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Rowan Companies, Inc. (NYSE:RDC)

Q4 2009 Earnings Call Transcript

March 1, 2010 11:00 am ET

Executives

Suzanne McLeod – Director, IR

Matt Ralls – President and CEO

Mark Keller – EVP, Business Development

Bill Wells – VP, Finance and CFO

Tom Burke – President and CEO of LeTourneau Technologies

Analysts

Jeff Tillery – Tudor, Pickering & Holt

Brian Uhlmer – Pritchard Capital

Mike Urban – Deutsche Bank

Robin Shoemaker – Citigroup

Tom Curran – Wells Fargo

Ian MacPherson – Simmons & Company

Scott Gruber – Bernstein

Kurt Hallead – RBC

Alan Laws – BMO Capital Markets

Jud Bailey – Jefferies & Company

Operator

Greetings and welcome to Rowan’s fourth quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Suzanne McLeod, Director of Investor Relations for Rowan Companies. Thank you. You may begin.

Suzanne McLeod

Thank you, Diego; and good morning, everyone. Welcome to Rowan’s fourth quarter and full-year 2009 earnings conference call.

Joining me on the call this morning are Matt Ralls, President and Chief Executive Officer; Mark Keller, Executive Vice President, Business Development; and Bill Wells, Vice President, Finance and Chief Financial Officer, who will have prepared comments. Also in the room to respond to questions are David Russell, Executive Vice President, Drilling Operations; Kevin Bartol, Vice President, Strategic Planning; and Tom Burke, President and Chief Executive Officer of LeTourneau Technologies.

Before Matt begins his remarks, I would like to remind you that during the course of this conference call, certain forward-looking statements may be made within the meaning of the Private Securities Litigation Reform Act of 1995, including statements as to the expectations, beliefs, and future financial performance of the company that are based on current expectations and are subject to certain risks, trends, and uncertainties that could cause the results to differ materially from those projected by the company.

With that, I will turn the call over to Matt.

Matt Ralls

Thank you, Suzanne. Good morning, everyone; and thanks for joining us. I am going to make a few brief comments and then turn it over to Mark Keller, who will discuss the rig markets; and then turn it over to Bill Wells for more financial detail before opening the call for Q&A.

We reported today that our fourth quarter 2009 earnings were $61 million or $0.52 per share of clean [ph] earnings, beating consensus estimates by $0.02. For the full year, we earned $367.5 million or $3.24 per share. Rowan organization executed at a very high level in 2009, despite the sharpest downturn in worldwide drilling activity since the early 80s. We had the best safety record in the company's history, significantly reduced operating expenses, took delivery of our latest newbuild jack-up, the Ralph Coffman ahead of schedule and below budget, took advantage of idle time on several of our older rigs to make some upgrades and life enhancements.

As Mark will relate in more detail, during the last few months, we have seen improving activity and tendering in virtually jack-up market, with Middle East, North Sea, and the Gulf of Mexico regions being the most significant for our fleet. We continue to see good demand for higher-specification jack-ups, and during the last quarter and so far in 2010, we have added some very attractive backlog on our Super Gorillas. We built the Coffman to work with McMoRan and the contract with them for the Rowan-Louisiana as well as our first EXL when it comes out of the shipyard.

On that note, I want to take this opportunity to congratulate McMoRan and their partners on their very exciting discovery with the Davy Jones well drilled by the Rowan-Mississippi. This well and the wells in this group that will be drilling to delineate and develop their ultra deep shelf gas opportunities are excellent examples of the move we are seeing across jack-up markets, with more demanding drilling requiring higher specification drilling equipment, which of course plays to our strengths. We are seeing it in tenders for harsh environment wells in the North Sea, long retour zone drilling in Qatar and high-pressure, high-temperature wells in several markets.

Industry jack-up utilization currently stands at 75%, which has been increasing, but is still below the level necessary in any single market to allow rig rates to move higher. However, it is important to understand that many of those idle jack-ups are not competitive with our higher specification rigs, which compete in markets where supply and demand are in better balance, and which are all currently contracted. Also, while there are approximately 60 newbuild jack-ups on order for delivery in the next two to three years, many analysts expect that about half of those will go to uncompetitive markets or not be built, which should improve the market’s ability to absorb the additional competitive units.

I think an interesting analog demonstrating the ability to increase utilization in day rates of high-end rigs in an otherwise oversupplied market is what is going on in the land rig market. Despite the active land rig count being nearly 1000 rigs below where it peaked in 2008, we have put several of our land rigs back to work over the past few months, and leading edge day rates have increased by over 50% for our lightning fast rigs. Clearly, this is because clients are selecting more capable equipment that can drill and move faster, rather than just focusing on just (inaudible), and we believe the same basic dynamic is underway, as operators look for jack-ups back and forth.

With regard to our manufacturing businesses, we have seen a recovery in demand in the mining segment, where we build and sell the industry’s largest front-loaders and have leading market share. We have also seen increased interest from several markets outside the US for new land drilling equipment. It is too early to point to a cyclical upturn for drilling equipment, but it certainly feels like we have come out bottom in that segment of our business.

We hired Tom Burke as CEO for LeTourneau in December, and are making important progress in improving our manufacturing efficiencies and enhancing the competitive design advantages in LTI’s product line.

With that, I will turn the call over to Mark, who will give you more detail on the drilling market.

Mark Keller

Thanks, Matt; and good morning, everyone. Our offshore fleet of 23 jack-ups is currently contracted at 78% utilization, with an average day rate of approximately $186,000. We are encouraged by the increased tender activity over the past few months and the term contracts we have secured recently. 15 of our 23 rigs are located in international markets; nine in the Middle East, two in the North Sea, one in West Africa; one in Eastern Canada; one in Mexico; and one in Egypt. Our remaining eight jack-ups are located in the US Gulf of Mexico.

Continuing our efforts to further diversify our fleet internationally, we are establishing a marketing office in Kuala Lumpur, to cover the Southeast Asia, India, and Australia markets. These areas, Malaysia and Vietnam in particular, will demand higher-spec HPHT jack-ups, and Rowan is preparing to take advantage of those opportunities. As I mentioned, recent tender activity has been strong, and we are currently seeing demand for approximately 40 jack-ups in regions such as the US Gulf of Mexico, Eastern Canada, Central and South America, the North Sea, the Mediterranean, the Middle East, India, and Southeast Asia. We anticipate at least 20 additional tenders inbound over the next couple of months. We remain optimistic, while acknowledging significant amount of contract expirations for 2010, as well as the uncontracted newbuilds in rigging markets.

According to ODS-Petrodata, there are currently 459 jack-ups worldwide. Demand is 343 rigs, with utilization at 75%. It appears that the bottom of the cycle is behind us, as worldwide utilization has been on a slow but steady increase from 71% in August of 2009. Fortunately for Rowan, utilization and day rates for premium jack-ups are stronger. 300-foot independent leg cantilever and above are currently contracted at 82% utilization with high-spec rigs contracted at 93%. We believe the industry has experienced a high grading of the fleet, as operators worldwide are demanding more stringent drilling requirements. Rowan maintains one of the youngest and most technologically advanced fleets in the world, and we are poised to greatly benefit from this market shift.

I will now address our areas of operations. Let us begin with the US Gulf of Mexico. Deployment in the region is 80 jack-ups, while demand is 39 rigs, for a utilization of 49%. We have eight jack-ups domestically, with a contracted utilization of 88%, at an average day rate of approximately $145,000. As Matt noted, we are thrilled to be a part of McMoRan’s ultra deep gas discovery on Davy Jones, and we are pleased to announce that we have contracted two additional jack-ups with them, bringing the total to four. In addition to the Rowan-Mississippi and the Ralph Coffman already working for McMoRan, the Rowan-Louisiana will drill the (inaudible) prospect beginning next month for approximately 180 days in the mid 50s. Our newbuild EXL #1 will also commence operations for McMoRan on its delivery from the shipyard in early May 2010 in the mid-70s.

We previously reported that the EXL #1 was committed in the low-160s beginning in August 2010. Acknowledging the growing importance of the McMoRan relationship, we have since agreed to reduce that day rate to the low-140s effective from early August as part of a multi-well package related to the projects mentioned above. We are optimistic that the Davy Jones discovery will lead to a significant increase in deep drilling on the US Gulf of Mexico shelf in the years to come.

Now, turning to the North Sea, supply is 36 jack-ups, while demand is 32 rigs, and contracted utilization was 89%. Rowan currently has two Super Gorilla class jack-ups operating in the area and the Gorilla VII; we are mobilizing in the region upon its completion of the Cabinda contract in West Africa. As recently announced, the Gorilla VII is contracted to Apache UK for approximately 18 months of work in the low-180s. The Gorilla V continues its contract with TOTAL and we recently signed an extension with TOTAL to keep the rig busy through May of 2011. The Gorilla VI remains on location in Norway with BG until July 2010, at which point it is anticipated to mobilize back to the UK sector to drill an additional well for BG UK in the low 200s. Even though the standard jack-up market in the North Sea remains soft, the high-spec market is one of the most active in terms of tenders, and we are aggressively pursuing multiple projects. Despite several highly-capable units back in the region, our Super Gorillas continue to secure attractive term contracts at above-average day rates.

Moving on to the Middle East, the supply in this region is 118 jack-ups, while demand is currently at 93 rigs and contracted utilization is 79%. Rowan has nine jack-ups in the Middle East. Five of our units are contracted, and the remaining four are currently completing life enhancement modifications and upgrades in the shipyard. As previously announced, Rowan-California has received an LoI from WinterShaw [ph] for a three-well project beginning in May 2010 in the mid-70s, which we currently consider a leading edge day rate in the region for that capacity jack-up. Although all available jack-ups are being tendered worldwide, we are confident that we will secure additional contracts from the Middle East in the near future. Like the North Sea, the Middle East has seen a significant increase in tender activity over the last 90 days, including multiple requirements from Saudi Arabia.

To briefly summarize the remainder of our fleet, the Gorilla III is in Eastern Canada, and commenced operations with EnCana in late fourth quarter of 2009 in the mid 280s, and is expected to complete its drilling project in September of 2010. The J. P. Bussell continues its contract with Shell in Egypt in the low-180s the through May 2011. As mentioned, the Gorilla VII will complete operations in Cabinda Gulf in West Africa during the second quarter of this year, and will mobilize to the North Sea for Apache UK. And finally, the Gorilla IV continues operations with PEMEX, and is contracted through July 2011. As the industry is well aware, we have anticipated additional tenders from PEMEX for more than six months. All indications are that they will tender for five jack-ups in the first round of tenders. However, we have yet to receive a per-tender day.

And finally, I will cover our on-shore division. We have a marketed fleet of 29 land rigs, located in Texas, Louisiana, Oklahoma, and Alaska. Currently, 79% of our fleet is contracted at an average day rate of approximately $20,000. 87% of our contracted fleet is operating in US shale and gas plays, including the Haynesville and Deep Bossier. We target these areas due to the operating requirements for 2000 horsepower high-spec rigs that can drill these challenging wells. The land rig market continues to gain momentum, and we anticipate that our marketed fleet will be 100% utilized beginning sometime early this summer.

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

Bill Wells

Thank you, Mark; and good morning, everyone. Starting with our drilling operations, our fourth quarter 2009 revenues were $255 million, down by 34% from the prior year and by 1% from last quarter, with both decreases resulting from reduced Gulf of Mexico and Middle East drilling activity between periods, partially offset by our recent startups in Egypt, Mexico, and Norway.

In the fourth quarter, we experienced unplanned downtime related to equipment repairs and inspections on Gorillas III, VI, and VII, which collectively reduced drilling revenues by almost $20 million during the period. Our full year 2009 drilling revenues exceeded $1.2 billion, a 16% decrease from 2008, as lower average utilization more than offset the impact of net fleet additions between periods. As of February 16, the date of our most recent fleet status update, our backlog of drilling contracts totaled approximately $1.3 billion. We expect that about 70% of that amount will be realized as revenue during the remainder of 2010, 25% will occur in 2011, and the balance in 2012 or beyond.

Our fourth-quarter drilling expenses of $122 million were 17% below the prior year, virtually unchanged from last quarter, and well below our previous guidance, despite the start up of drilling operations in Egypt and Norway, and a full quarter of activity in Mexico. The year-over-year reduction was primarily in labor and related personnel costs through optimization of crew levels on active rigs and manning reductions on auto rigs. In addition, several shipyard upgrade projects absorbed certain personnel-related costs and defrayed maintenance expenses for many of our auto rigs.

Despite fleet additions and 6% more available rig days in 2009, our full year drilling expenses were 17%, or more than $100 million below the 2008 levels, due largely to the factors mentioned previously. We will add two full rig years to our offshore fleet in 2010 and expect to reactivate certain US land rigs during the year, which will collectively result in an estimated 21% increase in operating days over 2009. Thus, we expect an activity-led increase in drilling expenses in 2010, up 13% to approximately $595 million for the year. That number assumes a nominal increase in insurance costs in 2010. It is too early to know what coverage we will end up buying upon our April 1 renewal, or what that coverage will cost. We will provide an update on our next quarterly call to the extent that our actual experience differs materially from that estimate.

We expect that our first quarter 2010 drilling expenses will be in the range of $137 million to $140 million, with the sequential increase due to the reactivation of certain rigs, the conclusion of most rig upgrade projects, the startup of the Ralph Coffman and a full quarter of activity for Gorilla VI in Norway.

Turning to our manufacturing operations, our fourth-quarter revenues totaled $231 million, including $86 million of (inaudible) sales to our drilling division. External revenues were $145 million, an increase of 7% over the last quarter, but down by 36% from the prior year. Our drilling products and systems segment contributed $184 million or 80% of total revenues, including sales to our drilling division. External revenues were $98 million, and featured $51 million from rig projects, $18 million from power systems and components, and another $13 million from drilling equipment.

Our mining, forestry, and steel products revenues totaled $47 million, including $13 million from shipments of mining and forestry equipment and $9 million from steel plates. Margins were heavily impacted by sales mix, with aftermarket margin specifically higher than those for original equipment. Early in 2009, our overall manufacturing margins were adversely impacted by losses realized on certain land rig projects, which had also contributed to a larger share of revenues. Our performance improved in the fourth quarter, when land rig and kit revenues totaled $22 million, and provided a high-teens gross margin, as compared to $36 million and no margin in the third quarter.

We shipped two of our largest and most profitable mining loaders, the L-2350 during the fourth quarter, bringing the total to three units for the full year. Our combined aftermarket parts and service revenues mercifully averaged low to mid 40s gross margins, with $31 million during the fourth quarter compared to $30 million in the third quarter; and a record $126 million for the full year. Our overall operating margin was 17% of manufacturing revenues during the fourth quarter, down from 25% in the prior year, but up from 13% last quarter, with a sequential increase due primarily to more favorable sales mix and better results on land rig projects.

At year end 2009, our manufacturing backlog totaled $675 million, which was down by about 14% during the fourth quarter. The external backlog of $413 million included $217 million related to offshore rig projects, $71 million related to land rig projects, $67 million of mining and forestry equipment, and $29 million of drilling equipment, with the remainder primarily parts and other components. Our estimated backlog at risk totaled $15 million, or less than 4% of our external backlog at December 31.

We booked approximately $118 million of new orders in the fourth quarter, or 82% of external revenues during the period, with mining equipment contributing one half of the total. We currently expect to ship 21 mining loaders in 2010, up from 14 machines shipped in 2009, with the likely mix increasing our average gross margins on mining equipment from the low-20s in 2009 to the mid-20s in 2010. Almost all of our external manufacturing backlog at year-end 2009 should be realized as revenues in 2010 and we expect another record year in the aftermarket. In 2009, our manufacturing operations generated $555 million of external revenues at an average 14% operating margin. For 2010, we expect that revenues will be flat to slightly up when compared to 2009, and with a more favorable sales mix, our overall average margin should increase to the upper teens.

Value of our investment in Mississippi shipyard and related inventories totaled approximately $60 million at year-end 2009. We currently have no further plans for reconstruction there, following the delivery of the Joe Douglas in 2011. Absent additional orders or sufficient prospects for future work, the activities at the facility would be significantly reduced at that time, in which case we would incur additional costs such as employee severance, among other charges. Closing our significantly reducing activity levels at the facility could result in cash charges ranging from $5 million to $6 million and non-cash charges ranging from $7 million to $10 million.

Our fourth-quarter depreciation expense totaled approximately $45 million, which slightly exceeded our previous guidance and was up 2% from last quarter and 16% over last year, primarily due to rig fleet additions in late 2008 and 2009. For the full year, depreciation totaled $171 million, up by 21% over last year. Our latest estimate for 2010 depreciation is in the range of $185 million to $188 million, including approximately $46 million to $47 million in the first quarter.

Our fourth-quarter SG&A expenses totaled $29 million, unchanged from last year, but up by 22% over last quarter and $2 million more than our previous guidance, due primarily to incremental incentive compensation costs, higher professional fees related to tax planning, and additional bad debt revisions. For the full year, SG&A totaled $103 million, down by 11% from last year, due to headcount reductions in our manufacturing operations, and other cost-cutting initiatives. Geographic expansion of our drilling operations is requiring more sales and administrative support, and we currently expect an increase in 2010 SG&A expenses to the range of $113 million to $115 million for the year, including approximately $27 million to $28 million for the first quarter.

Following our July debt offering, interest expense, net of interest capitalized was $4.1 million during the fourth quarter and just over $8 million for the year. Assuming no new borrowings, our 2010 interest expense should be in the range of $50 million to $51 million, about one half of which should be capitalized. As noted in our press release, our 2009 results were aided by favorable tax adjustments that followed from a recent third-party tax gauge. Following the rulings in that case yielded an estimated $25 million net tax benefit and a five percentage point reduction in our effective tax rate in 2009 to a level below 27%. Looking ahead, we currently expect an annual rate of approximately 30% in 2010.

Property and equipment additions totaled $183 million in the fourth quarter, which included $16 million for our second and third 240C jack-ups, $84 million toward the four EXL jack-ups, and $69 million for our existing fleet, including contractually required upgrades.

At year-end 2009, we had approximately $500 million remaining to be spent under our newbuild program over the next three years, two-thirds of which is expected to occur in 2010. Our 2010 capital budget has been set at approximately $501 million, and includes $106 million towards the Joe Douglas, $231 million for the EXL jack-ups, and $119 million for existing rigs, including contractually-required upgrades. The remaining $45 million includes the cost of drill pipe, needed improvements to our manufacturing facilities and store bases and other enhancements. We currently intend to fully fund our capital program through existing cash or operating cash flows.

That concludes our prepared remarks. With Diego’s assistance, we will now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jeff Tillery with Tudor, Pickering & Holt. Please state your question.

Jeff Tillery – Tudor, Pickering & Holt

Good morning. I know you guys have been talking for some time about the four rigs, or the three rigs that are currently idle in the Middle East; and just wanted to get your thoughts on the prospects of those going back to work, kind of before midyear?

Mark Keller

Jeff, we have several tenders out of the Middle East as I mentioned. We have an LoI with WinterShaw currently, and we have some tenders in with Saudi Aramco and a couple of other operators in the Middle East. There are some other tenders that will be coming out shortly in the Middle East that fit the specs of our rigs. So we are very optimistic that we will put them to work this year. We are also tendering those rigs in other areas in the world, with ONGC in India and also we will be tendering them in Southeast Asia.

Jeff Tillery – Tudor, Pickering & Holt

But those rigs haven’t been in the shipyard for fair bit of time now, can you give us a feel for how meaningful the CapEx dollars that are being spent on those are?

Bill Wells

Yes, total is a little over $40 million for all four rigs.

Jeff Tillery – Tudor, Pickering & Holt

Okay, relatively small. Last question just on the EXL rigs, with the first one coming out and staying in the Gulf of Mexico, it is a little bit of a change. I mean, the opportunity now with some of the deep shelf opportunities in the Gulf is different, but do you foresee trying to keep those other EXL rigs here in the Gulf or continuing to market those internationally?

Mark Keller

We are continuing to market the rigs around the world. However, the deep gas play continues to improve like it has and we need to add rigs with McMoRan and their partnerships. We will keep as many rigs here as they need, but we are continuing to market those rigs worldwide.

Matt Ralls

And those rigs can work year-round in the Gulf of Mexico and are perfectly suited for the demanding drilling requirements of the deep gas.

Jeff Tillery – Tudor, Pickering & Holt

Do you see additional opportunities today for those rigs to stay here, or is it too early?

Mark Keller

There is a good chance just looking at what McMoRan and their partnerships have laid out and where they think the rigs will go, I think there is a good chance that more than one of the EXLs can stay here in the Gulf to drill deep gas as Matt said. There is a growing concern in the US Gulf just on these shelf operations, with so few can laborers here in the US Gulf of Mexico, that there are very few rigs that can work through Hurricane season. And that is becoming a larger concern to operators here, but we are also anticipating the team extenders, you know, in our meetings with team, they have indicated to us that they want to hydrate their fleet, and they have shown a lot of interest in those rigs. But, as I stated in my comments, we are still not sure what the – you know, when we will see those tenders.

Jeff Tillery – Tudor, Pickering & Holt

Great. Thank you very much.

Matt Ralls

Thank you.

Operator

Our next question comes from Brian Uhlmer with Pritchard Capital. Please state your question.

Brian Uhlmer – Pritchard Capital

Hey, good morning. How are you all doing?

Matt Ralls

Good, thanks.

Brian Uhlmer – Pritchard Capital

I have just some clarifying questions actually from something in your prepared remarks on – the Louisiana; you said that you are beginning next month for 80 days in the mid-50s?

Mark Keller

It will be 180 days. It is going to go drill a well. It is currently working for Devon Energy, and it is going to work for McMoRan on their Boudin [ph] prospect, 26, it is about a 180-day prospect.

Brian Uhlmer – Pritchard Capital

And that is to be in the mid-50s?

Mark Keller

That is correct.

Brian Uhlmer – Pritchard Capital

Okay. And that wasn't previously announced, correct?

Mark Keller

Yes, Brian.

Brian Uhlmer – Pritchard Capital

Okay. And I just – as I am reading the transcript and you said something about the EXL working in the mid-70s, is that for a short term when it comes out and then in August, it goes to 140s now instead of 160. Is that correct?

Mark Keller

That is correct. We are going to go to (inaudible) 23 and drill about an 85-day shakedown well at $75,000 a day, anticipate being on location for the prospect in the first week of August and that day rate within $140,000.

Brian Uhlmer – Pritchard Capital

That is 140. Okay. Those first two things, got them, thank you. The second thing I had was kind of looking at LeTourneau, you have hired a new CEO and as we look out with what you are doing in that business, is this something that you foresee could get down in transaction later this year or are we looking at a 2011 event or beyond?

Matt Ralls

You are talking about the separation of LTI?

Brian Uhlmer – Pritchard Capital

Yes, sir.

Matt Ralls

Yes. You know, it is hard to put any kind of timeframe around that. It is – we are starting to see some improvements, pretty much across their markets right now, but it is hard to see that it is at the point where we feel like if we stand alone this year, then it is probably 2011 or later.

Brian Uhlmer – Pritchard Capital

Okay. And as far as ordering activity in LeTourneau, how is that shaping up, is the quotation activity high, I mean the order rates were I guess across the board pretty bad for Q4 for a lot of companies, so I am just looking forward out into 2010 as a quote activity indicated in the drilling market that we should see some higher order rates?

Matt Ralls

I will let Tom Burke speak to that.

Tom Burke

Probably, optional private business obviously, private is better right now, but we are seeing more interest on the land rig business quickly from national companies.

Mark Keller

In the mining side as well.

Tom Burke

The mining side is definitely looking up.

Brian Uhlmer – Pritchard Capital

Absolutely. Well, I think I have run over my questions. I will turn it back.

Matt Ralls

Thanks.

Operator

Our next question comes from Mike Urban with Deutsche Bank. Please state your questions.

Mike Urban – Deutsche Bank

Thanks, good morning. The move to open an office over in Asia, (inaudible) historically. Do you think that is – it sounds like it is mostly a function of the opportunity set over there, so presuming that the market where you see get better growth, or is it a function of some rigs or some markets maybe not recovering as quickly as might have, in other words, you know, weakness in other markets (inaudible). A little color on that?

Matt Ralls

Sure. Mike, this is Matt, I will take it, and then let Mark add some color to it. But basically, it is not that it reflects a weakness in other markets, because of the high specification rigs, as we noted earlier, they are already in above 90% utilization. It is a recognition of the trend in just about every market toward more demanding drilling requirements and we see some really attractive HPHT type work over there that these rigs will be especially well suited for. So we are not willing to sort of foreclose any markets for Rowan drilling equipment going forward.

Mike Urban – Deutsche Bank

And presumably if you know, again, putting at least a little bit of cost in there initially, you know, it is going to be more than one rig market for you. What do you think you would need in order to have critical mass in a market like that?

Matt Ralls

Yes, that is hard to say, Mike, for the right day rate, we definitely will work one rig in a market and we currently are in Eastern Canada and in Mexico and in West Africa, Egypt; so we prefer to have several rigs to spread the shore base cost over, but you can definitely make the numbers work on a one-rig operation. As we increase the number of rigs in the Rowan fleet through these new deliveries, to get in a market, at some point, you are probably going to have a one rig operation till you get established.

Mike Urban – Deutsche Bank

Okay, that is helpful.

Mark Keller

We are also seeing, along with Matt's comments, we are seeing several HPHT requirements coming out in the next few months in Malaysia and Vietnam. So there is an opportunity to put more rigs there.

Mike Urban – Deutsche Bank

Okay, so there is positioning for that. Okay. That is all for me, thank you.

Operator

Our next question comes from Robin Shoemaker with Citigroup. Please state your questions.

Robin Shoemaker – Citigroup

Thanks. Matt, I was wondering about the aggregate opportunities, you talked about the 40 jack-ups, tenders of more to come. In your view, how many of these are tenders against incumbent rigs and how much is growth, if you can separate those two out?

Matt Ralls

Yes, I assume that you meant Mark.

Mark Keller

The tenders with ONGC is seven rigs, and they are against incumbent rigs. In a lot of areas, that is a difficult question to answer, because it changes, because a lot of times there may be an incumbent rig, but the operator is trying to high grade its fleet and look for a rig that has harder equipment. We are seeing that a lot as Matt relayed to you earlier, we are seeing it in every operating area in the world, but if you go through the markets real quick, the rigs in the Middle East, two of those are new additions to the fleet over there, they would be new rigs, entering their fleet. If you look at Trinidad, certainly tendering against an incumbent rig, however, some of the specs have changed on that tender. And then I think with PEMEX, as you know, there are several contracts in 2010, but PEMEX has indicated once again that they are looking to high grade their jack-up fleets. So I would say that a good portion of them are contracts, but certainly there are a lot of incumbents that are being tendered against.

Robin Shoemaker – Citigroup

Okay. My other question then had to do with deep drilling in the Gulf of Mexico shelf. Apart from McMoRan, are you talking to other operators about rig requirements that would be effectively in this ultra deep drilling plate or is it predominantly one operator at this point in time?

Mark Keller

Right now, McMoRan is the most active. As you know, we had the Bob Palmer the working for BP last year, and they still had several deep gas wells that they wanted drilled. However, I am not sure of their status this year; we are in very close communications with them. If it occurs, it will probably occur at the end of 2010, probably in early 2011. There are certainly other people taking a look at it. The more success that McMoRan and their partnership have, the more interest we are going to see in deep gas drilling. We get a lot of questions about that from almost every operator we see.

Robin Shoemaker – Citigroup

Okay. So it has taken a little while for the enthusiasm for this kind of build, if you will.

Mark Keller

Well, I think the wells that they are drilling; certainly the Davy Jones well was probably one of the most watched around. Everywhere I traveled in the world, people would ask about it, but a lot of people have taken a look at it. Certainly here in the US Gulf of Mexico, almost every operator is monitoring that situation pretty closely.

Matt Ralls

But your point, it is probably a 2011 impact on us before we start to see, if we do see it, before we start seeing a lot of departments for additional equipment.

Robin Shoemaker – Citigroup

Right. But you have got a couple of rigs that are due for delivery, new rigs in that timeframe, so –

Matt Ralls

Exactly, yes.

Mark Keller

There is also McMoRan and their partnerships have a possibility of another prospect that will start in the fourth quarter. So that is one we are looking at too.

Robin Shoemaker – Citigroup

Okay. Thank you.

Matt Ralls

Thanks, Robin.

Operator

Our next question comes from Tom Curran with Wells Fargo. Please state your question.

Tom Curran – Wells Fargo

Good morning, guys. I wanted to dig a little deeper into LeTourneau. I guess first, when you look at opportunities either for jack-up rig kits or land rig packages, clearly it sounds as if you are more optimistic, at least for now, on the land rig package side. Are there any potential jack-up rig kit orders on the horizon, and then, on the land rig package side, where specifically are you beginning to see the signs of light that could lead to some orders in your term?

Tom Burke

Well, this is Tom. On the offshore kit side, it is not a completely dead market. You know, we do see some people requiring through the – from different customers, both national companies and other operators. On the – as far as the land rig kit side, it is, you know, it is actually from pretty much all over the place. You know, not most specific components will reach them.

Tom Curran – Wells Fargo

Okay. Fair to say that – has Russia been your strongest market for land rig packages recently?

Tom Burke

No, it hasn't.

Tom Curran – Wells Fargo

Okay. And then, with regards to aftermarket sales, what was the percentage of total external revenues in aftermarket sales and projects, give me that for 2009, and what are you currently expecting for 2010?

Bill Wells

Tom, this is Bill. For 2009, we did $126 million on a total of $555 million, so I didn’t calculate that percentage, it is a little over 20%, I guess. And then for 2010, we are currently expecting about a 10% increase in aftermarket.

Tom Curran – Wells Fargo

Okay. And just to confirm that I heard correctly, Bill, you said you expected external revenues to be flat to up slightly?

Bill Wells

Correct.

Tom Curran – Wells Fargo

Okay. And then, last question on LeTourneau, could you share what total top drive revenues were in 2008 and 2009, and then what your run-rate is heading into 2010?

Bill Wells

I know they were negligible in 2009. I think we were a fair bit more successful in 2008, but we didn't have much in the way of 2009 revenues from top drives. Individual top drives, yes.

Tom Curran – Wells Fargo

Understood. And any signs of that starting to pick up?

Tom Burke

Well, we have had some interest from its customers on top-drive packages from Latin America, from the Middle East, but I wouldn't say there is anything firm at this point.

Tom Curran – Wells Fargo

Okay, and then, last question from me, on LeTourneau here, the Saudi Aramco newbuild jack-up that has just been ordered, is that rig kit, has that been assigned and if not, is that a (inaudible) for you guys?

Tom Burke

Yes, that order was won by (inaudible), I believe, and they are using their own design.

Mark Keller

As far as the rig equipment, we are not expecting to be – we don't expect to get that order.

Tom Curran – Wells Fargo

Okay. Thanks for the color. That's all I had.

Operator

Our next question comes from Ian MacPherson with Simmons & Company. Please state your questions.

Ian MacPherson – Simmons & Company

Question, can you talk about your – full cost complement through all of your jack-ups this year embedded within that, is that correct?

Matt Ralls

You are cutting out there, Ian. Can you repeat the question?

Ian MacPherson – Simmons & Company

I am sorry. I have a bad mobile connection. I was asking if the cost guidance for drilling this year assumes a full cost complement for the entire jack-up fleet this year, including the idle rates in the Middle East?

Mark Keller

It does. We still have a number of shipyard projects that we expect to finish in March. But beyond that, it should be a full cost complement, except for the one rig that is cold staffed.

Ian MacPherson – Simmons & Company

With regard to the improvement with utilization and rates for the land rig fleet, could you provide some color as to how you think if leading edge rates stop going up and stay where they are, where do you think your average day rates and cash margins on the full utilized fleet look?

Mark Keller

I think for day rates, as Matt mentioned in his comments, we have seen our land rig fleet in terms of utilization and day rates go up over 50% certainly in the 50% range. We also are continuing to see a lot of tenders, the tender activity is very high because of the types of rigs that we have in our fleet for drilling in the Haynesville and the Deep Bossier. There is a high grading trend in that market, and the operators are taking advantage of that. We have seen this before. And they are certainly picking up as many high spec rigs as they can, Ian, and we are pushing rates up in the 20s right now, trying to – where we are tendering, and because of the demand be a seeing and we think the demand will continue to increase. As I said in my remarks, we fully anticipate having 100% utilization of our active fleet sometime in early summer. We have got a lot of operator and different people looking at our rigs right now at Haynesville.

Bill Wells

And Ian, on the costs side, for land rigs, it is roughly $13,000, all-in for working land rigs, and we don’t expect that. That was the 2009 number. We don't expect that to change much in 2010.

Ian MacPherson – Simmons & Company

Great, thanks. And then, what is the average link to contract term sort of by –

Mark Keller

Ian, we are seeing them anywhere from six months to three years.

Ian MacPherson – Simmons & Company

Great. Okay, thank you.

Operator

Our next question comes from Scott Gruber with Bernstein. Please state your question.

Scott Gruber – Bernstein

Yes, good morning, gentlemen.

Matt Ralls

Good morning.

Scott Gruber – Bernstein

I wanted to go back to the outlook for jack-up demand internationally. Do you find the recent tendering activity which certainly has ticked up in your discussions with the client, do you think that overall international projected demand will be up in 2010 versus the 2009 average?

Matt Ralls

Yes. I do. I think that as Mark has talked about it, and we had mentioned in our comments that I think that you are going to see a different mix. I think you are going to see the higher spec rigs get more of the contracts than I think some of the commodity type rates will be released, even that they are incumbents. I think that we are definitely seeing – in every operating segment of the world we are seeing high grading because of rig requirements – our general requirements were a lot more stringent than they were two years ago. That's why you are seeing the modifications made for roughly, Middle East and some of our competitors you are upgrading because of what we are seeing around the world in terms of requirements. Also, if commodity prices stay in the 80 plus range or 75, 85 range, I think you will see increase in tender activity you had mentioned.

Scott Gruber – Bernstein

Pardon. Go ahead.

Matt Ralls

Sure. 2010, being more active than 2009 is not particularly higher hurdle. 2009 was a very, very weak year. We definitely expect that we will see improving activity going forward.

Scott Gruber – Bernstein

Really. Looking at the Middle East, specifically we saw the Aramco order, assuming there is a high grading trend there. Is the requirement that you are seeing during the assessed date [ph], assuming that the 116, leaving an upgrade where there is and the BoP, Collar, the Top Drives et cetera. What do you think they would fulfill the requirements you are seeing out there?

Matt Ralls

Typically, the 116CS see it – the three pump rates are adequate for most of the tenders that we are seeing. What we are seeing is a lot of the Middle East markets, were drilled up by a smaller rigs that mark competitive return with current tenders that are coming out there. 116CS as upgrading and we meet that requirement.

Scott Gruber – Bernstein

Okay. Great. That's all from me. I will turn it back.

Operator

Our next question comes from Kurt Hallead with RBC. Please proceed with our question.

Kurt Hallead – RBC

Hey, good morning.

Matt Ralls

Good morning, Kurt.

Kurt Hallead – RBC

Hey, Yes. For Mark, with referenced that in the Middle East, $70,000 a day was kind of leading edge rate. I was wondering if you could provide sort of color commentary for the other part of regions and in that context of the leading age rates, are the leading age rates flat or moving higher?

Mark Keller

Kurt, in the Middle East, leading edge rate – I mean for 116C, certainly the gas rates and higher spec rates that are 116Cs, the rigs would be higher than that but of the tenders that we have seen in the region in Qatar, in different areas, seems to be a leading edge right.

And Southeast Asia, we moved to different areas of the world and are seeing rice still above the 100,000 a day in Vietnam and some of those reasons which move into Indonesia, places like that with more of the commodity class rigs. They take those jobs that – also maybe March 2 class rigs and we expect 300-foot cantilevers we sold, their rates will come down and they will be down by $100,000 in those markets.

Uncertainly, the ONGC is depending which hindered – I don't want to really go into that because we have got an active thinker sitting there but certainly – depending on the spec of a Rig is going to have a huge impact on their rate. It's tendered in regions. It is going to be a little distorted in certain areas because they are going to see one rig and a really high rig and you will see some rigs, 400,000, so, unlike what was – we are stronger with …

Kurt Hallead – RBC

And, I want to know about it like Gulf of Mexico, leading edge, almost line if you take to that market and maybe even, North Sea?

Mark Keller

Sure. In the North sea, Kurt, as you know we secured the job with Apache, U.K and 180,000, we extended contracts on the real six to work in the – if the works in the U.K. sector be at 215,000 a day that works on Norway, in the Norwegian sector it will be at $300,000 a day. We also extended drilling contracts with Hotel for a year. It's a one well or a year at 150,000. There are several rigs that are idle in that area as Bill say in our comments that several high spec rigs that have been down, so that – once again reflects the day rated contractors is worried in the area has recently lowered the rate on TOTAL was – because there were several rigs that could do the job and it's been a long-term program with them and as we move forward with them, you will see the day rate go up.

But there is a lot of demand for the Super Gorillas in the North Sea right now; we are seeing a lot of activity. In the U.S, Gulf of Mexico, we are seeing a 116 in a 55 to 66 range, 65 range right now, some are little longer but Matt, rigs are still high 20s, low 30s, seeing job of the commodity reached the 82 Secs, the 250s had moved up in the 40s, 50 and the higher spec rates modified rates like our rig themselves come out and do shape down well – 75, there is some written on it, Bob Palmer's that are 100, it will increase performance next well, accurately but that's kind of a flavor out and the highest rates in the U.S. Gulf would probably right know contracted in 5.10 and that's for high spec rate

Kurt Hallead – RBC

Well, what are the prospects in West Africa?

Mark Keller

Prospects in West Africa, there are lot of rigs available there. The tenders that we have seen there have been very aggressive, transactions got a lot of rigs available in that area. And it's improving, ExxonMobil came out with a multi-rate tender in Nigeria, and so we'll see how this – I haven't see this, pick the results of those tenders there but market has been pretty competitive, Kurt.

Kurt Hallead – RBC

Okay. And then, as a follow-up I have is Matt, there has been referenced in the past the possibility of kind of monetizing the land rig fleet, you have a change of opinion of viewpoint on that, given the state of the current market. I just wonder, if you can give us an update.

Matt Ralls

No. Kurt, we don't have a general view on that. Contrary, I'd say that the strength we have seen in that market, probably will facilitate that will may make it impossible to do something there, sooner than we might have thought. We don't see anything as being imminent right now. We are now discussing with anybody, so. But I would say we were looking for these current market improvements to have the right kind of environment to monetize land rig, so we are not updated yet but just had to occurred for us to, really be interested in selling.

Kurt Hallead – RBC

And are you having any change on your view and pursing deep water opportunities?

Matt Ralls

No change there either. We are consistent with what we have said on the last few calls. We are still looking at both deep water opportunities as well as opportunities to add high end jack-ups to our rig, so we are kind of going down parallel tracks there. It is – there is a lot of activity in that general area but, than the Houston have.

Kurt Hallead – RBC

Thank you.

Operator

Our next question comes from Alan Laws with BMO Capital Markets. Please proceed with your question.

Alan Laws – BMO Capital Markets

Good morning.

Matt Ralls

Good morning.

Alan Laws – BMO Capital Markets

Hey, I got a couple. Just a few couple on Kurt's questionnaire, so if you got a bid that you need to ask you on the land fleet. Your preference is to use the cash for great expansion, is that levered?

Matt Ralls

Yes. That would be the case, although, once again, I don't look for anything there anytime soon, I think we didn't see a lot more strength in the market for this attractiveness.

Alan Laws – BMO Capital Markets

Okay. Great. That's good clarification. The other things I had here were on the North Sea, you mention that the demand for higher spec rigs there and with most of our Gorillas and the Gulf, so kind of contracted through this year, wondering if there is any thought to once this contracts were lost, do we expect to mobbing this thing to the, any of those rigs that leaves everyone out together to a – to the North Seas and pick up day rate?

Mark Keller

Absolutely. We have centered the Bob Palmer on several tenders in the North Sea. We just had – being successful on one – we are talking to a couple of operators that are interesting the rig, but nothing confirmed as of yet but we are looking at opportunities in different areas of the world, so, to mobilize everything U.S. Gulf, if Mack rigs [ph] doesn't secure.

Alan Laws – BMO Capital Markets

Okay. Great. And the last question, I have here is really on the tax – a lot of our, almost all of your competitors now have reincorporated forum, I think you have mentioned in the couple of our conference appearance recently that you've looked at the pick up here. I wonder, if you could talk a little about your thoughts on tax re-incorporation. Are there any plans to position yourself for this?

Matt Ralls

Yes. Let me repeat what I have said. That headlines – which is exactly what we have been saying for the last year that I have been year. And before that – we do believe that if we are successful and doing a transaction than we should look for an opportunity, a transaction required additional improvement that we should look for an opportunity that will allow us to meet the requirements to – at least have the option to re domesticate and to be able to bring out effective tax rate down. That doesn’t mean that we would leave the Unites States, the headquarters but it had – I mean in terms of the staff here that means re domesticate corporation.

There's no assurances that kind of transaction can be done. You have to need pretty stricter rules, so we continued to work closely with our tax advisors on how we might structure something, if we find, found the right kind of transaction.

Alan Laws – BMO Capital Markets

So, potentially a merger acquisition that you are going to invert at the same time?

Matt Ralls

Yes. Yes, exactly.

Alan Laws – BMO Capital Markets

Okay. And, just blend with this also. This will help then, I guess to get us in the land rigs for good value here in that? Is that the first step, the first (inaudible) that needs to follow in order to move that one?

Matt Ralls

You got it all. There's really vertical correlation between land rig transactions and the ability to agree with that.

Bill Wells

And we don't need liquidity from that transaction to raise capital to do a sizeable deal of balance sheet is strong. We have wide capacity with access to the equity and debt market.

Matt Ralls

And just, back to the land rig. We have a very good land rig fleet. It's operated very well, customer love the work that we did there. The issue for is that we are about to number 15 land rig driller in the U.S. who are not interesting in expanding it international land markets, so it may make more sense – it will likely make more sense simple in the future for a different land drill, beyond those rigs. We have to make more money with them and look good, despite having dollar based operation. We are not in a hurry to get them. We don't have to do anything. But we believe that, that over time it will make sense as they capitalized on that end of business, looking at the floating side. Sorry, in the offshore side. That's our objective.

Alan Laws – BMO Capital Markets

All right. Thanks, looks good. Appreciate the answers. Thank you.

Matt Ralls

Okay.

Operator

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

Jud Bailey – Jefferies & Company

Thank you. Good morning. Follow-up on some of the questions regarding the Middle East and India, the jack-up market, and I apologize if I missed upfront but did you say what the timing could potentially be on those ONGC Tenders and then when – if you want a contract there, when those recruits start?

Mark Keller

Jud, with ONGC, they can avert those in the next few weeks, to start after those because of the monsoon, leave before the end of May or the – sometime after October, as when they give you startup there. In the Middle East, winter shale project will start sometime in mid towards the end of May and the other operators that we are in discussions with or sometime in the May, June time frame, Aramco for their, their work over risk, that the 116Cs were tendered on, they were asking for May, June start which is fairly quick and we are hoping that those are awarded early soon that has not been as of yet.

And another tenders that we are looking at – they vary from a May, June start to a – no August, September, October story. They are kind of broken into –

Jud Bailey – Jefferies & Company

Okay. That's helpful. And my last question, I guess is kind of two part, but when I look out and try to forecast day rates, it seems like you are seeing a little to quite a bit, that and you heard this as well. New build assets are definitely getting a premium and it's not, and you can see the build those rates, maybe move up a notch in some areas. How should we think about your 116Cs, you have been upgrading, do we see those dressed up behind kind of new build assets, or is they more flattish because they are computing with maybe a different assets in other parts of the world or help us think about, how we maybe think about it 350'IC, even though of 300 for IC in some areas, given what's happening to newer higher spec assets?

Mark Keller

Jud. It would depend on – certainly word is and what the term of the contract would be. If it's a longer term contract, obviously, I think the rates will go up. If an operator needs a 350 rig or we would add late back on those 116s and use the bulk capability, I could see the day rates going up. We have actually tendered those rigs at higher levels than we have awarded jobs in the Middle East currently. So there are lot of tenders right now, Jud, I think in the next – probably the next 45-60 days, you are going to get a lot of data points that when jobs were award – the market went for a longtime, before there were any fixtures, so that contractors can really get fixed on what the market is really doing. And there is some odd numbers in the Middle East, 54 hotel and some of those are where the first rates came out and rest have more priced options in the regions. So it gives you kind of a historic view, but I think that the 116Cs will certainly hold at their level and probably move up some in the Middle East. That's what I am seeing right now because of what we have stated earlier, Jud, the people are definitely high grading their fleet, and that's why we took our region in the yard and did some upgrades on them.

Our standard 116Cs will even get matched out and so they are way ahead of lot of the standard commodity rates that are working. We think that there is a good opportunity; doing the work we have a great reputation and our operations did do a great job and so we are optimistic about putting the work with it, our way of working with it.

Jud Bailey – Jefferies & Company

That's helpful. I'll turn it back. Thank you.

Suzanne McLeod

Yes. We are going to go ahead and end our call here for now. But thank you everyone for joining us and if you have any additional questions, just try and give Investor Relations a call. Thank you, again.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. All parties may disconnect now. Thank you.

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