Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Noble Corporation (NYSE:NE)

Q1 2009 Earnings Call

April 23, 2009 2:00 pm ET

Executives

Lee Ahlstrom – Vice President, Investor Relations

David Williams – Chairman, President and Chief Executive Officer

Tom Mitchell – Senior Vice President and Chief Financial Officer

Kurt Hoffman – Vice President of Marketing

Analysts

David Wilson – Howard Weil

Ian Macpherson – Simmons & Company

Angie Sedita – Macquarie Capital

Robin Shumaker – Citigroup

Dan Pickering – Tudor Pickering Holt

Collin Gerry – Raymond James

Michael LaMotte – JP Morgan

Pierre Conner – Capital One Southcoast, Inc

Jeff Spittel – Natixis Bleichroeder

Atle Hauge – Carnegie Investment Bank

Geoff Kieburtz – Whedon

Mike Urban – Deutsche Bank

Operator

Good afternoon, ladies and gentlemen. My name is [Tina] and I will be your operator today. At this time, I would like to welcome everyone to the Noble Corporation first quarter earnings conference call. (Operator Instructions) I would now like to turn the call to Mr. Lee Ahlstrom, Vice President of Investor Relations and Planning.

Lee Ahlstrom

Welcome, everybody to Noble Corp.'s first quarter 2009 earnings call. Before we begin, I would like to remind everyone that any statements we make today about our plans, expectations, estimates, predictions or similar expressions for the future, including those concerning financial performance, operating results and the drilling business are forward-looking statements, and are subject to risks and uncertainties.

Our filings with the U.S. Securities and Exchange Commission, which are posted on our website, discuss the risks and uncertainties in our business and industry, and the various factors that could keep outcomes of any forward-looking statements from being realized. Our actual results could differ materially from our expectations. We have included detailed balance sheets and income and cash flow statements with our earnings news release.

Also note that we may use non-GAAP financial measures in the call today. Should we do so, you will find the required supplemental disclosure for those measures, including the most directly comparable GAAP measure on our website, and an associated reconciliation.

Also, when we open up for questions, you know the guidelines – one question with one follow-up, so pick your best question. We have a large number of folks who'd like the opportunity to have a question answered today, and we want to be fair to everyone.

With that, I'll turn the call over to David Williams, our Chairman, President and Chief Executive officer.

David Williams

Thanks, Lee. Good afternoon, and thanks for calling in. We're very pleased to have been able to release such positive results last evening. Understandably, many investors and analysts were already looking past the quarter to focus on where we're headed. And we'll discuss that in a minute, but first I want to take a moment to congratulate the Noble team on a great effort.

We had a great quarter, costs are under control, and our safety results year-to-date are better in 2009 than they were at this point in 2008. And I'd like to remind you, 2008 was a record year for us in safety, so we're so far, so good.

I'm going to keep my comments fairly brief to allow some time for Q&A. Tom Mitchell, our CFO, will review the quarterly numbers and discuss our performance versus the guidance we guidance we gave on the last call, and update our future guidance. And then Kurt Hoffman, our VP of Marketing, will give you an update on the markets, and then we'll open it up for questions.

I want to begin by talking a little bit about the overall market. It's no secret to anyone that since last summer we've seen unprecedented volatility of the financial markets around the work, and demand for hydrocarbons has fallen, drilling activity is down and tendering activity is down. So by comparison, in the past few years, it's pretty rough out there. We all know it, so there's really not a whole lot to say about it.

What I will say is, is this is cyclical business. We all knew this day would come, and when you know the up cycle leads to a down cycle, you can manage to it. The ebbs and flows may cause some concern for investors, but this is what we do – manage the cycles. And for several reasons, I think Noble's in great shape.

First, over the last several weeks, oil seems to have stabilized somewhere in the upper $40s to low $50s per barrel. And that's not $100 a barrel, but in the grand scheme of things, it's light years ahead of the low $30s that we saw earlier in the year.

There are lots of prospects that make sense at $48 to $52 a barrel that just don't work with a [$30-handle]. So we feel somewhat better about oil prices. However, keep in mind that price stability and confidence in the market is key.

Second, we have a strong backlog of $10.6 billion that we can ride for some time. Yes, it's true that Pemex could exercise its 30-day cancellation clause, or that a customer could come to us and ask to renegotiate the terms of a deal, but so far, that Armageddon scenario that some people predicted just hasn't materialized. And we still don't really expect it to, given the higher level of product price support, along with the underlying logic that tells us that discounted oil prices are just not sustainable for any period of time.

Third, we think we're pretty good at what we do. We're flexible. We can move quickly, and we clearly have our costs well under control. We can't predict how far down some contractors might be willing to chase rates, but with our cost structure, we're able to fight that battle as long as it makes sense for us. When it doesn't, we'll move quickly to stack rigs.

And I won't give you a rule of thumb on how our decision process works in this regard. I'll just say that each rig in each individual area has its own set of circumstances, and we'll evaluate that situation for each one on a case-by-case basis.

In the meantime, for us it's a heavy survey year, and we're going to make sure that we get the surveys and the shipyard projects that we've queued up over the past couple of years completed, so that when the market turns, as we well know it will, our units will be in good shape and ready to go back to work.

Now let me touch on a couple specific issues that have been on your minds recently. First, many of you have been focused on the MOUs that we have with Petrobras concerning our contract extensions on the five deep water rigs in Brazil. We've been assured by Petrobras and management at every level that there are no issues and there's no danger the contracts' not being executed just as they've been negotiated. Truthfully, we expect this to happen any day now.

Many of you have also expressed concern about our new bill delivery schedules, with respect to customers' rights to cancel contracts or enforce penalties. We remain in close contact with our customers, and they're anxious to have these rigs commence their projects. Our engineering and operations teams are focused on delivering a quality product, and getting these rigs on the payroll as quickly and as safely as possible.

With the exception of our one remaining new bill jackup, the contract rates for all these rigs are still well below where we view the current market, and we see very little danger of any cancellation. On the Noble Dave Beard, Petrobras does have the ability to impose a penalty for late delivery, but we're in discussions with them to provide some additional equipment in order to mitigate that penalty. We'll let you know in due course what impact, if any, we'll see on the day rate as a result of those discussions.

We've had some real challenges on our projects for a variety of reasons. In fact, today I need to let you know that we're going to slip the Noble Jim Day schedule from a late December 2009 delivery to April 2010. This is based on our experience with the Noble Danny Adkins and the shipyard's ability to respond to issues surrounding these very complex rigs.

While I'm not happy about having to tell you this, I do want to remind everyone that our original rig schedules are pretty aggressive, and that Jim Day cancellation rights don't come into play until December 2010. So we've got a lot of time still.

Like Noble, some other companies have had some difficulty in making delivery schedules, but unlike us, some of these other companies don't have the financial strength required to meet all their commitments. This is just the kind of situation we've been watching for, and with over $1 billion liquidity, we're in a great position to act.

Our focus hasn't changed. We continue to prioritize assets over larger deals, and floaters over jackups. We won't be commenting today on any particular opportunities that might be floating around out there, but I can assure you that we're in the deal flow, and that Noble will have a shot at just about anything you're aware of, plus some opportunities that may or may not be in the public domain.

Our hallmark in this regard will continue to be discipline, but the target environment is becoming a lot more interesting. In Noble, we just turned to 88 years, and this isn't our first rodeo. We've got solid backlog, good assets, great operating teams and the financial strength to not only weather the downturn, but actually make the most of it and grow our business. We believe we're about as well-positioned as we can be, and we won't let you down.

With that, I'm going to turn it over to Tom.

Tom Mitchell

Thank you, David. We're pleased with the strong first quarter results, as David said, just as reported last evening. I'd like to spend some time going over the detail, and then I'll update you on how we're doing for the rest of the year and how we see that shaping up.

In our release last evening, we reported first quarter net income of $414 million, or $1.58 per fully diluted share on total revenue of $896 million. Compared to the fourth quarter '08, net income was down slightly, while the per share earnings were flat. Our total contract drilling services revenues were slightly lower quarter-on-quarter at $872 million. However, our average daily revenues of $194,000 were up, compared to $190,000 in the fourth quarter.

Revenue increases were led by several rigs, repricing at higher day rates, including two of the jackups operating in Mexico under the indexed contracts. In addition, the Roy Butler and the Carl Norberg, two jackups we moved out of the Nigerian market segment, went to work for Pemex, and the Noble McLeod – George McLeod – completed its move to India, and went on contract with ONGC. Our second new-build jackup, the Hans Deul, commenced its two-year commitment in the North Sea.

We also had a number of rigs moved to slightly higher realized rates due to cost escalation billings. Offsetting these revenue gains were two fewer revenue days during the quarter, and loss revenue on number of jackup rigs which entered the shipyard or went idle. In West Africa, the Don Walker is currently stacked, while the Craighead and the Lloyd Noble are in the shipyard in Cameroon for upgrades and inspections.

In the Mid East, the Roy Rhodes, the Charles Copeland, the Cees van Diemen and David Tinsley each experienced shipyard time. Several of those rigs are currently in the shipyard undergoing projects. Finally, the Noble Muravlenko was in the yard for most of the quarter, with thruster and POP]repairs, and the Clyde Boudreaux experienced some mechanical downtime as well.

In light of the market environment, we doubled our efforts on controlling contract drilling services costs. Rather than increasing slightly, which was our expectation when we gave guidance in January, several events in the global markets caused us to reign in the spending pretty significantly. Quarter-on-quarter costs were down about 9% to $241 million and on a per day basis our cost dropped from $57,300 in the fourth quarter of '08 to $53,600 during this quarter. That's a decrease of 6%.

Lower labor costs made up the lion's share of our outperformance versus our original expectations and there are a couple of elements worth mentioning. However, for those of you interested in whether or not we're seeing labor rates come down, I don't think that we can yet say we are experiencing that.

We're still seeing a large number of new builds entering the global fleet and these rigs will all need crews so our belief is that we are not likely to see that global surplus of offshore workers any time soon. Nevertheless the current environment has led to more workforce stability. We're not seeing many employees actively seeking new opportunities.

So then our labor contract cost – our labor cost reductions are a result of some benefits we received from foreign exchange and from some focus steps we've taken. It's fair to say as we've guided early in the year we expected the dollar to weaken and our cost forecast in Brazil and the North Sea reflect that expectation.

But the dollar remains strong in the first quarter and so compared to our expectations, our labor costs were about $8 million lower. Going forward we've adjusted our expectations for the remainder of the year and those will be reflected as I give guidance later in my comments.

Proactively we've been reducing the size of crews where possible, particularly as rig contracts roll over or rigs move to the shipyard for project work. You may recall that over the last year or so, we've mentioned several times we've been carrying extra hands across the fleet as a result of the high demand.

Clearly the market is not where it was last year and we've reduced the number of extra hands. We've also slowed down the crewing of several of the new builds due out later this year to be more commensurate with our revised delivery schedules, as disclosed in the fleet status.

Labor expense is also decreased for rigs entering the shipyards since we generally capitalize labor related to those projects. Finally there was some wage increases that were due in the first quarter that we have on hold given the current market conditions.

This focus on controlling our off shore labor costs has had other positive effects. For instance, catering and shore base costs are down across the fleet as well. Other areas also came in better than forecasted including repair and maintenance spending where we've tightened our belts and on our insurance renewal.

Our insurance costs are going to be somewhere around $15 million lower for the full year than they were last year, but as we said to many of you during meetings, that's not because premiums have come down. The damage caused by Hurricane Ike in the Gulf of Mexico last year was significant and insurers are seeking to recoup their losses.

For companies operating in the Gulf this means less coverage is available in the market and what is available is more expensive. Our solution to balancing cost versus the risk is that we are willing to take on some additional risk in the form of a higher deductible and different coverage levels around named wind storm damage.

This trade-off will help lower our overall costs for the full year assuming of course that we don't have any major incidents. Our strong focus on cost control enabled us to actually increase our contract drilling margin percent this quarter. The margin was about 72%. That compares to 70% in the fourth quarter.

Moving on, D&A expense of $93 million was right in line with the guidance we gave on our last call. SG&A expense of about $18 million was below the low end of our guidance. We had budgeted some costs related to the special investigation through the quarter, those did not materialize but we still expect that later in the year.

The tax rate was 19.5% for the quarter, a bit higher than the 19% guidance and the increase is related solely to our geographic revenue mix with our revenues being pushed to higher tax areas. You will note that we took a $12 million charge or about $0.04 a share for impairment of the Noble Fri Rodli.

That submersible unit rated for about 70 feet of water is cold stack in the Gulf of Mexico. Certain events in the quarter caused us to re-evaluate the outlook for the rig, and began looking at disposal alternatives.

Capital spending of $251 million during the quarter was below our expectations. That's based on a combination mostly timing and some work scope productions on ship yard projects. We repurchased about 1.7 million shares during the quarter at a cost of $25.28 or $44 million, and we have 16.6 million shares remaining on the current board authorization.

Cash at the end of the quarter was $514 million and that is after paying down the $173 million worth of notes that were due. Our total debt is around $750 million giving us a debt-to-cap ratio of 11.7% and a net debt-to-total cap of around 4%. Both of these ratios are lower than where we were at the end of '08.

Factoring in the $600 million of undrawn capacity on our revolving credit facility our liquidity remains roughly $1.1 billion giving us sufficient financial flexibility to take advantage of any opportunity that we see. The debt markets are open to us. Should we need to access them and our level of comfort with taking leverage up to the 25% level for the right opportunity is unchanged.

One final comment before I move on to updating our guidance. You'll note that we have an additional schedule on the end of our press release. The schedule reflects the implementation of a new accounting rule that became effective in the first quarter.

The rule requires us to allocate income to unvested restricted shares as those shares meet the definition of participating securities. Effectively this increases the diluted effect of our invested restricted share awards on earnings per share.

From a practical standpoint this amounts to adding of about 2.1 million shares to both the basic and diluted share count, thus reducing EPS by about $0.01. Going forward we'll disclose this number in our quarterly filings but we don't anticipate it changing a whole lot.

Now for guidance, clearly the uncertainly in the environment increases the difficulty in providing guidance, we'll be out with the fleet status later today and Kurt will give some commentary on the markets to help set expectations on the revenue side, but I'm sure the big question in your minds is where we see contract drilling costs headed for the year.

To be open, it's a bit of a moving target since we need to make assumptions about contract rollovers, the ongoing impact of our cost control efforts and if, where, and how we stack rigs. Given our performance in the first quarter we do see our costs coming down.

I'm going to give you our expectations for this quarter which we estimate will be somewhere in the $255 million to $265 million range. That would be for the second quarter, but I'm reluctant to give you a full year number today because this is still very much a moving target.

That said, we do expect full year costs to be down at least $100 million from the guidance we gave on the last call which was $1.1 million to $1.3 billion, and it could go lower than that based on activity levels. So for now we'll stick with the short term guidance and then update you on the July call with our thoughts as to how the full year is looking at that point in time.

D&A should remain unchanged in the $400 million to $420 million range, and we're going to keep the SG&A at the $75 million to $80 million range because we are likely to see expenses related to the investigation later on in the year.

The tax rate should be about where we were in the first quarter at 19.5% and on capital we're maintaining our guidance at $1.25 billion for the year. With that I'll turn it over to Kurt to review the market.

Kurt Hoffman

Thank you, Tom. Let me take a few minutes to review where we are in the markets in a general way, and update you on some specifics that are in our fleet status report that will be released later this afternoon.

As David mentioned there's a lot of volatility and uncertainty out there. It's not surprising that our customers have elected to take a wait and see approach to the rig market, particularly in the jackup and mid water market segments. Deepwater as well has seen some slack.

We expect this behavior to continue until our customers become confident that we've seen a floor in product prices and global demand begins to stabilize. But let me reemphasize that a $50 world for oil looks a lot better to us and our customers than a $30 world and we're seeing some signs of life.

Let's talk about the jackup market segment where as you know rates and utilization have fallen. The only region where we're seeing meaningful incremental demand is in Mexico. Since the third quarter 2008 Pemex has added about seven jackups all of which have been independent leg cantilevers.

We expect that they will soon come to the market with a bid package for an additional four to six independent leg jackups and we expect the competition for those opportunities will be substantial. There's little tendering activity going on in the North Sea, the Middle East or West Africa. However, our fleet status report will contain several new data points.

In the Middle East, Noble Harvey Duhaney received a one year contract at a day rate of $85,000. That contract began earlier this month and is subject to a 60-day cancellation notice.

We've also received contracts for the Nobel David Tinsley and the Nobel Gene House for one-year and nine-month opportunities respectively. Both rigs will be used as accommodation units. The day rate for the David Tinsley in this type of service is $52,000 and for the Gene House it's $48,000. Our operating costs will be in the range of $15,000 meaning that both rigs will generate some solid cash flow numbers.

These accommodation opportunities are clearly a much better alternative to simply stacking the rigs. In Mexico the Noble Bill Jennings and the [Noble Orofedex] and re-price downward as a result of the index arrangements in the respective contracts. The rates on the Bill Jennings dropped from approximately $174,000 to approximately $150,000. And the Earl Frederickson fell from about $139,000 to about $122,000.

We also have a number of rigs that are either in the shipyard or will be moving there over the next month or so. These include in the Middle East, the Noble Gus Androes, the Noble Roy Rhodes, the Noble Cees van Diemen, the Noble Charles Copeland, and the Noble Dick Favor. And in West Africa, the Noble Don Walker, the Noble Tommy Craighead, and the Noble Lloyd Noble.

Since utilization has been high for the last several years many of these rigs have surveys that are due or upgrade projects which need to occur and this market pause will give us a chance to attend to these needs. Of course, we'll continue to market these units, but to be conservative we're assuming that most of these rigs will be at least warm stacked for some period of time when they've completed their shipyard projects as noted in the Fleet Status Report.

In deepwater, while few fixtures have been announced, there are still ongoing needs that operators are trying to fill, specifically in India, West Africa, and Brazil. We continue to carry on discussions with a number of interested parties on the Noble Globetrotter. But we don't have anything of substance to tell you yet.

We reported yesterday that the Noble Clyde Boudreaux will substitute for the Noble Paul Romano in fulfilling a two year commitment with Noble Energy following completion of its work with Shell. We believe this is a mutually beneficial arrangement in that the availability of the Clyde Boudreaux will enable our customer to commence their program earlier than anticipated. We'll also accelerate the revenue stream for us.

In addition, we believe there are a number of strong opportunities for the Noble Paul Romano, which is scheduled in its current commitment in the first quarter of 2010. Some of those opportunities could be outside the U.S. Gulf of Mexico which would be preferable to us.

Finally, at the end of the quarter our contract backlog was about $10.6 billion of which about $2 billion is associated with our jackup fleet. Excluding planned shipyard work, our fleet is about 73% contracted for the remainder of 2009, 41% for 2001, and 24% for 2011. Thank you and I will now return the call to Lee.

Lee Ahlstrom

Thanks Kurt. [Tina] lets go ahead and open things up for questions. And I've got to remind everybody if you please try to stick to the one question with one follow-up.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question will come from the line of Dave Wilson with Howard Weil.

Dave Wilson – Howard Weil

Good afternoon guys. Quick question regarding share repurchases. Given your current cash balance and strong free cash flow expected for the year, what are your thoughts about being more regressive on these share repurchases, especially if the right kind of acquisition opportunity doesn't present itself? Thanks.

David Williams

Well, we've been, I'm not sure exactly I get your question. We've been fairly constant over the last several quarters buying shares when we could. We've been blacked out some and not blacked out some. We obviously we have been pleased, at least been interested in buying shares at this share price. We've always maintained, and I think we'll continue to maintain that we don't intend to put debt on the balance sheet just to go buys shares. If we can buy it out of cash flow to make sense that's what we'll do, if we have other alternatives out there, we may not.

It's latitude that our board has given us. We've exercised that latitude and I wouldn't look for a lot of change in our mood toward share repurchase. We think it's good. We will continue to look at it. But loading up the balance sheet with debt just to go buy a wad or it's probably not in the cards.

Operator

Our next question will come from the line of Ian Macpherson – Simmons & Company

Ian Macpherson – Simmons & Company

Hi. Congratulations on the results. David, I wanted to ask you about the next 28 rigs that are expected out of Petrobras and what role you think there might be for Noble, either with new builds or somehow squeezing the Globetrotter into their plans, or if you think that that's really going to be an opportunity mainly for Brazilian companies?

David Williams

Well, we hear the same stuff out of Petrobras everybody else does, so I mean the answer to your question is actually all of the above. We expect Petrobras is certainly one of the companies that we've had an ongoing dialog with about Globetrotter. We're not in a big hurry on Globetrotter. We think we've still got a good product and a good price in the market. We've still got a lot of talk going on. We're not panicked about it, but certainly that's a good fit for Petrobras. So it might be a fit.

Petrobras has historically been very heavily weighted toward DP rigs but there have been a lot of moored rigs that they've let in there the last few years and I think that may be an opportunity for some of the moored rigs we've got. Likewise, it may be an opportunity for additional new builds. They've contracted these 12 new builds that I think we all know are not all going to get delivered.

Petrobras has been very hesitant about admitting publicly that they don't think these 12 rigs are going to be, get built. So they're kind of sitting there and waiting on somebody to come by and I guess acknowledge it or admit that they're not going to do it. We all know some of them aren't going to make it.

But it kind of depends on how Petrobras behaves. I mean we hear they're over in the Far East talking about building their own rigs. We also know they've got an effort to build in Brazil. As soon as they put more clarity on it we'll know. But I can tell you that we, along with other deepwater contractors are watching it closely and there's almost no way that they can do this on their own. They're going to have to – if they're going to put more rigs in the water, they're going to have to go on the backs of the contractors that are in that business and that includes us.

Ian Macpherson – Simmons & Company

Okay, and if I can get a quick follow-up, it would be regarding the swap with the Romano and the Boudreaux. One of your peers earlier was talking about an expectation for, I guess a restratification of rate structures through six generation rigs. Do you agree that that's going to unfold sooner than later, and does that give you pause with respect to the Romano or other 14 rigs that you need to get contracts for?

David Williams

A restratification. I don't know that you'll see a restratification anytime soon. There's just not a whole lot available anytime soon. There are a lot of opportunities around the world, I think the most recent fixtures we've been fairly pleased with the Petrobras Americas and a couple others. I think that's a possible scenario but there are a bunch of different possible scenarios.

I think, there is a lot of talk, there's a lot of noise in the market about work from people who work in deepwater. I think what our customers are looking for right now is some range of stability where they have confidence in a product price that goes forward.

This cycle that we've just run up through, and then, topped apparently topped out and we're now teetering on, I'm not sure whether it's true, by the economic crisis or by supply and demand for hydrocarbons but it wasn't really conceived on the back of $100 oil. It was – you don't have to go back that far to find oil prices in a range that are similar to where we are now in the $50s. So it depends a lot on what happens with the global economic environment.

I'm not prepared to make a call on the deepwater market right now because there's just not enough activity and there's frankly just, not a lot of iron out there available for, until 2012. So I think there's a lot to play out before we call the deepwater market I believe.

Operator

Our next question will come from the line of Angie Sedita – Macquarie Capital.

Angie Sedita – Macquarie Capital

Good afternoon guys. David, on the – clearly it's the jackup market, mid-water markets are weak, but on the other deepwater markets to get a sense of what you're hearing from the customers in your conversations regarding the Globetrotter, are you seeing any change in the rates that they're willing to assign or any slacking of interest? Is it still potentially a 2009 event to sign that rig or more so 2010?

David Williams

Angie, it could easily happen in 2009. If we don't get the right deal in 2009 we're not going to be, we're not going to push a deal just to get it signed up. There is – operators and contractors by nature of our relationship is adversarial and so they've been looking for a chink in the armor for a long time and they see this economic environment as a chink in the armor. The fact is that with the backlog and the cash position of most of the established drillers, we're not in a panic mode.

So I think many operators are trying to see how we're going to respond to this, how long it's going to take. If oil stabilized in this range, I think our customers can make some money, and I think sooner or later they'll get off the dime and start drilling. I think what they're looking for is stability.

So our conversations on Globe Trotter and the other rigs that we've got and other potential opportunities are still, they're still viable. They're still strong. We're still comfortable. I really like where we are, but an operator is going to use leverage if he thinks he's got it, whether he's got it or not doesn't mean he's not going to try to use. He'll try to use it whether he's got it or not so, yes, they're trying to push back but they try to push back when rates go from 26 to 27 as well so it's just the nature of the beast.

Kurt Hoffman

And then just as a follow-up just on the floater markets, certainly sublets are increasing and we're seeing them for longer term. Have you heard much about discounted rates, what's being offered out there? So far in limited demand, but I would assume that ultimately we'll start to see some discounted rates here.

David Williams

I think operators are I think you may see that. We've not heard anything definitive about that. There's a lot of sublet activity as there always is. I think there's probably more of it now. I think that's probably a better question for our customers than it is for us. We have not had anybody tell us, we don't have any contracts that I feel like are in jeopardy right now because the operator can't pay them.

Whether or not their programs or more importantly their partners are becoming a problem, none of our customers go out and drill these things 100%, they've all got partners. And as they prioritize their packages, their partners become a problem sometimes so it's likely you may see some of that at some point. We haven't seen it out there a whole lot yet so we're watching it like you all are. We're not quite as focused on it as you guys are because we're still under contract, but we're watching it. We haven't seen a whole lot of deterioration in that piece of the business yet.

Operator

Your next question comes from Robin Shumaker – Citigroup.

Robin Shumaker – Citigroup

David, when you talked about the four to six independent leg cantilevers that Mexico is likely to tender for. Since most of Pemex requirements have been coming from the U.S. Gulf of Mexico side and it seems like there would be availability there. Your rigs, I guess, closest ones available are West Africa and elsewhere, but raises a question of mob expense and how that would be covered in the terms of the contract. Are we in a world now where mobilization expense for rigs is on the contractor's dime?

David Williams

Well, the last two rigs we've taken into Mexico have been from West Africa and we've been able to cover the cost fairly handily on all those rigs. So, no, I don't think we're in the position where mob cost is on the back of the contractor specifically for Mexico. Pemex has been willing to pay the mob cost if you can demonstrate that it's actually mobilization cost.

Where they have balked at mob fees is when people have tried to load up repair cost and a bunch of other [inaudible] crude for Pemex and chunk in a big mob fee moved it from the Gulf of Mexico where they think the actual cost may be $4 or $5 million and somebody chunks in a $15 million mob fee that's pushback, they'll get some pushback form Pemex in that regard.

But on the jobs that we bid, we'll have to be competitive on an overall basis, which means that you got to love Mexico. You chunk in a bid they'll add up the mob fee, the day rate over the number of days and the demob fee for everybody in there and low man wins. And so we'll have to look at it and we'll have to normalize it in some way but I don't think that we have to give it up.

Robin Shumaker – Citigroup

Okay. My other question then had to do with the Denny Atkins. I don't know if you gave us an update, but your last fleet status showed a very tight delivery schedule ahead of that clause that allows the operator.

David Williams

Well, it is very tight. The yard we always said those rigs would, when we bought those holes a number of years ago and retrofitting versus building from the keel up has its own little exciting facades. We've always said that when we got to pulling wire and doing terminations that's when these rigs were at risk the last six months, and it's become true. They're both, Denny Atkins and Jim Day are both DP-3, they're very complex rigs. Retrofitting that in an existing hole has proven to be very exciting.

But there's no question we're in constant dialogue with Shell. Yes, it's very tight. Our obligation to meet that standard is to sail. So the rig may not be fully commissioned and we have to be seaworthy and be ready to sail. Shell is very well tuned into it. They want the rig. The rate is still well below where we think the current market is. They agree with that, I think.

I think there is almost no danger at all with Shell jumping up either in front of or behind that date and terminating a contract. What they want is a quality product. Shell is a very sophisticated operator. They didn't get in this thing Tuesday, they're very sophisticated. They've had their hand in this rig since the get go and they want this rig. So we're not overly concerned about the Denny Atkins. It looks bad to everybody else, but what Shell's interested in right now is getting a quality product, and they'll get it.

Operator

Your next question comes from Dan Pickering – Tudor Pickering Holt.

Dan Pickering – Tudor Pickering Holt

David, could you talk a little bit about you've got a lot of rigs scheduled for the shipyard here for the rest of the year. If there were to be more accommodations contracts available for instance, would you defer any of those shipyards to take a job like that or are these shipyards that have to be done this year?

David Williams

It depends on the specific jobs, Dan. If it's a survey cycle, then we've got to do it. We can't stay offshore and continue, particularly when you're there only for life support and accommodation. You've got to be current on your survey cycle. So if it's a survey cycle, then we'll have to do it. If it's an elective program that we bought equipment for over the last few years and we're taking the opportunity to install that equipment, we would certainly consider deferring those kinds of projects, and we may defer some of those anyway.

If it appears that this thing is going to continue to get, it looks to me like the thing is starting to bottom out a little bit, but if it continues to be ugly or we see oil prices fall again, we may take some of these elective projects and put them on the shelf and go ahead and ratchet back some more. But we have every intention at this point to keeping our survey cycles up to speed so that we can work the rigs unless the market changes and the latitude we'd have is other projects but not the survey cycles.

Dan Pickering – Tudor Pickering Holt

Okay, and, Tom, how many dollars in your $1.250 billion CapEx number are associated with elective shipyards?

Tom Mitchell

We haven't given that out, Dan.

Dan Pickering – Tudor Pickering Holt

Now would be the perfect time.

Tom Mitchell

Dan, I think when we originally gave you that $1.250 billion we said about $620 of that was new build CapEx, probably about $250 of that was sort of sustaining CapEx and the remainder would be major shipyard projects. Our major shipyard is probably around 150 in this number.

David Williams

A lot of stuff for some of these programs has already been purchased in the past, Dan, and we may have equipment that's already laying around and so it's a function of whether or not we go ahead and install it. So some of it actually may or may not be capitalized and may be expensed, and so we may have some optionality on some additional capital or some expense items or whether or not we go forward. But that's a decision we'll make as we go through the year.

Dan Pickering – Tudor Pickering Holt

Okay, follow-up question then would be as these rigs complete their shipyard projects, what's the criteria around warm stacking them versus cold stacking them as you look at the marketplace. If it feels like it's bottoming I would assume you wouldn't cold stack anything if we're kind of finding the bottom of the market.

David Williams

Well, it depends on where the bottom is and what rig it is. As I said in my opening comments, I don't want to get too detailed about it because it depends on the specific rig. The outlook for a 250 footer well outfitted in the middle east maybe a little bit different than 150 footer, or in West Africa where Nigeria doesn't know. They're just absolutely just completely sideways with everything.

It's a different decision on different rigs and different markets. There are also considerations, in West Africa you really can't just coal stack the rig. You can't just pull it up to the dock and walk away from it because you'll walk out there the next day and they've stolen the legs off of it or something.

But you've got to have some crews, you know, you've got to at least have a crew available I think in the Middle East or someplace where you could. It depends on the region, the rig and the circumstances and certainly our comfort level with that particular asset in the market will be a large piece of that.

Dan Pickering – Tudor Pickering Holt

Just as an FYI there are some Somali pirates that are willing to cold stack rigs.

David Williams

We'll keep that in mind. They might be interested in a free ride.

Operator

Your next question comes from Collin Gerry – Raymond James.

Collin Gerry – Raymond James

Okay, most of my questions have been answered but one of the topics we heard on one of the calls earlier today was the North Sea market seems to be a little more resilient or maybe more so than some of the international markets. Can you characterize how you're seeing demand and particularly for jackups kind of evolving in 2009 in the North Sea?

David Williams

Well I think the North Sea is kind of a market unto itself because it's effectively a closed market. The rigs that are there that qualify, there are very few other rigs around the world that are qualified to work there that are not actually already there. So it's kind of a closed little subculture unto itself so it's sort of isolated from the turmoil of the rest of the world as long as the local gas and product prices hold up.

My expectation is there is demand in the North Sea, but my expectation is that you'll see pressure on that market just like you do other markets. We've heard some anecdotal stories about what people are willing to do and the 200,000 plus day rates, those are retail prices for those rigs in the southern North Sea and my expectation is you'll see some pressure on those rates as the market continues to evolve.

I think it's been a little bit slow to come there just because it's isolated but I don't see how you're going to see the pressure off that market while you have pressure on the rest of the markets as this cycle continues to evolve.

Collin Gerry – Raymond James

Okay, and then just kind of a follow-up on – I know you've been a little remiss on giving some details on the stacking behavior just because of the uncertainty, but what are the cost savings generally as you move a rig from a warm stack to a cold stack situation?

David Williams

Well again, it depends on where it is and in some places we can't cold stack but you know, say at the handrail cash cost, if you can cut your cost by 60%, say, daily operating cost to go warm stack you might be able to take it to 80% or maybe a little bit more if you cold stack it.

Operator

Your next question comes from Michael LaMotte – JP Morgan.

Michael LaMotte – JP Morgan

Did the $100 million reduction in costs versus last quarter, is that related to the warm stack in the Arabian Gulf jackups?

David Williams

No, it's not really, Michael. We've taken a look at the labor line that I spend some time talking about. There's a portion of it there. The insurance is obviously down like we talked about. You can kind of get to my number for the number I mentioned in the call, that $15 million. And then from the costs that we have mostly because of labor and others is pretty much spread throughout several different line items, so between labor and insurance you get two of the larger ones.

Michael LaMotte – JP Morgan

And as a follow-up, Dave, some of the bigger operators have been pretty vocal about getting their costs back to the 2004 level. As you go into these negotiations with them over rate, is that sort of a bogey that we should keep in mind in terms of where this market's headed or are there reasons why we could hold above that?

David Williams

Well every time I've heard people say that but I always say well if we go back to that when it goes back to 2009 prices are you going to adjust us up? I mean we don't have any intention of negotiating backwards from deals we've got in place. They're in the hydrocarbon business. We're in the drilling business so we don't have any intention of repricing what we've got back to a 2004 level.

We've heard that but I mean, hell, I don't know how you – no. I don't think that's a reasonable benchmark for what we should look at. The market's just a – the 2009 scenario was very different than the 2004 scenario. Everybody's costs have gone up. Product prices are higher. They're in a different place so we hear the same junk. I don't – it's a nice place to start a negotiating strategy. I don't think it's a proxy for anything.

Michael LaMotte – JP Morgan

Okay, thank you.

David Williams

Don't tell my customers I said that, but –

Operator

Your next question comes from Pierre Conner – Capital One Southcoast

Pierre Conner – Capital One Southcoast

I wanted to ask you about, and maybe this is for Kurt, West Africa or Dave, you've kind of spoken about all the problems there so I guess to put the potential work in context, it's not about the rate and it's not about the available project. It's strictly work agreements and things of that nature or a combination of rate as well?

Kurt Hoffman

In specifically to Nigeria it's the relationship going on right now between the Nigerian government and the operators themselves and some new parts that they've added into the Nigerian government and NNPC for example, the National Nigerian Content Division, so that's what we're seeing programs being slowed down in Nigeria itself.

Now up and down north and south of Nigeria we are seeing some good tender opportunities, both in the jackup segment and also in the deepwater segment. The jackup opportunities are shorter in term and nature and it's part of the cycle, but some of the deepwater opportunities we're seeing are longer term, so we haven't given up on the region. Nigeria's very difficult at the moment.

Pierre Conner – Capital One Southcoast

And no outlook for resolution of the NNPC issues in Nigeria is the point?

Kurt Hoffman

Well I think the resolution's going to have to come between our customers and the Nigerian government. I mean that's where we see the roadblock.

David Williams

It's been a mess a long time.

Pierre Conner – Capital One Southcoast

And maybe Kurt, also a follow-up on the Kenneth Delaney, just to understand, is one year extension there, when does that start and is that still with gutter gas or is that with a different – I'm assuming that's going to be in this fleet status [inaudible].

Kurt Hoffman

Yes, Pierre, we're going to put fleet status out in the next hour or so so it'll be, let's see. You know what? I don't have it right in front of me but it'll be out here in a few minutes.

Operator

Your next question will come from Jeff Spittel – Natixis Bleichroeder.

Jeff Spittel – Natixis Bleichroeder

Most of my questions have been answered. I just wanted to ask a little about Pemex. Have you seen any change in their behavior that they had in the hurricane season versus what you saw last year in terms of their appetite for rigs? I know there is incremental demand and there'll be another tender out there, but I was wondering if you could talk about that a little bit?

David Williams

Pemex vis-à-vis hurricane season, no change in their behavior at all. They are outside of the – statistically outside of where the most harmful storms impact oilfield infrastructure so we haven't seen any kind of modifications of their behavior as a result of hurricane season. Pemex kind of does what Pemex does on their own time. We hear a lot of anecdotal information before they tender, but you don't really know exactly what they're going to do until they pop it out there, so we're watching that happen closely just like everybody else is.

Operator

Your next question comes from Atle Hauge – Carnegie Investment Bank.

Atle Hauge – Carnegie Investment Bank

I just wanted to touch base on the M&A bit if I may. In terms of types of assets you are looking at, are you sort of focused on the deepwater or is anything sort of interesting at the right price?

David Williams

Well I would say yes to both. Anything would be interesting at the right price, however we would have a definite focus and strategically a bent toward deepwater assets. So the jackups would have to be awfully cheap for us to get really excited, but hell, we like them. So if they're cheap enough we'd pay attention, but our primary focus and our goal, and what we'd really like to see, is put more floaters in this fleet.

Atle Hauge – Carnegie Investment Bank

In terms of the bid asked for do you see that sort of significantly narrowing or is there hardly any movement at all?

David Williams

I would say that I wouldn't characterize it as a target rich environment yet, but I would say that the bid asked is, in some cases, converging. Well, not converging, getting better.

Atle Hauge – Carnegie Investment Bank

Except that, and, finally, in terms of options for dealerships, what's the status on those?

David Williams

Our options on our existing new builds have technically really expired and, although we're in a constant dialogue with our two main providers, and I think they would support us very handily to either re-price those or re-bid those, so we'll see how that plays out.

We'll, actually, be having a dialogue with those guys in a very short order to talk about the future of those option and how those, actually, some other opportunities that we're chasing. So, we'll see how that plays out.

Atle Hauge – Carnegie Investment Bank

And, finally, if I may, in terms of dividends versus buy backs, can you just update me on how you view that?

Lee Ahlstrom

You're violating the one question and one follow up rule.

Atle Hauge – Carnegie Investment Bank

Sorry.

David Williams

We've been very active on the buyback front and, as it goes right now, we like that better.

Operator

And our next question will come from the line of Geoff Kieburtz – Whedon.

Geoff Kieburtz – Whedon

Good afternoon, I have just a quick one, David. You mentioned that you have no intention of renegotiating existing rates, but a lot of your competitors have been faced with the choice of lower rates in exchange for longer terms. Would you consider that?

David Williams

Well, sure, what I meant to say, and that's a good catch, I mean what I meant to say is, if an operator came to me and says, okay, you're in 2009, we want you to re-price your committed contract to the 2004 level, I don't think we would be very willing to do that just on that basis. But, certainly, if an operator came to us and said, you're committed for a jackup at, we're committed for six months at $180, we'll give you two years at a reduced price. We would certainly consider that if it made sense. We would have to make sense.

We've had those conversations with a number of people and, some cases we've pursued those to a conclusion that made sense and, some cases we pursued those to a conclusion. Then lastly, I guess, we haven't. We've chased a lot of them. But in most cases, it's, you wind up with we'll just take what we've got and see how the market evolves. Their expectation versus our expectation might be very different, so, you always have the optionality.

Actually, we always view we have the optionality of just taking the contract we've got and see how the market plays out. This market doesn't scare me. I mean, it's fallen an awful lot from a high of $147 a barrel, but it doesn't have to get back to $100 a barrel to excite the market.

We didn't – we started some by conversation projects when oil was well below $70 or $80 a barrel, so we're not afraid to play these. But, surely, if an operator comes to us with, and says, look, I've got a cash flow problem or I've got more work and I've got a high rate, would you negotiate. If it made sense, of course we would.

Geoff Kieburtz – Whedon

Have you been seeing more or less of those kinds of inquiries coming in from customers?

David Williams

I would say that we had a lot of those conversations earlier in the year. We've probably had more in the earlier part of the year than we're having now, so I would say probably less. I mean, keep in mind there's a finite number of rigs out there and you can only have that conversation so many times, so I would say that most of those, we've not had a conversation on floaters. We've had – those conversations have been jackup conversations, so it's, I think, they've pretty much run their course.

Operator

Your final question will come from the line of Mike Urban – Deutsche Bank

Mike Urban – Deutsche Bank

Yes, good afternoon, just under the wire there. The only thing I have left is, and I think you alluded this a little bit, I just wanted to see if you could give us some more specifics on some of the glimmers of hope that you had talked about out there.

Is that just kind of moving from a situation last quarter where you were just in and you had a lot of customers in paralysis mode to now they're willing to think about things or are there specific examples or where you might see some of that paralysis loosen up a little bit with specific opportunities opening up?

David Williams

Well, I'd say a little bit of both. I mean, last quarter, when we talked to everybody, it was in the, oh, my God, mode. I mean we had seen the market fall from a high and a very elevated oil price that we had likewise didn't think was sustainable and I don't remember exactly where we were. But I think it was probably closer to the $30s than it is now.

At least over the last few weeks, it seems like oil has found at least a trading range that it hasn't. It's not real high, but it's not real low and the volatility seems to be in a quarter, we had a $4 day a couple of days ago. But, other than that, we're seeing it kind of become a little more reasonable I guess and I think in this you need too.

When you need to talk about psychology to customers, you need to talk to our customers. But it appears to us that the stability, any market runs on confidence. All markets run on confidence and this market's no different. They need confidence that they're playing in a 45 or 50 or 55 plus barrel range and not potentially a 25 or 30 or 35 range and, up until the last few weeks, I don't think they really had that confidence.

Now, how long is it going to take for them to get enough confidence to go forward or to re-ignite and re-excite some of these partners? I don't know. A lot of the majors would tell you they're going to keep going and it appears to us that they are. So, the incremental softness is primarily in the jackups and it's largely, I think, in many cases, independent driven. So confidence is key and stability is driven.

It will drive that confidence and so, when we talk about glimmers of hope, that's, we're not having a lot of scary conversations that the world thought we might be having. We haven't seen panic. There's still opportunities out there. We're not seeing people just say, we're not going to drill. We may put our activity on a go-slow and see how this thing plays out for a few months, but things seem to have calmed down a little bit.

And, whether that's a good thing or a bad thing, I'll let you know next quarter. But, at right now, it gives us a little confidence that at least there is at least some stability afoot that might give some people some hope and they cannot not drill forever. I mean this is what these people do you know.

If they can't find prospects that work at 48, they've got to look at other prospects. But, they're going to drill. I mean, this is what they do. The world runs on oil and gas and that hasn't changed. If we can sort out this financial goat roping we're in, and you see the world economic environment start turning over again, you'll see the same start picking up again.

So it's that there's a lot of moving parts, but product prices, oil price stability, is one of the key things that I think gives us some hope.

Mike Urban – Deutsche Bank

So, the stability rather than levels then, if we hold 50 and you get some more confidence, some of these marginal jackup projects could re-emerge?

David Williams

I think at $50 oil, a lot of people could make money, yes.

Lee Ahlstrom

All right, well, thank you very much to everybody who's joined today and for helping us be disciplined so that we could get everybody's questions in. As I mentioned, we will have a fleet status coming out probably in the next hour or so to help you all with models and we look forward to joining you on the next quarterly call at the end of July, so thank you and have a good day.

David Williams

Au revoir.

Operator

Ladies and gentlemen, that is the conclusion of today's teleconference and you may all disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Noble Corporation Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts