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Executives

James M. Holland - Senior Vice President, Chief Financial Officer and Secretary

John R. Irwin - President and Chief Executive Officer

Alan Quintero - Senior Vice President of Operations

Analysts

Collin Gerry - Raymond James

Scott Burk - Oppenheimer & Co.

Brian Uhlmer - Pritchard Capital

Waqar Syed - Macquarie Capital

Tom Curran - Wells Fargo

Arun Jayaram - Credit Suisse

Mike Breard - Hodges Capital

Atwood Oceanics Inc. (ATW) F4Q09 Earnings Call November 24, 2009 11:00 AM ET

Operator

Welcome to today’s fourth quarter earnings conference. At this time all participants are in a listen-only mode. (Operator Instructions).

It is now my pleasure to turn the program over to Jim Holland, please begin sir.

James Holland

Good morning and welcome to Atwood Oceanics’ conference call and webcast to review the company’s operating results for the year and quarter ended September 30. Speakers today will be John Irwin, President and CEO and myself Jim Holland, Senior Vice President and CFO.

Before we commence our financial and operational view, let me as usual remind everyone that during the course of this conference call, we may make forward-looking statements based up on managements’ current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and therefore involve a number of risk and uncertainties.

We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. The words believe, estimate, impact, intend, anticipate are predicted by the uncertainty of future events or outcomes. Undue reliance should not be placed on these forward-looking statements which are applicable only on a dates here of.

Before John provides some comments on the company’s current operations, let me comment on some events, impact and results for the quarter. Our diluted earnings per share for the quarter ended September 30 was $0.75 which resulted in a diluted earnings for the year of $3.89. Despite some fluctuations during the year our effective tax rate for the year was 15% which is in line with our guidance given at the beginning of the year.

Total drilling cost for the September quarter and year was approximately $55 million and $222 million respectively. During the September quarter, the rig rate incurred 58 days of zero rate time while undergoing a slight financing upgrade. The Atwood Hunter incurred 12 days of zero rate time while undergoing required inspections. The Atwood Aurora incurred seven days zero rate time due to some equipment issues, the Atwood Beacon incurred 61 days of zero rate time after completing its contract India, at the end of July with the Atwood Southern Cross and Richmond out of the entire quarter.

The net impact resulting from these zero rate days have all set somewhat from the operating day rate of the Atwood Falcon increasing by 160,000 to 425,000 in August. These events result in drilling revenues for the September quarter declining approximately $18 million from the previous quarter’s revenues which was below our guidance of $20 million decline.

Before I also turn it over to John, let me just mention that in our 8-K contract status reports filed our 8-K yesterday that there was one correction we need to make, the Vicksburg contract end point was at December and in our 8-K that we filed in November, the 16th NuCoastal had extended that contract to March, so the current firm period of Vicksburg contract today goes to the end of March not the end of December as indicated in our 8-K contract status report.

After John’s comments I will provide some current expectation comments on current expectation for drilling costs for the December quarter and comments on other items that could impact results for the fiscal year 2010.

I will now turn the conference call over to John.

John Irwin

Thank you Jim, and good morning everyone. Yesterday as you know, we filed our fleet status report with contract day rate and cost information, I’m not going to repeat all of that, but I would like to comment on some highlights and some additional items. Of course we would be pleased to respond to questions at the end of the call.

Even though fiscal year 2009 was very challenging from a drilling industry viewpoint, we recorded our fourth consecutive year of record financial results with revenues, operating cash flows, net income again being the most favorable in our history, as well as achieving a number of other significant accomplishments.

Fiscal year 2009 was also our sixth consecutive year of improving financial results. During fiscal ‘09 there was a strong focus throughout the company on execution in all of our activities. With contracts for four of our drilling units expiring during the year was our goal to define and execute a clear strategy for these four units in terms of planning and completing critical maintenance, subsequently reducing direct operating cost to target levels, maintaining key personnel, aggressively bidding any suitable contract opportunities, and having all of these units ready to return to work at short notice.

Three of these four units, with Vicksburg, Richmond and Atwood Beacon were contracted and have returned to work, the Atwood Southern Cross is still idle. For most of 2009 there is almost no bidding activities relating to opportunities suitable for the Atwood Southern Cross, while we continued to anticipate drilling market challenges in fiscal year 2010 and remains uncertainty with contracts that rollover.

We are currently experiencing some increases in discussions in bidding activities including, possible shorter-term opportunities for the Atwood Southern Cross mainly in the second half of calendar 2010. From a longer-term perspective, we remain confident as to the outlook for the worldwide offshore drilling industry, especially deepwater.

Our nine owned operational drilling units and two drilling units currently under construction, five of these have current contract commitments that extended to fiscal year 2011 or later, one has a contract commitment through fiscal year 2010, three have current contract commitments that expire during fiscal year 2010, and one is currently idle, and one under construction scheduled for delivery in mid 2002 is currently without a contract.

On September 30, 2009 we had estimated contract revenue backlog of approximately $1.8 billion compared to approximately $1 billion of estimated capital commitments relating primarily to the new semi submersibles under construction, and currently we have approximately 70% of our available rig days contacted for fiscal year 2010. Progress continues as scheduled on the construction of our 10th and 11 units, two deepwater EXD Millennium semi submersibles being built at Jurong shipyard in Singapore.

First of these at the Atwood Osprey, conventionally more than 6000 foot water depth unit scheduled for delivery in early calendar 2011, with an estimated total cost of approximately $625 million, and the other is a dynamically positioned 10,000 foot water depth unit scheduled for delivery in mid calendar 2012, with estimated total cost approximately $750 million. Through September 30, 2009 we have invested approximately $600 million toward the construction of these two drilling units.

Funding of the remaining approximately $775 million for the construction of these two units will come from internally generated funds and borrowing under our two credit facilities which have a combined borrowing capacity of $580 million. We currently have $275 million borrowed under our credit facilities, and we will endeavor to keep our maximum borrowing below $500 million during the construction of these two units.

Now some specific comments on certain state of the current status of our unit is starting with the Atwood Southern Cross which remains idle. However, as previously reported that the rig has been selected Biotics Resources subjected to signing a contract and receiving government approvals to drill one well offshore to use some time in 2010.

For most of 2009 there has been almost no bidding activities relating to opportunities suitable for the Atwood Southern Cross. However, we are currently experiencing some increase in discussion and bidding activities including possible shorter term opportunities in addition to the [Inaudible] as well mainly for the second half of calendar 2010.

On November 15, the Atwood Beacon following its relocation from India commenced its 240 days contract commitment with Hess Equatorial Guinea. Hess has an option to extend the contract for another 240 days which have exercised could extend the drilling program into fiscal year 2011.

The contract provides for an operating day rate for the current firm period as well as the auction period of 110,000 per day, however, for the initial 240 days we will amortize the mobilization cost of approximately $25,000 per day which will result in effective day rate for this period of around $85,000.

The Vicksburg has announced in our Form 8-K filing on November 16, the Vicksburg current contract with NuCoastal has been extended to the end of March 2010. This contract extension also provided for two options, to extend the program an additional three months which must be exercised by January 4, and an additional six months which must be exercised by April 1st. If all options are exercised the drilling program would extend to the end of December 2010, and the day rate will be 90,000 for the extended drilling program and for all the auction periods.

The Richmond is in the process of building its current One Well program for ATTI at a day rate of 32,500. Additional programs are currently being pursued for ongoing work this year and for next year. The Atwood Hunter is currently working for Kosmos Energy Offshore Ghana under its joint contract Noble and Kosmos, which extends into late 2012 at an operating day rate around the mid 500,000s.

Now the new semis, the first of these now under construction, the Atwood Osprey is scheduled to be mobilized to Australia up on delivery from the shipyard in the second quarter of fiscal year 2011 to commence a three-year contract with an option to extent the firm period up to six years and this is for Chevron, Australia.

Contract provides an operating day rate of approximately 470,000 for the three-year commitment, and approximately 450,000 per day if the option is exercised to extend the firm period to six years.

Our second new semi submersible being constructed at 10,000 foot Ultra deepwater unit will become the A-11 company owned mobile offshore drilling unit when it is delivered in 2012. Stated earlier, construction is progressing in schedule and we are continuing discussions with potential clients internationally regarding possible future opportunities.

From a longer term perspective, we remain committed to our strategy of consistently meeting our client needs with safe quality operations, premium equipment and being leveraged to deepwater and international markets, the strategy has been successful, and enabling us to create value in the past, and we believe stands as in good stead for the future.

We continue to actively progress our efforts to develop our organization, systems, expertise, talent and our capability for future growth. While it is our goal to consider further value enhancing opportunities in the future at the appropriate time, we have no immediate plans today for further growth beyond our current two deepwater semi submersible construction program.

Based on longer term expectations for world energy demand, our ongoing fleet major upgrade New Construction Capital program, continuing development of our organization, our increasing capability, we believe our fleet have talented personnel and the services we provide position the company well to meet the future drilling and completion needs of our clients internationally and deeper water.

So, again in fiscal year 2010, executing on our current activities is a high priority for us, and the focus on delivering this plan with progress on our current two semi construction program, building backlog in fiscal year 2010 for those units with contracts rolling over, achieving high utilization of our fleet financial results and our operating performance.

We believe our contract portfolio offers a combination of longer-term commitments with attractive returns and shorter commitments with upside potential whenever market conditions improve in the future.

Thank you all for your time and for your interest. We will be available to answer questions after Jim finishes his remaining comments.

James Holland

Thank you John. Before we open the conference call for questions, I will now address certain norms that could have an impact on our operating results for the same quarter in fiscal year 2010.

As John stated, currently our available rig days contract for fiscal year 2010 which at this time results are approximately $600 million of contract revenues for fiscal year 2010 compared to $587 million of revenues we received in fiscal ‘09.

The Atwood Beacon incurred 45 days zero rates in October and November prior to commencing its 240 day contract commitment on November the 15th for Hess. The Richmond incurred 25 zero rate days prior to committing its One Well contract commitment with ATTI in October. The Atwood Southern Cross expected to be idle all of the December quarter with the Atwood Hunter, Atwood Falcon and Atwood Eagle, Atwood Aurora, Vicksburg and Seahawk expected to be fully utilized during the December quarter.

We currently expect total drilling cost for the first quarter of fiscal year 2010 to be around $59 million. Expected per day operating cost on a rig-to-rig basis for the December quarter are as follows. Atwood Hunter $190,000, Atwood Eagle 145,000, Atwood Falcon $75,000 and Atwood Southern Cross $35,000 which reflect as idle status. Atwood Aurora $60,000, Atwood Beacon $75,000, Vicksburg $40,000, The Seahawk $70,000, Richmond $35,000 and the other costs were around $15,000.

Now the Atwood Beacon’s expected average per day operating cost during the first quarter of fiscal year 2010 reflects a low level of cost during the October around 20,000 per day while it was completing its mobilization, with a high level of operating cost in November, December after commencing operation due to the amortization of mobilization expense of around $25,000 per day, plus initial expected daily operating cost of around $75,000.

We now expect general and administrative expenses to be around $10 million for the December quarter, which is in line with what we incurred during the first quarter of fiscal year 2009 and $34 to $35 million for the year. Purchasing expense expected to be around $10 million for the December quarter, around $40 million for the year. Based on current market environment and excluding any discrete items that may be incurred, we currently expect our effective tax rate for fiscal year 2010 to be between 16% and 18%.

I’ll now comment on expected total capital expenditures for fiscal year 2010. Through September 30, 2009 we have expended approximately $600 million toward the construction of the Atwood Osprey and the DP semi submersible, which leads approximately $775 million remaining to be expended.

We incurred total capital expenditures in fiscal year 2009 of approximately $417 million. Our current projection of capital expenditures fiscal years 2010, 2011 and 2012 are around $300 million, $400 million and $330 million respectively. As John stated, of our current debt capacity of $580 million, we currently have $275 million of outstanding debt, and we expect at the end of fiscal year 2010 will be around $300 million.

With our current contract backlog expected to provide approximately $1 million in future advertised cash flows. We foresee no covenant issues with our credit facility even if we should incur additional holidays during rig days during fiscal years 2010, 2011.

As John stated, we will endeavor to keep our maximum borrowing below $500 million. Thus with the expected future cash flows from our current contract backlog and available borrowing capacity with the current interest cost of less than 3%. We believe that we can complete the funding of the construction of over two deep-water semi submersibles and maintaining a strong balance sheet without incurring any additional sources of capital.

I will now open the conference call to questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Collin Gerry - Raymond James.

Collin Gerry - Raymond James

I want to look at a little bit longer term on your deep-water side, you have got two of your bigger floaters up for renewal kind of just before, a year before the new build on spec comes out I guess, walk us through the timing in terms of when do you start talking seriously about contract in 2011 available deep-water rigs and how important is it to get those under contract before you enter serious discussions on the new build or am I thinking about it right?

John Irwin

Actually certainly from the point of view of the new build and the A-11 rig I mean, we will pursue and that marketing next year and that work I want to say independently, I mean that’s certainly an effort that has been well underway and talking to all of our clients and conveying to them the technical capability of this rig and all of it being down and preparing it to at a service.

We believe that their clients have received that oil and all the indications are that of what we received. I mean as far as the other semis, the Eagle under Falcon each of those actually has been engaged doing drilling on programs that have kept them very busy and I believe they have performed well on work that’s been going well. Some of the results of those efforts have been reported separately or disclosed by the clients for him worked and the successes they had.

So all of that’s very good for those rigs and we believe those rigs are well-positioned for the future. Certainly, we always look at opportunities. I mean as to the Eagle there remains the question of could it be required longer, you’ll see that under the current contract is an arrangement for discussion of further period of time, and would that be required. But certainly it has an important place in the Australian market for the lot of big developments to be done down there.

The hunters has been very much engaged, of course that goes a bit longer and the rig we believe offers a lot of potential for people doing that type of work like it’s now being doing. And as far as the Falcon there has been some discussions as to future work and should there be the opportunity to discuss that then we will be ready to do that. But certainly committing those rigs doesn’t really prevent or it doesn’t relate as such to moving ahead and marketing the new rig, if that addresses your question Collin.

Collin Gerry - Raymond James

No, it absolutely does. Switching gears a little bit to the jack-up side. You mentioned the Vicksburg, it’s a firm contract going through to March. Are the options on there? I believe it’s 90,000 a day. Were those right on the fleet status in terms of its timing, and do you expect those to get exercised based on where leading edge rates are now and kind of just where the market is going?

John Irwin

Well, first, I might say from the point of view of jack-ups and from what I said, our goal is to build backlog really through the next fiscal year for our rollover rigs, and position ourselves to determine whether the market moves and then either build further backlogs or take advantage of rising day rates, we’ll have to see where the market goes from the Vicksburg point of view.

We commonly don’t agree to award options unless we believe there is high probability that those will be used and we were hopeful that those could be used and of course one is a three month and then one is a six months, they are all at the 90,000. Should they be exercised that would keep the rig busy through next calendar year and position the rig for future opportunities and see where the market goes.

Equally we continuous, we always do to bid other opportunities at the same time, and there are some other opportunities out there and then same with the Beacon will continue to bid and are bidding other opportunities for later next year when it rolls over and of course we have option there to see where that’s used, but we always continue to bid back up work.

But the goal of the short-term, I guess for the next fiscal year Collin, is still build backlog on those two units and on the Richmond and really then see where the market heads and either continue to build backlog based on the market or perhaps have the opportunity for further upside.

Collin Gerry - Raymond James

And on the building backlog point, a lot of your larger competitors sort of mentioned some positive momentum in the jack-up market. I guess things have been bottoming in the prior two quarters and this quarter just starting to see a little bit more momentum there. Would you share their sentiments in terms of the direction of that market?

John Irwin

Not knowing exactly what all of them said in just hearing some of it indirect. But certainly from our own point of view we are having more discussions, there has been more bidding depending on the type of rig. So, certainly the right direction that we, in our own case we try not to guess where the market might be at a certain point in time and right now it would be still our goal to, based on the encouragement to still build backlog through the next fiscal year, but certainly some signs that are certainly encouraging Collin.

Operator

Your next question comes from Scott Burk - Oppenheimer.

Scott Burk - Oppenheimer & Co.

I had a question regarding the Atwood Eagle communications at Woodside and Chevron are having a dispute over when Chevron will take that rig from Woodside. Does this dispute have any impact on your revenue and also how might it affect BHP Billiton while that’s planned for the middle of next year?

John Irwin

First, it’s not something that involves us as such. But really the impact for us is timing and I can look down the table here with the other guys and of course the latest, but, and Alan, but I think where we stand today is that the rig should go from one client to the other during December, around mid-December, as such it doesn’t impact what we do going forward as what you have seen in the fleet status, but that change should occur in around second week, third week of December, 3rd.

As far as the well next year of BHP, that’s still planned, and just going from memory around June or middle of the year or something like that, is that correct Alan?

Alan Quintero

That’s right. And no impact on the timing on what happens.

John Irwin

So no impact on timing from the latest we have heard today, yes.

Scott Burk - Oppenheimer & Co.

Okay. So the rate would continue to be 405,000 if that rollover happen to Chevron.

John Irwin

Yes that’s correct.

Scott Burk - Oppenheimer & Co.

Then I guess, I am just wondering, does this little dispute have any positive implications for the broader kind of mid to deepwater market or is there just a lack of equivalent 5000 foot rigs immediately available in Australia?

John Irwin

Well, as to the market and what client’s view are and so on I guess I wouldn’t comment on that. I guess the one comment I would make is that we believe that the Atwood Eagle has been a rig that’s performed very well in the Australian market and certainly a rig that should be in demand in Australia, given the nature of the work and the huge developments that would have to occur down there.

So from our own point of view we believe the Atwood’s Eagle performed a very well. Certainly we are always pleased to see more than one client wanting it, so that’s the way we hope to keep it.

Scott Burk - Oppenheimer & Co.

I just wanted to verify on the Southern Cross, it sounds like the work then at the products is not going to be till the second half of 2010. So, should we continue to assume that it’s just higher for the first half of the year?

John Irwin

Yes, I guess I said in my comments that those opportunities we are seeing are really more focused towards the second half of calendar ‘10 and I think in our disclosure in Odex it said summer of next year I think, and generally that would have been in the third or perhaps into the fourth fiscal quarter, that type of timeframe but more focused in the second half of the calendar year.

Scott Burk - Oppenheimer & Co.

I see. And can you give us any idea what the rate level you are discussing with Odex.

John Irwin

In two weeks, if and when we get a deal done is we hope, and certainly it’s our goal to try to progress those discussions. We won’t release details until such time there is a commitment made and a contract signed. But in the general sense, and what we have said in the past is that rates for work we have been bidding, shorter term work and for the timeframe in the future, generally have been in the 100,000s meaning anywhere from the low to the mids to a bit higher than that, generally currently but until we reach agreement there is nothing more we can offer as to what the rate would be.

Scott Burk - Oppenheimer & Co.

Okay, that’s helpful, and I’m just pretty encouraged by the fact that you have been able to put the Beacon and Richmond, Southern Cross factor, I mean potentially have some work for the Southern Cross this quarter. And would you say that that’s mostly because of improving commodity prices or is it just that Atwood being willing to bid competitively, potentially more so than larger peers might be willing to do.

John Irwin

As I tried to convey in my comments our teams here has worked very hard with a clear plan when the rigs rolled over to undertake critical maintenance, to then maintain key personnel with the rig to have the rigs ready to go, and to aggressively pursue work around the world that was suitable given our fleet size our rigs don’t compete for themselves and we don’t compete generally with rigs in another market.

So, each of these rigs, other than the Richmond, which is basically Gulf of Mexico rig, as you know with some very unique characteristics, but these rigs have been aggressively bid and certainly we think that a factor that’s hopefully been a positive for us, and I know in one case it certainly was because it was work with a client with whom we are already working with another rig in West Africa. But the track record on these rigs and the crews that are being with them for so long and just their reputations of also being a factor and I don’t think while being aggressive I don’t think we have had to chase absolutely the lowest rates to get these jobs.

So, certainly, there has been a lot of focus, a lot of effort and we are starting to see some results now and we are encouraged by things done as it gradually improve, and in the meantime of course we have reduced the cost on the Atwood Southern Cross while maintaining the key personnel with the rig and aggressively or very actively continuing to pursue further work. Though as I said mainly most of it looks, second half of next calendar year not as much first half of next calendar year.

Operator

Your next question comes from Brian Uhlmer - Pritchard Capital.

Brian Uhlmer - Pritchard Capital

Quick question on the Southern Cross; now, you can’t disclose the day, but would you guys incur the mobilization expense for that rig or is that something you can comment on?

John Irwin

It’s not something I could comment on specifically in this case, and once again we wouldn’t disclose until if and when an agreement occurs. But in the general sense in bidding these rigs, you’ve seen us big rigs sometimes like the Beacon where the mobilization to some extend was being amortized into the total deal, it still makes sense and that was a longer deal. The shorter deal of course then you have to look at them from the point of view of what’s better than being stacked and what makes overall economic sense for a short-term deal.

So, normally, in this type of market for shorter term deals, you wouldn’t expect a full day rate for mobilization, but you would expect contribution in terms of toeing vessels and perhaps some of the cost of the rig. But it’s too early to comment on that one specifically, that’s just a general comment.

Brian Uhlmer - Pritchard Capital

Then finally, just hoping to get a little more color on your thought for the jack-up market; are you seeing a nice increase in tender activity, if so, what regions? And are you seeing more tenders favoring higher spec rigs as opposed to more commodity type rigs?

John Irwin

Well, of course our fleet is basically a premium fleet or is the higher end jack-up, so that’s pretty much all we see. We don’t look at any commodity rigs and most of those rigs are in the Gulf of Mexico and we have the Richmond, and even the Richmond and the Gulf of Mexico is a unique rig.

We are seeing, in that case, pursuing an ongoing job that would start potentially December, carry it possibly January or February and we are pursuing other work for next year. And of course, in that case not a jack-up but a rig that has unique characteristics going into hurricane season, which we believe will be beneficial going forward

But as far as the jack-up markets that we look at in the Vicksburg and the Beacon, of course we continue to look at in those market South East Asia, West Africa where the Beacon is now and even further afield than that we are seeing one or two jobs and with that getting into all of them, we are getting gradually more inquiries and bidding.

If we just look at our own bid statistics that we keep, we are generally seeing the number of bids that we are working on, the lines being up for the last few months. Of course it was pretty low earlier on, but we look at that month and it has been going up probably now for what 4 or 5 months I would think.

Operator

Your next question comes from Waqar Syed - Macquarie Capital.

Waqar Syed - Macquarie Capital

My question relates to a comment made by one of your competitors regarding the fortune market. Saying that there is the increased differentiation between rigs with DP capability and those without DP. It’s possible that comment relates primarily to the Gulf of Mexico. But are you seeing anything like that in West Africa or Asia Pacific region or the Mediterranean with your fleet.

John Irwin

Of course we are not actively bidding our rigs and have got backlog under Eagle Falcon right now. So, perhaps our position may be a little different. But my own feeling would be and my own view that those rigs have been very successful rigs in terms of meeting our client’s needs, both in terms of their performance and technical capability.

While being more at rigs, my own feeling is that they are very attractive rigs and that’s been proven by the current clients with whom they have been working with, with whom they have been very successful and where we have been getting some really very positive feed back as to the performance of those rigs.

So I can’t comment specifically on what another party might have said, but I guess I would comment on our own rigs into their capability for doing the type of work they are doing both exploration, completions and generally performing in a way with a long track record that satisfies our clients and I would still feel it very competitive rigs in the market and for the future.

Waqar Syed - Macquarie Capital

And secondly, for the Seahawk you still have contract for another year or so, at what point would you be starting negotiations on that rig and do you expect it to see in West Africa, do you think it may need to be moved to the Asia Pacific region again?

John Irwin

Well certainly about this time and our people are always very active in staying abreast of the opportunities that would be out there Waqar, and it’s not just a matter of deciding when you are going to negotiate, but certainly we will look at all suitable opportunities for that rig including West Africa and those are the markets where it could be used typically that’s been South East Asia in the past for tender resist units.

Of course our rig now the Seahawk has been quite successful in working along side of TLP in deeper water I think it was may be the second rig to have done this, and working for a client where it originally was upgraded and moved to that client for quite an aggressive target window with a lot of importance to the client and bringing on stream production and so on, and we were able to achieve those goals and believe that rigs established a great track record for its performance floating alongside a TLP.

So, certainly those would be areas of opportunity in the future as well. But in simple terms we will pursue everything that’s out there, and, no, we haven’t started negotiating anything yet. But, yes, we will be very active in looking at everything that’s out there Waqar.

Waqar Syed - Macquarie Capital

Now, do you have any sense of where the market for such rigs today, another large markets we don’t see there any transaction. Were the rates for that type of rig, stupendous to semi submersibles, at some point the end rates have gone up really high, I don’t know where the market is today.

John Irwin

Yes, and actually as you point out, it’s a thin market in the sense that the number of rigs working in that market is a smaller number, and I forget the get the exact number today, but around the 30 or the low 30s, and only a few of those floating type of rigs that would work in the environmental conditions alongside floating structures such as TLPs.

Certainly the market and the fixtures that have occurred after the Seahawk had been committed to the current program, and when it was committed the market was down. And after that it improved quite significantly, and I think we have probably seen rates everywhere from the low 100s probably approaching 200.

So, depending on the nature of the requirement and the demand and the timing, I mean without predicting where the market would be, but certainly the current day rate of the Seahawk is much lower than where the market has been and we would still be hopeful that the market in the future would be certainly north of where it is today and hopefully north of the 100,000.

Operator

Your next question comes from Tom Curran - Wells Fargo.

Tom Curran - Wells Fargo

Jim or Mike, could you provide some color on the long term asset entry are there receivables of about $14 million.

James Holland

Yes Tom, sure will. As we have disclosed for several quarters in our continued foot note we have had an ongoing dispute with a client in India related to what they call service tax. It is our contention and backed up by our legal opinions and even assessments from the actual tax authorities there that this tax became effective in 2007, there the client is alleging that the initial law came in in 2004.

So, the key important point between the two dates is that it was 2007 it’s after we signed a contract with our client and there is a provision the contract says any change in law rate taxes will be there obligation.

So it’s our belief and our strong belief that this service tax of about $14 million that we accumulate over the period of the contract we were in India is an obligation that we have paid but an obligation of our client, and we are in the process of what we believe will probably take legal action to pursue this, we feel pretty strongly in our case backed up by various legal opinions, but we do believe it might take longer than a year or two to collect this and to pursue this process.

So we have reclassified as a current receivable to a long term receivable. So that it will be further disclosed and we hope to get our 10-K filed tomorrow, and in foot note 11 that will be further discussed. But, anyway, that’s a kind of summary there. We do believe we would probably wind up with some type of legal action there and we are prepared to do that and what we need to do to collect what we believe is a receivable due under the terms of contract.

Tom Curran - Wells Fargo

I was aware of that dispute, and I assumed this might reflect it. I guess just so I understand you correctly it sounds as if the decision to shift it from current to long term was more a reflection of the time frame over which you now expect to collect it, and not change the estimated probability of collecting it.

James Holland

That’s absolutely correct. We still feel very strongly in our position in our case and we are going to take this as long as it takes. We have had other issues in India before and you can get fair hearings there. We have always won there, but it takes a long time even any legal, even in the U.S legal actions take a long time.

In India, its even lot longer, but we feel strongly who we are and yes, the timing that we expect that this will take in the legal action we expect we will have to start here. But it’s more timing not in anyway indications of our belief that, we still believe we have a strong case.

Tom Curran - Wells Fargo

Then John given the stage you just had to showcase the capabilities of the Seahawk, when it comes to working along side of a TLP, could you provide an update on the thinking about potentially divesting of that unit at some point and what opportunities, if any, you might have on that front?

John Irwin

Tom, I mean as far as the Seahawk and the longer-term strategy on that I mean, I think that it would be a bit early to comment. I means it’s not a rig that we have been, it’s certainly still part of the active fleet and the one that we are continuing to pursue opportunities for, and while it doesn’t, being a deepwater semi submersible, but not like other fleet, it doesn’t quite be part of the strategy quite the same way.

It’s still been a very important and premium unit that’s created a lot of value and in the short term, and going forward we’re still continuing to pursue work for it and longer term, it’s always possible you look at these things but no change in short term thinking and as to pursuing work after the current job, Tom.

Tom Curran - Wells Fargo

Okay. It’s fair to say though that at some point over the long term, given the option at the right price to redeploy the capital in Seahawk at this point to ultra deepwater floater capacity, you would take it?

John Irwin

Well, I wouldn’t want to respond to that in a way that would suggest that with even made up our mind or even thought that far ahead. But clearly the company continues to move into deepwater and a strategy to grow the organization and build that capability to do more beyond the opportunity to give us to do more, beyond the current two semis we’re building and we’re certainly not building in the directions of more tender assist units like the Seahawk.

So, I guess, pretty clearly we’re trying to move and we’ll have to see where that takes us in the future and hopefully that gives you some sense of where we’re heading. But as to where the Seahawk continues to play a role I wouldn’t want to suggest that we’ve got any thoughts at this point in time anyway as to looking at strategy you’re talking, but possibly not being part of the fleet at some point.

Operator

(Operator Instructions) Your next question comes from Arun Jayaram - Credit Suisse.

Arun Jayaram – Credit Suisse

Jim, I wonder if you could elaborate little bit on your CapEx guidance. Because it seem like, at least versus my model came in over the four year period maybe a 100 million over, so I just wanted to see if you could comment on if anything has changed versus previous guidance of did I just have a mistake when we modeled?

James Holland

Arun, where we believe we’re going to go, the 100 million could be the fact we do believe that on the Atwood Falcon that we have not made any commitments on that, do not know for sure what we’re going to do 100%. I am assuming right now we will probably, once that rig is completed its current contract with our commitment with Shell high probability I think right now that we’re looking at an upgrade.

We know we need especially to get the quarters upgraded and we expect to look at some other upgrades, bring that up technically to update the same specs that the Hunter and Eagle are, and so assuming about a $100 million upgrade for that unit some time 11, 12 somewhere there. I mean no doubt it depends upon ongoing work with Shell and what we might do there.

So, in my numbers I am assuming, the guidance I gave you, that somewhere in 11, 12 we will have a $100 million of commitments there and expenditure there. Again, not committed, not any firm decisions made yet but we’re going, wee are making planning, engineering studies being done, and moving down the road to probably seriously look at that and do believe we’ll have to do at least some quarters work and then at the time we’re doing that which could take four to five months to do we’re also looking at maybe do some work at the same time.

Arun Jayaram – Credit Suisse

Okay, so that is in your numbers that you gave.

James Holland

In my numbers. Nothing really changed on the two semis being built. Those are pretty well where we believe we are. So, nothing has changed there, but that difference there might be coming out which is amazing. The assumption now we right now probably will do some upgrade on the Falcon.

Arun Jayaram – Credit Suisse

Okay. I think that was the delta, and we would just assume you said five or six months of downtime for that upgrade, is that correct?

James Holland

Four to five.

Arun Jayaram – Credit Suisse

Four to five.

James Holland

Yes, a little more than that, Yes.

Arun Jayaram – Credit Suisse

Okay. All right, great. My second question is regarding the Southern Cross, John you made some comments I guess on a wide day rate range. But, is that also what you’re seeing in terms of the additional work beyond Odex, potentially that rig same range or can you see a higher?

John Irwin

We don’t want to talk to, and probably look out further. But really looking out into 2010 and generally what we’re looking at is, it still does cover some of that range depending on the job and the timing. But it’s probably for anything starting next year. It’s probably still in the hundreds somewhere maybe even in the high 100s.

But probably for, until we get that rig going and we see the market improving it would be hard. And without looking too far down the road but just in today’s market, generally in that range in the 100s and maybe as you go down the road could get higher. But it’s hard to say above that yet at this point.

Arun Jayaram – Credit Suisse

Okay. Kind of a niche asset for you, but the Richmond, are you seeing some additional demand in the Gulf of Mexico shallow water market or what?

John Irwin

Yes, well, of course Richmond is a unique rig. And I know you probably have heard me say that over and over again.

Arun Jayaram – Credit Suisse

Yes.

John Irwin

But, and it is because of its capability, particularly drilling really shallow water and drilling deep wells and during hurricane season. But, yes, we have seen some more discussion going on. Certainly, with regard to this current well should finish December and certainly there are parties interested, we should make a determination on here pretty quickly.

Of course we’re running right into Thanksgiving but it’s certainly being worked on and that would keep it busy until probably February and then there is several other parties for next year. So, day rates haven’t shown any big improvement yet. But the goal for us to is to build backlog. So, yes, we are seeing more discussion for the Richmond anyway.

Arun Jayaram – Credit Suisse

Yes, personally I am glad to see the Gulf get a little better. And last comment John is, if you look at 2011 in terms rig years our analysis show there’s perhaps 45 rig years of availability in 2011 in the deepwater market, 4500 foot or greater. Do you see the potential for an air pocket in 2011 with all that, with that level of rig availability? Or do you see there should be enough demand where the industry can move through that without a real hick up in terms of pricing?

John Irwin

Yes, and without trying to predict pricing and maybe looking at the bigger picture and looking from our side, and of course, given our fleet size and the type of strategy we’ve got our goal, and all of these rigs is to make them to differentiate based on their performance and their capability in meeting our client’s needs.

Those new rigs in which we’re investing it’s not just in terms of building a unit for the immediate market, it’s really units that will play a key role in the market and be very desirable over a longer a period of time, and in which we can put in place the people and the talent and the capability in the systems to really pursue the better jobs.

So, certainly where we want to be in any market, be it a down one or a little bit down or little bit up depending on how it works, it will always be an active rig and a desirable rig with strong performance and track record and a strong backing from the company in terms of the company’s capability and performance.

So, certainly, we’ve looked at a longer-term, and in this business we see waves of construction and deliveries and some things happen in the shorter-term but certainly goals looking to the future and building our capability and our fleet accordingly, and marketing our rigs we’ll adjust accordingly. But certainly we believe we’re well positioned today to keep and committed to go on doing what we’re doing.

So it doesn’t answer the bigger picture question and I won’t try to predict that. But certainly where we see our lead role to be played is one that puts us in a, hopefully we always strive to differentiate and put ourselves in a favorable position.

Operator

Your next question comes from Waqar Syed - Macquarie Capital.

Waqar Syed – Macquarie Capital

Could you provide some guidance on interest expenses for the first quarter and for the remainder of the year?

James Holland

Yes. For the first quarter current price similar to what we just incurred here in the September quarter, but somewhere around $2.5 million of interest expense and then probably capitalize the interest somewhere $2.6, $2.7 million so about a $600,000, $700,000 difference in this net expense and it’s probably going to about that similar, going throughout the year.

We don’t expect us earlier in our comments we expect our outstanding debt to be may be $25 million more, but I mean similar to what where we are today, so don’t expect the debt to go up dramatically. So probably similar to what we have, so it will be only impacted by increasing interest rates and that doesn’t appear that’s going to be too much serious that occurred dramatically there. So, it’s probably very similar to what we’ve incurred in the last quarter.

Waqar Syed – Macquarie Capital

Now, when do you, when does the capitalized interest drop and what do you expect capitalized interest to be in 2011 fiscal year?

James Holland

Well, obviously it will go down some once the Atwood Osprey is delivered in, so second half of ‘11 capitalized interest would drop-off some but, then as you go into the final build out of the DP in it obviously it will be impacted somewhat by that but it will drop-off, clearly drop-off some but --

John Irwin

How much capitalized interest?

James Holland

Yes.

John Irwin

It’s going to be full off, fully absorbing by the Atwood 11?

James Holland

Yes, Yes so, okay we’re probably not too much there but okay, it may go up through 2011 pretty well the same rate we’re going right now Waqar.

Operator

Your next question comes from Mike Breard - Hodges Capital.

Mike Breard - Hodges Capital

Are you taking a serious look at any of the distressed rigs around the world?

John Irwin

Mike, at this point and as we said today, we’re not looking at any additional growth beyond what we’ve committed to the focus today in the foreseeable future is on progressing what we’re doing and executing. Now, certainly as we’ve said in the comments that goals is to continue building the company, and our capability and putting us in the position to consider doing more in the future, but in the immediate term today, we’re not looking at the distressed units of those for example that are been auctioned.

Mike Breard - Hodges Capital

Okay, I understand the prices of the steel are too high aren’t they?

John Irwin

Well, you got to look at the deal and how you do your model and how we run our model and so on and certainly there are those who have felt that certain prices were higher than they would pay and others have had a different view on that, but for us today it’s really not a matter of price, it’s a matter of the moves we make given where we stand.

We’ve committed to build two new rigs and very committed to wanting to progress those as we’ve been doing, and bring them online and build the organization and be looking for the right time to take advantage of future opportunity, but today it’s not a matter of price or may be even the type of rig what’s available it’s more to do with just timing and taking a longer term view and strategy for us Mike.

Mike Breard - Hodges Capital

All right, and just one last question, in terms of what Petrobras might have planned, would your new DP rig possibly fit into their plan?

John Irwin

Well certainly we’d be very interested in Brazil and Petrobras should there be opportunities. Now there is obviously been a lot of discussion on the direction that will take, and whether there will be opportunities for rigs from outside were not build there, and so on and well, that still remains to be seen.

I cant say that we remained very active in staying in touch with the Brazil, marketing of Brazil, relationships in Brazil and the A-11 would be a great rig for that market, and certainly should that opportunity arise we would be very interested and we certainly would hope to continue working away to find out should that ever happen.

Operator

And I’m showing no further questions in queue.

James Holland

Okay, we appreciate your interest in Atwood, have a good Thanksgiving.

John Irwin

Thank you everyone.

Operator

This concludes today’s teleconference, have a great day and you may disconnect at this time.

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Source: Atwood Oceanics Inc. F4Q09 (Qtr End 30/09/09) Earnings Call Transcript.
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