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Atwood Oceanics (NYSE:ATW)

Q1 2014 Earnings Call

February 05, 2014 10:00 am ET

Executives

Mark L. Mey - Chief Financial Officer, Principal Financial & Accounting Officer and Senior Vice President

Robert J. Saltiel - Chief Executive Officer, President, Director and Member of Executive Committee

Analysts

Collin Gerry - Raymond James & Associates, Inc., Research Division

Gregory Lewis - Crédit Suisse AG, Research Division

Ian Macpherson - Simmons & Company International, Research Division

David Wilson - Howard Weil Incorporated, Research Division

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

Waqar Syed - Goldman Sachs Group Inc., Research Division

Roland Morris - Cowen and Company, LLC, Research Division

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Lukas Daul

Operator

Good day, and welcome to the Atwood Oceanics First Quarter Earnings Call. [Operator Instructions] Please be advised, today's program may be recorded.

It is now my pleasure to turn the program over to Mr. Mark Mey, Senior Vice President and CFO. You may begin.

Mark L. Mey

Thanks, Erin. Good morning, and welcome to Atwood Oceanics conference call and webcast to review the company's operating results for the first quarter ended December 31, 2013. The speakers today will be Rob Saltiel, President and CEO; and me, Mark Mey, Senior Vice President and CFO.

Before we begin, let me remind everyone that we are -- during the course of this conference call, we may make forward-looking statements that reflect management's current plans, expectations, estimates and assumptions concerning the future. These statements may involve risks and uncertainties, and actual results may differ materially from those expressed in these forward-looking statements. These risks and uncertainties are more fully described in our latest 10-K and other filings with the U.S. Securities and Exchange Commission. Undue reliance should not be placed on these forward-looking statements, which are applicable only at the date hereof.

Now let me turn the call over to Rob for his opening remarks.

Robert J. Saltiel

Thanks, Mark, and welcome to all of you joining this morning's call. This is Atwood's first earnings call from our new Houston headquarters building, after spending nearly 34 years at our previous location. For our employees, this move is another welcome sign of our company's growth and transformation.

Our first quarter revenue was the second-highest in Atwood's history, at $284.7 million, and a number of positive developments helped make this possible. We enjoyed outstanding revenue efficiency on our deepwater fleet, nearly 100% across the 3 rigs. Our jack-up fleet also operated extremely well for the quarter, with virtually no operational downtime. And we received Italian regulatory approval for the Atwood Beacon without any remediation requirements. The Atwood Osprey also enjoyed a good quarter operationally, and our drilling program on Atwood Hunter extended further into December than we anticipated. Finally, and most exciting for our company, the Atwood Advantage joined our fleet in December and commenced its mobilization to the Gulf of Mexico, contributing to our top and bottom lines.

However, 2 negative developments marred what would've otherwise been an outstanding quarter. First, we incurred a major downtime incident on the Atwood Condor due to a BOP control system problem. Resolution of this issue required more than 3 weeks of zero rate time and a loss of approximately $13 million in revenue and operating profit. The good news is we've corrected this problem with a hardware fix so it cannot occur again.

Our second issue involved the Atwood Beacon, which incurred delays waiting for a heavy lift vessel to transport the rig from Israel to Italy, limiting its earning power for the quarter. With the impact of these 2 events, our fleet-wide revenue efficiency for the first quarter was reduced to 92% from 97% in the previous quarter.

The first quarter was also a busy one for our project teams involving 5 of our rigs. Let me give a quick rundown on each. The delivery of the Atwood Advantage on December 12 from the Daewoo Shipyard was clearly a key milestone for our company. When we announced that we were building our first ultra-deepwater drillship in January 2011, we knew that it presented both a great opportunity and a significant challenge. Our project team in Korea did an outstanding job, managing the construction and commissioning of this first vessel, especially with the delays we faced from some of the key equipment suppliers. In addition, our operations team has assembled a first-class crew of trained and competent personnel to deliver safe and reliable drilling services for our client, Noble Energy. The Advantage has now completed the first 2 legs of its voyage and is expected to arrive in the Gulf Mexico in early March.

With the delivery of the Atwood Advantage behind us, our project team in Korea has shifted focus to the Atwood Achiever. Some of the supply chain challenges that impacted the Advantage delivery are likely to persist, but we believe we are better equipped to address these with the experience gained from our first drillship. Working with the Daewoo Shipyard, we are reviewing progress with the key suppliers every 2 weeks, with Atwood participating directly with these suppliers to improve their delivery timing. In addition, the shipyard has increased its manpower allocation on the Achiever project to minimize delays in mechanical completion and equipment commissioning.

The Atwood Falcon completed its intermediate regulatory survey in late December, doing so in just under the expected number of out-of-service days and within budget. The Falcon has returned to work in Australia after this project and the rig is not expected to require a regulatory out-of-service period until at least fiscal 2016. And as I mentioned at the outset, the Atwood Beacon completed its project workscope to comply with Italy offshore regulation in a very efficient manner. As soon as the Beacon arrived in Italian waters, it went on a 95% standby rate as it underwent final inspections. The rig was officially accepted in late December, which marked the beginning of its 2-year drilling program with ENI.

And finally, the Atwood Hunter completed its extended drilling program in Equatorial Guinea in late December, and then moved to Cameroon to begin its planned regulatory and maintenance work, which is currently ongoing. We expect this project will be completed by mid-April.

I'll turn now to our market outlook, starting with the floaters. The visibility in the floater segment has become less certain since our last earnings call. The combination of a slowdown in announced fixtures near-term, uncontracted newbuild capacity and a significant number of pending deepwater and ultra-deepwater rig contract rollovers, has clouded our 12- to 18-month outlook. Adding to this has been a handful of unsuccessful appraisals of previous discoveries and a nearly universal call by E&P operators to improve cash returns and cost discipline in the wake of rising costs and low realized returns. We've also seen the operators delay or cancel drilling programs that had been expected to occur this year, which has pushed floater demand to the right. As a result, we've seen a number of our competitors' rigs go idle in the past 3 months, and more are likely to do so in the months ahead.

Fortunately for us, Atwood is in excellent shape to weather a weaker 2014 due to the significant contract backlog that we added last year. As a result, we really only have 2 floaters that require significant marketing focus in 2014: the Atwood Hunter and the Atwood Admiral. As I mentioned earlier, the Atwood Hunter is expected to complete at shipyard in April. We are targeting 3 different opportunities in Africa with 2014 commencement windows that align with the Hunter's technical capabilities. We still have our 3-well contract with GEPetrol in Equatorial Guinea, which has been delayed but which we believe will be drilled once issues among the partners and the relevant government entities are resolved. Most of the new opportunities we are targeting for the Hunter are likely to commence in the June to August time frame, so there is an increasing likelihood that we may experience some idle time on the Hunter after it completes its project in Cameroon.

As far as the Atwood Admiral is concerned, we are currently targeting a number of jobs with a mid-2015 start, primarily in West Africa and the Gulf of Mexico. And we expect that more will materialize as we move through this year. We are aware that some of our competitors have uncontracted 2014 newbuild capacity that may put some near-term pressure on day rates, along with some contract rollovers of less capable, ultra-deepwater rigs. However, we remain extremely bullish on our A-class drillship technical capabilities, as offshore E&P operators continue to migrate toward floaters with dual BOP systems, 2.5 million pound hook load and off-line efficiencies similar to what our rigs provide.

Turning briefly to the jack-up segment. We continue to see high specification jack-up rates and utilization holding up quite well. However, given the number of jack-ups under construction that are still available for contract, we do remain a bit cautious as to the effect this could have on rate to utilization going forward.

This concludes my prepared comments. I'll now pass it back to Mark for our financial commentary.

Mark L. Mey

Thanks, Rob. Today, I'm going to touch on a few first quarter highlights and then compare these results with the previous fiscal quarter. I will then comment on our financial position and provide updated cost guidance for the fiscal second quarter and the remainder of the year.

Let's start with the fiscal first quarter highlights. Revenues of $285 million on 1,009 operating days for the quarter. Diluted earnings per share was $1.28 as compared to $1.57 for the prior quarter, a decrease of 18% on 3 fewer operating days during the quarter. Revenues, net income -- revenue efficiency and earnings per share were all negatively impacted by the Atwood Condor, Atwood Falcon and Atwood Beacon totaling a combined 55 zero rate days during the quarter. Net margins were 39.3% [ph] for the quarter and revenue efficiency of 92.5%, with the 3 deepwater rigs achieving 99.5% revenue efficiency for the quarter.

Contract drilling costs, excluding reimbursable costs of $8.4 million, totaled $123 million for the quarter as compared to $112 million for the previous quarter, in fact, below the guidance I provided in the prior conference call. The $112 million in fiscal 2013 also excluded $9 million of reimbursable costs. This increase in contract drilling costs is explained as follows: the addition of the Atwood Advantage to the operating fleet for 19 days in December, and the Atwood Falcon's 14 days of regulatory inspection and maintenance project in December, where about $4.5 million was expensed. The Atwood Beacon's 60-day waiting on the heavy lift vessel to mobilize to Italy, and a delay or elimination of certain maintenance projects on mainly the Atwood Condor and Atwood Hunter.

General and administrative totaled -- costs totaled $20 million, in line with expectations for the first fiscal quarter. Our effective tax rate was 11.5%, slightly below the previous quarter, per our guidance due to a change in geographical mix of income, as well as certain discrete benefits from a favorable tax provision of a prior year examination.

Moving to the balance sheet, capital expenditures totaled $463 million during the quarter, which consisted mainly of a final payment on the Atwood Advantage, plus capital spend and project management and other related costs because we still have many rigs under construction.

Net debt increased by $30 million to $1.47 billion at December 31, with our net debt-to-capital ratio increasing to 37.8%, and that's up from 34% at the end of the previous quarter. Liquidity totaled $287 million at the end of the quarter. Most of our[indiscernible] metric peak later this fiscal year with the delivery of the Atwood Achiever and then moderate as we generate significantly higher EBITDA and de-lever thereafter.

Now let's discuss the outlook for the second quarter -- second fiscal quarter of 2014. Before beginning with my guidance, let me reiterate that 96% of the remaining days occurring in 2014 are currently contracted. In addition, approximately 70% of our 2015 available days are contracted. Also, and consistent with our ongoing strategy of upgrading our fleet, the Vicksburg sale closed on schedule in mid-January, realizing a pre-tax gain on sale of about $34 million.

Now for my updated guidance. We estimate reimbursable revenues of $12 million for the fiscal second quarter. Regarding contract drilling costs, I now anticipate full year 2014 to range between $520 million and $535 million, with the fiscal second quarter ranging between $140 million and $150 million. These estimates for contract drilling costs exclude reimbursable costs which would approximate $8 million for the second quarter and $32 million for the fiscal year. The increase in costs for the fiscal second quarter are being driven primarily by the Atwood Hunter project costs, most of which as an expense on a full quarter of the Atwood Advantage.

Depreciation should increase to $37 million for the second quarter, reflecting a full quarter of depreciation for the Atwood Advantage. G&A expense should decrease for the remaining 3 quarters, and range between $13 million and $15 million per quarter. Interest expense should approximate $13 million, net of capitalized interest, for each of the remaining 3 quarters.

We expect our tax rate for the second quarter to approximate 20%, with us taking the tax on the Vicksburg sale. For the fiscal year 2014, our effective tax rate should range between 13% and 15%.

Capital expenditures should total between $80 million and $90 million in the second quarter. Full-year fiscal 2014 CapEx should approximate $975 million, that's up $25 million from prior guidance. The vast majority of the remaining CapEx will be incurred in the fourth quarter upon delivery of the Atwood Achiever. We will continue to use a mix of cash, cash flow from operations and our revolving credit facility to fund these capital expenditures.

That concludes my prepared comments. I'll now turn the call back over to Erin for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we will first go to the site of Collin Gerry with Raymond James.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Well, I'll start the question. As it relates to some of the accounting issues that you guys are talking with the SEC about, I'm wondering, do we -- for the Achiever, do we start modeling revenue being recognized on the mobilization period? Or is that something that you're going to go back to kind of maybe the traditional way of amortizing that over the life of the contract?

Mark L. Mey

Well, as you saw in our disclosure both this quarter and with the annual disclosure last quarter, we don't anticipate changing anything at this stage. We have approached this and we've had 2 signed opinions on this, whereby, we believe that our approach in recognizing mobilization revenue during the mobilization period to be correct. So right now, I would oblige you to not change your accounting for the Achiever contract, as that contract is very similar to the Atwood Condor and Atwood Advantage.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Okay. Okay, good. So status quo. I just wanted to double check on that one. And then, Rob, just for you. You mentioned, kind of, on the floater outlook you described it as a 12- to 18-month kind of softness, and we can all kind of look and see at the supply coming on the market. What is the hardest thing for us to look at is what is demand doing, because there aren't very good numbers out there, it's just more or less what are your customers are saying. And so I guess, what confidence do you get that it is only 12 to 18 months? And maybe describe just kind of more specifically the types of conversations that you are having with your customers right now.

Robert J. Saltiel

Well, Collin, we do believe that any downturn that we may be facing is probably bracketed around 12 to 18 months. A lot of that is because the real challenges for the market look to be over the next 6 to 12 months. And we are already starting to see some rigs getting idled in the marketplace. At the same time, we're really not seeing a decrease in demand. What we're seeing is an absence of demand increase to account for the continuing flow of newbuilds into the marketplace. So this is certainly not like past downturns, certainly at this point, where you see demand fall off, at the same time, supply is rising. This is more about a stagnant demand met by rising supply. And I think that the market has spoken pretty clearly about its preference for higher-specification, ultra-deepwater rigs, similar to the A-class drillships that we're building. We fully expect that lower-class -- lower-specification, older ultra-deepwater rigs will increasingly be idled to the extent that demand doesn't keep up with the rising supply. But we really think that the bulk of the pain will probably occur over the next 12 months or so.

Operator

And we'll next go to the site of Gregory Lewis with Crédit Suisse.

Gregory Lewis - Crédit Suisse AG, Research Division

Rob, I mean clearly, bifurcation in the ultra-deepwater or deepwater has been an issue. I'm just curious on your thoughts, I mean, clearly, we've already seen some rigs being idled. I think the expectation is that we're going to continue to see more rigs be idled over the next 6 to 12 months. At what point -- and maybe we are already seeing it as -- in the ultra-deepwater, at what point do these lower day rates and even idle time for lower-generation rigs not only start to spill into the ultra-deepwater next gen rigs, but actually have an impact where we start to see rates move lower?

Robert J. Saltiel

Well, I think we're going to have to see how it plays out. But I would like to point out, as I made the comment in my prepared statements, that there are a larger number of operators out there that insist on the capabilities of the newer, higher-spec ultra-deepwater rigs. It isn't just a question of substitutability of a lower-spec, older ultra-deepwater rig for a newer one. In a lot of cases, there is an insistence on clients for these newer, higher-spec, more capable ultra-deepwater rigs. And as I mentioned, hook load and BOP systems and efficiencies are key drivers for that. There's no question that the movement of any segment of the floater fleet downward has the potential to impact the other parts of the floater group. But right now, we feel very good about our position, being heavily concentrated at the high end of the ultra-deepwater. And while we've seen some softening at the high-end moving from kind of the high 5s and low 6s to the mid-5s, we see the high-end of the ultra-deepwater segment holding up reasonably well. And clearly, that's where we have our marketing opportunities with the Atwood Admiral and the Atwood Archer.

Gregory Lewis - Crédit Suisse AG, Research Division

Okay, great. And then on -- and also, you talked a little bit about the Hunter and its 3 potential opportunities that we're seeing in West Africa. Do you have any sense for what types of other rigs are being bid for that work? And just to follow up on what you were previously saying, should -- do we think that the Hunter is going to be competing against next gen ultra-deepwater rigs for this work? Or is this going to be more of the types of projects that the Hunter, potentially, can find in West Africa. Are these sort of more shorter-term projects more geared towards a fourth or even a third, fourth or fifth gen-type floater?

Robert J. Saltiel

Yes, absolutely, the latter. The jobs that we're looking at are typically in the 3- to 12-month range. And most of us in the business, when we deliver an ultra-deepwater rig, we're looking for significantly more term than that. I really don't see the newer ultra-deepwater rigs competing for the work that we're focusing the Hunter on, which is exactly what you'd expect and what we would hope for.

Operator

We'll next go to the site of Ian Macpherson with Simmons.

Ian Macpherson - Simmons & Company International, Research Division

Rob, can you shed a little more light with regard to the delays of the Hunter's existing backlog in Equatorial Guinea? And just help us frame the risk if you're not successful in bidding some of this -- these shorter-term gap projects. Is there a scenario in which the Hunter could be idle for the rest of the year or is that very unlikely in your opinion?

Robert J. Saltiel

Well, let me start at the end of the question and work my way back. We feel very -- feel very good about the Hunter's ability to attract good work and work for most of the calendar 2014 year. That said, there had been delays in the contract that we had with GEPetrol due to some partner issues, as well as approval from the appropriate ministries within the Equatorial government for the program to go forward. We do understand that they are making progress on both fronts, so we still expect that, that program will go forward. And that when we come out of the shipyard in mid-April, that either upon delivery from the shipyard or shortly thereafter, that we'll have opportunities to put the rig to work. I will say that we are very focused on utilization. We want to keep the rig busy. Having a rig go idle is never very helpful for the crews or for the continuity of the operation. So we're very focused on utilization. And as I say, we've identified 3 opportunities to date that we're targeting, and that's in addition to the GEPetrol work. So overall, we remain relatively sanguine. I mean, we do have to acknowledge that the likelihood of some idle time has increased, as I said in my prepared statement. But we do believe that the rigs will find work through 2014.

Ian Macpherson - Simmons & Company International, Research Division

Great. Follow-up question. On the jack-up side, you mentioned that there -- you're a little bit more cautious there. Your next rig is in -- that's up for renewal will be the Mako in September. Are you heavily in the marketing window for that rig already or do you think that it's going to be more towards midyear before you have some visibility as to how the contract opportunities look for a rig under that time frame?

Robert J. Saltiel

No. We've -- we have looked to secure follow-on work. And in fact, we think that we're in a really good position having 3 new rigs that are already operational. Because there's no question that when you bring a rig out of the shipyard, you can't guarantee that it will work at the same levels of reliability and safety that our rigs have had. And we've averaged over 99% revenue efficiency on the Mako, Manta and Orca, and they're brand new rigs. So it's really the best of all worlds. These are hot rigs that have got a great reputation and the latest capabilities. We also feel very good about our situation, where we are in Thailand, with the opportunities there on some potential follow-on work with a current client. So all in all, we feel good about renewal and we are working on that.

Operator

And we will next go to the site of Dave Wilson with Howard Weil.

David Wilson - Howard Weil Incorporated, Research Division

Rob, I just wanted to follow-up on your prepared comments. There's not a question about this, but just regarding the clouded outlook for the 12 to 18 months. And I just want to see if I'm summing it up correctly. So the outlook for the industry appears a little more uncertain in the near term. You feel really good about Atwood's contract coverage and rig quality, such that it might not be as impacted as much by the uncertainty. Is that a fair statement or am I oversimplifying it?

Robert J. Saltiel

No, that's absolutely right. Let me make 2 comments. The first is that what we're seeing in the market in terms of bifurcation is something we've been talking about for a long time. And really, for a company like Atwood, it's more of an opportunity than it is a threat. So we feel extremely good about our positioning in terms of the newbuild construction that we've undertaken and the rigs we've already delivered and the ones we have yet to deliver, as transforming our company to be very successful in a, if you will, post-bifurcation market. At the same time, we recognize that there are going to be some headwinds in the short-term and we're going to weather our way through that. 2014 is likely to be a soft year, but when you put the kind of backlog on that we did in 2013, getting some key extensions on both our floater fleet, as well as our jack-up fleet, and in addition, I think the positioning of our deepwater rigs, where we have 2 of those in Australia which, as I said on the last call, is an area of competitive advantage for Atwood, I think we're very well-positioned to get through this. And as much as you never like to see the market turn down, I can't imagine us being in any better positioned for this potential downturn than we are today.

David Wilson - Howard Weil Incorporated, Research Division

Great. And then, finally, just kind of 1 housekeeping kind of item. The deepwater expenses for the quarter looked a little high. And I just was wondering how much of that was related to some of the work done on the Falcon or to the extent any of that was done on the Hunter?

Mark L. Mey

As I mentioned, Dave, we expensed $4.5 million on the 14-day project in the Falcon in December. So a lot of the increase is due directly to that project, which is now complete.

David Wilson - Howard Weil Incorporated, Research Division

Okay. And just on the -- on Hunter, there was none expensed during the -- in December?

Mark L. Mey

Nothing material because, as Rob mentioned, we finished up with Noble by December 22. So we just mobilized it over and got started on the project in December.

Operator

And we will next go to the site of Klayton Kovac with Tudor, Pickering.

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

So you made the comment in your prepared remarks regarding operators delaying or canceling drilling programs. Is this centered around a handful of operators or specific geographic area? Or should we just think about it as being across the board?

Robert J. Saltiel

Well, I think you have seen it across the board. I mean, if you -- if you listen in on some of our customers' comments in their public statements and their own quarterly earnings calls, there's lot of talk about they're making hard choices about being focused on cost discipline, about improving returns, improving cash performance. There are a lot of different ways that people say it, but when you get that kind of a conservatism creep into the marketplace, as a matter of fact, you will just get fewer wells drilled and people will be a bit more particular about their -- the well programs and the timing for those. My own personal view is that these things tend to be temporal. And you'll see, as I say, a period of time where folks will back off their -- what may have been their initial drilling programs that they had for 2014. But we would expect that this could be relatively short-lived. And the plans that were in place for, let's say, 2014 that have been moved to 2015, you'll start to see next year. So we're really focused on kind of bridging our way through 2014 and into 2015 with an expectation that, again, 12 to 18 months from now, we'll be looking at a better market.

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

Okay, thanks. And then a follow-up. You mentioned rigs being idled. Have you started to see any of these idled rigs being cold-stacked?

Robert J. Saltiel

I think that it's still early days on some of these rigs being idled. And we'll have to watch how many of those idled rigs are actually able to get work in the near term. Most of the folks in this business, on our side of the table, are hesitant to cold-stack rigs because it really closes off the opportunity to keep the rig working. It typically involves a release of all the crews, and then we have to really undergo significant cost to reactivate once you cold-stack the rig. So I think it's too early yet to see much in the way of cold stacking. Although, I will point out that a number of our competitors have multiple rigs that, potentially, could go idle. And I think once you start to get a critical mass of idle rigs, then you may start to see incremental rigs getting cold-stacked when the likelihood of all of the rigs going back to work in the near term period becomes remote. I don't think we're there yet because I think it's early days on rigs going idle in the deepwater/lower-spec, ultra-deepwater space. But again, as we move through this year and I'd say, maybe around midyear, you may start to see an increasing trend in -- and in some of our competitors who have got a lot of these rigs starting to cold-stack some rigs.

Operator

And we will next go to the side of Waqar Syed with Goldman Sachs.

Waqar Syed - Goldman Sachs Group Inc., Research Division

Mark, just one clarification on the tax rate for the second quarter. So the 35% tax rate on the $34 million of gain and then 13.5% for the operating income. Is that the way to look at it?

Mark L. Mey

That's correct, yes, Waqar.

Waqar Syed - Goldman Sachs Group Inc., Research Division

Okay, great. And secondly, the CapEx for '15, does that change? Or any initial guidance there?

Mark L. Mey

No initial guidance for '15 yet, but I think it's going to be somewhere in that $500 million area, because as you would recall, we do have one ultra-deepwater rig delivery, the Atwood Admiral coming on in fiscal '15. So that's going to be the bulk of our CapEx for next year. But we haven't guided to the street on that yet.

Waqar Syed - Goldman Sachs Group Inc., Research Division

Okay. And Rob, given the upcoming drop in CapEx in '15 and a similar capital allocation procedure -- policy, what are you thinking on '15? What other uses of cash, if your CapEx comes down?

Robert J. Saltiel

Well, this is one of the things that we've said would be a topic of discussion for 2014, would be to look at where we are in terms of our investment profile and the opportunity to take a free cash flow position, which will be positive, and allocate that through various -- and including potential repatriation of cash to shareholders. So that's a discussion that we're undergoing right now, and we'll just have to stay tuned or ask you to stay tuned as we develop that strategy for 2015.

Operator

And next, we'll go to Roland Morris with Cowen and Company.

Roland Morris - Cowen and Company, LLC, Research Division

I was just wondering, if you wouldn't mind, I know it's a little ways out, but talking about follow-on work for the Falcon at the end of '14 over in Australia and where you guys think that's going to be. Do you think that you're going to be looking for that kind of 3- to 12-month work that you're looking for on the Hunter right now? Is it going to be -- what kind of range? If you can just discuss that.

Robert J. Saltiel

Yes. The Atwood Falcon is in a pretty good position for us out there in Australia, with the market being relatively strong in terms of demand. And Atwood's position there of having full-Australian crews with an employee bargaining agreement that doesn't involve any union activities, so we can run our rigs the way we like, as opposed to some of the handicaps our competitors have. And just our general reputation in the marketplace has been outstanding. With 3 floaters, we pretty much have the lion's share of the market among our competitors. So the Falcon, we feel very good about. You saw that recently, we did put a short-term job on there with Murphy that's going to take us into early calendar 2015. And we feel good about the marketing prospects for the Falcon and follow-on work. So that's certainly a rig that, although not quite at the level of urgency the Atwood Hunter is for our existing fleet, it's the very next rig that we're marketing. And we certainly hope to be able to put some additional backlog on the Falcon as we move towards the middle of this year.

Operator

And next, we go to the site of Darren Gacicia with Guggenheim.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

I guess -- speaking on the theme of the call here, it seems like the stocks are definitely discounting, a pretty big drop in day rates, kind of, across the board. The one thing to kind of explore a little bit more is, I know that there's going to be some rigs idled here. That's clear. Do you have a sense of maybe kind of how many you expect to sort of idle? Do you, and kind of tying that end, is there a chance here that some of these idled rigs, given the CapEx needed, may actually kind of go away permanently and the market balance may be kind of more favorable faster than people expect? As -- if you have an uptick in activity at some point, whether it's 12 or 18 months out, if the rig's retired because they need more work in order to stay competitive, can we be -- could the market be a little bit too bearish here?

Robert J. Saltiel

Well, I think if you refer to the earlier question around our competitors starting to cold-stack rigs, I think as you go through this year and into next year, if we continue to see excess supply, then you are going to start to see rigs cold-stacking, whether it's because competitors don't want to weather the additional cost for warm-stacking, or because they have a number of rigs that they know all of which cannot return to work within a reasonable time, or as you point out, they're facing a regulatory survey that's going to require some costs and/or some significant maintenance work, which makes it uneconomic to make that investment in a marketplace which is as uncertain as this one could be. So I think all those things add up to 12 months from now, you can see a number of cold-stacked rigs by competitors, especially those that have got a large number of deepwater and lower-spec, ultra-deepwater rigs coming available in calendar '14. So I think you can see -- you can determine yourself who those competitors are and their challenges. And I -- and it wouldn't surprise me to see a number of those rigs cold-stacked if the market doesn't improve and pick up some of this capacity.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Well, do you think -- if my numbers are serving correct, that something like 25 to 30 rigs are rolling off contract that probably fit that lower-spec category, from an order of magnitude standpoint. Because it's all about sort of marking where you think kind of the downturn ends, like how many of those do you think could wind up idle-stacked? Fill in the blank, I'll let you put it in. And maybe how many, do you think, as you kind of sit there and think about your analysis of where things are going, how many do you think may be kind of cold-stacked, maybe as a euphemism for going away permanently?

Robert J. Saltiel

Well, I think those questions are probably better aimed at some of our competitors who are really going to be the ones holding the cards that include a number of idled rigs, which are incurring significant costs or maybe facing significant maintenance bills. But there's no question in our industry, we don't permanently warm-stack rigs. People are going to very reasonably take the decision that if a rig can't go back to work within a reasonable period of time, they will cold-stack the rigs. We had to make some of those hard decisions ourselves back in 2010 after Macondo. You search for work for a while, and then at some point, you basically have to make the hard decision to cold-stack. And again, that decision to cold-stack is going to be easier for some of our competitors, as the number of idled rigs piles up. It's going to start to affect the bottom line and it will start to become not very credible that all of those rigs can go back to work in a reasonable time frame. So we expect to see cold stacking and, ultimately, that's going to be favorable for us, given the rigs that we hold and the opportunities that we see down the road. We just hope that we can get through this in, again, at about a 12- to 18-month time frame.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

If I could squeeze one more quick one. Per one of the earlier questions, would you say that as you kind of review what you want to do from a capital budgeting standpoint, would you say that the current environment makes you more inclined to return capital in some way or less inclined?

Robert J. Saltiel

Well, I think any time you start to put a -- the possibility out there that you're not going to grow as fast as you have, then the opportunity to either pay down debt or return cash in some way to shareholders has to increase in the probability directionally. I'm not going to be definitive on that in terms of how we might balance the allocation of free cash flow. But to the extent that the industry and Atwood in particular doesn't grow at the pace that we have, then there's more money available for those kinds of uses.

Operator

And we will next go to the side of Lukas Daul with ABG.

Lukas Daul

Rob, you mentioned that you would like to get a longer-term contract on your upcoming newbuild. And I was wondering, some of your peers are actually marketing newbuilds against shorter-term contracts. So the amount of work that you are bidding this rig for, has anything changed with the duration of those projects? Or compared to 12 to 18 months back? Are they getting shorter, are they the same?

Robert J. Saltiel

Well, I think that -- I don't think it's changing for Atwood. But I think it is changing for some of our competitors that have gotten deliveries of rigs in 2014. And I think that's what you see as they -- as a rig nears its completion in the shipyard, if it doesn't have work, then you become a bit more eager to pursue jobs that may be shorter in duration. And I think what you're referring to is that these rigs that are coming out in mid-third quarter of calendar 2014, having to settle for shorter-term contracts. We saw this post-Macondo as well, when we had the moratorium in place and the slowdown on fixing contracts for newbuilds, a number of those ultra-deepwater rigs came out and took shorter-term jobs. So that's what happens when you have demand not meet the rising supply. So I think you're going to see that here in 2014. Keep in mind that the Atwood Admiral is not scheduled to come out of the shipyard until the end of March 2015. So we're still looking at roughly 14 months of time. And the opportunities we're pursuing for the Admiral at this point haven't changed in duration in terms of what we were targeting for the Advantage and the Achiever.

Lukas Daul

And what do you think needs to change so that we don't carry over this momentum into '15?

Robert J. Saltiel

Well, I think a couple of things. One is, I do believe that 2015 will see a pickup in demand because I think a lot of things in 2014 have been pushed to the right, as opposed to being taken off the table completely. So that's one thing. I think the second thing is, rigs will leave this market on a more permanent basis as we move through 2014, if it doesn't improve. So the discussion, again, around cold-stacking, you will see cold stacking of rigs if this market doesn't pick up. And I think the -- both the supply end and the increase in demand will help improve prospects for 2015 outlook.

Lukas Daul

Okay. And just quickly, have you made a final decision on the newbuild option?

Robert J. Saltiel

We haven't. That option expires in March and that's something that we will be deciding as a management team and the board in the days ahead. I will point out, however, that if you look at our history, we've tended not to excise an option on a newbuild until we had a contract on at least 1 of our remaining 2 other newbuilds that were -- that were under way. So that's probably a pretty good guide for you, at least, on the timing for which we would consider entering into another newbuild contract with the shipyard. We've really been focused on getting a contract for the Atwood Admiral, and we're unlikely to exercise any further growth at the -- in the shipyard for drillships until we get that contract on the Admiral.

Operator

And we will next go to the site of Bill Lasinsky [ph], who is a private investor.

Unknown Attendee

A small ticket item but, nonetheless, an item. I had in my notes from last conference call that you all had signed a contract to sell the Seahawk for about $6 million. Did I miss the closing of that sale or an announcement regarding the status of that contract?

Robert J. Saltiel

No you didn't. We actually had -- we did have a contract in place to sell the rig. We got a deposit on the rig and the sale did not close because the buyer failed to fulfill his obligations. So we still own the rig. We kept the deposit. And we'll look at other opportunities to divest that rig in the days ahead.

Operator

[Operator Instructions] At this time, there are no additional questions. I'd like to turn the program back over to our presenters.

Robert J. Saltiel

Okay, Erin, if there are no further questions, I thank everybody for your participation on our call, and we look forward to talking with you all in May as we review our second quarter results.

Operator

This does conclude today's program. You may disconnect at any time.

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