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Hercules Offshore Q3 2009 Earnings Call Transcript

October 28, 2009 | about: HERO

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Hercules Offshore, Inc (HERO)

Q309 Results Call

October 27, 2009 11:02 AM ET

Executives:

Stephen Butz - Vice President and Treasurer

John Rynd - Chief Executive Officer and President

Lisa Rodriguez - Senior Vice President and Chief Financial Officer.

Analysts:

Jeff Tillery - Tudor Pickering Holt

Igor Levi - Morgan Stanley

James West - Barclays Capital

Arun Jayaram - Credit Suisse

Pierre Connor - Capital One Southcoast

Geoff Kieburtz - Weeden

Brian Uhlmer - Pritchard Capital

Collin Gerry - Raymond James

Ian McPherson - Simmons & Company

Dave Wilson - Howard Weil

Mike Urban - Deutsche Bank

Robin Shoemaker - Citigroup

Presentation:

Operator

Good morning ladies and gentlemen and welcome to the Q3 2009 Hercules Offshore Earnings Conference Call. My name is Glen and I will be your co-ordinator for today.

(Operator Instructions). I will now like to turn the presentation over to your host of today’s conference, Mr. Stephen Butz, Vice President and Treasurer of Hercules Offshore, please proceed.

Stephen Butz

Thank you Glen. Good morning. I would like to welcome everyone to our third quarter 2009 earnings conference call. Participating this morning from the Hercules Offshore management team are John Rynd, our Chief Executive Officer and President and Lisa Rodriguez, our Senior Vice President and Chief Financial Officer.

This morning we issued our financial results and filed in a 8-K with the SEC. The press release is available on our website at www.herculesoffshore.com. We will follow our normal format today, but before John begins his remarks, I would like to remind everyone that this conference call would contain forward-looking statements.

All statements other than statements of historical fact that address our remaining outlook for 2009 and beyond, activities, events or developments that we expect, estimate, project, believe or anticipate will or may occur in the future are forward-looking statements.

Forward-looking statements, by their nature, involve substantial risks and uncertainties that could significantly affect expected results and actual future results could differ materially from those described in such statements.

You can obtain more information about these risks and factors in our filings with the SEC which can be found on our website and the SEC’s website, sec.gov. John will begin the call with some general remarks and discussion regarding the outlook and Lisa will detail our third quarter financial results and provide cost guidance for the fourth quarter.

I will then have some closing remarks before opening the call for questions and answers answers. Now it’s my pleasure to turn the call over to John.

John Rynd

Thank you Stephen and good morning and thanks for joining us today. We reported our financial results before the market opened today.

Excluding non-recurring items, we recorded a net loss from continuing operations of $37.2 million or a $0.38 loss per diluted share for the third quarter 2009 compared with income from continuing operations of $31.9 million or $0.36 per diluted share for the third quarter of 2008.

Our reported results for the third quarter of 2009 included a total of approximately $9.0 million after tax of expense associated with the amendment of our credit agreement.

The decrease in our third quarter 2009 earnings per share from the comparable quarter in 2008 can be attributed to the weakest market conditions we've seen domestically in years and the lowest activity levels since the onset of the industry.

Domestic results where somewhat offset by solid performances in our international offshore and liftboat segments. As Stephen mentioned Lisa will talk to these items in greater detail later in the call and Stephen will discuss the significant headway we have made in strengthening our capital structure.

I will discuss the outlook in each of core segments, including our continued international expansion efforts and the early signs we are seeing that point to recovery in demand in our domestic offshore and inland segments.

While many industry observers are getting more constructive on the outlook for international jack-up markets, our optimism there is measured as we continue to believe even in the $70 to $80 a barrel of oil environment and perhaps with growing capital spending, with 33 of the 37 jack-ups scheduled for delivery through 2010 on contract.

In addition to the plus or minus 80 jack-ups currently idle in the international markets, this will push out any recovery of the utilization of day rates into 2011. Although rising demand could stamp further reduction in the utilization of day rates.

While we believe the number the new build orders for delivery in 2011 and beyond will get cancelled or be significantly delayed and as well we recognize a further number of the orders or for captive markets such as our Iran and China.

This is still a fair amount of capacity to work through prior to any significant rate improvements. That said we're well positioned and continue to have strong contract rig coverage with six of our 11 of our rigs contracted into 2011.

We recently secured a two well work over contract for Hercules 156 in West Africa, which operates, it may commence as early as mid November for about 30 to 40 days of work.

This program however is subject to Nigerian regulatory approval subject to during regulatory approval, which we understand as not yet been received and those may delay commencement.

The rig has been warm stacked since February so we will pleased, once it get back on the payroll. The Hercules 206 which has been in Mexico since late 2003 wrapped up its work with Pemex, two to three weeks early and we headed back to the U.S Gulf of Mexico for cold stacking.

We are close to finalizing extensions for the Hercules 205 in our platform rig 3 with Pemex for work through year end at approximately 44000 and 57000 per day respectively.

We believe platform 3 has good likelihood of remaining in Mexico with Pemex through 2010, but the outlook for the Hercules 205 remains uncertain. The Hercules 170 remains warm stacked in Qatar and does not have any likely near term opportunities, although we continue to market the rig in the region.

As I mentioned, our other six international jack-ups remains contracted into 2011. The demand for our domestic liftboat fleet has held up better than we thought it would throughout 2009, again highlighting a less cyclical nature of the liftboat business as compared to drilling rigs.

We don’t see any significant change in the fourth quarter 2009 and first quarter 2010 other than a normal seasonal weakness in demand related to rougher weather - winter weather that we typically begin to see develop in late November and sometimes last through February.

Our international liftboat segment has remained steady as well. Utilization has been strong for our larger liftboats and fairly low for the smaller boats whose marginally customer have been less active in the wake of the financial crisis.

As a result of that strong demand and good outlook for larger vessels, during the quarter, we decided to mobilize four of our large vessels, the Tiger Shark, Cutlassfish, Creole Fish and Mako to West Africa

Their voyage is underway and we are expected to arrive Saturday, October 31^st. The Cutlassfish has secured a contract, which is expected to commence mid-to-late November and last through mid-2010 at a day rate of approximately 40,000 per day.

We believe we will have a second vessel under contract by year-end and hope to secure contracts for the other two vessels in the first quarter.

We expect to spend a total of $8 million on the transport and various upgrades to the vessels. However, at these day rates - at the day rates we’ve been able to achieve in West Africa for our larger liftboats operating in the region relative to the day rates in the U.S. Gulf.

The move made good economic sense. It provides better revenue visibility, reducing the number of similar vessels operating in the U.S. Gulf where supply has been growing of late and furthers our international growth initiative.

While I take no pleasure in it, we’ve been right to be cautious on the outlook for domestic drilling over the past year. We believe shallow water; Domestic Offshore and Inland drilling activity hit a low not seen since the early days of the industry during the third quarter.

At one point during the heart of the hurricane season with natural gas prices at extremely low levels and gas storage headed toward record highs, the industry wide jack-up rig count declined to 14 and the inland barge count stood at four.

As a remainder in May of 2008, Hercules Offshore alone had 19 domestic offshore and 15 inland barges working. While it’s next to impossible to make up for the decline in revenue, we were extremely aggressive on reducing our cost structure.

We reduced our operating cost in these two segments by 54% or $52.4 million in the third quarter of 2009, relative to the year ago quarter. Now, while we're certainly not expecting a return to activity levels of 2007, early 2008 over the short-term, we do feel confident that we have seen the bottom in terms of domestic levels.

The worst of the financial crisis appears to be behind us. Capital markets have recovered somewhat providing an opportunity for our customers to replenish their liquidity.

According to the most recent EIA-914 report, natural gas production in July declined 1.7% month-over-month in the U.S, and consensus appears to be that these declines will increase into 2010.

Despite natural gases price has improved to $4.51 per MMBtu as of October 26 '09 from a recent low of $1.83 per MMBtu on September 4 and the strip was even stronger at $5.58 per MMBtu as of 26th of October.

Generally speaking our customer's confidence levels appears to be improving. These factors led to a sharp increase in bidding activity. In fact we submitted 21 bids in September and 11 bids thus far in October versus the anemic levels in July where we always submitted for domestic bids.

Additionally, the current total marketed supply in the U.S Gulf of Mexico is only 41. We only need to go back to the demand of six months ago in March of 2009 and the industry will be fully utilized in terms of marketed supply.

It is not hard to foresee a situation in the U.S Gulf where utilization could rise meaningfully in a relatively short time frame.

Fortunately, we have retained our experienced and skilled personnel; we have kept our stacked rates in class so when the time comes and it will come we will be able to capitalize on the opportunities they arise with minimal reactivation cost.

Since our August 20 fleet status report our average days of backlog for marketed rig has increased to 88 from 19 days for the domestic offshore and to 44 from two days for inland.

Their rates are still weak, but rebuilding the backlog is the first step towards improving margins. Our optimism is somewhat balanced by the fact that some of the improvement we are seeing maybe seasonal. Now that we are coming out of hurricane season and some of the demand could stem from related unspent budgets.

We will be watching the budget announcements of our customers closely as we move deeper into the fourth quarter, as this will give us better indication if the up tick will continue and provide a backdrop for improving results in the 2010.

In summary, the third quarter 2009 has proved to be our most challenging quarter-to-date. Although that's a dedication and hard work of our employees the supportive Board of Directors, our ongoing geographic diversification, the fruits of our cost and capital reduction efforts and the continued strengthening of our balance sheet, it would have turned out much worse.

Now as we look forward to the recovery, we believe all of these endeavors will put us is a stronger position to capitalize on a cyclical upswing as it occurs.

I will now turn the call over to Lisa to discuss our financial results in more detail.

Lisa Rodriguez

Thank you John. For the third quarter, we recorded a loss from continuing operations of $0.38 per share compared to a loss of $0.09 per share in the second quarter, excluding the effects of non-recurring charges in both quarters.

Since the second quarter, we’ve taken several initiatives to improve our capital structure including the amendment of our credit facility, which we discussed on the second quarter conference call, the issuance of common stock and a senior notes offering, which closed in October.

One of these initiatives, the credit facility amendment, resulted in the aforementioned non-recurring charge of $15.1 million on a pre-tax basis. Stephen will discuss all of these activities in more detail in his remarks.

Now I will address the segment results on a sequential basis looking back through third quarter compared to the second quarter. Our Domestic Offshore segment recorded an operating loss of $35.3 million in the third quarter compared to an operating loss of $20.2 million in the prior quarter.

The decline in this segments results was top line driven. Revenue declined by $18 million due to the lower activities during hurricane season with the number of operating days declining by 40% on a sequential basis. Our average revenue per day declined by 15% as we continued to work off older backlog that was at higher rates.

Total operating cost declined by $4.3 million or 10% as a result of our continued cost reduction effort. In spite of these efforts, we have maintained an 11 marketed rigs with crews to enable us to respond the anticipated post-hurricane season increase in activity, which we are currently experiencing.

The average operating cost per day of these marketed rigs was $29,000 in the third quarter. This was inclusive of Hercules 350, which has higher costs than the rest of the fleet. The $29,000 per day is fully burdened with shore-based costs. Our handrail costs do run lower.

The operating costs on our cold-stacked rigs was 6,400 per day in the third quarter. Our International Offshore operating income declined 17.3 million to $26.7 million after excluding the second quarter impairment charge related to the sale of Hercules 110.

Revenue declined by $11.7 million primarily due to downtime on Hercules 260 and 208, lower day rates on our rigs in Mexico, and Hercules 170 going off contract in early July. These were partially offset by Hercules 185 commencing its contract early in the third quarter.

Excluding the second quarter impairment charge, operating costs increased 5.1 million primarily due to operating costs on Hercules 185 and the costs associated with the leg repair on Hercules 260, offset by reductions on the recently stacked rig.

In our inland segment, we reported an operating loss of $13.5 million during the third quarter, versus an operating loss of 17.4 million in the second quarter. The demand for inland barges was weak again, but we did record a 116 operating days in the third quarter compared to zero operating days in the second quarter.

Operating expenses were 7.4 million compared to $8.9 million in the second quarter as we benefited the full third quarter from the cost reduction efforts we took during the second quarter.

We expect to see continued improvement in our inland segments results in the fourth quarter as we currently have all three of our marketed barge rigs working.

In our domestic Liftboats segment, we generated $950,000 of operating income, an increase from $200,000 in the second quarter, mainly driven by higher utilization which increased to 69% in the third quarter compared to 64% in the prior quarter.

Average revenue per day increased to $7,800 in the third quarter from $7,700 in the second quarter due to higher utilization on the larger class vessels.

The international Liftboats segment generated operating income of $2.6 million in third quarter compared to $8.4 million in the second quarter.

The lower result were primarily due to preparation cost on the four vessels that we are transporting from the Gulf of Mexico to West Africa and final shipyard cost on the Whale Shark, in the Middle East.

Average revenue pre day per Liftboat was $19,400, just slightly lower than the second average of $20,600. Operating cost increased to an average of $7,900 per day in the third quarter from $5,300 in the second quarter.

This was due to preparation cost that I mentioned on the four vessels we are moving and the shipyard cost in the Middle East. If you exclude the preparatory cost associated with the transport of the four vessels, operating cost were approximately $6,700 per day.

Delta Towing reported an operating loss of $3.9 million compared to the prior quarter loss of $3.1 million. As a reminder, Delta's results are directly impacted by the level of demand we're seeing in out domestic offshore and inland segments.

General and administrative expenses were $16.8 million for the third quarter; this is up from $15.5 million in the second quarter and higher than we were expecting due to a $2 million reserve for un-collectable accounts. Interest expense was $24.1 million in the third quarter.

As a result of our credit facility amendment our interest rate derivatives are no longer deemed hedges for accounting purposes. We therefore are now marking to fair value these instruments, which in the third quarter resulted in a charge to interest expense of $1.2 million.

Excluding the impact of marking our hedges to fair value, we expect interest expense to be approximately $23 million for the fourth quarter. Cash flow from operating activities was $32.7 million for the third quarter. This was due to strong cash flow generated from working capital of $31 million.

Capital expenditures and deferred dry-docking expenses were $13.4 million for the third quarter. As activity is increasing and AR will be rising, we do not anticipate continuing to have this level of positive cash flow from working capital.

However we do believe that capital expenditures and dry dock expenses for the fourth quarter will remain at the same low level as this past quarter, approximately $15 million. Now I'd like to provide some cost guidance for the fourth quarter.

We estimate on the domestic offshore operating costs that total cost will be between $37 million and $39 million for the fourth quarter. Our average daily operating cost per rig for domestic offshore will range between $29,000 and $30,000 for marketed rig, and this does include the Hercules 350.

We estimate that cost for the cold-stacked rigs will be approximately $6,500 to $7,000 per day, per rig for the fourth quarter. International Offshore operating cost are expected to be between $46 million and $48 million and this includes a one time $2 million demobilization expense for Hercules 206 and this will be reimbursed by Pemex.

For the Inland segment, we expect our daily operating cost per rig to be approximately $18,000 per day for marketed rigs. We expect the cost to be approximately $2000 per day on stacked barges.

This is essentially the same level of expense we had in the third quarter, though with higher activity we would see total cost in the division just slightly higher with the greater crewing levels on the working rigs.

In our Domestic Liftboats segment, we expect fourth quarter daily operating cost per vessel to be in the $3400 to $3600 per day range. We anticipate operating costs for International Liftboats to be approximately $17 million to $19 million.

And this is resulting from the four incremental vessels that will be in West Africa, and approximately $4 million that we will expense related to the mobilization of these vessels from the U.S Gulf to West Africa.

We expect general and administrative expenses to be approximately $14 million to $15 million in the fourth quarter. And depreciation and amortization expense to range between $53 million and $54 million.

At this point I'll turn the call over to Stephen.

Stephen Butz

Thank you, Lisa. My comments will be brief this morning but I would like to touch on our capitalization and liquidity. We continue to focus on strengthening our balance sheet during the third quarter and made great strides to that effect.

As we discussed during our last quarterly call in late July, we reached agreement with our lenders to amend our credit facility providing for significant covenant relief.

During the quarter, we also closed down a number of non-core assets sales including the Hercules 100 and 110 and a Delta Towing vessel that was foreign flagged and unable to work in the U.S.

In late September, we completed an equity offering proceeds of which are reflected in our cash balance at quarter end. Subsequent at quarter end, the underwriters completed a partial exercise of the over allotment option earned an additional 6.3 million in proceeds.

In total, the offering generated net proceeds of approximately $90 million. Most recently, in October, we completed the private placement of $300 million of 10.5% senior notes due 2017. The notes are secured, but the security is suspended once our other secured debt falls to a specified amount.

Previous activities, we have now reduced the balance on our term loan to approximately $484 million. A level of which the margin on the loan and any future borrowings on a revolver declines by 250 basis points bringing the current rate to 6%, down from 8.5% previously.

While the senior notes were issued with the yield to maturity of 11%, the stepdown in pricing that was achieved on our term loan actually will reduce our overall interest costs and help to improve our debt maturity profile.

Overall, the recent debt reduction coupled with the reduced margin on our term loan partially offset by the higher cost in the notes should have the effect of reducing our annual cash interest costs by nearly $15 million from what it would have been otherwise.

Looking back to the same time a year ago, the company had 1.16 billion in total debt and 2013 debt maturity of the 1.1 billion. Since that time, we retired approximately 280 million and our total debt now stands at 862 million. Through this debt retirement and the recent senior notes offering, we’ve also reduced 2013 debt maturities by $537 million or nearly 50% to $563 million.

Further we've accomplished all this, we'll continuing to maintain very strong liquidity. We currently have cash and equivalents of approximately a $120 million, after all the recent debt reduction versus a $106 million a year ago.

We also have a $165 million of remaining availability under our revolving credit facility for total liquidity of approximately $285 million. Foreign capital structure remains flavored with our improved maturity profile, lower interest cost and more flexible financial covenants we believe we are well positioned to capitalize on the upturn win in the curve.

With that we are ready to open the call for question, operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Jeff Tillery - Tudor Pickering Holt.

Jeff Tillery - Tudor Pickering Holt

John, with the recent pickup and activity in the Gulf of Mexico, how would you essentially contributing factors kind of down day rate, up cost post hurricane season. What do you attribute kind of the - what's most important, what least important in those factors do you think?

John Rynd

I think it's collectively all things kind of turning and it doing a 180 from where we are battling through the hurricane season. Obviously the people, given that the exposure to boost off like last year right us into drill this season.

So there was some of that pent up demand like the capital markets being open and being able to fill their [coppers] again with liquidity and I think as important the positive outlook on the forward curve on natural gas and then you layer that in with recalibration of all the service cost collectively it's working.

Jeff Tillery - Tudor Pickering Holt

The 11 available or marketed rigs you have in the Gulf of Mexico, do you have full crews for all those and tomorrow you could put them to work?

John Rynd

That's correct.

Jeff Tillery - Tudor Pickering Holt

Chevron signed up a nice term on several rigs, do you see other opportunities for term out there or is that more of a one off again?

John Rynd

No, I think we've seen other opportunities, another major, a large independent public EMP company that has a large acreage position in the Gulf of Mexico is currently in the market looking for three jack-ups starting kind of mid-January for plus or minus 180 days plus options.

Another large public independent EMP has a nice kind of eight months program that's out in the market. So it's been a good mix, I think that's what pleased us, as it was an all 30-day jobs. There has been a balance of the term.

As you know you have to get backlog before you have any chance to increase margins and by securing, in our example the three rigs with Chevron, we talked in our opening comments there is a 41 fleet, jack-up fleet marketed supply, well really there is 38.

If you take the three to the other operator and other one all of sudden, the available marketed supply is 33, 34. So another way to take the capacity off the market is to go long.

Jeff Tillery - Tudor Pickering Holt

Sure and then my last question around the marketing for the Mosvold rigs. Could you just give some color on, on what you are seeing out there and should try to put those result forward?

John Rynd

We have mutually agreed with Mosvold to terminate our agreement. They are in negotiations with the shipyard on some issues. So the timing of delivery of the two jack-ups are in question.

And we just mutually agreed that given the uncertainty on delivery, it was tough to market to a date. We have very good relationship with Mosvold. It's just an unfortunate situation. So we've agreed to move on. If the situation gets resolved, we are back in.

Operator

Your next question comes from Igor Levi - Morgan Stanley

Igor Levi - Morgan Stanley

So it looks like you have two idle non-cold stack jack-up rigs in the Gulf of Mexico. So I was just wondering at what day rate would you be willing to start reactivating cold-stack rigs?

Stephen Butz

It will depend on which rig because our reactivation cost on the cold-stack rigs range probably from a low of $500,000 to upwards of $3 million. So on the rigs that have a lower cost, marginally better than where we are today; if there is time associated with it.

We would not be as opportunistic on the 30-day job on a rig we’re deploying new capital. So we have some surety of pay back, and that incremental capital will do it. So marginally better today.

It is going to be a situation-by-situation decision as we look at what's the program, are we seeing continued strength throughout 2010. Even if we don’t have the term all those factor will drive the decision to or not to reactivate cold-stack rigs.

Operator

Your next question comes from James West - Barclays Capital.

James West - Barclays Capital

John, given the pickup obviously that we are seeing in the marketplace and the dynamics around the number of rigs that are cold-stacked and not marketed, where do you think demand needs to go before you can get some pricing leverage?

John Rynd

I think it will be a combination of not just how many rigs are working, let's a say at 90% or 85% utilization mark of the currently active 41 rigs, it'll also had to do with what’s the backlog of that fleet if that fleet pays very short i.e. if you look on a 30-day look forward.

And you have 90% utilization, but you look out 45 to 60 days and utilization is 50%, it's going to be tough to reactivate any incremental rigs or push rates as everybody is going to be re-pricing.

But I think we've got a run up and get to the current marketed fleet of 41 fairly well contracted, 85% to 90% before you'll see potential (inaudible) incremental capacity unless a rig has a shallow draft capability and there’s a shallow draft program that gives it a niche that might be an opportunity to bring the rig out of cold-stacked maybe kind of "ahead of itself" but I think that’s where we are right now.

James West - Barclays Capital

Are you seeing those opportunities develop now?

John Rynd

A few.

James West - Barclays Capital

And then just one question on the barge business, you have all three of the barges out there marketed, working right now, that market probably gets better along with the jack-up business, do you opportunities to un-stack barge rigs?

John Rynd

Well, the first thing we’re going to do is if you've noticed we've increased our backlog from two days, the 44, so we want to keep focused on the existing three rigs' backlog. But yes we’re pursuing opportunities for fourth or fifth, but again we want to take care of the three we have.

We don't have quite a visibility as far as the duration in the barge business that we do right now of the jack-up side, the other term with Chevron and some other programs that we’re looking at, so its building but it's not quite where the domestic offshore is.

James West - Barclays Capital

Is the barges, are they similar to the jack-ups where at least the first few will be minimal cost to reactivate.

John Rynd

Yes, we have quite a few that are minimal cost.

Operator

Your next question comes from Arun Jayaram - Credit Suisse.

Arun Jayaram - Credit Suisse

Why don’t you, perhaps give us or shed some light on the type of opportunities you are seeing from the demand perspective, is this open water drilling in the gulf development work or what type of work are you seeing operate first at (inaudible)?

John Rynd

Little bit about actually. It's been a good mix, obviously you've seen our propensity go to existing structure, existing infrastructure around the structure so the actual cost to get in the pipeline is less but we have drilled some exploration wells also.

Arun Jayaram - Credit Suisse

From a type of rig standpoint, has the demand been focused more at the mat rig level or are you seeing similar opportunities perhaps for some of the independent leg rigs.

John Rynd

Its across the board, I will tell you what's interesting though, if you go back to 2005, to the jack-up fleet and I don’t have the overall numbers of the fleet but it was about a 55% dominated market by independent leg rigs.

And if you go to the current fleet of the active fleet, it's dominated over 55% by mat rigs. So you're naturally seeing the mat rigs get the first look since we have a better market share. Makes sense?

Arun Jayaram - Credit Suisse

Does make sense. The, I guess one of your peers had commented that, obviously the Pem extend are taking a little bit longer than we all anticipated that there is a meeting coming up in November and perhaps we could set the timing perhaps, later this year or early next year in terms of that. Is that what you’re seeing today in terms of Pemex?

John Rynd

Yes, it continues to get pushed to the right as far as the incremental activity and I think that everybody that’s running a jack-up down there has faced similar frustrations as we have of trying to get a clear read on not only what’s coming in 2010 but what’s the state of play on the current rigs down there as we go back and forth.

As we talked on the second quarter call, the 206, we received notice of early termination in April of about 80 days early, come back, and then within 10 days we reinstated that contract.

We never came off contract but they reinstated that contract and gave us an extension. So that’s the kind of the big and the little of dealing PMEX, is they’re trying to - in their defense they’ve got a big, massive operation and they’re going through their budget process.

So it takes a while to get some clarity.

Arun Jayaram - Credit Suisse

And just a couple of thoughts, perhaps from you John on the international jack-up market, there has been some commentary suggesting that we have seen international rates plateauing depending on market in the 85 to 120 range.

Do you think are you optimistic that that kind of range could represent the plateau or do you see perhaps, some risk to those numbers given some of the capacity coming etcetera?

John Rynd

I think the risk to a significant step down is relatively low because I do think even in the international market we have probably seen the worst of the financial crisis, oil going to $33.

But the big question remains, as I stated in the prepared remarks, you’ve got a fair amount of capacity coming to the market that’s un-contracted through 2010. You’ve got roughly 80 jack-ups around the world that are un-contracted.

We've got to see some demand come back to market and we think that we’re going to see a relatively flattish environment in 2010, maybe some potential upside in 2011. The rates have held in there, but you still got more capacity to come, so you just go to see how people are going to behave.

Operator

Your next question comes from Pierre Connor - Capital One Southcoast.

Pierre Connor - Capital One Southcoast

First on to you and your team congratulations on significant capitalization and liquidity improvements over the quarter. John first on, Lisa mentioned cost, so maybe you (inaudible) you said that handrail cost went well below. Give us a feel for what the labor handrail cost is currently?

John Rynd

They’ll range anywhere from 24 to kind of 29ish and really the variants will depend on -- really the big variants we face is the R&M. If we have some unscheduled maintenance it will drive it to the higher side.

But the smaller the rig, the lower the cost, the bigger the rig, the higher cost, just because of people and an overall maintenance standpoint. But the real variable is kind of what your month-to-month maintenance -- will drive that variance.

Pierre Connor - Capital One Southcoast

Are you able to access any spare parts off of cold-stack rigs in order to minimize that R&M exposure or is that really even an option right now?

John Rynd

No, we could do that Pierre. We don’t need to do that. We loan spare parts in our [homer yard]. So, we’re not ordering any new, we’re taking out of our existing inventory at homer.

Pierre Connor - Capital One Southcoast

On the inland barge side, we've seen the permits tick-up there as well, and but I wanted to get your take on the make up of those permits. Are you seeing anything with any depth to it that would, you spoke of trying to add some backlog more than just jobs, but actual deeper permitting?

John Rynd

It's modest as you know; I mean (inaudible) has done a very good job in the Inland waters. Energy 21 it is contemplating a well or two, others, but it's been the first push it was an old driven push. I think it, when the rig count, the Inland barge count got to about 15 active barges I think about 60% of those were working on old related projects, which make sense in the long run, costs were down.

It really, it took probably 45 to 60 days longer to come to the market that we had anticipated once all recovered.

Pierre Connor - Capital One Southcoast

So if I could put you on the spot a little with what do you'd expect utilization to be, can you envision these three with the permitting and sort of what's on the horizon out there. How far out these envision beyond what you've got there printed on back log?

John Rynd

Now we currently have 44 days of backlog that didn't quite get us through this year right, but we are seeing enough enquiries where we think that we can maintain the three rig fleet at greater than 80%.

You never going to get in a well-to-well environment, it's tough to get the 100% because you are going to get a week between wells extra and as I mentioned the fourth and fifth rig going back to work, we're going to get the three that are working on solid ground before we look at that.

Pierre Connor - Capital One Southcoast

Right and then last one related to the same question on the cash, the handrail cost on the barges, I understood that daily OpEx there includes maybe not as much of shore-based costs, but where are the cash costs there?

Lisa Rodriguez

They really run in the high teens.

Operator

Your next question comes from Geoff Kieburtz - Weeden.