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Hercules Offshore (NASDAQ:HERO)

Q4 2013 Earnings Call

February 06, 2014 11:00 am ET

Executives

Son P. Vann - Vice President of Investor Relations & Planning

John T. Rynd - Chief Executive Officer, President and Executive Director

Stephen M. Butz - Chief Financial Officer and Executive Vice President

Analysts

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

Gregory Lewis - Crédit Suisse AG, Research Division

Robin E. Shoemaker - Citigroup Inc, Research Division

Ian Macpherson - Simmons & Company International, Research Division

Matthew Marietta - Stephens Inc., Research Division

John Booth Lowe - Cowen and Company, LLC, Research Division

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Judson E. Bailey - ISI Group Inc., Research Division

David Wilson - Howard Weil Incorporated, Research Division

Jeffrey Spittel

Operator

Ladies and gentlemen, and welcome to the Fourth Quarter 2013 Hercules Offshore, Inc. Earnings Conference Call. My name is Dave, I'll be your operator for today. [Operator Instructions] As a reminder, the call is being replayed -- is being recorded, I'm sorry, for replay purposes. I'd now like to turn the call over to Mr. Son Vann, Vice President of Investor Relations. Please proceed, sir.

Son P. Vann

Thank you, Dave. Good morning, and welcome everyone, to our fourth quarter and full year 2013 earnings call. With me today are: John Rynd, CEO and President; and Stephen Butz, Executive Vice President and CFO; along with members of our senior management team, including Troy Carson, Senior Vice President, Chief Accounting Officer; Beau Thompson, General Counsel; and Craig Muirhead, Vice President and Treasurer. This morning, we issued our fourth quarter results and filed an 8-K with SEC. The press release is available on our website, herculesoffshore.com. John will begin the call with some broad remarks regarding our quarterly performance, current market conditions and recent company events. Stephen will follow with a more detailed financial discussion and provide cost guidance for 2014. We will then open the call up for Q&A.

Before we begin, let me remind everyone that our call will contain forward-looking statements. Except for statements of historical facts, all statements that address our outlook for 2014 and beyond, as well as activities, events or developments that we expect, estimate, project, believe or anticipate may or will occur in the future, are forward-looking statements. Forward-looking statements involve substantial risks and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such statements. You can obtain more information about these risks and other factors in our SEC filings, which can also be found on the SEC's website, as well as our website, sec.gov., herculesoffshore.com. Now with that, let me turn the call over to John.

John T. Rynd

Good morning, everyone, and thanks for joining us today. This morning, we reported fourth quarter and full year 2013 results. For the fourth quarter, we incurred a loss from continuing operations of $100.8 million or $0.63 per diluted share, compared to income of $2.4 million or $0.01 per share in the fourth quarter 2012. The latest quarterly results include several nonoperational items that reduced our income from continuing operations by $123.4 million or $0.77 per share, which Stephen will discuss in greater detail in his prepared remarks. Excluding the impact of these items, our adjusted fourth quarter 2013 income from continuing operations was $0.14 per share. For the full year 2013, we reported net loss of continuing operations of $26.8 million or $0.17 per diluted share, compared to a loss of $121 million or $0.79 per diluted share for 2012. Excluding nonoperational items, adjusted income from continuing operations was $44 million or $0.27 per share for the full year 2013, versus a loss of $62 million or $0.40 per share for 2012. We had a number of achievements in 2013, along with a few setbacks, but overall, the year marks a pivotal period for Hercules Offshore as we took several steps to modernize our fleet, rationalize our asset mix and reduce our cost to capital. So before I discuss the market outlook, I would like to briefly highlight some of these key accomplishments. The most significant was our acquisition of Discovery Offshore. With Discovery, we now have full ownership of 2 premier super A-class jackups rigs, the Hercules Triumph and Hercules Resilience, that we expect will command premium pricing for many years to come. Since acquiring these rigs, we have placed the Triumph on a high dayrate, short-term contract in India. While we missed on a few long-term opportunities earlier in the year, primarily because we were too bullish on pricing, I believe that we are now close to securing a multiyear opportunity for one of the rigs. The main contract terms have been agreed to, and we are hopeful that we can finalize the contract within the next month. If we are successful securing this work, startup is expected sometime during the third quarter of 2014, at a dayrate in the low $200,000 levels. We are also in discussions of the shorter-term opportunities for both rigs. Pricing on these shorter-term jobs can vary by location, ranging from a low of $160,000 per day, to a high of $200,000 plus, depending on the operators' requirements. In keeping with our fleet renewal strategy, we also acquired a relatively new, high-capacity liftboat in West Africa, the Bull Ray. Demand and pricing for the vessel has surpassed our initial expectations. In fact, in its first full year of operations, we estimate that the cash flow generated from the Bull Ray alone is almost as much as what the entire Domestic Liftboat segment generated during our last year of ownership. As many of you know, we sold Domestic Liftboats, as well as the inland barge segment last year, in order to better focus resources on businesses that have more attractive long-term growth and return prospects. The sale of these segments generated over $100 million, or about 10x the annual cash flow generated by these segments. We also recently sold the Hercules 170 for approximately $8 million, a rig that has been stacked in the Middle East since 2009, with limited prospects of returning to service for us. We also continue to make progress on the balance sheet, lengthening our maturity profile and reducing our borrowing cost. Our most recent refinancing lowers our borrowing cost on a quarter of our debt by 300 basis points and over the next 4 years, we have early redemption options on our remaining debt, allowing for the possibility of further reductions in our fixed charges. I am confident that the these strategic moves, coupled with our revenue backlog of over $1 billion, will improve our long-term competitive position and reduce the volatility of our overall operations.

Moving onto our market overview, starting with the U.S. Gulf of Mexico. Our contract backlog remains fairly solid by historic norms at approximately 170 average days per rig. 8 of our 18 marketed rigs are contracted well into the second half of 2014, including 2 of the 3 rigs that we recently extended with Chevron, through year-end 2014. We executed a contract this morning for the Hercules 209 at $110,000 per day for a 3 week program. We do have a couple of other rigs with near-term availability and are in discussions with various customers to pick them up. While we could incur some modest downtime on certain rigs between jobs, I don't expect significant idle time, and I expect pricing in the U.S. Gulf of Mexico to remain stable. Activity has started the year a little slower than previously anticipated, but we do not anticipate any material change in the supply of jackups in the Gulf of Mexico in 2014. There a number of factors that could account for this start. Some of our customers have seen ownership changes, which we suspect could have temporarily delayed previously planned drilling programs. A number of operators that we typically see in the market have not been as active recently for various unique reasons. And we have heard from a select group of customers that permitting has gotten more challenging. These factors likely all contributed to slower contracting activity in the last couple of months than we have experienced over the last couple of years. As a result, some of our rigs have near-term availability. Given this fact, we have elected to suspend the reactivation of the Hercules 203 until we get more contract coverage on these rigs and greater demand visibility during the second half of 2014, and heading into 2015. As for the Hercules 265, our insurance underwriters determine that the rig was a constructive total loss, and we received proceeds of approximately $50 million at end of last year. We are planning to have a site team board the rig and assess the integrity of the hull over the next few months. That will assist us in our decision as to whether or not to attempt to buy the hull back from the underwriters, with the intent to possibly rebuild the rig at some future date if economic conditions are favorable.

Reviewing the international jackup markets. Utilization remains very high at approximately 96% of the marketed fleet, and demand is still growing as national oil companies continue to add to their rig count. But clearly, what has weighed on investor sentiment in our industry is the new build capacity scheduled to be delivered over the next 3 years. Currently, there are 135 jackup rigs under construction or on order, of which 40 rigs are scheduled for delivery in 2014. About 30% of new builds to be delivered this year are already contracted. With the current guidance in international jackup markets, we still think that the absorption of new builds won't create much market dislocation in 2014. Visibility beyond 2014 is a little less certain, and will depend on several factors. Outside of the 2 super A-class rigs, our remaining international fleet is fairly well positioned in terms of contract coverage. We have 3 of our 6 standard rigs under long-term contract with Aramco. The Hercules 261 and 262 are contracted through 2019 with dayrates set to increase by 50% at the end of this year, and maintain at those levels for the next 5 years. The Hercules 266 is contracted through late 2015, and Aramco may seek a multiyear extension later this year. In West Africa, we operate the Hercules 267, which is contracted through late 2016. The 2 standard rigs with 2014 availability are the Hercules 208 and 260. The 208 is scheduled to arrive in India on the 10th of February and commence it 8-month contract on plus or minus February 25. The operator has already expressed an interest to extend the program on the 208 beyond the current work scope, which would keep the rig busy well into 2015. The Hercules 260 is contracted through late May 2014 in West Africa, and we are in discussion with other operators within the region about follow-on work for the 260.

Turning to our International Liftboat business. Activity levels in West Africa experienced a bit more volatility during the fourth quarter, mainly in the small to midsize vessels. This choppiness continues today and could be something to monitor throughout the year as more competition develops. The good news that pricing across all classes is holding steady. For the larger vessel classes, we expect continued market strength. The Bull Ray, our 280-foot vessel, is on contract through late first quarter and we had several good long-term prospects. In the Middle East, liftboat activity ended the year on a strong note, with all 3 vessels under contract. We expect 2014 will be a strong year for Middle East liftboats, with good demand visibility and firm pricing for all 3 vessels.

In closing, let me reiterate that we still expect fairly healthy fundamentals across our business segment through 2014. Particularly with crude oil prices maintaining around the $100 per barrel level. In the U.S. Gulf of Mexico, dayrate for jackups are expected to remain stable at current levels. We have good contract coverage with built in pricing increases for much of our marketed fleet through the year. There are some interesting new drilling programs that are testing deeper zones in the Gulf of Mexico shelf, that could be very good, longer-term, for demand in the region. With that said, contracting activity has gotten off to a slow start this year. It is very possible that this is a temporary lull, and that we will reengage on the reactivation of 203 later this year. But for now, we prefer to take a cautious more stance and focus on how to best maximize cash flow from the business. As for our international drilling segment, I firmly believe that we are close to securing long-term work for -- on the super A-class rigs, and are viewing several short-term prospects for both rigs. Overall, our ability to execute will play a major role in how well we perform in 2014. We are in good position to generate healthy amounts of free cash flow this year, and continue to believe that attractive growth opportunities remain a favorite path to deploy our cash. But we also have the option to pay down debt. In either case, we will take a prudent approach that best positions the company for long-term growth. With that overview, let me turn the call over to Stephen.

Stephen M. Butz

Thank you, John, and good morning, everyone. As normal, my comments today will focus on a sequential comparison of our quarterly results. I'll also provide an update to our operating cost and capital spending guidance, before opening the call for Q&A. For the fourth quarter, we reported a net loss from continuing operations of $0.63 per share, which included several nonoperational items that impacted the results. These items include an impairment charge of $114 million on the Hercules 153, 203, 250 and 206, all of which have been cold stacked in the U.S. Gulf of Mexico for approximately 5 years, an $11.5 million impairment charge on the Hercules 170, prompted by our sale of the rig, a $32 million gain on the Hercules 265 insurance settlement and a $29 million charge related to the premium paid to redeem our 10.5% notes and other refinancing related expenses. These items net to a loss of $123 million or $0.77 per share. Excluding these items, our adjusted net income from continuing operations was $0.14 per share. This compares to income of $0.11 per share in the third quarter 2013.

Moving on to our segment results, I'll begin with Domestic Offshore. Domestic Offshore reported an operating loss of $34 million, which includes the asset impairment charge of $114 million and the insurance related gain on the Hercules 265 of $32 million. Excluding these items, operating income for the fourth quarter was $49 million compared to $44 million in the third quarter, driven by higher pricing. Average revenue per day increased by 10% in the fourth quarter to just over $100,000 per day, from approximately $91,000 in the previous quarter. Our rigs in the U.S. Gulf are continuing their move to higher-priced contracts, and we expect this trend to be repeated in the first quarter based on our contract coverage. Somewhat offsetting the improvement in dayrates was the decline in the fourth quarter utilization to 82% from 91%, primarily due to increased shipyard time for special surveys on the Hercules 205, 264 and 300. We believe first quarter utilization will remain in a similar range, as it will be impacted by the continuation of surveys on the Hercules 205 and 264, and a potential limited amount of downtime on the Hercules 150 and 209. Domestic Offshore operating expenses of $33 million include the insurance related gain on the Hercules 265. Excluding the gain, fourth quarter operating expenses of $65 million were 12% lower than third quarter expenses of $74 million. The decline was driven mainly by lower cost on the Hercules 265, along with a reduction in workers' compensation expense. We expect to incur first quarter operating expenses for Domestic Offshore in the mid-to high $70 million range, driven by repair and maintenance, which is somewhat front-end loaded, and normalization of workers' compensation expense. For 2014, we expect full year Domestic Offshore operating cost to be in the low $300 million range.

Our International Offshore segment reported an operating loss of $6.8 million. Excluding the loss on the sale of the Hercules 170, the segment income would have been $4.7 million, a slight increase from income of $2.5 million in the third quarter. While average dayrates increased 28% and operating days rose 7%, both benefited from the mid-quarter startup of the Hercules Triumph and Hercules 267. The Hercules 208 offset much of the gains as it was in the shipyard for its special survey the entire quarter. Operating expenses were $40 million, when excluding the loss on the sale of the Hercules 170, up from $28 million in the third quarter. Again, related to incremental costs resulting from the startup of the Triumph and 267. We expect International Offshore operating cost for the first quarter to be in the high $40 million range, as we incur a full quarter of cost on these rigs, as well as startup costs on the Resilience. For the full year 2014, we estimate segment operating expenses will be in the low $200 million range, which assumes a late first quarter start up for the Resilience.

Now turning to our International Liftboat segment. Operating income decreased to $9.7 million from $12.8 million in the third quarter. Lower activity levels in West Africa caused overall utilization to decline to 66% from 75% during the third quarter. Activity levels in West Africa could remain at similar levels in 2014, as regional competition has grown, particularly for the small and midsized vessels. However, demand and pricing for larger class vessels in West Africa and the Middle East remains firm. Overall, average revenue per day for the fourth quarter rose modestly to $25,900 from $25,400, while operating expenses remained relatively flat from the third quarter at $21 million. First quarter operating expenses are expected to increase modestly, and gradually increase throughout 2014.

Moving onto other income statement and cash flow items. General and administrative expenses of $19.6 million were relatively flat with the third quarter level, and we expect G&A to remain in the same range of $19 million to $20 million per quarter for the year. Depreciation and amortization expense increased to $41 million from $38 million in the third quarter, as a result of the startup of the Triumph and the 267. We expect first quarter depreciation to approximate $45 million, increasing to the high $40 million range in the second quarter as a result of incremental depreciation related to the Resilience. Interest expense declined to $18.8 million from $19.4 million in the third quarter, due to the refinance of our highest cost debt at the start of the fourth quarter. Additionally, approximately $8 million of interest was capitalized during the fourth quarter, compared to $9 million in the third quarter. We expect to capitalize even less interest in the first quarter and a minimal amount thereafter, which will increase our interest expense to the low $20 million range in the first quarter and the mid-$20 million range per quarter thereafter. Our effective income tax rate for the fourth quarter was approximately 25%, excluding the impact from nonoperational items. We expect our effective income tax rate for 2014 will be in the low to mid-30% range. Cash taxes for the year are expected to range between $20 million to $30 million. As for capital and drydocking expenditures, we spent approximately $230 million during the fourth quarter, which includes the final shipyard installment of $167 million for the Resilience. For 2014, we expect to incur capital expenditures, including drydocking expenditures of approximately $125 million to $140 million. This is slightly higher than our previous guidance, reflecting higher cost on certain surveys and a modest amount of additional cost on the Resilience, prior to its initial contract. The majority of our capital expenditures are for maintenance, reflecting the high number of special surveys planned for this year. As our fleet status report shows, we have 6 surveys scheduled for 2014, 5 in the U.S. and 1 in the Middle East. The number of special surveys will decline to only 1 in 2015. So while it's too early for detailed 2015 capital spending guidance, we expect capital spending will decline from 2014 levels.

With respect to our balance sheet and liquidity, we ended the fourth quarter with approximately $200 million of cash and equivalents. We also had $138 million of availability under our $150 million revolving credit facility. In April, we have the option to redeem our early -- our $300 million senior secured notes due in 2017 at 105.3. We're continuing to monitor the debt markets, but have not made any decision at this time. In closing, over the last few years, we've made good progress in beginning to transform our asset base and strengthen our balance sheet. Looking into 2014, we remain focused on day-to-day execution and a continuation of these strategic initiatives. Our current contract coverage, which provides over $1 billion of revenue backlog and strong liquidity, puts us in an improved position to manage through any challenges that come our way, as well as to capitalize on growth opportunities that provide attractive returns for our shareholders. With that, we're ready to open the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Please standby for your first question, which comes from the line of Collin Gerry at Raymond James.

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

It sounds like, we're in a period here were there's some softness in the market, and yourselves and your competitors are kind of acknowledging that. But we don't have a lot of visibility in terms of the light at the end of the tunnel. And John, you've been through this before. I'm just kind of curious, and very successfully, I'm just kind of curious, how you go through the next year, from a cash priority here? Is it stock cash, in case of you want to take advantage of M&A in the market? Is it pay down a debt to reduce the interest expense? I mean, how do you guys see yourselves kind of working in the next 12 months from a financial perspective?

John T. Rynd

Good question. I think that, 1, good news is, we're starting from a very good position in our liquidity, which is different than other times in the cycles that we challenge. So we're off on the right foot. And I think that you nailed the 2 opportunities that we still think, as is, I said in the prepared remarks, growth is the best use of our cash. But if those opportunities aren't there, or the returns on those opportunities don't meet our hurdles, we've layered the maturities of our debt profile to deploy the cash in that direction, and that'll be just an opportunity by opportunity situation.

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

And then, just to kind of follow up on the market commentary, we've had any number of, kind of outlooks, in terms of the softness we're seeing right now. You have a little bit more of a niche market, with more niche customer base. Maybe you can describe just the mentality and the behavior? I mean, are we seeing this is as a 3 to 6 month lull? Is it a capital return issue? Is it a people issue? I would just think, based on what we're seeing, Gulf of Mexico from a pricing perspective, I'm a little bit surprised to see that you are seeing a little bit of softness in demand. Maybe just -- give us a little color on the timing, and how this kind of feels compared to maybe prior -- starts of some softness in prior cycles?

John T. Rynd

Yes. I think that we're not experiencing any significant softness anywhere in the world. We got off to like a -- we did get off to a little slower start and I think truly, a lot of it's permit driven, acquisition driven, that's delayed some starts. We're still having very robust conversations with our customers. Very confident in the Gulf of Mexico market. It's going to be very solid this year. As I said in the prepared remarks, we do not see any material change in the supply equation of jackups in the Gulf. And it is a unique market, and we're still very optimistic about '14. It's still looks very solid. But you remember, we came off a phenomenally successful 2013. So we set the bar fairly high. Internationally, I firmly believe right now, we will absorb the capacity here in the market in 2014. It's anybody's guess beyond. You laid out a very good piece in your report on the, I think, Monday of this week that laid out the challenges of supply growth. I think it's going to be interesting. I think a lot of the deliveries will be pushed to the right, which pushes that point in the cross of the curves probably into '15. But we have not seen any significant change in our customers' behavior around the world on the jackup front. Internationally, we're in very good shape. Very confident on the 2 Discovery rigs, on the Triumph and the Resilience. Wish we could say more, other than that we are very comfortable and very confident on positive resolutions on those opportunities we're working on.

Operator

Your next question comes from the line of Gregory Lewis at Credit Suisse.

Gregory Lewis - Crédit Suisse AG, Research Division

John, could you talk a bit more about the permitting issue in the U.S. Gulf of Mexico? Is that something that, that we're surprised from? Is it related -- could it be related from issues with the government shutdown last year that's sort of dragging out the process? Is it government, maybe becoming more strict or -- anti-business in -- on the shelf. I'm just sort of curious on, if you're seeing anything, what customers are saying about that?

John T. Rynd

Yes, I think in our conversations with the customers that we know, are having challenges with permits, which is directly impacting rig demand. The demand's there, it's a permit issue. That's a regional office issue. Why are they doing it? I don't know. We went through a fairly smooth period in '11, kind of got going '12. I think we've gone almost 2 years without losing any revenue days, waiting on a permit. It's just taking longer, more scrutiny. What's that a result of, we're not sure. It's not impacting all of our customers, but it is impacting some key customers.

Gregory Lewis - Crédit Suisse AG, Research Division

Okay. And then just my other question. In terms of the liftboats in West Africa. I guess, in the prepared comments, talked a little bit about some of the choppiness there on the smaller vessels. Is that simply less a slowdown in activity, or is there more supply coming into the market? And if so, where is that supply coming from? Has it always been there, and it's being reactivated, or...

John T. Rynd

It's supply growth, Greg, as we talked for 2 years about the growing supply, that local Nigerians have purchased mainly in the U.S. Gulf of Mexico and mobilized to West Africa, principally Nigeria. They have bought, kind of the low to mid-class vessels, and that's where we're seeing the choppiness. We've-- I think we've been very surprised at how positive our results have been, given that supply growth. The numbers don't speak the whole story. A lot of the people that have bought boats have not been able to really get them activated and work properly, so the numbers are a little skewed. But that's been, really on that mid-market to shallow market, has been where the choppiness is. Surprisingly, we've been very happy with the pricing on the big vessels, and even on the vessels that are experiencing lower than anticipated utilization, if there's not been a pricing drop. So it's mostly been supply creep. The demand is very robust.

Operator

Your next question comes from the line of Robin Shoemaker at Citi.

Robin E. Shoemaker - Citigroup Inc, Research Division

Just going back to the Gulf of Mexico, the -- there's been a lot of large property transactions, and some newer players in the Gulf. And how does that play into this pattern of unexpected, kind of slowing of demand in here -- early in the year?

John T. Rynd

Yes, very good question. I think, longer term, it's nothing but a positive to see about $8 billion of capital deployed in the Gulf over the last 2 and a half years. The challenge is, that's a lot to swallow for some of these companies, reprioritize, rescheduled, et cetera. So I think that is, been some of the slowdown, or couple of customers that have made acquisitions as they get their house in order and get their drilling plans in order, definitely that I think, that is a short-term blip. Longer-term it's nothing but a big positive.

Robin E. Shoemaker - Citigroup Inc, Research Division

And some of these companies that we read about that are acquiring these properties, whether they're private equity or companies that have been on the buying side of this. I assume you're in detailed discussions with them about their rig needs and so forth. So you would have an idea that they are going to be springing back to action, at some --

John T. Rynd

Yes. That's why, in the prepared remarks in the previous question, we're still optimistic about the demand levels in 2014. We're in their offices weekly. We know what they're talking about. We know what their discussions for us throughout the year on rig needs and even a couple of customers, not to get these 2 out of whack, but they're talking about 2015 rig demand. So we're going to have some spottiness. We've had, as I mentioned, a couple of customers that historically, would run a rig for a year, are not in the market, and then some of the smaller guys that would drill 2 to 4 wells a year, we don't see them. And that's where we're seeing the gap, just like on the 209, there was no guided drills, 1 or 2 wells there to kind of run to immediately. Now we've secured a nice contract at $110,000 a day with a good customer that's going to pick up the rig. So just going to be -- you're going to see some of that choppiness. It doesn't feel like right now, that's going to be significant gaps. But we'll -- every week we'll learn a little more.

Robin E. Shoemaker - Citigroup Inc, Research Division

Yes, and then you addressed the big picture issue on jackups supply looking out of -- what are you expecting on attrition -- the attrition rate of older jackups, in terms of where the demand is projected to go? What type of assets and how challenged, maybe not in the Gulf of Mexico, it's kind of unusual circumstances there, but how challenged will 1980s vintage jackups, which some of the major drilling companies, of course, are spinning off or carving out and -- how challenged will they be with this new supply coming in, and would you expect a higher rate of attrition?

John T. Rynd

I would anticipate that people that have been around the business for a couple of decades or more would see those as an opportunity to not deploy new capital in their older assets as the market does get, maybe a little out of balance in '15, and that's what -- I think that if you go to the last down cycle in 2009, 2010, there was a lot of capacity taken off the market, a lot of discipline was shown. We can just hope that everybody's prudent as we go into '15. And into the back half of this year, potentially.

Operator

The next question comes from the line of Ian Macpherson at Simmons.

Ian Macpherson - Simmons & Company International, Research Division

John, I wanted to get back to the liftboat comments again, and I wondered, given the sort of divergent trends that are occurring with the higher end and lower end assets there, if you could sort of synthesize that for us, into what that means in terms of the run rate EBITDA potential for that segment, based on today's conditions? Is that, is your liftboat EBITDA, you think, growing year-on-year in '14 or stable, or how do you see it?

John T. Rynd

I think it's going to be fairly stable, because what we're kind of getting, losing a little bit on lower investments in West Africa, we're picking up with the strength in the Middle East. Big vessels, opportunities there are excellent. The Bull Ray is working at $65,000 a day, operating costs are sub $15,000 a day and the outlook for that is very solid. So we've been able to kind of pick up the slack, if you will, from the lower end vessel challenge on utilization in West Africa by the firmness in the Middle East.

Ian Macpherson - Simmons & Company International, Research Division

And separately, I was wondering, can you give us a little bit of an update on the status of your renewal negotiations with Chevron in the Gulf of Mexico jackups, where those stand today and when you think you might have longer-term extensions in place? And is that at all permit related, or is this more of a contract negotiation?

John T. Rynd

No, it's done. The 120 and the 173 are contracted through the end of the year. The 204 is contracted into July. So that was consummated last week. They were going to a new global contract, so we are starting with a fresh contract. So it took longer than anticipated just to work out the details of the contract.

Operator

Your next question comes from the line of Clayton Kovach [ph] at Tudor Pickering Holt.

Unknown Analyst

So just one question for me. So what's the potential for incremental Saudi demand over the next 18 months?

John T. Rynd

It looks to be, I would say, anywhere between 5 and 12. I know that's a big range, but they move pretty quick, but then they move pretty slow as well. So we're still optimistic there as the opportunities in Saudi, for both the new generation jackups and they deploy a lot of the standard jackups and it fits their need very well. So we think there's opportunities for both as we progress through '14.

Operator

Your next question comes from the line of Matthew Marietta at Stephens.

Matthew Marietta - Stephens Inc., Research Division

Starting with the Gulf of Mexico, how long did you say that, that work was, with the 209 rig? Was that 3 weeks or 3 months?

John T. Rynd

3 weeks, 3 weeks.

Matthew Marietta - Stephens Inc., Research Division

And at that point, did the customer express any opportunity to that -- for that work to extend into something longer?

John T. Rynd

Yes, he's asked us not to sell it out from under him. But it doesn't mean he has anything firm, but he's obviously got something cooking.

Matthew Marietta - Stephens Inc., Research Division

Very good. And I just want to make sure I caught the backlog number right in the Gulf of Mexico. Did you say that, that was 170?

John T. Rynd

Yes. Right around 170 with the contract extensions on the 120, 173 and the 204.

Matthew Marietta - Stephens Inc., Research Division

Great. Switching internationally, the opportunities for the Resilience and Triumph sound very positive, but can you maybe provide an update on what needs to transpire for the Resilience from a timing perspective of crewing up the rig, making it drill ready, if some of those shorter term or near-term opportunities do pan out?

John T. Rynd

We can be ready to go under tow by February 18. If that helps.

Operator

Your next question comes from the line of J.B. Lowe at Cowen and Co.

John Booth Lowe - Cowen and Company, LLC, Research Division

Just another question on the Discovery rigs. On the long-term contract that's going to start in the third quarter, did you say where it's going to be, what region?

John T. Rynd

No.

John Booth Lowe - Cowen and Company, LLC, Research Division

Okay, and then the short-term stuff, would that be something that you would fill in before that longer-term contract, or is that for the rig that doesn't get the longer-term contract? Would that be kind of overlapping the same time?

John T. Rynd

Yes, the shorter-term work will probably go to the rig that doesn't get the long-term work. Build the near-term gap with that short-term work.

John Booth Lowe - Cowen and Company, LLC, Research Division

Got you, okay. And then on the 209, was that rig down at all, in between picking up the 3 week work?

John T. Rynd

That came off at the 29th of January, plus or minus, maybe the 28, back to work in the next 7 to 10 days. Going to 10.

Operator

Your next question comes from the line of Matt Conlan at Wells Fargo.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

First, let me just say, pretty good quarter operationally, not that anyone's focusing on that, but congratulations on that. I had a follow-up on the permitting issue here. You mentioned it's affecting some customers, but not all. I mean, is it random, or is there some sort of pattern that you can decipher which companies are having permitting issues?

John T. Rynd

It is more random than specific customers. It just -- there's no pattern.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Okay.

John T. Rynd

As with -- not to get too much in the weeds, but the initial applications to drill is called the DOCD. I think that stands for Development Operations Coordination Document, and that is for the lease or for a number of wells. So it's the broader piece of the package. And once the DOCD is approved, which is approved at the regional office, once it gets to the field office, we understand the permits are moving. It looks like, in our conversations with the guys that are having some delays, it's the DOCD which is the bigger package, the overall plan of development at the regional office.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Okay. So do you don't think it has anything to do specific customers. There has been some well-control incidents, nothing like that.

John T. Rynd

We don't see that.

Operator

Next question is from Jud Bailey at ISI Group.

Judson E. Bailey - ISI Group Inc., Research Division

John, you mentioned in your prepared comments you didn't expect supply in the Gulf to increase in 2014, which I just wanted to follow onto that. Obviously, it implies you feel comfortable. No supply's going to come out of Mexico, and just wondering if could just expand maybe on your updated thoughts on kind of what you think is going to go on down there, as they take delivery of all the new builds they're going to come up. I believe they have some -- they may have released some tenders recently, and if you can make a comment on that?

John T. Rynd

Yes, perfect, Jud. I mean, obviously, we pay attention to Mexico very well. We have operated there, as you well know, and our intelligence gathering there is superb and has been since 2007. There's 4 rigs that are scheduled to come off contract late in the fourth quarter, mid-fourth quarter legacy rigs, that our sources indicate that they're going to be extended anywhere from 180 to 365 days, because the deliveries of the new builds are kind of lagging what they anticipated. So we think that it's more of a '15 event than a '14 event and then we'll just again, as with -- we do every year with Pemex, watch very closely, but they do have a very aggressive rig schedule. If they could get up to a 60 rig count as they exit 2015. But good news for us, we don't see any material mobilizations back to the Gulf from Mexico in '14.

Judson E. Bailey - ISI Group Inc., Research Division

And my other question is, obviously, a lot of new builds coming out of various yards, but I'm curious, are there other opportunities out there from a consolidation standpoint, maybe existing rigs, higher-quality existing rigs in certain areas that may be available to you guys? And if so, are you evaluating, I mean, how do you think about those, or evaluating those in a market that's I guess, a little bit more uncertain than it was 6 months ago?

John T. Rynd

Very good question, and yes, we have been on a kind of, as you all know, trying to renew the fleet. We realize the challenge that we have. We've made some good progress with the Discovery and the Bull Ray. And there some rigs potentially available, that are not brand-new, but not 30 years old that would -- we think would fit the bill. As well as, there's a lot of speculators that have rigs under construction that we think that, over time, the asset values may correct to where they need to be. We haven't seen it yet. So again, to your point, as the market adjusts, you got it -- asset value should adjust to those market expectations, and so we'll keep a close eye on that.

Judson E. Bailey - ISI Group Inc., Research Division

And if I could just follow up on that, if you look to the new build situations that you've looked at, and the existing rig situations, do you a sense on where maybe the flight, the price may be more flexible depending, I guess, who's selling it, but do you have a sense of kind of, who'll be more flexible on price, wanting to maybe unload certain rigs?

John T. Rynd

We haven't seen anybody get real flexible yet. I think what you're going -- I think what's going to have to happen is, a couple of them are going to have to take deliveries and park them at the dock for that reality to set in.

Operator

Your next question comes from the line of Dave Wilson at Howard Weil.

David Wilson - Howard Weil Incorporated, Research Division

Just wanted to follow-up on the uses of cash. And I understand the growth and debt are priorities. But just wanted to get your thoughts around instituting some type of share repurchase program or something like that.

Stephen M. Butz

Yes, David, that's a good question. And as John mentioned, we obviously have been -- over the past several years, fleet renewal has been a priority for us, given where our -- the specifications and age of our assets. And we'll continue to be so, but at the same time, we're continuously evaluating all those good uses of cash, whether it's debt repayment, share buyback, dividends, although that's probably less likely, but we'll continue to evaluate all of those uses and discuss with the Board each quarter. So we're not going to rule anything out but we just note the, again, what the priority has been.

David Wilson - Howard Weil Incorporated, Research Division

Got you. And then finally, John, just kind of a follow up, I think couple -- maybe last quarter, couple of quarters ago, you mentioned that there might be some possible demands for mat supported rigs outside the Gulf of Mexico, I just wanted to see if there's been any developments there?

John T. Rynd

That demand is still there, and it's Asia-specific. Obviously, you've seen the 208 get a very attractive contract in India. It speaks well for the mat rigs. The 208 worked in Myanmar, previous to go into special surveys and then going on to Karin. There is demand at -- in Myanmar and other places for the mat rigs. So we're monitoring that and seeing if we could match up timing to possibly move a rig out the U.S. Gulf of Mexico to one of those international opportunities. Just a minute though, on that, just to -- not to get everybody excited, there's nothing imminent, but we are continuing to explore those opportunities.

Operator

[Operator Instructions] Next, we have another question from J.B. Lowe at Cowen and Co.

John Booth Lowe - Cowen and Company, LLC, Research Division

I just remembered what I was going to ask. The other question I was going to ask. On the 265, you said there is a potential that you could buy it back from the underwriters? That's -- is that something that would could happen sooner, rather than later? When are you going to be able to get guys on board the rig, and see what the status of it is?

John T. Rynd

We're going to get on here the next couple of weeks. And that could take upwards of 90 days before we do a thorough investigation. On the surface, the rig's looks like it could be put back in shape, but you never know until you really do the detailed analysis. And then from there, we would have to look at the refurbishment cost, to put it back to service, and where the market is around the world, and can we get the appropriate return for that incremental capital.

John Booth Lowe - Cowen and Company, LLC, Research Division

Right. So that could kind of be, something that goes up against the 203 if you ever think about reactivating it again, that you can kind of choose between the 2 there?

John T. Rynd

No. I think they're separate, actually. On timing and on capital dollars, to refurb the 265, probably twice as much as the 203 and twice as long. They're somewhat independent.

Operator

Your next question is from Jeff Spittel at Clarkson Capital Markets.

Jeffrey Spittel

I just have 1 last. I guess, maybe a little bit of an update on the transition. You're doing a bit more horizontal work of the shelf. And if you have any indication directionally on how much longer, if at all, those wells are taking to drill, versus kind of your garden-variety vertical well on the shelf.

John T. Rynd

They're not taking substantially longer. A little bit longer, but not a game changer longer.

Operator

Ladies and gentlemen, that concludes the question-and-answer portion of today's call. So I'd now like to turn the call back to Son Vann for closing remarks.

Son P. Vann

Thank you, Dave, and thanks, everyone, for joining us today. A replay of this call will be available on our website in the next couple of hours. And as always, if you guys have any questions, feel free to reach out.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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