Executives
Suzanne M. McLeod - Director of Investor Relations
W. Matt Ralls - President and Chief Executive Officer
William H. Wells - Vice President, Finance and Chief Financial Officer
David P. Russell - Executive Vice President, Drilling Operations
Analysts
Mark A. Keller - Executive Vice President, Business Development
Robin Shoemaker - Citi
Ian Macpherson - Simmons & Company
Dan Pickering - Tudor Pickering Holt
Brian Uhlmer - Pritchard Capital
Collin Gerry - Raymond James
Rowan Companies, Inc. (RDC) Q1 2009 Earnings Call May 7, 2009 11:00 AM ET
Operator
Good day everyone and welcome to this Rowan Companies Incorporated First Quarter 2009 Earnings Results Conference Call. Today's call is being recorded.
At this time for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Susan McLeod. Please go ahead ma'am.
Suzanne M. McLeod
Thank you, Jessica and good morning. Welcome to Rowan's first quarter 2009 earnings conference 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 of Strategic Planning; and Dan Eckermann, President and Chief Executive Officer of LeTourneau Technology.
Before Matt begins his remarks, I'd 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'll turn the call over to Matt.
W. Matt Ralls
Thank you, Suzanne. Welcome everyone and thanks for joining us this morning. I'm going to make a few 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 first quarter results and provide some updated guidance for 2009 before we open it up to questions.
To begin with, we had a solid first quarter. We reported earnings for the quarter of a $132 million or $1.14 per share, excluding gains, significantly exceeding consensus estimates. Looking at some of the analyst models it would appear, our performance was fairly equally related to higher drilling revenues, lower drilling costs, higher manufacturing revenues and margins than most analysts were modeling.
On the contract drilling side of our business, lower commodity prices and continued weakness in the financial markets are clearly continuing to negatively impact activity levels, particularly in the U.S. land and Gulf of Mexico shallow water markets.
As Mark will discuss more fully in his section, we'll soon be reducing our presence in the U.S Gulf from 10 jack-ups to seven. On a worldwide basis, the jack-up market is seeing declining day rates and utilization in virtually every market except Mexico. And likely won't recover until the current global economic malaise abates, providing a basis for stronger commodity prices.
Fortunately, we have approximately two-thirds of our offshore rig days committed through the balance of 2009 and approximately 87% of our budgeted drilling revenues committed, including land rigs. We're responding to this uncertain market environment by continuing our commitment to our financial and operational priorities. Our financial priorities are focused on cost control and managing liquidity. And we're pleased with our progress on reducing our costs in both drilling and manufacturing.
Also as Bill will discuss in his comments, we expect our capital expenditure for the year to be about 5% below earlier guidance.
From an operational standpoint our focus is on the drilling -- our focus in the drilling side of our business is on improving our already strong operating performance, in order to continue to be able to leverage the brand value of the Rowan name to gain above industry average utilization rates in the current weak jack-up stock market.
On the manufacturing side, we have made painful but necessary adjustments to our workforce levels to reflect lower revenue expectations while at the same time focusing on improving our manufacturing efficiency, further developing the technology leadership and reliability in our drilling system's product line.
With respect to our new build program, construction continues on our second 240C, the Ralph Kaufman, which is scheduled to be delivered around year-end. Our first three EXL rigs remain on schedule and budget with delivery schedule for the second, third and fourth quarters of next year. As previously discussed, we have suspended construction on the fourth EXL rig as well as a third 240C and expect to decide by the third quarter whether to go forward on those rigs.
And with that I'll turn the call over to Mark.
Mark A. Keller
Thanks, Matt. I will now discuss Rowan's drilling operations and provide an overview of the worldwide markets in which we're currently operating.
Rowan's offshore fleet of 22 jack-ups is currently contracted at 100% utilization, with an average day rate of $167,000 worldwide. While all of our jack-ups are under contract to-date we are likely to have idle time in both the US Gulf of Mexico and the Middle East in near future.
Nonetheless, we continue to believe that the quality of our rigs and our operational reputation will enable us to maintain above average utilization day rates on our available jack-ups. 77% of our jack-up rigs remain on term contracts. 13 of our 22 rigs are located in international markets; 9 in the Middle East, 2 in the North Sea, one in West Africa and Gorilla III is currently mobilizing in Eastern Canada. The rig has a bonding LOI with Exxon Mobil at $305,000 a day for approximately 90 days.
Following that commitment, the Gorilla III will commence operations within Canada at $305,000 a day for an additional 200 days.
Rowan's remaining nine jack-ups are located in the US Gulf of Mexico. However two of those jack-ups are scheduled to depart for international markets in 2009. As previously announced, the J.P. Bussell will mobilize to Egypt for operations with Shell in the third quarter of 2009. Recently contracted, the Gorilla IV will mobilize to Mexico to work with PEMEX in mid-June. I'll go into more detail regarding these contracts later in the call.
In each region that we're currently operating, Rowan has the highest utilization and the highest average day rate as compared to our peer group. As we've historically proven, Rowan's premium jack-up fleet combined with our qualified well trained crews sets us apart from the industry.
According the ODS-Petrodata, there are currently 441 jack-ups worldwide. Demand is 358 rigs with utilizations of 81%. We don't expect to see an improvement in the supply demand in balance before early 2010.
Despite the decrease in demand for the total jack-up fleet, demand for high-spec rigs, which redefine as 2 million tons or greater (ph) has remained at very high levels and is currently at 96%. Only 25 jack-ups in the world meet this specification and Rowan owns 10 of them or 40%. It has always been our strategy to use state-of-the-art technology in our jack-up designs to meet niche market demand worldwide. And we will continue to benefit from higher utilizations and higher day rates as operators recognize this level of excellence and drilling performance.
We're very proud of our fleet, but realize that we're not immune to current market conditions. Of the total industry jack-up fleet, more than half is either not working or a little off-contract in 2009. ENT (ph) budgets remain constricted and operators worldwide are requesting to renegotiate existing term contracts and day rates.
Despite the current weakness, Rowan is currently considering tenders in India, the Middle East, the Mediterranean, Mexico and the North Sea. We're hopeful that the recent stabilization of oil prices will spur additional international demand.
I will now discuss Rowan's geographical areas of operation. Let's begin with the Middle East. The supply in this region is 105 jack-ups while demand is currently at 90 rigs. Contracted utilization rate is 86%. A significant number of jack-ups will be rolling off contract in 2009 and competition for available work continues to put downward pressure on day rates.
No one has nine jack-ups in the region at an average of day rate of $144,000. Saudi Aramco extended the contract on the Arch Rowan at 115,000 a day for December 2009. The Rowan-California is expected to complete operations for Saudi Aramco this week and mobilize to the shipyard in Sharjah for upgrades and modifications.
We are hopeful that Aramco will continue to utilize our two 116Cs rolling off contract this quarter. But we are actively marketing these units worldwide. Although demand has significantly slowed Rowan is currently reviewing multiple tenders in the region and based on operator discussions, additional tenders maybe announced later in the year. Rowan will aggressively pursue these opportunities as we continue to believe that the Middle East is an important part of our long-term business strategy.
Next I will cover the North Sea; supply and demand are above 35 jack-ups and contract utilization is at 100%. Though utilization is currently high, a market surplus of 3 to 5 rigs is forecast for 2009 and 2010.
Lack of funding has hit many projects that were previously planned in the region and some of those operators may (ph) not play. Norway seems to be the bright spot in the North Sea but while has been difficult to gauge the market from the lack of day (ph), the Norwegian sector remains more stable in terms of demand day rate levels than the rest of the region.
Rowan currently has two Super Gorilla class jack-ups operating in the North Sea at an average day rate of approximately $282,500. North Sea contracts typically require high spec jack-ups due to the harsh environment requirements, making Rowan Super Gorillas and our new 240C class rigs perfect candidates for the region. Various operators remain interest in these units for projects in 2010 and 2011.
Moving onto West Africa, supply is 26 jack-ups in the region and demand is 17 rigs, 65% utilization. As reported in our last call multiple rigs have rolled off contract and remain out. Utilization is forecasted to continue its decline for the remainder of 2009 and possibly in the 2010.
What little demand exists in the region is comprised of short-term projects. The Rowan Gorilla VII continues operations within the Gulf (ph) till second quarter 2010 at a day rate in the low 330s.
And finally the US Gulf of Mexico, supply in the region is 73 jack-ups while demand is 37 rigs with the contracted utilization of 51%. All of Rowan's nine jack-ups are currently contracted on average day rate of approximately $147,000.
Demand in the US Gulf of Mexico has reached to historic level. Unfortunately, an increase in near term activity is not expected with the looming hurricane season and the current economic environment. Providing some balance to the decrease in demand is continual departure of premium rigs from the US Gulf of Mexico. At the peak of supply in 2001, approximately 48 jack-ups existed with the specifications of 300 feet like cantilever or greater. Once scheduled migrations take place, only 12 of these units will exist in the region by the end of 2009. That's a 75% decrease in supply of these premium rigs, through the scheduled migrations of Rowan jack-ups. As I mentioned earlier, the Rowan J. P. Bussell will mobilize out of the region in the third quarter 2009.
The rig is contracted in Egypt with Shell were approximately two years of work in the low 180. The Rowan Gorilla IV will depart in the second quarter of 2009 for operations in Mexico. We reported in February that Mexico was the only market in the world with increased demand and after aggressively tendering in the region, Rowan is excited to reenter this market and further diversify our fleet geographically.
The Gorilla IV will commence operations for PEMEX in mid June on a 785 day contract at a $152000 a day. To offset the significant production decline experienced from the Cantarell Field, PEMEX plans to tender for approximately 5 to 7 additional jack-ups in 2009. The requirements will be for independent like cantilevers which may pose further threat on our remaining number of premium units available in the U.S. Gulf of Mexico.
The aggressive demand in Mexico continues at a historical trend. In 2002, only six units existed in the region. Now the PEMEX fleet covers more than 30. Competition for the upcoming tenders will be fierce given the availability of jack-ups around the world. However Rowan is confident that with our premium fleet of jack-ups, we would be successful in securing additional contracts in Mexico.
Now turning to our onshore division; Rowan has a fleet of 32 land rigs. 29 are located in Texas, one in Oklahoma one in Louisiana and one in Alaska. We're currently marketing 28 rigs at a contracted utilization rate of 75%. Four units will currently pull us back (ph). our current average day rate is $23,000. Approximately 57% of our marketed fleet is on term contracts.
We expect delivery of land Rig 87 later this month. The rig is contracted to Common Resources for three years at $27,000 a day. According to the Land Rig News Letter, the U.S. land rig count has declined 60% from its peak of 2,374 rigs in October 2008 and 932 rigs in April 2009.
Although the bottom of the trough has not been realized, some stabilization in rig count is occurring. As evidenced by the market change, Rowan currently has 14 active tenders for projects beginning in the next few months.
We are confident that despite the current economic situation, our fleet of high-spec, high efficiency units will continue to be the rigs of choice to meet the increasingly difficult technical challenges of our customers.
In conclusion, it is clear that the worldwide market continues to experience demand erosion. But we believe that the integrity of our people, the technology of our fleet and the stability of our company will carry us through this trough and forge (ph) us to take advantage in the next upside.
This concludes our market overview and I will now turn the call over to Bill Wells.
William H. Wells
Thank you, Mark. Our first quarter 2009 drilling revenues were 380 million, up by 12% over the prior year and down by 2% from last quarter. The year-over-year increase is primarily attributable to the contribution of jack-up new builds, Rowan Mississippi and J.P. Bussell delivered last November, while the sequential decrease resulted from reduced domestic activity.
Despite the added rigs, which contributed 3% sequential increase in available offshore rig days, our first quarter drilling expenses were 145 million or 7% below the prior year and 1% below last quarter and well below our previous guidance. Both comparisons showed reductions in labor and related personnel costs for a continued optimization of crew levels and reduced overhead.
The sequential decrease was tempered somewhat by almost $6 million increase in reimbursable expenses between periods. Rowan Reimbursables, our offshore operations achieved the 9% sequential decrease in our average cost per available rig day.
As expected the aftermath of Hurricane Ike dramatically reduced the availability of windstorm covers in the Gulf of Mexico and made available covers very expensive. As a result, during our April 1 policy renewal we opted for less windstorm coverage which should yield a 10% year-over-year reduction in insurance costs.
We currently expect our second quarter 2009 drilling expenses will track very closely to the first quarter amount and be about 11% below the prior year. And despite an expected 6% increase in available rig days in 2009, our total 2009 drilling expenses should come in about 10% below 2008 levels.
Our first quarter manufacturing revenues totaled 188 million, including 74 million of arms length sales through our drilling division. External revenues were 114 million, a decrease of 49% from the last quarter and 21% from the prior year. Of the 188 million of total manufacturing revenues in the first quarter, our Drilling Products and Systems segment contributed 145 million or 77% including the sales to our drilling division.
External revenues were 71 million and featured 32 million from rig projects and another 15 million from drilling equipment. Of the 114 million of external manufacturing revenues, our Mining, Forestry and Steel Product segment contributed 43 million, including 9 million from shipments of mining and forestry equipment and 12 million from steel plate. Our combined aftermarket parts and services business produced 34 million in revenues during the first quarter, or 30% of external revenues compared to 35 million, or 15% of revenues in the last quarter and 28 million or 19% of revenues in the prior year.
Our total average margin on operating cost is 21% of revenues during the first quarter, up from 13% the prior year, but down from 25% last quarter with fluctuations primarily due to sales mix. Similarly our manufacturing operating income, excluding charges improved 10% of revenues in the current quarter, up from 3% the prior year but down from 18% last quarter.
Our quarter-end manufacturing backlog was just over 1 billion, down by about 2% over the past three months. The external backlog of 593 million included 285 million related to land rig projects, 169 million related to offshore rig projects, 40 million of mining and forestry equipment and about another 60 million of ad-hoc drilling equipment.
We expected that about two-thirds of our external backlog at March 31, 2009 will be realized as revenue in 2009. The quarter-end backlog included 83 million for the kits to two jack-ups rigs to be built in Brazil. In April we confirmed orders for the drilling equipment for these rigs totaling another 102 million, most of which would be delivered in 2010.
Another positive development is our progress made with certain customers in our Drilling Products And System segment that had previously sought to modify existing orders by delaying deliveries and related payments. Our estimated backlog at risk which was 236 million or 42% of external backlog at December 31 was down to 150 million or 19% of our external backlog in March 31, 2009.
In terms of guidance for the manufacturing segments, we indicated earlier this year that we expect the 2009 external revenues of approximately 465 million and operating margins of around 20%. We continue to believe that these results are attainable.
Our first quarter depreciation expense totaled 41 million which tracked our previous guidance and was up by 5% from last quarter and by 22% over the last year, primarily due to the rig fleet addition. Our latest estimate for 2009 depreciation is in the range of 165 to 170 million, including approximately 41 to 42 million in the second quarter.
Our first quarter SG&A expenses totaled 25 million, well below our previous guidance and down by 17% from last quarter and by 10% from last year, primarily due to reduced compensation and related costs.
Head count reductions and other cost cutting initiatives were expected to yield a 10 to 12% reduction in 2009 costs to a range of 101 to 104 million for the year, including approximately 25 to 26 million in the second quarter.
Interest expense, net of interest capitalized was less than 0.5 million during the first quarter. Our 2009 interest expense should be in the range of 17 to 18 million most of which should be capitalized. The first quarter and expected full year effective tax rate is 34%, property and equipment additions (ph) totaled 136 million for the first quarter which included 18 million towards our second 240C jack-up Ralph Kaufman, 65 million for the first three new build EXL jack-ups and 27 million for our existing fleet.
As previously reported, we have suspended further construction of the third 240C rig at our Vicksburg, Mississippi shipyard. And the fourth EXL rig being built by Amfel at its Brownsville, Texas shipyard. We have spent approximately 53 million on the third 240C through March 31, 2009 and estimate than another 180 million over and above cancellation cost, would be required to complete the rig.
Given the expected timing of the Ralph Kaufman construction currently in process at Vicksburg, our decision regarding third 240C rig should be finalized by early July. Should we elect to cancel construction of the third 240C rig, we will be probably incur the charge for a substantial portion of the approximately 85 million expenditure made and to be made close plus up to another 26 million related to closing with Vicksburg shipyard.
We have spent approximately 29 million on the fourth EXL rig through March 31, 2009 and estimate another 130 million over and above cancellation cost would be required to complete the rig. We recently extended our cancellation option on that project, until late September. Should we elect to cancel construction of the fourth EXL rig, we will probably incur a charge for a substantial portion of the approximately 60 million of expenditures made and to be made.
In each case our decision about whether or not to resume construction will depend primarily on our outlook for liquidity and alternative investment opportunities for the lower go forward cost on the fourth EXK rig makes it the more attractive than the two projects.
For remaining 2009 property and equipment additions we are projecting approximately 390 million, including 71 million towards completion of Ralph Kaufman, 186 million for the first three EXL jack-ups, 60 million for existing rigs, including contractually required upgrades. We expect to be able to fund our capital program through operating cash flows and cash. While we are encouraged by recent trends and the debt markets which we believe are open to Rowan we have no plans for any borrowings at present. Suzanne.
Suzanne M. McLeod
Well, that conclude our prepared comments Jessica, our management team is now available to answer any of the question, remarks, listening audience.
Question-and-Answer Session
Operator
Thank you (Operator Instructions). Our first question will come from Robin Shoemaker with Citi.
Robin Shoemaker - Citi
Yes, thank you. Good morning.
W. Ralls
Good morning, Robin.
Robin Shoemaker - Citi
Matt, I was wondering what your current understanding is of Saudi Aramco's rig requirements as compared to your contract expiration. I know they've scaled back, they made a presentation I think to some oil service companies indicating what their plans were, but do you have any visibility with regard to their jack-up requirements?
W. Ralls
Well let me Mark Keller and Dave Russell and I were just over there a few weeks ago and we had a big visit with Aramco. But I am going to let Mark comment on his latest discussions with them.
Mark Keller - Executive Vice President, Business Development
In our latest meetings with Saudi Aramco and we're in touch with them constantly. They currently have about eight more jack-ups that roll off contract by the end of this year, 8 to 9 rigs and they are reviewing all of those. As I mentioned in my prepared statement, the Rowan California will complete operations in the next day or two and it will roll off contract.
But right now they are still taking the position on a day-by-day basis, that they are still reviewing their drilling options and trying to migrate their fleet. Whether they will keep the other two rigs, I'm not sure. I asked that question day before yesterday and I was given the answer that they still don't know. And as far future requirements, they tell us that they are still going to go to the market for two to three gas rigs, that would be the Hashbac type (ph) rigs, like the Tarzans and the 240C class rigs.
Robin Shoemaker - Citi
Okay, and that will be this year?
Mark Keller - Executive Vice President, Business Development
As of my last meeting with them, that is their plan right now.
Robin Shoemaker - Citi
Right.
Mark Keller - Executive Vice President, Business Development
It will be towards the end of the year though.
Robin Shoemaker - Citi
Okay. The other question I want to ask you is, as you bid rigs for various jobs around the world, like you mentioned, India for example. What kind of comes into consideration in terms of having a single rig operation in the market and how does that drive your bidding strategy? Is that a strategy you would want to pursue?
W. Ralls
Let me say that from a company perspective and Mark can comment specifically on India if he wants to but in a market like this, where one rig, shore basis are not ideal and they're certainly better than having idle equipments, that were not as much of a factor as this part of the market is that, when the market is very tight and you have options and then you have to look at the added cost to having one reinsure base and that's factor in the potential of growing your presence in that market.
Mark Keller - Executive Vice President, Business Development
I would just add to that, that we made a decision to take drill to seven and (ph) go over it to one rig operation. That day rig is so significant that it made sense. We want to enter that region and you look at it from a strategic standpoint, (inaudible) in Mexico we feel like there is more opportunities to put rigs there. So to answer to your question, we look at it in a lot of different ways.
It's like as Matt said, it's not the ideal situation. But we want to enter that market like we've done in Egypt and Mexico. We will certainly look at individual markets that start out with one rig operation.
Robin Shoemaker - Citi
Right. Okay, thank you.
Operator
And we'll now have from Ian Macpherson with Simmons & Company.
Ian Macpherson - Simmons & Company
Hi, good morning. My first question would be for, is it the Joe Douglas that is under review, under construction at Vicksberg?
W. Ralls
That's correct
Ian Macpherson - Simmons & Company
Okay and so the decision to shutter that project or not would of course follow with a decision to close that shipyard or keep it open. Is that correct?
W. Ralls
Yeah, they're definitely related. That's right.
Ian Macpherson - Simmons & Company
Okay, will this one lead the other or to those two?
W. Ralls
No well the decision on the Joe Douglas leads the decision on the shipyard. So if we elect not to go forward and we've got more time. So we just don't need to make that decision right now. But if we did elect not to go forward with the Joe Douglas then we would begin to pretty dramatically scale down that operation as Ralph Coffman goes into the river there.
Ian Macpherson - Simmons & Company
Okay. I'm just wondering if we should think about significant based on cost reductions for the businesses. If that outcome or to be that the Vicksberg would be...
W. Ralls
Most of that cost, Ian goes into the new build rigs.
Ian Macpherson - Simmons & Company
Okay.
W. Ralls
So --
Ian Macpherson - Simmons & Company
So, it's all toward -- for the rig construction.
Mark Keller - Executive Vice President, Business Development
Yeah, majority of it is. Yes.
Ian Macpherson - Simmons & Company
Okay. So, with this recent order for the two jack-up packages for Brazil, leads me the question if you are looking at any -- if you have any capability to sell significant rig capital equipment to Petrobras, destined for deep water new builds that we're expecting, do you have that capability or now you're considering ramping up to that capability?
Mark Keller - Executive Vice President, Business Development
Well first of all, those are of course are completely separate than the Vicksberg decision
Ian Macpherson - Simmons & Company
Okay, yeah.
W. Ralls
Yes, we see the you are pointing to the boring opportunities that,
Ian Macpherson - Simmons & Company
Right.
W. Ralls
We have locked our supply into some of those lounges (ph) at the moment. We have orders in progress there. So the same key components, but drawers are (ph) supplied there.
Ian Macpherson - Simmons & Company
And you elaborated on sort of the magnitude or size of those tickets?
W. Ralls
No, we're just moving there. It's a large opportunity and we're small at the moment but we have a great opportunity going forward.
Ian Macpherson - Simmons & Company
Okay. Last question just with regard to the market outlook for jack-ups, I guess specifically with the California is that a rig that we might see stacked up to shipyard or more or like, you've confident that you're going to keep that rig employed in the back half of the year?
W. Ralls
Looking at the market today, as I mentioned in my comments we have a few tendered, multiple tenders in the Middle East right now that we are reviewing. We feel pretty optimistic I mean from our standpoint that we're going to put the rig to work when it comes out the shipyard.
Mark Keller - Executive Vice President, Business Development
There's one in that region that we're bidding it around the world too.
W. Ralls
And, Ian we are upgrading the capability of that rig relative to the yard. And so that between the ceasing operations, demobing of the yard, doing the work, come back out, it gives mark and the market sometime to find additional opportunities.
Ian Macpherson - Simmons & Company
Okay. Got it.
W. Ralls
If we can't find them then of course we will close there.
Mark Keller - Executive Vice President, Business Development
Just for example, we have five tenders that we're reviewing right now.
Ian Macpherson - Simmons & Company
Okay.
W. Ralls
In that region.
Ian Macpherson - Simmons & Company
Great, thanks and congrats on the good results.
W. Ralls
Thank you.
Operator
(Operator Instructions). And you will now hear from Dan Pickering with Tudor, Pickering, Holt.
Dan Pickering - Tudor Pickering Holt
Good morning, guys. I guess as I'm thinking about the cancellation issues around the two for the new builds, Matt or I can't remember who exactly quoted the number but you talked about cancellation costs or charges. Are we assuming that any money spent to date is completely lost or there is all soft cost or there is some hard cost with some salvage value there?
Mark Keller - Executive Vice President, Business Development
No, that's kind of a worst case scenario as the number we quote. We do think we'll be able to salvage some of that but we just haven't been down into the detail yet?
Dan Pickering - Tudor Pickering Holt
Right. And I guess you have extended the cancellation option for EXL Rig, when we look at them the near term discussion and I think Matt has said in second quarter you are going to make that discussion I guess. What does it take to move ahead? You are not implying that the market is getting better before the end of the year. Would need to see a market uptick, would you need to see customer interest, I mean.
W. Ralls
Yeah. Dan first of all I appreciate question. Let me clarify something that I said that we need to make that decision by the third quarter.
Dan Pickering - Tudor Pickering Holt
Okay thank you.
W. Ralls
Fairly early in the third quarter for the 240C and not, we don't have to make a decision till September for the EXL.
Dan Pickering - Tudor Pickering Holt
Okay.
W. Ralls
And both of those projects are very much alive, I mean we have not made a decision and so we're continuing to look at, whether or not we can feel comfortable with liquidity position we've got and the market conditions are less of the factors, obviously because each weeks we start, at least our construction will be delivered till early 2011. So there is, we're really not so much facing it on what we see in the spot market for jack-ups, but there is customers interest particularly in the workforce that's a very robust design very capable rig with the very strong drilling packages and so we're just considering a number of different variables and as long as we don't have to make the decision we are going to continue to sit here and see what other issues develop, we'll make that call probably mid-year on 240.
Dan Pickering - Tudor Pickering Holt
And. When you think about issues like liquidity et cetera, I mean your balance sheet is obviously very strong and so it is really a function just how much inventory of rigs you want you have over the next three to four rigs that's the driver here?
W. Ralls
No. We didn't say so Dan. It's a, I mean we'd like to have 240C. When we get through building therefore, going forward, I am sure we're still at few rigs and we had seven years to go. So, I mean we like added earnings power and they are very capable, highly marketable rigs.
So it's truly more a function of how long do we think this downturn could last and how long do we think very tight credit markets could last as you say, we've got certainly have ample room for additional leverage but we just not willing to take any chances on getting caught along for attractive downturn in our liquidity. So those are kind of the things that we're watching. We're I guess I'd have to say we're sort of feeling better about everything, but we still haven't made the decision.
Dan Pickering - Tudor Pickering Holt
Okay. And last question from me is could you -- you talked about in prior conference calls the issues around stacking rigs and then my take away then was you really didn't have any interest in stacking rigs. The markets maybe a little softer since then. Can you just review your kind of stacking versus pricing process for us?
W. Ralls
Well, let me I am sorry to do this slide in one comment. But just to slightly rephrase what I think I've said was that I was thinking, we probably wouldn't have look to at quality of our overhead, not that we didn't like to and although, no one likes that to be shared. But we're just thinking that we've got a better chance to keeping our rigs working than most contractors do and but if the need arises, we definitely will do it. Now I'll turn it over to David for his comments. David Russell.
David Russell
Yeah, absolutely thank you. We do have a plan (ph) to stack our rigs. But we look at them on a case-by-case basis. And as Matt have said, we've a premium fleet and we have the best rig personnel in the industry. So we hope not to have to do any more in stacking or cold stacking.
Dan Pickering - Tudor Pickering Holt
Okay, thank you guys. I appreciate the clarification.
W. Ralls
Thanks Dan.
Operator
Our next question comes from Brian Uhlmer with Pritchard Capital.
Brian Uhlmer - Pritchard Capital
Good morning gentleman.
W. Ralls
Good morning.
Brian Uhlmer - Pritchard Capital
I was hoping that, as you stated, it looks like -- have been mostly arrears (ph) on margin. I was hoping if you could pinpoint a little bit better on where you're exceeded end margins for general margins far exceeded my estimates and I was wondering if its region-by-region or just across the board, cost cutting or some, I guess a little more details about whether or not these margins can keep this level for the rest of year.
William Wells
Well it was pretty much across the board, Brian. I mean, I don't think it's any one particular region. It's mostly in the labor area, we've been focusing very heavily on. And as far as go forward, I mean we think we give you guidance on the cost, we think we could come in there. We're really not prepared to give you any guidance on the revenue line, on the top line. I just really don't know what unitization day rates are going to be.
Brian Uhlmer - Pritchard Capital
Right.
William Wells
Guidance apart from what's in the 8-K Brian, about contract backlog.
Brian Uhlmer - Pritchard Capital
Right, right. Okay. Specifically, I mean where you can't annex your hands or were these I mean, I'm just trying to get a hand on where the cuts came from or other services that you guys had a lower cost and a little pressure on them as well?
W. Ralls
Well. As Bill had mentioned, it was the across the board. We did have, we had a lot of trainees across our fleet and we did have additional personnel as we mobilized our fleet internationally. So, you've seen our head count come down.
Mark Keller - Executive Vice President, Business Development
But we've been able to use more local nationals in TCMs in our foreign markets. And we regrettably have cold stacked or stacked a number of land rigs. So we've been laying off hands in that side of it too.
Brian Uhlmer - Pritchard Capital
Right.
Mark Keller - Executive Vice President, Business Development
Had about an 8% personnel of reduction across the board. But mostly on the land rig side.
Brian Uhlmer - Pritchard Capital
Okay. Fair enough. That's all I was worried about. Thank guys.
Operator
(Operator Instructions). Your next question comes from Colin Gerry with Raymond James.
Collin Gerry - Raymond James
Hey good morning.
W. Ralls
Hi Collin.
Collin Gerry - Raymond James
Congrats on the quarter. I want to horn in a little bit more on the margin question. Specifically as it relates to what turnover, help me understand that the 20% margin guidance. If I look back to last three or four years, certainly in s more bullish scenario, we're in the mid-teens to low -- mid-high teen range. How in a declining environment do we get to 20% margins is it labor reductions, mix, I guess just maybe give us little color there?
William Wells
Well. I'll try to, Collin. I mean, as we were drawing the business, I mean lot of the growth was coming in areas specially in our drilling products segment, areas that were new products and we were probably were able to achieve as high margin in those areas as in our base business for example, and there is been a definite focus on cost reduction, and it pretty much comes down to sales mix in the first quarter. I mean the after market was a much higher percent of our overall revenue base and that after-market generally has margins in the high forties, low fifties I going gross basis. We think that trend will hold going forward.
Collin Gerry - Raymond James
Okay. And then kind of a rehash a question on the manufacturing or the capital equipment side with OTC in terms seems maybe a little relevant, Chinese manufacturing, the presence at OTC remains still very prominent, talk to us about their market acceptance, are they putting more mud pumps into the market and how have they progressed and kind of the competitive rate you're seeing there in to the just next two five years?
William Wells
Well. We're currently not buying any products from China, I can say that -- I'll just add generally, I will spend time doing TC (ph) and spent time working on the industry, I think if anything rolled buying Chinese products, crew or not and what you want, there have been some serious incidents that you likely know about. And I think generally it's I think the presence is where you see, but I think the buying seems cooler.
As Dan said, in the past cycle they got off to a bad start with a lot NOCs around the world. And just to reiterate what he say in that, I think that has caused the buying the slowdown somewhat. And also make a tentative outlook and rigs that have this component.
Collin Gerry - Raymond James
Right. Okay. Well, I appreciate that. I was just thought of dwelling and given the income in term. I'll turn it back over. Thanks.
Collin Gerry - Raymond James
Thanks.
Operator
At this time we have no further questions. Ms. McLeod, I'll turn the call back over to you.
Suzanne McLeod
Alright. Well, thank you everyone for joining us for our first quarter call. We will hold our next quarterly call at the beginning of August and we look forward to speaking with you again. Thank you.
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