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Rowan Companies, Inc. (NYSE:RDC)

3Q09 (Qtr End 9/30/09) Earnings Call Transcript

November 03, 2009 11:00 ET

Executives

Suzanne M. McLeod - Director of Investor Relations

W. Matt Ralls - President and Chief Executive Officer

William H. Wells - Vice President, Finance and Chief Financial Officer

Mark A. Keller - Executive Vice President, Business Development

Analysts

Collin Gerry - Raymond James & Associates, Inc.

Robin Shoemaker - Citigroup

Daniel Boyd - Goldman Sachs

Michael Urban - Deutsche Bank Securities

Ian MacPherson - Simmons & Company

Arun Jayaram - Credit Suisse

Jeff Tillery - Tudor, Pickering, Holt & Co., LLC

Kurt Hallead - RBC Capital Markets

Judson Bailey - Jefferies & Company, Inc.

Mark A. Keller

[inaudible] We have seven jack-ups in the region with a contracted utilization of 71% at an average day rate of approximately $108,000. Over the last quarter, multiple projects have been deferred or canceled due to weak gas prices and the uncertainty that surrounds hurricane season. However we are now seeing a slight increase in activity on the U.S. Gulf of Mexico Shelf and we are optimistic that we will be able to put our idle jack-ups back to work by end of the year or early 2010.

Next I will cover the North Sea, supplies 35 jack-ups while demand is currently at 28 rigs and contracted utilization is 80%. Rowan has two Super Gorilla Class jack-ups in the region. The Gorilla VI has completed modifications in the shipyard and will commence operations at the end of the week in Norway for BG $375,000 per day, which includes amortization, modification fees. The Gorilla V continues its contracts with TOTAL at $180,000 per day. Short term outlook for the North Sea is concerning. However we are encouraged due to the 10 active tenders we have in-house that require high spec jack-ups for projects of 2010 and beyond.

Moving on to the Middle East the supply in the region is 114 jack-ups while demand is currently at 89 rigs and contracted utilization is 78%. Iran has seen a recent uptick in demand and we are hopeful that it will absorb some of the excess capacity in the region. Rowan has nine jack-ups in the Middle East. Five of our units are long term contracts at an average day rate of approximately $167,000. The remaining four are currently in the shipyard undergoing life enhancement modifications and upgrades.

As mentioned in our previous call, our strategy is to take advantage of any extended downtime to upgrade our fleet to meet the demands for the more challenging growing requirements. However idle rigs are being marketed worldwide. Despite the current excess capacity in the Middle East, we're actively tendering for the multiple projects in the region. In addition Saudi Aramco has indicated that they will tender for two to four high spec gas rigs in the near future and we will be aggressively pursuing these opportunities.

Let’s take a look at Mexico; supply in the region is 34 jack-ups while demand is 30 rigs with a contracted utilization of 88%. PEMEX is one of the most active operators in the world and we are pleased that the Gorilla IV is working for them on a 785 day contract. PEMEX has indicated that they will begin a high grade of jack-up fleet over the next several months, so better need the challenges presented by drilling prospects in the future.

PEMEX has forecast to tender for additional jack-ups in coming months to offset high depletion rates in their major production areas. We are hopeful that we will be able to secure additional contracts in mobilized units from the U.S. to Gulf of Mexico.

To briefly summarize the remainder of our fleet the Rowan Gorilla VII continues operations with Cabinda, Gulf of West Africa until second quarter 2010, at a day rate in the low 330s. We are currently in discussions with multiple operators in the North Sea regarding the Gorilla VII for [ph] HPHT opportunities at the conclusion of this contract.

In Eastern Canada, the Gorilla III will commence operations with EnCana this week at $285,000 per day for approximately 200 days, and we believe there maybe other work for this rig in this market following the EnCana contract.

As I mentioned earlier the J.P. Bussell mobilized into Egypt for a contract with Shell for approximately two years of work in the low 180s. We are pleased to be entering strong 15,000 pound [ph] BOP environment we look forward to future opportunities for additional Rowan rigs in this high spec market. Currently we have two active tenders in this region.

Now turning to our onshore division. We have a fleet of 32 land rigs located in Texas, Louisiana and Alaska. Currently 63% of our fleet is contracted at an average day rate of approximately $20,000. We currently have 11 rigs running in the U.S. shale and gas play.

We target these areas, these are the requirements for 2000 horsepower high spec rigs that can drill these challenging oils. We are encouraged by the recent increase and activity. As Matt mentioned operators have taken advantage of the availability of rigs the high rigs and fleet – the high spec rigs which are safer, automobile and more efficient. Over the coming weeks Rowan’s fleet of 19 high-spec rigs will be contracted in 100% utilization.

This concludes our market overview. I’ll now turn the call over to Bill Wells.

William H. Wells

Thank you, Mark, and good morning everyone. As we noted in our press release, our third quarter 2009 results were aided by a favorable tax adjustment that followed from a recent third-party tax case. Based on the rule into that case, we have concluded that certain of our foreign contracts are eligible for exclusion from U.S. taxation. We have estimated the current prior year tax benefit to be approximately 25 million which yielded 17 million or $0.15 per share increase in third quarter earnings. We have reported an eight million or $0.07 per share tax benefit from this matter in the second quarter.

We expect to claim a total benefit of approximately 75 million which increased the September 30 balance of other assets. Under prevailing accounting rules we’ve recognized only one-third of this amount in earnings.

Looking in our drilling operations, our third quarter 2009 revenues were $258 million, down by 28% from the prior year, and by 19% from last quarter with both decreases resulting from reduced domestic and Middle East drilling activity between periods. Partially offset by our recent start-ups in Canada and Mexico.

As of October 20, the date of our most recent fleet status update, our backlog of drilling contracts totaled approximately 1.3 billion including 250 million related to land drill. We expected about 15% of that backlog will be realized as revenue during [ph] the minor of 2009, 60% were currency in 2010 about 18% in 2011 and the balance in 2012.

Our third quarter drilling expenses of 121 million were 26% below the prior year, 11% below last quarter, and below end of our previous guidance. Both comparisons showed reductions in labor and related personnel costs, through continued optimization of crew levels and lower maintenance and reimbursable expenses.

In addition several shipyard upgrade projects absorb certain personnel-related costs for many idle rigs. We expect that our fourth quarter 2009 drilling expenses will be in the range of $126 to $130 million, an increase from the third quarter due to startup of drilling operations in Norway and Egypt. We expect the reactivation of certain Gulf of Mexico and U.S. land rigs. The conclusion of most rig upgrade projects and a full quarter of activity in Mexico. Total 2009 drilling expenses should come in around 15 to 16% or almost a 100 million below 2008 levels.

Turning to our manufacturing operations our third quarter revenues total 219 million including 84 million of arms length sales to our drilling division. External revenues were 135 million, a decrease of 16% from the last quarter and 21% from the prior year. Our Drilling Products and Systems segment contributed 178 million or 81% of the total revenues including sales to our drilling division. External revenues were 93 million, featured 65 million from rig projects and another 12 million from drilling equipment.

Our Mining, Forestry and Steel Products’ revenues totaled 42 million, including 15 million from shipments of mining and forestry equipment and 6 million from steel plate. Our manufacturing margin was 13% of revenues during the third quarter up from 12% in the prior year and 9% last quarter. Our second quarter 2009 margins had been reduced by 4 million of additional warranty cost and 2 million in purchase cancellation fees. Margins are heavily impacted by sales mix with after-market margins typically higher than those for original equipment.

In the last two quarters our manufacturing margins have been adversely impacted by poor results on land rig sales which have also contributed the larger share revenues. Land rig sales totaled 36 million, or 27% of external revenues in the third quarter compared to 41 million and 26% in the second quarter.

On a positive note our combined after-market parts and service business, which typically averages low to mid 40s gross margins, provided 30 million or 22% of external revenues during the third quarter compared to 31million and 19% in the second quarter and are on track to set a record in 2009.

In addition our offshore kits which typically yield a low 30s gross margin, provided 29 million or 21% of external revenues during the third quarter compared to 26 million and 16% in the second quarter.

Our quarter-end manufacturing backlog was 781 million down by about 17% over the past three months. The external backlog of 440 million, included 247 million related to offshore rig projects, 107 million related to land rig projects, 21 million to mining and forestry equipment, 29 million of ad-hoc drilling equipment with the [ph] remainder of primary parts and other components.

Our estimated backlog of risk totaled 51 million or 12% of our external backlog at September 30th. We booked approximately 56 million of new orders in the third quarter or around 40% of external revenues during the period with mining equipment leading the way. Orders for three mining loaders were booked during the quarter two of which were the L2350 model, the worlds largest. Another five loaders were booked in October for delivery in 2010 including one L2350 and three L1850’s. [Ph] Depending on the timing of shipments, we estimated that about 20 to 25% of our external manufacturing backlog at September 30 will be realized as revenues in the fourth quarter with another two-third’s expected in 2010 and the balance in 2011.

Thus we expect to exceed our earlier guidance [ph] for strong revenue of approximately 465 million. Most of the top line outperformer should come from land rig sales and that increased concentration is expected to hold our 2009 margin to its current level of 13 to 14% of revenues. Our third quarter depreciation expense totaled approximately 44 million which matched our previous guidance and was up 3% from last quarter and 21% over the last [ph] two year primarily due to rig fleet additions over the past 12 months. Our latest estimate for 2009 depreciation is in the range of 170 to 171 million, including approximately 43 to 44 million in the fourth quarter.

Our third quarter SG&A expenses totaled 24 million, slightly below our previous guidance in the last quarter and down 13% from last year, primarily due to reduced compensation related cost. Head count reductions and other cost cutting initiatives are expected to yield an overall 12 to 14% reduction in 2009 SG&A cost compared to 2008 to a range of 99 to 101 million for the current year including approximately 25 to 27 million in the fourth quarter. Following our [indiscernible] debt offering interest expense net of interest capital has increased to approximately 3.5 million during the third quarter and is expected to be about 5 million in the fourth quarter.

Property and equipment additions totaled 156 million in the third quarter which included 32 million for our second and third 240-C jack-up’s, 79 million for EXL jack-up’s and 45 million for our existing fleet including contractually required upgrades. Our fourth quarter property and equipment additions were projected at approximately 215 million including 181 million to the [ph] new build jack-ups and 22 million for existing rates. In year 2009 we expect to have approximately 433 million remaining to be spent under our new build program. That completes our prepared remarks, [ph] operator we will now open it up for questions.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen. At this time we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Collin Gerry with Raymond James. Please proceed with your question.

Collin Gerry - Raymond James & Associates, Inc.

Hey, good morning guys.

William H. Wells

Good morning, Collin.

Collin Gerry - Raymond James & Associates, Inc.

I hate to open up the questions with a tax question, but did I hear you right that there is an additional 50 million of expected tax savings going forward?

William H. Wells

Well, Collin that’s a potential recovery and we’re going to climb to that – to that 475 but under the accounting rules we only recognize about a third of the benefits there.

Collin Gerry - Raymond James & Associates, Inc.

On the income statement you are going to recognize a third?

William H. Wells

That’s correct, so there is 75 sitting on the balance sheet offset by about $50 million sitting on the liability side.

Collin Gerry - Raymond James & Associates, Inc.

Okay. So I mean how would you [ph] in vision that [indiscernible] pretty hard to guess but how do you [ph] invasion in the income statement, is that something we see in couple of quarters or the next six quarters?

William H. Wells

Well, I think it is a long term proposition Collin, it’s hard to speculate on what we collect and when but it is probably closer to six quarters than two for sure.

Collin Gerry - Raymond James & Associates, Inc.

Okay. That’s helpful. Going back to another comment you made today here right at 2009 was a record year for after market and in [indiscernible]?

William H. Wells

It will be, yeah we are tracking ahead of plan substantially, and ahead of our previous record and we fully expect to set a new records this year.

Collin Gerry - Raymond James & Associates, Inc.

Well, I just seem like an interesting year to be [indiscernible] on the positive side. I guess, walk us through may be some of the changes that have happened in the recent years over [indiscernible] a record year for after market.

William H. Wells

You are [ph] talking of the after market parts.

Collin Gerry - Raymond James & Associates, Inc.

Right. I mean I guess, is that more driven by the mining side or is it – I just think with the land rig count being as low as it is – it seems hard to imagine that after market would be that strong?

William H. Wells

First of all it is [ph] purely emotionally in mining, but there is some in drilling but keep in mind that in a down market people do spend more money to repair as [ph] suppose to new [ph] bill so it is not too unusual but let me also say that this is an area of focus and has been for number of years. So if you track us in that area we have been setting new records for several years and we continue to keep this as a strategic initiative and [ph] that going forward is our pulling [ph] step to set another record next year.

On that note Collin, it’s every year we have a larger install base on both sides. And so, you are expected we have [ph] higher after market part of sales every year.

Collin Gerry - Raymond James & Associates, Inc.

Right right. Okay, then the last one from me, sounds like [ph] somewhat over some of your competitor are saying we are encouraged by what we are seeing in the jack-up market although we don’t see anything really near-term going to change much on the pricing side. I guess in the Middle East you mentioned [indiscernible] with a couple of tenders that you are going to be bidding on, is there any other activity in the Middle East in terms of tendering an outside of Iran obviously but anything [indiscernible] about Qatar, UAE or anything along those lines.

William H. Wells

However, we have right now, we have three active tenders, couple of multiple rigs in the Middle East, we expect some additional tenders in the region by the end of the year, early next year. As I mentioned in my prepared remarks, Saudi Aramco has indicated that they are going to tender for two to four gas rigs which are [ph] hospec two million pound [indiscernible] rigs [indiscernible] currently working in their gas – on their projects today were the Tarzan Class rigs. And also they are indicating that they will tender for three additional oil drilling rigs against three incumbent rigs to [ph] high grade some of their fleet.

The timing of those tenders, I am not exactly sure – they are saying in the next few weeks, but the exact timing I am not sure, but we do have multiple tenders in the region.

Collin Gerry - Raymond James & Associates, Inc.

Okay. All right. Thanks guys, that’s it for me. I will turn it over.

William H. Wells

Okay.

Operator

Thank you. Our next question comes from the line of Robin Shoemaker with Citigroup. Please proceed with your question.

Robin Shoemaker - Citigroup

Thank you, good morning. Matt, I want to ask you in terms of Gulf of Mexico strategy for putting rigs back to work, can you give a sense of what the criteria is? You show one rig haven’t gone back to work to Louisiana in the mid 30s, I guess for a couple of months contract. What are you incurring in terms of expenses to put this rig back to work and kind of what’s the minimum criteria that you – if you could share that with us?

W. Matt Ralls

Well, may be if I could just say that it’s a wrong strategy, I mean we have the avoided work [ph] saying hurricane season where there was not much margin and we were in sort of marginal water depths. We would likewise avoid work – we [ph] wouldn’t have gone back in the 60 days job if we didn’t think there was going to be work behind it or actually seeing quite a bit of interest level out there. So, if it were a situation where we were going to [ph] crew-up, go back to work for new [ph] vertical margin and then just [indiscernible] staff again, we clearly wouldn’t proceed on that. We are expecting that we are going to be able to put these low range jack-ups in our fleet of standard jack-ups, the three slots back to work at reasonable margins. We still would like to get essentially all of our lesser or standard jack-ups out of this market and into other markets which I guess is pretty much the same objective you heard from the other contactors. So it’s really complicated competition in those markets.

Robin Shoemaker - Citigroup

Okay. So this initially at least the rates are likely to be similar to the one you put back to work already in the Louisiana?

W. Matt Ralls

I don’t think – well I’ll let Mark comment on that.

Mark A. Keller

When we contracted that rig, Robin, we – as Matt have said, we want to put it out – it was with a very good client of ours who has what they believe multiple wells to drill throughout the rest of the this year and then in 2010. We have since been in contact with several operators. We have a – we are in discussions and have a commitment on the one of our other jack-ups is substantially higher rate than that and we are in discussion with another operator for as much as a year’s worth of work for two of the slot rigs and that would be at a considerably higher rate.

Robin Shoemaker - Citigroup

Okay.

Mark A. Keller

[Ph] Louisiana.

Robin Shoemaker - Citigroup

Okay. [Ph] That’s good. Okay, thank you. Let me ask you on the Middle East situation. You’ve addressed that topic but you have a couple of rigs that are working for Maersk and its contracts expire early next year. I am sure you have had discussions with them about what their continuing needs might be and I’m not aware as to whether they foresee a need for addition – for keeping those jack-ups or whether those are likely to become available to pursue other opportunities.

Mark A. Keller

Robin, we’ve been in constant communication with Maersk. We are in an active tender situation with them for additional rigs. It’s our understanding today that their plans are to keep the two rigs, the Rowan-Paris and the Gilbert Rowe throughout 2010, they have additional work at their Al Shaheen project that would carry those rigs throughout 2010 and we are very hopeful that we will be successful on the multiple rig tender that we have with them currently today.

Robin Shoemaker - Citigroup

Okay.

Mark A. Keller

Those are additional rigs.

Robin Shoemaker - Citigroup

Okay. So there – another one besides what you mentioned was Saudi Aramco has tenders in the market in the Middle East, the other one would be this company.

Mark A. Keller

Yes.

Robin Shoemaker - Citigroup

Yes.

Mark A. Keller

And others, and others, yes.

Robin Shoemaker - Citigroup

And others. Okay. Alright. I appreciate it. Thank you.

Operator

Thank you. Our next question comes from the line of Jeff Tillery from Tudor, Pickering, Holt. Please proceed with your question.

Jeff Tillery - Tudor, Pickering, Holt & Co., LLC

Hi, Good morning.

William H. Wells

Hi, Jeff.

Jeff Tillery - Tudor, Pickering, Holt & Co., LLC

Just to stay on the Middle East for a second, does the timing of the tenders that you see today, doe that put – if you are among the winning bidders does that put those rigs back to work in the next couple of quarters or is that more of a mid 2010 event?

William H. Wells

They very can, some of them, we were hopeful would start in the fourth quarter, it looks like now some of them have been delayed in the first quarter 2010 when they would commence, the rest of them, the other ones that I discussed Ramco those would probably be a mid 2010 event, the future tenders, but the tenders that we have in house that we currently have active, they are first quarter 2010 start.

Jeff Tillery - Tudor, Pickering, Holt & Co., LLC

Great. And for the gas rigs for Ramco, the four rigs you have in the region are idle. Are those capable of meeting the requirements or would that be rigs coming from elsewhere?

Mark A. Keller

We haven’t seen the tender requirements but from what we have seen in the past and in our discussions they would come from – they would be [indiscernible] stack rigs that would come in from the outside market.

Jeff Tillery - Tudor, Pickering, Holt & Co., LLC

Okay. And then my next question, just broadly thinking about moving rigs between markets and what the economics of that is toady, do most get paid partially by the customer, fully by the customer, can you just talk a little bit – about that more broadly?

William H. Wells

It depends on the operating area, it depends on the customer; we tend to look at it if the term warrants it, long enough term contract and it’s a client that has historically a lot of work that can keep the rig for a number of years then we will review how much of that we would absorb internally rolling, sometimes clients will pay you partial mode or full mode, it just depends on the requirement, if they need a Super Gorilla or something that’s a specialized piece of equipment they’d be more inclined to probably pay some mode than projected; it also depends on what other available equipment is in that market so, that’s right, if we are bidding into a market where there are other rigs that can do the work you know, in those situations we’re likely not to get a move or maybe we get a paid a mode or part of the mode if they don’t continue past the initial contact [indiscernible].

But if you are bidding into a market where there is no available equipment then we are obviously competitive with every other group that’s out there we are likely bidding a mode.

Jeff Tillery - Tudor, Pickering, Holt & Co., LLC

That’s helpful and then and then one last question just on the Gorilla VII, it’s been while since we have seen a [indiscernible] of that type, so can you give us a feel for just I mean, even if it’s just broad, 50 or $100, 000 thousand range of where you see the day rate for a rig like the Gorilla VII with a roll off contract?

William H. Wells

Jeff, I’d rather not discuss that, we have several active tenders right now for that rig in particular and other Super Gorilla Class rigs and I would just rather not go into that discussion.

Jeff Tillery - Tudor, Pickering, Holt & Co., LLC

Sure. Thank you very much.

Mark A. Keller

We’ll talk to you next quarter about it.

Jeff Tillery - Tudor, Pickering, Holt & Co., LLC

I understand. Thank you.

William H. Wells

Thank you.

Operator

Thank you. Our next question comes from the line of Kurt Hallead with RBC Capital Markets. Please proceed with your question.

Kurt Hallead - RBC Capital Markets

Hey, good morning.

Mark A. Keller

Hi, Kurt.

Kurt Hallead - RBC Capital Markets

Hey, Matt, you know you have been kicking around the offshore drilling business for quite sometime, trying to gauge myself and I want to kind of draw on your experience and how you would characterize this recovery that we are in at this point. Can you compare it to other cycle periods, what do you see that’s similar, what do you see that’s different and how do you see the pricing power recovery occurring as we evolve and can you just kind of talk through some of that?

W. Matt Ralls

I can try Kurt, it’s – let’s say that there is each of the downturns and recoveries in my experience has been somewhat different from the others in the past and we used to say years ago that rates went up $1000 at a time it came down $10,000 at a time, but really that was just the imbalance in the supply and demand and we actually saw it almost the other way around in the very strong upturn after 2003 when rates went up 10,000, $20,000 at a time for jack-ups. So what I would say right now is that I sense, my personal sense now it’s – I don’t have a lot to point to you but just that data points we have got, I sense that there is going to be a fairly strong recovery in spending and the hard part about this recovery is going to be the capacity.

There’s been give or take something in the high-20s in new rigs delivered this year and again next year and then that many again over the following two years, so that part is a little bit hard to sort out and it – what really it’s going to depend on is – and we are doing some work on this right now, but the extent to which the new tenders have much higher specifications than they’ve had in the past. That’s really going to drive what happens in, if you will, our end of the market which is on the high spec premium end of market where we have got highly differentiated equipment. If all the recovery were come in Gulf of Mexico with 10,000 [ph] per wells that doesn’t look good for day rates. What we are seeing is strength in markets where they want higher spec equipment, which I think could tighten that end of the market more quickly. I don’t know if that helps or not but –

Kurt Hallead - RBC Capital Markets

Well, that definitely adds some perspective and maybe just as a kind of follow up to that, when you look at the – if I heard you correctly did you say, there is something like, there were 30 something tenders for 2010, is that right?

Mark A. Keller

We have 19 active tenders right now, which is 23 rigs. And we are expecting another group of tenders that would be an – approximately another 30 rigs.

Kurt Hallead - RBC Capital Markets

And then just, if I may finish on this one is, you referenced that you are getting some demand for multi-year type terms, once again do we think about it in the context of yeah ok, your operators now kind of see where [ph] all places are, where the cost basis is, clearly they are trying to lock in day rates at this relatively low level for two years. Is there going to be any optionality in these day rates, as the market improves?

Mark A. Keller

What we are seeing right now is that the tenders vary, they vary from one year to two years, some of them are of three years but a lot of operators are trying to get you to price options. We have resisted that for the most part and we have just said in our tenders we’ll get a primary term and then on our options there’ll be mutually agreed rates. To touch on what – oops, sorry.

W. Matt Ralls

Just before you lay that point let me hasten to add to that I mean there are – this part of the market the operator has more cards than they had in the upturn before and sometimes to get attractive opportunities, you do have to be willing to give price options.

Mark A. Keller

That’s right.

W. Matt Ralls

We don’t like them at all, we avoid them to the extent that we can, but sometimes unfortunately we’re forced into it.

Kurt Hallead - RBC Capital Markets

It’s fascinating to me that the operators seem to be taking it easy on the industry, and you guys are able to get some – actually some pricing improvement off the lows. And if there was as much excess in the market I wouldn’t think that you’d be getting more pushback on pricing. So I don’t know if you guys have got any color on that or maybe just more of an observation on my part, seems like you guys have little bit more sway than you might otherwise in a similar downturn, any color on that for me?

W. Matt Ralls

Well I would agree that that’s the case in the higher end equipment so I mean that’s, we are once again extremely well positioned there because we do have some of the most capable equipment that’s in the highest demand, so it gives us little but more flexibility to push back on some of those issues.

Kurt Hallead - RBC Capital Markets

That’s great, I really appreciate it. Thanks.

Mark A. Keller

Thank you.

Operator

Our next question comes from the line of Daniel Boyd with Goldman Sachs. Please proceed with your question.

Daniel Boyd - Goldman Sachs

Hi Thanks. I’d just like to follow up on a specific rig; the Bob Palmer. What opportunities – are you seeing any term opportunities for that rig and can you comment on maybe range of day rates?

W. Matt Ralls

Before Mark answers, let me say what I [ph] – tell our audience what I often say; that may be the most desired rig in – maybe in all of contract drilling, but certainly on the jack-up side of the business. Mark? Now back me up, Mark.

Mark A. Keller

To follow on my boss’ comment – no, we have had a lot of enquiries on the rig. We have tendered the rig overseas, particularly in the North Sea. We talked to some people here in the U.S. Gulf of Mexico about the rig [ph] on the gas. But to answer your question, we are being – we are bidding the rig on multi-year contracts outside of the U.S. Gulf of Mexico and as far as day rates, I’d rather not go into that for obvious reasons, of the competitiveness of the market.

Daniel Boyd - Goldman Sachs

Yeah, I understand. And then on this, the four rigs that are on the shipyard in the Middle East, you mentioned they’re doing life enhancements, but also some upgrades. Can you talk about what upgrades you’re doing to those rigs and are those being suited for any specific contracts or tenders in mind?

Mark A. Keller

Sure. The upgrades on one of our rigs, the one in California, we’re actually doing a re-power and we’re adding a third mud pump. So that’s the only rig that doesn’t have a third mud pump in our fleet. And I guess we’re increasing the skitter capacity on the rig floors and we’re also doing life enhancements on the hulls, it’s a primary upgrade.

Daniel Boyd - Goldman Sachs

Okay. Any range of CapEx for those?

Mark A. Keller

I mean they vary from I guess about $2 million to around $11 million per rig.

Daniel Boyd - Goldman Sachs

Okay. And then just lastly, on [inaudible] and on the mining equipment, the demand, I think it was Rio Tinto today that came out and said that they’re going to double their CapEx for new mining equipment. Is that part of what gives you optimism there or are you seeing other things outside of that?

Mark A. Keller

First of all, they’re – Rio Tinto has been an excellent customer of ours now for over a decade and we’ve been in almost a [inaudible] alliance with them in that regard. So that is good news for us. But overall, we’re seeing a better pattern of new orders right now.

Daniel Boyd - Goldman Sachs

Okay. Thanks, I’ll turn it over.

Operator

Thank you. Our next question comes from the line of Jud Bailey with Jefferies & Company. Please proceed with your question.

Judson Bailey - Jefferies & Company, Inc.

Thank You. Good morning. I wanted to follow up on Mexico, there seems to be some uncertainty over there, their budget issues here near term. And I wondered if you could give a little more color as to your comments earlier on maybe the timing of them, putting some rigs to work or more rigs to work in Mexico, and also on the aspect of them upgrading their fleet. We’ve heard that they’re talking about putting restrictions on some of the upcoming tenders of rigs that are only – that are less than 10 years old? Is that what you’re hearing as well?

Unidentified Company Representative

We are hearing some of that. We have not seen it in recent tenders, but we haven’t had a tender from them in a while.

To answer your question about future tenders, Jud, it’s 2 to 3 weeks ago, 5, 4 weeks ago when I was in Mexico, they felt like they would tender for 7 to 9 rigs. That would occur sometime in the end of November, end of December; and they will start up probably second quarter, end of second quarter 2010.

However, they are still going through budget issues and different things. And even the PEMEX people will tell you that I’m almost embarrassed to talk about it, because it’s changed so much and we’ve been telling you we’re going to tender since July, that it’s an evolving story.

I do think they’re going to pick up more rigs. We have had several discussions with them. They talked to us about our EXL class rigs. There’s a definite desire on their behalf to [ph] hydrate high grade their fleet. They’ve got some more challenging wells to drill the next few years. And I think they definitely will begin to upgrade their fleet.

The rigs that they’re talking about picking up are 300 feet and 350 cantilevers. They’ve talked to us about some Gorilla class rigs. But as far as the exact timing, I’m not sure. It changes all the time. But they’re hopeful that they will get them out before the end of the year. But I’m not sure if that will [inaudible].

Judson Bailey - Jefferies & Company, Inc.

Well, and of the tenders they’re releasing, do you have any sense of how many could be incremental from what they have in their fleet today?

Unidentified Company Representative

They look, they have seven [ph] Mack rigs that rolled off contract by the end of the year and they have some rigs rolling off in the first quarter. I am not sure what the incremental increase would be. I know that they said that the drilling group had made a recommendation to pick up 15 additional rigs. They did not think that will happen, and it would be a number less than that, somewhere in the [ph] pick your favor upward five to seven to nine. So, as I said earlier, it is changing.

Judson Bailey - Jefferies & Company, Inc.

Okay, and just to switch over to the Middle East again real quick, that the tenders you are evaluating in-house, we know Aramco is incremental, are the other three tenders’ incremental needs as well?

Unidentified Company Representative

Yes.

Judson Bailey - Jefferies & Company, Inc.

Okay, and then if I could just one more follow-up just to the discussion earlier on rates, operators are obviously trying to lock in rates to get some visibility of their cost and whatnot and trying to lock in presumably at the bottom. Where rates are now are not that unattractive compared to prior troughs, so I want to make sure I understand correctly. Are you, you are not opposed to maybe locking in or multi-year type deal at these type of rates even though it is the bottom but still pretty good cash flow. I just want to make sure I understand your strategy from a term perspective?

Unidentified Company Representative

It would depend what we talked about earlier, it would depend on the operator, what area [ph] of the role that we would be tendering into but we would walk into a primary term. We – you have seen the rates, some are several hundred for those type of rigs and most of them are; and we have tendered rigs previously in that range and would lock the rigs up for a period of time. Now, would we lock them up long term beyond one to two years? Probably not.

Unidentified Company Representative

Again Jud, it also – it kind of depends on just very dynamic, depends on which rig you are talking about.

Unidentified Company Representative

That’s right.

Unidentified Company Representative

If we had a chance to book one of the new EXLs, we would be arguably more aggressive on that because we have three more coming then we would be very, very cautious about tying up our super Gorillas at anything less than fairly attractive rates because we – those rates will always be in a very high demand.

Judson Bailey - Jefferies & Company, Inc.

What about your 116Cs in the Middle East?

Unidentified Company Representative

Well, the same situation.

Judson Bailey - Jefferies & Company, Inc.

Okay, all right. Thank you.

Unidentified Company Representative

Yeah.

Operator

Thank you. Our next question comes from the line of Mike Urban with Deutsche Bank. Please proceed with your question.

Michael Urban - Deutsche Bank Securities

Thanks. Good morning.

Unidentified Company Representative

Good morning.

Michael Urban - Deutsche Bank Securities

You’d spoken to your desire to move the rest of your standard jack-ups out of the Gulf of Mexico which makes perfect sense. You and others are certainly trying to do that. Do you feel comfortable retaining some exposure to that market at the high end of your fleet, the higher spec rigs for things like your deep gas, more complicated projects, or which you would like to ultimately have little to no exposure in the shallow water Gulf of Mexico moving forward?

Unidentified Company Representative

No, I mean, we are very comfortable working in the Gulf of Mexico especially with our higher spec rigs because of – from an environmental standpoint, I mean, they are built to withstand the hurricanes that we’ve seen since 2005 and as a matter of fact, when Hurricane Ike, Katrina, Rita, they all passed over the top of some of our rigs with no damage. So, with the higher spec rigs, we are drilling the ultra deep gas wells, we are fine with them working here and in the Gulf.

Michael Urban - Deutsche Bank Securities

Okay. And then more broadly, you spoke to a number of markets where you are seeing a pick up in demand and pick up a bit of tender activities, are there markets where you haven’t seen that response yet you haven’t seen as much of a pick up quite yet?

Unidentified Company Representative

Well, we have tenders as I mentioned in most areas of the world today. I would say that the largest activity has been in the North Sea, certainly in the Middle East. We anticipate a lot of activity in Mexico but there’ve been some activity in the Mediterranean more for higher spec rigs, but I would say that most activity right now is in the U.K. for higher spec rigs.

Michael Urban - Deutsche Bank Securities

And is there a part of the world, a region, a customer that disproportionately benefits from access to new budget money as you move into 2010 or just more of an ongoing ramp up in some of the markets that you spoke to?

Unidentified Company Representative

I think that you are seeing some of the, you know, the major players, Total has been very active worldwide in there tendering, the IOCs and the NOCs are certainly being very active in their tender process as I mentioned in my prepared remarks. We view this as a positive, a very strong positive that possibly this is the bottom of the market because they are coming out with term contracts, multi-year contracts. We believe that if they didn’t think this was the bottom, certainly, I think they would keep the term as short as they could.

William H. Wells

Right I think part of what we are seeing is just a recovery from very, very low activity levels in the first part of this year and so a lot of the operators even they are ramping up budgets ahead of 2008 levels, are definitely trying to catch up some.

Michael Urban - Deutsche Bank Securities

Thank you.

Operator

Thank you. Our next question comes from the line of Ian MacPherson with Simmons & Company. Please proceed with your question.

Ian MacPherson - Simmons & Company

Hi, good morning. Thanks. I think the comments with the current status on the Gulf of Mexico fleet. You talked about, I think only two rigs idle now. I think you had three idle in your last status sheet. Did the [indiscernible] get back to work in the recent weeks or could you elaborate on that?

Mark A. Keller

It hasn’t gone back to work yet, but it does have a contract.

Ian MacPherson - Simmons & Company

Okay and that would be consistent with the leading edge rates we have seen for the bigger rigs in the Gulf.

Mark A. Keller

Yes.

Ian MacPherson - Simmons & Company

Okay. What is the cost structure on the idle rigs in the shipyard when they are leased right now, that they are receiving upgrades and where do you think the cost load would be next year and I guess the subset of that question is what do you think the utilization status or outlook for those rigs in 2010?

Mark A. Keller

As far as our cost structure, all four the rigs remain in shipyard. They should be done with our projects towards the end of this year and as far as our, so we are capitalizing most of the labor and typically their own labors are around $10,000 a day for a warm stacked rig.

William H. Wells

Right. So that makes the [ph] hauling cost of that rig after it comes out of the yard, probably in the low 30s, high 20s versus a normal up in the upper 40s, low 50s when it is operated.

Ian MacPherson - Simmons & Company

Okay. That’s helpful thanks. And then last question, could you give us some guidance from what you think the land rig fleet might achieve in the fourth quarter with respect to average utilization rates? You talked about improving utilization particularly for the high end rigs and maybe just contrast the leading edge rates for the 20,000 that your are averaging today?

Mark A. Keller

We are seeing day rates right now for the new contracts range, our current day rate range is 13,000 for a 160-day well and 27.5 a day. But on these pictures, we are seeing day rates in the 16.5 range, 14.5 to 16.5 range and as Matt alluded to you earlier in his remarks, we have seen several of those rigs go back to work. We believe that our 2000 [ph] horse high-spec fleet are 50 and 60 series rigs will all be contracted at 100% in the next few weeks which would be pretty significant in this market.

As we talked about earlier, we are seeing a definite trend a high grade delivery fleets for the shale plays, we think we will have as many as 18 rigs operating in the shale and deep gas plays probably by the end of November. It’s what our fleet [indiscernible] so we are very optimistic given the current economic status in the market that we are seeing the operators take a position. We have several operators currently talking to us about multiple rigs through the Haynesville and in different projects that they wanted to talk about multiple rigs on a negotiated basis, so we are very encouraged.

Ian MacPherson - Simmons & Company

Right, okay, thank you.

Operator

Thank you. Our next question comes from the line of Arun Jayaram with Credit Suisse. Please proceed with your question.

Arun Jayaram - Credit Suisse

In the international jack-up market, we’ve seen rates that generally outside of perhaps the ultra-premium side oscillate in the 85 – call it, 110-120 range in the North Sea. In your prepared comments you mentioned that you are seeing some pressure on rates. I just wondered if you could elaborate on that and do you think that there’s perhaps pressure on the rate range that I mentioned or do you think that the rates are flattish in here?

Mark A. Keller

It depends on the market that you are talking about. If you are talking about the North Sea or you are high spec rigs it’s a totally different scenario than it would be in the Middle East or the Gulf of Mexico or something in that line.

In the Middle East, I think you’ve certainly seen some day rate pressure because of the amount of rigs that have come off contract there. In every markets of the world, you’ve seen some day rate pressure. But [ph] I feel I liked it.

When you look at the market today, we think rates are pretty well bottomed out and I think as Matt talked about earlier, we are seeing not only in the land rig business but I think as you get – on a go forward basis, you’re going to see a significant high grading in the offshore market, in the jack-up market.

And we believe that’s going to help us with our high spec fleet of rigs to attain higher day rates. But yes, you are seeing some day rate pressures in all sectors.

Arun Jayaram - Credit Suisse

Okay. And just to perhaps elaborate on the Middle East, where are you seeing kind of bidding activity in terms of just premium rigs in that market?

Mark A. Keller

I would rather not talk about that because we have a lot of active tenders still there. And we are in discussions now with operators currently. And I’d rather not talk about that if you don’t mind.

Arun Jayaram - Credit Suisse

Okay, that’s fair enough. Thank you. Bill, [indiscernible] any just broad outlook comments for LeTourneau as we move into 2010 from a revenue standpoint?

William H. Wells

No, Arun, we are going through the budgeting process right now. And we will have some commentary on that in our next call. But it’s a little too early to forecast [ph] on the count

Arun Jayaram - Credit Suisse

Okay, a final question, Matt, I was wondering if you could talk about perhaps your thoughts on consolidation in the premium jack-up market and perhaps some opportunities for RDC to participate?

W. Matt Ralls

Well, we can’t get too specific [indiscernible] but I think that there is – well, let me go back and say that from the very beginning, what we have said [indiscernible] here is that we believe we should expand the fleet under the Rowan banner and that we would like to do that either by expanding into deep water or as a possible alternative, consolidating the high end jack-ups.

So for us, to participate in any transactions that include jack-ups – the acquired jack-ups or the other party will have to have predominantly high end jack-ups what would be interesting to us. On the deep water side, there is – Kevin Bartol is in the room here.

He spends virtually all of his time tracking and staying in contact have a deep water asset where they are interested in partnering up or selling, [indiscernible] so I can’t really suggest [ph] a bias in either direction. We talk to our directors about this every quarter but I think both of those are viable alternatives. We are watching it closely. It deals with [indiscernible] difficult to do.

Arun Jayaram - Credit Suisse

Okay. That’s helpful. Thanks a lot, guys.

Suzanne M. McLeod

All right, well, that concludes our third quarter earnings conference call today. Thank you all for joining us

Operator

Once again, ladies and gentlemen, that concludes today’s teleconference. And you may disconnect your lines at this time. Thank you for your participation.

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Source: Rowan Companies, Inc. 3Q09 (Qtr End 9/30/09) Earnings Call Transcript
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