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Rowan Companies Inc.

Q2 2009 Earnings Call

August 4 2009, 11:00 am ET

Executives

Suzanne McLeod - Director of IR

Matt Ralls - President and CEO

Mark Keller - EVP, Business Development

Bill Wells - VP, Finance and CFO

Analysts

Collin Gerry - Raymond James

Robin Shoemaker - Citigroup

Ian Macpherson - Simmons & Company

Brian Uhlmer - Pritchard Capital

Mike Urban - Deutsche Bank

Dan Pickering - Tudor, Pickering, Holt

David Smith - SMH Capital

Arun Jayaram - Credit Suisse

Mike Drickamer - Morgan Keegan

Tom Curran - Wells Fargo

Operator

Welcome to the Rowan second quarter 2009 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator instruction)

It is now my pleasure to introduce your host Suzanne McLeod, Director of Investor Relations for Rowan Companies Incorporated.

Suzanne McLeod

Welcome to the Rowan second quarter 2009 earnings conference call. Joining me on the call this morning are Matt Ralls, President and Chief Executive Officer; Mark Keller, Executive Vice President, Business Development; and Bill Wells, Vice President, Finance and Chief Financial Officer who will have prepared comments.

Also in the room to respond to questions are David Russell, Executive Vice President, Drilling Operations and Dan Eckermann, President and Chief Executive Officer of LeTourneau Technologies.

Before Matt begins his remarks, I'd like to remind you that during the course of this conference call, certain forward-looking statements may be made within the meaning of the Private Securities Litigation Reform Act of 1995, including statements as to the expectations, beliefs and future financial performance of the company that are based on current expectations and are subject to certain risks, trends and uncertainties that could cause the results to differ materially from those projected by the company.

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

Matt Ralls

Welcome everyone and thanks for joining us this morning. I am going to make a few brief comments and then turn it over to Mark Keller who will discuss the markets where we operate and others where we see opportunities for our jack-up rigs. After that Bill Wells will provide more detail on our second quarter results and provide some updated guidance for 2009 before we open it up to questions.

To begin with, we're pleased with our results for the second quarter. We reported quarterly earnings of $97 million or $0.85 per share, including a $0.07 per share discrete tax benefit. Net of that benefit our earnings of $0.78 per share exceeded consensus estimates by 0.03, due primarily to lower drilling cost which is an area where we continue to show improved performance.

However, our manufacturing results were disappointing as a result of increased cost related to higher accruals for warranty expense and sales mix during the quarter. Bill will expand more on this during his comments.

The worldwide jack-up market weakened during the quarter as more jack-up (inaudible) idle dropping worldwide fleet utilization to 73% and putting pressure on day rates. As mark will relate in more detail we have definitely seen a pick-up in new tender activity over the past several week. However, we expect the competition for these jobs to be quite strong, both from existing equipment and from new builds entering the market. We estimate there are 55 to 60 new build jack-ups due for delivery between now and 2011, most of which are uncontracted which will hold utilization down.

Until utilization improves into the mid 80%, we expect that the general trend in day rates will continue to be lower. We have eight jack-ups that are or soon will be idle, four in the Gulf of Mexico and four in the Middle East. We are actively bidding all of these rigs but have substantially reduced manning on most of them pending obtaining contract.

During this period of low activity, we intend to take advantage of the downtime and low opportunity costs, to conduct upgrades and life extension work that will increase the competitiveness of these rigs.

Fortunately, we have approximately $1.5 billion in contract backlog that will enable us to generate strong cash flows despite current weakness in spot markets for jack-ups. We continue to believe that the quality of our rigs and our operational reputation will enable us to obtain above average day rates and utilization, for our available jack-ups.

From a liquidity standpoint, I am pleased to report that in July after receiving investment grade credit ratings from Standard & Poor's and Moody's, we completed the $500 million 10-year bond offering. These funds will help ensure that we have the liquidity to weather the current drilling downturn however long it lasts as well as have the financial flexibility to take advantage of opportunities to maintain, grow, and diversify our offshore rig fleet.

With respect to our new build program, construction continues on our second 240C, the Ralph Kaufman, which is to be delivered in early 2010. Our first three EXL rigs remain on schedule and on budget with deliveries scheduled for the second, third and fourth quarters of next year.

In June, we announced our decision to resume construction of our third 240C class jack-up, the Joe Douglas, at our Vicksburg, Mississippi shipyard, with delivery expected in the third quarter 2011.

Earlier this year we halted construction on this rig due to concerns over the lack of liquidity in the credit markets and the downturn in jack-up drilling markets. Based on a greatly improved liquidity outlook for 2010, we resumed construction, confident that this very capable high spec rig will generate an attractive return on capital based on its expected go-forward cost of $150 million and will be met with widespread customer acceptance when it is delivered in 2011

As previously discussed we have suspended construction on the fourth EXL rig and expect to make the decision in the coming months about whether to go forward with this rig based on expected go-forward costs of approximately $118 million.

With that, I will turn the call over to Mark who will discuss the drilling markets in more detail.

Mark Keller

I will now discuss Rowan's drilling operations and provide an overview of the worldwide markets in which we're currently operating. Rowan's offshore fleet of 22 jack-ups is currently contracted at 68% utilization with an average day rate for our working rigs of approximately $186,000.

Despite the continued decline in the jack-up market, we have been able to achieve above market day rates and leading utilization numbers in the regions where we're currently operating. We're grateful that operators continue to recognize our level of excellence in drilling performance.

14 of our 22 rigs are located in international markets; Nine in the Middle East, two in the North Sea, one in West Africa, one in Eastern Canada and one in Mexico. Rowan's remaining eight jack-ups are located in the U.S. Gulf of Mexico. However the J.P. Bussell will mobilize to Egypt for operations with Shell in September of 2009 as previously announced.

Our strategy remains to diversify our fleet geographically and we're encouraged by the number of international tenders we have in-house or inbound. We're currently considering opportunities in the Middle East, South America, India, the Mediterranean, Eastern Canada, Southeast Asia, Mexico, and the North Sea.

According to ODS-Petrodata there are currently 449 jack-ups worldwide. Demand is 346 rigs with utilizations of 73%. We don't expect to see an improvement in the supply-demand imbalance in the near term.

Worldwide demand for premium rigs, those that are 300-foot independent leg cantilever or greater has remained stronger than the total fleet and utilization is currently at 81%. 19 of our 22 jack-ups are in this premium category. To take another step; demand for high spec rigs which we define as 2 million tons or greater is even higher with utilization currently at 92%. Rowan has a 40% market share of the jack-ups that meet this specification worldwide. We continue to believe that our premium and high spec fleet of jack-ups will consistently outperform the industry in both utilization and average day rate.

I will now discuss Rowan's geographical area of operation. Let's begin with the Middle East. The supply in this region is 108 jack-ups while demand is currently at 82 rigs and contracted utilization is 76%. Rowan has nine jack-ups in the region. Five of our units are on term contracts at an average day rate of approximately $167,000. The remaining four are currently or soon to be in the shipyard undergoing life enhancement modifications and upgrades.

It has always been Rowan's strategy to take advantage of any extended downtime by upgrading our fleet. As drilling programs become more demanding in the Middle East and abroad, tender requirements and rig specifications have become proportionately more challenging and these modifications will enable us to meet those demands.

All of our idle rigs are being marketed worldwide. Despite the current excess capacity in the Middle East, we're actively tendering for the multiple projects in the region. We're confident that the quality of our jack-ups, the relationship we've forged and the drilling performance we've exhibited in the Middle East, will provide competitive advantage in the bidding process.

Next, I will cover the North Sea. Supply is 35 jack-ups while demand is correctly at 31 rigs and contracted utilization is 89%. Rowan has two Super Gorilla class jack-ups in the region. The Gorilla VI is currently in the shipyard undergoing modifications for BG to enter the Norwegian markets and scheduled to commence operations in mid-to-late September 2009 at $325,000 a day. The Gorilla V continues its contract with TOTAL at $260,000.

In the North Sea market, 11 of 31 contracted jack-ups will come off contract before year-end 2009. There are currently no prospects for these units as most of the outstanding tenders are for drilling programs that commence in 2010. Several jack-up contractors have accepted a combination work at below market day rates to keep their rigs active.

The short-term outlook for the North Sea is concerning, but we're optimistic about the number of tenders we have in-house or inbound for projects that require high spec jack-ups in 2010 and beyond. Given the harsh environment requirements of the region Rowan has a definite advantage considering the specifications of our Super Gorilla and 240C class jack-ups.

Moving on to West Africa; supply is 27 jack-ups in the region and demand is 14 rigs, with 52% utilization. This is currently the weakest region in the world behind the U.S. Gulf of Mexico. Scattered inquiries and tenders have entered the market, but nothing significant to offset the current supply-demand imbalance. The Rowan Gorilla VII continues operation with Cabinda Gulf until second quarter 2010, at a day rate in the low 330s. We're in currently in discussions with Cabinda Gulf about possible extensions, but we're also tendering the rig in the North Sea.

In Eastern Canada, the Gorilla III commenced operations with ExxonMobil in late may at a day rate in the mid 360s, which includes amortization in lump sum fees. Upon completion of that well in late August the rig will work in Canada at 305,000 per day for approximately 200 days. We're currently in discussions with ExxonMobil for additional work following that project.

Let's take a look at U.S. Gulf of Mexico; supply in the region is 71 jack-ups while demand is 21 rigs with a contracted utilization of 28%. We have recently experienced the lowest utilization number that ODS-Petrodata has reported since their inception in the mid 1970s.

Over the past two years there has been a 75% decrease in the number of rigs drilling and with hurricane season upon us, that number could get worse before it gets better. Potential bright spot for the Gulf of Mexico is the deep gas play. Rowan recently secured a two-year contract with McMoRan for the Ralph Kaufman at 180,000 per day, commencing upon delivery in January, 2010.

We believe that the Gulf of Mexico market, for high spec jack-ups could be revitalized if these very high potential wells prove successful. We have eight jack-ups in the region operating at 50% utilization with an average day rate of approximately $136,000.

As I mentioned earlier the J.P. Bussell will mobilize out of the region in the third quarter of 2009, for a contract in Egypt with Shell for approximately two years of work in the low 180s. We're pleased to be entering a strong 15k environment and we look forward to future opportunities for additional Rowan rigs in this high spec market.

Finally Mexico; Supply in the region is 37 Jack-ups while demand is 35 rigs with a contracted utilization of 95%. Mexico continues to be the most promising region in the world and we're excited that the Rowan Gorilla IV is on location with PEMEX for 785 day drilling commitment.

We're expecting additional tenders from PEMEX for approximately eight jack-ups in the near future with commencement dates raging from fourth quarter 2009 to first quarter 2010. Competition for these tenders will be fierce given the availability of jack-ups around the world. However, we're confident that we will be successful in securing additional contracts in the region.

Now turning to our onshore division. We have a fleet of 32 land rigs. 31 are located in Texas and one in Alaska. Currently 21 of our rigs are under contract at a utilization rate of 66% at an average day rate of approximately $21,000. 13 of the 21 have contracts lasting longer than one year.

According to the Land Rig Newsletter, the U.S. land rig count has increased 7% from its low point of 901 rigs in May of 2009. We're hopeful that the bottom of the trough has been realized and a slow but steady recovery is underway. Although the market has taken a modest turn, there is currently too much excess capacity to realize any pricing leverage at this time.

In conclusion, despite the current state of the worldwide jack-up market, we're encouraged by the stabilization of oil prices, the increase in international tenders and the opportunities we see for future projects.

This concludes our market overview. I will now turn the call over to Bill wells.

Bill Wells

As we noted in our press release, our second quarter 2009 results were aided by a favorable tax adjustment that followed from a recent tax case. The case provided that certain of our foreign contracts are eligible for exclusion from U.S. taxation. We have estimated a full-year 2009 after-tax benefit to be approximately $14 million which reduced our estimated full-year effective tax rate to approximately 31.4% and yielded an $8 million or $0.07 per share increase in second quarter earnings.

We're currently evaluating the impact on prior years and expect to complete that analysis in the third quarter. Our second quarter 2009 drilling revenues were $321 million, down by 13% from the prior year, and by 16% from last quarter, with both decreases resulting from significantly reduced domestic and Middle East drilling activity in the current quarter.

Second quarter revenues included approximately $40 million from eight current or soon to be idle jack-ups in the Gulf of Mexico and Middle East. We anticipate less than $5 million of revenues from these rigs during the third quarter. In addition, shipyard and mobilization time for J.P. Bussell and Gorilla VI in connection with upcoming assignments in Egypt and Norway respectively are expected to cause a further $20 million drop in third quarter revenues. So this will be temporary.

Finally, as we previously reported the Bob Palmer completed its two-year Gulf of Mexico assignment for BP late in the second quarter and has since been operating at a significantly reduced day rate.

Our second quarter drilling expenses of $137 million were 16% below the prior year, and 6% below last quarter and well below our previous guidance. Both comparisons showed reductions in labor and related personnel costs, through continued optimization of crew levels on active rigs, reduced manning on idle rigs and lower maintenance and reimbursable expenses.

We expect that our third quarter 2009 drilling expenses will be around $125 million. There are several upgrade and maintenance projects absorb certain personnel-related costs for many idle rigs and recent workforce reductions take hold.

Costs will probably be higher in the fourth quarter, with a schedule start-up of drilling operations in Norway and Egypt, and given a full quarter of activity in Mexico. Total 2009 drilling expenses should come in about 13% to 15% below 2008 levels. Our second quarter manufacturing revenues totaled $197 million, including $35 million of arms length sales to our drilling division.

External revenues were $161 million, an increase of 41% from the last quarter, but a decrease of 27% from the prior year. Our Drilling Products and Systems segment contributed $142 million or 72% of total revenues, including sales to our drilling division. External revenues were $107 million and featured $67 million from rig projects and another $14 million from drilling equipment.

Our Mining, Forestry and Steel Products revenues totaled $55 million, including $27 million from shipments of mining and forestry equipment and $5 million from steel plate. Our total average margin on operating costs was 9% of revenues during the second quarter, down from 18% in the prior year and 21% last quarter. Margins are heavily impacted by sales mix, with the after-market typically generating much higher gross margins than original equipment sales. Our combined after-market parts and services businesses was typically averaged low-to-mid 40s gross margins provided $31 million or 19% of external revenues during the second quarter, compared to $34 million and 30% in the first quarter.

Offshore kits which typically yield a low 30s gross margin, provided $26 million or 16% of external revenues during the second quarter compared to $28 million and 24% in the first quarter.

Land rig and kit sales, which typically provide an 8% to 10% gross margin totaled $41 million or 26% of external revenues in the second quarter, up from $4 million or 3% in the first quarter. In addition, our second quarter margins were further reduced by $4 million of warranty costs accrued for necessary design improvements in the 500-ton top drive line and $2 million in purchase cancelation fees.

Our quarter-end manufacturing backlog was $942 million down by about 10% over the past three months, with most of the decline resulting from the removal of certain at-risk orders. External backlog of $518 million, included $276 million related offshore rig projects, $145 million related to land rig projects, $22 million of mining and forestry equipment and another $38 million of ad-hoc drilling equipment. We expect that about one third of our external backlog of June 30, 2009 will be realized as revenue in 2009. Our estimated backlog at-risk totaled $36 million or 7% of our external backlog at June 30.

In terms of guidance for the manufacturing segments, we indicated earlier this year that we expect 2009 external revenues of approximately $465 million, and operating margins of around 20%. We continue to believe that the top-line is attainable but the higher concentration of land rig and kit sales estimated to be about one third of second half revenues, is expected to hold our 2009 operating margin to the first half level, of approximately 14% of revenues.

Our second quarter depreciation expense totaled $43 million which slightly exceeded our previous guidance and was up 5% from last quarter and 27% over the last year, primarily due to the rig fleet additions in late 2008. Our latest estimate for 2009 depreciation is in the range of $168 million to $170 million, including approximately $43 million to $44 million in the third quarter.

Our second quarter SG&A expenses totaled $25 million, in line with our previous guidance, and last quarter, and down 20% from last year, primarily due to reduced compensation and related costs.

Headcount reductions and other cost-cutting initiatives are expected to yield a 13% to 15% reduction in 2009 costs compared to 2008, to a range of $99 million to $102 million for the current year including approximately $25 million to $26 million in the third quarter.

Interest expense net of interest capitalized was close to zero during the second quarter. Following our recent debt transactions, which I will describe in a moment, our 2009 interest expense for the second half of 2009 will increase to an expected range of $22 million to $23 million, about 60% of which should be capitalized.

Property and equipment additions totaled $123 million for the second quarter which included $29 million for our second third, 240C jack-ups, $34 million for the first three new rebuild EXL jack-ups and $43 million for existing fleet, including contractually-required upgrades.

As previously reported in January of this year, we suspended further construction of the fourth EXL rig being built by AmFELS at its Brownsville, Texas shipyard. We spent approximately $29 million on the rig through June 30, 2009, estimate that another $118 million over and above cancelation costs, will be required to complete construction. Our decision about whether or not to resume construction for the fourth EXL rig will depend primarily on our prospects for alternative investment opportunities. Our cancelation option runs through late September. If we cancel construction, we expect to incur a charge for a substantial portion of approximately $60 million of past and future expenditures.

Our remaining 2009 property equipment additions projected at approximately $350 million including $97 million for second and third 240C jack-ups, $153 million for the first three EXL jack-ups and $70 million for existing rigs, including contractually required upgrades. The latter category includes an incremental $43 million for necessary upgrades and maintenance on eight available Gulf of Mexico and the Middle East rigs to take advantage of the low opportunity cost while they were idle.

As previously reported, on July 21, we completed an offering of 500,000 million of 7%, 8% 10-year senior notes. The offering has been well-received by the market, with over $1.7 billion in orders on the date of sale, and an 87 basis point tightening in the spread over treasury in the first two weeks of trading.

We are very pleased to have received investment grade ratings from both S&P and Moody's reflecting the company's strong financial position and high quality asset base. In addition, just this morning we closed on a refinancing of the $65.7 million of outstanding Bob Keller Title 11 notes for a coupon of 3.525%. This offering was also heavily oversubscribed with more than $400 million of total orders.

That concludes our prepared remarks. Rob, we will now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is coming from the line of Collin Gerry with Raymond James. Please state your question sir.

Collin Gerry - Raymond James

Question on the North Sea. You mentioned that there is a lot rigs going off by year-end here but the recent tenders or bidding activity on the high-spec side is encouraging. We saw transitions for instance that if there was one of those high-spec rigs, they cold stacked in that region. I guess, maybe just walk us through what you're seeing there in terms of possible number of demand? Is it oil driven? Is it gas driven? Where could we possibly see there? I know it is murky but maybe a little bit of color.

Mark Keller

Actually, there are three high-spec rigs available in the North Sea right now that compete with our fleet. What we are seeing, we have six active tenders right now that require a world-class high-spec jack-ups or 240c class jack-ups in the North Sea. They all commence beginning in first quarter 2010. Most of them are oil driven projects that we are seeing right now, but there is a lot of activity and the tenders that we look at and the optimism that I refer to in my prepared remarks are the fact that they are for high-spec rigs. And as far as day rates, I'd rather not go into the day rate part of it because we do have some live tenders, active tenders in the region. But the day rates are strong, given what's taken place in the worldwide market, we feel like those day rates are very good.

Collin Gerry - Raymond James

Moving onto the fourth EXL rig, I guess we're kind of pending a decision there on that, as sometime in the September. Kind of just reading body language or what you're saying in terms of the jack-up market, it doesn't sound like you're too excited about continuing to build that rig. I guess what does it take to pursue continuing or finishing construction on that?

Mark Keller

Collin, as we discussed in our prepared comments, it's fairly compelling investment when you look at that rig, roughly $120 million go forward cost when there was a rig that was sold recently that's similar but not quite as capable as this rig, it sold for $175 million. The main issue for us is sort of internal competition for capital dollars and what our alternatives are for capital investments. We are keeping our option open, we just don't have to make a decision yet and so we're putting it off and getting all the data we can before we decide which way we are going to go on that.

Operator

Our next question is from the line of Robin Shoemaker with Citigroup. Please state your question.

Robin Shoemaker - Citigroup

I wanted to ask on your idle or prospectively idle rigs. Are you intending to actively market with crews, all of these rigs in certain circumstances, either domestically or internationally? Would you cold stack any assets? I think you have talked somewhat but not directly addressed that issue.

Bill Wells

Yes. We currently have the four rigs that we have stacked in the Gulf of Mexico, three of them, you know, we call it a warm stack, phase 2, which is a minimal crew, consists of senior personnel, and the cost on that is around $5,000 per day. That is on the three slots, and on our one cantilever, we've what we call a phase 1 warm stack which is a total crew of 28 personnel at the cost of about $12,000 per day, and that rig should be going back to work within the next few weeks. The soon to be four rigs that we have available in the Middle East, they are all cantilever rigs and they are warm-stacked, phase one and our cost is about $16,000 per day.

Mark Keller

Robin, if your question was, would we see some of these rigs go all the way to cold stack, that is just minimal crews, minimal attention paid to them. We are not there yet but one thing, we have got several rigs coming out in the next 12 months and we need the senior level personnel that are left on those rigs, but we're not averse to it and certainly the slot rigs are further from probably, arguably better coming out than the 160c rig at the Gulf. But all of those we think have good marketable opportunities right now.

Robin Shoemaker - Citigroup

Let me just follow-up then on LeTourneau and the backlog. What kind of bidding opportunities externally does LeTourneau see in the current environment? Is there any visibility in the backhalf of '09 or into 2010?

Matt Ralls

Well, certainly that has diminished but there is activity, predominantly around the world with national oil companies. As you know, we have been successful there in the last year. And there is some follow-up opportunities that are in discussion. But no, it's too early to make comments about the probabilities of those developing.

Robin Shoemaker - Citigroup

And is there any change in the strategic plan for Rowan with regard to LeTourneau?

Matt Ralls

No, there is really not, Robin. It hasn't changed from what we have been talking about. We still believe that it would be better for LeTourneau to be separate from Rowan but at the same time we recognize that with that more positive momentum in their business right now, it would be very hard to separate them currently. So we continue to believe that LeTourneau has a very valuable product line, and that when there is little bit more positive momentum in the drilling business, that time will be right to separate them.

Operator

Our next question is from the line of Ian Macpherson with Simmons & Company. Please state your question.

Ian Macpherson - Simmons & Company

Mark it sounded like you expressed some confidence about winning maybe more contracts with the upcoming tenders, maybe not just one but maybe more than one? Have you bid the Bob Palmer to that market or are you holding out for possibly more differentiated drilling work for that rig in the North Sea or elsewhere in the next year?

Mark Keller

We haven't tendered that rig into Mexico yet. There is some interest but we have not entered those discussions yet. As I mentioned we have several tenders in the North Sea and there is a lot of interest in the rig in the North Sea, with the current tenders we have, they are multi-year and they do require that type of rig, so we're very optimistic about what we're seeing in the way of tenders that are in-house and also that we know are inbound. From our marketing trips and different things we know these tenders are coming in and we're excited about it. It is a big change in the market over the last four to six weeks.

Ian Macpherson - Simmons & Company

Are you seeing continued or increasing or decreasing dialogue from customers discussing quid pro quo with rate for the term or do you think that that has pretty much run its course as far as your backlog is concerned?

Mark Keller

Right now, it's pretty well run its course. We have a few discussions, as I mentioned in my remarks, with Cabinda Gulf, but nothing has materialized from that so far. So, it is kind of flatted down. Most of that was on the land rig side instead of the offshore side.

Ian Macpherson - Simmons & Company

I just want to clarify with regard to the recent debt issuance, we are for now just really back-stopping liquidity on your current CapEx program and no expectations near term for any deepwater acquisitions that I know you aspire to eventually at some point?

Matt Ralls

I'd say that's generally fair. That liquidity would give us the opportunity to may be work with someone out there who has got a deepwater asset that perhaps needs additional capital or maybe some management or access to a particular market or something of that nature, but we certainly don't expect to go out and use some of that cash to build a speculative ultra-deepwater rig. So, no concerns there, but it does give us the opportunity to have some liquidity to try to work our way into partial ownership of the ultra-deepwater asset.

Ian Macpherson - Simmons & Company

Has that opportunity wormed up or changed at all in the past couple of months or is it status quo?

Matt Ralls

No, I would say that it has wormed up a little bit. As you probably heard in some of the earlier conference calls, there is still some distance between the bid and ask on those, and there is enough good or decent news in the ultra-deepwater market to keep anybody out there from being particularly desperate to do anything. So, we want our first foray in ultra-deepwater to be a very solid transaction that backed up by a contract and at a reasonable price. So that obviously is a kind of a limited opportunity set at the moment, but I do think that as this kind of drags on and there is more activity in the sublet market, I think there are more people out there that are interested in at least talking.

Operator

Our next question is coming from the line of Brian Uhlmer of Pritchard Capital.

Brian Uhlmer - Pritchard Capital

I want to stay on LeTourneau for a second. I had a question about the backlog and the cancellations. I'm just trying to determine the order rate and what has been booked in the backlog from the Brazil orders, if those are all in there and Vietnam and what was the order rate on the quarter.

Bill Wells

I don't have that information Brian, but to answer your first question, the Brazil orders are in there. They weren't fully in there at the end of March when we reported backlog of roughly $600 million, but they were booked in April. They were fully in there at the end of April and then we added the Vietnam order which was about $38 million I believe. Then we did remove roughly $70 million backlog at-risk.

Brian Uhlmer - Pritchard Capital

So your order rate was probably in a 160 region?

Bill Wells

Yeah. It's about equal to the revenue for the quarter. It was relatively flat all things considered.

Brian Uhlmer - Pritchard Capital

As we look forward on your backlog turns and you gave us a percentage of land rigs to the other segments, is that how we should look forward as a split of revenue mix through the remainder of the year and determine what we think the margin should be?

Bill Wells

Right. The land rigs and kits are going to be an increasing portion of revenues over the last half of the year. Roughly a third of the revenue over the last half of the year we expect to be from land rigs and kits.

Brian Uhlmer - Pritchard Capital

So, your margin expectations would be below 20%, now somewhere in that 16% to 18%?

Bill Wells

Well, in my comments I said our operating margin should be very comparable to what we have done in the first six months of the year which is about 14%.

Operator

Our next question is from the line of Mike Urban with Deutsche Bank.

Mike Urban - Deutsche Bank

I wanted to stay on LeTourneau for just one more second. Some of the issues you had in terms of warranties and costs in the quarter, do you feel like those are largely one-off issues or there are some additional steps that you need to take internally there?

Matt Ralls

We do believe they are largely one-off and also want to start with the fact that LeTourneau has had a very long history of robust reliable product design. We're recognized for decades of product leadership in our markets. We did have one product line that will reference the 510 top drive that came into the market during the recent strong growth period. It is a fundamentally strong design, it uses excellent technology, but we do have several design upgrades that we are going to be making for the balance of this year. Those design upgrades, have been completed and we're now in the process of making the field upgrades. We'd expect to have that complete by near year-end.

Mike Urban - Deutsche Bank

In terms of your decision as to whether to go forward with the fourth rig, what might some of those alternative uses of the capital that you talked about, one of them potentially buying into deepwater assets? Are there additional jack-up assets out there that can be interesting to you? We've seen some activity in the M&A market on the deepwater side, but not very much on the jack-up side of the market despite most of those being un-contracted or there are some things potentially shaking loose there that could impact your decision whether to continue construction?

Mark Keller

I would say that it's highly unlikely that we would use capital to buy somebody else's jack-up, I wouldn't rule it out. Just in case there was something that came along that was ridiculously cheap, but at $120 million, there is nothing out there that represents the kind of value we see in EXL four. So to the extent that we are going to continue to put money into jack-up assets, that the EXL four is most logical place to do it, so really alternative use would be for some form of expansion into the ultra-deepwater.

Just to clarify that comment and say that we're under no sense of urgency with regard to that. It is something that we wanted it, but as I've said before we're getting into this late in the cycle and so we'd be very circumspect about how we enter that. I certainly don't expect that there's a transaction looming right now for us but we are canvassing the market on a regular basis just to see what is there.

Mike Urban - Deutsche Bank

And then the borrowing opportunity in deepwater, would you look to start up the buyback up again or would you prefer to keep your powder dry for now?

Matt Ralls

Yeah, I think at this point in the market cycle, I mean, arguably this is the time when you -- in retrospect, you always wish you had been buying, but at the same time you just think it is very important to maintain a very liquid balance sheet, very strong balance sheet.

Operator

Our next question is from the line of Dan Pickering with Tudor, Pickering, Holt. Please state your question sir.

Dan Pickering - Tudor, Pickering, Holt

You mentioned a substantially improved kind of level of enquires and bids, and you quantified the number in the North Sea. Kind of Rowan wide at this point, kind of what is the level of tenders in rig years relative to March or December of this year?

Mark Keller

Currently Dan, in-house right now we have 13 international tenders. Those vary from one to four years in term. They are spread from the Middle East, North Sea, Southeast Asia, India, South America, as I stated in my comments. We also have from our marketing trips, we know there are an additional 18 tenders that are inbound that we should receive in the next few weeks. Of those 18 tenders, there are also Middle East, Mexico, South America, and one more in the North Sea.

Dan Pickering - Tudor, Pickering, Holt

And how reliable is that inbound expectation? I am just thinking about Mexico, it has been sort of a minion type of tender process. Is there something that is indicating to you that these are more firm than we have seen over the last four or five months? Is it just body language? Is there something in the contractual timing? The tone is clearly better, I am trying to understand exactly why?

Mark Keller

In our last trip down there and our last communications with PEMEX, I am going down there tomorrow. They indicated that their budgets are in place, and they have sent the tenders to be approved, to be sent out. So I think that the level of confidence is higher than it was, probably two to three weeks ago. They are telling us that there are eight tenders coming, 300-foot cantilevers. Some will start in fourth quarter, some will start in first quarter 2010. That could change again but as of last week that's what we were told. Once again I am flying down tomorrow, so I will have a better understanding tomorrow.

Dan Pickering - Tudor, Pickering, Holt

And then a quick LeTourneau question. It sounds like your revenue guidance is unchanged, the margin expectation is different. Is that because the mix of the revenues has changed or did you learn something? Did pricing just come in worse than you expected at the beginning of the year? Why is the Delta in expectations for the second half relative to where you were at the beginning of the year?

Bill Wells

It is pretty much a mix issue, Dan. We did not expect to have the concentration of land rig and kit business that we have had in the second quarter and we expect to have over the last half of the year.

Dan Pickering - Tudor, Pickering, Holt

Finally, the Bob Palmer, I guess it rolls-off in mid-August. Can you just talk to us a little bit about expectations there?

Mark Keller

We are in negotiations right now. We should have a contract signed either today or tomorrow to extend the contract for another 30 to 40 days with Helix. We haven't gotten that signed yet, we're in discussions with two other operators here in the US Gulf of Mexico to use it on more of a deep gas wells, they have two to three wells to drill but we are also tendering a rig in the North Sea which we are hopeful, the tenders that we are seeing they need that spec of rig. We are pretty optimistic that if something doesn't materialize fast here in the US Gulf that the rig will depart the Gulf and go to an international operation.

Dan Pickering - Tudor, Pickering, Holt

Is this just a straight extension with Helix, same rate, same operating parameters or would that be a new contract and we'll just wait for the fleet status to see the stats there?

Mark Keller

It's a new contract. The rate will be less than 125. We'll report that in our next fleet stat.

Operator

Our next question is from the line of David Smith, SMH Capital. Please state your question sir.

David Smith - SMH Capital

I was wondering, how you view cash in the balance sheet in terms of having a cash cushion versus dry powder? And do you have a sense of the cash that you would like to keep on hand until we see a turnaround in the jack-up market?

Bill Wells

Well, we don't have a particular number in mind. We just want to take advantage of the loosening up of the credit markets and our credit rating outcomes and with the very strong demand we've upsized the offering to $500 million. I wouldn't say that we have a particular cash goal there, the nature of it is just to have liquidity in this downturn and to have flexibility in discussions with others about how we might be able to help an ultra deepwater project and perhaps, getting interest in an ultra deepwater asset by doing that and operate it ourselves. In terms of minimum cash balances, I think we are all comfortable somewhere around the $200 million range, and we don't expect them to really be eating into the cash as a result of our construction program, that's pretty well handled by our cash flow from operations.

David Smith - SMH Capital

The North Sea tender, does that include Norway? And are you looking at the ability to move an incremental rig or more into Norway?

Mark Keller

Currently the tenders that we have in-house do not include Norway but I think that the opportunity to move additional of the units into that region is strong. It looks as we are getting Gorilla VI ready to go, there is a lot of work in that region, and our rigs are certainly designed to operate in that area.

Operator

Our next question is from the line of Arun Jayaram of Credit Suisse. Please state your question.

Arun Jayaram - Credit Suisse

I was wondering if you could comment a little bit on some of the divergent trends in terms of Saudi demand. It looks like they are pulling back a little bit on the oil side but have some incremental demand for gas rigs. Can you comment on that?

Matt Ralls

You're exactly right. The rigs that you're seeing from our contract in 2009 are workover rigs and rigs that we're drilling on oil prospects. They are making a shift toward gas drilling, deep gas drilling and at our last trips over there; they are telling us that they will tender for probably two to three deep gas rigs in the first quarter. That is the last communication we had with them. That schedule as you know can change, but both on land and offshore, they have made a shift to more gas drilling.

Arun Jayaram - Credit Suisse

And Mark, with the 116 that you have near Saudi or in country, could those be upgraded to be able to drill the deep gas wells for ARAMCO.

Mark Keller

They could be upgraded but, for us to compete in that tender we have other rigs, EXL class, the 240C class that we would tender, and those are the rigs that they are looking at currently. It is that type of rig with 2.5 million hook load capabilities. It would cost lot money to upgrade a 116 C to reach that capability.

Arun Jayaram - Credit Suisse

Matt, you commented in your prepared remarks on looking at opportunities to diversify your offshore fleet and you signaled pursuing, I guess JV's or acquisitions. One of your peers ENSCO obviously has moved the rout of having their own design. Is that something longer term that you would look at?

Matt Ralls

Yeah. I'd say that we would because we do have a long history of designing jack-up rigs but, the problem is that we're late in the cycle. I just don't think it's going to make sense to try to do new construction in this market, in near term. So, we're going to be more focused on the rigs that are out there with speculators or smaller companies. That might be available. It's conceivable. At this point it would make more sense that we've got an opportunity to build something for someone and there is not a lot of those opportunities out there right now obviously but probably it's more proven when the existing drill shift to semi designs.

Arun Jayaram - Credit Suisse

And Matt based on the deal flow you're seeing you think that this is something that you could get done in the next 12 months or is this going to take a little bit longer than that?

Matt Ralls

I wouldn't be willing to pin us down on really any timeframe. I don't know whether it is the next six months or the next three years or something will happen there. It's very circumstantial and every one of the cases where we're talking to people and so it just depends on what their situations are, what their construction commitments are, contract, arrangements, or opportunities, that sort of thing.

These things are hard to do and we're not in the best competitive position compared to some of the other companies that would like to do the same thing so we are just trying to stay very, very close to it and be as financially flexible as possible to take advantage of an opportunity if it comes along and fits us. We are not going to do anything on a speculative basis unless we're very close to having a contract type commitment to back it up.

Arun Jayaram - Credit Suisse

My last question is there is a dozen or so kind of idle spec build type of jack-ups. Mark, I was just wondering if you've seen some of the bidding from this group of contractors, you did make some observations or what not, you know, how disciplined they're being and how aggressively are they competing on price?

Mark Keller

It varies from region to region; certain areas of the world will not allow them to tender. An example, you mentioned earlier, ARAMCO. Saudi ARAMCO will not allow them to tender unless they tender it through an existing company that has a track record with them because of their past experience with bringing new rigs in the last cycle.

In India, you will see them tender in those areas. They will be tendering in West Africa, places like that, certainly in Southeast Asia, but most areas of the world that we're seeing, with the drilling requirements becoming more stringent and the operators, the NOCs and the IOCs becoming more resistant to picking up rigs from companies that don't have a track record, that don't have proven crews, don't have proven safety records for performance issues.

We have seen a few low day rates that have been tendered, but we have seen that with established drilling companies too. So, can't really pin that on them, but long-term, I think that the major NOCs around the world and the IOCs are going to go with established drilling companies if they have a choice, and certainly in today's environment, there are plenty of those rigs available to contract.

Operator

Our next question is from the line of Mike Drickamer with Morgan Keegan.

Mike Drickamer - Morgan Keegan

In the current economy, can you talk about some of the opportunities LeTourneau has in the non-oilfield side of the business?

Bill Wells

Mining appears to be stabilized but overall mining CapEx equipment is down dramatically this year. And, we expect the second half continuing to be down. There is a noticeable amount of discussions about prospects for 2010 but very few for the remaining part of 2009. We have had a few opportunistic placements that will be shipped in the second half, but we think this will be 2010 before that market develops again to anywhere near where it was in the past.

Mike Drickamer - Morgan Keegan

How about the forestry side of the business? Is any of that recession resistant?

Matt Ralls

Forestry business is very dependent on homebuilding, and it also is at very low levels and we expect it to continue to stay at those low levels, certainly well into next year.

Mike Drickamer - Morgan Keegan

Turning then and looking at the Gulf of Mexico jack-up business, one of your lower spec competitors offered some incentive, some no day rates on drilling contracts, are you guys being asked for those kinds of incentives or offering those kind of incentives yet?

Mark Keller

It just depends on the term of the job. We haven't been asked to do anything like that yet. We would look at it on a job-by-job basis and see if it warrants doing something like that.

Operator

We have time for one more question ladies and gentlemen. That last question will be coming from the line of Tom Curran with Wells Fargo.

Tom Curran - Wells Fargo

Mark this is a follow-up on the Caspian. It's more of a conceptional question, but I guess there are two parts to it. First is, do you see any signs of the potential for some incremental demand there? And then the second would be, whether you do, or whether you decided speculatively to take a chance with one of your larger higher spec rigs by moving it in there? What would be the costs and the process involved with trying to send a rig into the Caspian?

Mark Keller

To be honest, I have no idea. We haven't looked at that.

Matt Ralls

I'd say Tom from my experience with GSF and Santa Fe it's very expensive to try to do that. I mean, you basically have to dismantle a rig in order to get it in. So that's the reason of course that we are able to get that very attractive day rate in there because it's almost impossible to make the numbers work unless you're able to get a five-year contract on the float or something like that and even then (inaudible) semi submersible for that market and that's quite a bit of idle time on that, so it's not something that we're really looking at.

Tom Curran - Wells Fargo

My understanding is that both the Trident 20 and the Maersk semi were built right there in the region in Azerbaijan and that to send that a jack-up into that Vogadone canal you would basically have to pretty much almost entirely disassemble it; is that correct?

Mark Keller

Yeah, cut it in half, that's right.

Operator

Thank you. Suzanne I would like to turn the call back to you.

Suzanne McLeod

That concludes our remarks for our second quarter conference call. Thank you again for your interest and following in Rowan.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Rowan Companies Inc Q2 2009 Earnings Call Transcript
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