Ensco International Inc. Q3 2009 Earnings Call Transcript

Oct.22.09 | About: Ensco PLC (ESV)

Ensco International Inc. (NYSE:ESV)

Q3 2009 Earnings Call Transcript

October 22, 2009 11:00 am ET

Executives

Sean O'Neill - VP, IR

Dan Rabun - Chairman, President and CEO

Jay Swent - SVP and CFO

Bill Chadwick - EVP and COO

Mark Burns - President, ENSCO Offshore International Company

Carey Lowe - SVP

Analysts

Judson Bailey - Jeffries & Co.

Daniel Boyd - Goldman Sachs

Geoff Kieburtz - Weeden & Co.

Scott Gruber - Bernstein Asset Management

Scott Burk - Oppenheimer

Michael Urban - Deutsche Bank

Pierre Conner - Capital One Southcoast Inc.

Ian MacPherson - Simmons & Co. International

Collin Gerry - Raymond James & Associates

Robert MacKenzie - FBR Capital Markets

Roger Read - Natixis Bleichroeder Inc.

Michael Drickamer - Morgan, Keegan & Company, Inc.

Operator

Welcome to the Ensco International third quarter 2009 Earnings Call. As a reminder this call is being recorded and your participation constitutes consent to its taping. I will now turn this conference call over to Mr. Sean O'Neill, Vice President of Investor Relations who will moderate the call. Please go ahead, sir.

Sean O'Neill

Good morning and welcome to Ensco's third quarter 2009 conference call. With me today are Dan Rabun, CEO; Bill Chadwick, our COO; Jay Swent, Chief Financial Officer, as well as other members of our executive management team.

This morning we issued our earnings release which is available on our website at enscointernational.com. Later today we plan to file our SEC Form 10-Q. As usual we will keep our call to one hour. Any comments we make about our expectations or forward-looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially.

Please refer our earnings release and SEC filings on our website that define forward-looking statements and list risk factors and other events that could impact future results. Also, please note that the company undertakes no duty to update forward-looking statements. As a reminder, our monthly rig status report was issued on October 15th.

Now let me turn the call over to Dan Rabun, Chairman and CEO.

Dan Rabun

Thanks, Sean and good morning everyone. Jay and I are in Europe and we're linked into Dallas for our call today. Before Jay walks through the financial results, I'd like to start by providing some color on the quarter and the state of our markets as well as our current outlook. I will start with our deepwater business.

In early September, we issued a press release regarding unplanned downtime in the third quarter for ENSCO’s 7500, our 9-year-old semi-operating in Australia, and ENSCO 8500, our brand new semi-operating in the US Gulf. I'm pleased to report that we have resolved OEM equipment issues causing the downtime, and that both semis are back up and running. The actual EPS impact was $0.19 per share, in line with our earlier projections. Only $0.03 was related to ENSCO 8500, and the downtime event was related to one specific piece of OEM equipment.

As you may recall, one of the major benefits of the uniform design for all seven rigs in the 8500 series is the ability to transfer knowledge from one rig to the other six. Needless to say, we have checked all of the other 8500 series rigs for similar issues.

Looking ahead, there will be significant growth in our deepwater business based on contracts already in place, and we have enhanced our deepwater organization to accommodate this growth. For example, ENSCO 8501 recently commenced operations in the US Gulf and is now contributing to revenues in the fourth quarter. ENSCO 8502 is not far behind, and is scheduled for delivery from the shipyard in the first quarter of 2010, which will further accelerate the deepwater revenue going forward. ENSCO 8503 also under contract is on schedule for a fourth quarter 2010 delivery. As our deepwater revenues are ramping up, our CapEx commitment is declining.

Turning now to the Jackup business, we are very pleased at how well our teams are maneuvering through the challenging markets. As you may have noticed in our recent rig status report during the quarter we have put several of our previously stacked rigs back on the payroll and based on our current marketing outlook we expect to see an increase in utilization in most of our markets.

Let me give you some of the highlights since our June report. In the Middle East, Saudi Aramco which consistently ranks our rigs among their top performers exercised options for two of our premium jackups. ENSCO 96 returned to work with McDermott a new customer and ENSCO 50 has commenced work in an accommodation mode for another new customer Sime Darby off Qatar.

In Southeast Asia ENSCO 106 returned to work a few days ago for a one-year program with Newfield in Malaysia and Pertamina awarded us a new contract for another rig in Indonesia. In Europe and Africa, Aegean Energy a new customer contracted ENSCO 85 to work in Greece. ENSCO 72 is going back to work next month for Eni and in the North Sea we've been able to extend several existing contracts.

In North and South America, we added one more jackup in Mexico where we now have five working for Pemex and in the US Gulf, Chevron extended its contract for ENSCO 82 through June of next year.

While the jackup market is still very challenging, our crews are doing a great job for our customers and our marketing and contracting groups are working hard to uncover new opportunities, bidding our rigs and winning tenders. Our overriding strategy is to keep our rigs working wherever possible even if we have to move to a new market for short assignments. This is in contrast with some of our competitors that are cold stacking rigs quickly when opportunities are not readily apparent.

Now I'd like to turn to the topic of safety. Ensco has a very strong safety record as I'll describe in a moment, but first I'd like to draw the connection between safety, reliability and customer satisfaction. First and foremost, focusing on safety is simply the right thing to do, but it's also the smart thing to do. Safety is the key driver behind a dedicated workforce, operational efficiency, and customer retention.

Employees want to work in a safe environment, and we can recruit and motivate the best employees by maintaining a strong culture of safety. Dedicated offshore workers focused on safety are attuned to keeping operations running smoothly, and this translates into satisfied customers.

For the past five years in a row, we have outperformed the offshore industry average for total recordable incident rates, and as a company, we have reduced our total recordable incident rate by more than half since 2003. We've improved our loss time incident rate even further by more than 80% over the same period.

Our commitment to safety is supported by our commitment to training, which also drives efficient operations. On our last rig contract status report, we highlighted our IEDC accreditation for 31 of our offshore positions more than any other drilling contractor. We firmly believe that some of the recovery we are seeing in our jackup business is our customer’s recognition of our commitment to safety and operational excellence.

Now let's discuss the markets. I'll start with deepwater. During the third quarter there were three new ultra-deepwater market fixtures, each around $500,000 per day for work starting in 2010. We continue to see new discoveries around the world including BPs recent discovery in the Gulf of Mexico. In Brazil the large discoveries are well known, and additional details have emerged regarding Petrobras plans for 28 rigs to be built in Brazil. This tender is expected out before the end of the month.

There are several outstanding bids for work elsewhere in 2010 and onward. West Africa continues to be an area of high activity with several tenders outstanding for multiyear programs in Angola and Nigeria and there are additional inquiries and tenders for work in India, China, Indonesia and Australia.

In the Mediterranean Israel is on the fast track for development and there are opportunities in Libya and Egypt. We are actively marketing and are engaged in discussions with several operators regarding prospective work opportunities for three uncommitted deepwater rigs and we fully expect our uncommitted rigs will be contracted well before their deliveries.

In the jackup market challenges continued during the quarter in terms of declining day rates and we expect this to continue for a period of time. With oil prices stabilizing in the $70 range, however, we have seen a noticeable increase in activity levels and the uptick in tenders and inquiries from operators makes us optimistic for 2010.

As in the past, once we see a meaningful increase in utilization, day rates will follow. History tells us though that it takes several consecutive quarters of improved utilization before we see any significant recovery in pricing. Therefore, we cannot make any predictions on the timing of the pricing recovery in the jackup markets other than to remind everyone that rates will recover as utilization improves prompted by stable oil prices and our customer’s confidence in the long-term fundamentals.

Now turning to specific markets; the Middle East, India and Southeast Asia Pacific Rim remain very competitive jackup markets although there has been a noticeable increase in market surveys, bidding activity, and several new contracts have been awarded or extended. In addition to the normal areas of activity, several others also stand out. Vietnam is very active with upcoming work planned by several operators. Tenders are expected from Saudi Aramco that will reportedly call for as many as four incremental gas rigs for requirements starting in 2010.

Kuwait Oil Company is expected to tender early next year for programs in Kuwait Bay, separate from work done in partnership with Saudi Aramco in the partitioned neutral zone. Iran is expected to continue increasing rig count by as many as five more rigs, which would help reduce the supply in other markets where we operate. In the North Sea, we have seen day rates come down with lower utilization. However, with the stabilization of oil and gas prices at somewhat higher levels as well as the easing of credit, we expect utilization to improve.

Most operators require a minimum of 20p per therm for UK gas projects to be feasible. With UK gas recently breaking the 30p per therm level we believe they will begin to see programs surfacing for work starting in 2010 and beyond. A recent report showed that offshore exploration and appraisal activity in the North Sea last quarter rose by 75% compared to the previous quarter. This is obviously positive for future demand.

Turning to the US Gulf of Mexico, the current jackup market continues to struggle. However, customer inquiries are improving for work starting early next year for all of our rig classes. With utilization at 50% though, there will be stiff competition. Opportunities in Latin America are also improving. We expect Pemex to tender for three independent cantilever jackups starting in 2010, which would be incremental demand. And jackup programs are emerging in Brazil, Columbia, Trinidad, Surinam, and Guyana. We are pursuing all of these opportunities.

Overall, we are seeing an uptick in jackup activity worldwide, and while competition is significant, we believe our reputation for safety and operational excellence will continue to make Ensco standout versus competitors.

Now, let me turn it over to Jay.

Jay Swent

Thanks, Dan. My comments today will cover details of third quarter results, our outlook for the rest of the year and a review of our financial position. Before we begin, I need to remind everyone that on October 14, we issued an 8-K that updated our 2008 Form 10-K filed in February for retrospective application of two accounting rules that became effective in January 2009 and reclassification of ENSCO 69 operating results to discontinued operations.

Please be aware that any prior period comparisons we mention today are against the amounts shown in this most recent 8-K filing. With that as an introduction, let's now discuss the results.

Third quarter earnings from continuing operations were $1.05 per diluted share compared to $2.06 a year ago. Total revenue for the third quarter was $425 million, a 31% decline from last year. Jackup segment revenues declined by approximately 39% to $363 million. This was partially offset by deepwater revenue more than doubling to $63 million with ENSCO 7500 working at a higher day rate and ENSCO 8500 commencing operations in early June.

Jackup utilization in the third quarter was 61% down from 72% in the second quarter and 97% a year ago. Average jackup day rates were also down sequentially from $159,000 in second quarter to $148,000 in the third quarter. Year-over-year jackup day rates declined $8,000 from $156,000 in last years third quarter.

As Dan mentioned, however, we have seen an uptick in jackup activity and customer inquiries have improved significantly. With respect to expenses, we reduced contract drilling expense for all Jackup segments by approximately 16% versus last year. As Jackup segment utilization has declined during the past year we have reduced cost by warm stacking, and in two cases cold stacking rigs in order to lower personnel and operating costs. Also, we've negotiated cost reductions from vendors and service providers.

Offsetting this, Deepwater segment expenses increased to $35 million from $8 million last year due to the addition of ENSCO 8500 to the fleet, and ENSCO 7500 operating in Australia where costs are higher, plus the mobilization expense that has amortized. Overall this nets to a 1% year-over-year reduction in total contract drilling expense.

Now let's discuss quarterly trends by comparing third quarter 2009 sequentially to second quarter 2009. Third quarter revenue of $425 million decreased 17% from prior quarter levels. This decrease is attributable to $5 million decrease in deepwater revenue due to the unplanned downtime that Dan noted earlier, and an 18% decline in Jackup segment revenues, as both utilization and day rates declined sequentially as shown in our earnings release tables.

Total contract drilling expense was up 3% sequentially from the second quarter. This breaks down as follows: Deepwater segment contract drilling expense increased 46% mostly due to ENSCO 8500 operating for the full third quarter, versus less than one month during the second quarter. Also, we reduced jackup expense by 4% due to lower utilization, as well as cost containment actions.

Looking at other expenses, depreciation increased by $4 million mainly due to Ensco 8500 coming online in late second quarter and then having a full quarter impact in the third quarter. G&A expense was $14 million as we projected. Cash on hand at quarter end was more than $1 billion even after $685 million of capital investments during the first nine months, $487 million of which related to our deepwater fleet expansion.

Now let's turn to our outlook for fourth quarter 2009. Revenue is expected to increase by about 11% from third quarter levels. In the Deepwater segment, ENSCO 8501 has now joined the fleet and commenced drilling on October 8th, in the Gulf of Mexico and deepwater utilization is projected to rise sharply in the third quarter, particularly for ENSCO 7500 which had an unusually high level of unplanned downtime in the third quarter.

We project an increase in utilization for our total Jackup segments as well, however the average day rate for our jackup fleet will continue to decline in the fourth quarter. For full-year 2009 we anticipate Deepwater segment revenue to nearly triple from 2008 levels to approximately $250 million.

Moving to expenses, we anticipate fourth quarter 2009 contract drilling expense will increase by approximately 6%. Increased jackup utilization and the addition of ENSCO 8501 are the key drivers. Depreciation expense should increase by approximately $3 million in the fourth quarter mostly due to adding ENSCO 8501 to the fleet.

Finally, we anticipate G&A expense will be approximately $16 million in the fourth quarter reflecting higher legal and professional fees. Our effective tax rate is projected to be about 18% for the year due in part to a 16% effective tax rate in the third quarter primarily related to favorable settlement of an international transfer pricing matter.

2009 capital spending projections are unchanged from last quarter and for the full year we expect 2009 capital spending to be approximately $790 million with $530 million committed to our 8500 series rigs, $160 million for rig enhancement projects, and $100 million for sustaining projects.

Now let's turn to the balance sheet. Despite difficult market conditions, we have strengthened our financial position over the past year even as we have made sizeable cash investments in our ultra-deepwater fleet. In particular, we have a strong cash position, excellent interest coverage ratios, a $350 million revolving credit facility that is fully available, and low debt levels with no significant near-term maturities.

In summary, I'd like to emphasize the following points. Our deepwater fleet is growing rapidly and we expect its contribution to earnings will increase significantly. Specifically in 2010, we expect Deepwater segment revenues to more than double to almost $600 million. Jackup utilization is projected to improve, and this should offset some of the weakness we are seeing in terms of the declining average jackup day rates. As Dan mentioned, this will take some time since contracts expiring at higher rates are being replaced at today's lower market rates.

We are closely managing costs but also making sure that our rigs are ready to work as customer demand improves. We have a very strong balance sheet so that we are well positioned to take advantage of potential investment opportunities as they may arise. The level of customer inquiries for programs starting in 2010 has risen, and if oil prices stabilize around current levels and credit markets continue to improve, we believe demand would be positive for contract drilling services next year.

Now I will turn the call back over to Sean.

Question-and-Answer Session

Operator

(Operator Instructions). And we will take our first question from Jud Bailey with Jeffries & Co.

Judson Bailey - Jeffries & Co.

Question on jackup rates going forward, you look at global utilization right now it's been bouncing around 70% for a while now although there is a pretty big disparity between several markets most notably the Gulf of Mexico and West Africa. Could we see a situation do you think where if activity increases in certain regions more quickly that we could see day rates go up in some regions and stay flat in others or even soften a little more, due to the transportation cost between some of the major regions?

Dan Rabun

Yes. Jud, this is Dan. I think as you realize all these markets are very different and certainly some of them react to pricing improvement utilization more quickly than others. So the answer to your question is yes. I mean, you could see a uptick in the Gulf of Mexico and since there is very little supply of premium jackup's those rates could have some positive momentum if utilization were to pick up as opposed to say Asia where there's much larger supply of available rigs for particular jobs in the Middle East as well.

Judson Bailey - Jeffries & Co.

Okay.

Dan Rabun

Same thing in the North Sea, I think the same dynamic in the North Sea if utilization were to pick up you could see rates move up more quickly but that's historically been the case.

Judson Bailey - Jeffries & Co.

Okay. And then on the Gulf of Mexico, one of your competitors said on one of the calls this morning that they're talking to customers about six to 12 month contracts and so it seemed like maybe what you are seeing as far as the demand increase might be more than a recovery, post hurricane season. Could you maybe talk a little bit about your discussions with the customers for work in the Gulf?

Dan Rabun

Yes, I think the dialogue over the last few weeks has been fairly brisk. There are some customers out there that are trying to take advantage of where the pricing is now and talking longer term. So yes, there are customers out there talking for longer periods in the well-to-well, which typically you find in that market.

Judson Bailey - Jeffries & Co.

Okay, and then last question if I may. As you noted in your prepared comments you've got over a billion dollars in cash now, the market is picking up. Can you talk a little bit about what you're going to do without the cash, how much more would you let it build before buying back more stock aggressively or doing something else with the cash?

Jay Swent

Yes Jud. It's a question we get fairly often. One thing, just to kind of let people know, we do have a lot of remaining CapEx on the 8500 series. I don't think we've given CapEx guidance for next year, but I'm sure you all can figure that out pretty quickly. One thing to note is our CapEx in our 8500 series rigs is very much frontend loaded coming up. We just have a lot of milestones hitting the early part of the year, particularly the first quarter.

So I would expect that you'll see some of the cash balances probably drift down a little bit, just because of the CapEx commitment. So we continue to evaluate our cash situation very carefully, and as we've continued to say, to the extent we can't find opportunities for cash we'll look at opportunities to return it to shareholders. We continue to see a number of opportunities to reinvest in the business and evaluate those, so it's something we watch very closely. We don't have an absolute number of what we'd let the cash build to, but…

Dan Rabun

I think part of the answer Jud, is we'd certainly not want to see cash drop tremendously lower than where we are right now. We certainly don't want to see it go much higher than it is either as Dan said we've got some still major CapEx commitments over the next couple of quarters. So I don't think you are going to see a major build in cash over the next couple of quarters.

Operator

We'll take our next question from Dan Boyd with Goldman Sachs.

Daniel Boyd - Goldman Sachs

Dan, I was wanting to follow-up on the Saudi market and the four rigs that they are going to be tendering, the natural gas rigs. With them looking to actually go to a shipyard and build a new rig, what does that say about what day rates might be on that tender?

Dan Rabun

Mark Burns just got back from Saudi a week or two ago so maybe I'll get him to respond to that question he can give you first hand what he learned.

Daniel Boyd - Goldman Sachs

That would be great.

Mark Burns

We have received no formal information from Saudi Aramco that they intend to go out to tender. But just in general discussions with Aramco recently, there is a potential that they will increase their capacity for gas drilling next year. So other than that, there's really no further information that we can give you on that, Dan.

Daniel Boyd - Goldman Sachs

I guess would you anticipate the day rates for those types of rigs will be necessary for that to be higher than what we're seeing in the market, maybe higher than the 115 or 120 that we've seen on some contracts?

Mark Burns

Well, remember, Dan. These are gas rigs, so they're high specification rigs. They will be most likely 15K equipment, Saudi Aramco will ask for more variable deck load, bigger rigs in order to minimize logistics expenses and those type of things. So you can take your assumptions based on that information.

Daniel Boyd - Goldman Sachs

Okay, thanks. And one follow-up. The Ensco 75 is available in the US Gulf. Are you marketing that outside of the Gulf or do you think there will be enough work there for that to go back in the next few months?

Bill Chadwick

Dan, this is Bill. We are looking for opportunities with sufficient therm and economics that would justify redeployment of that rig somewhere else. So yes, we're definitely marketing the rig outside of the Gulf, but unless and until an economic opportunity with some therm presents itself we will also continue to market it in the Gulf of Mexico.

Daniel Boyd - Goldman Sachs

Can you help me understand what the minimum criteria might be to move it outside in therm or day rate or anything you can help us think about that would be great.

Bill Chadwick

We don't have any specific threshold. It just has to make, the entire package has to make over all economic sense and that's a function of rate, day and therm.

Operator

We'll take our next question from Geoff Kieburtz with Weeden.

Geoff Kieburtz - Weeden & Co.

Let me just pick up on that last comment actually, if you were looking at moving the 75, would you expect; A) for the contract as an operator to pay for the mobilization and if they pay for the mobilization would you expect them to pay rate if you were moving the rig?

Bill Chadwick

Again, we don't have any specific criteria that we will have to have. We'll look at the overall economics of the package available to us considering both the rate, the mold and the therm and just decide what makes sense on a case-by-case basis.

Geoff Kieburtz - Weeden & Co.

Yes, I do understand. I guess what I am really trying to get at is sort of what is the current state of the market? Is it kind of right now is the tone of the market that the customer would pay for the mobilization costs or not?

Dan Rabun

Geoff this is Dan. I think it really depends on what markets you're talking about. So, I mean, you are talking about is somebody going to mobilize it to Asia to operate the answer is no.

Geoff Kieburtz - Weeden & Co.

Well that's fair enough. Yes.

Dan Rabun

So, it depends on what market you're talking about and what specific requirements. So I agree everything, the only thing to add to what Bill said is just a strategic priority to lessen our exposure to hurricane risk in the Gulf of Mexico would also factor in to how we view it not just the economics.

Geoff Kieburtz - Weeden & Co.

Got you. And in terms of the comments that were made earlier about jackup rates falling, just wanted to distinguish between jackup rates falling, the leading edge falling from here versus the average rates falling because you have contracts rolling off.

Dan Rabun

Geoff, that's an excellent point and I kind of caught that, as I was giving the remarks. It's really the average rates because you just have this momentum with the older higher day rates set in the previous market rolling off so your average keeps coming down. I don't think the leading edge is coming we're going to see the same momentum.

Geoff Kieburtz - Weeden & Co.

So, right now the most markets I know I understand your point about markets differing but right now your sense is that most markets within that market, the leading edge is relatively stable.

Dan Rabun

I would say it's fairly, I would say--

Bill Chadwick

But maybe even in some markets moving up slightly but not very dramatically and we don't anticipate any real dramatic upswing.

Geoff Kieburtz - Weeden & Co.

All right, okay. And Jay, you made a comment in regards to cash earlier that you wouldn't want to see it drop below this level. Just to clarify there, you mean right now because you have this visible CapEx or in general you want to keep a billion dollars as a kind of a…

Jay Swent

No, Geoff, I was talking with respect to the CapEx we see in front of us here over the next couple quarters.

Geoff Kieburtz - Weeden & Co.

So once you're through that you don't necessarily feel like you need to keep a billion dollar balance?

Jay Swent

Not at this point, but that could always change.

Geoff Kieburtz - Weeden & Co.

Okay. I understand, some other opportunity may come up. Let me just finish with that question actually. Let's get beyond the CapEx, not that you've got to cover here in the first half of 2010. If the market conditions that you see today were to just basically freeze, asset values, day rates, utilization, the outlook for activity, and you continued to have a large cash balance and significant free cash flow, how would you rate the attractiveness of the obvious list of some alternatives for that?

Jay Swent

Yes, you know, Geoff there are just very few alternatives to make dividends and/or do stock repurchases, and we've evaluated both of those. In the past we've chosen to buyback our stock, and we would evaluate both of them including special dividends or increasing the regular dividend and try to decide which we thought was appropriate to deliver the best value to the shareholders, and we would do.

Geoff Kieburtz - Weeden & Co.

And that would be more attractive than either building new rigs at today's asset values or buying somebody else at today's asset values?

Jay Swent

Well, no. I mean that's -- I thought you were just talking about the returning equity to shareholders. No, we continue to evaluate, if we can find a good way to invest in the business that we think gives very good returns to our shareholders that clearly would be a priority for us and it would give us additional exposure in the markets we want to be in.

Operator

Our next question comes from Scott Gruber with Bernstein Asset Management.

Scott Gruber - Bernstein Asset Management

Are you surprised that the strength of the spot jackup rates today in the international markets. It's surprising to us that margins on the new contracts have been maintained around the 50% level.

Dan Rabun

Am I surprised at that?

Scott Gruber - Bernstein Asset Management

Yes, just given the trends in utilization and the fact there is still new equipment coming into the markets?

Dan Rabun

No, I am not really surprised. We've done fairly well and I think as we've said on other calls there is somewhat of a bifurcation in the marketplace between contractors and we think with our operational performance and our low cost structure we can continue to deliver pretty good returns. So I am not particularly surprised, no.

Jay Swent

I think, Scott, a number of the new entrants have cost structures that Dan alluded to they're much higher than ours. They have debt service costs that are pretty significant and so their ability to come down well below current rates is pretty limited. We often get the question of how long do you think it'll be before day rates get down to cash breakeven and my response always is whose cash breakeven are you talking about? And I think from our advantage point at current day rates we're making very good margins. I am not sure somebody that's a new entrant with a small number of rigs is able to earn the same margin and he's got to put those rigs to work at a reasonable day rate.

Scott Gruber - Bernstein Asset Management

That makes sense.

Jay Swent

So it actually puts some pricing discipline into the market.

Scott Gruber - Bernstein Asset Management

But given the fact that the vast majority of rigs are still with established operators, does the level of rates today limit the upside as utilization starts to improve next year? Or do you think there is still upside to rates?

Dan Rabun

I am sorry I think we missed the first part of your question.

Scott Gruber - Bernstein Asset Management

Well given the fact that the majority of jackup fleets still resides with the established operators, who should have margins more similar to yours in the current rate structure. Do you think that limits the upside to rates if utilization improves next year?

Dan Rabun

Well I think it's not clear where utilization is going yet but I don't think we see it getting up into the high 80s or mid 90s during the early part of next year at all. So I think, until you're in that range it's hard to see day rates pushing much higher than where they are right now. And I would say at the same time I don’t think there's much incentive to come down much below where they are right now.

Scott Gruber - Bernstein Asset Management

And just if I could, turning to the North Sea LNG deliveries into the region have been quite robust after the opening of some new import terminals. Is there any potential for less gas directed activity in the Southern portion of the North Sea next year assuming the deliveries, continue?

Mark Burns

Scott, this is Mark Burns. I think recent reports have shown gas storage capacity in Europe are pretty robust, I think in the 95 to 97% level. However, we are starting to see the price of natural gas in the Southern North Sea and in Europe stabilize. I believe this morning it's over 34P per therm. So we will start with that improvement and stability and natural gas pricing, I think it bodes well for improvement in particularly in the North Sea for continued natural gas drilling.

Operator

We will take our next question from Scott Burk with Oppenheimer.

Scott Burk - Oppenheimer

A couple of question about the direction of the jackup fleet and a follow on questions. You had a couple in your last fleet status update and you had a couple of rigs in the Middle East that went to work as accommodation units. And just wondering do you see that being a major use or large use of jackup supply going forward in that region?

Dan Rabun

Mark, do you want to handle that one?

Mark Burns

Yes, Dan. I think what we're seeing in particularly in the Middle East in Qatar, we're starting to see two things. We're starting to see operators install new equipment, fix platforms that type of thing offshore. And in addition, the second thing we're seeing is we're seeing these platforms and production facilities starting to age somewhat.

So, with a decline in drilling activity that we're seeing in the Middle East, we're seeing an opportunity for operators to go out and commission new facilities and also repair and continue to maintain existing facilities. But that is allowing us an opportunity and the oil companies an opportunity to use some of the existing jackups for accommodation vessels.

So as Dan noted in his opening remarks, we returned two of our units offshore in accommodation mode. We are expecting some additional opportunities to surface in that particular segment of business and we could potentially get some extensions to existing contracts. So yes, there is some further opportunity there.

Scott Burk - Oppenheimer

Okay, and is that a preferred thing to do with your rigs, because it looks like higher margins; lower expenses, you still get pretty good decent rates. Is that a preferred thing to do?

Mark Burns

Well, as we stated in the opening comments, our overriding strategy is to maintain utilization, and when you have the unit offshore, you're keeping the equipment maintained, you're keeping your personnel employed and it's good morale for the company, and yes, I mean, we're going to look at all opportunities to keep our jackup fleet utilized.

Scott Burk - Oppenheimer

Okay. And then I wanted to ask you all…

Dan Rabun

I would just add that that's not going to be a major thrust of our business model to be an accommodation unit provider, but it is a very good use of the asset when it’s otherwise would have been warm stacked.

Scott Burk - Oppenheimer

Sure. The other question I had was about South East Asia market. Has these 20 some jackups delivering next year in 2010 and just wondering how you see that impacting the South East Asian market next year?

Mark Burns

Okay. You see what's happening so far, we have had some new build jackups delivered, but up until this point, the market has absorbed the new builds that have come on. Recently we've seen companies move rigs from South East Asia to West Africa to North Africa to other areas. So we continue to manage through this. Jackups will continue to be delivered through the end of the year, but we feel with our customer base and fast operating history that we're in a very good position. So we haven't seen to this point a major impact.

Operator

We'll take our next question from Mike Urban with Deutsche Bank.

Michael Urban - Deutsche Bank

Thanks, good morning. You listed a lot of potential opportunities in the jackup market and some folks that either are in the market or will be in the market. Do you have a sense for what that aggregates to in terms of number of rigs out there that we might be looking at in terms of bid or tender activity globally?

Dan Rabun

Now that's really hard to quantify. I think the best way to characterize it as I’ve travel around the world talking to customers and it's universally almost exactly the same story everywhere in the world which is 2009 budgets are in place and just basically 2009 is already cast. But with commodity prices recovering in the $70 to $80 range, people are going through their budgeting cycles, budgeting for 2010 and virtually all our customers around the world, I know there is some exceptions some of the majors that have been noted in the press. But virtually all of our customers are budgeting for increased activity of jackups and how all that plays out through the budget cycle and when it starts coming into effect will remain to be seen. I can just tell you that it's universally positive in every market that we operate in.

Michael Urban - Deutsche Bank

I guess following up on that, as you do get these 2010 budgets in place, are there markets that will benefit more or less from having the additional access to additional capital or is that as you said pretty broad based?

Dan Rabun

Well, I think the markets that have been the most adversely affected by lack of access to capital would be in the US Gulf of Mexico and the North Sea where you had smaller independence who didn't have the balance sheets to drill this year. So we do see some of the credit markets freeing up for some of those folks. So that would probably be the markets I would say would benefit the most.

Operator

We'll take our next question from Pierre Conner with Capital One Southcoast.

Pierre Conner - Capital One Southcoast Inc.

Dan, I know that your strategy is to continue to ultimately deploy capital towards growth of the floater fleet but would be curious if you have any data points on the bid ask spread on the jackup opportunities that are out there in terms of dollar amount, where you see it or percentages say?

Dan Rabun

You know, Pierre, on the jackup side, there really hasn't been a lot of activity in the last quarter in terms of people out trying to sell jackups. I mean, there's a few here and there that are in the market that we've evaluated, but we chose not to act not because of this difference between the bid and ask price, it was really just technical aspects of the equipment. A lot of it was more specialized jackup equipment rather than something that would fit nicer into our fleet. So I really can't give you a data point.

Pierre Conner - Capital One Southcoast, Inc.

Okay, that's okay. Let me ask some other topic of new builds. So is there a scenario where Ensco can employ your desires for preferred construction company, shipyard in the floater fleet and this obviously extensive tender out of Petrobras for construction of equipment in Brazil in order to get your returns. And is there a scenario that you can meet some of those desired outcomes?

Dan Rabun

Yes, I mean obviously, Pierre, we're evaluating those opportunities very carefully to see if we can participate, and how we're going to participate. So yes, that's under active consideration.

Pierre Conner - Capital One Southcoast, Inc.

Okay, and then getting back to this specific item just to take off the list I wanted to ask either for you or Bill, but on the Pemex tender that just continues to lag out there. Is there something we wait until after, same thing went into after the budget and so we would expect it kind of at year-end, is that right?

Dan Rabun

Well I think on that, Pierre, Pemex has invited all of the contractors to a meeting in early November where they're going to presumably, and I’d just say presumably, disclose their plans for incremental requirements or requirements for next year. So I think the marketplace that information should be filtering through the marketplace in the next few weeks.

Operator

We'll take our next question from Ian MacPherson with Simons & Co.

Ian MacPherson - Simmons & Co. International

Dan, you made the mark in your opening comments about feeling pretty confident regarding the contracted status of the next floaters before they get delivered.

Dan Rabun

Yes.

Ian MacPherson - Simmons & Co. International

And maybe I inferred that you sounded like you had some form of negotiations that were I don't know how advanced but regarding maybe the Ensco 8504, is that correct?

Dan Rabun

Ensco 8504 is the next rig. It's coming for delivery that we don't have a contract. No, I mean I wasn't trying to imply what the status of negotiations are, but I will just make a few comments just following up on my prepared remarks. There are quite a few outstanding tenders which we are participating in for work in various parts of the world and those discussions are I would say active and ongoing and we think will result in the contracts for somebody.

So we feel very good based on the level of discussions we're having with customers and the level of customer discussions we're having with customers. I think another data point we've recently had a marketing inquiry for two additional deepwater rigs in the US Gulf of Mexico which we haven't seen term contracts in the Gulf of Mexico being discussed for quite some time, so that's some new information that we think is going to bode well for the marketplace.

Ian MacPherson - Simmons & Co. International

Okay, very good. For a follow-up I wanted to ask you about maybe the shape of the eventual recovery in the jackup market. Do you sense maybe based on prior cycle recoveries or what you see now that the demand recovery will it be lead by higher end jackups capturing the incremental demand or sort of I guess easier wells that come back into the demand picture and so that really more generic jackups can participate and lead in the recovery?

Dan Rabun

Bill, do you want to handle that one?

Bill Chadwick

Yes sure. Ian, I think it will really be both. I think the lower end jackups that can work at substantially lower rates in the Gulf of Mexico are going to play a significant part in that market when it comes back. But I also think that this very limited supply of high end jackups in the Gulf of Mexico is going to place those rigs at a premium as activity increases in that market as well.

Ian MacPherson - Simmons & Co. International

Okay, so you think it will be both?

Bill Chadwick

Yes.

Operator

Moving on, we do have a question from Collin Gerry with Raymond James.

Collin Gerry - Raymond James & Associates

Most of mine have been answered. Just real quick, what was the piece of equipment that caused some of the delays on the floaters this quarter?

Dan Rabun

I don't think it would be appropriate to discuss but needless to say…

Collin Gerry - Raymond James & Associates

And then I guess some recent conversations with some industry folks, not as quite as overly bullish on the deepwater market going forward, maybe there's some concerns that we could have a little bit of slack. We've spent a lot of time talking about the new build jackups coming into the market over the last two or three years. If we looked at 2011 it seems to me there is 16 to 18 speck deepwater rigs hitting the market. How do you guys look at that situation and just kind of give us your gut feeling on what's your read on 2011 and do you see rates kind of being suppressed as we go through '011?

Carey Lowe

Collin, let me…

Dan Rabun

Go ahead, Carey.

Carey Lowe

Collin, this is Carey Lowe. I am seeing over the last couple of months there is a large increase in bidding activity and inquiries. And this is for a term work which is unusual recently. We are responding to those tenders, but I don't think we can talk about particularly about day rates and where they're going to be. There is definitely an uptick in the inquiries that we hadn't seen for the first six or so months of the year.

Collin Gerry - Raymond James & Associates

Okay, that's helpful. And last question from me, 2010 CapEx, I know you haven't given it, but is it fair to assume roughly kind of a similar range that we've seen in '08 and '09 is roughly similar, still got a pretty robust new build program.

Dan Rabun

Yes, we do, and I think it will probably taper off just a little bit but at this point in time we're still working on the 2010 budget and wrapping that up, so we'll give you better guidance on the next call and it would be a lot more precise.

Operator

We will take our next question from Rob MacKenzie with FBR Capital Markets.

Robert MacKenzie - FBR Capital Markets

Just a real quick follow-up guys on the new build market. Where do you see, have you checked first on where do you see prices now if you wanted to build another 8500 series rig at Keppel in Singapore? How much has the price come down?

Dan Rabun

We haven't priced a new rig in the last quarter. I mean, directionally, prices have come down. That having been said, steel prices for the type of steel that we use in the 8500 series rigs really has not come down substantially since the last time we placed a rig order. So, while certain commodities that you might think would affect pricing would have had a dramatic effect on the cost of a rig, it really hasn't come down that substantially and then the cost from several of our equipment vendors, they certainly haven't seemed to back off on pricing. So directionally it's less. I can't tell you how much. I don't think it’s real significant quite frankly.

Robert MacKenzie - FBR Capital Markets

Okay. And then as to follow-up to that, we've been hearing that some of the Korean yards are getting quite aggressive in their pricing on new build rigs, perhaps also worried about their shipyard book. If that was a case with you and you got a good build would you consider perhaps building an 8500 series rig at Daewoo or another Korean shipyard perhaps?

Dan Rabun

I don't think. We always would evaluate the opportunities. We certainly have a lot invested at the Keppel FELS facility and that works quite well for us so our inclination would be to build at Keppel FELS. They do a fantastic job for us, but of course we would look at alternatives if somebody gave us a great price.

Operator

We have a question from Roger Reed with Natixis Bleichroeder.

Roger Read - Natixis Bleichroeder Inc.

Real quick question, in terms of the and you kind of run through some of this on a regional basis, but in terms of the new build that are still coming into the market, are you seeing any change in their behavior given the amount of inquiries that are out there? In other words are they the guys most likely to lead rates down? Are they bidding rationally or are they guys that are holding out for better day rates?

Dan Rabun

I sort of touched on this a little bit earlier Roger, but what we're seeing and it makes sense economically is the new build participants for the most part had significantly higher operating costs in the rest of (inaudible) plus they have some pretty crushing debt service burdens. So what we've seen quite frankly all the way through the last cycle and what we see currently happening is that they're probably the most disciplined pricers in the market, because they have to be. They don't have the choice to come down as far as we can.

Roger Read - Natixis Bleichroeder Inc.

Okay. And then following on with that, is there anything you're actively under way on in terms of reducing your costs other than just what market conditions are? I mean, are you trying to cut back on any R&M expenditures, reduce number of headcount in the rig or anything like that?

Dan Rabun

Well I think we've taken a number of actions across the board and in both the G&A realm as well as contract drilling expense, looking at everything as creatively as we can. But with an overwriting priority that our rigs need to be ready for service and they need to continue to be well maintained so we can serve our customers well. We're putting pressure on every one of our vendors for cost reductions where we can. Where there is opportunities to save money we're obviously taking advantage of any of them. We're putting certain things on hold. But as I said when it comes to repair and maintenance activities we're not cutting any corners there.

As we're warm stacking rigs, we’ve try to do that in clusters where we can get the manning down as low as possible and still do a good job of keeping that rigs in a state of readiness. We still certainly have the option to look at more cold stacking but at this point, particularly given the level of activity that we're seeing in the market right now. I don't think we have any immediate plans to do a lot of cold stacking, but that's always an option.

Roger Read - Natixis Bleichroeder Inc.

Okay, so as I'm kind of thinking as a first let's say the fourth quarter, but the first half of next year as well, on a kind of per rig basis no reason to see much of a change in cost, not asking you to forecast me a number but if I take what we've been seeing that's a reasonable run rate?

Dan Rabun

I think so.

Operator

We do have a question from Mike Drickamer with Morgan Keegan.

Michael Drickamer - Morgan, Keegan & Company, Inc.

Good morning guys. Following up on your comments on jackup market in the Gulf of Mexico, talk about increasing inquiry levels, can you specify as to what customers are looking for, is it higher end jackups or is it something more of the commodity type rigs to be able to handle?

Dan Rabun

I'm sorry, there was some interference. I didn't hear the question.

Michael Drickamer - Morgan, Keegan & Company, Inc.

I'm sorry, is that better?

Dan Rabun

Yes, thank you.

Michael Drickamer - Morgan, Keegan & Company, Inc.

Okay, just looking at the Gulf of Mexico jackup market, following up on your comments about the inquiries there, can you specify what kind of work, what kind of rigs are you looking for, is it higher-end jackups or is it something more the commodity rigs can handle?

Dan Rabun

I think it's all in our rigs in every market. I don't think there's any one specific rig class that isn't getting an inquiry.

Michael Drickamer - Morgan, Keegan & Company, Inc.

Okay, and then your Gulf of Mexico jackup inquiry level comments. Was that more for work beginning in 2010?

Dan Rabun

Yes.

Operator

And that does conclude the question and answer session today. At this time I'd like to turn it back over to the speakers' for any additional or closing remarks.

Sean O'Neill

Thanks everyone. This is Sean O'Neill, and we appreciate your participation and we'll see you again in a quarter. Thank you.

Operator

That does conclude today's conference. Thank you for your participation.

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