Ensco International Inc. Q4 2009 Earnings Call Transcript

Feb.25.10 | About: Ensco PLC (ESV)

Ensco International Inc. (NYSE:ESV)

Q4 2009 Earnings Call Transcript

February 25, 2010 11:00 AM ET

Executives

Sean O'Neill - VP, IR

Dan Rabun - Chairman, President & CEO

Bill Chadwick - COO

Jay Swent - CFO

Carey Lowe - SVP

Analysts

Robin Shoemaker - Citi

Brian Uhlmer - Pritchard Capital

Pierre Conner - Capital One Southcoast

Mike Urban - Deutsche Bank

Geoff Kieburtz - Weeden & Co.

Ian MacPherson - Simmons & Company

Rob MacKenzie - FBR Capital Markets

Joe Hill - Tudor, Pickering

Operator

Good day, everyone, and welcome to the Ensco International Fourth Quarter Earnings for 2009 Conference Call. As a reminder, this call is being recorded and your participation constitutes consent to its taping.

I will now turn this conference call over to Mr. Sean O'Neill, Vice President of Investor Relations who will moderate the call. Please go ahead, sir.

Sean O'Neill

Good morning, and welcome to Ensco's fourth quarter 2009 conference call. With me today are Dan Rabun, CEO; Bill Chadwick, our Chief Operating Officer; Jay Swent, Chief Financial Officer, as well as other members of our executive management team.

We issued our earnings release which is available on our website at enscointernational.com. Later today, we plan to file our SEC Form 10-K. As usual, we will keep our call to one hour. Any comments we make about expectations are forward-looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially.

Please refer to our earnings release and SEC filings on our website that define forward-looking statements and list risk factors and other events that could impact future results. Also, please note that the company undertakes no duty to update forward-looking statements. As a reminder, our monthly rig status report was issued on February 16th.

Now, let me turn the call over to Dan Rabun, Chairman and CEO.

Dan Rabun

Thanks, Sean, and good morning, everyone. Jay and I are in our new headquarters in London today. Before Jay takes us through the financial results, I would like to start by providing some color on fourth quarter and full year highlights, the state of our markets and our current outlook.

On December 22nd of last year, we achieved an important milestone in Ensco’s history. Shareholders approved our re-domestication to the United Kingdom and virtually the entire senior executive management team is in the process of moving to London. The company, customers and shareholders are all expected to benefit from the relocation to the U.K.

Executive management oversight will improve from a more centrally located global headquarters in London. We will be closer to more of our major customers and we expect to achieve a global effective tax rate comparable to our competitors domiciled in Europe. The move to the U.K was a very logical next step for Ensco. We’ve operated in United Kingdom for sixteen years. We have more than 400 employees in the country supporting our North Sea operations.

In 2009, U.K revenues exceeded those in the U.S. Virtually all of our executives moving to the U.K have worked outside the U.S. previously on long-term assignments, so we anticipate a very smooth transition. Another major achievement for 2009 was our safety record.

Last quarter I underscored the importance of safety and its strong ties to operational excellence, reliability and customer satisfaction. I’m extremely pleased that our rig crews and the entire workforce achieved the lowest instant rates in our history last year, which were also better than the industry averages. I should mention that the IEDC industry average also improved significantly in 2009, which is great to see for our industry.

Now let me turn to our operations. I’ll start with our deepwater business. In 2009, our ultra-deepwater expansion strategy that we initiated in 2005 became a reality. ENSCO 8500 join the fleet in June and as you may have read it drilled Anadarko's major new Lucius field discovery in the U.S Gulf of Mexico and ENSCO 8501 the second rig in the series commenced operations in October.

They will be joined this year by ENSCO 8502 and we expect to commence operations in the third quarter, and then ENSCO 8503, which is anticipated to be delivered in the fourth quarter, while we have lowered our previous deepwater segment revenue projections for 2010, as Jay will describe in a moment, we were very pleased with the overall start-up of our 8500 series rigs.

We expect significant growth in our deepwater business over the next few years based on contracts already in place and customer inquires have picked up for our remaining uncommitted rigs for work beginning in 2011 and 2012 when they are scheduled for delivery.

During 2008 and 2009, there were 90 new deepwater discoveries around the world and it seems like there are new announcements everyday, which will create positive demand for deepwater drilling in the future.

From a cash flow perspective, we also achieved an important milestone in 2009. Our $3 billion capital spending commitment for the deepwater new build program has declined to just $1.1 billion at year-end as our deepwater segment revenues have began to ramp up as the new rigs commenced operations.

Turning now to our jack-up business, 2009 was clearly a challenging period for the whole industry. We are very pleased however at how we finished the year with 11 percentage point increase in utilization in the final quarter versus the third quarter driven by our Asia-Pacific and North and South America business units.

Our overriding strategy is to keep our rigs working wherever possible even if that means working in accommodation mode where we are able to lower our cost to achieve an adequate margin even at lower day rates. We believe we have a competitive advantage in terms of a lower-cost structure and we have used this advantage to our benefits in the bidding process.

Our ability to win bids however is not strictly tied to our cost advantage. Safety, reliability and the quality of our equipment are also critical factors.

As I mentioned earlier, 2009 was Ensco's best year ever in terms of safety and this is very important factor with our customers. I am also pleased to report that Ensco received very high remarks in our recent independent survey of operators grading the offshore drillers. Customers ranked Ensco number one for performance and reliability. We are proud of the recognition and gratified that customers value the investments we have made both in our fleet and our people, which was evident in the high scores.

Now, let’s discuss the markets. I will start with deepwater, in the fourth quarter Petrobras issued two tenders for work for both dynamically positioned and moored semis. This is an addition to their plans for 28 rigs to be built in Brazil and underscores Petrobras need for rigs on a near-term and medium-term basis.

We continue to see new discoveries being made around the world, recent examples include Petrobras in Brazil, ENI in Angola, Anadarko in Mozambique and our clients continue to make plans to drill deepwater exploration wells in prospective areas of Indonesia, China, Ghana and Australia. Additional discoveries also continue to be made in the U.S. Gulf of Mexico, including the recent announcement of Anadarko’s Lucius discovery that was drilled by ENSCO 8500.

We anticipate that demand for rigs will increase to undertake development activities over the next several years. We are actively marketing and are engaged in discussions with several operators regarding the prospective work opportunities for three uncommitted ultra-deepwater rigs. And we fully expect that our uncommitted rigs will be contracted well before their deliveries.

In the jack-up market, challenges continued during the quarter in terms of declining average day rates and we expect this to continue for a period of time as expiring rates from long-term contracts are renewed at lower market rates. With oil prices stabilizing in the $70 range, however, market day rates appear to be stabilizing as operators become more confident about prospects for 2010.

We cannot make any predictions on the timing of a pricing recovery in the jack-up markets other than to remind everyone that it usually takes several quarters of improved utilization prompted by stable commodity prices and our customers’ confidence in the long-term fundamentals.

Turning to specific markets, the Middle East, India and Southeast Asia Pacific Rim remain very competitive jack-up markets. Several contracts have been awarded or extended, several tenders remain outstanding and more are expected. In addition to the normal areas of activity, several opportunities standout. Saudi Aramco issued tenders for two high spec gas rigs and two work-over rigs and additional tenders are expected for requirements in late 2010 and early 2011. Some of these tenders will be against incumbent rigs.

Kuwait Oil Company expected to tender in the second quarter for a 15K jack-up. Iran increased its rig count by five rigs helping to reduce supply in other markets where we operate. We did opt to cold stack one rig, ENSCO 84 in Bahrain due to insufficient opportunities in the near term for this 250-foot jack-up.

In India. ONGC tendered for 7 jack-ups against the incumbents. In addition to multiple opportunities throughout Southeast Asia and Australia we’ve seen a major increase in bidding activity in Indonesia as a result of pressure to increase oil recovery and to capitalize on affordable rig rates. Since early December, there have been eight tenders for programs ranging from 90 to 490 days. The volume of tenders created a log jam and caused many bids to fail due to the insufficient number of bidders because of stringent operator terms and regulatory conditions. I should add that Ensco also was ranked number one in the Asia Pacific Rim region in the independent customer satisfaction survey I mentioned earlier.

Turning now to the North Sea, drilling economics remained fragile with U.K. gas prices remaining low. However, it appears that operators are focused on development and appraisal oil wells in known prospects and recently we have seen a number of new inquiry surface for work starting in mid to late 2010.

You will notice for example in our most recent fleet status report that we have three rigs contracted with delayed start dates beginning in late second quarter and early third quarter 2010. The oil and gas lobby in the U.K. is pushing for tax relief in order to leverage existing infrastructure and to make more fields economical which would be positive for drilling demand in the region.

In the U.S. Gulf of Mexico, jack-up utilization has improved substantially. The utilization rate for premium jack-ups is 90% and we are bringing ENSCO 90 out of cold stack to work under a new contract. As a result, we now have six rigs operating in the Gulf and just one cold stack.

Opportunities in Latin America were also improving, we understand that PEMEX has received approvals and will come out with tender soon for five independent leg cantilever jack-ups. Jack-up programs are also emerging in Brazil, Columbia, Trinidad, Surinam and Guyana, we are pursing all of these opportunities.

Overall, we are seeing a healthy level of jack-up activity worldwide and more in enquiries in the ultra deepwater markets. While competition is significant, we believe our reputation for safety, operational excellence, and cost effective service will continue to make Ensco standout versus competitors.

Now I will turn it over to Jay, thank you.

Jay Swent

Thanks, Dan. My comments today will cover Ensco’s re-domestication to the U.K, details of fourth quarter results, our outlook for the first quarter and full year 2010 and a review our financial position. As Dan mentioned our re-domestication to the U.K. is a pivotal event in Ensco’s history.

Over the past year the U.K. government has taken major steps to attract and retain large multinational companies like Ensco through more progressive tax policies. Since some of these changes are relatively recent and not yet fully known in the marketplace, I will take a few moments to discuss our move to the U.K.

The most frequent questions raised by investors today seems to fall under three basic categories. First, why move to the U.K. and not Switzerland like some of our competitors. Secondly, isn’t the U.K. taxation system similar to the U.S.? Third, will there be significant cost associated with restructuring operations and establishing a headquarters in the U.K.

Let me start with why we choose the U.K. First and foremost, as Dan mentioned, the U.K, and London specifically is an ideal location for our new headquarters, especially when you consider our global footprint. Secondly U.S. tax rules severely limit our U.S company’s ability to re-domesticate and one of the few ways that this can be as accomplished is to relocate to a country where you have substantial business activities.

Our extensive North Sea operations uniquely qualify us to re-domesticate to the U.K. Just to quantify this for you, during 2009, 86% of our revenues were generated outside of the U.S. and our U.K revenues exceeded the U.S. by a meaningful amount. The last point I would make on this topic is that we are in the process of restructuring our operations to be managed more globally. When this process is completed, the majority of our assets will be owned by Swiss subsidiary. So we will have the benefits of a Swiss subsidiary structure plus all the advantages of London, a major business and financial center and a global transportation hub.

With respect to the question of similarities between the U.S. and U.K international taxation systems, the answer is that the U.K and U.S. have historically been similar, but that change quite significantly in 2008 and 2009 as the U.K started to align more closely with the European Union, where many countries are on a territorial system as opposed to a worldwide taxation system.

The U.K has already made several changes to its tax policy from the multinational and the U.K treasury and HMRC are committed to further changes in 2011, all of which are aimed at making the U.K a more competitive business environment.

The answer to the third question which deals with expenditures associated with restructuring operations and establishing a headquarters in the U.K is yes, there are incremental expenditures involved, but we expect them to be more then offset by operational and other efficiencies.

The cash outlays for all of the planned restructuring activities totaled approximately $55 million. Some of this has already been expensed and some will be amortized. For example, in the fourth quarter of 2009, we incurred a $9 million tax charge that was included in our current tax provision, and $8 million of professional fees related to the U.K re-domestication that was reflected in G&A.

We incurred a $31 million obligation during the fourth quarter of 2009 associated with the transfer of rigs among subsidiaries, but this amount will be amortized to the income statement over 30 years so we’ll have a minimal P&L impact in 2010. There will also be some additional restructuring costs in 2010 estimated to be $4 million. These items add up to approximately $55 million as I just mentioned.

The incremental G&A increase associated with the London headquarters is approximately $10 million annually. In addition, we expect approximately $5 million of annual expenses to be reclassified from contract drilling expense to G&A as a result of our restructuring activities. The key question is what does this all mean for Ensco's effective tax rate?

We currently expect our 2010 effective tax rate will be approximately 16% to 17%, an improvement from our 19% tax rate in 2009. While we expect to substantially complete our restructuring activities by mid-year, we’ll not realize the full benefits of these changes in 2010. If all factors remained equal in 2011, we would expect to achieve an effective tax rate below 15%.

In a nutshell, we expect our move to the U.K will provide very meaningful intangible benefits to the company and our shareholders. The efficiency of our tax structure is similar to that of peers domiciled in Switzerland and positions us very competitively.

Now I will discuss our financial results. Fourth quarter earnings from continuing operations were $1.24 per diluted share compared to $2.14 a year ago. In addition, we generated $38 million of pretax income from discontinued operations in the fourth quarter for payments received in Venezuela related to ENSCO 69. As previously reported, ENSCO 69 was reclassified as discontinued operations, but discussions with the customer are ongoing.

Total revenue for the fourth quarter was $500 million, a 17% decline from last year. Jack-up segment revenues declined by approximately 38% to $376 million. Average jack-up day rates were down $31,000 year-to-year to $128,000 as shown in our earnings release tables and jack-up utilization in the fourth quarter was 72% down from 95% a year ago. This was partially offset by deepwater revenue increasing to $124 million from just $100,000 a year ago.

We had three deepwater semis, ENSCO 7500, 8500 and 8501 operating in the fourth quarter 2009 versus having only one rig ENSCO 7500 in the deepwater fleet a year ago. ENSCO 7500 was mobilizing to Australia at that time so its revenue was primarily deferred.

We reduced contract drilling expense for all jack-up segments by approximately 14% versus fourth quarter 2008 by proactively lowering personnel and operating costs on our idle rigs. We also negotiated cost reductions from vendors and service providers.

Offsetting this, deepwater segment contract drilling expenses increased $40 million largely due to adding ENSCO 8500 and 8501 to the active fleet. Also in fourth quarter 2008, ENSCO 7500 was deferring most of this expenses while mobilizing to Australia. Overall this nets to an 8% year-over-year increase in total contract drilling expense.

Now let's discuss quarterly trends by comparing fourth quarter 2009 sequentially to third quarter of 2009. Fourth quarter revenue of $500 million increased 17% from third quarter levels. This increase is attributable to a $61 million increase in deepwater revenue due mainly to the addition of ENSCO 8501 to the fleet and a significant improvement in utilizations to 91% versus 64% in the third quarter and a 4% increase in jack-up segment revenues driven by an 11 percentage point increase in utilization. This was offset in part by a $20,000 decline in average day rates.

Total contract drilling expense was up 10% sequentially from the third quarter. This breaks down as follows: Deepwater segment contract drilling expense increased 29% mostly due to ENSCO 8501 joining the fleet in October and jack-up expense rose 5% due to increased utilization.

Looking at other expenses, depreciation increased by $3 million mainly due to ENSCO 8501 coming online, G&A expense was $22 million. This was more than we’d indicated on our last call due mostly to higher legal and professional fees associated with re-domestication to the U.K. Cash on hand at year end was $1.1 billion even after $861 million of capital investments during the year, $623 million of which related to our deepwater fleet expansion.

Now let's turn to our outlook for first quarter 2010. Revenue is expected to decrease by about 13% from fourth quarter levels. In the deepwater segment revenues are projected to be down slightly due to lower utilization related to planned downtime for some equipment upgrades.

For the first quarter and also the balance of the year, utilization is expected to be steady for our total jack-up segments with the 72% utilization we achieved in fourth quarter 2009. However, the average day rates for our jack-up fleet will continue to decline as expiring contracts are adjusted to today’s lower rates.

Moving to expenses, we anticipate first quarter 2010 contract drilling expense will decrease by approximately 5%. Depreciation expense should remain unchanged. And we anticipate G&A expense will be approximately $20 million in the first quarter which includes $2 million of legal and professional fees related to the transition to the U.K.

Now, let’s move to the outlook for full year 2010. Deepwater revenues were estimated to be approximately $525 million, down from our prior forecast of almost $600 million. A delay in commencement of ENSCO 8502 and planned downtime on other rigs in 2010 are the primary cause for the decline. But these issues are not anticipated to affect deepwater revenue beyond this year.

Specifically, two weeks ago, we reported ENSCO 8502 is now scheduled to commence operations in the third quarter versus the second quarter due to fire damage in the engine room. Fortunately, no one was injured and we are assessing the damage and are working diligently to complete the necessary repairs as quickly as possible.

In addition, we anticipate approximately 18 days of downtime for ENSCO 8501 in the first quarter and 21 days for ENSCO 8500 in the third quarter, both related to equipment upgrades, as well as 18 days of downtime for ENSCO 7500 in the second quarter for scheduled repairs.

On the jack-up side, as I mentioned earlier, on average 2010 utilization is expected to be stable with the 72% utilization we achieved in the fourth quarter in 2009. However, second quarter utilization is anticipated to be somewhat lower and fourth quarter somewhat higher.

As Dan described earlier, we have contracted some of our North Sea rigs with historic dates in the latter half of 2010 which will benefit the fourth quarter, but these rigs are currently uncommitted for the second quarter. With respect to contract drilling expense, we expect a significant increase in the number of operating days for our semi fleet and deepwater segment contract drilling expense is forecasted to increase approximately 85%.

We expect this will be partially offset by an 8% decline in contract drilling expense for the jack-up fleet. Depreciation is projected to increase to approximately $232 million with the addition of our new ultra-deepwater rigs.

G&A expense is anticipated to be approximately $74 million, reflecting higher professional and legal fees to complete the transition to the U.K as well as cost associated with our new London headquarters.

As I mentioned earlier, our effective tax rate is projected to be 16% to 17% for the full year with the benefit versus last year being driven in part by the re-domestication to the U.K. 2010 capital spending which of course is subjected to change throughout the year is forecasted to decline by about $120 million to $740 million in 2010. The anticipated breakdown is as follows; $610 million is committed to our 8500 series rigs, $30 million for rig enhancement projects, and $100 million is for sustaining projects.

In summary, I’d like to emphasize that Ensco has become a much stronger company given our many accomplishments from 2009. We have a new global headquarters in London, which will provide many benefits as Dan described.

Our deepwater fleet is growing rapidly and we expect deepwater segment revenues to more than double in 2010. Jack-up utilization improved significantly in the final quarter of last year and we see good opportunities for most of our expiring contracts either be extended or to secure new work. Our balance sheet has never been stronger and Ensco's commitment to training has been rewarded with our best yet year ever in terms of safety performance. All of these accomplishments put us in a very strong competitive position as we began the New Year.

Now I’ll turn the call back over to Sean.

Sean O'Neill

Thank you, Jay. Operator, we can now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Robin Shoemaker - Citi.

Robin Shoemaker - Citi

I wanted to, Dan, ask you about, you mentioned a lot of tenders against incumbent rigs in several of the markets that you are anticipating. I wonder if you could just address where you see growth in jack-up markets globally, excluding tenders that are against incumbent rigs in those markets. It sounded like Indonesia is one area, but what about that market and a few others where you see real growth.

Dan Rabun

Hey Robin, let me refer that over to Mark Burns whose is head of our international jack-up operations, he is poised best to address that point.

Mark Burns

Yes, as Dan mentioned in his opening comments, there’s several areas where we see potential growth. Looking at South East Asia, Indonesia has been very active in the fourth quarter and we look for it to continue to be active in the early part of the year, Vietnam is an another area and also Malaysia we have seen some indication of increased activity, bidding activity in Malaysia. Going into the middle east again it continues to be a rig market.

Robin, there is currently 20 plus jack-ups idled there, we don’t see a lot of incremental activity there in the near future. India, certainly the ONGC tender that just came out against the seven incumbent tenders and that is another area that we’re going to see some activity. As for as you know new jack-ups will be delivered in 2010, currently Robin, we anticipate 29 new jackups to be delivered, that will also put pressure on various markets. So far, we’ve seen some good absorption of the new build jack-ups. So, there are some positive growth areas and we’ll continue to monitor those.

Robin Shoemaker - Citi

Was Mexico one of the markets where you see tenders against incumbents or actual growth?

Bill Chadwick

The tender that has been indicated will be issued shortly in Mexico is basically against incumbent rigs, but PEMEX has also indicated some new contractual specifications for the rigs it will accept. So, there is a belief if PEMEX holds to those standards that the incumbent rigs will not necessarily qualify for the forthcoming contracts, so that the number of rigs will remain constant or hopefully increase, but the actual rigs that are contracted in Mexico will change.

Robin Shoemaker - Citi

So that was the one where they are specifying the rig can only be a certain number of years old, like built after a certain date?

Bill Chadwick

That's correct.

Operator

Your next question is from Brian Uhlmer - Pritchard Capital.

Brian Uhlmer - Pritchard Capital

I had a couple of quick questions, first off, really on the operational cost fronts, as some of the other contractors, it has been kind of mixed throughout this quarter's reports of keeping cost in line. How do you see those heading out, not just in 2010, but as we move through the year, as rigs start to come back to work?

Dan Rabun

I think as we look at 2010, the way I would describe the dynamics of our business, Brian, is the operating days in the jack-up business are going to be fairly similar year-over-year. As I said in my comments, we expect contract drilling expense to come down about 8% in the jack-up business, our operating days in the deepwater business are almost double. And so, our expenses are going to go up quite significantly there.

When you look at it all on kind of weighted average basis, I think our contract drilling expenses going up 6% year-over-year, that’s really driven by the large amount of additional days where we are adding in the deepwater business. Relative to inflation, we’re assuming pretty constant cost year-over-year, we're continuing to take cost out of the jack-up business and turn that up as much a we can to the utilization that we see for the year, but at the moment, we don’t see a lot of cost pressure in the business. Does that the answer the question for you?

Brian Uhlmer - Pritchard Capital

Yeah, because we are looking at more of a per rig basis on the jack-up front that you are not actually seeing increases in that segment.

Jay Swent

If you do the math on our year-over-year number, our cost per day is coming down fairly meaningful.

Brian Uhlmer - Pritchard Capital

Okay. And then secondly unrelated, when we look out at your dividend and how are you guys looking at that versus your committed CapEx and your growth plans, if you see room for increasing that or doing something else with your cash flow?

Dan Rabun

Well, this is Dan, how are you doing? Our answer to that is really consistent with what we have said previously with the exception that we are feeling a lot better about the economic and banking climate that we have in our previous quarters. In addition we only have about one-third of the 8500 series capital commitments remaining to fund, so we had still less working capital pressure then we had previously. But that being said, we still have 1.1 billion of remaining Ensco 8500 series CapEx commitments.

So our current focus is executing on our deepwater program to generate organic growth. And beyond the 8500 series program, we continue to proactively search for other opportunities to extend the deepwater fleet. As we have said in previous quarters, if we can’t identify new investment opportunities, our board continues at every board meeting to evaluate opportunities to return capital to shareholders, either in the form of dividends or share repurchases, but this of course is a board-level decision.

I would like to say that we have spent a great deal of time in the last three to four months soliciting the views of our major stock holders on this issue and we are very mindful of their thoughts on this matter. And I will say that there also continues to remain an extreme diversity of views on this subject among our shareholders.

Operator

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

Pierre Conner - Capital One Southcoast

Maybe Mark and Dan, I’ll put you on the spot for a follow-up from a comment yesterday, Transocean on rates and arguably you might be better qualified actually, but the answer, they commented about incremental pricing and some premium for rigs in certain markets, so would you agree with that and would you describe if that is the case the character of that as what kind of increases or just costs or changes that you are seeing.

Dan Rabun

I'm sorry, are you talking about jack-ups or?

Pierre Conner - Capital One Southcoast

Yes, yes specifically.

Dan Rabun

Let Mark talk about that, because it is an interesting dynamic going on in the marketplace, specifically out in Asia.

Mark Burns

Yes, Pierre, I think to answer your question, if I understood it correctly, I think it’s what kind of processing dynamics we’re seeing in Southeast Asia, was that the question Pierre?

Pierre Conner - Capital One Southcoast

Yes, Mark, they commented in some markets they are seeing some improvement in pricing and so my question about the character of that less…

Mark Burns

I think that is the case, it is interesting, particularly in Southeast Asia. As these new builds continue to come home, we’ve seen the rates actually stay up fairly strong, particularly in Southeast Asia. I think we’re going to continue to see, as we’ve seen, we’re going to see pressure put on the lower spec jack-ups and those will eventually, there will be more pressure to put the lower spec units to work, but we are seeing, particularly in Southeast Asia, we’re starting to see or have seen rates fairly stable. And again, as I mentioned earlier, we’re starting to see additional activity in Vietnam, potential additional activity in Malaysia, so that’s also helping strengthen that market.

Pierre Conner - Capital One Southcoast

And that leads right into what my follow-up was about, it was really what you are seeing in terms of the character of the bidding from these additional -- you commented 29 that are coming. Do you see that those rigs are actively being dead right now or are we expecting a wave of additional availability coming. How much of that is in the bid market from what you can tell, those 29 that are coming this year?

Mark Burns

Yes, of the 29 units that are coming this year, 11 currently have contracts. In addition, several of those additional units will be going to non-core operating areas that we are not operating in. So, we’ve seen some fairly good absorption of the rigs, they will, the new builds will however continue to put pressure on rigs.

In Indonesia, again we are starting to – we have seen increased bidding activity and it’s really looking for the newer rigs, although we’ve been successful in keeping our lower-end jack-ups working. So, I think based on that, we feel quite good about absorbing the majority of these jack-ups into the market in 2010.

Dan Rabun

And Pierre, I just can’t let it go without saying that four of those jack-ups are delivered in December and three of them are on December 31.

Pierre Conner - Capital One Southcoast

Good luck. I had an unrelated follow-up really, Jay, probably more for you and Dan, related to your earlier comment, Dan, about perusing flexibility of use of free cash. And does the relocation and as you described Jay some of the ownership, just add a wrinkle in terms of your flexibility to do that, will that be anything we should be aware of in terms of would cause your extra time to evaluate and change to be able to get that flexibility?

Jay Swent

I don't think so, Pierre. I think maybe part of your question, because I know it's a question for the people in Switzerland, there are restrictions on dividends and share repurchase and that type of thing. And the answer to that question is, we are a U.K company and we are subject to the Companies Act, so there are some slightly different regulations, but we've tried to structure everything in the re-domestication process to give us maximum flexibility on both share repurchases and dividends. And I’d say we’ve really don't have any significant impediments that we didn't have before in that regard.

There is a duty of care for directors that’s a little higher standard in the U.K around making dividend payments, given our financial situation, it wouldn’t have any impact on our ability to do them. And in terms of other questions on financial flexibility, quite frankly the structure that we’ve put in place gives us dramatically more flexibility with respect to working capital than we had before and we previously had to be very mindful of income that was earned outside of the U.S and income that was earned in the U.S and not overlap those funds. And when you get to a point where 86% of your income is coming from outside of the U.S that starts to become an impediment. So with the new structure, we are able to move working capital around pretty efficiently and really much better than we're able to on the old structure.

Operator

Your next question comes from Mike Urban - Deutsche Bank.

Mike Urban - Deutsche Bank

certainly a level of bids and tenders out there sounds pretty encouraging and it is pretty clear that it’s up versus where it has been, but are you able to categorize or quantify what the level is or how much it might be up versus where you might have been last quarter and maybe six months ago or whatever time period you want to use as the reference?

Jay Swent

Mike, as I said, certainly during the middle part of 2009, the industry in terms of jack-up bids, we did see a low in jack-up tenders in the fourth quarter in certain parts of the markets that we operate in. We have seen increased bidding activity and into the first quarter of this year, we continue to see bidding activity and increased bidding activity. So, as far as quantifying it, I think it's good to see that there's been a steady number of enquires come out, which I think is positive for us.

Mark Burns

Well, if you look at the historic trend lines over the last 20 years, as commodity prices have increased and stabilized, demand for jack-up and utilization have increased and we see nothing different about the dynamics that even - what we’ve see over the last 20 years of the cycle. So, I think to the extent the commodity prices stay in the neighborhood that they are, for the longer period they stay and our customers have confidence in the stability of those prices, I would fully expect to see more demand.

Mike Urban - Deutsche Bank

I would tend to agree. Kind of an unrelated follow-up, one thing that Ensco has always done a good job over the years is as you’ve added assets or upgraded the fleet and upgraded the quality of the fleet, you perhaps looked to your exits in some lower ends part of the business, and you are certainly seeing some of the lower spec jack-ups, maybe 250s and below struggle a little bit here. Is that something that you might to look to do again going forward here as you do deliver deepwater rigs into the fleet again kind of upgrading the quality of that asset base overall?

Mark Burns

You are very familiar with our history and we’ve had a history of upgrading our fleet over long periods of time and we’ve got rid of the platform rigs, the lake barges. We got rid of some jack-ups over the years. So, we’re going to continue that trend. I mean our trend is towards the ultra-deepwater and to higher specification jack-ups and to the extent we see opportunities that we can place them of our other assets and we will do that.

Operator

Your next question comes from Geoff Kieburtz - Weeden & Co.

Geoff Kieburtz - Weeden & Co.

Some of your peers have recently commented about the challenging nature of the deepwater market. As you look at your un-contracted your floaters, I mean how are you thinking about that market. Do you have any concerns?

Carey Lowe

This is Carey Lowe. We’re seeing a strong increase in tendering activities particularly in the last few months. I believe operators are becoming more and more comfortable with the oil price stability and are re-looking at their long term programs and developments and we’re seeing an increase in tendering activity and plus in places that are outside the traditional deepwater basin. And that tendering activity is for 2011 and 2012 project starts and that’s when our rigs become available.

Geoff Kieburtz - Weeden & Co.

So, no comparable concerns to some of the other comments, do you think it’s just they are looking at 2010 and early 2011 more than?

Carey Lowe

I looked at some of the transcripts, and I think most of the references that they have made is 2010. There may be a few challenges and I think it’s just a holdover for what happened in late 2008 and 2009. These things have such a long lead time, so I think there’s just a little bit of hangover from what commodity prices and the financial crisis that we are going through. So, right now, our customers as Carey said, our belief is that, based on our conversations, they are getting much more confidence in commodity pricing and the long-term fundamentals. They're starting to plan these programs, which take long periods of time in advance to preparing and source rig demand and we see a noticeable up-tick in recent tendering activity and planning activity.

Probably planning is a better way to characterize between tendering, because I think you all know what the outstanding tenders are, in terms of planning activity and inquiries from customers, we would fully expect based on the activity level that we are seeing, that we will see an up-tick in tendering activity as we move through the year.

Geoff Kieburtz - Weeden & Co

We haven't really seen a lot of fixtures though so that I guess the West Gemini contract kind of figures may be more prominently that it should, but do you have any comments on the rate that the West Gemini was contracted at and as to whether it’s a reasonably valid barometer of the current market rate?

Carey Lowe

This is Carey, I think you have to look at each tender on its own. It depends on what the specifications are, what the terms are, where the project is and a number of other factors. And I just can’t say that one fixture is going to determine the whole market rate and I wouldn't, I really don't want to get too specific because we have open tenders right now.

Geoff Kieburtz - Weeden & Co

If I could squeeze one last one in, just to clarify here, I think Dan you said that typically it takes several quarters of rising utilization in the jack-up market before you start to see increasing day rates, which I think is probably pretty true. You’re forecasting for 2010 that your jack-up utilization is going to essentially stay flat. Can we infer that you're not anticipating any rate increases until sometime past 2010?

Dan Rabun

I think what we’ve said, we think, we expect the markets to be fairly stable this year, and that’s how we see it right now and that is how we see it for the year.

Carey Lowe

And I think Geoff, we do see a slight up-tick in the second half of the year, particularly in the North Sea, where there is a lot of work that people want to do later in the year, but there is bit of a low right now.

Dan Rabun

I think we do anticipate utilization will start moving up, till we get later into the year.

Carey Lowe

I made comments about the 20-year history and looking at trend lines and what we've always seen historically and this appears to be no exception to the historic trend line, is that the U.S Gulf of Mexico catches the cold first and Asia-Pacific and the North Sea is the last one to catch the cold, and we are seeing the same thing. North Sea’s kind of stabilized and ramped down a little bit and is on its way, probably be on its way back here pretty soon.

Operator

Your next question comes from Ian MacPherson - Simmons & Company.

Ian MacPherson - Simmons & Company

Just to catch up here on the cost guidance, I think I heard in the follow up Q&A that it’s essentially 6% higher in 2010 on an aggregate basis, is that correct?

Jay Swent

That’s for both businesses together, that’s right, Ian.

Ian MacPherson - Simmons & Company

Okay. Unrelated question, could you comment on, there was some industry press commentary about Ensco and Capital teaming together to work on low cost drill ship concept for Petrobras, is there anything to that that you’d want to comment on now or is it do you think that was overplayed in the press?

Dan Rabun

Well, we don’t comment. You all know, we actively peruse every opportunity that exists and I was surprised to see the article.

Ian MacPherson - Simmons & Company

Your last couple of 8500 series that don’t have contracts, do you think that Brazil is a potential market for those?

Dan Rabun

It’s designed for that market, West Africa. Yes, it is a possible market for those rigs.

Ian MacPherson - Simmons & Company

Have you bid them against the outstanding tender, I guess it’s a four rig tender from Petrobras last quarter?

Dan Rabun

It’s inappropriate for me to comment on that.

Operator

Our next question is from the line of Rob MacKenzie - FBR Capital Markets.

Rob MacKenzie - FBR Capital Markets

Thank you. Actually my questions have been answered.

Operator

Your last question comes from Joe Hill - Tudor, Pickering.

Joe Hill - Tudor, Pickering

Most of my questions have been answered too or not as the case may be. But would you guys talk about you prospects for the 7500 post August and what you think about moving the rig?

Dan Rabun

Our contracts with Chevron actually extends into the fourth quarter as part of the demo. And as far as what we plan on doing with the rig, we’re looking for opportunities in many regions right now and are taking to people of that project.

Joe Hill - Tudor, Pickering

Okay, would a move to Brazil make sense?

Dan Rabun

Many places we’re looking at.

Sean O'Neill

Okay, thank you everyone for participating on our call today. And we will see you next quarter. Thank you.

Operator

That concludes today's conference call, we appreciate your participation.

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