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Rowan Companies (NYSE:RDC)

Q1 2013 Earnings Call

May 01, 2013 11:00 am ET

Executives

Suzanne M. Spera - Director of Investor Relations

W. Matt Ralls - Executive Chairman, Chief Executive Officer and Chairman of Executive Committee

Thomas P. Burke - President and Chief Operating Officer

Mark A. Keller - Executive Vice President of Business Development

J. Kevin Bartol - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Robin E. Shoemaker - Citigroup Inc, Research Division

Gregory Lewis - Crédit Suisse AG, Research Division

Andrea Sharkey - Gabelli & Company, Inc.

Waqar Syed - Goldman Sachs Group Inc., Research Division

David Wilson - Howard Weil Incorporated, Research Division

David C. Smith - Johnson Rice & Company, L.L.C., Research Division

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Edward Muztafago - Societe Generale Cross Asset Research

Operator

Greetings, and welcome to the Rowan Companies First Quarter 2013 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Suzanne Spera, Director of Investor Relations for Rowan Companies. Thank you, Suzanne. You may now begin.

Suzanne M. Spera

Thanks Kevin and good morning. I seem to hear an echo, hopefully I sound okay to everyone. Welcome to Rowan's first quarter 2013 earnings conference call.

Joining me on the call this morning are Matt Ralls, Chief Executive Officer; Tom Burke, President and Chief Operating Officer; Mark Keller, Executive Vice President, Business Development; and Kevin Bartol, Executive Vice President, Chief Financial Officer, who will have prepared comments.

Before Matt begins his remarks, I'd like to remind you that during the course of this conference call, forward-looking statements may be made within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements about the change in corporate structure, as well as statements as to the expectations, beliefs and future expected financial performance of the company that are based on current expectations and are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected by the company. Other relevant factors have been and will be disclosed in the company's filings with the SEC.

With that, I'll turn the call over to Matt.

W. Matt Ralls

Thanks, Suzanne, and good morning, everyone. I'll make some brief comments before turning the call over to others for more detailed comments.

Before I do that, I want to acknowledge the recent passing of Scooter Yeargain, who played a major role in Rowan management from the 1950s to the 1990s, retiring as Executive Vice President in 1991 and serving as a Rowan director from 1975 to 1999. Scooter was a major influence in this company and touched a lot of lives. He will be remembered with great respect and affection.

I also want to note that this month marks the 90th anniversary of the company's founding, quite a rare accomplishment in an industry with cyclical swings experienced by offshore drillers over the past several decades.

Turning to our results, we had a good first quarter of 2013, reporting earnings of $0.55 a share compared to consensus expectations of $0.53.

We had solid operational performance during the quarter, with operational downtime at the lowest levels we've seen in the last few years. Cost of operations were in line with previous guidance, excluding the impact of reimbursables, that we will be essentially reaffirming prior guidance for the full year adjusted for the deferral of the Gorilla VII's shipyard visit until next year. While we will now book cost for that rig that otherwise would've been deferred, we'll also realize higher revenues in 2013 and, accordingly, improved earnings and margins.

Mark will give you more detail in a moment, so I'll just say that we see continued strengthening in the jack-up markets, especially for high-spec jack-ups. We've also seen some attractive fixtures recently in the ultra-deepwater market and are having encouraging conversations with several operators regarding contracting opportunities for our 3 uncontracted drillships. We remain optimistic about getting commitments for those vessels in the coming months.

I'll now turn it over to Tom for a brief operational update.

Thomas P. Burke

Thanks, Matt, and good morning. Overall, we delivered a good quarter with the results in line with our operating plan. We had a strong safety performance, lower than projected operational downtime and out of service date, about as planned.

Highlights in the first quarter included the following: In late February, the J.P. Bussell returned to service in Malaysia. On March 22, senior management and our Board of Directors attended the launching of our first ultra-deepwater drillship, the Rowan Renaissance, in Ulsan, South Korea. The rig is scheduled for delivery at the end of this year, going on contracts in the first quarter of next year with Repsol in West Africa.

Last year -- last week, the Gilbert Rowe was expected by Aramco and is currently on the way. Aramco was very complementary of the Rowan project management performance. In the first quarter of 2013, our operational downtime was 1.4%. We used the term operational downtime to mean time when our rigs are on contract and available to earn day rates but were off rate due to operational issues, such as equipment failure. We've been very focused over the last year to more effectively manage our operational downtime and are pleased with this quarter's performance.

We used the term out-of-service to mean shipyard transit and inspection days where our rigs were off contract or we did not recognize revenue, as a drilling operation has not commenced. We will continue to distinguish between out-of-service time and operational downtime to enable you to differentiate between downtime associated with operational problems, as opposed to that arising from marketing-related decisions.

In the first quarter, our out-of-service days were generally as projected. Kevin will provide details on the numbers, but we'd continue to focus on maximizing shareholder value through detailed operations, planning and project management to manage our service days to ensure reliability and superior performance of Rowan's fleet.

Looking forward into the remainder of 2013, we expect out-of-service days to be in line with previous guidance, although days may shift from one project to another. We are pleased that through working with Apache, we will not take the Gorilla VII out of service, until the end of the year, in order to upgrade the drilling equipment on the rig.

The Gorilla VI will come into shipyard at the end of May for similar drilling equipment upgrade in preparation for Norwegian operation.

The Gorilla II was working for Petronas in Southeast Asia, but Petronas has informed us, they will not exercise their option. Accordingly, the rig is now scheduled for 120 out-of-service days in the shipyard for spud can inspections and general maintenance, as well as an upgrade of the accommodation and BOP handling system to enhance the rig's marketability.

As Matt mentioned, this month, we celebrate Rowan's 90th anniversary. There have been many important milestones throughout the history of the company, and we're on the brink of another, with our entry into the deepwater market.

To that end, our deepwater preparation continues as planned. We are moving into starting ramp up, in particular, for the Rowan Renaissance. This is on target so far, but we are not underestimating the challenge ahead of us.

We continue to closely monitor the delivery of our drilling equipment supplies to avoid delay in the scheduled delivery of our drillships.

I'll now turn the call over to Mark, who will give a marketing update and discuss the drillship market in more depth.

Mark A. Keller

Thanks, Tom, and good morning, everyone. We maintained our optimistic outlook for the remainder of 2013 as the jack-up market remains strong and we entered the 2014 contracting window for our ultra-deepwater drillships. This morning, I will recap our Deepwater activities before moving on to the jack-up market and conclude with a regional overview of our fleet.

Our sites are now set on contracting the remaining 3 drillships. We are in a prime position to take advantage of the advertising ultra-deepwater drillship market. After detailed analysis of the competing units available in the 2014 contracting window, we project that there will be an excess capacity of only 2 rigs. We have identified 37 floaters available in 2014 that are capable of operating at water depths of 8,500 feet or greater. After accounting for the anticipated declared options and expected awards, we believe there are 18 competitive rigs vying for 2014 prospects. A tight supply scenario, coupled with a robust ultra-deepwater day rate environment provides us a great opportunity for a favorable contract.

Focusing on our eminent prospects, Rowan is actively pursuing 19 programs within the 2014 contracting window, which encompass the period from Q4 2013 to Q1 2015 for the purpose of this analysis. Of the 19, we are in detailed discussions with 4 operators who are interested in the Resolute, Reliance or Relentless. On a go-forward basis, we have identified several upcoming prospects that would require a ship of our caliber, particularly in the U.S. Gulf of Mexico, where there has been a surge in a number of programs requiring drillships with a 250-ton capability delivered with dual 15K BOPs.

We expect that the domestic ultra-deepwater market to continue to bifurcate in this direction, driven by downtime resulting from a more strenuous regulatory environment and higher technical requirements to drill more complex plays in the Gulf. We look forward to updating you on contract awards for our remaining 3 ultra-deepwater drillships.

Now to the worldwide jack-up market. According to IHS Petrodata, there are currently 492 jack-ups worldwide, demand is 422 rigs, with total utilization of 86%, a level that we have not seen since February of 2009.

International tender activity is increasing, considering submitted tenders and inquiries combined with bids in-house and anticipated demand. We currently see opportunities for Rowan jack-ups for approximately 38 projects. Another signal of the strengthening jack-up market is a significant uptick in new build orders. In 2013, an additional 27 units have been announced, bringing the total to 102 new build jack-ups scheduled for delivery in the coming years. These new units will help to replace an aging fleet, given that 290 jack-ups or 59% of the total fleet is currently 30 years or older.

I would now like to briefly discuss the regions of the world where we currently operate our jack-up fleet. The Gilbert Rowe has commenced operations with Saudi Aramco on a 3-year contract in the Middle East. The Gilbert Rowe joins 8 other Rowan jack-ups contracted to Saudi Aramco. Rowan has more jack-ups operating for Saudi Aramco than any other contractor, and we are proud of our long-standing partnership with the world's largest oil company. As previously announced, the Rowan California will be in the shipyards until later this summer, preparing for operations with Maersk Oil, Qatar.

We have 6 outstanding tenders in the region, including 3 from Saudi Aramco. The Middle East is currently 1 of the 3 regions driving jack-up demand worldwide.

Now turning to the North Sea. We believe the supply depths of approximately 4 rigs exist in the region and this trend may continue into 2014, especially for high-spec jack-ups. 46% of our total contract backlog is in the North Sea and all 6 of Rowan's jack-ups are currently contracted. We appreciate the strong relationships we have developed with several key operators in the region and we'll update you on any contract extensions in the near future.

In Southeast Asia, all 4 of our -- of Rowan's jack-ups are fully utilized. Recent contract fixtures, support momentum of the HPHT focus in the region. Rowan is in discussions with multiple operators interested in the Gorilla II for upcoming programs, and we believe the rig will be contracted on a term basis prior to its release in the shipyards.

And finally, the U.S. Gulf of Mexico. Despite a 64% total utilization, the region has a 93% market utilization when out-of-service, and cold-stacked units are excluded from the overall count. There are only 12 competitive, 300-footer grader cantilevers left in the U.S. Gulf of Mexico and 4 of them are Rowan rigs. All 5 of our active jack-ups who are currently contracted and the EXL III will return to location with ENI later this week.

In conclusion, 2013 will be a historic year for Rowan. We're celebrating our past 90 years of operational excellence and looking forward to the next chapter of our story, as we enter the ultra-deepwater market.

Thank you for your time, and I'll now turn the call over to Kevin.

J. Kevin Bartol

Thank you, Mark, and good morning, everyone. Our first quarter revenues were $394 million, up by 18% over last year due to higher average day rates, incremental activity from fleet additions and higher utilization for existing rigs between periods. Our collective shipyard inspection and transit time or out-of-service time was approximately 9% of our available rig days, including our 3 cold-stacked rigs during the first quarter, which was slightly lower than our previous guidance primarily due to the timing of activities for certain rigs. The out of service time was down from last year's level as fleet repositioning declined and certain rigs returned to service. Our operational downtime, which is unbillable time when a rig is operating, was only 1.1% of available rig days and 1.4% of in-service days during the first quarter.

We currently expect our out-of-service time in 2013 to be approximately 10% of our available rig days including our 3 cold-stacked rigs, which is in line with our previous guidance. However, the mix of rigs should result in a slightly increased operating margin. We also expect out-of-service time to be approximately 9% in the second quarter of 2013. It is important to know that there are times when we were compensated for certain out of service period. However, this revenue is recognized over the contract period once a rig commences drilling operations.

While our backlog of drilling commitments remains high at approximately $3.4 billion. We estimate that 27% of our contract backlog will be realized as revenue during 2013, 30% -- 31% will be realized in 2014, 22% in 2015 and the balance in 2016 and beyond. Excluding the 3 cold-stacked rigs, we have 71% of our available rig days under contract in 2013, 45% under contract in 2014 and 20% under contract in 2015.

Our first quarter operating expenses of $210 million were slightly higher than our previous guidance as a result of higher-than-anticipated reimbursable expenses, which are fully offset by incremental revenues. Excluding these incremental reimbursable expenses, our first quarter operating expenses were at the low end of our previous guidance.

Operating expenses in the first quarter were 15% above last year's level, primarily due to the impact of certain rigs operating at higher cost locations. It is important to note that these rigs obtained day rates that more than offset the incremental cost. Additional rig activity from the Joe Douglas, which was delivered in mid February of 2012, and certain rigs previously in the shipyard, also contributed to an increase in operating expenses year-over-year.

Looking at the second quarter, we estimate operating expenses will be in the range of $213 million to $215 million or slightly higher than the first quarter, as the Gilbert Rowe returns to work for Saudi Aramco following the shipyard period.

Our full year 2013 operating expenses are expected to be in the range of $805 million to $815 million or slightly higher than our previous guidance, primarily due to the deferral of the Gorilla VII shipyard work into 2014. These additional expenses for the Gorilla VII will be more than fully offset by additional revenues. We continue to estimate worldwide labor rate increases to be approximately 6% higher in 2013 as compared to 2012. Additionally, we continue to expect our average gross margin, as a percentage of revenue, to slightly improve in 2013 over the 2012 level.

Our first quarter depreciation expense pulled $65 million, which is in line with our previous guidance and last quarter and up by 10% over last year, primarily due to fleet additions between periods. We continue to estimate 2013 depreciation expense will be in the range of $270 million to $275 million, including approximately $66 million to $67 million in the second quarter, which is in line with our previous guidance.

Our first quarter SG&A expense totaled $29 million, which was in line with our previous guidance and up by 28% over last year, primarily due to professional fees related to the company's growth, the impact of a new retirement policy on the vesting period for certain share-based compensation and fair market adjustments to share-based awards accounted for as liabilities.

We continue to estimate 2013 SG&A expenses will be in the range of $115 million to $117 million, which is in line with our previous guidance. Our second quarter 2013 SG&A expenses are expected to be in the range of $30 million to $31 million.

Interest expense net of interest capitalized was approximately $19 million during the first quarter, which is in line with our previous guidance. We continue to estimate 2013 net interest expense to be approximately $65 million to $67 million, including approximately $18 million in the second quarter of 2013.

Our first quarter and expected 2013 full year effective tax rate is approximately 5%, which is at the midpoint of our previous guidance. Property and equipment additions totaled $95 million in the first quarter, which is significantly lower than our previous guidance, primarily due to timing of certain equipment deliveries in rig projects. We currently estimate our remaining 2013 capital expenditures to be approximately $1.3 billion, which is in line with our previous guidance, including $828 million for our 4 drillships and deepwater fleet support cost, $228 million for life enhancement projects and existing fleet maintenance, $183 million for partially reimbursed jack-up fleet contracts for modifications; and $47 million for equipment spares, drill pipe and improvements to our shore base.

We estimate approximately $306 million of capital expenditures in the second quarter of 2013, including $163 million for our 4 drillships and deepwater fleet support cost, $79 million for life enhancement projects and existing fleet maintenance, $44 million for partially reimbursed jack-up fleet contractual modifications and $20 million for equipment spares, drillpipe and improvements to our shore base.

At March 31, we have approximately $2.2 billion remaining capital expenditures under our drillship new build program. With, as previously mentioned, $828 million required for 2013, $1 billion in 2014 and $436 million in 2015. Our drillship commitments will be funded through available cash, cash flow from operations, amounts available under our revolving credit facility, if required and potential future finance.

That concludes our prepared remarks. With Kevin's assistance, we will now open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from Byron Pope from Tudor, Pickering, Holt.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

I wanted to ask about the Southeast Asia jack-up market outlook. You only talked in the past about that region transitioning toward a high pressure, high temperature type of work environment in certain countries like Malaysia. And so I'm just -- in the context of the Gorilla II on the other side of its shipyard stay, it sounds like you're confident that, that rig has a contract before it comes off -- it comes out of the yard. So I'm just wondering if the upgrades that are going to be done to that rig will enable to take on some of that HPHT type work?

W. Matt Ralls

Byron, that market, as you said, does remain very strong. We are seeing this more demand for HPHT rigs in that region. However, the upgrades that we're going to do to the Gorilla II will not take it to a high-spec rig, but it will make it a lot more marketable in the region with increased POB and POB handling systems that will be put on the rig. We are seeing a lot of demand, given the water DEF capability of the Gorilla II, and we feel very confident that we'll have a contract before it does leave the shipyard.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

And then just the second question. I think you all have an option on that fifth drillship. I just wanted to get your thinking with regard to that, I'm not sure if that option has expired, but just kind of wanted to get your thoughts on that in the context of you're currently bidding your existing on contracted drillships.

Thomas P. Burke

Byron, I think on that option, we do have an option and it expires later on this year. However, at this point, we wouldn't be exercising that option until we contract all of our remaining drillships and perhaps not even then, depending on how we feel about the markets.

W. Matt Ralls

Yes, Byron, I'll just add to that, that we are, as we discussed with a lot of investors, receiving inquiries from different companies about the possibility of building against a contract, and we think that, that may be -- we want to sort of run those opportunities to ground before we did anything more and just a continuation of the spec out of the new building plant program that we have. So it's a lower priority for us.

Operator

Our next question is coming from Robin Shoemaker from Citi.

Robin E. Shoemaker - Citigroup Inc, Research Division

I wanted to ask about this very strong surge of jack-up orders we've seen and get your perspective on that. Since the beginning of this year, something like 29 jack-ups ordered, and we can see that some of that is coming from countries like Mexico, where there are some local contractors who are going to be adding, building their fleets and then some companies that you hardly recognize. But are you seeing some of these rigs under construction today being offered to companies like yourself for purchase? Or do you think that is a potential for you, as you have done in the past, to find rigs currently under construction that you've not actually ordered?

W. Matt Ralls

Robin, I would say that we watch that market continuously. We have -- Kevin in the past has focused all of his attention in his new role. We've created another prudent test to watch that sort of opportunity, and we stay in touch with those smaller contractors or startup contractors who were building on a speculative basis. So that is a way to potentially add capacity, really in the middle of our fairway, and we showed that the [indiscernible] rigs. And in retrospect, we're extremely happy that we made that, that we were successful in concluding that transaction. But I would say that overall, the building program that we see is very consistent with the message that we've been putting out to investors for the last year, so that -- what we're seeing in terms of this new construction program is really a replacement program for older rigs that are going to have to come out in the world fleet that just don't have the equipment specification to compete for many of the new tenders and really the bulk of the new activity, the tender activity that we're seeing in jack-up markets. So I think that we'll probably -- the new capacity will help accelerate, in my view, retirements from the older fleet. But to answer the last part of your question, simply, we will watch that, and that would be a great way to add to what -- to the side of our business that we still feel very strongly about, and that's high-spec jack-ups.

Robin E. Shoemaker - Citigroup Inc, Research Division

Right, okay. Just on a different topic then, with a lot of offshore driller companies have -- are now paying some fairly generous dividends and are moving further in that direction. So just given the projections we see for Rowan in 2014, but especially 2015, I just wondered if the dividend topic is coming up at your board meeting, as I assume it is, and if there's either a near term or medium-term prospect to that?

W. Matt Ralls

There is. We've talked about this in past quarters. We've been a little bit more, said a little less about it recently, because what we said in the past, which is still the case that we would like to reinstate the dividend that we had before. It was a fairly modest dividend but had a level where we believe we can grow it over time. We do think that that's an attractive way to return cash to shareholders, and it makes the stock more attractive, particularly in this environment. And the issue for us is just that we, with our drillship new building program, we need to get these -- get commitments on these other 3 drillships, not necessarily on all 3, to reinstate that program, but we need to be a bit further along than we are the moment. So that's definitely on our radars discussed at every board meeting, and we feel strongly that we'll end up going that route. Having said that, some of the contractors have very high yields, and I don't see us getting to that level anytime soon, I'm not even sure I'd fully endorse that strategy. But I mean it certainly has worked for some of those folks very attractively in their share price. But I think that will be down the road for us to consider that.

Operator

Our next question is coming from Gregory Lewis from Crédit Suisse.

Gregory Lewis - Crédit Suisse AG, Research Division

Mark, in your prepared remarks, when you talked about the outlook for the ultra-deepwater market, you kind of mentioned that there were, I guess, 18 competitive rigs looking for opportunities in next year, and then you sort of followed that with, you see imminent programs of about 19, of about 19 programs? So I mean, I guess, as we think about that, given where rates are now in the deepwater, I mean, people have talked about we've kind of hit the ceiling here. I mean when you sort of run the numbers, do you think that there's continued upside or upward pricing pressure in deepwater rates, just given what looks to be a real tight market over the next, call it, 12 to 16 months?

J. Kevin Bartol

I think, right now, Greg, I mean, the market still is in -- depending on what area in the world you're operating in, but I still think we're in a high-5s, low-6 price range. As you start to see the U.S. Gulf of Mexico continue to develop and you move into development, more development drilling and you see that as rigs roll off contract, you're going to see more demand, we believe, for rigs that have 1,250-ton capability and with a dual-stack capabilities. So I think that's when you're going to start to see more pressure on rates for those higher-spec rigs. Of the 18 rigs, from what we see today, what actually -- rigs of our caliber, they're probably 10. The 18 is 8,500-foot rigs or greater. That does include semi's. So we just look at the whole market, Greg, just to make sure some operators will take [indiscernible]. From what we're seeing right now in the worldwide market, as you've seen some announcements and read in the last couple of weeks, there is still a major shift toward higher-spec rigs.

Operator

[Operator Instructions] Our next question is coming from Andrea Sharkey from Gabelli and Company.

Andrea Sharkey - Gabelli & Company, Inc.

I'm curious if you could maybe -- you've done really well on your shipyard trends and inspection time, and it's coming down and you expect 10% for 2013. I know it's sort of early, but as you look at 2014, what are your thoughts -- do you know of certain projects or modifications that would have to happen? Just give us a sense of is that sort of sustainable into '14 and beyond? Or are there things coming down the road that would increase it or decrease it?

Thomas P. Burke

Andrea, I would refer you to our fleet status report, where we are now projecting through the first quarter of 2014 out-of-service time. I think we also had a comment in there about the Gorilla III that it will have some out-of-service time. So as we know that we -- or start the plan for out-of-service time, we will announce it and give plenty of notice to investors. I will say, in general, if you look at our -- the fleet of our older rigs, all of our 116-Cs now have been to the shipyard -- once the California comes out and goes back to work. All the 116-Cs that we are marketing for work have been through the shipyard process. When the Gorilla VI and the Gorilla VII -- those are relatively newer rigs. Once we've renewed the -- as we have planned the drilling package, those, really, we don't forecast anything major. Once the Gorilla III goes through its upgrade, we don't forecast anything major there. The Gorilla II, we're doing some work on that. So beyond maybe the Gorilla V with a similar drilling equipment package, we don't -- there are not any major projects. So the major shipyard upgrade projects should be over now, should be -- continue to ramp down. I would say that the transit time, that all depends on where the markets development and what the best IRR projects we can get. So again, when we transit a rig, we are almost always paid a mode fee, which compensates us for day rate during that period, but we're not able to book that as revenue, and it shows up as out-of-service time even though we're compensated. So that is much harder to predict and can impact current year that can have an earnings impact in the period, but not a cash flow impact.

W. Matt Ralls

And just -- I would just add to that, Andrea, that, I think, generally, we're very comfortable that we can sustain this level. And as Kevin said, we expect over time that it will drift down. What makes it lumpy is when shipyard projects move around in different periods for various reasons, customer reasons or equipment availability or when we make a decision to move rigs between markets, but broadly speaking, we expect it to continue to trend down.

Andrea Sharkey - Gabelli & Company, Inc.

Okay, great. That's really helpful. And then just the last one for me on the -- I think there's 2 rigs that are rolling off contract in the Gulf of Mexico later this year. What are your thoughts on likelihood of them staying in the Gulf of Mexico and being re-contracted or potentially moving internationally?

W. Matt Ralls

Actually, Andrea, we have 4 rigs that will roll off contract this year in the U.S. Gulf. The Rowan Louisiana is 350-slot rig, we anticipate it staying in the U.S. Gulf of Mexico. We're lining up some work for it. It also has a potential to go back to work for McMoRan when they finally close their deal. The Gorilla IV, we believe, right now, it will stay in the U.S. Gulf. It's the only rig of its type in the U.S. Gulf with the water depth capability that it has, and we're in discussions with the operators that currently have it -- to extend that contract now. The Joe Douglas is a high-spec rig, and we have that contracted now that will go into third quarter, and we anticipate in our meetings with McMoRan and Plaines when they get everything finalized or closed in their deal that high potential of that rig going to work for them. Again, in the EXL III, when it completes operations with ENI, is scheduled to go back to Davy Jones. It's the only 20,000 rig in the world. So they will keep that rig both during completion operations and drilling other prospects, Andrea, that are expiring in the U.S. Gulf that they have.

Operator

Our next question is coming from Waqar Syed from Goldman Sachs.

Waqar Syed - Goldman Sachs Group Inc., Research Division

My question relates to the Renaissance. The rig is going to be delivered by the end of the year. At what point would you start to hire or would you hire the crew for that rig?

Thomas P. Burke

We started at the end of last year. So the most senior people for that rig have already been hired, and we are -- we started at the end of last year. So the OEM and senior positions on the rig are already in place.

Waqar Syed - Goldman Sachs Group Inc., Research Division

So now, for the rest of the crew, the drillers and the rest abouts and all the other guys, when do you hire them? And then how would you train them, given that this is the first deepwater rig that you have? And then at what point do you start recognizing operating cost? I'm assuming some of the costs are going to be capitalized while the rig is under construction? And at what space do you start recognizing as operating cost in the profit and loss table?

Thomas P. Burke

I'll take the first part of that and then Kevin, you can take the second part of that. So on the -- as far as when do we start hiring the rest of them, well, we have a very detailed ramp-up schedule that started the end of last year and carries through all the way through this year. And so as you can imagine, when we move out of seniority, they generally get higher lead times, but we have hired, and we continue to hire. The ramp-up of the hiring for the Renaissance does actually accelerate in the next several months. But it's on track right now, and we -- I couldn't sort of articulate to you when we would hire drillers versus AGs, et cetera but we've got a detailed plan. And as far as having to train them, our operations group is extremely experienced in deepwater operations. The team that we have has operated deepwater rigs for many years at other companies. So as far as putting in place our operating procedures, our maintenance procedures, we've started the work on those last year and we basically are -- as we bring people on, we train them according to our procedures, and bring them up to how we want to operate on that rig. So although Rowan hasn't been in the deepwater market, this is obviously our entry. The group that we have is extremely experienced in deepwater and has activated and built multiple rigs. So we have a detailed plan. Kevin?

J. Kevin Bartol

In terms of the expense recognition, what will happen is as we build up the crews and they begin to work from the ship during sea trials and mobilization and all that, those costs, we capitalize, and we'll begin to expense those in the first quarter of 2014 when the rig goes to work. Now having said that, many of these people will come from our jack-ups. And so when the people leave the jack-ups, they're experienced. And that's one way that we train people, when we take an experienced people from the jack-ups. Those people on the jack-ups will have to be replaced, and so in that period, when we're preparing to transfer people off the jack-ups, we will have people shadowing them to be able to take over their position. So we'll have some added expenses on the jack-ups that will get expensed that we planned into our budgets already in the guidance that we've given.

Waqar Syed - Goldman Sachs Group Inc., Research Division

Okay. And then as I look at your operating cost guidance for the second quarter, what proportion of the cost or what is the dollar amount of the cost which is reimbursable?

J. Kevin Bartol

Let's see, we're projecting that re-billables for the second quarter -- about $4 million is our budget. Again, we were over that this quarter, which is why OpEx was above guidance, but it's a pass-through, but I'll just -- we'll let you know.

Waqar Syed - Goldman Sachs Group Inc., Research Division

Now as I look into your -- yes?

J. Kevin Bartol

$4 million.

Waqar Syed - Goldman Sachs Group Inc., Research Division

Okay. Now as I look at your OpEx for the full year, 8.25 to 8.15 guidance, and given the first 2 quarters, you'll have more than half the cost. So second, you're assuming second half costs are going to come down and that's primarily because you won't have reimbursables, is that right?

J. Kevin Bartol

No. It relates to the timing of when rigs are in the shipyard. We'll have the Gorilla VI, as Tom mentioned, in the shipyard. And then when that rig is in the shipyard, those costs will be capitalized, and we currently budget to have several of the Tarzans in the shipyard and those costs will be capitalized. And then for a small period, you'll have the Gorilla VII in the shipyard, and those cost would be capitalized.

Operator

Our next question is coming from Dave Wilson from Howard Weil.

David Wilson - Howard Weil Incorporated, Research Division

We're getting close to being 1 year out on the delivery, the resolute, and historically, it seems like the industry has contracted its ultra-deepwater fleet about a year out, leaving some windows for equipment modifications and staffing, et cetera. More recently, though, it feels like we've reached that 1-year window a time or 2 within the industry. I just wanted to know how you guys think about that and how much before the rig gets delivered does the contract need to be signed overall in order to avoid any delays in getting that rig started up and getting on contract?

W. Matt Ralls

Well, Dave, I'll answer the question about the window. As I mentioned in my prepared remarks, we're tracking 19 prospects within that window. We were in discussions with 4 operators currently. You've heard us say before, we remain very optimistic and confident that we will contract the rigs. We're in our prime contracting window, given the fixtures. And you've seen in the last couple of weeks, 4 rigs that were contracted. We feel like the market still remains very strong, and we feel like we'll be in a position, hopefully, to announce some contracts very soon. And as far as how far out to contract the rigs, our operations team are ramping up all the time. So as far as delays, I don't think that's going to make that much difference. Certainly, you want to contract out as far as you can because of inspections and things like that, that are required by the operator and have them as part of your group in the shipyard going through all the inspection criteria before you commence mobilization to location is always very beneficial.

Thomas P. Burke

And clearly, the sooner we understand if the customer wants a major change for the rig, the better. I would say that, that would be unlikely in what -- with the discussions we're having with our customers. More, it would be adding some of the customer-specific equipment to the rig, and as you know, we have plenty of time to do that.

Operator

Our next question is coming from David Smith with Johnson Rice.

David C. Smith - Johnson Rice & Company, L.L.C., Research Division

Just a quick follow-up on Dave's question. First, for modeling purposes, what range of time should we think about between the drillship delivery dates and the day they go on day rate? It looks like 2 to maybe 2.5 months for the Renaissance? I wanted to get your thoughts on the follow-on delivery.

Thomas P. Burke

David, I would say depending on the areas of operation. I would use probably 60 days to West Africa and then another 30 days from that to the U.S. Gulf of Mexico. So probably 90 days, U.S. Gulf of Mexico.

W. Matt Ralls

Yes, then some acceptance [indiscernible].

Thomas P. Burke

Right.

W. Matt Ralls

So I would say 90 days probably is a good rule of thumb.

David C. Smith - Johnson Rice & Company, L.L.C., Research Division

Okay. And the follow-up question is can you remind us the ballpark cost range for the second BOP stack and maybe some color around how that equipment gets reflected in the day rate?

W. Matt Ralls

Yes, it's -- you're sort of testing our memories around the table here, but I'm going to say the overall stack is about 40 million incremental, and it -- we would expect that we would get more attractive contracts as a result of this. It's a little hard to -- it's not necessarily transparent all the time because some people may get high day rates on a single stack rigs because they've agreed to retrofit with dual stacks, which will be more expensive and less efficient. What I would say is that it also changes over time with what the customers expect from a 6-generation rig. And when we first contracted to build our rigs, I think there were 9 of them that had dual stacks. There are now 25 under construction with dual stacks. It's rapidly becoming an industry standard, and so you'll see the rigs that get the kind of first priority for getting a contract and market-leading day rates will have that equipment.

Operator

[Operator Instructions] Our next question is coming from Darren Gacicia from Guggenheim.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

You commented earlier about going with the option or going with potential contracted new build. Is that a function of maybe getting a little bit more tepid in your view on the market? Is it a faction of visibility in the market? Or is it a function of what people are offering on the contracted side being much better?

W. Matt Ralls

Yes, since I made the comment, I'll start out, and then Mark can follow on with anything he wants to say. But I would say, if anything, it shows the strength of the market when -- that operators, even in the face of the substantial new building programs that have been undertaken that they still have projects or specific needs where they're willing to go out and commit to somebody to build something for delivery a few years out in the future. So it actually shows the strength of the market. And what I was intending to say is that we just see -- we believe that with 4 rigs, we've got a nucleus that is efficient in terms of spreading our incremental cost over that sized fleet, and that we think that to take more look from our targeted opportunities, going forward, as opposed to just continuing a kind of a speculative new building program is our preferred approach. That doesn't mean that someone won't come along and say they need another one exactly like what we're looking for and we might pull the trigger on the basis of preliminary discussions there. But I think just for us to continue to build what we think the market is looking for when there's some very specific opportunities out there for what they're looking for, that's the preferred approach.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

And I mean, the return structure is kind of what you kind of planned to see or what you're seeing on spec versus what you're seeing on contract. Do you have to yield any economics? And to what extent do you think that, that yield -- to what economics do you have to yield to kind of -- to pay for the reduced risk, if you will?

W. Matt Ralls

No, we're not seeing that currently. That would not be our expectation.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Got it. And just one last one, you made comments about -- I think you had talked about being higher yield. I'm assuming you meant kind of higher payout, maybe disagreeing with that philosophy. Just a little bit more of a theoretical finance debate, but I'd love for you to kind of expand and sort of share how you would think about what your views are and expand on that comment, if you would.

W. Matt Ralls

Right, as far as the dividend?

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Yes.

W. Matt Ralls

Yes, what I was saying, I mean, there's some out there that are in the upper single digits in terms of yield on their share price, and I just think that it will be a while before we'd be in the position to even think along those lines in terms of the -- we have spent about $3 billion on our jack-up fleet. We're spending about $3 billion on our ultra deepwater fleet. So we've made significant capital commitments. And while we have a strong balance sheet, I think for us to make a commitment in that magnitude to basically take equity out of the company, going forward, is definitely down the road. It's not something that we're opposed to. It just doesn't fit our capital structure currently. So we're more likely to start with a smaller dividend and try to build it and try to show growth in it. So we believe investors would look at stable and growing dividend and capitalize that in the share price.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

And we could argue though that a higher yield but above NAV would be an accretive financing tool as well?

J. Kevin Bartol

A higher?

Darren Gacicia - Guggenheim Securities, LLC, Research Division

A high yield on your -- a higher-yielding equity that's trading at a premium to NAV, given your financing, it may actually be an accretive financing tool.

J. Kevin Bartol

You're assuming that the dividend would move the stock up, and then we could use the equity to sort of turn ourselves into some sort of an MLP-type structure. That -- I think that we don't know what the federal reserve is going to do and some -- a lot of things look real good when interest rates are 0. It won't look the same when interest rates are at normal levels. And so what we're trying to do is we have an investment-grade financial strategy, and we're committed to maintaining that. We don't want to jeopardize that for sort of a short-term financial engineering. And we're committed to grow the company, if we can -- if we believe strongly that we can invest at more than our cost of capital. And than to return capital when we have excess capital and we don't believe we can invest it to return in excess of our cost of capital. So it's a more traditional type of approach, but again, this is a cyclical bottled industry. And I think that what might work or be perceived possibly now financially can flip on you pretty fast. And in the last 5 years, we've already seen it happen about 3 times.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Yes, and I wasn't recommending this solely an MLP. I think -- I was thinking more on straight equity, but I appreciate your reply.

Operator

Our next question is coming from Ed Muztafago from Societe Generale.

Edward Muztafago - Societe Generale Cross Asset Research

I guess just wanted to get a little bit of your thought process on your deepwater program and the, I guess, operating and maintenance procedures inside the new build efficiency issues seems to be the norm as opposed to the exception when we look at this cycle or prior cycles. And I guess, what I'm wondering is what is Rowan doing differently to potentially mitigate those issues that have plagued, for better or worse, the majority of the industry?

Thomas P. Burke

Well, a couple of thoughts for you on that is just -- the team that we have, and it has built a similar design in the same shipyard. So I think as far as pulling a team together to build a certain rig design in a certain shipyard, the group that we have is experienced with this design and in the shipyard. And I can tell you, when I was in Korea just a few weeks ago, talking to the -- touring the vessels and talking to some of the people that are building it, the Rowan people that are working with HII, they made some real interesting comment like last time, we did it this way and it didn't work really well. We learned from the mistakes and we've done it this way, and it worked so much better, and this is ship one for Rowan. So we're having those kind of conversations, which is good. Secondly, as we're full shooting right down the middle of the fairway as far as our equipment selections, we haven't gone out with a particular -- we've gone with a very rapid full yard and it's a yard that numerous operators have said to us, "You're in the best yard." And also with a design, as far as what we've put on the rig, we're right in the middle of the road as far as reliable, proven technology. And so the technology that we have as far as drilling equipment, we have on other rigs inside Rowan. So we know about how the NAV drilling systems, the hybrid system works. We have it on several other rigs and you can see from the discussion today, we're putting it on more rigs with our Gorilla VI and Gorilla VII. So we're not obviously through the finish line yet. The rig hasn't been delivered, but we have spent a lot of time thinking internally, starting 2, 2.5 years ago about how to minimize risk on this new build program. And we are actively maintaining that, what internally we call our risk wedges to try to manage or to move those risks.

W. Matt Ralls

And let me just add slightly to that that this very experienced team that Tom has talked about has built this rig before and others and operated different kinds of rigs. And I think the efficiency issues that you're talking about that some of the other contractors have struggled with mostly are around the stack problems, which is exactly the reason that this experienced team we have, in their interview with clients before we ever decided what to build, came to the conclusion that we needed to go with the dual stack system. I mean, that is primarily the reason that we spent the extra capital is to address just that potential downtime issue because, particularly in the Gulf of Mexico, the regulators are very strict on redundancy these days. And so that's the reason for going the route we did on the dual stack design and retractable for us to use, being another issue.

Edward Muztafago - Societe Generale Cross Asset Research

Okay, that's very helpful. And then just as an unrelated follow-up, obviously, there is, I guess, a pretty clear plan for PEMEX to add some additional rigs to its program, and that's not really a market, I think, that Rowan has traditionally looked at. But as they expand their drilling program down there, are you all beginning to look a little bit more heavily at PEMEX and potentially maybe even moving some other Rowan rigs over to that market?

Mark A. Keller

We operated the Gorilla IV down there for...

Edward Muztafago - Societe Generale Cross Asset Research

That's right, yes, yes.

Mark A. Keller

A little over 400 days, and we opted to move the rig back to the U.S. Gulf of Mexico. To answer your question, we're always looking at that market. We're seeing an increase there as they try to take that fleet from about 34 rigs to somewhere in the 40s, but -- and they're trying to high grade that fleet, which obviously meshes well with our fleet. But we always keep open dialog with them. Certainly, they'll take some capacity from other markets, the Gulf of Mexico included. As I mentioned, in my remarks, there are 12 300-foot or greater independent leg cantilevers in the Gulf, and so a lot of those rigs, we'll be tendering there. But we always monitor it to see if they improve on their contract. Provisions of the contract and risk allocation is very tough in their contract right now.

W. Matt Ralls

I'd say, overall, that the all-in economics of working in Mexico are currently not as attractive as they are in other markets, and until that changes, we probably will continue to work in the markets we're in.

Operator

That does conclude our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Suzanne M. Spera

Yes. Thank you to everyone for joining us today in our first quarter earnings conference call, and if there are any additional follow-ups, I will be available. Thank you very much. Bye-bye.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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