Rowan Companies Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 6.13 | About: Rowan Companies (RDC)

Rowan Companies (NYSE:RDC)

Q2 2013 Earnings Call

August 06, 2013 11:00 am ET

Executives

Suzanne M. Spera - Director of Investor Relations

W. Matt Ralls - Chief Executive Officer, Director and Chairman of Executive Committee

Thomas P. Burke - President and Chief Operating Officer

Mark A. Keller - Executive Vice President of Business Development

J. Kevin Bartol - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Ian Macpherson - Simmons & Company International, Research Division

David Wilson - Howard Weil Incorporated, Research Division

Gregory Lewis - Crédit Suisse AG, Research Division

John Booth Lowe - Cowen Securities LLC, Research Division

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Robin E. Shoemaker - Citigroup Inc, Research Division

Operator

Greetings, and welcome to the Rowan Companies Second Quarter 2013 Earnings Result Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Suzanne Spera, Director of Investor Relations for Rowan Companies. Thank you. Suzanne, you may now begin.

Suzanne M. Spera

Thank you, Christian, and good morning. Welcome to Rowan's second quarter 2013 earnings conference call. Joining me on the call this morning are Matt Ralls, Chief Executive Officer; Tom Burke, President and Chief Operating Officer; Mark Keller, Executive Vice President, Business Development; and Kevin Bartol, Executive Vice President and Chief Financial Officer, who will have prepared comments.

Before Matt begins his remarks, I'd like to remind you that during the course of this conference call, forward-looking statements may be made within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements about the change in corporate structure as well as statements as to the expectations, beliefs and future expected financial performance of the company that are based on current expectations and are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected by the company. Other relevant factors have been and will be disclosed in the company's filings with the SEC.

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

W. Matt Ralls

Thanks, Suzanne. Good morning, everyone, and thanks for joining us. We're pleased with our results for the second quarter, particularly in regard to a strong operational performance that resulted in less than 1% of operational downtime in the quarter. In addition, our expenses came in below the guidance Kevin gave on our last call.

As Kevin will comment in a moment, we are increasing our cost guidance for the second half of the year. I want to set the stage for those comments by saying that while they increase -- will impact our EPS estimates, and higher expenses relate mostly to additional revenue-generating operating days in the second half of the year for our Tarzan rigs due to the deferral of their planned shipyard projects and to non-recurring or noncash expenses and not to inflationary pressures. Our labor cost increases have remained in line with our previous guidance with the exception of what we believe are temporarily higher costs for the start-up phase of our Norway operations, as Tom will explain in his comments.

Mark's comments will offer further support for our optimism on earlier calls about the strength of the jack-up markets and the outlook for getting commitments for our newbuild drillships. We've now entered into contracts for our second and third ships and are seeing strong interest by multiple operators in the fourth. As you will recall, we have an option for a fifth drillship and continue to be optimistic that we can have the opportunity to exercise that option against the commitment for a long-term contract. Having said that, it would be unlikely that we would exercise the option without such commitment.

Now I want to update previous discussions on these calls regarding dividends. We continue to have discussions with our Board about reinstating our quarterly dividend. However, any decision on that has been deferred pending the results of our efforts to get a long-term commitment for a fifth drillship. Building a fifth drillship would not necessarily be determinative regarding reinstating the dividend, but it would be a substantial investment financed in part by additional debt. So we would want to know the outcome before making a decision on the dividend.

With that, I'll turn it over to Tom.

Thomas P. Burke

Thanks, Matt, and good morning, everyone. For the second quarter, we are pleased with our operational results and the recent contract awards for our jack-up and drillship fleets. Our safety performance remained strong, our operational downtime is below our guidance and our 2013 out-of-service time is due to completed estimates. We're also encouraged by the increase in jack-up day rates as several of our rigs rolled on to new contracts, which Mark will tell you about shortly.

In the second quarter of 2013, our operational downtime was less than 1%. We use the term operational downtime to mean time when our rigs are on contract and are available to earn day rates but won't operate due to operational issues such as equipment breakdown. Rowan's low level of operational downtime, which equates to revenue efficiency of over 99% in the second quarter, reflects considerable assets across the fleet to provide the most reliable contract drilling services to our customers. We will remain focused on continuously improving operational downtime. However, we recommend you continue to use the previously stated guidance of 2.5%.

We use the term out-of-service to mean all operating time other than operational downtime and cold-stacked days, including shipyard transit and inspection time in which our rigs are off contract or we do not recognize revenue. We will continue to distinguish between out-of-service time and operational downtime to enable you to differentiate between downtime associated with operational problems as opposed to that arising from marketing-related decisions.

Our service time for customer required equipment upgrades to 3 of our Tarzan Class jack-ups have been postponed to 2014. As a result, our out-of-service time was 8% in the second quarter, and we're on track to outperform our previous guidance for the whole year. We continue to improve our project management capability to become more efficient and reduce out-of-service time associated with shipyard projects.

In our last fleet status, we disclosed a recent setback on the Gorilla VII in the North Sea related to some leg damage revealed when the rig came off its last location. The repair time was initially estimated to be 21 days. However, we now have a better assessment of the damage, and we expect the repair time to be 6 to 8 weeks. We will keep you informed if this estimate changes.

From an operating cost perspective, we are seeing the increases that we guided to at the beginning of the year. There are some areas where wages are moving higher, but our guidance on labor cost increase remains about 6%. We spent a lot of time and effort on improving Rowan's cost control in our operations, including improved visibility of costs in our management information system. However, in our Norwegian operation, the start-up costs for the Rowan Norway were higher than estimated due to a number of items, including a tight labor market and start-up training requirements, though we expect those costs to normalize over the balance of 2013.

Now turning to deepwater. In May 2013, we laid the keel for the Rowan Resolute, our second drillship, and we struck a deal for the Rowan Reliance, our third drillship. Preparations for the development of the Rowan Renaissance, our first drillship, continues with our pre-ramp-up on schedule. Construction is over 90% complete. We are closely monitoring the delivery of drilling equipment and working with vendors to minimize the impact of any late deliveries.

We continue to see strong demand for the Rowan Relentless, our fourth drillship. Multiple customers have expressed interest in the rig. We've extended the option for our fifth drillship to be built at the HHI shipyard to the end of September. But as Matt stated, it's not likely that we would exercise this option on a speculative basis.

Now I'll turn the call over to Mark, who'll report on our recent jack-up and drillship contract awards and provide a regional overview of the jack-up market.

Mark A. Keller

Thanks, Tom, and good morning, everyone. After months of marketing, strategic planning and negotiations, we are thrilled with the recent contract announcements of our second and third new build drillships. Anadarko awarded the Rowan Resolute a 3-year contract and an effective day rate of $608,000. We expect the Resolute to commence operations in the U.S. Gulf of Mexico late in the third quarter of 2014 following its delivery.

Cobalt International Energy L.P. awarded the Rowan Reliance a 3-year contract at an effective day rate of $602,000. We expect operations to commence for Cobalt in the first quarter of 2015 in the U.S. Gulf of Mexico.

We look forward to our partnership with both Anadarko and Cobalt on the maiden voyages of these 2 ships.

Our ultra-deepwater marketing focus now shifts to contracting the Rowan Relentless, our fourth drillship. We are currently in discussions with multiple operators regarding their 2015 drilling programs and the use of the Rowan Relentless. We remain optimistic about the opportunities for our ultra-deepwater fleet.

On the jack-up side of the market, we are encouraged by the steadily climbing utilization and the increase in day rates worldwide. We expect this trend to continue for the remainder of 2013 and into '14 as projections indicate that worldwide demand for jack-ups will continue to rise. I'll go into more detail regarding future demand and our regional breakdown.

According to IHS Petrodata, there are currently 496 jack-ups worldwide. Demand is 427 rigs with total utilization of 86%, which has slowly and steadily increased since the low 68% in January 2011.

Further evidence of the confidence in the jack-up market moving forward is the large number of newbuild orders in 2013. Since January, the industry has announced 42 units, bringing the total to 114 jack-ups scheduled for delivery over the next 4 years. We believe these newbuilds are necessary to replace the aging fleet as the industry now accepts the bifurcation of the market. Further to bifurcation, we consider the new focus to be the obsolescence of older rigs driven by the current demand for such specifications as high-capacity living quarters, automated pipe handling equipment, increased hook load, hot fluid capacities and HPHT capabilities.

Tendering the older jack-ups has become increasingly difficult giving the high CapExes that correspond with current market requirements. These newbuild jack-ups are essential to meeting future demand as the imminent attrition of the jack-up fleet materializes.

I would now like to briefly discuss the regions of the world where we currently operate our jack-up fleet. The Southeast Asia jack-up market continues to be a global driver of demand. Based on current tenders and inquiries, we see near-term demand for 14 jack-ups in the region. Additionally, we see visible demand for 11 more units over the next 2 years based on market intelligence.

In Indonesia, Pertamina Hulu Energi awarded the Gorilla II a 210-day contract at $167,000 per day, an increase from the rig's previous contract in the mid-130s. In the coming weeks, we expect to report an additional commitment for the EXL I in the region.

All 10 of our jack-ups in the Middle East are currently contracted. Nine of the 10 are operating, and we expect the Rowan California to commence operations in September.

We believe that future demand will grow, as evidenced by our count of approximately 15 potential projects over the next 18 months. Driving that demand is Saudi Aramco with 43 jack-ups currently contracted in a forecasted fleet of between 50 and 60 units by year-end 2014.

Despite the challenges of working rigs during hurricane season in the U.S. Gulf of Mexico, we're pleased with the tight market utilization of 92%. Our 5 active jack-ups are all utilized, and the Cecil Provine, Joe Douglas and the Gorilla IV have all benefited from rate increases in the last quarter. The Gorilla IV actually received 2 recent contracts: a 6-month extension with Walter Oil & Gas at $180,000 per day and a 45-day contract with Exxon Mobil at $200,000 per day expected to commence in May 2014 following the commitment with Walter.

As an update to the fleet status, the EXL III drilled a 1-well contract with McMoRan at $160,000 per day that ended earlier than we anticipated. However, the rig is currently drilling a relief well estimated at 45 days for Walter Oil & Gas, also at a day rate of $160,000 per day. We're glad to be able to provide assistance to Walter and Hercules.

In other news, we were fortunate to fill the gap on the Rowan Louisiana with a 90-day well from NorthStar at a rate in the mid-90s. This project will hopefully carry us through hurricane season, after which we expect to resume market rates.

The U.S. Gulf of Mexico has seen a recent increase in term contracts versus the traditional well-to-well environment. Operators are realizing the necessity of higher rates and longer terms if they hope to keep the limited number of 300-foot-plus independent-leg cantilevers in the region.

And finally, the North Sea. Jack-up availability is scarce, and we expect the supply-demand balance to remain tight, if not in deficit, through mid-2015.

The Gorilla V received a 33% day rate increase on its extension with Total for an additional 2 years at $274,000 per day. This new rate was effective in late June and is a clear indication of the competitive environment amongst operators to retain their preferred high-spec equipment in the region.

We expect to announce additional work for the Rowan Stavanger in the coming quarter.

2013 has been a strong year for the offshore drilling industry and for Rowan. Today, we've added approximately $1.8 billion in backlog, and we look forward to increasing that number by contracting our fourth drillships and securing additional jack-up contracts at premium day rates.

Thank you for your time this morning, and I will now turn the call over to Kevin.

J. Kevin Bartol

Thank you, Mark, and good morning, everyone. Our second quarter revenues were $409 million, up by 16% over last year due to higher average day rates and higher utilization between periods.

Our out-of-service time was approximately 8% of our available rig days during the second quarter, which was slightly lower than our previous guidance as we successfully reduced planned operated inspection periods for a certain rig.

The out-of-service time was down from last year's level as fleet repositioning declined and certain rigs returned to service.

Our operational downtime, which is unbillable time when a rig is operating, was only 0.6% of available rig days and 0.8% of in-service days during the quarter.

We currently expect our out-of-service time for the full year 2013 to be approximately 9% of our available rig days, which is lower than our previous guidance of 10% primarily due to the deferral into 2014 of the shipyard period for the 3 Tarzan rigs working for Aramco.

We expect our out-of-service time to be approximately 12% in the third quarter of 2013 due to off rig days for Gorilla VII leg repairs and incremental shipyard time for the Gorilla VI, Gorilla II and the Rowan California as they prepare for their next contracts.

It is important to note that there are times when were compensated for certain out-of-service periods. However, this revenue is recognized over the contract period once the rig commences drilling operations.

Our backlog of drilling commitments is at an all-time high of approximately $4.6 billion. We estimate that 14% of our contract backlog will be realized as revenue during 2013, 27% will be realized in 2014, 26% in 2015, 22% in 2016 and the balance in 2017 and beyond.

Excluding our 2 cold-stacked rigs, we have 78% of our available rig days under contract in 2013, 52% under contract in 2014, 28% under contract in 2015 and 15% under contract in 2016.

Our second quarter operating expenses of $216 million were slightly higher than our previous guidance as a result of higher-than-anticipated reimbursable expenses, which are fully offset by incremental revenues. Excluding these incremental reimbursable expenses, our second quarter operating expenses were slightly lower than our previous guidance.

Operating expenses in the second quarter were 15% above last year's level primarily due to the impact of certain rigs operating in higher-cost locations.

It is important to note that these rigs earnings revenues that more than offset the incremental costs.

Looking at the third quarter, we estimate operating expenses will be in the range of $207 million to $210 million or slightly lower than the second quarter as the additional out-of-service time discussed previously will result in certain costs being capitalized while rigs are at the shipyard prior to their next contracts. As a reminder, when rigs are in the shipyard for upgrades, crew and other personnel-related costs associated with the project are capitalized rather than expensed.

Our full year 2013 operating expenses are expected to be in the range of $830 million to $840 million or $20 million higher than our previous guidance, net of rebuilds. Nearly half of the increase is due to the 3 Tarzans continuing to work for Aramco and their planned shipyard periods being deferred into 2014. And these expenses will be more than offset by incremental revenues. The remaining expense increase is primarily due to non-recurring costs, including higher-than-estimated Norwegian start-up costs, incremental incentive-based compensation due to the company's projected performance and Gorilla VII leg repair costs.

We continue to estimate worldwide labor rate increases to be approximately 26% in 2013 versus 2012. Additionally, we expect our average gross margin as a percent of revenue to slightly improve in 2013 over the 2012 level.

Our second quarter depreciation expense totaled $67 million, which was in line with our previous guidance and last quarter, and up by 8% over last year primarily due to fleet additions between periods.

We estimate 2013 depreciation expense will be in the range of $270 million to $273 million, in line with our previous guidance, including approximately $68 million to $69 million in the third quarter.

Our second quarter SG&A expenses totaled $33 million, which was slightly higher than our previous guidance and up by 33% over last year primarily due to professional services and fees for an issue related to the company's internationalization, entry into the ultra-deepwater market and corporate restructuring, also including the noncash impact of a new retirement policy relating to the vesting period for share-based consumption and incremental incentive-based compensation due to the company's projected performance. We estimate 2013 SG&A expenses will be in the range of $123 million to $125 million, which is slightly higher than our previous guidance, primarily due to the same noncash impact of the new retirement policy and the incremental projected incentive-based compensation due to the company's projected performance.

Our third quarter 2013 SG&A expenses are expected to be in the range of $31 million to $32 million.

Interest expense, net of capitalized interest, was approximately $18 million during the second quarter, which was in line with our previous guidance. We continue to estimate 2013 net interest expense to be approximately $67 million to $68 million, including approximately $16 million in the third quarter of 2013.

Our second quarter tax rate was approximately 12%, which was higher than our previous guidance due to the sale of the Rowan-Paris.

Our expected 2013 full year effective tax rate is approximately 8%, which is slightly higher than our previous guidance, again primarily due to the sale of the Rowan-Paris.

Excluding the sale of the Rowan-Paris, our second quarter tax rate would have been 6.5%, and our expected full year tax rate would be 6%, both slightly higher than our previous guidance due to the mix of projected foreign and domestic earnings. We expect the tax rate to be approximately 6% in both the third and fourth quarters. As a reminder, the tax rate is dependent on a full-year projected mix of income from our U.S.-owned assets and our foreign-owned assets and any discrete tax items, such as tax filings for settlements reportable in the quarter.

Property and equipment additions totaled $199 million in the second quarter, which is significantly lower than our previous guidance primarily due to timing of certain equipment deliveries and rig projects.

We currently estimate our remaining 2013 capital expenditures to be approximately $930 million, which is lower than our previous guidance also due primarily to the timing of equipment deliveries and rig projects. This includes $590 million for our 4 drillships, $50 million for riser gas handling equipment associated with the drillships, software certifications and deepwater fleet support costs, $181 million for life enhancement projects and existing fleet maintenance, $71 million for partially reimbursed jack-up fleet contractual modifications and $38 million for equipment spares, drill pipe and improvements to our shore base.

We estimate approximately $251 million of capital expenditures in the third quarter of 2013, including $76 million for our 4 drillships and deepwater fleet support costs, $109 million for life enhancement projects and existing fleet maintenance, $41 million for partial reimbursed jack-up fleet contractual modifications and $25 million for equipment spares, drill pipe and improvements to our shore base.

At June 30, we had approximately $2.1 billion of remaining capital expenditures under our drillship newbuild program with $590 million required in 2013, $1.1 billion in 2014 and $450 million in 2015. Our drillship commitments will be funded through available cash, cash flow from operations, amounts available under our revolving credit facility, if required, and potential future finance.

That concludes our prepared remarks. With Christian's assistance, we will now open the lines up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ian Macpherson with Simmons.

Ian Macpherson - Simmons & Company International, Research Division

And I wondered if you might be able to help us understand. You've published your day rates, including the mobilization revenues. And could you help us understand what the deferred revenue and cost considerations might be for those mobilizations and how we'll think about the cash margin on a clean basis for those contracts as you see it today?

Mark A. Keller

Ian, I'd like to help you with that. I will just like to tell you that the mob is obviously included in number that we published, but we're in a very competitive situation still with our four ships. And to break it out, I mean, we can -- I'd prefer not doing that. I -- we -- we're looking at several other contracts and dealing with other operators, and we're -- we'll just stay with what we published right now, if you don't mind.

Ian Macpherson - Simmons & Company International, Research Division

Fair enough, okay. Mark, you mentioned you expect to have a new commitment to announce with the Stavanger before too long. Are you looking at keeping that rig on the U.K. side? Or would that possibly be moving into Norway?

Mark A. Keller

The first extension, Ian, will probably be in Norway, but we're also talking to additional operators in Norway and in the U.K. But we believe that it will be extended in Norway on the first contract.

Ian Macpherson - Simmons & Company International, Research Division

Got it. And then just lastly, did you say what the new exercise deadline is for drillship #5?

Mark A. Keller

It should be in the end of September.

Operator

Our next question comes from the line of Dave Wilson with Howard Weil.

David Wilson - Howard Weil Incorporated, Research Division

Just kind of the following up on the Reliance. I just wanted to see if you are in discussions with other operators for that rig. Just trying to size up to the market interest out there.

Mark A. Keller

Dave, we were -- we're in discussions with several operators on each one of the rigs, and we were just fortunate that we were able to secure the contracts with Anadarko and Cobalt, 2 operators we feel like we'll be able to establish long-term relationships with.

David Wilson - Howard Weil Incorporated, Research Division

Okay. And Mark, do you think there's any more room to push rates in the Gulf of Mexico on the longer-leg jack-ups, like the Gorilla IV and the Joe Douglas, higher than kind of the low 200s?

Mark A. Keller

Well, as I said in my remarks, Dave, we -- it's a short-term job, but we've received an award from Exxon Mobil for $200,000. It all depends on the need for the rig. If McMoRan gets active, that certainly, the Joe Douglas, those type of rigs, they'll be up in the -- with the tune for the Gorilla IV if an operator requires long legs and extended-reach cantilever, it just all depends on the requirement. But right now, we're seeing a lot of demand in the U.S. Gulf for those type of rigs. It's always a challenge, as you know, with hurricane season. But so far, we've been fortunate to keep them going.

David Wilson - Howard Weil Incorporated, Research Division

Okay. And then one final one, if I could sneak in here, regarding the planned shipyard time that's getting pushed out. Anything really to note there? Was that fit-ins with Saudi Aramco's plans or available shipyard time? Anything behind that shift?

Thomas P. Burke

David, that was just fitting in with Saudi Aramco's plan.

Operator

Our next question comes from the line of Gregory Lewis with Credit Suisse Group.

Gregory Lewis - Crédit Suisse AG, Research Division

Just following up on Dave's question on the Tarzan rigs. Clearly, Aramco has pushed these back a few times. When are those rigs actually scheduled to go into the yard for further sort of scheduled or planned drydocking?

Thomas P. Burke

Well, Greg, what we did this year was we took -- as you know, we took each of those rigs or we plan to take each of those rigs, or the 3 Tarzans, off for a short period to do some necessary inspections, and those inspections are basically for Rowan for our equipment and just normal inspections that we do every 7 years. And then the actual upgrades to some of the high-pressure piping and other things that were required will be pushed into 2014. And that -- we don't exactly know -- exactly when in 2014, but it'd really depend on Aramco's need and their plan.

W. Matt Ralls

And Greg, you may remember that this is the issue with the Monogram, API Monogram. So we have API-certified piping. The contract calls for Monogram, which they're sensitive to because of some issues that they've had with some land rigs. It's -- these rigs have operated for them since they were built using the same piping that meets all the standards. But -- so it's -- we're still waiting for a final resolution from Aramco whether they want to take the rig out of service long enough to do that Monogram upgrade.

Gregory Lewis - Crédit Suisse AG, Research Division

Okay. But beyond Aramco, as regulatory Rowan is concerned, they're pretty -- there's no real reason for them to enter the yard over the next what, 2, 3 years, it sounds like?

W. Matt Ralls

That's correct, yes. We -- without -- or segue to a different client, we would not expect it due to the segue.

Gregory Lewis - Crédit Suisse AG, Research Division

Okay. Okay, perfect. And then just real quick, touching on that -- on the fifth -- your option for the drillship, just following up on that. Is there a delivery window if you were to exercise that? And I guess my question is, without that option, so, for instance, if you were to just sort of let that option expire in terms of thinking about taking delivery of a drillship, I guess, in late '15 or early '16, does that option actually provide some sort of benefit in getting into the shipyard?

W. Matt Ralls

It does secure us an earlier delivery date than if we let it lapse. So yes. But if we -- if this option went away and we went back to the shipyard later, we would expect that delivery to be pushed out probably in the neighborhood of 6 months.

Gregory Lewis - Crédit Suisse AG, Research Division

Okay, 6 months. Okay, great. And then just, I'm sorry, one more follow-up. I mean, clearly, you're looking to do drillships with -- on the back of contracts. I mean, there's definitely been a few ultra-deepwater -- or should I say ultra high-spec jack-up contracts on the back of -- newbuilds on the back of contracts. I mean, is that something that Rowan is exploring at this point? Or pretty much when we think about new equipment, the focus really is going to be on the ultra-deepwater, at least in the near or medium term?

W. Matt Ralls

Yes, what I would say about that is that we have looked at those other opportunities and had the opportunity to bid on those. And those -- right now, I would say that the returns from the ultra-deepwater side of new -- of fleet expansion are higher than they are on the very high-end jack-ups. And so, for that reason, and really just for balance sheet considerations, I don't really expect to see us do anything in that area in the near future. But that could change, it's -- if we had very a attractive contract. But I don't think that's going to occur. And so it's more likely that any further expansion would probably be a fifth drillship.

Operator

[Operator Instructions] Our next question comes from the line of JB Lowe with Cowen and Company.

John Booth Lowe - Cowen Securities LLC, Research Division

I just had a quick question on the Louisiana. You said you signed a 90-day contract that'll take it through hurricane season. Are you expecting that, that will roll over on the higher rate after the hurricane season? And was the rate that you got a function of a discount for when it was actually contracted?

Mark A. Keller

That's right, JB. We had to take a job, lower rates than we wouldn't -- you would normally compete with a smaller rig in order to get in the shallow enough water during the peak of hurricane season. So we opted to take a job that would walk the rig through hurricane season, and then we should be able to return to market rates, which we think are -- will be up in the 120s, somewhere out there.

John Booth Lowe - Cowen Securities LLC, Research Division

Okay, that makes sense. And then just on the Reliance, have you guys did that rig for work with Cobalt in West Africa? Or were you really just focused on the gulf for that rig?

Mark A. Keller

We were focused on the U.S. Gulf of Mexico. We had talked to them about West Africa, but they clearly -- with the operating abilities of our rig, it is better suited for their projects in the U.S. Gulf of Mexico with the 1,250-ton capability and dual stacks and all the redundancies they wanted here in the U.S. Gulf.

John Booth Lowe - Cowen Securities LLC, Research Division

Okay. So on the -- on your fourth ship then, you probably would not -- did that for Cobalt working in West Africa? You didn't -- did a similar spec?

W. Matt Ralls

We would -- we're in discussions with them all the time, and we would be happy to put multiple rigs to work with Cobalt. They're a very successful operator. However, right now, we are in not serious discussions with them on that topic.

Operator

Our next question comes from the line of Byron Pope with Tudor, Pickering, Holt.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Mark, you mentioned on the near-term demand for 14 jack-ups in Southeast Asia, and I know you had a presence in Malaysia and Indonesia. Just wondering if you could get a little more granular in terms of which countries that you think drive that incremental demand. And as you think about potentially going your presence into Southeast Asia over time, how would you meet any contract you were to get in terms of supplying the rig to meet incremental demand?

Mark A. Keller

Well, we're always -- Byron, we're always looking at the market. We have a very strong presence there, a very strong marketing effort there with a young man in Joe Pope and a very good operation. And right now, we see a lot of demand that has increased not only in the number of rigs required in the region but their specs have changed quite a bit and that's in Indonesia. Malaysia is certainly very active. We're seeing some HPHT requirements coming in Malaysia and Indonesia, in Brunei. Also offshore Vietnam, we're seeing some requirements there. There'll be a few requirements off Thailand. So we -- we're very close to that market. You're -- there's a lot of projected increase in demand coming in Australia and new Zealand, which fits our fleet of Gorillas and our higher-spec jack-ups in the -- over the next year to 18 months, which we're tracking that very closely. I guess the -- where the rigs would come from, we have 6 rigs rolling off contracts in 2013. We believe that we will secure contracts for them. We are talking to operators in Southeast Asia to -- possibly to high-grade their fleet. That would depend on what happens with McMoRan, if that's a 1-rig, 2-rig situation here. We're always tendering those rigs internationally. If we get a term contract at a day rate that would yield us a good return, we would obviously talk to them and mobilize the rig to Southeast Asia. There is some demand there. We -- we're looking at the Douglas, what we would do with it, also the Gorilla IV when it finishes its contract. There are a lot of requirements for rigs with that leg length, and the Gorilla IV has 2 million hook load capability and a 75-foot cantilever. So it will be a rig that could operate offshore Australia, in that area.

Operator

Our next question comes from the line of Robin Shoemaker with Citigroup.

Robin E. Shoemaker - Citigroup Inc, Research Division

Matt, I just wanted to ask you. Last year, we saw quite a few drillship contracts signed for terms of 5 years, of 7 years, even 10 years. I'm seeing more like shorter terms this year. Or at least your rigs are all on 3-year terms. I wonder if you considered -- or longer contract lengths and if there were some trade-offs that made you favor the 3-year term?

W. Matt Ralls

We certainly would consider contracts of any length, Robin, and we probably would have a bias for longer term. They just -- I'd say the part of the market is really 3-year contracts if you look at all the awards over the last several years, and I would guess that 70% of them are 3-year contracts. We would take a slight discount to get more term. And there are fixtures in the market that sort of indicate where the market is on very long terms versus kind of intermediate terms, versus 3-year terms. So that's -- those -- I think that is still a possibility. And we -- as I said, we would look at a slightly lower day rate to justify or to -- in order to encourage longer term. But the issue here was -- in none of the situations that we were involved, were there trade-offs like a lower day rate for longer term and we took shorter day rate for higher -- sorry, the higher day rate for shorter term. That did not occur in here.

Robin E. Shoemaker - Citigroup Inc, Research Division

Okay. And then on the -- just so I understand in terms of how the startup of the 3 drillships got contracted in terms of the way the costs are going to be handled, as I understand, you're going to capitalize virtually everything all the way through sea trials, acceptance testing and then capitalize all the way up to the start date of the contract. I have a figure, like for the -- $655 million is the estimated capitalized costs of these first 3 rigs, and then I believe it's higher on the Relentless at $695 million. Is that still your best estimate of the total capitalized costs when these rigs start contracts?

Mark A. Keller

Robin, you are correct. We capitalize everything up until the date that a rig starts to work. And when you include all those capitalized costs, including the crew during the sea trials and the readiness period and the acceptance period, the total capitalized value for those rigs is closer to $750 million per rig. And you can see that breakdown in the 10 -- it was 10-Q. So it ranges from $730 million for the Renaissance up to $755 million for the Relentless...

W. Matt Ralls

Including capitalized.

Mark A. Keller

Including capitalized interest.

Robin E. Shoemaker - Citigroup Inc, Research Division

Yes, capitalized interest, the whole thing. Okay, that's the number I was looking for. Okay, $730 million up to $755 million.

W. Matt Ralls

Yes, that's available in the K.

Mark A. Keller

Yes, the 10-K.

W. Matt Ralls

Oh, sorry, the Q.

Operator

[Operator Instructions] There are no further questions at this time. I'd like to turn the floor back over to you for any closing comments you may have.

Suzanne M. Spera

Thank you, Christian. Well, that concludes our prepared comments for our second quarter 2013 earnings conference call. Thank you for joining us. Until next time. If you have any questions, please feel free to contact us. Thank you.

Operator

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time, and we thank you all for your participation. Good day.

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