Noble Corporation Q2 2009 Earnings Call Transcript

Jul.24.09 | About: Noble Corporation (NE)

Noble Corporation (NYSE:NE)

Q2 2009 Earnings Call

July 23, 2009 2:00 pm ET


Lee Ahlstrom – Vice President, Investor Relations

David Williams – Chairman, President and Chief Executive Officer

Roger B. Hunt - Senior Vice President of Marketing and Contracts

Kurt Hoffman – Vice President of Marketing


Arun Jayaram - Credit Suisse

Jim Crandell - Barclays Capital

Kurt Hallead - RBC Capital Markets

Geoff Kieburtz – Weeden & Co., LP

Roger Read - Natixis Bleichroeder

Joe Hill - Tudor Pickering Holt

Daniel Boyd - Goldman Sachs

Ian Macpherson - Simmons & Company International

David Smith - SMH Capital

Robin Shoemaker - Citigroup


Good afternoon. My name is Richard and I will be your conference operator today. At this time, I would like to welcome everyone to the Noble Corporation second quarter 2009 earnings conference call. (Operator Instructions)

Mr. Ahlstrom, you may begin your conference.

Lee Ahlstrom

Thank you, Richard, and welcome, everybody, to the Noble Corporation second quarter 2009 earnings call.

Before we begin I'd like to remind everyone that any statements we make today about our plans, expectations, estimates, predictions or similar expressions for the future, including those concerning financial performance, operating results and the drilling business, are forward-looking statements and are subject to risks and uncertainties. Our filings with the U.S. Securities and Exchange Commission, which are posted on our website, discuss the risks and uncertainties in our business and industry and the various factors that could keep outcomes of any forward-looking statements from being realized. Our actual results could differ materially from expectations.

We have included detailed balance sheets and income and cash flow statements with our earnings news release. Also note that we may use non-GAAP financial measures in the call today. If we do, you'll find the required supplemental disclosure for those measures, including the most directly comparable GAAP measure, on our website and an associated reconciliation also on the website.

Now I'll turn the call over to David Williams, our Chairman, President and Chief Executive Officer.

David Williams

Thank you, Lee. Good afternoon and thanks for calling in.

Once again we've delivered strong results thanks to the excellent work by our dedicated team around the world.

I specifically want to congratulate our U.S. Gulf of Mexico group, who, for an unprecedented third consecutive year, was recognized by the UMS for their outstanding operations. This is the first time any drilling contractor has been awarded the National Safety Award for Excellence three years in a row, and it's a tribute to all the men and women offshore and on who work very hard every day to provide a safe, efficient operation for our customers, employees and shareholders. It's an outstanding achievement, one that the entire company's very proud of.

Happily, it's not just our U.S. group that's doing well; so far this year we're almost 30% of our 2008 safe performance and that was a record year for us.

So to all of our employees, thanks for their hard work and to our customers, thanks for supporting what we do.

Also today I want to welcome two new members to Noble's executive team. Roger Hunt has assumed the role of Noble's Senior Vice President of Marketing and Contracts this week after 35 years of basic training with Santa Fe and Global Santa Fe.

Roger B. Hunt

Thank you, David.

David Williams

We are delighted that Roger's with us and excited to bring his experience to the Noble family.

I'd also like to welcome Don Jacobsen to Noble. Don, as we announced yesterday, will assume the role of Senior Vice President of Worldwide Operations next week. Don brings about 28 years of experience from the operator's side of the business, working most of that time with Shell in a variety of drilling and other operational roles. Most recently Don served as VP of Drilling and Completions for Hess. His experience brings a valuable and a unique perspective to what's already an exceptional operations team, so Don and Roger, welcome [inaudible]. We look forward to having you here.

Our call today will follow its usual format, with a few brief comments by me, a financial overview which today will be provided by Lee because Tom is unable to be with us, and finally our view of the markets, which will be delivered by Kurt Hoffman, our VP of Marketing. After that we'll be happy to take your questions.

On the macro front, the global economic situation continues to ebb and flow, but on the margin things feel a little bit better now than they did six months ago. For now, the constant flow of negative news appears to have slowed and there are even some positive indicators out there such as the outperformance of China's second quarter economic growth versus expectations and rising U.S. steel production. Oil, which was trading below $50 a barrel on our last call and in the $30s in February spent most of June in the upper $60s and low $70s.

Even so, I think volatility continues to be the watchword as evidenced by oil's rapid fall into the low $60s a few weeks ago. So I think it's way too early to get overly optimistic and frankly we think we'll see little or no measurable impact on our business from the improved oil price through the rest of this year.

I do, however, feel better about where we are considering where our customers are in their planning cycles for 2010. As the industry entered last year's budget cycle oil was in a freefall. This year, based on the recent stability and the somewhat improved oil price environment, along with generally more positive sentiment, our customers [inaudible] because it's got to be a little bit better this year than it was last. Hopefully that will lead to more confidence built into their budgets and improve our overall situation for next year.

It's worth noting that when we signed our long-term commitments on the upgrades for both our Noble Danny Adkins and Noble Jim Day oil was below $60 a barrel. It's also worth noting that Pemex, who's been a bright spot for the jackup business in the last year, last year hedged a big portion of their production at $70 a barrel for 2009 and today repeat that process and possibly hedge in the mid-$70s for 2010. We think these are positive signs for us.

Now I'd like to touch briefly on a couple of our new builds. On our last fleet status we disclosed that we have experienced additional delays on the Noble Dave Beard and Noble Danny Adkins. I think that over the past several calls I've said that if we ran into trouble it would be in the last six months of construction and that's effectively what's happened to us.

On the Beard the recent delays are primarily the result of the time it took to get the rig imported through Brazilian customs as well as a shipyard strike that we had. The rig is now in country and we're working towards completion with an expected contract commencement date at the end of this year.

The good news, as expected, we've reached an agreement with Petrobras regarding the penalty for late delivery. In exchange for our providing some additional capital equipment which was already contemplated in our AFE, a new delivery date for the rig has been set in late October. Beyond this date we'll still incur a penalty for late delivery which will be in the form of a percentage reduction day rate, so if the rig goes to work in the first of next year, say, we would essentially have two months of penalty. Our accounting treatment for that penalty will be to recognize the total amount as a reduction in day rate over the full five years of the contract, which means that there will be likely only a small adjustment to the day rate, as shown on our fleet status. Both we and our customer are pleased that we've been able to reach this arrangement.

On the Noble Danny Adkins we continue to make progress and plan to depart the shipyard at the end of September. First and foremost our goal is to deliver a quality rig to our customer, Shell, as safely and efficiently as possible. We each agree to spending some additional time in Singapore makes more sense than towing the rig to the Gulf of Mexico and trying to finish construction there.

Shell's been very much a part of this process, this project and this decision. Today I'm pleased to report that we've reached an agreement with Shell that modifies our contract so that the earliest potential termination date for that rig will be January 1, 2010. There are no changes to the financial terms of the contract. We're working hard to get the rig out by the end of September and we look forward to going to work as soon as possible.

Finally, the last of our new build jackups, the Noble Scott Marks, left China on June 25th and is currently in transit. It's expected to arrive in Rotterdam mid-August and commence operations under its two-year contract in September. As you'll recall, the rate for this rig is $210,000 a day and we're looking forward to getting started on that job.

With that, I'll turn it back over to Lee.

Lee Ahlstrom

Thanks, David.

It's a pretty clean quarter for us and I'll try to move quickly through the results before giving you some guidance on the remainder of the year.

In our release last evening we reported second quarter net income of $392 million or $1.49 per fully diluted share on total revenues of $899 million. Our results included a $17 million pre-tax charge for repairs related to the punch-through on the Noble David Tinsley which occurred in May. After-tax this amounted to a $0.05 per share impact.

Total revenues were slightly higher quarter-on-quarter, driven primarily by an increase in reimbursable revenue contributed by the Noble Homer Ferrington, which spent much of the period preparing to begin its contract with Exxon Mobil in Libya. As we noted in the press release, three deep water rigs were priced to higher day rates during the quarter, contributing an additional $11 million in revenue compared to the previous quarter. An additional calendar day in Q2 versus Q1 also contributed $10 million.

These revenue gains were largely offset by increased idle time on jackup rigs in the Middle East that came off contract as well as a number of jackup rigs which rolled to lower day rates. For example, in Mexico the Noble Tom Jobe, Noble Lewis Dugger, Noble Earl Frederickson, and Noble Bill Jennings all repriced to lower rates during the quarter as a result of Pemex's indexing formula, which relies on global jackup fixtures. Revenues were also negatively impacted by the punch-through incident on the Noble David Tinsley, which was not able to perform its role as an accommodation unit.

Nevertheless, our average daily revenues of $198,300 were up compared to $194,300 in the first quarter.

Cost control continued to be a strong focus. Quarter-on-quarter costs were up about 4% to $251 million, but below the guidance range we gave you on the last call. On a per-day basis, our costs increased 7% to $57,300 from $53,600 in the first quarter. Despite the increase in costs, our contract drilling margin fell only slightly to 71% from 72% in the first quarter.

Most of the cost increase quarter-on-quarter comes from three areas - import fees paid on equipment for rig repairs in Brazil, an increase in R&M spending, and some additional fuel. Versus guidance we came in better than expected due mainly to higher-than-expected idle time on certain jackup rigs which we had thought might go back to work and incur higher operating costs but didn't. We also had lower startup spending on our new-build rigs as a result of schedule changes and benefits of FX, which were only $2 million in the quarter compared to $8 million last quarter. As we mentioned on our last call, we don't see unit costs coming down on anything except consumable materials. Labor rates, equipment prices, insurance, etc., are all holding relatively firm.

Moving on, DD&A expense of $99 million was up from last quarter's $92 million as we had a full quarter on our new build jackup, the Noble Hans Deul, and also had equipment from many of our shipyard projects that we began to depreciate. SG&A expense of about $21 million was up $4 million from the previous quarter due to costs related to our Swiss reincorporation as well as a variety of other miscellaneous charges.

As I mentioned earlier, we took a $17 million pre-tax charge or $0.05 per share after-tax impact for repairs on the Noble David Tinsley. Currently, we don't expect to reach the full $25 million deductible for this incident as some of the repair costs can be capitalized.

Capital spending of $275 million during the quarter was below our expectations, primarily based on changes to our new build delivery schedules.

You'll note we did not repurchase shares this quarter. This was due to the Swiss migration and associated requirements under Swiss law, along with the necessary mechanical procedures we're required to put in place to actually purchase shares. Most of these features are now in place.

Our total debt remained flat at $751 million, giving us a debt-to-cap ratio of 11%, but the cash balance grew during the quarter to $671 million from $514 million, giving us a net debt-to-total capital ratio of 1.3%.

Before moving on to guidance we do want to make you aware of a situation we have with a privately owned E&P company operating in the U.S. Gulf of Mexico. This customer was adversely impacted by Hurricane Ike last year and a substantial portion of their production was shut in, impacting their cash flows.

As a result, we have accrued a receivable primarily against their contract on the Noble Lorris Bouzigard, one of our mid-water floaters. At the end of the quarter that receivable totaled about $50 million. We're working with the customer and have developed a payment schedule. We've also obtained an overriding royalty interest against some of their oil and gas properties, which gives us a level of protection on the receivable balance.

In the meantime, we plan to offer them some relief by marketing the Lorris Bouzigard to interested parties. The rig will be idle intermittently as we market it, which will help the customer by reducing much of the spread cost. However, it's important to point out that even while the rig is idle Noble will continue to earn our contracted day rate.

We have not reserved against the receivable because we believe it to be fully collectible and we'll continue to collect against the payment schedule we've developed with the customer.

Now for the guidance. I think the first comment we'd make that with respect to rigs that are shown to be idle on the fleet status, don't be surprised if they remain idle. While Kurt will talk about the market and some potential opportunities, we all know it's a challenging environment. We don't predict for you on the FSR when these rigs will go back to work, so the next time the status report comes out and you see more downtime as a result of rigs that are idle, it shouldn't come as a big revelation. Therefore, I'd urge you to go through your models and check your assumptions.

We've had good cost performance so far this year, though some of that has been due to idle rigs and project delays. As we mentioned on the last quarterly call, we expected full year contract drilling service costs to be down at least $100 million to the $1.0 to $1.2 billion range. We're going to take contract drilling service costs down again, to the $1.0 to $1.050 billion range with the remaining costs for the year spread roughly equally over the third and fourth quarters. Note, however, if we put some of the idle rigs back to work then these costs could go up and conversely, if we're unable to secure work for some rigs that roll later in the year, costs may come down further.

We expect DD&A to continue to be in the $400 to $420 million range.

And on SG&A we're going to increase that to $80 to $90 million, primarily due to expenses related to the change in place of incorporation and the relocation of certain personnel in Geneva.

The tax rate should continue to be around 19.5%.

On capital we expect to still spend about $1.3 billion for the year. Many of you have asked about capital guidance for 2010 and 2011. We're just starting our budget so we can't give you anything absolute, but let me lay out some of our reasonably firm expenditures.

Most of the new build CapEx will be done this year. There may be some carryover on the Noble Jim Day and possibly the Noble Dave Beard, but the main exception to this is Globetrotter, which will have about $370 million split between 2010 and 2011.

We also have the three drill ship upgrades in Brazil which will run $175 to $200 million per ship, again, primarily spread over 2010 and 2011.

Add to that about $250 to $300 million of maintenance capital per year, plus any additional major project spending we do, and it wouldn't be hard to see us in the plus or minus billion range for both years.

Hopefully that will help with your models.

With that, I'll turn it over to Kurt to review the market.

Kurt Hoffman

Thank you, Lee.

Despite the fact that we've seen significant improvement in oil prices, the market continues to be relatively quiet in terms of tendering activity. With most deepwater and ultra deepwater floaters contracted well into 2011, operators have been slow to identify new floater requirements. There has been some activity in West Africa, specifically Angola and Nigeria, also in India and, of course, in Brazil, but operators appear to be taking a wait-and-see approach while contractors' rate expectations for ultra deepwater rigs continue to hold firm at or above $500,000 per day depending on the term.

The next deepwater rig Noble has available is the Noble Paul Romano. We're showing availability on the fleet status in the first quarter of 2010, but we believe it's likely that the rig will continue working with the current operator - Marathon - into the second quarter.

Of course, our conversations about Globetrotter are ongoing with several majors and national oil companies, but at this point we don’t have anything new to report other than we expect to cut steel in the third quarter.

Moving on to jackups, outside the United States Gulf of Mexico we're seeing pricing in a band of roughly $85,000 to $115,000 per day. We view this as a positive sign given industry conditions over the last 12 months; however, we are optimistic based on several factors. Inquiries and tender activity has picked up somewhat since last quarter's call, though activity's by no means robust nor, as David said, do we think it's likely that activity during the remainder of 2009 will increase significantly.

Nevertheless, we do see some signs of life in the jackup market. For example, in Nigeria we reached an agreement with Exxon Mobil to continue working the Noble Ed Noble through the end of January 2010 subject to a 30-day cancellation right for either party at a day rate of $115,000. In other areas of West Africa we're seeing a number of opportunities with indigenous companies, with programs for 60, 90 or 120 days. While these programs don't offer a lot of term, we're encouraged because this is more activity in the region than we've seen since this time last year.

Likewise there are some potential opportunities in the Middle East and we're hopeful they will come to fruition. Among others looking for rigs, Saudi Aramco is rumored to be in the market for three or more jackups, which would certainly absorb a significant amount of supply. And in Mexico, the industry is waiting for Pemex to publish a tender for between four and seven 300foot independent leg cantilever rigs, most of which are expected to be incremental.

Next, the contracting community has been fairly well disciplined in stacking rigs or moving rigs to the shipyard to complete planned maintenance programs. This has helped reduce available supply and has supported rates.

Also, a number of the speculative builders who are debt financed likely have much higher cost structures which may also serve to help put a soft floor under rates.

Finally, the new build supply picture continues to change. New build deliveries between now and 2011 have dropped to about 60. As we saw ODS report this week, the construction on three speculative jackup rigs has been cancelled. Frankly, we hope to see more cancellations, but even lacking that we think most of these rigs will experience construction delays.

Many of the rigs scheduled to enter the work force over the next several years still show their original delivery dates, which we view as unlikely. For example, the 13 rigs delivered so far this year had an average delivery delay of 75 days, so we believe the delivery schedule will be extended. In addition, a number of these rigs are also unlikely to be truly competitive in the worldwide market, being built by Iran, China, Gazflot, and others.

Ultimately, however, your view on the jackup market will be influenced by your view of commodity markets. If you believe the global economy's recovered and drive activity and commodity prices move into the $80s and beyond, utilization for the jackup fleet could increase and deepwater rates could remain strong. We're not saying that we think we're going to see jackup rates back at the $160,000 to $180,000 day level anytime soon, but we do believe they will be strong enough for those of us with good discipline around cost to deliver solid margins. So, as I said, we're optimistic.

Finally, let me close with a backlog summary. At the end of the quarter our contract backlog was about $10 billion, of which $1.5 billion is associated with our jackup fleet. Excluding planned shipyard work, our fleet is about 74% contracted for the remainder of this year, 41% for 2010, and 24% for 2011.

Thank you and I'll now return the call back to Lee.

Lee Ahlstrom

Okay, Operator, I think we're ready to open up for questions. I'm going to remind everybody that we'd like to try and keep to our one question with one follow up rule so that we're able to get everybody who wants to ask a question on the call.

Let's go ahead and open it up, Richard.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Arun Jayaram - Credit Suisse.

Arun Jayaram - Credit Suisse

Thinking about the U.S. land business, we've seen some differentiation in regards to rigs with higher spec rigs staying a little bit more active in getting premium day rates. I wanted to get your thoughts on the international jackup market and what do you think the differentiating factor will be internationally? Will it be the shiniest iron operating history or ultimately day rate?

David Williams

Okay, AJ, let me see if I can break that down.

It depends on the market. You will see some higher spec rigs probably get higher day rates in places where they're working at their highest and best use. National oil companies tend to define the spec and as long as you meet the spec you bid. And so like, for instance, Pemex, if they define the spec as a 300-foot cantilever with a 40-foot reach and 10 foot either side of the center line, that's just about any rig in the world. So a 30-year-old rig can compete favorably as long as it's equipped just as well as a new-build rig.

So there is differentiation between higher spec and lower spec rigs as long as those rigs are working as close as they can to the highest and best use. And that depends on the application.

Arun Jayaram - Credit Suisse

And my follow up, David, two recent hires at the executive management team. Can you elaborate a little bit on that? Kurt and his team have had the highest margins in the group in the last couple of quarters. I just wanted to see if you could elaborate on the management additions?

David Williams

Well, we've got two good athletes that are out there and if we see good talent in the market we decide to go for it. The marketing group we've got has done a great job. It's one set of circumstances to work through the cycle we've been; it's another set of circumstances to work through a cycle that's down. We're going to separate our management team and move part of it to Switzerland. We have talked about mergers and acquisitions and opportunities and we had the opportunity to grab some guys and we did it. We think those guys are a good add to what I think is already the best team out there.


Your next question comes from Jim Crandell - Barclays Capital.

Jim Crandell - Barclays Capital

A couple questions, Dave. First is can you talk about any rigs under construction you see coming on the market here for deepwater rigs and jackups? I know that you're very interested in these new rigs at the right price, such as the PetroMena 1.

David Williams

Yes, Jim, there are a number of rigs out there we're watching. We had an interest in the PetroMena 1. We chased that rig hard long before it really came to market.

We had a little bit different strategy than most of the other people. It was really our intent to go ahead and service the Petrobras contract that was in place and so we had already pre-discussed the contracts and some of the modifications that we felt needed to be made to that contract with Petrobras. We had negotiated with bondholders and other equipment suppliers and the other third parties that held equipment to try to secure the rights to the whole package in order to service that contract.

And we were very close; it was a convoluted deal. Our expectation was that the all-in price of that rig should have been around $450 million. As it sits today the buyer of the rig bought a rig that's almost outfitted for 7,500 feet of water for more than our all-in price and we think by the time they finish outfitting it and buying riser and drill pipe and the rest of it they'll be pretty close to the new construction price. So at that level it just didn't make a whole lot of sense to us.

There are other opportunities out there; certainly, with the disposition of the PetroRig 1, PetroRig 2 would likely be in play before too long, and then there's always PetroRig 3. So you don't really know how those are going to shake out. I'm not even sure who owns them technically now. But there are other rigs, there are a number of other one or two or three or even four-rig asset holding organizations out there that might make potential targets.

We would have liked to have seen the bar set on resale of those a little bit lower, but that doesn't mean that we won't still see opportunities and we're still chasing those.

Jim Crandell - Barclays Capital

And a follow up, Dave. To what extent is the day rate, the recent day rate announcement on the Cajun Express indicative of what you would either hope to get or expect to get on the Globetrotter?

David Williams

There hasn't been a lot of [inaudible] so it's hard to define the market, so almost by definition that becomes the market.

As Kurt said in his commentary, we're still not embarrassed about a rate that's got a five handle on it, so depending on the term and location, when it starts and who we see as real competition, we're certainly not afraid to chunk in a 500-style number.

Clearly, the deepwater market is holding its own. I think all markets in an environment like we're in right now see some pressure, but I think that market's held up fairly well and I thought the rate for the Cajun Express was a nice reflection of that.


Your next question comes from Kurt Hallead - RBC Capital Markets.

Kurt Hallead - RBC Capital Markets

I'm curious on your thoughts with respect to the outlook on the jackup market as we head out into 2010. I know you gave us some color here, but if I do my math correctly the market's going to need something like demand of 200-plus jackup rigs next year to get you to 85% utilization, which is typically the trigger point for pricing power. How would you calibrate the market relative to that number and do you think that I'm way off base in that assessment?

David Williams

Well, Kurt, I haven't counted the rigs so I'll give you credit for doing the math right. And I don't necessarily disagree that there are tipping points in markets where you can push rates or not.

I would tell you that a lot of the rigs that are idle in the world are situated in a market that really is not a worldwide competitive market and that's the U.S. Gulf of Mexico, so once you carve that pile of rigs out I think you're taking a big chunk of the idle equipment out and each little market is kind of unto itself.

I think we demonstrated there is strength of being in place. For instance, in West Africa we were able to do, I thought, a pretty nice deal for our rig in Nigeria on extension there.

Each market is kind of different. Yes, clearly we need to see some increased opportunities and increased demand, but there's a lot of chatter out there. I think there is a lot of pent-up demand in certain places. You know, we've been waiting on these to come out of Mexico for a long time. West Africa's just been on its ear now for 18 months, long before oil price really started its downfall there, and I think there's a lot of opportunity there if they can ever get some things straightened out. There are some signs we may see some of that breaking up; it's not real exciting yet, but we might see some opportunities.

So without counting the rigs I can't question your math, but I feel a lot better about where we are headed in 2010 than I did about where we were headed in 2009, I guess.

Kurt Hallead - RBC Capital Markets

And then maybe a follow up to the answer to your prior question is for a period here during the first three/four months of the year it looked like there would be a lot of distressed situations that would enable you to pick up assets or companies and I'm just wondering in your view - you may have sort of answered it already - but do you think the window of opportunity of getting asset deals done or some consolidation done in the offshore drilling market, has that now come and gone?

David Williams

No, I don't think so. I mean, I think that the failure to get asset deals, I mean, there's been one deal done and, again, I was frankly disappointed at the level of that deal. But I think the fact there hasn't been more activity is a testament to the strength of the deepwater market. You know, there are some of these guys that need to die but somebody's keeping them propped up long enough to either provide financing or to keep some kind of cash infusion going so that these projects stay alive, and I think that's as good a testament as you can give to the strength of what those rigs are aimed for and that's the deepwater market. So I think you have to take it in context.

I don't think the window of opportunity is closed. I think there's still going to be opportunities. They may not be as, for lack of a better word, cheap as I had personally hoped and I think as we thought it should be, but you go back a year and a half ago when oil was crossing through $100 a barrel and headed up, you know, at that point, when people were allowancing $800 million drilling rigs and one guy $900 plus million rig, we said then the best thing happened to us from a strategic perspective is oil go to $40 and stay there long enough to dry all these guys up. It went below $40 but it didn't stay long enough to dry anybody up and I think that should bode well for those of us that are trading where we're trading.


Your next question comes from Geoff Kieburtz – Weeden & Co., LP.

Geoff Kieburtz – Weeden & Co., LP

With the comment about the band of jackup pricing in the $85,000 to $115,000 range at this point, as you look out over the next six months do you think that band holds up or do you see more movement in that?

David Williams

I think there are markets where we haven't seen the full impact of the market yet and I think there are places that have been, you know, the North Sea is a place you haven't seen a lot of new renewals; it's likely to come down. My view is - one of the things we talked about, that both Kurt and I touched on in our discussion about oil prices - we don't expect to see a lot of improvement this year.

I think what you may see - I think rates will still, on the average you'll see them average down as renewals go down. So, if you take the sum of all the rigs out there, their average rate's going to come down some.

What I would hope to see and what will give me comfort as we go through the third quarter, fourth quarter, if we still see the continuing strength of the oil price is that rigs that are rolling off, if there's an incremental opportunity for an operator to extend it either short term or longer term, you'll see a lot more negotiated extensions, so you can see utilization flatten out and rates would continue on the margin to trade down. But you, I think, could see them flatten out in a band.

We saw rates fall off earlier in the year pretty dramatically, but they seem to have kind of flattened down. That tells me that we're already starting to see, I think, some of that activity where people are starting to negotiate existing rigs without going to tender. You're starting to see things kind of flatten out a little bit.

Kurt, do you have anything to add to that?

Kurt Hallead - RBC Capital Markets

No, I agree with that.

Geoff Kieburtz - Weeden & Co., LP

And with that outlook on rates, would that sort of lead you to not cold stack any of your idle rigs? Is cold stacking kind of off the table at this point then?

David Williams

Well, we've cold stacked a couple of bottom founded rigs in the Gulf of Mexico. We've cluster stacked three rigs in West Africa that we really don't feel comfortable cold stacking; we've taken them as far offline as we can.

There's two pieces of that. One is we don't want to just zero man them because we're afraid of what we'll find when we come back. You've got to have a watch on those rigs in that market because things walk away. So we've got a small crew looking after three rigs there in a cluster. We did that several months ago. That gives the option to be back in the market before some of the other guys that may cold stack. But it's as far down as we want to take those rigs. We won't cold stack anything that we've got an active dialogue or something that we think may come to fruition in the near term or something we may need shipyard work for.

So we've been doing necessary maintenance. We had a heavy survey year this year; we've been doing some of that. But we've either got dialogue bids or opportunities we think for most of the rigs that we've got stacked that we think we've got a shot at. If we didn't we'd be cold stacked.

Geoff Kieburtz - Weeden & Co., LP

The way you see the market currently you wouldn't expect any incremental cold stacks?

David Williams

If we don't see some things that we hope to see, if we don't see some things happen in the Middle East that we are either chasing, expecting or working on, if we don't see some of those things come to fruition and we continue to see slack, then we may very well cold stack a couple rigs there through the end of the year. Right now, just because of our shipyard schedule and some other things, it hasn't come up.

We're not bashful about cold stacking rigs. We pulled the Fri Rodli out a year and a half ago or something. If we saw things getting slack, we're not afraid to make the decision to do it. We're not hanging on betting on the come; we're either chasing something or we've got a shipyard job or we've got something in mind.


Your next question comes from Roger Read - Natixis Bleichroeder.

Roger Read - Natixis Bleichroeder

I guess a quick question for you, maybe a little more specific to the North Sea. You've got a lot of rigs that, end of this year, very first part of next year, do go off contract on the jackup side. Does that look like, in terms of bidding activity, one, that you could end up filling the utilization holes if not necessarily arresting any day rate declines?

David Williams

I think it's naïve to think that those rates are not going to see pressure. In some cases we may already be in dialogue with an operator, either the existing operator or a new operator about the future of those rigs. In some cases we've got our eye on other work.

But, I mean, it's unlikely to believe that the rigs that are in the $200,000 plus range are going to be able to roll in the $200,000 plus range for continuing work in the North Sea. I think if there's work there, which it appears now that there will be work for some of these rigs, if not all, those rates are going to be under pressure. There's no question about it. We couldn't pull enough rigs out of the market to make a big enough difference to keep those rates up, I don't believe.

Roger Read - Natixis Bleichroeder

No, I'm with you that the rates will go down. I guess what I'm trying to understand, with that many rigs coming on the market, several rigs already out there, do you see enough bidding activity that you can actually keep, let's say, a majority of the North Sea fleet working through the winter months?

Kurt Hallead - RBC Capital Markets

There's definitely a concern, as David said. It could get a little choppy in the North Sea. But what we're forcing and what's going on is we're not seeing a lot of bidding activity, which is troublesome, but we are having a lot of conversation with our current operators to renew existing assets, so that's positive. That's encouraging news.

I wish there were more tenders out there right now. There's certainly talk of tender activity in the near future. I'd like to be seeing it now. We don't have it now. But as I said earlier, what is encouraging is there's dialogue going on with operators that currently have our rigs under contract for extensions.

Roger Read - Natixis Bleichroeder

And it was addressed a little bit in the introductory comments why you didn't buy shares back in the second quarter, obviously a lot of questions have focused on potential asset purchases. Are you comfortable at this point building cash in the absence of either share repurchases or near-term acquisitions? You've said you wish things had stayed softer a little longer, but it definitely created a more fertile opportunity for asset acquisitions. Do you wait at this point, I mean, do it in the second quarter of next year? Would you be comfortable not doing anything between now and then?

David Williams

Well, we're not going to spend the cash just because we've got the cash. I mean, we're not embarrassed about building cash on the balance sheet. You look back at my career, we love to have the cash on the balance sheet. So our view of the world hasn't changed. I mean, we didn't buy shares in the second quarter for a reason, but that doesn't mean we won't be in the market in the future.

We still think, you know, we talked about the one sale ad nauseam already on the call, but I think there will be other opportunities and we're certainly not embarrassed to have some cash on the balance sheet.

The balance sheet that we've got and the cash that we're going to generate at the margins that we're able to run through this thing will create options for the company and for the shareholders. The key for us is how do we use that optionality to the maximum benefit of the shareholders. Hopefully we've demonstrated at least that we're not standing here just dying to go do a deal. We could have done that deal if we wanted to do it. We're looking for value and having the cash where it is and building cash and being patient will provide that opportunity in the fullness of time. And when it comes, you won't be embarrassed.


Your next question comes from Joe Hill - Tudor Pickering Holt.

Joe Hill - Tudor Pickering Holt

The Ed Noble rate was a pretty nice rate and I'm trying to figure out whether or not you all think that would be representative of where West Africa's going or current market or whether you just struck a nice rate?

Kurt Hallead - RBC Capital Markets

Well, we're pleased with the rate as well, Joe. It's a little too early, I think, to say it's indicative of where the market's going to go. It's one of the first, really one of the freshest jackup fixtures in the region. If you look at the amount of idle rigs in the area right now, about 40% or a little over 40% of the jackup market in West Africa is idle today, so to say that $115,000 may be indicative of where we're going to stay, I think, would be an optimistic statement. What we're doing right now is just looking for every opportunity we have and focus on utilization and trying to put the right deals together when they come our way.

We're also not, as you know, specifically in West Africa, if there's the right opportunity to migrate rigs or relocate rigs out of West Africa, we're not afraid of looking at that either.

Joe Hill - Tudor Pickering Holt

It sounds like you guys kind of see the second derivative of utilization flattening out here, maybe going into next year. Your commentary is a little bit more optimistic than what I recall on the last call. If you were going to divide the world up into regions, where do you think would strengthen first for jackups?

David Williams

It depends. I mean, strengthen is kind of a relative term. The Gulf of Mexico could turn on a dime if gas goes up. Whether or not that happens, I don't know.

Joe Hill - Tudor Pickering Holt

But let me give you some [inaudible] on that. Like you say, gas prices are flat here and oil prices are flat here for 12 - 18 months.

David Williams

I think West Africa has potential to turn at any time because I don't think it's necessarily product price driven. I think it's geopolitical crud and that could turn over at any moment.

You know, the Middle East, by virtue of the fact there's so many rigs there, if you see some activity there I think that could have a domino affect. There's a lot of discussion about work over there and I think you could see some things turn there.

So I think both those markets have potential. Kurt, do you have a different view?

Kurt Hallead - RBC Capital Markets

No, I don't. We actually talked about this prior to the call and it's consistent with what we talked about earlier.

What I like about the Middle East is, with the exception of the north field, it's mainly driven by oil prices or oil commodity, which we like. There is such mature infrastructure within the Arabian Gulf area that if operators see a length of time with stability in oil prices they'll get started with their projects again and because of the infrastructure it's very efficient to get rigs on location and drilling complete wells and get them in the pipeline to a sale point.

So with that in mind, I'm encouraged and I think the Middle East and West Africa are areas that can show recovery quicker than others.


Your next question comes from Daniel Boyd - Goldman Sachs.

Daniel Boyd - Goldman Sachs

I've got a question on the strategy and the use of cash, to come back to that. It doesn't sound like you want to make asset acquisitions if it's going to cost more than what you could build a Globetrotter for just judging by your comments on the PetroMena rig and your past actions, I guess. And when we look at how much cash you have on the balance sheet and you mentioned that you do think your stock is attractive here, why not use that to accelerate share repurchases going forward as opposed to spending on an asset that cost more than a new build?

David Williams

Well, I don't think the asset cost more than a new build; I think it cost about what a new build costs. And as it relates to asset acquisitions versus Globetrotters, I don't know that they're mutually exclusive. If we had gotten that rig for what we wanted to pay for it and then also landed two Globetrotters, we would have been able to do both. So I don't know that one necessarily precludes the other.

I'm one of these guys that believes that the strength of the deepwater market or the depth of the deepwater market is still very strong. I think we're under rigged, if you will, on a go forward basis. I think if you look at the number of rigs that Petrobras talks about that they need on a go forward basis and subtract from that the number of rigs they think they've contracted that they're not going to get delivered, I think clearly a $60 or $70 oil price environment supports the kind of work that's going to require more equipment.

So we're not afraid of where we are. We're not bashful about doing either one. Again, Dan, it's got to be value for money for us and we're going to be disciplined about it. You talk about share repurchases; we've not been bashful about buying our stock. I think we did over 1.5 million shares, 1.8 million, whatever it was, in the first quarter. We were very active in our own shares last year. So we're certainly doing that.

We haven't changed our view of going out and putting a bunch of debt on the balance sheet just to buy stock. I just don't think that's - that's not in our best interest long term. Once we do that we're effectively out of the game and we're not going to get there.

So I'm not saying we're not going to buy rigs. What we can build the next Globetrotter for certainly is a proxy for or certainly a good bellwether for what we would be willing to pay for secondhand equipment because we can outfit it exactly the way we want it. One of the things we didn't like about that rig was the kit that was onboard the rig was all hydraulic and you walk on the rig and you're immediately slipping rates. It wasn't kitted up the way we would kit it up. But it was a decent hull at what we had hoped was a decent price. But I think we can do both.

Daniel Boyd - Goldman Sachs

Okay. And I wasn't alluding to levering up; I was more alluding to using free cash flow as opposed to reinvesting in assets, just reinvesting in your own stock where you're potentially buying assets cheaper than in the market.

David Williams

Dan, we've been doing that. I mean, we couldn't do it for mechanical purposes in the second quarter.

Daniel Boyd - Goldman Sachs

Okay, I think I hear you on that. And just on a follow up with, you know, there's always talk of M&A out there and corporate M&A. Can you talk about does Noble have any strategic goals or do you see any value creation outside of financial engineering or potential tax benefits in terms of corporate M&A?

David Williams

Well, strategically I think we've talked about at length we'd like to put more deepwater assets in this fleet, so from a strategic perspective, I mean, there's no reason to grow the fleet just to grow the fleet. With our fleet of rigs we can compete with anybody anywhere we want to compete with them. So the reasons to do it are strategic reasons and those would be additions of the right kind of rigs, which would be primarily floaters, or if we could expand into a region that we're not. I mean, I love Southeast Asia; I spent a lot of my career there. If we could wire into something that had a big presence there, that might be fun. If it was a jackup deal it would have to be extremely cheap.

So, you know, again it goes back to the same discussion and that's about where's the value. From a strategic perspective, we want to put more floaters in this fleet.


Your next question comes from Ian Macpherson - Simmons & Company International.

Ian Macpherson - Simmons & Company International

I wanted to get back to the Lorris Bouzigard contract with LLOG, I guess, and just clarify they are committed to pay their contracted rate up until I guess you find another taker for the rig. And if you reprice the rig on a new contract that's a good bit lower, are they committed to pay the day rate differential through their committed term or how would it work in that scenario?

David Williams

We didn't say who the operator was; we'll let your surmise that.

I don't think we should get too deep into the mechanics of it. I think the way Lee described it is appropriate. We have what we view as excellent security and we're continuing to build day rate even if the rig is idle.

Lee Ahlstrom

A full day rate.

David Williams

Or if we are able to put the rig out to service to somebody else, we would still, as Lee said, draw our full day rate.

I'll let you use your imagination to see how that could be construed. You know, the operator has an issue. He's been very forthright with us about the issue and very fair in the security, and we want to give them the latitude to get their problem solved and go forward. We're going to help them every way we can, but we're very comfortable with the security we have that backs us up.

Lee Ahlstrom

The deal is designed basically to give them a pretty large incentive to make sure they take care of the receivable so that we don't go and sell the override.

Ian Macpherson - Simmons & Company International

Okay, I got you on the receivables. I'm really more concerned about you've got long-term backlog at a pretty high day rate and so are they responsible for all that backlog if you re-contract it at a much lower rate with another party.

David Williams

We have not given up the backlog.

Ian Macpherson - Simmons & Company International

And then the follow on question on the jackup market internationally, David, are you of the opinion that a good swath of the jackup market ultimately does need to be retired or cold stacked in order to rebalance the market or is that not necessarily the case? How do you think about that vis-à-vis your own fleet over the next few years?

David Williams

That depends on what the product price is, Ian. Would I like to see 10% of the jackups in the world scuttled, turned into razor blades, of course I would. Does that mean we can't put them back to work in the right product price environment? Absolutely not.

I don't think that you're going to see and you never have seen a wholesale retirement of assets by drilling contractors. I mean, you've got to be pretty thick skinned to want to do this and contractors just don't give up on their assets very easy.

I think it's fair to say that the bulk of what's remaining in the U.S. Gulf of Mexico is relegated to the U.S. Gulf of Mexico and the Gulf of Mexico, instead of being what used to be the melting pot of the jackup market around the world - when you had a rig without a job you always brought it back to the Gulf because you would work for somebody for something - it's just not that way anymore. And I think the Gulf of Mexico fleet is largely, with a few exceptions  I mean, there's some quality iron out there doing some high spec work, some of our competition has some pretty nice jackups - but most of that fleet is technically obsolete to be working in international markets, so almost by definition you have reduced the number of available rigs for international service over what you could take out of here.

Would I like to see it? Absolutely. Do I expect it's in the cards? Probably not. You know, we took an impairment and wrote the Fri Rodli off early this year. It is our intention that that rig will not - we don't want to ever have to compete with that rig again so we've already stripped some equipment. We'll either cut it up, sell it, scrap it, sink it, something, but we're not going to be drilling with it. And it would be very nice to see some other contractors take that same approach with some of these rigs that really ought to be doing something else.

But again, I mean, you know, look, $60 oil, I mean, everybody's oh, my God, oil's only $60, we've only seen this oil price a couple times in our history. I mean, $60 - $70 oil is a very healthy product price. People say what does it take to get rigs back to work; I think we're there. I think the problem is confidence in the market and other influences that impact our business, not product price.


Your next question comes from David Smith - SMH Capital.

David Smith - SMH Capital

If you wanted to maybe look at retiring some rigs or get rid of some excess capacity, you maybe roll the dice and move some into Venezuela.

David Williams

We've been there.

David Smith - SMH Capital

My question was if we're thinking about how improved oil prices are going to factor into demand a year from now, any thoughts on whether you see a better impact from oil prices to the fourth generation floaters as opposed to the international jackups?

David Williams

On the margin I would say a 10% increase across the board in drilling activity, you know, that benefit would accrue to all rigs. The fact that I think the fourth generation floater market is already fairly robust and strong, you would probably see those rates kind of move a little bit faster and a little bit higher. I mean, there's less competition. If you put out a bid today for a 6,000-foot, 4,000-ton variable load fourth generation rig that you want to start work on in January, you'd probably get a handful of bids, and you put out a bid for a 300-foot jackup to start in February you'd probably get a ton of bids.

So I think it's just a function of where the market is. While we've seen a lot of slack, there's been a lot of discussion about jackups, there's just not that much slack in the floater business so, you know, I would think you'd see it would move the needle further faster on floaters.


Your final question comes from Robin Shoemaker - Citigroup.

Robin Shoemaker - Citigroup

I just wanted to ask about, going back to the potential rig repurchases, I've heard perhaps you and others say that in this kind of environment what you really want to do is buy rigs from shipyards or creditors and not from the original equity investors, such as was the case, of course, with the PetroRig 1.

However, it seems like with the recent rise in oil prices or for various other reasons having to do with credit markets that some of the speculative rig builders who are financially challenged are cobbling together maybe some short-term financing or bridge financing to get into a better market environment.

My question, I guess, really is: Do you see any evidence of that? Do you think it's still true that you should be buying rigs only that have been repossessed by shipyards or creditors?

David Williams

Well, we never really had a view that we should only buy rigs from creditors. We felt like they were a little easier to deal with and probably a little more hungry to get something done.

I think clearly there were some folks that set out on a path to either build rigs or become drilling contractors who clearly underestimated what it was going to take and how complicated and how many [inaudible] holes there are in it, and you don't really want to save somebody that needs to die in the fight anyway.

But, you know, having said all that, we wouldn't be bashful about buying a rig from a speculative new build person or group as long as they had the right attitude about selling it and truly wanted to get out of it. I think the problem that we've seen really is that most of those guys, if you're dealing with the principals, they think you're there to save them and if you're dealing with the debt holders you're there to bail them out. And so just how the negotiation or the discussion commences the position of strength of one versus the other might be stronger if you're there to bail somebody out than a guy who thinks you're there to save him.

So we've talked to both. We've talked to both. We're not bashful. I think the debt holders who are stuck with - you know, no banker in his right mind wants to be a drilling contractor, and so I think just from that perspective I think they're just easier to deal with.

Robin Shoemaker - Citigroup

Just one follow up then on the share repurchase plan. As a Swiss corporation now, do you need to have a shareholder vote to approve a new share repurchase plan?

David Williams

There are nuances to the Swiss repurchase plan. We have an authorization and the shares that we could buy are within that authorization. We may go ask for a greater authorization later if we think it makes sense. You have certain latitude, but it's limited. I think we're fine with our current authorization with the Board and with Swiss law to continue where we are now without asking shareholders. Not to say we wouldn't go ask shareholders in the future for another authorization, but where we are now I think we're comfortable.

Lee Ahlstrom

And at some point if we burn through what we have, we will have to go back and ask shareholders.

Robin Shoemaker - Citigroup

Yes, understood. Thank you.

David Williams

Thank you.

Lee Ahlstrom

Okay, ladies and gentlemen. Thank you very much for joining us on the call today. We'll be back in October for the third quarter call and we'll no doubt see you on the road between now and then. Have a good day.


Ladies and gentlemen, that concludes today's Noble Corporation second quarter 2009 earnings conference call.

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