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Executives

Mark L. Mey - Chief Financial Officer, Chief Accounting Officer and Senior Vice President

Robert J. Saltiel - Chief Executive Officer, President, Director and Member of Executive Committee

Analysts

Collin Gerry - Raymond James & Associates, Inc., Research Division

Ian Macpherson - Simmons & Company International, Research Division

Waqar Syed - Goldman Sachs Group Inc., Research Division

Zachary Sadow - Barclays Capital, Research Division

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Nigel Browne - Macquarie Research

John Booth Lowe - Cowen Securities LLC, Research Division

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Atwood Oceanics (ATW) Q2 2013 Earnings Call May 2, 2013 10:00 AM ET

Operator

Good day, everyone, and welcome to today's program. [Operator Instructions] Please note, this conference may be recorded. I'll be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr. Mark Mey, Senior Vice President and CFO.

Mark L. Mey

Thanks, Leo, and good morning. Welcome [indiscernible] to Atwood Oceanics conference call and webcast to review the company's operating results for the second quarter ended March 31, 2013. The speakers today will be Rob Saltiel, President and CEO; and me, Mark Mey, Senior Vice President and CFO.

Before we begin, let me remind everyone that during the course of this conference call, we may make forward-looking statements, which are not historical facts and are based upon management's current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us. These statements involve a number of risks and uncertainties, including the risks which are described in the company's most recent Form 10-K and the filings with the U.S. Securities and Exchange Commission. We caution that forward-looking statements are not guarantees and actual results could differ materially from those expressed or implied in the forward-looking statements if one of these risks or uncertainties were to occur or our assumptions prove incorrect. Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. Now let me turn the call over to Rob for his opening remarks.

Robert J. Saltiel

Thank you, Mark, and good morning to all of you joining today's call. Operationally, our second quarter continued to pattern an outstanding performance by our jack-up fleet. Our revenue efficiency for our 5 active jack-ups was 98.5% for the quarter, and our 2 newest rigs, the Atwood Mako and the Atwood Manta, performed at very high levels. As you would've seen in our fleet status report that we issued yesterday, we took delivery of the Atwood Orca in late April, increasing our total fleet to 13 rigs. We began mobilizing the Orca to Thailand on April 29, and we expect it to arrive on location by approximately May 7. At which time, it will commence its 2-year drilling program with Mubadala Petroleum. The delivery of the Atwood Orca concludes the jack-up construction program that we initiated in October of 2010. All 3 of our Pacific Class jack-ups have been delivered ahead of schedule, and all 3 were able to go directly to work on attractive term contracts. Overall, we've been very pleased with the performance of the PPL Shipyard and the high quality of the rigs that we now own and operate. We continue to like the jack-up segment, and we will look for further opportunities to enhance our jack-up fleet in the future. Our 3 deepwater semisubmersibles, the Atwood Falcon, Atwood Eagle and Atwood Hunter, have collectively achieved a 95% revenue efficiency for the quarter. And this occurred despite 3 separate evacuations for tropical cyclones on the Eagle and the Falcon in Australia. I recently visited Australia where I spent a day and a night on the Atwood Falcon. The rig has brand new living quarters, new life boats, a new BOP crane and a number of other smaller enhancements that were installed last year in Singapore. The rig has made a very successful transition to the Australian market with the assimilation of its Australian crews, and we expect the Falcon to have a long run in the Australian market.

The one blemish in our second quarter's operating performance related to the lower revenue efficiencies on the Atwood Condor and the Atwood Osprey, each of which experienced extended downtime due to BOP issues. The Atwood Condor's reliability was impaired by a latent issue within the BOP control system that caused 2 separate stack poles. Our subsea team successfully diagnosed the root cause of the problem, which was not obvious at all, and after a consultation with the BOP system manufacturer, we implemented a modification in early March that we expect will fully resolve this issue going forward. Similarly, the Atwood Osprey's BOP issues in the quarter were due to certain subsea BOP components that were not achieving their expected service lives. The parts in question are being redesigned by the OEMs to improve their durability and reliability. If there's a silver lining to the BOP difficulties of this past quarter on the Condor and the Osprey, it is that they were not due to competency issues within Atwood subsea teams. We continue to believe that our BOP maintenance and testing protocols are best-in-class for our industry. Also, the benefits of standardizing our BOP equipment over all of our ultra-deepwater rigs are readily apparent as we are able to extend all these lessons learned among the Osprey, the Condor and our 3 drillships. The delivery of the Atwood Orca signals the completion of our jack-up construction program, so our newbuild project team is solely focused now on completing our 3 A-class drillships at the DSME shipyard in South Korea. The Atwood Advantage continues to make excellent progress toward its scheduled completion date in late September of this year. We have seen the shipyard ramp up its resource commitments over the past few months, so we remain hopeful of an on-time delivery. The rig operations team is also well on its way to assuming ownership of the rig as the onshore management is fully in place and the key offshore supervisory positions have been filled. Now, let's take a look at the market. Despite the recent pullback in the price of Brent crude and recurring concerns about the worldwide economy, the outlook for our business remains very positive. A flurry of recent fixtures of ultra-deepwater newbuilds, coupled with the continued strength of the jack-up space, underpin our views. Starting with the ultra-deepwater segment, we're especially encouraged by the recent discoveries that have been announced in the Inboard Lower Tertiary in the U.S. Gulf of Mexico as these discoveries confirm the existence of a very large play, and they signal significant exploration and appraisal drilling in the near term and development drilling in the longer term. This lower tertiary drilling is especially challenging with deep well depths, high pressures and temps and fixed salt layers, and it is quite rig-intensive. We subscribe to the view that the Gulf of Mexico will see the greatest absolute growth in ultra-deepwater rig demand of any region over the next 2 to 3 years. This said, we still see strong ultra-deepwater demand growth in other regions, West Africa in particular. Even with the optimistic outlook, the rate of supply growth has slowed considerably as we have not seen any newbuild ultra-deepwater rigs announced in the past 2 months. With regard to high specification jack-ups, this segment continues to surprise to the upside. The fact that all 3 of our newbuild jack-ups went to work for smaller independents who are not pursuing particularly challenging drilling programs provides further support of our long-standing bifurcation theme. We continue to believe that the jack-up segment will be sustained by the combination of demand growth and the continual replacement of older rigs by newer and more capable rigs. On the supply side, we have seen a number of new jack-up rigs ordered since our last earnings call on the back of this optimism. On the contracting front, I wish we had new fixtures that we could talk about today, but the truth is that there's quite a bit of activity going on behind the scenes with our clients that has not quite reached the signature stage. However, we do fully expect to announce new contacts for some of our rigs during this quarter. Our most immediate marketing priority has been to secure follow-on work for the Atwood Beacon, which is expected to include -- conclude its current program as early as next month. We recognize that this looks like a really short fuse, which it is, but we've been working on this for a while and we feel good about our chances to maintain continuous or near continuous work on the Beacon with a suitable follow-on drilling program. The Atwood Hunter has been just behind the Beacon on our marketing priority list, and we expect that the Hunter's current drilling program in Equatorial Guinea will now conclude in October. Also, we disclosed in our recent fleet status reports that the Hunter could incur approximately 110 days of out-of-service time in fiscal year 2014 to complete regulatory inspections and to perform necessary maintenance, including coating of the hull, top sides and tank internals. It is important to note that the Hunter has not undergone any major shipyard-based maintenance since 2001. If we complete this maintenance work directly after our current program, the rig would be available in the first calendar quarter of 2014. We are currently in discussions on a number of longer-term drilling programs that are scheduled to commence during that timeframe that match up quite well with the Hunter's technical capabilities. Discussions on the Atwood Achiever, the second of our 3 A-class drillships, are progressing well. The recent pickup in ultra-deepwater fixtures is helping the 2014 supply/demand balance look a bit tighter. Echoing what I said on our last call, we remain positive about securing an agreement on the Achiever by sometime this summer. This concludes my prepared comments. I'll turn it over to Mark now for the financial discussion.

Mark L. Mey

Thanks, Rob. Today, I'm going to provide color on our second quarter financial results and then compare these results to the previous fiscal quarter. I will then comment on our financial position and provide cost cutters[ph] for the remainder of the fiscal year. Let's start with the fiscal second quarter ended March 31, 2013. Revenues of $253.2 million is a new quarterly record for Atwood and $8 million ahead of the previous quarter. Diluted earnings per share was $1.28 as compared to $1.10 for the prior quarter, an increase of 16% on 67 additional operating days during the fiscal second quarter. Revenues of $253 million compared to revenues of $245 million, as I mentioned previously, with revenue efficiency declining 3% to 92% quarter-on-quarter. As previously discussed by Rob, this reduction is mainly attributable to downtime on the Atwood Condor and the Atwood Osprey. However, we had quite excellent revenue efficiency on the remaining 7 rigs. Note that our 2 new Pacific Class jack-ups uploading in Thailand, it should have an average revenue efficiency of 98% for 2 consecutive quarters. Contract drilling margins increased by 4% from the previous quarter to 59%, and more importantly, net margins increased by more than 4% to 34% this quarter as compared to the fiscal first quarter 2013. These margin increases are attributable to higher quality revenue mix with the Atwood Condor and Atwood Eagle operating for a full quarter and the excellent cost control. Contract drilling costs, including reimbursable costs, were $108 million for the quarter as compared to $112 million for the previous quarter. This reduction in cost is explained as follows: $6.5 million related to 2 projects, the Atwood Beacon and Atwood Eagle, that were completed during the fiscal first quarter; certain maintenance projects being delayed to later quarters due to longer lead times of certain parts and materials. Offsetting these cost reductions were 67 additional operating days during the fiscal second quarter. Our effective tax rate was 12.2%, slightly below previous guidance due to a change in geographical mix of our pre-tax income. Moving to the balance sheet, capital expenditures totaled $51 million during the quarter, which consisted mainly of capital spares and project management and other [indiscernible] costs for 4 rigs under construction during the quarter. Net debt increased to $922 million at March 31, 2013, with our debt-to-cap ratio dropping 2% to 33% from the previous quarter. Now let's look at the outlook for the remaining 2 quarters of fiscal 2013. Revenues excluding reimbursables estimated at $11 million should increase approximately 7% in the fiscal second quarter to the fiscal third quarter. Updating my guidance from the previous earnings conference call, contract drilling costs should now range between $435 million and $450 million for fiscal 2013, with emphasis on the lower end of that range. For the fiscal third quarter, we anticipate contract drilling costs of between $110 million and $115 million. These estimates for contract drilling costs exclude reimbursable costs, which will approximate $8 million to $9 million per quarter for the remaining 2 quarters in fiscal 2013. As Rob mentioned, the Atwood Orca began its mobilization to Thailand on April 29 at 95% of its operating day rates. Mobilization should last about 8 days with the rig running on location and earning full operating rates on May 7. Depreciation expense should increase approximately $1 million quarter-on-quarter, factoring in the Orca's placement into service in April.

General and administrative costs remained flat quarter-on-quarter and around $13 million for the remaining 2 quarters. Interest expense should range between $6 million and $8 million per quarter for the remainder of the year, net of capitalized interest. We expect our tax rate for the third quarter and for full-year 2013 to remain between 12% and 14%. As previously mentioned, we spent $373 million in capital expenditures during the first half of 2013, leaving approximately $280 million for the remaining 2 quarters of fiscal 2013. Of this amount, $140 million was paid upon the delivery of the Orca in April, with the remainder split equally through the rest of the year and comprising primarily of capital spares and project management and other related costs for our 3 drillships currently under construction. We will continue to use a mix of cash, cash flow from operations and our revolving credit facility to fund these capital expenditures throughout 2013 and 2014. In addition, our public bonds are trading at attractive levels around 4%. We may access the capital markets to term out a portion of our revolving credit facility in the future.

That concludes my prepared comments. I'll turn the call back to Leo for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take a question from the site of Collin Gerry, Raymond James.

Collin Gerry - Raymond James & Associates, Inc., Research Division

I just wanted to maybe dig a little bit deeper on the BOP issues that you mentioned. Both those rigs have been in service for a while, and I guess what was the Genesis -- I actually kind of missed what's your explanation on the Condor, but what was the genesis of finding out what the problem was during downtime, during routine, just kind of inspection or full on the BOPs? And going forward, are they the same standardized equipment that's sort of on the new drillships, and how do we get comfortable with maybe the uptime as these drillships start coming into the mix?

Robert J. Saltiel

Yes, Collin, the issue that we had on the Condor BOP system related to the flow of the hydraulic fluid to the control system on the BOP, and there were issues with how that system was operating with regard to the pressure gradients that were on that system. And it took a bit of forensic work from our BOP subsea team to really figure out what was going on. Frankly, this is something that could have and, in our view, should have been corrected at the point of manufacture, but it wasn't, and we detected it through operation. So we went back and worked with the manufacturer on a fix and we believe that, that problem on the Condor is fully behind us. As I mentioned in our prepared comments, we have standardized our BOP equipment with a single manufacturer. So to the extent that we discover any issues with the performance of the BOP systems, obviously, that information gets communicated with the manufacturer, and we ensure that corrections are made and that these problems don't recur. We have a similar issue occur on the Osprey with regard to some subsea components. These were minor components on the system that were not achieving their full service lives. So you expect to get a certain number of, if you will, subsea days on each of these components and they weren't achieving that, so they're actually redesigning these components. But I think it's really just symptomatic of the fact that as an industry, we are absolutely driving to a higher standard in terms of the performance of the equipment and the absolute level of redundancy that has to be in place at all times. And in point of fact, I think that the folks that manufacture the BOP equipment haven't been driving to that same standard really for that many years. I mean a lot of this is post-Macondo expectations by the operator and the contractor community that is just now working its way through the manufacturers in terms of the tolerances on the performance of their equipment. But we feel very good about the equipment that we've got and the corrections that we made, and our expectation is that the occurrence in the second quarter was an anomaly for Atwood with regard to BOP performance.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Very interesting color. And I just wanted to follow up with a quick question for Mark. How may -- how should I think about maintenance CapEx for your fleet maybe now and then on a fully delivered basis when we have all the drillships in the fold?

Mark L. Mey

Yes, Collin. If you'll recall, about 18 months ago, we did a look-back for 5 years on maintenance CapEx for our fleet, and we were in that $28 million to $30 million total rig -- sorry, in total. Since then, we delivered the Osprey, the Condor, the 3 jack-ups. So to be able to service those rigs, we've added some capital spares to the capital spare inventory. That's over the 2012, 2013 and 2014 timeframe will add about $75 million in total in capital spares. Once we get through that, I think our run rate on a go-forward basis for the full fleet will be somewhere in that $40 million to $50 million range for maintenance CapEx.

Operator

[Operator Instructions] We'll move next to the site of Clayton Kovacz [ph], Tudor, Pickering, Holt.

Unknown Analyst

So I know you guys briefly touched on the pickup in jack-up orders year-to-date. But could you elaborate a little bit more as to why we've seen so many jack-ups relative to floaters?

Mark L. Mey

Clayton [ph], if you take a look at the makeup of 26 or 27 orders so far, I think 5 of them were ordered by established drillers. So I think given the terms, more than 1/2 of those rigs have been ordered from Chinese shipyards with very favorable back-end weighted payment terms. We're seeing speculators getting into the drilling space by ordering jack-ups. The demand we've seen from every single pocket worldwide for jack-ups, examples include Mexico, India, Iran, China, elsewhere, is driving the speculators to order these jack-ups. So it's really a function of the market where potential speculators can play and taking advantage of the opportunity given by the Chinese shipyards, which are starting out, in some cases, to order these rigs.

Unknown Analyst

Okay, great. That's great color. And then also, are you seeing any sort of change in the operator mix behind recent deepwater inquiries?

Robert J. Saltiel

Well, we're certainly seeing a lot of activity from the independents. And if you look at some of the recent fixtures, they've been with smaller players, as well as some larger players. And I think what it really confirms for all of us is a hypothesis we had, which was that the Macondo incident would not impair the appetite for independents to play in the ultra-deepwater. And I think that these recent fixtures are very supportive of that. Among the opportunities we're looking at for the Atwood Achiever, a number of those are with, what I would call large independents as opposed to majors or super majors. They're certainly in the mix, but the independents are playing a big role in that. And I do think that is something that we're seeing and it's certainly a welcome development for us. It's not just in the Gulf of Mexico, it's around the world, and I think it's what we're going to see going forward in the ultra-deepwater segment.

Operator

We'll move next to the site of Ian Macpherson of Simmons.

Ian Macpherson - Simmons & Company International, Research Division

Can you remind me, are the Achiever and the Admiral being marketed with 1 single BOP configuration or with 2? Or is that an open-ended proposition?

Robert J. Saltiel

No, we made the decision to outfit both of those rigs with 2 BOPs, as well as the Advantage. So all 3 of the Atwood drillships will have 2 BOPs on each ship.

Ian Macpherson - Simmons & Company International, Research Division

Right. Rob, do you think it's well-defined in the market by now sort of what the day rate delineation is between those 2 alternatives or do you think that's still an evolving process?

Robert J. Saltiel

Well, I think it's evolving because we haven't seen a large number of these fixtures yet. But I can tell you that the trend is certainly toward 2 BOP systems as a preferred apparatus for operators, especially as I've talked about previously on the call about in a post-Macondo environment. I -- we certainly believe that our rigs with 2 BOPs will command a premium. And in some cases, I think there are operators out there who won't look at rigs that don't have 2 BOPs for their particular programs. So I think we feel very good about the fact that the 3 rigs we've got under construction now have the 2 BOPs. They're more marketable and they should yield higher day rates for us.

Ian Macpherson - Simmons & Company International, Research Division

Okay, great. And then on the jack-up side, should we expect there to be significant increases in your leading edge day rates this year given the tightness that you've described? I mean I think your highest rate on the Oracle would be 160. Would we be surprised to see leading edge rates above 160 this year?

Robert J. Saltiel

Yes, we certainly believe that day rates are moving up on the jack-up space, and that's really been, as I said in my prepared comments, a pleasant surprise for the market given the supply that is coming on here in 2013. So our expectation is that those leading edge rates are higher than where we're currently contracted, so your assumption is a fair one.

Ian Macpherson - Simmons & Company International, Research Division

Very good. And then one more quick one, if I may. Mark, could you talk about the costs that you're contemplating for the shipyard work for the Hunter and what that would entail in terms of what's going to be recognized in the shipyard property cost versus being capitalized? Or is that premature to ask?

Mark L. Mey

It's a little premature, Ian, but we have scoped out the project as we have arrived at an estimated amount of time out of service. The cost should total somewhere around $30 million. If you look back historically, about 1/3 of that gets expensed, but we would need a little more time to give you a true breakout between the expense and capital part of that.

Operator

We'll move next to the site of Waqar Syed of Goldman Sachs.

Waqar Syed - Goldman Sachs Group Inc., Research Division

Just want to follow up on the BOP issue. Rob, to your knowledge, is this issue first time cropped up on Osprey and Condor or those issues have been experienced by the industry as well?

Robert J. Saltiel

So some of these issues have been experienced by others in the industry, notably the issues that we had on the Osprey relating to the components that I mentioned were not achieving their full subsea service lives. There are competitors of ours who have experienced the same sort of thing with their equipment, and that's why, as I mentioned, the OEMs are working on redesigns of those parts to improve their durability and reliability. So what we're experiencing is not necessarily unique, but these are endemic challenges with the equipment that's put under a high service load with a very high expectation for reliability. And as an industry, we need to respond to that.

Waqar Syed - Goldman Sachs Group Inc., Research Division

Okay. Secondly, where do you think the rates are for the Beacon and Hunter right now?

Robert J. Saltiel

Well, I don't want to say too much about either those rigs because of where we are in terms of our discussions, but as I said in the previous question, we a certainly expect leading edge rates on the jack-ups to move higher. On the Hunter, generally, I will say that the deepwater rates have been healthy. We're kind of in the low to mid 4s right now, and we think that, that's a number that we could potentially improve on, on refixing or recontracting of the Hunter. In short, we believe that just about every rig in our fleet could roll over at a higher rate than where it is right now to varying degrees just because of the strength of both the floater and the jack-up market, Waqar. So I would just say stay tuned on our expectations this quarter where we do announce some fixtures. It's been a while since we've done that, and I think they'll bear out the increases over current rates that I referred to.

Waqar Syed - Goldman Sachs Group Inc., Research Division

Okay. And what would it take for you to order additional equipment? And you mentioned in your prepared comments about additional opportunities. Was that mostly newbuilds or you would consider acquisitions as well?

Robert J. Saltiel

Well, 1 thing to keep focused on is that we do have 2 uncontracted ultra-deepwater drillships, the Achiever and the Admiral, and we certainly would like to get contacts on those. We do have a remaining option for an ultra-deepwater drillship. So in terms of growth opportunities for Atwood, that is certainly an area where we're going to focus our efforts. Obviously, we would like to continue to grow this company. And as long as we feel that we can build quality equipment at a good price and put it to work for-- under good initial contracts, we certainly would like to do that. So that's really the near-term focus for us, Waqar, is a decision on pulling the trigger on a fourth drillship.

Waqar Syed - Goldman Sachs Group Inc., Research Division

So when does that option expire?

Robert J. Saltiel

Yes, nominally, the option expires in late June of this year. I will remind that in the past, we've been able to extend our time with the shipyard on exercising that option. And in the event we were close to doing something and wanted to get some more time, we think we could get that. We still haven't seen very much in the way of inflation in the drillship construction space. So with the options being pretty much at the money, we believe that we could extend that option if we need more time.

Waqar Syed - Goldman Sachs Group Inc., Research Division

Now in terms of your confidence in ordering a new -- or exercising the option, do you need to only see the Hunter get recontracted or do you need to see Achiever and Admiral as well recontracted -- contracted?

Robert J. Saltiel

Yes, it isn't quite a direct formula, Waqar, where we can say if this, then that. But clearly, we're looking to recontract a number of rigs in our fleet. Obviously, we expect, after doing that, our backlog will increase significantly from where it is today. It's about $2.3 billion today, and that'll obviously give management and the board confidence that we should invest another $635 million or so in another drillship. So there isn't any direct correlation between 1 rig or the other, but we certainly would like to recontract both the Hunter and then get a contract on the Achiever here in the coming months.

Operator

Next question from the site of Zachary Sadow of Barclays.

Zachary Sadow - Barclays Capital, Research Division

Considering the strength we're seeing in Southeast Asian shallow water market currently, do you have any thoughts on where the leading edge day rates for premium jack-ups in the region could be exit 2014? Do you think we could see rates pushing to $200,000?

Robert J. Saltiel

Well, that's a great question. I think the open question will be the absorption of the uncontracted jack-ups that are still to come out here in 2013, and there is still quite a few. But there's no question, the momentum is quite good in the market right now, and we're heading toward that number. A little difficult to predict here in early May where we're going to be at the end of the year, but we certainly hope the momentum continues. We do have a couple of our own rigs that are in Southeast Asia that will roll off at the end of this year, the Atwood Manta and the Vicksburg. So we're going to be in a recontracting mode, and we will certainly hope to take advantage of higher day rates.

Zachary Sadow - Barclays Capital, Research Division

Great. Beyond the option that you have outstanding for the additional drillship, what are your thoughts on drillships versus semisubmersibles?

Robert J. Saltiel

Well, a lot of that's driven us to drillships has been the opportunity to get highly technically capable rigs at a very attractive pricing. And the Korean yards, we've talked about this before, have been very aggressive in terms of their pricing for a particular specification. The other advantage you get with the drillships is the mobility, and we are seeing a number of exploration programs that are intercontinental or interregional, where having a highly mobile asset, like a drillship, has an advantage over a semi. But look, we've been operating semis for many years. We've got the Osprey and the Condor as part of our ultra-deepwater fleet, and we'll continue to take a look at both types of ultra-deepwater rig. Again, what we have in hand is an option on an ultra-deepwater drillship, but that's what we'll focus on initially before making incremental decisions on the ultra-deepwater.

Operator

Our next question comes from Darren Gacicia of Guggenheim.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

;

I had a couple of questions. One of the things I've seen recently in some of the news flows that the shipyards themselves are starting to build kind of jack-ups in speculation and selling them on to players. Is that -- am I reading that right? Is that something that's actually starting to happen? Or who's taking the risk on the speculator side? Is it kind of newfound operators, is it the yards? Do you have any color on that?

Mark L. Mey

Darren, I think there's 2 questions over there. On your first question, that's nothing new. We've been building rigs, the 3 Pacific Class rigs at the PPL yard. They've been building their Pacific Class rigs throughout the tackle from 2005 through now. And as the yard orders slow down, they've been building for their own account and selling those off. In fact, if you recall back, one of our competitors bought a rig for them -- from them for a long-term drilling program in Malaysia last year. So I don't think that's new. It's probably a little newer to capital, but PPL has been doing that for quite a while.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Interesting. Is that -- is it more true for jack-ups or for floaters?

Mark L. Mey

Well, I think it's definitely true for jack-ups. On the floater side, you're starting to see 1 or 2 Chinese yards looking at building a semi on spec. They're trying to get some experience and get a prototype out there. But you're not seeing the major U.S. and Singapore or in Korea doing that.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Got you. Then changing gears a little bit, in terms of -- a few of your competitors have talked about the market starting to warm up for contract-backed new builds. And typically, logically, you would think that, that would need to happen at sort of a discounted rate relative to kind of to current day rates given that the spec aspect should give you some better reward. Are you seeing any of that activity? Are you seeing any differential in the terms for contracted versus maybe the current spec deliveries that are coming in?

Robert J. Saltiel

Yes, I think the -- I'll take this one. I think the reference to the contract-backed newbuilds is really more relevant for the ultra-deepwater set. On the jack-ups space, the -- we're really not seeing that much of that other than potentially, for very heavy-duty, harsh environment rigs. But I think the real opportunity for contract-backed newbuilds is in the ultra-deepwater space. And I would say at this point, that's still relatively limited, but we could see that increasing as we move forward. And some of the technical requirements evolve for our clients. There are definitely some opportunities that require specific assets because of the complexity of the wells, the depth of the wells and such. And so, therefore, you may see some contract-backed opportunities on the ultra-deepwater side.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Do you think that terms for that will probably be a little less favorable if you're going on a contracted rig versus what people are seeing on newbuild spec deliveries now?

Robert J. Saltiel

I think those are going to be down to individual cases to determine whether the economics are different or not relative to what we're getting in the spec market.

Operator

Our next question comes from Nigel Browne of Macquarie.

Nigel Browne - Macquarie Research

You sort of pre-answered my question, Rob, but I'll ask it anyway. If I could put you on the spot on the theme of how the jack-up market will evolve in the future, do we -- do you anticipate an acceleration of retirement of some of the legacy or commodity jack-ups out there? And you alluded to higher technical specifications for equipment to qualify for tenders. Could you give us any color on what some of those technical specifications are that sort of differentiates where the jack-up strength would be versus where some of the commodity assets will sort of continue to face demand headwinds?

Robert J. Saltiel

Yes, we've been talking for some time about the fact that the jack-up space in particular is -- has a large number of rigs that were constructed in the '80s. About 55% of the currently working jack-ups are 30-years old or older. And I think it's only natural that you're going to see a replacement of the fleet, and this really underpinned our belief in building spec jack-ups that even as demand was growing slightly or not, you would see a significant replacement of the legacy fleet just because of its technical obsolescence, and the needs and desires of operators for more capable rigs. I mean there's any number of functions that you get with the higher spec rigs, and it really depends on the program that will drive those specifications. But things like the hook load, the offline capability, the cranes, the accommodations, all those things really roll in to a decision that the operator might make around whether they can work with an older rig or whether they desire a new rig. And I will also tell you that, again, in a post-Macondo world, the desire for state-of-the-art in terms of safety and redundancy definitely drives towards the newer assets. So we're big believers in the replacement of the jack-up fleet. We think it's going to continue going forward, and that certainly will give further strength to the jack-up market even in the face of growing supply.

Nigel Browne - Macquarie Research

And 1 follow-up question was, you guys get these 2 ultra-deepwater rigs signed up, and up and running. How are you thinking about in terms of the decision between increasing supply versus that sort of trend we've been seeing now towards instituting a dividend no matter how small it is and growing it from there, how you guys thinking about that over the next couple of years?

Robert J. Saltiel

Well, we think our primary function as management is to identify NPV positive transactions for our shareholder base. And as long as we can continue to grow our fleet profitably, and that means -- basically means getting very good rigs at good prices and being able to put them to work right away, then that's our first port of call in terms of what we're going to focus on. We do recognize that as this company continues to grow, we are going to get to a position where we may be able to throw off more cash than we could possibly invest. But that's probably not at least until 2015 or beyond. And we'll clearly want to address the proper way to return cash to shareholders if and when we get to that point. But that's certainly a ways in the future right now, and right now, our focus is on execution and seeing if we can find other attractive growth opportunities.

Nigel Browne - Macquarie Research

And one last quick one. The shipyards, especially the Koreans, I saw that they actually announced more on the container vessel side, a number of orders that will -- that sort of disappointed in terms of pricing. We know that the newbuild rates for rigs have sort of stayed sort of within the same range. Is it possible to conceptualize that the cost of ordering a new ultra-deep rig could go down in the future? How are you thinking about the probability of that happening?

Robert J. Saltiel

Well, we don't see that as very likely. In fact, there has been some talk about some inflation. It's certainly for some of the components that go into the rigs, and we're not seeing any deflation in terms of the construction costs from the Korean yards. So we expect that prices are in a pretty narrow range from where they were a couple of years ago. But we certainly haven't seen anything that we would call deflationary in terms of construction cost.

Operator

[Operator Instructions] We'll take a question from JB Lowe from Cowen Securities.

John Booth Lowe - Cowen Securities LLC, Research Division

Apologies if I missed this earlier, but for the deepwater rigs that you have coming available in 2014, are you looking to keep them in the same region they're operating now? Are you getting inquiries from operators elsewhere?

Robert J. Saltiel

Yes, the Eagle and the Falcon are in Australia. And I mentioned in my prepared comments that we think the Falcon will have a long run there. We feel the same about the Eagle. There's a lot of opportunities for drilling, mostly LNG-based drilling, that's taking place off the North West shelves. So we feel quite good about where the Eagle and the Falcon are positioned in that market. The Atwood Hunter has done quite a bit of drilling in West Africa, Equatorial Guinea, Ghana, other places in that area. And we think that the rig has a good chance of staying in West Africa because we see a large number of jobs that are in that 5,000-foot or shallower range that we can look at. I would say that there is a possibility the Hunter could leave West Africa based on some other opportunities that we're seeing, but I would say the lead case is the Hunter stays in West Africa, the Eagle and the Falcon stay in Australia.

John Booth Lowe - Cowen Securities LLC, Research Division

Okay, great. And the -- just on all the jack-ups that are being built right now, you said that a lot of it are coming out of the Chinese yards. Are those -- are the Chinese guys building on spec, too? I know we were talking about that with some of the other guys building on spec, but are the Chinese yards building on spec? And if so, would you guys ever consider 1 year or 2 down the road, grabbing an unspoken for rig that's being built at a Chinese yard?

Mark L. Mey

JB, this is Mark. We're not aware of any rigs being built on spec by the Chinese rigs yards. Although, you could consider 1% down to be a spec -- a newbuild.

Operator

And we'll take a question from Brian Uhlmer of Global Hunter.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

I just have a real quick one for you, Mark. When you talk about your bonds, which are yielding about 4 1/8, what do you think of a target of -- what happens to long-term debt versus the revolver versus maybe your EBITDA or your debt-to-cap? Or how do you look at what's the proper amount of long-term debt to keep on your balance sheet?

Mark L. Mey

Brian, firstly, we look at debt overall as a component of our capital structure based upon the quality of -- quantity of our backlogs. And as we deliver new rigs and the longer-term contracts, we'll get more comfortable with a higher leverage on the balance sheet. The mix between fixed and floating rate or bonds versus bank debt can fluctuate as well. Right now, as you pointed out, as a BB-rated company to be trading in the low 4s, that's excellent. So we may take more money on the bond side in this environment as opposed to where it was a few years ago. But we don't have a fixed percentage of debt that has to be bonds versus a revolving credit facility.

Operator

And we do have a follow-up from Darren Gacicia's line from Guggenheim.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Your comment about only like kind of 1% down from the yards kind of begs one question, and I think it's something kind of looking them over just from a private scenario standpoint, is if you look at the terms being offered by the shipyards, you may have a little down. Are there other things that kind of -- in the clauses and in the contract terms that give people -- give drilling operators flexibility in getting maybe not honoring the orders or something like this? I mean how firm are the contacts in favor of the shipyards if they're giving those kind of terms? Is there anything happening in the contractual language that kind of defers more risk on them?

Mark L. Mey

Darren, I really can't speak to that. This is a rig that was ordered by a speculator a year or so back. Yes, we're not privy to their contract term with the shipyard. As you know, we've chosen some of the world's best shipyards. When we bought in our jack-ups, we'll have both of them in PPL. And we can talk to those contracts, but really can't shed any light on the Chinese contracts.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Okay. I just didn't know if anything had passed under your nose to say that things have been kind of lighter, but I appreciate the color.

Operator

And it appears that we have no further questions at this time.

Robert J. Saltiel

Okay. If there are no further questions, we thank everybody for joining on this call, and we'll look forward to picking it up in 3 months on our third quarter call.

Operator

This concludes today's conference for today. You may now disconnect your lines and everyone, have a great day.

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