funding our capital program through operating cash flows.

With that I will turn the call back over to William.

Suzanne McLeod

William, we are now ready to take questions.

Question and Answer Session

Operator

Thank you. (Operator Instructions).

We'll take our first question from Colin Gerry, Raymond James.

Colin Gerry - Raymond James

Hi, good morning.

Mark Keller

Good morning, Colin.

Colin Gerry - Raymond James

The first question. You mentioned the contract restructuring could you give us a little bit more color on that in terms of the length of term that you are looking for in some of these situations? Give us a sense; is there an area or region of the world where these conversations are more prevalent, obviously, the Gulf of Mexico being one of the weaker markets or is it more North Sea, West Africa, Middle East, maybe, just a little bit of color as far as where those conversations are coming from?

Mark Keller

We had most of the conversations, Colin, in our land division with long-term contracts, as I mentioned in my comments. We've seen some softening in that market, so we have just recently rolled over some rigs on some three year contracts. So we're talking to those operators now.

On the jack-up side, we are looking at some things in West Africa with Gorilla VII. We have been approached. However, all of these discussions are in early stages and nothing has been decided yet. So, they're ongoing in different regions of the world, but primarily, the North Sea, West Africa, land. US Gulf of Mexico; there hasn't been much discussion there with day rates there. We are getting ready to renew some rigs. So that eliminates that discussion.

Colin Gerry - Raymond James

That's interesting, because it seems to me like some of the recent data points we have seen indicate that Middle East seems to be one of the markets that's softening the quickest with Saudi kind of electing not to take some options and even shrinking the term on some of their existing options. So I would just think in that region maybe you are starting to see some of those conversations, but it sounds like you haven't?

Matt Ralls

Well, Saudi Aramco is still reviewing their drilling budget moving forward. There are about 10 jack ups that roll off contract with them this year. And they're reviewing those right now. And whether they're going to renew those options, most of those rigs have priced options and they are going through a review process right now. There hasn't been a final determination on that yet.

Colin Gerry - Raymond James

Okay. That is helpful. Just switching gears on the LeTourneau side, If I understood correctly, I believe 42% of the backlog is at risk or cancelable, as you put it. I am trying to understand where margins could go in that business. Maybe the best way to ask that is what percentage of your cost in 2008 would you say are fixed costs that might be recurring in 2009?

Bill Wells

The fixed costs will come down, but probably not substantially, 10% or 15%.

Colin Gerry - Raymond James

Is there a reduction in fixed costs in 2009?

Matt Ralls

Let's just be clear though. I mean, LTI has already reduced their labor force, not the fixed costs but the variable costs by about a third from the peak in the fourth quarter of last year. So, they are moving very quickly to adjust their overall size to the level of activities they're expecting size in 2009. Admittedly, we don't have a tremendous amount of there. A lot of it depends on this backlog.

It is not actually cancelable. We have got good contracts there. The issue is, we have a couple of customers there that are saying that they are not obligated to fulfill the terms of the contract for various reasons and most of the others are either just financially distressed or just recalcitrant. We have a strong legal position. This could be a question of how long it takes to work through all that.

Colin Gerry - Raymond James

Okay. That makes sense. I guess I am just trying to hone in. In the past when things were certain, the outlook was more positive, we were thinking margins could go to 20%. I am just thinking now, can we get to single digits as you have to assume revenue does kind of start coming down in 2009 and 2010, and how those situations play out?

Bill Wells

Are you speaking about gross margins?

Colin Gerry - Raymond James

Gross margins, yes, on LeTourneau.

Bill Wells

We think gross margins should hold in at higher levels. The challenge will be to right size the G&A component, the cost to match the downturn and we are already doing that.

Colin Gerry - Raymond James

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

Operator

Our next question from Angie Sedita of Macquarie Securities.

Angie Sedita - Macquarie Securities

Great, thanks. First, congratulations Matt and I appreciate the kind words on Danny and all the good work that he achieved with Rowan before you.

Matt Ralls

Thank you, Angie.

Angie Sedita - Macquarie Securities

The first question I guess is a follow-up on the manufacturing side. If you say 42% of backlog is at risk, are you in a net positive cash flow position, meaning that you have collected more than you have actually paid out in expenses for that manufacturing component?

Mark Keller

On a net basis, the answer is yes. It varies from contract to contract, but on a net basis the answer is yes.

Angeline Sedita - Macquarie Securities

Okay. And then as a follow-up on what we're seeing in the Middle East. The Gilbert Row came in at a 100,000 on your excised option there, that's a 350-foot jack-up. Would that thus imply for 116C in the region, that rates for leading edge new awards would be obviously well below the 100, but 80 to 90 or were you thinking even lower than that potentially considering the market?

Mark Keller

Angie, the Maersk contract was a unique situation. Maersk had changed their budgetary plans and we were facing a situation to where they were actually going to go re-tender or actually cancel that rig line in their program. They have the Gilbert row and the Rowan Perish on their drilling schedule in the late 2011, early 2012.

And we made a business decision to keep the rig working for Maersk for one year and see how commodity prices shakeout over the next 12 months. And given the fact that we have four rigs potentially exposed with Saudi Aramco, we thought it was a good decision to take that job with the amount of work they had in front of those two jack-ups.

Angeline Sedita - Macquarie Securities

Okay. Fair enough. And then therefore, on the four jack-ups that are up in Saudi, is it fair to assume I guess when are you expecting something a word out of Saudi? And I would assume the probability is at least one of those four will be released if not more.

Mark Keller

Angie, we are in constant contact with Saudi Aramco. And today we have literally no idea how many. We've heard every rumor in the world, from one to four to them keeping all of them. But as I said in my comments we have been marketing all four rigs for a while, and we are marketing them on a worldwide basis. We hope that Saudi Aramco keeps the four rigs. We've had a great relationship with them and we hope to continue it.

Angeline Sedita - Macquarie Securities

All right and then finally, Matt you made a remark in your opening comments about the deepwater market. Could you elaborate on that comment?

Matt Ralls

Yeah I just wanted to kind of set the stage for the fact that the company has had an interest for sometime now and was even developing a skill set here for deepwater. And so we are just going to be constantly looking for opportunities to move ourselves toward that [endeavor] it. It's difficult to obviously bootstrap yourself into the deepwater business, one deep water rig at a time.

So this may not be something that happens in the next year or two years or three years or we may find something that fits this where we could be -- where it is good opportunity, we could go forward in the near-term to start to get back into that side of the business, having sold the only floating rig the company had a couple of years ago.

Angeline Sedita - Macquarie Securities

So this would be looking at potential one-off asset acquisitions or something broader?

Matt Ralls

Well, it is, I would say that it would be anything that we thought we could get done. We would like to see the company move to more of a balance, I should say, between jack-ups and deepwater, we feel very good. I am personally very constructive on the long-term outlook for jack-ups over the years, for a couple of reasons. Just for the fact that there's highly underdeveloped shallow water basins all around the world, but just not getting the attention they deserve. And there's also, the industry fleet is getting pretty long in the tube.

We expect that over the next several years we'll see more -- see a higher rate of attrition there. So, I think the jack-ups will come back into balance in a relatively short period of time. But, nonetheless, we would still like to have a balance between floating, drilling cash flows and jack-up cash flows. And clearly, we got a long way to go. We can do it little by at a time or maybe we can find a combination that makes sense for us. We'll just keep our eyes open.

Angeline Sedita - Macquarie Securities

Great. Thanks.

Operator

We'll take our next question from Waqar Syed, Tristone Capital.

Waqar Syed - Tristone Capital

Hi, Matt. Just a couple of questions, first, just on a broad question. What do you see the core businesses long-term for Rowan, does it need to be in the land rig business and manufacturing business or where would you consider, you had obviously mentioned the deepwater is one area you may want to expand. Where do you see Rowan couple of years from now?

Matt Ralls

Well, that's hard to say. It just depends on what the opportunities are to, I guess harvest capital from some part of the business and put it into another part we'd rather focus on. I think we view ourselves first as an offshore drilling contractor. In terms of approaching 90% of our revenue, our cash flows rather come from the offshore drilling business.

So, manufacturing we believe ultimately probably needs to be up on its own. If this is not the market to do that in, the company's business is contracting. So it just wouldn't have the kind of visible trajectory that we would be looking to spend that in order to merge it with another company, but we believe that ultimately is going to be the answer. So hopefully we can use some capital from that to further our interest in deep water.

On the land side, that company, fits us very well for now. But at the same time we will be looking at whether or not it, it may make more sense or not, to combine that with another company so there's more scale in that side of it. But for right now, we have no intentions of changing anything there and we have got a very high-spec fleet which we think is going to be very valuable to us in this downturn.

Waqar Syed - Tristone Capital

Sure. Then, just on a follow up to an earlier question on the manufacturing margin side, and if you look at the cash margin part on the gross part. It was close to 25% for the outside revenues and costs, and that compared to like 12%, 13% in the last quarter. Where do you see that heading, do you go back to kind of the average for the last year or do you think that 25% is a sustainable kind of number?

Matt Ralls

Well, we think that we can hold that margin. One of the things that should happen is we should have a higher concentration going forward of like after market part sales and service sales which really are best margin item. So we are optimistic that we can hold that margin.

Waqar Syed - Tristone Capital

Now, did the recent write-off of the inventory, is that helping the margins as well?

Bill Wells

We don't see any real benefit to that in 2009, because most of what we wrote-off there was excess beyond our anticipated needs for 2009.

Waqar Syed - Tristone Capital

Okay.

Matt Ralls

Just to be clear, Bill noted in his comments this is not inventory that we think has no value or that doesn't work in parts. It is just inventory that will take very long time to consume at current rates consumption, so I am sure it is out in the future as opposed to helping near term margins.

Waqar Syed - Tristone Capital

Okay. Great. That's all I have. Thank you very much.

Operator

Our next question from Ian Macpherson, Simmons & Company.

Ian Macpherson - Simmons & Company

Hey Good morning, Matt. I wanted to ask you first of all, I guess as we are trying to have realistic expectations for jack-up utilization this year, what is your contingency planning for the rigs in Saudi Arabia and I guess really when you talk about your cost guidance this year I assume that does not include any expectations for stacking rigs, but I mean the analysts need to be thinking Rowan stacking rigs this year or is that not in your planning yet?

Matt Ralls

Let me start and then I will turn it back over to Mark and David for comments.

Ian Macpherson - Simmons & Company

Okay.

Matt Ralls

With the caliber of our rig fleet we don't expect to have to cold stack anything with the possible exception of the standard rigs in the Gulf of Mexico. And we are looking at ways to keep those busy and/or move them out of this market. But as far as the Saudi rigs I will let Mark comment on those?

Mark Keller

Well, first thing our contingency plan is to keep those rigs working. We have several opportunities right now, we are tendering the rigs as I mentioned worldwide. We don't think about stacking rigs. We think about keeping them contracted with a very good reputation worldwide and we feel like with our fleet of high-spec rigs, as I stated earlier, I think that we will be able to maintain high utilization and high day rates above market day rates.

Today we have approximately 11 tenders in house, and we are anticipating more tenders inbound from Mexico. So, there's work out there. We are not sitting back waiting on Aramco. We hope they keep the rigs as stated earlier, but if they don't, our contingency plan is to put them in other markets.

Matt Ralls

To answer your question specifically, our cost guidance did not include cold stacking any or staking any.

Ian MacPherson - Simmons &Company

Okay. And then if I could just maybe ask a follow up on the high end Gulf of Mexico market. You have got the Bob Palmer and the Gorilla IV, both with some exposure in the back half of this year. Do you have sense yet what the day rate adjustment is going to be like for ultrahigh-spec rigs and prospects for ultra deep gas?

Mark Keller

We are currently in discussions right now with BP on the extension of the Bob Palmer. They have indicated that they have multiple wells, deep gas wells to drill. As far as the Gorilla IV, we've had some interest from other operators in US Gulf that have some deep gas opportunities. It is currently working for W&T Offshore. They are looking at a couple of deep gas wells on the platform the rig is on now. We are also looking at opportunities internationally for the rig and have bid both of those rigs internationally.

Ian MacPherson - Simmons &Company

Okay. Thank you.

Mark Keller

Thank you.

Operator

Our next question from Kurt Hallead of RBC Capital Markets.

Kurt Hallead - RBC Capital Markets

Hi. Good morning.

Matt Ralls

Hi, Kurt.

Kurt Hallead - RBC Capital Markets

Matt I was wondering can we work our way through this down cycle, the jack-up market has tended to ultimately get close to if not at cash costs. And I was wondering if there was something that you can identify in this current period where you actually think that, maybe that doesn't happen this time around?

Matt Ralls

Well, first of all just to add on to what Mark said in the last question., rig markets are basically micro markets. And so if you have a rig that has the only specification, it can do a job for somebody; those rigs will continue to work at high day rates regardless of what's going on in markets. So more sort of commodity rigs or lower capability or this is why there is more competition, rig-on-rig.

So, I think that we are likely to see that some of our bigger competitors, particularly those with large floating fleet backlogs and with lower specification jack-ups were likely to see that they take rigs out of service pretty quickly or cold stack pretty quickly, which would help balance the supply demand picture more quickly than otherwise.

So it's just hard to say. There are not very many high-spec rigs left in the Gulf of Mexico for example. That's actually kind of a tight market for high-spec rigs. And same for the North Sea for the Super Gorilla class rigs. So we know there are some areas that are going to be under more pressure and some that are going to remain fairly tight.

Kurt Hallead - RBC Capital Markets

And if you were to stack some rigs, I know this might be difficult to answer, too, but if you give me some general sense. What will be like the average range or the range of stacking cost whether it be in the Gulf of Mexico or internationally? How would I think about that?

David Russell

Now, this is David. I guess as Mark had said, with our rigs and our personnel typically we don't stack our rigs. But if we did have to stack our rigs, cold stack cost would be around $8,600 per day and that's fully insured. Warm stack costs would be around $12,000 to $13,000 dollars a day, and then hot stack costs for about 38 to 39,000.

Matt Ralls

But we are reasonably confident in those numbers, but as David and Mark have both said we do not have much practice in stacking rigs. We don't plan to get a lot of practice.

Mark Keller

That's right.

Kurt Hallead - RBC Capital Markets

There you go. Do you have numbers of company speculators or other rig contractors now that are finding themselves in somewhat of a bind or if not an extreme bind. So what's the prospect for potential of acquiring assets whether they be jack-up up assets or deepwater assets at this stage? Can you give us some general sense of how you see the bid [ad spread], is it narrowing, is it narrowing enough to get some deals done or is there just going to have to beast on further pains before some of these speculators [accrete].

Matt Ralls

Well I can only speak for us, and that is, if we were going to go forward with the cash acquisition of additional jack-ups it would effectively be the two that we've suspended construction on. Because we believe we can buy, that our go forward capital costs on those are below what we could buy similar equipment in the market even now. I think that it could be that jack-up rigs will continue to be distressed I mean it will get more distressed.

But at the same time I would count something close to sort of in the range of 20 of the jack-ups that are expected to be delivered in the next few years and where they probably won't make it to market. So it may not be that there are all that many jack-ups in truly weak hands. So, right now if we were going to expand for cash in jack-ups it would be with the equipment that we are already partly through construction on, because that would be the best value and the best equipment.

Let me also say that we are, as I have noted in my prepared comments, we are looking for any opportunity to control more rigs without putting too much capital in it. And as always something that could come along and you've seen that for example with Hercules and the (inaudible) rigs. So you may see us involved in something like that if we find a good opportunity.

Kurt Hallead - RBC Capital Markets

And then, just as you referenced here you say, new jack-ups won't make it to market Matt. Are those rigs that are already in process of construction and therefore will not be completed or are sort of in the preconstruction phase that this won't come to fruition, how do I think about that?

Matt Ralls

It's kind of a mix, Kurt. It's some that are probably in the very early stages of actual construction, but have been ordered and announced that we think just won't make it. And then some that are under construction where construction, we think will be halted.

Mark Keller

Of the 70 announced new builds that are not delivered yet, we think roughly 20 may not make it to market.

Kurt Hallead - RBC Capital Markets

Okay. And then of the ones that do make it to market, do you think there's a very strong probability that these new rigs will displace existing rigs?

Matt Ralls

Well it kind of depends. I mean some of the new rigs are not all that high-spec actually. We think our new builds will because they're 2 million pounds hook loads or greater and cantilevers from 70 to 80 feet. The Super Gorillas have 100, so they're going to be very high-spec rigs with competitive features a lot of these other ones like the smaller (inaudible) type rigs.

In addition, some of those 70 net 50 we think are effectively uncompetitive are Chinese or Iranian. That sort of thing, it won’t really compete with our rig.

Kurt Hallead - RBC Capital Markets

Great, that's all for me. Thank you very much.

Matt Ralls

Thanks, Kurt.

Operator

We will move to our next question from Jeff Tillery, Tudor Pickering & Co

Jeff Tillery - Tudor Pickering & Co

Hi, good morning.

Matt Ralls

Good morning

Jeff Tillery - Tudor Pickering & Co

Just wanted to follow-up, most of my questions had been questions, but to touch one more time on these four Saudi rigs that roll off in April. If we take the extreme case and Saudi doesn't renew any of those, is it reasonable to assume that any of those are back working within a three months time frame, as you look at the tenders and opportunities outstanding today?

Mark Keller

Well, as I stated earlier, we are actively marketing those rigs now and we are hopeful that we will be awarded some contracts very soon. We don't know the time frame of that, but we are actively marketing all four; we are actively marketing them in the region. They are in the Middle East and we’re also marketing them in different areas. We are marketing them in Mexico, India, different places. We have active tenders.

And so to give you a timeline of that I'm not sure at this point, but we feel optimistic that we will have contracts for them before they roll off contract, but as I stated earlier, if they do. And as I stated earlier, we are very hopeful that Saudi Aramco keeps the four rigs working and exercises their option.

As I said we've had a tremendous relationship with them. And I know that's one of the reasons they're taking a hard look at the rigs that are rolling off contract, because those 10 rigs are a lot of good rigs that have worked for them for multiple years and they're doing what they can to try to preserve their operational fleet.

Jeff Tillery - Tudor Pickering & Co

All right. And the only other question I had was just to make sure I understood the construction plans that they laid out in terms of the cancellation provisions and what not. The $56 million number of purchase order and kind of other committed expenditures does that include any sort of buy out of the capital contract as well?

Bill Wells

It does.

Jeff Tillery - Tudor Pickering & Co

Okay. All right. Thank you very much.

Matt Ralls

Thanks. I think we have time for one more question.

Operator

We will take our final question from Robin Shoemaker of Citigroup.

Robin Shoemaker - Citigroup

Thank you. Good morning, Matt. I wondered if you could tell us in terms of PMEX tenders that you know of or expect to receive, you indicated that you might bid Middle East rigs, but I would assume that Gulf of Mexico rigs would be good candidates for offering under PMEX tenders. Do you think if you were successful, in terms of your bidding for PMEX with the amount of work that you see, how many of your Gulf of Mexico rights might be working in Mexico, say, in 2010?

Mark Keller

Right now what we see is probably as many as four. We are hopeful from tenders that we see going forward, in discussions with PMEX if those tenders materialize and they have the bid requirements that they say they're going to have then I see multiple rigs from the Gulf of Mexico. But we also see a large demand for 300-foot cantilevers and that's why I stated that we have tendered some of the rigs from the Middle East into that market.

Robin Shoemaker - Citigroup

Okay. So the ones that you have that become available in the Gulf of Mexico are somewhat smaller rigs, but presumably they would have the competitive advantage of being closer in lower mobilization costs and so forth.

Matt Ralls

Well, the mobilization costs, that's right. I had rather not go into which rigs, because we are in a competitive situation, but they're high-spec rigs.

Robin Shoemaker - Citigroup

Okay. Sure. All right. That's all I had. Thank you.

Suzanne McLeod

Okay. That concludes our prepared comments for Rowan Company. Thank you for joining us today and if you have any additional questions please feel free to call Investor Relations, myself, Suzanne McLeod. Thanks again.

Operator

That concludes our conference for today. We thank you for your attendance and have a nice day.

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