Executives
Sean O'Neill - Vice President - Investor Relations
Daniel W. Rabun - Chairman, President and Chief Executive Officer
Jay W. Swent - Senior Vice President - Chief Financial Officer
William S. Chadwick – Executive Vice President and Chief Operating Officer
Mark Burns - President of ENSCO Offshore International Company
Analysts
Pierre Conner - Capital One Southcoast, Inc.
Michael Drickamer - Morgan, Keegan & Company, Inc.
Tom Curran - Wachovia Capital Markets, LLC
Daniel Boyd - Goldman Sachs
Scott Gruber - Bernstein
Arun Jayaram - Credit Suisse
Ian MacPherson - Simmons & Co. International
Michael Urban - Deutsche Bank North America
David Smith - SMH Capital
Jeff Spittel - Natixis Bleichroeder Inc.
Brian Uhlmer - Pritchard Capital Partners, LLC
Joe Hill - Tudor Pickering Holt & Co.
Geoff Kieburtz - Weeden & Co.
ENSCO International (ESV) Q2 2009 Earnings Call July 23, 2009 11:00 AM ET
Operator
Good day everyone and welcome to the Ensco International Second Quarter of 2009 Earnings Conference Call. As a reminder, this call is being recorded and your participation constitute concept to its taping.
I will now turn this conference over to Mr. Sean O'Neill, Vice President of Investor Relations who will moderate the call. Please go ahead sir.
Sean O'Neill
Good morning and welcome to ENSCO's Second quarter 2009 conference call. With me in Dallas are Dan Rabun, Chief Chairman and CEO, Bill Chadwick, our Chief Operating Officer and Jay Swent, Chief Financial Officer, as well as other members of our executive management team.
This morning we issued our earnings released which is available on our website at enscointernational.com. Later today, we plan to file our SEC form 10-Q. As usual we'll keep our call to one hour. Any comments we make about expectations are forward-looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our earnings release and SEC filings on our website that define forward-looking statements and list risk factors and other events that could impact future results.
Also, please note that the company undertakes no duty to update forward-looking statements. As a reminder, our monthly rig status report was last issued on July 15. Now, let me turn it over to Dan Rabun, Chairman and CEO.
Daniel W. Rabun
Thanks Sean and good morning everyone. First, let me introduce Sean O'Neill to those of you who've not had the opportunity to meet him. Sean joined us in May as Vice President of Investor Relations and he brings many years of Investor Relations experience. We are pleased to have him with us. Before we get into the numbers, I'm going to take a few minutes to provide you mid-year update on some important miles some that we achieved so far this year, and also comment on our overall competitive position.
Let me start with our deepwater business. As many of you know, in 2005 we strategically embarked on our deepwater expansion plan to build the first of the ENSCO 8500 Series rigs. On June 6, it was extremely gratifying to announce that the first of the ENSCO 8500 Series has commenced drilling operations and is now on the payroll. This is a major milestone in the history of our company and the start-up and operation of the rig has gone extremely well.
Also in June we announced that ENSCO 8501 the second in the series was delivered in Singapore and is now in transit to the Gulf of Mexico. We expect ENSCO 8501 will arrive -- in the Gulf of Mexico we're onto second 2009. Together with ENSCO's 7500 working in Australia, we now have three ultra-deepwater semisubmersible drilling rigs. Our success with ENSCO's 7500 which is been in our fleet since 2000 gave us the confidence to launch the ENSCO 8500 Series program.
In total, we are now investing more than $3 billion over 8 years to build seven new ultra-deepwater rigs. Next year we expect to add two more 8500 Series rigs to our fleet, both of which are already under contract.
During 2011 and 2012, we plan to take delivery of three more ultra-deepwater semis, bringing our total fleet day rigs, with five of the eight rigs under contract we already have locked in a sizeable stream of revenues and we expect the final three rigs in the series will be delivered as scheduled, although we have had some minor delays in our initial deliveries, overall I'm very pleased with our performance in terms of meeting our timetables for the new built program, especially relative to others who've had long delays.
I feel very comfortable with our customer demand for our three remaining un-contracted rigs and I'll discuss the deepwater markets in a moment. As some of you may recall, we are using a proprietary design for the ENSCO 8500 Series that was developed through extensive discussion with our customers. All seven new build rigs have the same design and are build in the same shipyard giving us enormous efficiencies in terms of construction, daily operations, repairs and maintenance, spare parts and training. It’s also worth noting that the first four 8500 Series rigs will all be working in the Gulf of Mexico which gives us additional economies of scale.
And then the major milestone that we achieved is passing the halfway mark for the funding of our $3 billion plus investment in the 8500 series program. Remaining commitments for the ENSCO 85 series program are now less than $1.4 billion. I should head, that we have financed these new bills through debt, but rather few operating cash flows. Our cash position has continued to improve since the end of the quarter and an outstands at approximately $1 billion and our long term debt is just 5% of total capital.
So in a nut shell, our deepwater expansion strategy is beginning to pay-off in a major way. We're in a great position in terms of our balance sheet strength and I mentioned these milestones, because it is important to note that they will not only buffer us from some of the current challenges in the jackup market, but also provide us long term growth opportunities.
In hind side bolstering our balance sheet was clearly the right defensive move given the decline in the global economy. As we look ahead we believe our strong balance sheet also give us in all sense of capability as we consider new investment alternatives.
Our commitment to disciplined investing hasn't changed and we remain committed to meeting our strict return criteria. Finally, before I provide a market overview, we were very pleased to receive accreditation from the International Association of Drilling Contractors for our offshore competency insurance programs.
Our investment in employee development is just that, an investment. Training our workforce leads to improve safety, more efficient operations and greater reliability for our customers. And I should add that our safety record has been exceptional again this year.
Now let’s talk about the markets. During the second quarter challenges in the jackup market continued as we indicated they were during our last earnings call. Jackup utilization declined further as customers continue to be cautious about new programs in the face of unfavorable credit markets and unstable oil and gas prices that were driven in part by lower demand and rising inventories.
As more jackups roll off existing contracts and more new bills enter the market, we expect the supply-demand imbalance will become more acute although cold stacking of rigs will provide some relief. For instance, Jackup utilization in the second quarter was 72%, down from 79% in the first quarter and 95% a year ago.
Average jackup day rates were also down sequentially from 168,000 in the first quarter to 159,000 in the second quarter. Year-over-year day rates were up $10,000 from 149,000 in last year's second quarter. Given the challenges of the current environment, we will continue to market heavily and pursue opportunities in all of the major markets around the world.
When we do not see prospects for work, we will coal stag rigs to sharply lower cost as we did with two rigs in the second quarter.
We believe, we continue to have a cost advantage versus most of our peers, and will continue to actively manage our cost stand wherever possible.
Now, let me turn to specific regions. The Middle East and Southeast Asia Pacific Rim remained very competitive markets. Although we have recently seen a very noticeable increase in discussion levels, in bidding activity for work starting late this year, or in 2010.
The most active areas are the United Arab Emirates, Indonesia, India and China with several other areas having one or two jackup requirements. Saudi Aramco is not tended for rigs yet, but reportedly will start developing two newly discovered offshore gas fields and is targeting a 50% increase in non-associated natural gas production by 2015 to help meet the rise in domestic demand.
In the North Sea, with the ongoing shortage of funding from financial institutions and low natural gas prices, operators continue to defer programs and there are only a few short term opportunities for work in 2009. However, there has also been a recent increase of short and longer term programs servicing for work starting in 2010 and beyond.
Turning to the U.S. Gulf of Mexico, the jackup market continues to shrink the impact of lower natural gas prices is being exacerbated by unfavorable credit markets and the onset of hurricane season.
More drillers, including ENSCO or coal stacking rigs and we are being even more selective on drilling locations during hurricane season. We expect only a few new drilling opportunities until we emerge from a hurricane season and day rates will remain under pressure during this period.
The good news is that we've been successful in moving rigs to Mexico. We now have four jackups working for PMX and we will move one more to Mexico from the Gulf in the third quarter.
Also on a positive note, we expect PMX will tender soon for three incremental 300 foot independent cantilever jackups for work in Mexico starting in 2010.
To give you some perspective on the longer term shift in our business, in 2005 when we made the strategic decision to expand our deepwater business the Gulf of Mexico was our largest market and jackup revenues accounted for one-third of our total company wide revenues.
With the expansion of our deepwater fleet and mobilizations of jackups for International markets, we anticipate that third quarter revenues for jackup fleet in the Gulf of Mexico to be only 6% in revenue. In Venezuela we've kept every one informed about the status of ENSCO 69 through our news releases during the quarter and more information will be contained in our Form 10-Q to be filed later today.
Jay will address the accounting more fully, but we won't be commenting beyond our prepared remarks since we are in the process of pursuing plans as we've disclosed. More broadly in South America, new jackup programs are emerging in Brazil, Columbia, Trinidad, Surinam and Guyana and we are pursuing all of these opportunities.
Now let's turn to Deepwater. Brazil remains by far the strongest market. Operators in the region are continuing to report successes in their exploration programs and these discoveries are expected to lead -- to development work possibly starting by late 2011.
Petrobras has announced they will tender for an additional seven or eight rigs during the third quarter with the requirements that the rigs be built in Brazil. Its still unclear how all this will unfold.
There are several outstanding bids for work else were in 2010 and onward, and new discoveries are being announced that are expected to require development work. West Africa continues to be an area of high activity with several multi-year existing tenders for programs, for projects in Angola and Nigeria are outstanding.
Also there are additional inquires and tenders for work in India, China, Indonesia and Australia. In the Mediterranean, a significant gas discovery was found offshore Israel and is on the fast track for development. Work continues offshore heavily and Libya is worth watching as well.
U.S. Gulf of Mexico is relatively quite now, as far as new deepwater programs, but continued explorations successes and the lower tertiary trend is expected to create additional demand for development rigs in the future. We are actively marketing and are engaged in discussions with several operators regarding prospective work programs for our three uncommitted deepwater rigs.
The delivery is not scheduled until the second half of 2011, and in 2012 we fully expect that the rigs will be contracted before delivery. During the quarter we also announced that Jeff Saile would be retiring from the company and we wish him the very best.
Jeff is one of our founding employees and has served in multiple management positions around the world. His dedication has been instrumental in growing our company and his commitment to the safety of our employees will long be remembered. Bill Chadwick, our Chief Operating Officer will now add direct responsibility for North and South America business. And Carey Lowe has taken over responsibility for our deepwater business. Now with those comments, let me turn it over to Jay.
Jay W. Swent
Thanks Dan and good morning everyone. My comments this morning will cover details of second quarter results, our outlook for the third quarter and full year 2009 and the review of our financial position.
Before we get started, I'd like to remind you everybody that ENSCO 69 financial results for current and all prior periods are now reflected in discontinued operations.
For long term discontinued operations in the second quarter was $0.18 per share. This amount is less than the $0.26 per share estimate provided in our July 15 news release, because we subsequently received an $11.5 million payment from (inaudible) on July 17.
Second quarter earnings from continuing operations were $1.59 per share compared to $1.98 a year ago. Earnings per share including the loss from discontinued operations was $1.41, down from $2.05 last year. Total revenue for the second quarter was $512 million, a 16% decline from last year.
Jackup segment revenues declined $133 or 23%. This was partially offset by a $35 increase in deepwater revenue as ENSCO 7500 went back to work in Australia in early April at a day rate of $550,000.
And ENSCO 8500 commenced drilling operations in the Gulf of Mexico in early June. As Dan mentioned, our average jackup day rate was higher this quarter than in the second quarter last year.
But this was more than offset by a significant decline in utilization which dropped to 72%. Currently, we have 11 jackups warm stacked and two are cold stacked. We reduced total contract drilling expense for all jackup segments by 20% versus last year. Offsetting this, Deepwater segment cost increased 144% due to the addition of ENSCO 8500 and ENSCO 7500 operating in Australia where expenses are higher.
Overall this stands to a 12% reduction in total contract drilling expense. We took the following actions to reduce drilling costs during the second quarter. First, we closely managed all elements of our cost structure to reduce year-over-year cost.
Specifically, we coal stacked two jackup rigs and reduced personnel and idle rigs to reduce expenses, where we did not see near term prospects for additional work. And we continue to press vendors and service providers for cost reductions.
Now let's discuss quarterly trends by comparing second quarter 2009 sequentially to the first quarter 2009. Please remember that the income statement for first and second quarter reflects ENSCO 69 results in this continued operations as I mentioned earlier.
Second quarter revenue of $512 million increased slightly from first quarter levels. This increase is attributable to a $68 million increase in deepwater revenue for the reasons previously mentioned which was largely offset by a decline in jackup revenues in Asia Pacific and Europe then Africa.
Contract drilling expense was up 9% sequentially from the first quarter versus our 15% estimate last quarter. This breaks down as follows: We had a $18.9 million increase for the deepwater segment primarily due to ENSCO 7500 and ENSCO 8500 commencing drilling operations during the second quarter. And jackup expenses decreased by $4.8 million due to utilization and cost containment actions, offset impart by higher cost associated with operating rigs in Mexico and Venezuela, as well as higher repair and maintenance on rigs that were not contracted.
As we have done historically, we are taking advantage of rig down time to complete surveys and repair and maintenance work so that our fleet is ready for when the market returns.
Looking at other expenses, as expected, depreciation increased by about $2 million due mainly to ENSCO 8500 coming online during the quarter. G&A expense was up 4% more than we had predicted last quarter, due to an early retirement of the senior executive and higher professional fees.
Our cash generation remained strong during the first half of 2009, with cash from operations totaling $586 million. Cash-on-hand at quarter end was $882 million even after $472 million of capital investments during the first six months, $329 million of which related to our deepwater fleet expansion.
So let's now look at the outlook and our expectations for third quarter 2009. Revenue is expected to decrease by about 12% from second quarter levels. More jackup rigs are likely to become idle and day rates will remain under pressure.
We expect to see a 12% decline in the average number of days or jackups that are utilized in the third quarter when compared to second quarter.
Higher revenues from the deepwater segment should partially offset these factors. However I should point out that we anticipate ENSCO 7500 will have non-routine downtime to replace recently installed equipment that failed prematurely.
This will impact third quarter revenues by approximately $12 million. We expect third quarter contract drilling expense will increase by approximately 4%. Deepwater expenses will increase 46% because ENSCO 7500 and ENSCO 8500 combined will have 43% more operating days in the third quarter.
This will be partially offset by a 2% decline in the jackup segments. Depreciation expense will increase by approximately $5 million in the third quarter, mostly due to adding ENSCO 8500 to the fleet.
Finally, we anticipate G&A expense will be approximately $14 million during the third quarter. Now, few comments about our 2009 full year outlook.
The revenue contribution from our deepwater is projected to more then triple in 2009 to approximately $280 million. In addition, we expect 2010 deepwater revenues to more than double again to approximately $600 million.
Contract drilling expense is estimated to decrease by 5% from last year's level of $752 million. Now, I'd point out here for everyone that this the number after adjusting for discontinued operations treatment of ENSCO 69.
Deepwater segment expenses will increase by approximately 236%, reflecting higher activity levels, but this will be more than offset by our cost containment actions that we are taking, including stacking of jackup rigs which will reduce jackup segment expenses by approximately 15%.
In July, we completed our insurance renewals, and as expected insurance premiums have increased significantly. We have elected to purchase windstorm coverage for ENSCO 8500, but given the prohibitably expensive premiums that were reported by underwriters, we have not purchased windstorm coverage for our Gulf of Mexico jackups.
Since last year we have reduced our Gulf of Mexico jackup rig exposure significantly to just five rigs now marketed in the U.S. Gulf. To further mitigate risk, we're being very selective about the drilling locations we will expect during hurricane season.
We expect 2009 depreciation to increase approximately 12% to $210 million due to the addition of our two new ultra-deepwater rigs. G&A expense will approximate last year's level of $54 million. Our effective tax rate is projected to be approximately 19% for the year as we indicated last quarter. 2009 capital spending projections were unchanged from last quarter, but please remember that enhancement and sustaining budgets maybe adjusted over the balance of the year.
At this point, we expect 2009 capital spending to be approximately $790 million with $530 million committed to our 8500 Series rigs, $160 million for rig enhancement projects and $100 million for sustaining projects.
Let's now turn to the balance sheet. We have steadily strengthened our financial position despite turbulent market conditions and a significant cash investments that we've made to expand our ultra-deepwater fleet.
Our strong balance sheet is a distinct advantage given the challenges of the current market environment and it provides the financial flexibility to consider future investment opportunities that meet our strict return criteria.
During the second quarter, Standards & Poors reissued its rating on ENSCO and assigned us a BBB plus corporate credit rating.
In its report, S&P noted that ENSCO's credit measures are currently strong for the BBB plus rating and compare favorably to the Investment Grade peer group. In particular, S&P sited our strong cash position, our $350 million revolving credit facility that is fully available, our low debt levels with no significant near term maturities, our growing ultra-deepwater fleet, global diversification and our ability to maintain strong operating margins and returns on capital.
I think S&P summed up our position quite well. Moody’s also has a similar credit rating for ENSCO, BAA1.
In summary I'd like to note the following: Our growing deepwater fleet is ramping up nicely and we project it's contribution to earnings will grow significantly. This should help offset some of the weakness that we are currently experiencing in our jackup markets.
On the expense side, we are aggressively managing cost during the current slowdown and we will continue to stack jackup rigs as we did in the second quarter to reduce cost where we do not have reasonable prospects for work.
We have a very strong balance sheet, and I think we're very well positioned to not only weather the difficulties of the current market, but also take advantage of potential opportunities as they arise.
The level of customer enquiries has improved for programs starting at 2010. And if oil prices can stabilize around current levels, we believe this would be very positive for demand for contract drilling services next year, especially since customers have curtailed drilling during 2009. Now with that, I will turn back the call over to Sean.
Sean O'Neill
Operator, if you could please open it up for questions.
Question-and-Answer Session
Operator
Thank you so much. (Operator Instructions). And we will go to our first question from Pierre Conner.
Pierre Conner - Capital One Southcoast, Inc.
Dan, my first one is macro, you started out with commentary over the supply demand and balance getting worse. Noted several potential opportunities coming. I wanted to get a little more perspective from you on, that's just kind of making it less of a problem than it was 90 days ago, is that the point or do you feel we can absorb how many of the new bills coming on?
Daniel Rabun
Its on the jackups?
Pierre Conner - Capital One Southcoast, Inc.
Yes sir.
Daniel Rabun
Pierre, the activity levels and dialogue with customers has picked up appreciably, it is hard to get a hand alone the magnitude of all these opportunities because they are fairly recent in being developed and how that will affect the supply of jackups. I tend to believe what we'll see as fairly slow ramp-up in activity and I think utilizational increase (inaudible) will be under pressure for a little bit because of the supply.
So it's a little early to see how it's all going unfold. We've got a lot of moving parts with rigs being coldstalked, new rigs coming on board. So I would say its net positive but the effect of the new builds still a question mark in my mind.
Pierre Conner - Capital One Southcoast, Inc.
Okay, I understand. On, speaking of new builds, we ask it all the time but with the backlog coming out, the potential for some of those becoming available. In your discussions, do you see the bid ask for potential purchases widening.
There was a recent acquisition that was a bit high from my perspective but wondered if you thought there was opportunity for some of those to be sold?
Daniel Rabun
Pierre, strangely enough it's fairly quite on that front so I wouldn't fear getting any closer to this there just haven't been a lot of dialogue over the last -- since the last earnings call on that front.
Pierre Conner - Capital One Southcoast, Inc.
Okay.
Jay Swent
Pierre, just to add to that I think what we've seen over the last several months is the number of those the operators, the owners of those rigs were solving their financial situations for the short-term in terms of getting extensions or waivers on their financing commitments. And so I think most people are sitting tight trying to kind of wait out the market and see if things improve and I think they are hopeful that they will able to get higher prices for those rigs in the next year or two.
Pierre Conner - Capital One Southcoast, Inc.
Okay.
Daniel Rabun
One thing we do continue to see Pierre and it's been this way for a while with the new builds into with our outstanding operational exploration commitments of safety of our employees we see opportunities that new build companies don't see and that will continue to be the case. So not with standing the challenge of the supply side of the equation. ENSCO will continue to get jobs and opportunities that new build guys won't.
Pierre Conner - Capital One Southcoast, Inc.
Okay. One last one specific for Jay or Sean, when those rigs go into accommodation mode, can you give us a range of what that OpEx changes to for the jackups you are talking about?
Jay Swent
I would say Pierre, this is a rough numbers probably 10,000 to $15,000 a day maximum. It's the reduction that is...
Pierre Conner - Capital One Southcoast, Inc.
The reduction is 10 to 15.
Jay Swent
Yes.
Pierre Conner - Capital One Southcoast, Inc.
Thank you. And then the last thing I don't... it sounded like Jeff wasn’t actually there.
Daniel Rabun
Hello, Jeff's here.
Pierre Conner - Capital One Southcoast, Inc.
Okay. Well, I might not say the things I was going to say then. But very personally Jeff, congratulations and many thanks for everything. Congratulations for what you've have done for ENSCO. And wish you all the best.
Daniel Rabun
Hey, thanks Pierre. I appreciate that.
Pierre Conner - Capital One Southcoast, Inc.
Thank you, gentlemen.
Operator
And we will take our next question from Mike Drickamer with Morgan, Keegan.
Michael Drickamer - Morgan, Keegan & Company, Inc.
Hey, good morning, guys.
Daniel Rabun
Good morning.
Michael Drickamer - Morgan, Keegan & Company, Inc.
Real quickly, about month ago when your competitors talked about offering some incentives to keep the rigs working during hurricane season, offering contracts that they had no day rate during evacuation. Are you guys offering any comparable incentives or being asked by customers to accept comparable terms?
William Chadwick
This is Bill. No, we have not been requested to do that and we haven't considered it yet.
Michael Drickamer - Morgan, Keegan & Company, Inc.
Okay. But Jay, looking at the Gulf of Mexico fleet, its interesting that you guys started not to re-up the principle coverage, I can definitely understand the increased cost, can you update us, perhaps what's the total book value of the Gulf of Mexico jackups, and what's your exposure here?
Jay Swent
I don't have the number right at the top of my head, it's pretty long and we're going to end up with seven to eight rigs in the Gulf, five of which are marketed. So and many of which are fully depreciated on a book basis. So it would be a pretty low number.
Michael Drickamer - Morgan, Keegan & Company, Inc.
That's all from me guys, thank you.
Operator
And we'll take our next question from Tom Curran with Wells Fargo (ph).
Tom Curran - Wachovia Capital Markets, LLC
Good morning, guys.
Daniel Rabun
Good morning.
Jay Swent
Good morning.
Tom Curran - Wachovia Capital Markets, LLC
First, would just to one wish you the best of luck and thanks for everything you've done for Ensco. Dan I'm curious as you look out across each of the jackup geo markets gets longer term, which market do you think has the most potential for demand to surprise the upside because of the nature of the demand. In other words there are certain markets were also focused because its very clear that there is going to be incremental demand driven by our long-term expansion of say new fields. But are the other markets where maybe Brownfield revitalization or other types of work you think the potential for demand is being under appreciated?
Daniel Rabun
I don't know where I'm on this one. You know I think the markets that has the potential for the most near-term surprises, probably going to be the U.S. Gulf of Mexico because the supply of rigs has dropped so dramatically.
And any return, any improvement, natural gas prices is going to result in an uptick in drilling activity plus there's just been very little work out in the Gulf of Mexico in terms of work by work and people are going to -- it's a very large and developed area and it's going to -- people aren't going to not drill forever.
So whenever, drilling activity picks up, then its going to go up fast and sharp and I don't have any prediction to when that might occur, but that's the one that historically has provided the more short-term supplies positively and negatively, so I don't think that its going to be any different in the future.
I think the North Sea, quite frankly is going to have a substantial for good opportunities in the future again, that's a very protected market in terms of rig supply. So I think that those two markets probably are going to show some surprises.
Jay Swent
I think he is absolutely correct about the Gulf of Mexico. One think there has been a pent up demand being manifesting itself now, and there is a lot of demand out there from reparation work it needs to be done from going to fall back as Rita and that has not been addressed I think that MMS is not going to start forcing that hand so in the short-term that should provide a little bit of activity and as Dan was mentioning, the supply is certainly decreased out there. So I think there may be a little pleasant surprise in the short-term there. And then consequently the long-term will be probably be affected basically the same way.
Tom Curran - Wachovia Capital Markets, LLC
Thanks guys. This is very helpful, one market I think you expanded is West Africa as Nigeria continues to struggle with the militant, disruption of its on shore capacity, could we see them to look to offset that with a level of investment in jackup related activities that other wise wouldn't have pursued or could it perhaps, could Angola seek to exploit Nigeria's trouble by ramping up it's shore activities?
Daniel Rabun
I think I would say Tom as most of those guys have really fast boats. The notion that a jackup is exempt from those problems is probably not realistic in Nigeria, certainly going further offshore for deepwater drilling and some of those places might help a bit. But even there those guys have really fast boats now.
There is a very noticeable uptick in deepwater activity both in Nigeria and Angola. Their existing tenders for multi-year programs from several operators are outstanding in those markets currently.
Tom Curran - Wachovia Capital Markets, LLC
Okay. So fast boats and cushion of costs are generally good return, I'll take it. Thanks guys, I'll send it back.
Daniel Rabun
Thank you.
Operator
And moving next with we'll go to Dan Boyd with Goldman Sachs.
Daniel Boyd - Goldman Sachs
Hi, thanks. Dan, I though I heard you earlier say that you expect utilization potentially to increase in the jackup market. I want to make sure I heard you correctly and see if that was due to the pick up in demand or just more of you were talking about effective utilization due to stacking?
Daniel Rabun
No we indicated actually that we see in the jackup market certainly that utilization would be going down in the third quarter.
Daniel Boyd - Goldman Sachs
When would you expect that to barge you and is more talking to the tenders and activities you see picking up this year are bottomed at any point or--?
Daniel Rabun
Dan based on what we're seeing, there are very noticeable uptick in activity, in the later this year and into 2010 so we have some momentum of rigs come in our contracts there and when that balances I'm not really sure but it feels like we're getting close to the bottom.
Daniel Boyd - Goldman Sachs
Okay helpful. Also in the past conversations you've expressed some interest in, if you could buy a two deepwater rigs or very similar such as the remaining Petrobras rigs, you would be interested there as opposed to just one-off assets, can you give us an update on any potential sales processes there, are there other opportunities that you see to acquire multiple similarly deigned rigs.
Daniel Rabun
Yeah. I mean there are some opportunities out there Dan, its not whole lot of them. We did look at the Petronas rigs and decided to pass some of that opportunity. Our competitive advantage with ENSCO 8500 which we repeated many times is our operating efficiencies, and that gives our ENSCO has been pretty good about having good margins in this business and the way you do that is through efficiencies, one off operations just is contrary to our philosophy.
So, yes we can find the collection of assets that we could get efficiencies from, we get them at the right price, very important. We would clearly -- we're looking at all opportunities, we just haven't fount the right one just now.
Daniel Boyd - Goldman Sachs
And then along that same lines, are you on a very good net cash position, you've have $1 billion in cash. And according to our model, you still generate quite a bit of free cash flow even after paying for the new build CapEx that you have coming up. So, are you starting to think about if those opportunities don't come up returning cash to shareholders or building additional 8500 Series rigs?
Daniel Rabun
We're not currently contemplating build anymore 8500 Series rigs at this time. We've got our hands full right now with our current program. Dan yeah, we look at that, we've said on every call we look at that every quarter with our Board very carefully.
Obviously, today we feel lot more comfortable than we did last quarter and we feel lot more comfortable than we did six months ago, about the stability of the credit markets. So yes, we do look at that and we can't find a good use for our cash, it will get return to shareholders.
Daniel Boyd - Goldman Sachs
Right. And I guess that's what I think about the timing of that, is once you would expect to jackup market to be bottoming out, we're starting to see an uptake in utilization, you'll probably then being more comfortable returning cash to shareholders as oppose to do when things continue to decline. Is that fair?
Daniel Rabun
Yeah, that's a fair statement. And like we have said on the last few earnings calls, especially six months ago when credit markets were non-existent, we just didn't feel real comfortable. The debt markets have opened up very nicely and most of our competitors have accessed the debt markets, we haven't felt necessary to do that.
I will say; for committed lines of credit and things of that nature, those markets still haven't opened up except for exceptionally high costs. So, there is still some of bit stability out there that causes us -- makes us feel good about having cash-on-hand.
Daniel Boyd - Goldman Sachs
Okay. And then looking forward, you do pay a small dividend, but historically you've preferred to buyback shares. Is that still what you would do if you did decide to return that to shareholders through share repurchases.
Daniel Rabun
No, not necessarily Dan. We've considered both, a lively debate about both, so.
Daniel Boyd - Goldman Sachs
Okay. Thanks. I'll turn it back over.
Operator
And we'll go to our next question from Scott Gruber with Bernstein.
Scott Gruber - Bernstein
Yes, good morning gentlemen.
Jay Swent
Good morning.
Scott Gruber - Bernstein
I just have one macro question. About oil pricing, I mean in oil price range, do you think it needed to drive jackup utilization backup for the 90% level or above?
Daniel Rabun
Quite frankly, I think we are there. I mean if you get stability in and commodity price for a long time I think quite frankly this is extremely healthy price.
Jay Swent
Lack of confidence right now.
Scott Gruber - Bernstein
So if oil prices stay in the mid-60s or around 70, how long do you think it will take to reach back up to 90%, given the new utiliz’s coming out?
Daniel Rabun
I can't give you any prediction or timing. One thing I have learnt about in this business, from the period I've been here is, no one can ever say its different this time. So, I don't think there is any different this time and if you look at store charts, commodity prices and utilization and day rates, there is a pretty good historic trend here and quite frankly, I think if you look at historic trends at this price you'd see fairly high utilization and fairly good day rates, and we don't expect that it will be any different this time.
And we do have a little bit of a different factor, because the supply side of the equation and natural gas prices are not particularly robust. So it's not exactly a parity with oil and gas prices anymore. So, there are few factors that are little bit different, but clearly if commodity prices stay at this level I would fully expect that day rates and utilization would go up.
Scott Gruber - Bernstein
Okay, great. That's all I had. I'll turn it back.
Operator
And we'll take our next question from Arun Jayaram with Credit Suisse.
Arun Jayaram - Credit Suisse
Good morning guys.
Daniel Rabun
Good morning.
Arun Jayaram - Credit Suisse
Jay, I want to drill about little bit on the operating cost. Just broadly, how we should think about cost for stacked equipment versus a regular list of available or idle in your fleet status report on the jackup front. And also, given the costs associated with given the 7500 over to Australia, what is the cost per day including the amortization of the move.
Jay Swent
Let me try to take your first question Arun. I think in terms of rigs that are cold stacked, probably safe to think in terms of $5,000 a day be the cost of that. Although I cautioned you as we said, we are looking at this as an opportunity or the shipyard little slower than they were before.
Cost were little better now than they have been before. So we're looking at this as an opportunity where it makes sense to do some repair and maintenance work, obviously we're not going to go over board on that.
So, some of these rigs will get stacked, either one cold stacked, but there will be some level of work probably done on them. I think relative to warm stacked rig, we've said, you're probably going to take 10,000 to $15,000 a day off of the normal operating cost just to be in to the warm stack mode. I think we've tried to be as I said in my comments, we've tried to be pretty careful about that and get as many people off the rigs as we can when they go into warm stack status. Certainly make sure we keep all the senior people on board, but where we can get the headcount down just as low as we possibly can.
On the 7500, if you wouldn't mind, let me have Sean get back with these specific numbers on that, they are large.
Arun Jayaram - Credit Suisse
I just want to make sure I get that right, there was -- in last question, in terms of your guidance Jay, in the back half of the year you have 11 jackups which roll off the current contract, there's options associated with those, but what do you think in terms of your ability to keep those rigs operating. What are you assuming for the third quarter in terms of the ability of to get new contracts and rigs that roll off.
Jay Swent
Well, I think I was pretty specific about what we think is going to happen to revenue.
Daniel Rabun
Yeah and also on the jackup side, specifically in Jay's prepared remarks. We said there'll be about 12 % decline in the average number of days that our jackups are utilized in the third quarter, so.
Jay Swent
And I think the only thing we didn't cover there is, there's going to be a little bit day rate movement as well, obviously in the downward mode. And I think one of the point Dan was talking about, we are seeing more activity, it gives us a little more confidence, but really hard to tell when that turns back and the rigs being back on payroll.
And I think most of the discussions we're having right now probably center more around early 2010 and very late 2009. So I don't think we're going to see any real improvement on the third quarter from the discussions that we're currently having.
Arun Jayaram - Credit Suisse
Okay. Fair enough, last question. Dan, any sense on the timing of the tenders coming our of the PMX?
Daniel Rabun
They were rumored to be coming out the end of July or first part of August. They've indicated that for a couple of months, but I think now our information is, next week or first part of August that's what I heard, Bill do you have any update?
William Chadwick
That's the most current information we have.
Arun Jayaram - Credit Suisse
Okay. Thanks a lot guys, I really appreciate it.
William Chadwick
Thanks Arun.
Operator
And we'll take next question comes Ian MacPherson with Simmons & Company.
Ian MacPherson - Simmons & Co. International
Hey, good morning. Congratulations on the quarter. I'm sorry to ask you to repeat, I just caught your EP, jackup days utilized, it is expected to be down 12% sequentially.
Daniel Rabun
Right.
Ian MacPherson - Simmons & Co. International
And what did you say about revenues?
Daniel Rabun
While, we said that we're going to have a movement in revenues, we're going to be up on deepwater, we're going to be down on jackups. So, and it gives a total sequentially quarter-over-quarter about 12% decline.
Ian MacPherson - Simmons & Co. International
Okay. With respect to your full year cost guidance that you provided, are there assumptions about further cold stacking embedded within that or not?
Daniel Rabun
This number is pretty limited in the number that I gave you.
Ian MacPherson - Simmons & Co. International
Okay. Lastly, it sounds like the outlook is -- I am talking industry wide here for jackups, activity levels maybe close to bottoming and you have reason to believe that they stabilize and begin to move higher next year possibly. Looking in the North Sea, what do you think specifically is kind of, six month outlook there, you've got a couple of rigs thrown off and one or two rigs available I believe. So, how do you bridge the now and then in that market?
Mark Burns
This is Mark Burns. In the North Sea currently, we've got 8 jackups. The majority of our units are located in North Sea, which as you know is more driven by gas well production, natural gas in U.K and here in U.S, Northern Mexico is very compressed.
We've seen independence in the drilling programs. We don't see a lot of activity between now and lot of new activity and lets say between now and the end of 2009. However, we do see as Jay mentioned and Dan mentioned in their earlier remarks, we have seen a number of enquiries increased. There is a lot of interest in the availability starting in the late fourth quarter and first and second quarter of 2010.
So certainly we are expecting to see some improvements there. In the central North Sea, that's more evolving and safe drilling, that's more of you're heavier duty jackups. Most of those units are again there is lots of interest in contract discussions in the future. So we don't see a great impact on activity levels for those bigger rigs.
Daniel Rabun
One thing that is encouraging, what we are seeing is a noticeable uptick in the activity by the majors to take advantage of low service cost or trying to lock in multi-year programs.
So a lot of the enquiries we're seeing as opposed to three and six month programs. You're seeing multi-year programs out in the market place now we wouldn't have seen last year.
Ian MacPherson - Simmons & Co. International
Okay. That's helpful. Thank you.
Daniel Rabun
Thanks Ian.
Operator
Moving next to Mike Urban with Deutsche Bank.
Michael Urban - Deutsche Bank North America
Thanks, good morning. What are the follow-up on couple of those issues. On the jackup market you guys have spent a lot of time going through -- I think I have got what you're saying but just want to be clear.
Tell me the supply side is really kind of modeling things given that the new builts situation? If we just look at international jackup demand, are you seeing inquiries from interest in activity and rigs going back to work? Would you say that that's just the demand side is at or close to a bottom here in the second half '09?
Jay Swent
I don't think there is any question about that.
Michael Urban - Deutsche Bank North America
Okay. That's what I suspected. And then on the balance sheet, again keeping the power dry and clearly one of the indicators you look at is jackup market bottoming for going back to the buyback. Would another factor be contracting one or more of the contracted 8500 series rig?
Daniel Rabun
I mean all those would be positive indications, yes.
Michael Urban - Deutsche Bank North America
Okay. That was it. The rest of my questions were answered. Thank you.
Daniel Rabun
Thanks Mike.
Operator
And moving next to David Smith with SMH capital.
David Smith - SMH Capital
Hi, good morning. I think about 60% of the international jackup demand to date -- the global jackup demand to date has been with the national oil company’s and that have grown steadily from 25% in 2001. We now have the independent AMPs and other majors respond to oil and get color on the North Sea. Wondering if you can give us some color on how are you seeing the industries response to oil price historically with jackup demand?
Jay Swent
Well, I think Dave, if you look at each area independently, obviously you look at Middle East, you think of Saudi Aramco they have been very vocal in their efforts to maintain activity based on the commodity prices of oil and gas. They have recently announced they plan to increase their natural gas productions over the next few years. So I think we will see activity from Saudi Aramco additional jack ups, potentially there.
If you go around and look at the other noble in the Southeast Asia, look at Petronas and other areas I think these companies are watching, watching across oil and gas very closely and they're going to adopt and hold their programs, same Pemex in Mexico, you'll see them also adjust their drilling schedule accordingly.
When we -- national companies that we've worked for very important client portfolio who have watch these guys very closely, and they're very-very adept at understanding and following the market.
David Smith - SMH Capital
Okay, thank you. And looks like -- wondering if I could get some color on kind of the cost savings this year versus last year by going as self insured on the Gulf jackups were working?
Daniel Rabun
Well, it isn't really so much a cost savings as much as cost avoidance, our wind-storm coverage last year in the Gulf of Mexico was not that expensive. This year was quoted at a rate that was exorbitantly high and it just made no sense at all.
David Smith - SMH Capital
Okay. I appreciate it. Thank you.
Daniel Rabun
Thank you.
Operator
And going next to Jeff Spittel with Natixis Bleichroeder.
Jeff Spittel - Natixis Bleichroeder Inc.
Hey good morning guys. I guess first question with regard to cost containments, your stacking rigs you talked a little bit about R&M expense and the shipyards coming off a little bit. To what extent at this point have you started to see some success in terms of pressuring equipment vendors on either replacement or new equipments and getting some cost relief there as well?
Daniel Rabun
Well as I said, we've had a lot of interaction with vendors and service providers. We've been pushing really hard on this issue and the range is everywhere from zero to probably 50% reductions.
And you can imagine who the people are that are closed to the 0% range. We've had a very disciplined approach to our cost containment efforts and every vendor down to the guy we buy coffee from we pressured for cost concessions but it's paid very large dividends, it's an ongoing effort. And yeah as Jay said, you can imagine... it haven't a lot of movement but we've got some good concessions from others.
Jeff Spittel - Natixis Bleichroeder Inc.
Okay.
Daniel Rabun
And we're going to keep pushing.
Jeff Spittel - Natixis Bleichroeder Inc.
Good. I guess following up on your comments to Ian about the North Sea. You talked about you're starting to see a pick up in bidding enquiries for jackups I guess, globally. Is the phenomenon of starting to see NOC looking to lock up jackups longer terms specific to the North Sea or are starting to see that in others areas as well?
Daniel Rabun
We didn't say national, we just said majors.
Jeff Spittel - Natixis Bleichroeder Inc.
Okay.
Daniel Rabun
Yeah, I think you can see that trend. But frankly all over the place I think with the drilling rig cost coming down you'll see majors in NOCs that had multi-year program start to lock up jackups for longer term.
Jeff Spittel - Natixis Bleichroeder Inc.
Okay. That's it from me guys.
Operator
And we are moving next to Brian Uhlmer with Pritchard Capital.
Brian Uhlmer - Pritchard Capital Partners, LLC
Good morning. I have two quick questions for you. First, I heard you say that you expect all of your deepwater rigs to come out of the yard but timing wise we also have to contracts. So I was curious if you could give a little bit more color on that and if your talking about some of the tenders that we're already see out there, if you're working on negotiate agreements with folks on those and what regions you're looking at right now?
Daniel Rabun
Yeah. We pretty consistently said, the market is on ease where it needs to be within two years of the delivery date to really get, really lively discussions with the customers. We're getting close to getting inside two years on ENSCO 8504. I would characterize the dialogue with customers is pretty substantial. So, we really don't view that as a substantial risk to our business.
Brian Uhlmer - Pritchard Capital Partners, LLC
Okay. Good deal. And second on the Gulf of Mexico jackups. As you look out, I mean what's your outlook for the Gulf? Kind of make you -- stack you from bidding some of the rows that you have in the Gulf of Mexico down into Mexico or other regions, do you want to keep some critical match in the Gulf of Mexico and about where do you see that number?
Daniel Rabun
We don't feel any difference about the market that we always had. I remember what we said is, we're going to pursue the markets that have the longest term and the highest rates. And if Gulf of Mexico offers term and rate. We'll certainly keep in there, but until that market does, we're going to look at other markets that have longer term and higher rates.
Brian Uhlmer - Pritchard Capital Partners, LLC
Thank you.
Daniel Rabun
But I do feel comfortable about that market rebounding. But even in a rebound situation, we're still going to look for longer term.
Brian Uhlmer - Pritchard Capital Partners, LLC
In that case kind of leverage this spot market.
Daniel Rabun
Yeah. I mean it's -- you got another factor going up in the Gulf of Mexico, I don't think we've ever had before. This insurance situation is a very difficult situation for us and other drilling rig contractors.
So, it's an important issue for the industry that somehow it's going to have rationalize itself. Also hurricane criteria for accepting drilling locations is substantially different than it was in the past. So there is a lot of moving parts in that market, but it's not just an ENSCO issue, its a very critical issue for the entire industry.
Brian Uhlmer - Pritchard Capital Partners, LLC
All right. Thank you gentlemen.
Operator
And we will take our next question from Joe Hill, Tudor Pickering Holt.
Joe Hill - Tudor Pickering Holt & Co.
Good morning.
Daniel Rabun
Good morning.
Joe Hill - Tudor Pickering Holt & Co.
would you all talk about your ability, what you think your ability is to place the 8500 Series with a petrography giving the local content requirements that seem to be strengthening and whether are not you consider something creative or unusual like a joint-venture structure to work down there?
Daniel Rabun
We believe that there is great opportunities for our rigs down there. So, the local content requirements I assume you are referring to the new rigs, they want to see built them in Brazil. There is still a lot of opportunities even with those rigs who work down there. So view that as a very good opportunity for us.
Joe Hill - Tudor Pickering Holt & Co.
Okay. So this happens to be above and beyond the 28 that they need, that they said they're going to owned locally?
Daniel Rabun
Yeah. I mean, first of all that has a lot of complexity to it to be worked out. So, during the interim there is a lot of drilling opportunities down there, before those rigs ever get built and delivered, so.
Joe Hill - Tudor Pickering Holt & Co.
Okay. Thanks.
Daniel Rabun
And we're not looking at any joint ventures or anything like that.
Joe Hill - Tudor Pickering Holt & Co.
I appreciate it.
Operator
Going next to (inaudible)
Unidentified Analyst
Thank you. Good morning. I was wondering, given the latest picture we have seen in the deepwater causing express. Where do you see the day rate level in 2010, as we approach to time where many more be putting bills in 2011 that will be coming to the market.
Daniel Rabun
I am sorry, what was your question?
Unidentified Analyst
My question was, we saw a very good fix recently on causing express (ph) in consumption. As we approach the time, as we approach 2011 there will be about 20 rigs will be coming available in the deepwater market. What do you think, what are your thoughts on the day rate levels with this kind of supply increase?
Jay Swent
We still see a very large number of opportunities for Deepwater drilling and you've got to remember all the Deepwater drilling for vast majority of it to date has been exploration and the development work that will result from all this exploration activity but there is going to be plenty of work. So we view that market is going to be -- continue to be pretty healthy. And yes, that was a good fixture with -- express.
Unidentified Analyst
Okay. And then one more question on the jackup side as well. There was another transaction in which premiums of that rig was sold at 175. Do you think that was a one-off or is that the level that we could expect going forward in similar transactions?
Jay Swent
I am not that familiar. I know which rig you're referring to and I don't know really know the background to it so I don't really can comment on it.
Unidentified Analyst
Okay. Fair enough. Thanks.
Sean O'Neill
Angelina (ph), we will take one more call.
Operator
All right. We will take our last question from Geoff Kieburtz with Weeden.
Geoff Kieburtz - Weeden & Co.
Thanks very much. Just one quick one. You've mentioned a couple of times that you're seeing more interest in term contracts as the rigs come down. I haven't heard you say what your response is going to be. Could you just kind of describe that?
Daniel Rabun
We will take term contracts.
Geoff Kieburtz - Weeden & Co.
Okay. I guess what it has been -- prices have come down, are you ready to basically, if you could put all of your rigs to work at your full term contracts, you do it today as rates?
Daniel Rabun
Yes.
Geoff Kieburtz - Weeden & Co.
Okay. They're no strategy to kind of building of laddered portfolio or anything like that?
Daniel Rabun
We're not that smart.
Geoff Kieburtz - Weeden & Co.
Okay. That was the last question I had.
Sean O'Neill
In that case, thanks everyone for joining us today. We greatly appreciate your questions and we very much look forward to speaking with you again on our third quarter earnings call. Thanks very much.
Operator
And once again it does conclude today's call. We thank you for your participation.
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