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Rowan Companies (NYSE:RDC)

Q3 2013 Earnings Call

November 05, 2013 11:00 am ET

Executives

Suzanne M. Spera - Director of Investor Relations

W. Matt Ralls - Chief Executive Officer, Director and Chairman of Executive Committee

Thomas P. Burke - President and Chief Operating Officer

Mark A. Keller - Executive Vice President of Business Development

J. Kevin Bartol - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

David Wilson - Howard Weil Incorporated, Research Division

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Ian Macpherson - Simmons & Company International, Research Division

Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

John Booth Lowe - Cowen Securities LLC, Research Division

Harry Mateer - Barclays Capital, Research Division

Operator

Greetings, and welcome to the Rowan and Companies Third Quarter 2013 Earnings Result Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Suzanne Spera, Director of Investor Relations for Rowan Companies. Thank you. Suzanne, you may begin.

Suzanne M. Spera

Good morning. Welcome to Rowan's Third Quarter 2013 Earnings Conference Call. Joining me on the call this morning are Matt Ralls, Chief Executive Officer; Tom Burke, President and Chief Operating Officer; Mark Keller, Executive Vice President, Business Development; and Kevin Bartol, Executive Vice President, Chief Financial Officer, who will have prepared comments.

Before Matt begins his remarks, I'd like to remind you that during the course of this conference call, forward-looking statements may be made within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements about the change in corporate structure, as well as statements as to the expectations, beliefs and future expected financial performance of the company that are based on current expectations and are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected by the company. Other relevant factors have been and will be disclosed in the company's filings with the SEC.

With that, I'll turn the call over to Matt.

W. Matt Ralls

Thanks, Suzanne, and good morning, everyone. You'll note that I sound a little different this morning from everyone else. I am attending a customer event out of state and will leave it -- the team at Houston to handle most of the opening comments and the questions following, although I will be on the line for any directed questions to me. But for the problems we've been experienced with Gorilla VII leg damage, we had a very solid third quarter. Still investigating the cause of the leg damage, but suffice it to say that this type of leg damage is not a common occurrence for the Super Gorilla Class of rigs. Gorilla VII is one of our highest-earning rig though, unfortunately, the lost revenues and prepared expense reduced earnings in the quarter by approximately $0.22 per share and are expected to impact the full year by approximately $0.32.

One bright spot for the quarter that -- was that operating expense came in very close to our previous guidance despite the extra repair expense on the Gorilla VII. We expect to put this event behind us by midmonth when the rig is anticipated to be back on the payroll. Tom and Mark will give you more details on the continuing strength of the high-spec jack-up market, the state of our marketing efforts for our fourth drillship. Thanks to the support of HHI, our option for a fifth drillship in the same class has been extended to year end. As I explained on last quarter's call, we did not anticipate exercising the option on a purely speculative basis. Or said another way, we would need a very strong indication of intent to contract the rig from an operator before we would expect to move forward.

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

Thomas P. Burke

Thanks, Matt, and good morning, everyone. For the third quarter, we're pleased with our operational results. In particular, our safety performance remains strong and our operational downtime is better than our guidance. However, our 2013 out-of-service time is slightly higher than previously estimated due to leg issues with the Gorilla VII, which I will discuss in more detail.

We continue to be encouraged by the increase in jack-up day rates as several of our rigs commenced new contracts. Mark will tell you about these shortly. In the quarter, our operational downtime was less than 1%. We use the term operational downtime to mean time when our rigs are on contract and available to earn day rates, but they -- but won't operate due to operational issues such as equipment breakdowns. We are happy with our continued low level of operational downtime, which equates to a revenue efficiency of over 99% in the third quarter. We remain focused on continuously improving operational downtime. However, we recommend you continue to use the previously stated guidance of 2.5% for jack-ups.

We use the term out-of-service to mean all operate time other than operational downtime and cold-stack days. During the quarter, leg repairs on the Gorilla VII continued, pushing our out-of-service time to 13% for the quarter. The Gorilla VII legs were damaged as it was departing its last location. The seabed topography put the rig's legs under significant torsional stress that was not anticipated by our third-party warrantee surveyor, or [indiscernible] engineering team. This stress resulted in leg-bracing damage when the rig was jacking down into the water. The rig's out-of-service time has also been exacerbated by poor weather conditions that hampered the repair process.

Today, Kevin will give guidance on 2014 costs. We're in the throes of our budgeting process and we'll refine these costs over the next couple of months. Our on-rig operating costs will go up in 2014, mostly due to more operating days. Our off-rig operating costs will increase moderately, as we have already put in much of the infrastructure required to support deepwater operations.

Now turning to deepwater. Our construction program is on time and on budget. We celebrated the naming of our first drillship, the Rowan Renaissance, on October 2. This rig is currently on sea trial and is over 96% complete. We expect to take ownership of it at the end of the year. Our second drillship was launched on September 27, and is now 82% complete. Our third drillship had its keel-laying on September 30, and is now over 45% complete. Finally, steel was cut for Rowan's fourth drillship on October 21.

As I mentioned last quarter, we are closely monitoring the delivery of drilling equipment and working with vendors to minimize the impact of any late deliveries. The contract commencement dates given on our last fleet status remain valid, and we'll keep you informed if these dates change.

We continue to see robust demand for our fourth drillship, which is expected to be delivered from the shipyard at the end of March 2015 and be available to commence work in the summer of 2015. We have extended our option for a fifth drillship from Hyundai Heavy Industries to the end of December 2013, which would put its delivery at the end of the first quarter 2016. However, as Matt stated in his comments, it's not likely that we would exercise this option on a purely speculative basis.

Now I'll turn it over to Mark to comment on markets and recent pictures.

Mark A. Keller

Thanks, Tom, and good morning, everyone. Today, I'll review the jack-up market including a regional breakdown of the areas where we are currently operating, and I'll conclude with an update on the ultra-deepwater market and the prospects for our fourth drillship, the Rowan Relentless.

The offshore drilling market is strong and we have a positive outlook for 2014. Almost 2/3 of our jack-up fleet will roll off contract in the next 12 to 18 months, and we are well positioned to take advantage of the upside. In light of recent pictures worldwide, we're confident in our ability to contract these rigs at higher rates on a term basis. According to IHS Petrodata, there are currently partnered in 7 jack-ups worldwide. Demand is 446 rigs with a total utilization of 88%, a 4-year high. Rowan's marketed utilization is 100%, and we're encouraged by the increases in utilization and the improvement in day rates worldwide. We expect this trend to carry on well into 2014, as current projections indicate that global demand for jack-ups will continue to rise.

Starting with the North Sea, all of our jack-ups are currently contracted, and 5 of our 6 units are booked through 2014. We recently announced an extension for the Rowan Stavanger with Talisman at 413,000 a day for approximately 3 to 4 months. This project will carry the rig to August 2014. We're currently in discussions with multiple operators regarding their high-spec requirements following the Talisman contract.

Following upgrades, the Gorilla VI is expected to commence operations for ConocoPhillips in early first quarter on a 3.5-year contract and an effective day rate of 358,000 a day, as previously reported. The Gorilla VII should return to work shortly with Apache U.K., depending on whether, after completing labor repairs.

The North Sea continues to be a tight market with a supply deficit of 1 to 3 jack-ups expected in 2014, despite the influx of new builds. Our harsh-environment, high-spec fleet is strategically and optimally located to remain a long-term player in the region.

Now looking at the Middle East. Nine of our jack-ups are working in Saudi Arabia and 1 in Qatar. The Rowan California commenced operations with Maersk Oil Qatar in early September on a 3-year contract at an effective day rate of 144,000 a day. Additional projects in Qatar is expected in 2014 from MOQ, NOC, Shell, Maersk and Total. However, the bulk of the demand increase in the region is projected to come from Saudi Aramco. Their fleet of 43 jack-ups is forecast to increase significantly over the next 18 months. We have 8 jack-ups completing contracts with Saudi Aramco in 2014 and we believe we will secure additional work at favorable day rates as Aramco strives to meet stringent production demands. We look forward to continuing our long-standing partnership with the largest oil company the world.

Southeast Asia continues to be an active market for tenders and inquiries. We are currently evaluating 6 to 10 projects that are particularly suitable for our jack-ups. We recently contracted the EXL 1 in Petronas Indonesia at 160,000 a day for 1 year. The rig went straight to work at the conclusion of its contract with Hess at the end of October. The J.P. Bussell will complete a farm-out with Newfield in mid-December, when it will go into the yard for maintenance and inspections. The rig will be ready to return to work in early first quarter 2014.

And finally, the Americas. We signed a contract for the Gorilla III with a rig share group in Trinidad to commence operations on October 28. The contract has an expected duration of 1 year at 160,000 a day. The day rate for option oil spud in the second year of the contract will be higher than the current day rates. We are pleased to continue our presence in the Trinidad market.

Turning to the U.S. Gulf of Mexico where 5 active jack-ups are fully utilized and we recently announced a contract to the EXL III with Freeport-McMoRan. The rig is currently on the standby rate until we commence operations in mid-December on the Davy Jones prospect at the full operating rate of 180,000 per day. Duration of the project is expected at a minimum of 8 months. The Rowan Louisiana was awarded a contract with EnVen, and will move directly to location following the current commitment with NorthStar in late November. The project should last approximately 45 days at 125,000 a day with options following. Day rate fixtures in the region for 300-foot independent leg cantilevers or greater have increased 11% over the last quarter. As our Gulf of Mexico jack-ups rollover in 2014, we expect to contract them at higher rates as well.

I'll conclude with a few comments on the ultra-deepwater market. 3 of our 4 newbuild drillships are contracted, and we're currently marketing our fourth ship, the Rowan Relentless. We are in active discussions with multiple operators about projects for the mid-2015 delivery and we are optimistic about our opportunities. The deepwater market continues to show rapid bifurcation as the ultra-deepwater units with advanced capabilities, such as our design, continue to separate themselves from the fifth-generation fleet. There's a step change in customer requirements as dual-stack higher hook-load increased water depth capabilities are in high demand. Day rates for these more capable units remain in the range of high 500s to the low 600s, with the Golden Triangle driving demand for activity. Based on the level of interest we are experiencing, we are hopeful to announce a contract for the Rowan Relentless well ahead of the scheduled delivery.

Thank you for time this morning, and I will now turn the call over to Kevin.

J. Kevin Bartol

Thank you, Mark, and good morning, everyone. Our third quarter revenues were $383 million, up by 8% over last year due to higher average day rates and higher utilization between periods. Our out-of-service time was approximately 13% of our available rig days during the third quarter, which was slightly higher than our previous guidance due to the extended out-of-service time for the Gorilla VII leg repairs. The out-of-service time was down from last year's level as fleet repositioning declined and certain rigs returned to service.

Our operational downtime, which is the unbillable time when a rig is operating, was less than 1% of in-service days during the quarter. We currently expect our out-of-service time for full year 2013 to be approximately 10% of our available rig days, which is slightly higher than our previous guidance of 9%, primarily due to the extended out-of-service time for the Gorilla VII leg repairs. We expect our out-of-service time to be approximately 9% in the fourth quarter of 2013 due to off rig days for the remaining Gorilla VII repairs and shipyard time for the Gorilla VI, as it prepares for a fixed contract in Norway.

It is important to note that there are times when we are compensated for certain out-of-service periods. However, this revenue is recognized over the contract period once the rig commences drilling operations. As of the date of our last fleet status update on October 24, our backlog of drilling commitments was near an all-time high of approximately $4.4 billion. We estimate that 7% of our contract backlog will be realized as revenue during the remainder of 2013, 31% will be realized in 2014, 28% in 2015, 24% in 2016 and the balance in 2017 and beyond. Excluding our 2 cold-stack rigs, we have 85% of our remaining available rig days under contract in 2013, 57% under contract in 2014, and 27% under contract in 2015 and a 19% under contract in 2016.

Despite higher-than-anticipated cost for the Gorilla VII leg repairs, our third quarter operating expense of $212 million were only slightly higher than our previous guidance and lower than our previous guidance when higher reimbursable expenses, which are fully offset by incremental revenues, are excluded.

Operating expenses in the third quarter were 13% above last year's level, primarily due to the Gorilla VII leg repairs, and the impact of certain rigs operating in higher-cost locations. It is important to note that these rigs operating in higher-cost locations are in revenues that more than offset the incremental costs.

Looking at the fourth quarter, we estimate operating expenses will be in the range of $212 million to $215 million, or slightly higher than the third quarter, as the impact of additional operating days from certain rigs which returned to service during the third quarter will offset the expected reduction for the Gorilla VII repair cost. As a reminder, when rigs are in the shipyard for upgrades, like the Gorilla VI, crew and other personnel-related costs associated with the project are capitalized rather than expensed. When rigs are out of service for repairs, like the Gorilla VII, crew costs are expensed.

Our full year 2013 operating expenses are expected to be in the range of $849 million to $852 million, or less than 2% higher than our previous guidance net of rebuilds. The increase is primarily due to the Gorilla VII repair costs. Additionally, we continue to expect our average gross margin as a percentage of revenue to slightly improve in 2013 over the 2012 level.

Our third quarter depreciation expense totaled $69 million, which was in line with our previous guidance in last quarter and up by 10% over last year, primarily due to fleet additions between periods. We estimate 2013 depreciation expense will be in the range of $271 million to $272 million, in line with our previous guidance, including approximately $70 million to $71 million in the fourth quarter.

Our third quarter SG&A expenses totaled $33 million, which was slightly higher than our previous guidance and up by 29% over last year, primarily due to professional services and fees for initiatives related to the company's corporate restructuring which have produced and are expected to continue to produce significant economic benefits.

SG&A was also up due to support for entry into the ultra-deepwater market and due to incremental incentive-based compensation linked to the company's projected performance. We estimate 2013 SG&A expense will be in the range of $129 million to $139 million, which is higher than our previous guidance primarily due to these same items. Our fourth quarter 2013 SG&A expenses are expected to be in the range of $33 million to $35 million.

Interest expense, net of interest capitalized, was approximately $17 million during the third quarter, which was in line with our previous guidance. We continue to estimate 2013 net interest expense to be approximately $69 million to $70 million, including approximately $16 million in the fourth quarter of 2013.

Our third quarter tax rate was approximately negative 1%, which was below our previous guidance, primarily due to the beneficial impact of certain discrete items recognized during the quarter. We expect our fourth quarter effective tax rate to be approximately 6%, which is in line with our previous guidance. We expect our full year 2013 effective tax rate to be approximately 7%, which is slightly lower than our previous guidance due to discrete items recognize during the third quarter. As a reminder, the tax rate is dependent on the full year projected mix of income from our U.S.-owned assets and our foreign-owned assets and any discrete items such as tax borrowings or settlements reportable in the quarter.

Property and equipment additions totaled $157 million in the third quarter, which is significantly lower than our previous guidance, primarily due to timing of certain equipment deliveries and rig projects. We currently are estimating our remaining 2013 capital expenditures to be approximately $730 million, which is lower than our previous guidance, also due primarily to the timing of equipment deliveries and rig projects and includes $517 million for our 4 drillships; $49 million for riser gas-handling equipment for the drillships, software certifications and deepwater fleet support costs; $105 million for life enhancement projects and existing fleet maintenance; $24 million for partially reimbursed jack-up fleet contractual modifications; and $35 million for equipment spares, drill pipe and improvements to our shore base.

At September 30, we had approximately $2 billion of remaining capital expenditures under our drillship -- under our 4 rig drillship newbuild program, with $517 million required in 2013, $1.1 billion in 2014 and $452 million in 2015. Our drillship commitments will be funded through available cash, cash flow from operations, amounts available under our revolving credit facility, if required, and potential future financings.

Although we have not completed our 2014 annual budget process, we are providing preliminary guidance, which we'll update in our next earnings call. Actual results may differ significantly from this guidance due to contracting activity, which may require shipyard stays and capital expenditures for rig modifications, rig relocations and other factors not currently contemplated.

As shown in our fleet status, we currently expect our first 2 ultra-deepwater drillships to begin operation late in the first quarter of 2014 and late in the third quarter of 2014, respectively. While we do not expect any out-of-service days in 2014 for the drillships, please note that we are expecting our operational downtime to be less than 5% after some break-in period when operational downtime could be somewhat higher. We expect jack-up out-of-service time to decline to 7% to 9% of our available rig days in 2014, compared to an estimated 10% in 2013. And we continue to estimate jack-up average operational downtime of 2.5% of in-service days.

Our 2014 operating expenses, excluding rebillable expenses, are expected to increase primarily due to the addition of drillship operating days and more activity in Norway and, secondarily, due to labor rate increase.

First, we are estimating that the addition of the 2 ultra-deepwater drillships will add approximately $70 million to $75 million of direct on-rig operating expenses. Second, we expect to incur approximately $40 million to $45 million of incremental operating expenses due to an increase in jack-up activity in Norway. Norway is a higher-cost market, but also with higher day rates, which more than offset the expected higher costs.

Finally, we are estimating worldwide base wage rate increases to be approximately 6% to 8%, which are expected to increase our operating expenses by approximately $17 million to $20 million. Excluding these 3 items, we are expecting our remaining operating expenses to increase by approximately $10 million to $20 million, or only 1% to 2% over the 2013 levels. This expected increase is moderate, given the expected increase in total jack-up in-service days and reflects the maturing of our infrastructure and processes to support global operations and our entry into the ultra-deepwater market. We expect our average gross margin, as a percentage of revenue, to improve slightly in 2014.

Selling and general and administrative expenses are expected to increase approximately 6% to 8% in 2014, primarily due to the full year impact of growth in our support functions for our global expansion in deepwater operation. This increase, as well as our off-rig operating expense increase, is more moderate than our 2013 increase because we established large parts of the infrastructure necessary to operate in the ultra-deepwater market during 2013.

Our 2014 depreciation expense is expected to increase to approximately $310 million to $320 million, primarily due to the addition of the 2 ultra-deepwater drillships. Based on current debt levels, our 2014 interest expense, net of interest capitalized, is expected to be approximately $50 million to $55 million. We will adjust guidance on interest expense when our financing plans for 2014 CapEx become clear.

Our 2014 effective tax rate is currently expected to be in the single digits. This rate could fluctuate as we finalize our 2014 budget and enter into additional drilling contracts. As you know, the tax rate is driven by our mix of domestic and foreign income and the underlying tax rates in each jurisdiction.

We are currently estimating our 2014 capital expenditures to be approximately $1.6 billion to $1.7 billion, with approximately $1.2 billion for 3 drillships and related costs and the remainder for jack-up fleet contractual modifications, life-enhancement projects, fleet spares and fleet maintenance and upgrades. We will refine this 2014 guidance in our next earnings call after we have completed our annual budget process.

This concludes our prepared remarks. With Laura's assistance, we will now open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Dave Wilson with Howard Weil.

David Wilson - Howard Weil Incorporated, Research Division

Mark, I'll start with you and just one quick question following up on your prepared comments on the recent contract for the Stavanger and its uses as the combination work. Not that the day rate reflects that, but given the rig's capabilities, that will be the first and best use of that rig, I would think. I wanted to see if the work here is -- in this capacity, is suggestive of anything else like the demand of the higher-spec rigs in the North sea. And kind of maybe if you could put some color around the demand following -- when this rolls off in August 2014.

Mark A. Keller

I'd be happy to, Dave. We -- I do think the day rate of 413 per day is indicative of how strong the market is in the North Sea, particularly in the Norwegian sector. For rigs to qualify for an AoC is very expensive, it takes a lot of time and you have to have, as you know, a special unit to do that. As far as surveyor [ph] goes, we're in discussions with multiple operators. We're taking to 5 or 6 operators currently about the rig both in Norway and in the U.K. sector. So we feel like the market remains very strong. We're looking at about a 1 to 3 rig supply depths [ph] in the region right now. And that's given the fact that you've seen several newbuilds come into the market. So we feel good about our position there, and we have -- I think, August is fairly conservative, a time for release also.

David Wilson - Howard Weil Incorporated, Research Division

Okay, fair enough. And then kind of switching gears. Kevin, regarding the cost guidance for 2014, and I apologize if I missed this. But you went through these -- all the iterations, the reasons for the increases, the drillships, the Norway jack-up market, labor inflation and some other. Did we just -- is that on top of the base which you gave guidance for 2013, around 8 40, 8 42, we just kind of add those on. Is that how we look or should think about it?

J. Kevin Bartol

That would be in addition to 2013 operating expense less rebuild. You have to subtract the rebuilds from 2013 operating expense and then add the amounts that I gave you to forecast '14 operating expense. While I'm speaking, I'd like to clarify, in case I misspoke when I gave guidance for our 2013 SG&A expense. That expense, we anticipate, to be in the range of $129 million to $131 million, it's total. I might have said $139 million, which was incorrect. Again, 2013 SG&A expense, we expect that to be in the range of $129 million to $131 million.

Operator

Our next question comes from the line of Ryan Fitzgibbon of Global Hunter Securities.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Kevin, if I can just follow-up on that cost question one more time. So $850 million less, call it, $35 million in rebillable would be $815 million. If I do my math, you are more less guiding to $950 million to $975 million next year, is that right?

J. Kevin Bartol

I don't think you're getting the addition right there. We can help you, I think, offline on that. Suzanne can help you.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Okay. For enough. The next one would be for Mark. Question on the Saudi market outlook for next year. Kind of looking at the fleet status, you've got 8 rigs rolling off over the next 13 months. I think most of those have fixed-price options for 1 year. Would you expect all those to be exercised? Or do you think you can build additional term on the back of those at higher rates?

Mark A. Keller

Ryan, right now we're having discussions with Saudi Aramco. What they are doing currently, they have 24 rigs rolling off in 2014 as a fleet. As you said, 8 of them are ours. What they're doing is taking them in sequence, so when they come off. So we are in discussions currently. The term that we are in discussions with, they range from 3 years to as long as 10 years, and so it depends on the operating area where the rigs will be operating. But we are in discussions with multiple things. I do believe, from what we are hearing today and what we are seeing today, that the terms will be longer than the 1 year extensions that are provided in the current contracts.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Okay. And then, I guess, just a follow-on there. For the Tarzan rigs, is there any potential possibility that the yard time in the back half of next year could also be deferred again if they do elect to exercise those options to recontract those rigs?

Thomas P. Burke

I'll answer that, Ryan. There is always a possibility of that depending on Aramco's drilling program. But that is the -- what we have in the fleet status is what we believe will happen right now.

Suzanne M. Spera

And we'll update you on the fleet status as it changes.

Operator

Our next question comes from the line of Ian Macpherson with Simmons.

Ian Macpherson - Simmons & Company International, Research Division

Kevin, I also just wanted to seek a clarification on the cost guidance for next year, rather than following up offline if we could all just get on the same page here on the call with regard to how much of your OpEx for 2013 is in the reimbursable bucket. And then if I calculate it correctly, your incremental cost that you've laid out for the different components looks to be about $145 million to $150 million year-on-year, is that correct?

J. Kevin Bartol

Correct. Yes, about $30 million in 2013 is rebuilds. So if you wanted to subtract our total projection, take $30 million off that, add that amount that I forecasted in those 4 items in effect, you would get the 2014 guidance, exclusive of rebuilds. Then, of course, you're going to have to add some rebuilds back to get the total operating expenses that we will report.

Ian Macpherson - Simmons & Company International, Research Division

Got it. Mark, I'm sorry, I misheard you, it sounded like the EXL I contract that started recently, I didn't get the details of that, I'm sorry.

Mark A. Keller

That's not a problem, Ian, how are you doing? We rolled the contract with Petronas Indonesia. We're trying to build a long-term relationship with them, obviously, in every area they operate. And we rolled the contract at 160 a day for 1 year. It has options on it at mutually agreed rates. But they are looking at fleet -- their fleet to use it different areas of Southeast Asia and Malaysia, Vietnam. We work for them in Vietnam and Malaysia, and certainly now in Indonesia.

Ian Macpherson - Simmons & Company International, Research Division

Perfect. And then lastly, have you commented on the Joe Douglas outlook post-rollover this month with LLOG?

Mark A. Keller

We -- Ian, I haven't. We're in discussions with about 3 operators. Currently, we haven't signed anything, but indications are that we'll have -- from what we see right now, we'll have contact that -- we're working on a contract right now to try to carry the rig through hurricane season. And so we haven't finalized it as of yet. But with only 6 300-foot or greater jack-ups in the Gulf, demand is very high, and so we're just working with multiple operators trying to bring that to conclusion.

Operator

[Operator Instructions] Our next question comes from the line of Klayton Kovac with Tudor, Pickering, Holt.

Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

So regarding the 6% to 8% base inflation in 2014, what areas do you see as having the largest and smallest inflation?

J. Kevin Bartol

We think the increase is more moderate in the U.S., and it's greater in Norway and in the North Sea in general. Would you agree with that, Mark?

Mark A. Keller

Absolutely. Yes.

Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

And then also could you provide an update on your thoughts around reinstating the dividend?

J. Kevin Bartol

Actually, we'll push that across to Matt, if you could give him a second to [indiscernible].

W. Matt Ralls

Yes, we continue to evaluate that. It's our current intention to go to the board in our January meeting with a recommendation on the dividend. No guarantees, of course, about what the recommendation will be or what they'll do about it. But in the meantime, between now and then, we're doing some modeling about what size dividend we should start with and how fast -- how frequently and aggressive we grow the dividend once it is reinstated. So I guess, more news to come. It's really not a lot different from what I've said in the last quarterly call except for the fact that we do intend to make recommendation.

Operator

Our next question comes from the line of JB Lowe with Cowen & Company.

John Booth Lowe - Cowen Securities LLC, Research Division

Just wanted to get an idea if you could let us know what you think in terms of the potential for getting new high-spec jack-up in the future versus exercising options on that fifth drillship. Do you think that you'd order any additional jack-ups down the line?

Thomas P. Burke

Okay. I'll take that question, JB. I think where we are right now is that we have a very desirable design in our HHI drillship, and it will be a good capital to -- and not a huge amount of additional effort as far as the resources in the company to exercise that fifth option. We are interested in growing our jack-up fleets and that's something which we are thinking about and we will do in the future. But right now, our absolute focus is getting these deepwater drillship contracted -- built, contracted and on earning day rates. So that is our focus in the company right now. I would say that that we've spent -- I just would add to that, we have spent $3 billion on newbuild jack-ups and we have spent or are spending another $3 billion on drillships. So we have done a good amount and so we want to use the capital from the drillships. But all the rigs will produce wisely, and we're always evaluating jack-ups and drillships. Frankly, we are in the high-spec jack-up market and we will, no doubt, be adding more rigs, but probably not immediately.

John Booth Lowe - Cowen Securities LLC, Research Division

And I know you guys have discussed this kind of at length here, but just to get an idea from a real top-level perspective whether -- when you're looking at a lot of these contracts that are rolling off, Saudi Aramco, are you -- the length and the term of the contracts, where you guys lean and what are you looking to sign on to, just from very top-level, nothing to beat a dead horse here or anything like that?

Mark A. Keller

No, that's fine. Without divulging any confidential information, JB, we're in discussions with Aramco currently. But what we're seeing right now for our 8 rigs -- and I'll just keep it with our 8 rigs, but what we're seeing right now is Aramco currently has 43 jack-ups working for them, they have 24 rolling off in '14. And they are going through a process right now of extending and/or high grading. They have high-graded some of those rigs and made some changes, but we see them increasing their fleet over the next 18 months aside from the 24 that are rolling off contract. So what we're seeing in terms of extension terms, I mentioned earlier, is 3 years to some are 5, and we've heard terms discussed at 7 and even possibly 10. So it just depends on where the rigs will be utilized. The gas rigs, for looking at high-spec gas rigs, I think certainly, the recent fixtures that Noble posted on the 2 JU-2000s gives you a pretty good idea where those rigs will be. Hopefully ours are higher than that, but that's -- they did a good job on the renewals there, Noble did. So I think it gives you a pretty good indication. Hercules rolled some rigs at good rates in the region and they all vary by term. So we're pretty -- we feel good about where we are. We have a great relationship with Aramco. Our operations team has built a very strong relationship with their drilling team. And we feel good about where we are with our 8 rigs rolling off and even the possibility, hopefully, of adding rigs to our fleet.

Thomas P. Burke

I'd just add to that, JB, Aramco has a plan and it's a very detailed plan and they decide. They're the driving force in deciding contract terms, and so they will present what they want. And so really, we don't get -- we may want a certain length of contract, but really it's what our -- how it fits and what customers like, the hydrocarbon extraction program.

Operator

Our next question comes from the line of Harry Mateer with Barclays.

Harry Mateer - Barclays Capital, Research Division

I'm just wondering if you could talk a little bit more about how you're balancing the dividend recommendation early next year with your financing needs given the large CapEx numbers in Q and then in 2014. I'm just a bit surprised that we're already talking about dividends when I think your expectation is you're still going to outspend cash flow next year and likely have to raise some debt.

W. Matt Ralls

Let me start with that, Kevin, and then I'll turn to you. But we have said all along that when we reinstate this, we expect to instate it pretty close to the dividend that we had before, if not exactly [indiscernible]. So that's not a big demand on our capital. We've got very visible cash flow growth, rigs that are under contracts. So while we'll not be free cash flow in 2014 while we're still in the restructuring [ph] program, we would be comfortable. And we've the same discussion with leading agencies as well, but there's visibility from the rigs that are coming onstream it's the appropriate time to start with a small dividend and to grow over time as our leverage increases.

J. Kevin Bartol

Yes, Matt. Matt, I'm not sure if they've heard everything, you broke up a little there. But just to go over in case not everybody got all of that, what Matt said was if we make a decision to move ahead with the dividend reinstatement, and we will be preparing analysis for the board and modeling all the financials here over the next quarter, it would likely be modest along the lines that we had before. It would be a way to start and think about growing that over time. So it wouldn't be set at the level that would tax us financially, it would just get us on -- into the discipline of thinking about a dividend and putting it to our financial strategy and planning for the future. Harry, does that answer your question?

Harry Mateer - Barclays Capital, Research Division

It does, yes.

Operator

There are no further questions at this time. I would like to turn the floor back over for closing comments.

Suzanne M. Spera

All right. Well, thank you, everyone, for joining us on our third quarter earnings conference call. If you have any additional questions, please feel free to contact Investor Relations. Thank you.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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