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Noble Corporation (NYSE:NE)

Q3 2009 Earnings Call

October 22, 2009 10:00 a.m. ET

Executives

Lee Ahlstrom - VP IR and Planning

David Williams - Chairman, CEO and President

Tom Mitchell - CFO

Roger Hunt - SVP of Marketing and Contracts

Analysts

Kurt Hallead - RBC Capital Markets

Joe Hill - Tudor Pickering Holt

Dan Boyd - Goldman Sachs

Jim Crandell - Barclays

Arun Jayaram - Credit Suisse

Ian McPherson - Simmons & Company

Roger Read - Natixis Bleichroeder

Brian Omar - Pritchard Capital

Kevin Simpson - Miller Tabak

Alan Laws - BMO Capital Markets

Matt Conlan - MKM Partners.

Operator

Good morning, my name is Regina and I will be your conference operator today. At this time I would like to welcome everyone to the Noble Drilling Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' prepared remarks, there will be a question and answer period. (Operator Instructions). As a reminder, ladies and gentlemen this conference is being recorded today Thursday, October 22, 2009.

Thank you. I would now like to introduce Mr. Lee Ahlstrom, Vice President of Investor Relations and Planning. Mr. Ahlstrom, you may begin your conference.

Lee Ahlstrom

Thank you, Regina and good morning and welcome everyone to Noble Corps third quarter 2009 earnings call. Before we begin, I would like to remind everyone that any statements we make today about our plans, expectations, estimates, predictions or similar expressions for the future, including those concerning financial performance, operating results and the drilling business are forward-looking statements that are subject to risks and uncertainties.

Our filings with the US Securities and Exchange Commission which are posted on our website discuss the risks and uncertainties in our business and industry and the various factors that could keep outcomes of any forward-looking statements from being realized.

Our actual results could differ materially from our expectations. We have included detailed balance sheets and income and cash flow statements with our earnings news release. Also note that we may use non-GAAP financial measures in the call today. If we do, you'll find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure on our website and an associated reconciliation on the website. When we move into Q&A, we'll follow our usual format, so please remember its one question with one follow up, so we can get as many people on as possible.

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

David Williams

Good morning, everyone and thanks for joining us. Once again we delivered strong results in a challenging environment. Thanks to the great work by our employees all over the world. When things are going as well as they are sometimes it's better to say less up front and spend more time on Q&A. Besides that I am about to lose my voice.

SO following my very brief comments, I'll turn the call over to Tom Mitchell our CFO have to review the financials. Roger Hunt Senior Vice President of Marketing and Contracts will update you on the market conditions. And then we'll answer some of your questions.

First of all I’d like to begin with some good news on the new builds. The Noble Danny Adkins the first of our two dynamically positioned semisubmersible units are under construction in Singapore completed the first phase of its sea trials off the coast of Malaysia and has commenced its voyage to the Gulf of Mexico.

The rig departed Singapore under wet tow on Friday, October 16 a few days ahead of what we had noted in the fleet status. By contract the Adkins went on a [mope] day rate on Friday. And this rate will continue until the unit arrives from the Gulf of Mexico sometime in January.

Once we get in the Gulf of Mexico, we perform some final systems integration testing, that we couldn't conduct in Singapore and we'll provision the rig, load riser, drill pipe and some other startup equipment before we leave for our first drilling location.

We expect to commence operating at full day right around the 1st of March. It's good to get the unit out of the yard and we're looking forward to making some money for [shale] and for our shareholders. Likewise, we're happy to put the last of our three new build jackups to work during the quarter, the Noble Scott Marks commenced a two year contract in the North Sea in early September at a day rate of $213,000 a day.

The rig had a great startup, the performance so far has been outstanding. So, we and our customer are delighted about that. The Noble Dave Beard and the Noble Jim Day both continuing to make progress. We continue to expect the Beard to commence its contract with Petrobras and Brazil around the beginning of the year. And we expect the Day will leave Singapore as scheduled in April, 2010 for its journey to the Gulf of Mexico to begin a four year contract with Marathon at a rate of $515,000 a day.

Putting these last two units to work will conclude our original new build program. On November 10, we'll cut steel on the Globetrotter and launch the next phase of our new build program. We still have a commitment for the rig yet, but we're continuing discussion with a number of different potential operators, and we remain confident that we'll be able to secure good opportunity with strong returns from the shareholders.

The Company continues to run like a top. Our safety performance is on track for a record year as are our personnel retention figures, which are averaging about 6.6% across the fleet as compared to about 8.9% for the same period last year. Our backlog is running about $8.9 billion, which is mostly attributable with deepwater fleet. And that coupled with our strong balance sheet gives us a lot of optionality both in terms of how we manage the fleet and how we evaluate opportunities.

We were able to resume share purchases during the quarter, now that we've worked out the proper mechanics in Switzerland. And I might mention this since 2006 we've returned about $890 million to shareholders in the form of repurchases, which is not insignificant.

Current commodity price direction was a 180 degrees from this time last year. And headed through the budget season, we think this potentially bodes well for 2010 activity levels.

Our outlook for developing continuing opportunities for the jackups is improving our confident and deepwater business remains strong. Now we're not exactly sure where we are on the recovery, but the market is starting to feel better again. And in any event, whether the oil price stays above $80 where it closed yesterday or drops to $40 Noble is in fantastic shape to take advantage. We got a great fleet, we got a great team managing and operating it. And we're working hard to deliver value to shareholders.

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

Tom Mitchell

Thank you, David. In our release last evening, we reported third quarter net income of $426 million or $1.63 per fully diluted share on total revenues of $906 million. These results include approximately $12 million or about $0.05 per share in discreet tax related benefits that I'll discuss in a few minutes.

Total revenues were up by about $7 million quarter-on-quarter, driven by an increase in contract drilling revenues. The Noble (Inaudible) which operated at 605,000 per day for the majority of the quarter, a significantly higher day rate than the rate of 245 during the previous quarter contributed $31 million. The performance bonuses for our units operating Brazil added 8 million and an additional calendar day contributed about another $10 million of revenue.

Offsetting these gains were reductions from rigs that re-priced the lower day rates including the Noble Leo Segerius in Brazil, the four jackups in Mexico that are subject to index agreements, an additional idle time on rigs in the Middle East and North Sea.

Overall, our average daily revenue declined slightly to a 196,900 from a 198,270 though the average is still above the first quarters 194,300. We are still keeping a very strong focus on cost, after a 4% increase between the first and second quarters. Costs for the third quarter were essentially flat at $251 million, bringing our total contract drilling services costs through the third quarter to approximately $743 million.

On a per day basis our costs decreased 1.5% to 56,450 from 57,330 in the second quarter. Our contract drilling margin remains strong at 71%. DD&A expenses of a 103 million were up from last quarter's 99 million with includes increased depreciation as a result of the delivery of the Scott Marks and its contract commencement in September.

SG&A expense of about $22 million was essentially flat with the previous quarter. Probably the biggest surprise for most of you is our effective tax rate, which came in at 15.9% for the quarter versus our guidance of 19.5%. We enjoyed a benefit of 12 million during the quarter, because of settlement agreements on a number of tax assessments in various locales, as well as some other discreet items. The other 130 basis points of the delta between guidance and the actual related, simply to revenue mix across geographic areas.

Capital spending of 367 million during the quarter was significantly higher and the 275 million during the second quarter. Some of the increases related to the delivery of the Scott Marks as well as the general increase in activity.

Total capital spending through the third quarter came to $893 million.

We mentioned on the last call, that we have been working to get features in place that would allow us to be back in the market buying shares and you can see that we did repurchase two million shares at an average price of $34.71 per share, for a total cost of 69 million.

Year-to-date we've repurchased 3.7 million shares and at average price of $30.35 per share for a total cost of 113 million.

Turning to our capital structure. Total debt remained flat at 751 million, but the cash balance grew during the quarter to 756 million from 671 million last quarter. This leaves us net debt free at the end of the third quarter.

Now for guidance. First we don't have any guidance for you for 2010 yet. We're still involved in the budgeting cycle and there are lot of moving parts in terms of both capital and expense. Typically we put our planned shipyard down time which includes surveys and project time, but not idle time, out with our first fleet status in January, so you should look forward to that.

We mentioned on the last call that it wouldn't be unreasonable to see CapEx in 2010 be plus or minus 1 billion, but as I said, we're still in the process. And on OpEx, despite the recession, there is still pressure on costs. We'll also be putting three semis to work next year, so that will put some upward pressure on absolute costs as well. I guess the main message is stay tuned.

For the rest of this year, with one exception, we don't intend to change the guidance we gave on the lost call. Contract drilling services cost should still be in the range of 1 billion to 1.05 billion, albeit near the low end. DD&A should continue to be in the range of 400 million to 420 million.

SG&A we're still looking at 80 million to 90 million and on capital, we're still expecting to spend around 1.3 billion for the year, which given the ramp up in third quarter isn't unreasonable. There is one area where we do expect a change and that's on the tax front.

As I mentioned, the tax rate during the quarter was reduced to 15.9%, because of settling some outstanding audits and other related issues. But on October 1, shortly after the end of the third quarter, we completed a worldwide internal restructuring of the ownership of substantially all of our drilling rigs, that we believe will have a number of business and tax benefits, including an expected long-term positive impact on our overall tax rate.

You're all aware of our change in [place] incorporation which we completed earlier this year and the relocation of a number of our executives to Geneva. You can also observe from the fleet status that we currently have approximately 90% of our fleet deployed in markets outside the US and that these units contribute about 80% of our revenue.

Consistent with our long-standing historical strategy to shift away from US markets and to international markets, we decided to consolidate our worldwide rig ownership under a single non-US entity. This has a number of advantages, including better alignment of fleet ownership and operations with our predominantly international drilling business, facilitation of more efficient fleet deployment on a worldwide basis, and greater efficiency in managing cash and enhancing borrowing opportunities.

As a result of the asset consolidation restructure we should also achieve global tax savings that reduces our ongoing effective tax rate from 19.5% to a range near where we were in the third quarter, which we expect to benefit shareholders beginning in the fourth quarter of 2009.

We're still working out the exact rate and it may change some over time with how and where the fleet is working, among other factors, but in your models I'd use about 14% for the coming quarter. Then in 2010 and beyond, I'd tentatively suggest a rate in the neighborhood of 15% for now. We will finalize the budget and certain elements of the restructuring over the coming months. As I mentioned, so I'll be able to tighten this with more definitive tax rate, give the 2010 guidance in January.

And with that, I'll turn it over to Roger to review the market.

Roger Hunt

Thanks, Tom. My formal comments today will be brief as there really isn't much that's changed in the market since our last call in July.

Let me begin with the jackups. On our last call, we suggested that international jackups we are finding work in the day rate range of 85,000 to 115,000. This generally continues to be the case, though there have been some exceptions announced during the quarter such as the three rigs moving into Iran at 177,000 and one into Sudan at 180.

Finally these units will be operating in semi closed markets where sanctions prohibit competitive bidding and the read across the other markets in terms of rate is minimal. Nevertheless, these data points are positive for international jackup utilization, as is the likelihood that large customers like Pemex or AMCO and ONGC will maintain or increase their rig count. These are all encouraging signs.

Utilization in the international market continues to hover just below 80%, despite the delivery of four new jackups during the quarter. We believe that if oil price continues to behave as it has in recent months there is a good chance, utilization and day rates for the international jackup fleet will hold at current levels with potential for upside. We should also emphasize that Noble utilization has been superior to the industry in all of the regions we operate.

Let me mention a few of our market areas and some positive fixtures we achieved during the quarter.

In the Middle East, we secured a two-year contract on the Mark Burns. We also secured an accommodation job for the Charles Copeland. We had three units working in this mode during the quarter, generating around 150,000 per day revenues in total with total rig operating costs of around 50,000.

Coming out of Ramadan we're starting to see a pick up in tendering activity, and while the environment is competitive, we're optimistic we'll obtain work for several of our units.

In India, we're in the tender process for the renewal of the Ed Holt and waiting for some concrete news on ONGC plans. We also see there are few other opportunities in the sector as well.

In West Africa, we're pleased to report that the Lloyd Noble returned to work for five to six months at day rates in the 90s. Although West Africa is a challenging area right now, we are cautiously optimistic that utilization will improve in the second and third quarter as some of the super majors begin to move forward in filling their needs.

In the North Sea, the Scott Marks, our final new build jackup was delivered and commenced its two-year contract at 212,000 per day. In addition, we secured incremental work for the Piet van Ede, George Sauvageau and the Al White for 10, 12 and 18 months respectively which (Inaudible) these units up through the majority of 2010 and well into 2011 for the Al White.

Finally in Mexico, we're all waiting to learn when the incremental tenders we've been expecting will actually be published. Obviously there has been a lot of news in past several weeks around the management change in Pemex and the potential reevaluation of the (Inaudible), but in our view that makes the outlook for the jackups more positive. We have three rigs coming off contract in December and January and expect Pemex to extend these contracts for a period of five to six months, each while they complete their formal tender process.

All in all, we're well positioned with our jackup fleet with almost 35% of our days booked for 2010 and 10% booked for 2011. On the floater side, there is really not much that's new. Most of the worldwide deepwater fleet is contracted while the mid-water appears to be struggling. Ultra-deepwater rates continue to hold in the $500,000 range. It's our view that both contractors and operators are playing a bit of a waiting game right now. Unless the customer has an immediate near term requirement, they are viewing the market with a watchful eye, hoping that the event of a short-term commodity pull back, they can act quickly and contract something at a discounted rate. We, however, are enjoying the benefit of strong backlog which enables us to take a longer term view, so we don't have an incentive to rush out and lock up our rigs. At some point customers will need to begin securing rigs to ensure they can execute their programs. It may be several more months before we see significant activity.

In the Gulf of Mexico, we can report that we've concluded negotiations with Marathon which will allow them to keep the Paul Romano an additional 120 to 150 days at a day rate of 375,000. This size up the Romano, our only available floater in 2010 into next summer and we're looking at additional opportunities beyond that both in and out of the US Gulf. That ends my formal remarks. So I'll turn the call over to Lee.

Lee Ahlstrom

All right, thanks, Roger. Regina, we'll now go ahead and open it up for Q&A and, again, please remember our protocol, which is one question with one follow-up. Thanks very much.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Kurt Hallead with RBC Capital Markets.

Kurt Hallead - RBC Capital Markets

Good morning.

Kurt Hallead - RBC Capital Markets

My first question is going to be on the jackup market. Clearly it sounds like the tone is improving, a lot of that on the heels of the $80 oil price level. In some calculations [iron] you need about 100 rigs of demand on 2010 for the independent leg, cantilevers. If you start with Pemex and say they need you know five at the low end may be ten at the upper end, you walk through the rest of the world, you referenced India, where do you see the biggest incremental demand for jackups coming in 2010? What two or three markets do you think are going to be the absolute best for you next year?

David Williams

Well, I'll take a shot at that and then see Roger has anything to add. I think you are spot on with Pemex I think they clearly have additional demand, clearly India as they're out for tender now. I think one of the places that has been [where] we would watch very carefully for a long time that's been a big disappointment, even when prior prices were north of a hundred a barrel is Africa and I think clearly we could see things loosen up there and I'm not quite sure how many rigs I could swallow up, but it would be a pile. There has been a lot of work over there that's been held in just advance for more than a year just because of the political condition all up down the coast there. So I think Africa could be a surprise. And frankly, I think there is still possibilities in the Middle East. There are a lot of rigs that are coming off contract in different parts. You know, we've got some exposure at Qatar next year, but that's an active market and as you correctly pointed out, oil prices above $70 a barrel solved a lot of problems. And, so I think the expectation is that if you see or from our expectation is if we see product prices continue to hover or continue to grow, that will create additional demand in all markets. So, you know, it's incrementally you can model it a lot of ways. Not all the rigs that are coming off contract are going to enter the market. Many have options, a lot will be extended, a lot will be pre-negotiated so all of this stuff is ongoing. So you don't have to see 100 tenders to put all these rigs to work, Kurt.

Kurt Hallead - RBC Capital Markets

My follow-up will be on deepwater. I had some conversations recently with some of your peers on the deepwater front and there has been some general sense of maybe some growing caution that day rate for deepwater rig might come down given the supply/demand imbalance, as temporary as it may be, in 2011. Do you guys, any color on that or any read on how you think the deepwater pricing market may shake out as you look out for that (Inaudible) 2011?

David Williams

Well I think Roger's comment of hovering rates are still holding around $500,000 a day. I think what we're intending to just provide a range. Yes, I think that we've heard the same stuff you've heard. We've seen a couple of contracts that have let at rates that we think should have been a little bit higher, but on the margin, I think that business is holding its own. I mean keep in mind there have been very few fixtures this year and those fixtures have been done in a product price environment that's much below where we are today, and as we continue to head through the year and oil continues to climb and costs across the board for most goods and services that operators may be providing continue to come down, that makes a lot of prospects economic. So again, I think $70 to $80 a barrel solves a lot of problems. So I don't see any reason yet to think that rates are going to fall significantly. Are we telling you that we're going to get 500 a day on the button for Globetrotter, no. But I can tell you that we've had conversations above that number, but we've had some conversations around that number and slightly below that number, but I think that's a good benchmark estimate for where that market feels like it is right now to me.

Roger Hunt

Kurt, I'd add to that is that let's say two years ago when operators were signing up deepwater rigs, they had to operate, with a two year lead time, because that was the supply chain. Now, with supply coming onto the market, they don't have to move quite as quickly. So I think there's a lot of this kind of who blinks first behavior going on. I'm confident the demand build is there, but the operators are working hard to shield it.

Kurt Hallead - RBC Capital Markets

Okay Great, thanks.

Operator

Our next question comes from the line of Joe Hill with Tudor Pickering Holt.

Joe Hill - Tudor Pickering Holt

Good morning. Congrats on a great quarter. This question is really directed towards Tom. I was wondering if we could get an update on how much capitalized interest you guys have and kind of the association between the Adkins, the Dave Beard and the Jim Day?

Tom Mitchell

Tell you what, why don't you go to your net, let me pull that here. I am in Geneva right now, so I'm a little bit separated from my numbers, guys. Give me just a second and I'll pull that and come back to you.

Joe Hill - Tudor Pickering Holt

Okay. And then I'll just throw out a follow up while you're doing that. David, what's kind of the status of the agreement with the (Inaudible) regard and where do you all stand on kind of maneuvering out of the current receivable situation into something little bit more traditional?

David Williams

Well, I would characterize right now as the only nontraditional piece of that deal right now is the rig's not drilling. We're getting paid. We have an agreement with the operator and we have an arrangement whereby they have a schedule. The rig is not drilling right now, but they are meeting their obligations. The rig, if the operator wants to do it, is available for [farm out] to somebody else or they have the opportunity to take the rig out and drill with it themselves, but the arrangement we have is we feel is very well secured. Tom and his guys worked hard to execute an agreement that protected our shareholders and our interest and we're getting paid. So, the rig is still idle, but we don't had any real issue with the receivables. I mean they still owe us money, but they're paying us.

Joe Hill - Tudor Pickering Holt

Okay. That's fair.

Tom Mitchell

Hey Joe, this is Tom. I'm back. We got about year-to-date around 40 million to 45 million. You'd see that around 50 million to 55 million by the end of the year. And I wouldn't really just think about that associated with the Adkins and the Day. We've got enough capital program spend to stay about the same level, I would guess, for next year.

Joe Hill - Tudor Pickering Holt

Okay. And I should start taking up interest expenses as those rigs come to market?

Tom Mitchell

I think probably not until we get out of next year.

Joe Hill - Tudor Pickering Holt

Okay. Great.

Tom Mitchell

I think you're going to see about the same thing next year.

Joe Hill - Tudor Pickering Holt

Got you. All right thanks a lot, guys.

Operator

Our next question comes from the line of Dan Boyd with Goldman Sachs.

Dan Boyd - Goldman Sachs

Hi, thanks, guys. Given the outlook on the market that you just described where you are seeing improvements now on the jackup market, the visibility is looking better, especially in West Africa, the deepwater market is maybe going to be in limbo here of holding steady with new some risk to the downside, you really don't know till we get out. And in the acquisition market we've seen two rigs already go to diamond. I don't know of that many other deepwater rigs that are available, but there are some jackups that are becoming available. I know one in particular that's being auctioned off by a shipyard. How is your appetite changing given the outlook in the market to potentially going after some jackups?

David Williams

Our view, I'm going to call you Roy just because it's more fun, Dan.

Dan Boyd - Goldman Sachs

No problem.

David Williams

Our view really hasn't changed. I mean we look at the PetroRig rigs with a keen eye. We had an idea of what we thought they were worth. I haven't seen anything yet that tells me we were wrong. And so, diamond wanted them more than we did and they were willing to pay a lot more than we were willing to pay. The jackups, my point is that I think that these rigs are distressed need to come at a discount to the market. Our view of jackups hasn't changed really from what it was six months ago. We've said that we'd be interested in buying jackups at the right price, but we haven't seen those prices come down to a point that makes any real sense. If you go buy jackup, it's pure risk. You're not going to buy a rig that's got a contract.

So you're going to go out and just commit whatever it is and just take your shot at the market. The jackup market is always going to be historically shorter term than the floater market and given where we are, I think you got to see a discount. I think for jackups, it's got to be meaningful and we haven't seen that yet. I still hope we will see it. As I said a year and a half ago, the best thing that I am [going] to see is oil go to $40 and stay there and burn all these guys out and reset the clock and get some real opportunities. The problem is I just don't see that's in the cards. So we're still looking at jackups, we'd still like to acquire some, but not at the current prices.

Dan Boyd - Goldman Sachs

Okay. Related follow-up going with the uses of cash, you are going to build quite a bit of cash next year, at least according to our projections. You have a lot of cash on the balance sheet. What is your appetite for building new builds, specifically in Brazil?

David Williams

It's got to make sense. I mean it's got to make sense. I mean Petrobras is a very good customer, not only of ours but a number of our competitors and they have a resource there in this pre-salt structure that they want to utilize for the greater good of Brazil and you can't blame them for that it's a very noble effort. But the economics, I think are still very challenged to build rigs in Brazil. The tender is out. We will evaluate the tender, we've got a very good relationship with Petrobras. We would certainly like to be involved and we intend to pursue it vigorously, but it's got to make sense for our shareholders. We're not here to subsidize Petrobras, we're here to make money for our shareholders and if we can figure out a way to do that, we'll be involved and if we can't, we'll let somebody else do it.

Dan Boyd - Goldman Sachs

Okay. Thanks. I'll respect Lee's role and let someone else go.

Lee Ahlstrom

Thanks, Roy.

Operator

Our next question comes from the line of Jim Crandell with Barclays.

Jim Crandell - Barclays

Good morning. David or Roger, you talked about the deepwater sort of outlook here and you used the words who blinks first. What is your estimate at this point about how many either deepwater or ultra-deepwater rigs you're aware of that companies, your customers will need in 2010, 2011 that they have not yet contracted?

Roger Hunt

You know, I think 2010, there's probably, I don't know, two to three that I'm aware of and I think that will be a lot to do with, whether they can put a deal together as opposed to deferring it into 2011. 2011, Jim, there's a half a dozen projects right now that are in the various stages of prequalification and bidding. Is that enough to consume the availability in 2011? No. But we still have a view that because customers can defer the procurement cycle, they are.

Jim Crandell - Barclays

Okay. So, Roger, if there is somewhere around 25 deepwater or ultra-deepwater new builds without contract, do you think that if, I mean could we be in an environment in the first half of 2010, where if we see two or three or four of these things go quickly, do you think there is enough demand for when these start that we could see several more are scooped up and then the sort of psychology start to change around the market where the thought is that maybe there's more demand out there by mid-2012 than the 25 or so rigs that are being built?

Roger Hunt

You know, I firmly believe that this is a game it's not for the meek. It is a waiting game. And I think if the discipline we see now continues, we're looking at probably around the floor in the deepwater rates.

Jim Crandell - Barclays

Okay. And just my follow-up to that is what do you think absent the new build plan at Petrobras, what do you think their desire is for incremental rigs should they go idle here over the near term.

Roger Hunt

I'm not sure if I understand your question, Jim.

Jim Crandell - Barclays

Petrobras

Roger Hunt

Are they going to keep the 28 that they're talking about now for delivery post 2014, you are asking the question is there enough demand in Brazil to keep the current fleet plus the 20 to 25 that are supposed to be headed there?

Jim Crandell - Barclays

I guess my question, Roger, is on top of the sort of 42 rig program, do they have a desire for even rigs in the near term to the extent that rigs in other areas at around the world, yours or others were to become available, do you believe that Brazil on top of their program that goes out to 2014 would take additional floaters over the next six months should they become available.

David Williams

We do believe that Petrobras and others will be taking to Brazil during that period.

Jim Crandell - Barclays

How many?

David Williams

Can't answer that question.

Jim Crandell - Barclays

Okay.

David Williams

Jim, keep in mind, they've got letters of intent, these other 12 rigs that they've committed to previously, and I think everybody is aware Petrobras is yet to admit that it's unlikely they'll get all of those 12 rigs. And so even with the plan that’s operating another 28 rigs, I agree with Roger a thousand percent, I think it's very likely that they will be back in the market for additional rigs before the delivery of anything they may build in Brazil and deliver in 2014 or 15. I think it's very naive to believe they're going to put all their future in A: the current fleet and the new build rigs. So I think, yes I think whole heartedly they'll be in the market picking up additional rigs.

Jim Crandell - Barclays

Okay. Thank you guys.

Operator

Our next question comes from the line of Arun Jayaram with Credit Suisse.

Arun Jayaram - Credit Suisse

Good morning. Good afternoon to Tom and David. Roger, I just wanted to get a little bit of clarification on Mexico where you have a few rigs coming up, off contract at year end and then the first quarter. You believe that you'll be able to get extensions on all of these rigs or a portion of them?

Roger Hunt

Arun, clearly we believe that Pemex's requirements are strong enough that our rigs in Mexico will be extended. Now, specifically on the two that are approaching contract rollover, we're confident that Pemex, we're in discussion with Pemex and they'll be extended under the provision where they can take 20% of the original contract days and add it to the term. So that’s an ongoing conversation right now. That will probably extend the first two four or five months, five or six months, and hopefully that will give them a chance to get organized with a formal tender. But the answer is absolutely, the current 34 fleet, we believe they'll stay at that number and then it's a discussion around whether the incremental number is going to be, five, six or seven. But we feel very good about our position in Mexico.

Arun Jayaram - Credit Suisse

Okay. That's very positive that you won't have any down time there. Second question is just, again, on West Africa we have seen a couple of commitments in that market. What do you think it will take to stimulate some demand there? Is there any political things or what do you think would take to unlock some demand in that market at this point?

Roger Hunt

If we look back, not too long ago, probably as many as 18 to 19, 20 rigs working in Nigeria alone, and now I think we're down to 10 or 11. So clearly kind of cleaning up the tender process in Nigeria is a road block and if we can see that sort itself out, I believe you're going to see an increase in demand there. We're beginning to see signs that, there was a push for indigenous contractors. The major operators in Nigeria, along with the contractors I think have done a good job of sitting down with the authorities and pointing out to them just how indigenous our operations are. They actually contribute more to the economy than somebody that's bringing in a new rig and even though the ownership is Nigerian, you'll find that the crewing level and the level of local purchase and infrastructure is less.

So they're beginning to see that. So, I think you'll see the likes of Exxon and Chevron and others have success in tendering here in the next six months.

Arun Jayaram - Credit Suisse

Okay. That's helpful. Thanks, guys.

Roger Hunt

Now, in addition to that, we do see signs of companies like Total talking about programs in the Cameroon’s, in Gabon, and so that's where I'd look for some incremental demand.

Arun Jayaram - Credit Suisse

Okay. Thanks, Roger.

Operator

Our next question comes from the line of Ian McPherson with Simmons & Company.

Ian McPherson - Simmons & Company

Hi, thanks. David, I guess the year's not over. There maybe ten weeks left but so far this is 2009, hasn't been a year of fruition for M&A. And if the joint market is stabilizing or the jackup market may be stabilizing and improving and deepwater is not getting worse, I guess that doesn't bode well for you to get better asset prices next year. And under that scenario, when do you have more of a sense of urgency about addressing your balance sheet and the cash flow that at some point is going to be burning a hole in your pocket if you can't get deals done?

David Williams

Well, Ian, clearly it's not burning hole in our pocket yet because, it's comical every time something happens in the market, our stock [tanks] because somebody thinks we're going to do something stupid and clearly the money is not burning a hole in our pocket. We're about value, we always have been. I'm not embarrassed to have cash on the balance sheet. It's not a place that drillers have been before to be able to build some cash.

So, where we are now and where we're going is not a bad thing. I agree with you that it's going to be more challenging to do deals but I also believe that the strength of the balance sheet and the cash that we've got available, sooner or later there will be an opportunity that’s presented that always turns out this way, there will be an opportunity presented to us because of the strength of the balance sheet and the available cash. So, we're not in a hurry. We're still kissing frogs, we're still looking for deals. We're going to continue to do that and so, I feel very good about where we are. I'm not embarrassed at all to have the amount of money we've got on the balance sheet now or where we are, so it's going to get a lot more before we get worried about what we do with it. But it will not burn a hole in our pocket. We'll figure out something to do with it.

Ian McPherson - Simmons & Company

Okay. I guess for a follow-up, more just kind of a detail question about the Lorris Bouzigard situation would the customer need to involve you with the formal negotiation, would you have any participation at that process?

David Williams

Sure we will.

Ian McPherson - Simmons & Company

How could you influence that situation?

David Williams

Well, I mean the most drilling contracts, if not all drilling contracts, most drilling contracts will have a stated provision where the operator has a right to assign. Once the rig is under contract to him, it's up to him whether or not he wants to drill with it or farm it out to somebody else. We would certainly assist him in finding somebody if he wanted to farm it out. We would certainly assist him in that. We would have a right, generally and during the contract, and I can't speak specifically to this, it's been a while so I've looked at it, but we would have a right to approve, so he couldn't farm it out to David Williams oil company and expect that David Williams oil company could perform.

He would have to be the guarantor, would have to buy some kind of security to know that whoever he farmed out to will have some, the wherewithal to match it. And if there was somebody who want to go international, we would certainly have the authority to bless whether or not we would accept that contract, that operate in that locale. So absolutely we’d be we would have active participation, but almost all drilling contracts have the right of assignment by the operator to another to either one of the partners or another operator who's qualified to meet his obligations.

Ian McPherson - Simmons & Company

Okay. I was really curious to know if you could influence trying to keep the day rate higher versus lower on the farm out?

David Williams

You know, in a different market, he might farm it out and make a little money or he might subsidize it. You know, it depends. Its I think where we are right now, I'm not sure the day rate is a bad number. We're all about money, but we've committed that time and we certainly won't try to beat anybody out of any more money under committed contracts as long as we get paid.

Tom Mitchell

And of course the day rate to us stays at published contract get day rate, regardless of whether he subsidizes it or not.

Ian McPherson - Simmons & Company

Sure. Got it. Okay thank you.

Operator

Our next question comes from the line of Roger Read with Natixis Bleichroeder.

Roger Read - Natixis Bleichroeder

I guess kind of hitting one of the other things in Brazil we have been talking about building as many rigs and their shipyard constraints and all that. For the three rigs that you're going to upgrade 2010, 2011, do you have shipyard slots all set up for that?

David Williams

We do, yes.

Roger Read - Natixis Bleichroeder

Okay. So no risk there at all?

David Williams

No, we've got there is shipyard capacity available to do those rigs. Our current plan is to do them sequentially and trying to work around Christmas and carnival because nothing happens at Christmas and carnival. So, but yes, we have active discussions going on in the capacity in Brazil to do what we're going to do. We're not building from the keel up, keep in mind, so we're doing some significant upgrades, but big step from what we're doing to all the way from the keel up.

Roger Read - Natixis Bleichroeder

Okay. Thanks. And then I guess the other question as we look at operating costs and try to think about just general costs for next year, obviously I’ll talk about guidance later, early in 2010. Foreign exchange issues, the dollar obviously considerably weaker again after the beginning of the year looking a lot stronger and changed a lot of companies’ views on impact and operating costs. Can you all give us an idea of what happens in a, let's say the dollar stays where it is environment kind of 2010 compared to 2009 op costs?

Tom Mitchell

Well, I won't get into that level of detail, Roger, but I will tell you that we have got hedges on right now for about 60% of our exposed position for the coming quarter and then that bleeds off as you get into next year. You've already seen some of the inflation. It was about, I'd say, around $4 million bucks that came through in this quarter before the hedges and so we were protected. And we continue to roll those out.

So what happens in our cost number is you kind of get it averaged out as the rates move up and down. So it takes a little bit of the volatility out and you lag the market, but it's worked pretty well for us and we'll continue that process to do that. The most exposure that we've had has been the Real lately it's not been on the European currencies, and so we're dealing with that. But I wouldn't expect it to be a huge exposure for next year. Even in blow out situations, you don't have just a massive cost change in our structure right now.

Roger Read - Natixis Bleichroeder

Okay. Thank you.

Operator

Our next question comes from the line of Brian Omar with Pritchard Capital.

Brian Omar - Pritchard Capital

Good morning. I had a couple of real quick questions. Last year we saw a bunch of shipping companies and private guys put in orders in the ship yards for drill-ships I'm just wondering if you think there's any embedded value and the orders these guys have put in and if they're looking or talking about joint ventures or some sale of those assets or what your thought is if they just go away eventually?

David Williams

They did put in there you're absolutely right. There were some guys put up some orders. They have had mixed and not a great deal of good success of putting those rigs under contract. I think the story with each one is a little bit different, although as far as we know, they're still continuing to pursue various avenues for those rigs, but the cost base of those rigs makes it prohibitive just to go out and just try to take them out. They've ordered equipment from ship yards, they've bought slots and they've ordered equipment from suppliers, they've bought slots at ship yards and they've committed capital, so somebody is going to have to take a hit to make those some of those were north of $700 million assets.

So the cost to take them out is well above what a newly placed new construction cost would be say for Globetrotter which we think we could build right now for around $500 million. So they're there, we’d have to ask them exactly what their degree of stress looks like. We haven't seen them run into the market to alleviate that stress yet.

Brian Omar - Pritchard Capital

Okay. And on an unrelated question, when you're talking about your entities, I just wonder if I heard this correctly. You have every one of your rigs rolled into one entity now, so floaters, jackups, everything was under one entity?

Tom Mitchell

No outside of what you see, there are multiple companies within the Noble Group that we use for various reasons and that rolls up through several structures, but it's under essentially, what you could think of as a partnership right now in one country. And it's for the efficiency that I talked about in my text.

Brian Omar - Pritchard Capital

All right. Okay. But there is still multiple entities for bidding in various countries?

Tom Mitchell

Yeah, absolutely.

Brian Omar - Pritchard Capital

All right. I was just confused a little. Thank you very much.

Operator

Our next question comes from the line of Kevin Simpson with Miller Tabak.

Kevin Simpson - Miller Tabak

Hello. And congratulations on another good performance.

David Williams

Thank you very much.

Kevin Simpson - Miller Tabak

I just wanted to, get your perspective on the jackup market. There's been a lot of positive commentary or let's say, more favorable than, we've seen in a while. Do you guys think that rates have bottomed or are there specific markets you see that stabilization already having occurred based off of what you're seeing in the marketplace? Maybe regionally or market either couple the markets by markets, how those all playing out?

David Williams

I'll say what I have to say then we'll see if Roger wants to add to it or disagree with me. But it appears to me, Kevin, that in individual markets, rates have found a floor and they have been fairly stable over the last few months. It appears that rates in the Middle East have found a happy floor well above cash costs, I might add. Rates in West Africa have been well above cash costs and it seems like they've found a stable place. Rates in the North Sea likewise have found some stability.

So it seems like on an individual market basis, the market seems to have stabilized around the utilization level that Roger characterized as just below 80% and level that Roger characterized as just below 80% and so it appears that the market to me has been able to swallow the additional new builds and find a happy place just below 80% where the utilization appears to be reasonably stable and rates are stabilized.

Now, I'll caution the other thing that’s going to happen is rigs that are under two-year contracts or at the end of two-year contracts or one-year contracts, whatever they are, as they roll to the market, the average rates are going to continue to roll down. So I mean the average rate for jackups in North Sea is going to continue to decline as they roll off rates, deals that were agreed two years ago and re-pricing in the current environment. But it appears to me that the markets have stabilized at the current level and also Roger, do you have anything to add to that or do you…

Roger Hunt

No. I would just observe that, the recent fixtures in the North Sea are well above a hundred. We've averaged we were able to book 44 months of rig backlog at rates of 112 in the north. I really think it's a story about the work that you can't see right now with commodity price around 80, we have a view that you'll see more programs than we can quantify right now. And so it's a lot about discipline over this quarter.

Kevin Simpson - Miller Tabak

I guess just to follow up on that, though is there I mean it's obviously not your company, but Transocean has really in putting rigs on the beach has really been a big factor in stabilizing the market relative to other down cycles. Any sense on whether some of the guys who have rigs on the beach are looking at these rates that are actually pretty good and are getting a little bit antsy and might bid into the market again?

Roger Hunt

Well you know that’s an interesting decision they have taken this 44 months of rig backlog that we secured in the North Sea occurred when five rigs went to the beach. We like that. Our customers prefer hard rigs. So we're clearly in an advantage position as this demand builds.

Kevin Simpson - Miller Tabak

Okay. The question would be how you know I guess it's not your answer. You're pursuing your strategy and they're pursuing theirs and we'll ask them when it's their turn. Thanks.

Roger Hunt

I think you got to keep in mind, Kevin, that whoever is the biggest fish in the pond always kind of has to take a leadership role and they find themselves very often, we've been there different times, they're bidding against themselves very often. So it's understandable for them to take the strategy they've taken.

Kevin Simpson - Miller Tabak

Yeah. That's a good point. Thanks.

Operator

Our next question comes from the line of Alan Laws with BMO Capital Markets.

Alan Laws - BMO Capital Markets

Good morning. Hey, a couple of things. They're actually just follow-up questions for the most part here. We talked about some consolidation or asset purchases, really, a lot of attention on deepwater consolidation over the last year or so and interest in the assets that are available. Can you comment on your interest in consolidation in the jackup side on a corporate level more so than just buying jackup that's maybe distressed?

David Williams

No, except that I think the view is the same. If there is a good strategic benefit to it, then [it] something that would be interesting to us. What we said is the strategy has been to continue to move we are coming towards technology. I think we got a history of that over the last 15 years, moving out of the land business into offshore business and continue to move the fleet deeper and deeper and now what we're building is deepwater DP vessels and so we continue to move to cover that way, but, the jackup it's a great business. It's from a technical standpoint, it's a very simple business and it ebbs and flows with the market. So there's a lot of good things about it. For us to want to buy jackup company, it would have to be great value or real strategic benefit that we'd have to derive out of it. But, I wouldn't say we wouldn't consider it.

Alan Laws - BMO Capital Markets

Right. So if your view was that the market was turning, what data points would you need to see in the market that would suggest that you could go in and, capture the leverage to the next up cycle which as it seems now, maybe you could comment on that, do you see leverage in the deepwater business or is it all just contained in the jackup business if we get a turn here?

David Williams

Well, I think it's across all lines. I'm not going to give you a data point at which we're going to jump up and go try to buy something. I can tell you, but then I would have to kill you. So I just I think that’s probably not in our best interest. I think we view this if what we've just been through is the down cycle, I'll take it. It's certainly the best down cycle I've ever seen. I think there is as we've moved out of it and from our position right now of about 80% utilization for international jackups and the strength of deepwater market, as you see product prices continue to run up, that bodes well for the whole pile. I hope oil doesn't run up and go past $140 a barrel in the next three months.

I hope that there is a steady, logical growth pattern to this. It doesn't always work that way, but, people tend to get excited with spikes and things. What we've seen over the last six months is a steady continual climb of product prices that I think is supported by a worldwide demand model and the fact that most of the major [basins] in the world are in decline and I think it's an expectation the world runs on oil and gas and in spite of the recession that the world has just gone through or is going through, that underlying premise hasn't changed. So, as I said in my comments and this doesn't mean there's nothing you can go take to the bank, but the whole thing feels better. It's from an intuitive standpoint, the market feels better to me right now than it did three months ago and that's worth exactly what you paid for it, but, you have to have some intuitive view of the way things are going and that's the best way I can characterize it right now.

Alan Laws - BMO Capital Markets

Okay. Good. I have one more little one here. The Perennial and this probably breaks Lee's question…

Lee Ahlstrom

It does, Alan.

Alan Laws - BMO Capital Markets

But the Perennial dividend question looks like you got the buy back thing sorted out for Switzerland, you can probably progress on that, but your thoughts on the dividend again?

David Williams

We lack our regular dividend right now.

Alan Laws - BMO Capital Markets

Okay. Sounds good. Thank you, guys.

Lee Ahlstrom

Regina, we're going to take one final question.

Operator

Your final question will come from the line of Matt Conlan with MKM Partners.

Matt Conlan - MKM Partners.

Hey, guys, I was also going to ask if you were going to do something stupid with your cash. But I will change that question.

David Williams

Thank you for saving that to the last question.

Matt Conlan - MKM Partners.

No I'm going to change that. You mentioned that you think you could build a Globetrotter for 500 now and I want some clarification. Is that for the first unit that you've already ordered or that you said a year ago would cost 585 or is that for a potential follow-up unit?

David Williams

No, the first unit is [committed] and our fee for that unit is $585 million and that's an all in number and our expectation is that's about what it's going to cost. But what I and maybe I misspoke, but I think we can replicate that hull on another new build for around 500. Whether it's 500 or whether it's 520, I'm not sure, but it's going to be well below the 585 that we envision on the first hull.

Matt Conlan - MKM Partners.

Okay. I just wanted to make sure that I didn't misunderstand that you were getting a…

David Williams

If I misspoke, I apologize. I'm talking about future holes.

Matt Conlan - MKM Partners.

Okay. Great. Well thank you very much.

Lee Ahlstrom

All right. Thank you very much for joining us today, ladies and gentlemen. We appreciate your participation, your interest in Noble. We look forward to seeing you again on the road or at our next earnings call conference, which will be in late January. Thank you.

Operator

Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect.

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Source: Noble Corporation, Q3 2009 Earnings Conference Call

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