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Atwood Oceanics, Inc (NYSE:ATW)

F3Q09 (Qtr End 6/30/09) Earnings Call

August 06, 2009 11:00 AM ET

Executives

James M. Holland - Senior Vice President, Chief Financial Officer and Secretary

John R. Irwin - President and Chief Executive Officer

Analysts

Collin Gerry - Raymond James

Arun Jayaram - Credit Suisse

Brian Uhlmer - Pritchard Capital

Waqar Syed - Tristone Capital

Mike Breard - Hodges Capital

Bill Doyle - Columbia Wanger

Operator

Good day and welcome to today's teleconference. At this time all participants are in a listen-only mode. Later you'll have the opportunity to ask questions during our Q&A session. Please note today's call may be recorded and it's my pleasure to turn today's conference over to Jim Holland. Please go ahead Sir.

James M. Holland

Good morning and welcome to Atwood Oceanics' conference call and webcast to review the company's operating results for our June quarter. Speakers today will be John Irwin, President and CEO and myself Jim Holland, Senior Vice President and CFO.

Before we commence our financial and operational view, let me as usual remind everyone that during the course of this conference call, we may make forward-looking statements based on managements' current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and therefore involve a number of risk and uncertainties.

Be cautioned that forward-looking statements are not guaranteed and that actual results could differ materially from those expressed or implied in the forward-looking statements. The words believe, estimate, impact, intend, anticipate are predicted by the uncertainty of future events or outcomes. Undue reliance should not be placed on these forward-looking statements which are update for only on a date year out.

Before John revise our comments on the company's current operations, let me comment on so events, impact and results for the quarter.

Our diluted earnings per share for the quarter ended June 30, 2009 was $1.5 with effective tax rate of 8% for the quarter, within operating cost for the quarter of approximate 58 million. And in our last conference call on May 7, I stated at that time that we believe that the total drilling cost for the third quarter would be around 60 million with approximately 5 million of this amount relating to the Atwood Aurora and stated that the Atwood Hunter could incur 10 days of zero rate at the end of the third quarter or at the beginning of the fourth quarter for required inspections.

We also projected in effected tax rate of the quarter of 17 to 19%. The total main decline in actual drilling cost compared to our guidance related to incurring during the quarter approximate 4 million of operating cost on Atwood Aurora, compared to our projections of approximately 5 million covered with total operating cost for the quarter being reduced by approximately 1 million due to currency gains in Australia. Thus compared to our cost guidance of 60 million from lower operating cost of 2 million enhanced earnings per share about approximately $0.03.

The impact of the timing of the Atwood Hunter zero rate inspection period occurring in the fourth quarter and not in the third quarter increased earnings in the third quarter and reduced earnings and will reduce earnings in the fourth quarter by approximately $0.06.

I will now address the fluctuation reflected tax rate. With the effective tax rate for each quarter being adjusted are only reflects the effected tax rate for the year. Market uncertainties regard to future work and divert some of or our rigs, have made the precised quarter guidance and reflected tax rate some what challenging.

Our guidance was too low for the second quarter and too high of the third quarter. We now feel fairly confident that our affected tax rate for the fourth quarter at fiscal years will be approximately 15%.

A lower effective tax rate compared to our guidance for the June quarter was due primarily to lower revenues now expected from the Richmond due to its idle time which reduces U.S. taxation and currency fluctuations in Australia which reduces Australian taxation.

Lower effected tax rate of 8% compared to I guess 18% and has earnings per share for the quarter by approximately $0.11. At this time, we also believe that our effected tax rate for the fiscal year 2010, could also remain around 15%.

During the June quarter, the Atwood Aurora commenced operations on April 21, the Richmond completed its contract on June 9, and currently remains idle. The break completed its contract offshore Thailand on June 23 and was moved to a shipyard work by its current undergoing an approximately $8 million live enhancing upgrade with the Atwood Southern Cross idle in the entire quarter.

After John's comments, I will revise some current expectations for drilling cost for the September quarter and he'll comment on other rounds that could impact our fourth quarter results. I will now turn the conference call over to John.

John R. Irwin

Thank you Jim and good morning everyone. Yesterday we filed our fleet status report with contract dayrate cost information. I'm not going to repeat all that, but I will comment on some highlights and some additional items and we will be pleased to respond to any questions at the end of the call.

During our last conference call, we commented on the negative market environment and oil and gas companies delaying certain exploration development production activities. These delays led to significantly reduce contract bid requests along with continued delivery in newly constructed drilling units mainly Jack-ups, result to more competitive bidding for future contract activity, declining dayrates and increased rig availability for Jack-ups and centralize miscible drilling in its technically similar or like the Atwood Southern Cross, in the broader market.

While we're now seeing some signs of increased interest by our clients for programs later this year and next year, there still remains uncertainty with regard to future work and dayrates for our currently un-contracted three idle rigs, the Atwood Southern Cross, Atwood Beacon and the Richmond.

At this stage we plan to continue pursuing a highest utilization possible for our fleet and contract opportunities for our idle units. Accordingly we're initially using any idle time incurred by our units to complete critical maintenance following which direct cost will be reduced with these units ready to return to work and being actively marketed.

Our current estimated contract backlog in terms of available rig days is approximately 60% for fiscal year 2010 and 35% for fiscal 2011. Now, when you look at our contract backlog from a cash-flow perspective we have approximately $1 billion in after tax, backlog cash flows relating to our long-term contracts on the Atwood Hunter, Atwood Eagle, Atwood Falcon and Atwood Osprey compared to approximately $1 billion of estimated capital commitments related primarily to the two new semisubmersibles under construction.

Despite the near term deterioration in worldwide offshore drilling markets, we continue to believe that longer term outlook remains positive, particularly for worldwide deepwater drilling. At our nine existing drilling units, and the two drilling units we currently have under construction, five have current contract commitments that extend into fiscal year 2011 or later.

One the Seahawk has just had it's last six month option exercised which extends it's contract commitment through fiscal year 2010. And one, the Vicksburg has a three month firm commitment with an option to extend to six months commencing in September this year 2009. Three; the Atwood Southern Cross, Atwood Beacon and Richmond as previously stated they're currently idle and one unit Aurora through deep water semi-submersible on construction without a contract is not scheduled for delivery until a mid of calendar 2012.

Progress continues as planned on the construction of our 10th and 11th units, the two deepwater EXD Millennium Semisubmersibles being build at Jurong Shipyard in Singapore, while in the Atwood Osprey, conventionally mored 6000 foot water depth units scheduled for delivery in early calendar 2011 was an estimated total cost of approximately 600 million to $625 million, and the second dynamically positioned 10,000 foot water depth units scheduled for delivery in mid calendar 2012, estimated total cost of approximately 750 million. Through June 30, 2009 we have invested approximately $525 million toward the construction of these two drilling units.

Funding of the remaining expenditures on the construction of these two units, will come from internally generated funds and borrowing under our two credit facilities which have a combined borrowing capacity of 580 million.

We currently have 280 million borrowed under our credit facilities and we will endeavor to keep our maximum borrowing below 450 million. Now, some comments on the latest status of certain units.

The Atwood Southern Cross which us been idle since December 2008, during the idle period since then the rig has been undergoing certain equipment repairs and maintenance which have kept its operating cost relatively high at around $65,000 per day.

This extraordinary level of maintenance is now being completed. As long as the rig remains idle, per day direct cost are targeted to be reduced, and are below 50,000 with the rig being marketed for any suitable future contract opportunities and ready to return to work.

We are continuing to pursue all suitable future contract opportunities. The Atwood Beacon completed its contract at the end of July and is currently being demobilized from it's last location in India.

During August and September, the rig will undergo certain maintenance that will keep its operating costs for the fourth quarter of fiscal year '09 relatively high at around 65,000 per day. Direct costs are then targeted to be reduced with the rig being marketed and available for any future contract opportunities and ready to return to work. We are continuing to pursue all suitable future contract opportunities.

As stated, the Vicksburg is currently in a shipyard in Thailand, undergoing an $8 million life enhancing upgrade that is expected to be completed later this month. Almost all of these upgrade cost are expected to be capitalized. Following completion of this upgrade, the rig will immediately commence working under its contract with new coastal Thailand, offshore Thailand.

This contract provides for a firm program of three months with an option to extend the program to six months. The option to extend the program must be exercised no later than 30 days after commencement of the contract. If the dayrate of the drilling program is for the three month period, the operating day rate will be 95,000, and if the drilling program extends for six months the operating day rate will be $90,000 for the entire period.

We are currently pursuing ongoing opportunities for the Richmond, our only rig in the U.S. Gulf of Mexico.

It is possible, the Richmond may not return to work until after hurricane season and with day rates with shorter term commitments likely to be in the 30,000s. During this idle period, critical maintenance period critical maintenance work is being competed on the Richmond.

The Atwood Hunter completed the drilling program for Noble Energy offshore Israel, in mid July, which time it was moved to shelter water to undergo required classification inspections which have now been completed. The rig incurred approximately 10 days of zero rate for these required inspections and the Hunter is now apparently being mobilized to Ghana, at a dayrate of 460,000 upon arrival currently expected in early September will commence drilling for Kosmos Energy Ghana under its joint contract with Noble and Kosmos which extends into late 2012 at an operating day rate in the mid 500,000.

Now on our two new semi-submersible the first of these now under construction Atwood Osprey is targeted to be mobilized to Australia upon delivery from the shipyard in second quarter fiscal year 2011 to commence a three year firm contract with an option to extend to six year firm period and that is with Chevron Australia.

Contract provides an operating day rate of approximately 470,000 if the firm commitment is three years, and approximately 450,000 if the option is exercised to extend the firm commitment period to six years.

Dayrates are subject to adjustment pursuant to cost escalation provisions of the contract. Our second new semisubmersible being constructed, a 10,000 foot ultra deepwater unit will become 11th company mobile offshore drilling unit when it is delivered in 2012.

We are continuing discussions with potential international clients regarding their possible future opportunities for when the rig is delivered. While we have no immediate plans for further growth in addition to our present two unit construction program.

It is our goal to continue developing and positioning the company for the future. We remain committed to and are active in developing our organization, our people and our capability. It is our goal to remain opportunistic in terms of identifying value enhancing opportunities over the longer term when the time is right.

Based on longer term expectations for world energy demand, our ongoing fleet major upgrade and new construction capital programs started in the 90s and are continuing the development of our organization and our increasing capability, we believe our fleet and the services we provide, physician the company well to meet the future drilling and completion needs of our clients to take advantage of attractive international markets particularly in deeper water.

As longer term strategy simply is based on consistently meeting the needs of our clients with safe quality and efficient operations, premium equipment and being leveraged to attractive deep water and international markets. This strategy has served us well and continues to guide us forward both in the current market and in creating value over the longer term.

In the shorter term executing on our current activities is a high priority for us with a focus on high utilization of our fleet, financial results, operational performance and delivering as planned with progress on our current two semi-submersible new construction program.

I thank you all for your time and interest, we'll be available answer questions after Jim's remaining comments.

James M. Holland

Thank you, John. Before we open the conference call to questions, I will now address some certain arms that could have an impact on our operating results for the fourth quarter. As John has stated, there remains uncertainty with regard to future work and dayrate regard to our current three rigs without current contracts, that would sudden cost, that with Beacon and the Richmond. With the Vicksburg currently only having a firm commitment of three months upon completion of its upgrade, it remains uncertainty with this future work in dayrate for most of fiscal year 2010.

Concerning impact on the results for the September quarter, there is a higher possibility that the Atwood Southern Cross and rig will remain idle for the entire quarter. With the Vicksburg incurring zero, rate days during July and August, one of it's upgrade. And the Atwood Beacon remained idle for the remainder of the quarter after completing its current contract in India at the end of July.

Expected idle rig days, the Atwood Aurora incurred seven days of zero rate in July due to some equipment issues which will reduce earnings per share for the quarter by approximately $0.02, while as stated the Atwood Hunter incurred around 10 days of zero rate.

Also in July, also undergoing required especially which will reduce earnings for the quarter by approximately $0.06. The Seahawk is in the process of being moved to a another drilling site which will take a part of 30 days complete during these approximate 30 day moving period.it’s day rate will reduce by approximately 20,000 per day reduction earnings per share for the quarter. On a more positive perspective, the results for the second quarter re-enhanced commencing on August 20, while the operating rate of the Atwood Falcon increased by 160,000 to 425,000.

This increase in dayrate expected at approximately 11 million in additional revenues to the quarter. However, approximately 2 million of this increase, we all set by termination of certain revenue amortizations. With firstly, all of our drilling rates incurring some change in their operating status during the quarter in at September 30, is a challenge to give precise guidance exact speculate revenues, operating cost for the quarter.

However, considering the idle rig days that we could incur in the fourth quarter of fiscal year 2009 on the Atwood Southern Cross, the Beacon and the Richmond coupled a zero rate days currently incurred by the Vicksburg days upgrade, zero rate days incurred by the Atwood Hunter during its required inspections. The unplanned seven days down on the Atwood Aurora, reduction in the Seahawk's drilling day rate and considering the positive impact increase in the Atwood Falcon dayrate which will offset with some of the impact of the zero rate days.

Total revenues for the fourth quarter of fiscal year 2009 compared to the third quarter of fiscal year 2009 could decline by approximately 20 million. Assuming the Atwood Southern Cross and Richmond remain idle for the entire fourth quarter with approximately 60 days of zero rate days for the Atwood Beacon and the Vicksburg, we currently expect total drilling cost of fourth quarter to be again around 58 million and on a rig by rig basis, we currently expect per day operating cost levels for the fourth quarter of fiscal year to be as follows.

The Atwood Hunter, 100,000 per day; the Atwood Eagle, 140,000 per day; the Atwood Falcon 70,000; the Atwood Southern Cross 50,000; the Atwood Aurora, 55,000; the Atwood Beacon, 65,000. Even though we expect this rig to be idle for two months during the quarter certain planned maintenance will keep its cost higher for the quarter as I said around 65,000 expected.

The Vicksburg 30,000, the Seahawk 70,000, the Richmond 40,000, other costs 15,000. We now expect the general and administrative expenses to be around 8 million for the quarter, which will result in the fourth quarter for the year 3 million in the next year. Depreciation expense expected to be around 10 million for the quarter, around 36 million for the year.

As I said earlier, based on current market environment and excluding in discreet items that maybe incurred we currently expect our effective tax rate for the yearly quarter to be around 15%. I will now comment on expected total capital expenditures for fiscal year 2009.

As John stated through June 30, 2009 we have expanded approximately 525 million to the construction of the Atwood Osprey at our (inaudible) semisubmersible. Our total capital expenditures through June 30 for fiscal year 2009 was approximately 350 million.

We expect to spend around 50 million in capital expenditures during the fourth quarter fiscal year of 2009, total of 400 million for the fiscal year. Our current projections of capital expenditures for fiscal year 2010, 2011 and 2012 all around 300 million, 400 million and 300 million respectively.

We now expect to have outstanding debt of around 300 million at the end of fiscal year 2009, but debt to total cap ratio of just over 20%. With our current contract backlogs expected to be approximately 1 million in future after tax cash flows.

We foresee no cover issues with our credit facility even if we should have an additional out rig days during the fiscal year 2010 and 2011. With our outstanding debt over the period expected not to exceed 450 million.

Thus, with the expected future cash flows from our current contract backlogs and available long capacity with a current interest cost of less than 3%. We believe that we can complete the funding and the construction of ultra deepwater semisubmersibles and maintain a strong balance sheet without requiring any additional sources of capital.

We will now open the conference call to questions.

Question-and-Answer Session

Operator

(Operating Instructions). We will go first to the side of Collin Gerry with Raymond James. Your line is open, please go ahead.

Collin Gerry - Raymond James

Hey, good morning guys.

John Irwin

Good morning, Collin.

Collin Gerry - Raymond James

Well, you gave us a lot of detail and I guess my first question, just kind of in regards to what you're seeing out there. Tell us about, we have seen some strength in oil prices and it's been there for little while. Are we seeing any bids come back in the mid water market or even in jack-up? What's your sense if you could kind of read the pulse of what's on going on in the industry?

John Irwin

Collin, certainly having seen oil prices up and then, hopefully being sustained in a more favorable economic environment, should hopefully lead to improvement. When that could occur of course that's always the question and then in our strategy, then we have to consider both sooner rather than later and still latest. So our strategy hopefully addresses that.

But in simple terms, earlier in the year, as far as the mid water or the Southern Cross type opportunities and then jack-ups was very quite and not much discussion. At this point we're having more discussion on the idle rigs that we have. We do have discussions I think, on each one of them and it will work later this year or next year.

Now whether those come to past or go ahead or we are successful, remains to be seen. So I would characterize it by saying certainly there is more discussion. I don't see any major change or momentum this year at this point. And as far as the market itself and downward pressure on rates in those markets, I think that that downward pressure is still continuing and we will of course in bidding our rigs and with that strategy will adjust accordingly and pursuing that work aggressively.

Collin Gerry - Raymond James

Okay. And then Jim one for you, in your guidance, you had a bump in SG&A, is that for the next quarter, is that a run rate we should assume is more normal for 2010?

James Holland

Yeah, we're...

Collin Gerry - Raymond James

In 8 million range?

James Holland

Well, our December quarter will always be the highest G&A because that's when we get the bonuses and kind of year end compensation that gets all expense through. But I think that the 8 million is probably a pretty run rate for the three quarters with exception of that first fiscal quarter which could be more in the 10 million range.

So I believe that for next year, 33-34, I don't see a significant increase in G&A, maybe up for a million or so Collin.

Collin Gerry - Raymond James

All right, thanks so much. That's it for me.

John Irwin

Thanks Collin.

Operator

Thank you. And next we'll go to the side of Arun Jayaram with Credit Suisse. Your line is open. Please go ahead.

Arun Jayaram - Credit Suisse

Hey, good morning guys.

James Holland

Good morning.

John Irwin

Good morning.

Arun Jayaram - Credit Suisse

John, in some of the contractor calls in the quarter to-date, we've heard a couple of different thoughts on the jack-up market. One corner, the transition appears to be pretty bearish, that could even have been perhaps 25-26 of the rigs in the jack-up market could be stacked and we've heard some more optimistic comments about seeing things starting to improve and things like that particularly with budgets in the next year.

Wonder where do you stand on this subject and where are your thoughts about getting some of your idle rigs back to work and particular the Beacon and the jack-up market?

John Irwin

Well, I wouldn't put myself in the speaking from my own point of view and the optimistic camp at this point, I guess and maybe its my normal perspective but certainly a cautious one, but at the same time, I think where we see the market is reflected in our strategy for having our idle rigs ready to work.

We believe these are very competitive rigs with great track records and we've put them in great shape to get back to work early. So certainly, we're keeping them in a very competitive condition and pursuing opportunities and we believe at that this stage, with our outlook for the marketing and given our own position as a company in that given our size in the units we have, their idle with these units do not compete with each other and really they do not compete with other units in our fleet for other parts of the world.

So that means that our goal of seeking high utilization for fleet fitting aggressively and having the units rate to work at this stage, still reflects a feeling that there maybe opportunities out there, but at some stage we could be successful with and that the rates would certainly make sense in working them versus the other alternatives of perhaps stacking more rigs, but as for the timing of when this occurs, certainly its not predicted but predicted that or I couldn't predicted it and wouldn't try to do so, but our approach is certainly bidding aggressively and try to have the rigs already get back to work and being ready to go, and certainly trying to capitalize what we believe is on our, some great units that are very competitive and can meet our clients' needs at a very attractive rates.

Arun Jayaram - Credit Suisse

John, I want to perhaps, you can educate me a little bit of about the Indian jack-up market. I know ONGC is looking for some units and that could be again some renewals rigs in country. But I know that there is an advantage from having rigs in country because of import duties and what not. Cut could you just maybe talk a little bit about your understanding of the import duties and what kind of advantage you have by being in country in terms of incremental Indian demand?

John Irwin

Yeah. I really wouldn't try to from our own point of view focus too much on the Indian market that might suggest that that's a priority or a focus or one of the opportunities that stands out most for us at this point. Certainly we'll pursue those opportunities, I think there are advantages in being there, but equally we are looking further field. And we'll have to base our strategy in having the rig, the Beacon, after we get to worked done on it and deciding where to keep it, depending on if we get work or not for longer term opportunities.

So, certainly India is there for us, anytime you have a rig closer to a market in the environment we are in today, you're more competitive in terms of mobilization and just the ability to operate in that market and maybe some of the other factors you have talked about, but we certainly wouldn't want to overplay those. But we are looking wider and fielder.

Arun Jayaram - Credit Suisse

Okay. And last question is, we're hearing also about some the recent near term softness of the 5000 foot deepwater category. Yet there is some optimism about quite a bit of tendering activity in West Africa. And I wonder maybe from bigger rigs but I was just wondering if you can maybe comment on those two issues?

John Irwin

And some of this is anicdotal from what you've already seen in the market clearly, so the rigs rolling over are rolling over with the most recent roll over from a short term higher rate contract in West Africa to another contract has been at a lower rate.

But there has been work and rigs have been employed and up until this point, I think not withstanding what we've seen is downward pressure on rates. We have seen these rigs working in our own situation of course, and 5000 foot units is as we want to through in our narrative there that we're employed, out until '11 and into the future and we've had rigs employed on contracts where they have been fully employed under those contracts. There hasn't really been any impetus as such on need to farm them out other than where there is a need by another client or partner, or someone else to have a rig because it's there and it's a good rig.

And from our own point of view, we have got our 5000 footers locked up and on work we believe, we'll keep them busy and where they have been performing well.

So, we haven't been as involved and really focusing our energy on that part of the market. We've been really focusing our energy on working our idle rigs. But as far as 5000 foot market, our rigs have been committed, and if anything we've seen some interest in one or two cases, instances and maybe even going a little bit longer.

Arun Jayaram - Credit Suisse

Interesting. Thanks a lot, John.

John Irwin

Thank you, Arun.

Operator

And we will move next to the side of Brian Uhlmer with Pritchard Capital. Your line is open. Please go ahead.

Brian Uhlmer - Pritchard Capital

Hey, good morning gentlemen.

John Irwin

Good morning.

James Holland

Good morning, Brian.

Brian Uhlmer - Pritchard Capital

Last commentary on India was definetly where I was heading as well. I wonder if you could comment a little bit more on that market and the fact that they've been, they are going to increase re-gas capacity for LNG and there seems to be a massive need for drilling shallow water in India with several operators. Is it a factor of price or politics or take away capacity, I mean what's stopping these guys from expanding there in your opinion?

John Irwin

Well Brian, I am not going to start speculating on what's going on in there and how much activity I've learnt in trying to predict the future and talk about these things. I am not sure I can bring information to bear that would be helpful in that sense. But certainly it's been an important market with a lot of rigs being used in longer term.

We would hope that there would be opportunities and thats something we will continue to look at. We've worked there over a long period of time, but as far as the Atwood Beacon, we think its a rig has performed extremely well. And it could be great for certain opportunities in that market, we'll look at those but we're looking further a field and certainly not putting our only eggs in the basket of the Indian market and what direction that market might take notwithstanding the fact that it has employed a lot of rigs in the past and hopefully will do so in the future.

Brian Uhlmer - Pritchard Capital

Good John, thanks. And you seem very confident on the Osprey getting out of the yard in time. Is that really a take away that you're using the quality yard with a proven design that we shouldn't expect any delays in that rig.

John Irwin

Well, you certainly hit it on the head when you said quality design in a quality yard, that was a big motivation in our working with that yard on both of these rigs and the fact that these rigs have been built and delivered in recent times, and in the risk equation that's extremely important and its where we want to be.

At this stage, we're progressing on schedule and certainly we're targeting the same schedule we've referred to. Naturally throughout the market, we've seen a lot of pressure on rig deliveries, we've seen delays depending on various factors, the yard, the design and the equipment and so on.

But I can tell you we're working very hard on planning, not only in terms of building a rig, constructing the rig, delivery of equipment, but really a plan that goes into personnel recruiting or transfers within the fleet, commissioning mobilization startup. So a whole realistic approach to the planning and our people, we have a lot of great people here working hard on this subject and we're progressing well.

But naturally it's one of those things that even if you're in a top yard with a top design and you work hard at it, you need to do so in order to deliver on time. But at this stage we're putting the attention on it and progressing as planned.

But naturally you have to work hard and apply lot of pressure, particularly as you get into the later stages of the project where surprises can delay you. But, so we'll be focusing on those risk areas and trying to ensure that we don't get any delays out of those that could potentially cause delay but so far so good.

Brian Uhlmer - Pritchard Capital

Okay. And what did you say that your up cost in kind of fiscal 4Q '10 would increase as you kind of add extra hands to existing rigs to train them for the new rig or is that going to be capitalized in the yards?

John Irwin

Well, number one as people have put on the rig in yard the Osprey, that will be capitalized as part of the commissioning process until the rig mobilizes and that rig mobilizes on a dayrate, and it will be direct operating cost once she starts mobilizing. I mean from a company point of view and I think we've said this over quite a number of conference calls, or going back quite a few conference calls, when there was a focus at one point in time for the companies within our peer group when cost and direct operating cost were escalating and what was causing those is escalations as we had said back then, part of the escalation for us was as we were carrying additional people throughout the fleet for training purposes and for development, and for meeting our needs both in the existing operating legacy fleet and for growth.

As we have kind of entered the current year, we have targeted that in terms of the people we need for the new rig and to some extent with attrition and a focus on cost we have trim down some cost, but still focused on keeping key people for operating units, having those units ready to go and still a lot of focus on developing and keeping extra personnel and developing those personnel, accelerating the development for the future.

So, as far as that impacting the cost in terms of increasing our cost from where we are, we certainly don't anticipate that at this point in time. We don't plan that and hopefully that's not a requirement to meet the needs. We believe we can meet it through what we are doing and putting those people into the rig, into the Osprey at the right time and putting enough time into development, that's what hit the numbers that I put out there today, Brian.

Brian Uhlmer - Pritchard Capital

Well, great. Thank you very much.

John Irwin

Thank you.

Operator

And next we'll move to the side of Waqar Syed with Tristone Capital. Your line is open, please go ahead.

Waqar Syed - Tristone Capital

Good morning John and Jim. I'm going to follow-up on early questions about India, but maybe take a different tack here. There have been some talks that ONGC has been promoting local content and rewarding contracts to some of the local marketers or local companies. Do you think that's valid, do you think if that is the case it's a disadvantage for you guys marketing as a outsider. And would you consider collaborating with local marketing company or a local contractor?

John Irwin

Well, on the last point of course where we work around the world Waqar, as you know and in many of these areas we do have relationships with let's say, operating entities they may not be drilling contractors but operating entities who know that market and do certain things for us, certain of the needs where we run the rig and they may help us and there is certain fee’s and so on.

And in India we've had those relationships as we have had elsewhere. And as to ONGC and as to local content and so on, we have had a long history there and I am not going to comment on ONGC or even speculate on any of that. But certainly in many of the -- from time to time and in some of the markets in which we work, work local content can be a factor. And we've always tried to deal with that in a most effective way we can.

But certainly in running our rigs, our experience has been that we do better by overall when there is an operating rig. Operating that rig and running a rig and marketing it ourselves, or controlling. That works better for us and generally that's been the approach we would take. So, certainly it's an important market. We have relationships there. We continue to pursue those, we dealt with some of these same things in the past and have always stayed busy and it will be an important market for the purpose of the Atwood Beacon and we'll look at the other markets around the world and particularly those closer to where it is now, Waqar.

Waqar Syed - Tristone Capital

Okay. And then on the cost side, what are you seeing on the materials and supplies cost, what kind of percentage changes? And then also on insurance costs, what are you seeing in that market?

John Irwin

Waqar on the cooperating cost side, the material cost, it has mitigated some is kind of flat; we don't see really increasing trends there. So our belief is it will kind of level off, that's for sure. As far as the insurance go, our overall insurance cost is still very good, I mean the Gulf of Mexico fared fairly on the Richmond, that's going to go up some here, windstorm coverage. But it's a general statement I think that our international fleet, it's come up some but nothing dramatic there. We've been able to keep that pretty well, under control. So nothing that I say that will be a big increase overall or something.

Waqar Syed - Tristone Capital

So the insurance companies are still willing to cover for insurance coverage in the Gulf Mexico in a reasonable price?

John Irwin

I wouldn’t say it’s reasonable, but we have coverage Waqar, but it's pretty expensive. Fortunately we only just have one in the Gulf of Mexico but now fortunately for us, but they can coverage but it's very, very expensive and that's for sure.

James Holland

I guess one, please to add to that Waqar is of course we have the Richmond in the Gulf of Mexico which is our only unit in the Gulf and it's a special and unique unit which fortunately through its patented suction impale system and other characteristics has performed extremely well during hurricane season in the past and including with hurricanes passing over it.

So, while cost, wind storm insurance cost over Mexico, as you know have gone up and had more impact some on some more than others and depending on the type of rigs, fortunately in our case we've seen some increased cost and direct operating cost but in terms of retention or deductible and overall we still have good insurance and still able to bid the rig competitively we believe in the Gulf and that's not a factor in it being down today, it's just a matter of the work, but still we believe we're very attractive rig for this market.

Waqar Syed - Tristone Capital

Good. Well, thank you very much.

James Holland

Thank you, Waqar.

Operator

Thank you. And next we will go to the side of Mike Breard with Hodges Capital. Your line open, please go ahead.

Mike Breard - Hodges Capital

Okay. You mentioned early on in discussions on your three idle rigs. Are you seeing any more serious long term type of work to use that kind of thing or is it just one word here and there?

John Irwin

Mike, it depends of the rig and Gulf of Mexico, the market generally is of the shorter term nature and those opportunities still probably of a shorter nature. And with the other rigs I wouldn't say there are any range of opportunities that could be months, maybe up to a year and by saying that I don't want to imply that any of those are about to happen or ought, its one of those situations where you have to wait and see and it might be a question that when you are successful before the particular opportunities, that we are looking at I don't think any of them would be longer than a year firm.

Though they could be potential to go longer once you established hopefully in the right market. But I don't think any in as specific cases that would, could be up to a year but not longer than that in the firm period.

Mike Breard - Hodges Capital

Did you get the impression that there is still, there is kind of dipping the toes in the water that maybe they are waiting for oil to hold over $70 or demand increased before they really start bigger problem?

John Irwin

Well, it's not usually not the nature of discussions you have with clients, as so the oil price and those sort of factors its usually to do with your internal approvals, how this project might fit with some other projects that they vying for or internally, meaning where does it fit in terms of the CapEx budget, and is it one of those that gets selected, and/or perhaps it's on the back of some recent discovery or further work that a client might want to do.

So, certainly improving oil prices and improving economies, have to be a factor in those projects going ahead, though it's not usually discussed with us specifically in that form but the fact that clients are at least starting to talk more and look at these projects, and I think those if they look at, I think they are really evaluating, and the question is whether they will go ahead, when they will go ahead, when they'll go ahead, will they get it approved. But certainly more discussions and presumably some of that has to do with improving prices and improving economies, and things starting to look a little bit better.

Mike Breard - Hodges Capital

Okay. One last quick question. This is a very popular day for conference calls. I get onto years a little late, have you mentioned the reason for the relatively low tax rate in the last quarter?

James Holland

Yeah, Mike I will address that. With all the uncertainties we're having here with some of our rigs and so far it has made somewhat difficult to give précised guidance, but the main reason for the lower rate compared to our guidance was due to the -- we did not assume the Richmond would be idle at the start of the quarter. So that rig now being ideal and you haven't adjust that, we think you will in the year that is definitely will lead to less taxes in the U.S. and that's a very promising right areas with pretty high rate for as compared and the other area which we held higher rates and that in Australia and its like about 70% of our foreign taxes will be for this year.

We've had some currency fluctuations there which have been on the positive side which has reduced our taxes there too that's the reason that rates come down from where we are today and we feel pretty confident that 15% now we'll end up being for the year end for the fourth quarter and right now based on just our preliminary view and we maybe and MTN... we believe that's a pretty good run rate going forward on MTN as well.

Mike Breard - Hodges Capital

Okay. Thank you.

Operator

And next we'll go to the side of Bill Doyle with Columbia Wanger. Your line is open, please go ahead.

Bill Doyle - Columbia Wanger

Hi, Jim and John. Could you give us the CapEx again just to make sure we all have it right?

John Irwin

Yes. The CapEx for the fourth quarter we believe about 50 million will spend and then for the 10, 11 and 12 it would be about 300 million of projections, 300 million, 400 million and then 300 million.

Bill Doyle - Columbia Wanger

Its 310, 411, 312?

John Irwin

312, yes.

Bill Doyle - Columbia Wanger

312. And then 50 less to go this year to get to 350.

John Irwin

About 4...about 350 spend to-date, so for the first three quarters about 400, we expect to be this year and then its like 3 and then for 9, 4 for 10 and 3 for 11, I'm sorry, 3 for 10, 4 for 11 and 3 for 12.

Bill Doyle - Columbia Wanger

Okay. Thank you

John Irwin

Yes.

James Holland

Okay. Thank you, Bill.

Operator

(Operator Instructions). And it does appear that we have no further questions in the queue at this time.

John Irwin

Okay. Thank you very much for your interest in Atwood.

Operator

This does concludes today's teleconference. Thank you for your participation. You may at any time and have a wonderful day.

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Source: Atwood Oceanics F3Q09 (Qtr End 6/30/09) Earnings Transcript
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