Rowan Companies Q1 2010 Earnings Call Transcript

May. 4.10 | About: Rowan Companies (RDC)

Rowan Companies (NYSE:RDC)

Q1 2010 Earnings Call

May 04, 2010 11:00 am ET

Executives

David Russell - Executive Vice President of Drilling Operations

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

Mark Keller - Executive Vice President of Business Development

Thomas Burke -

Suzanne McLeod - Director of Investor Relations

William Wells - Chief Financial Officer and Senior Vice President

Analysts

Jeff Tillery - Tudor Pickering

Kurt Hallead - RBC Capital Markets Corporation

Michael Urban - Deutsche Bank AG

Operator

Ladies and gentlemen, greetings, and welcome to the Rowan Companies, Inc., First Quarter 2010 Earnings Release. [Operator Instructions] It is now my pleasure to introduce your host, Ms. Suzanne McLeod, Director of Investor Relations for Rowan Companies, Inc. Thank you, Suzanne, you may begin.

Suzanne McLeod

Thank you, and good morning. Welcome to Rowan's First Quarter 2010 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, Senior 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 Operation; Kevin Bartol, Senior Vice President Corporate Development; and Tom Burke, President and Chief Executive Officer of LeTourneau Technologies.

Before Matt begins his remarks, I'd 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'll turn the call over to Matt.

W. Ralls

Thank you, Suzanne. Welcome, everyone, and thanks for joining us this morning. First, let me express condolences from all of us at Rowan to the families and co-workers of the crew members lost and injured in the Horizon incident. While offshore drilling has one of the strongest safety cultures and records of any industry, this incident is a stark reminder of the immense forces we deal with in our daily activity. Safety of our people and protection of the environment are two of the highest priorities for Rowan. We get very strong support from our customers in our efforts to achieve injury- and incident-free operation.

Turning to offshore drilling, we had a strong first quarter, operationally. Revenues were helped by our best uptime percentage in several quarters, and we managed our costs well during the quarter. We continue to be pleased by the level of interest we're seeing for our high-spec jack-ups in several markets around the world. Utilization in that category of jack-ups was [ph] 2 million pounds for greater hook load, was at 93% for the industry, but 100% for Rowan. We've also seen utilization for the 350-foot-or-greater premium jack-ups reached 90% supporting our belief that tenders are consistently requiring higher-level capabilities.

Some of that utilization has come at the expense of the rigs in the 300-foot category where utilization is currently 79%. This high grading of equipment by our customers along with new capacity coming into the premium into the market has kept day rates for the 350-foot jack-ups from moving significantly higher. As noted in our last call, we delivered our second 240C jack-up at Ralph Coffman at the end of last year. And that rig had a great start-up in the first quarter working for McMoRan.

This past weekend, we christened our first new EXL high-spec jack-up, which will also soon begin drilling for McMoRan. That rig was on time and on budget as are the remaining four high-spec jack-ups we have under construction.

Our Land division continues to see good demand, and we believe we will shortly sign contracts on three of our four remaining uncontracted market land rig. Our manufacturing company, LeTourneau Technologies, had a mixed quarter. Margins were in line with expectations, but revenues were negatively impacted by delays in the shipments of both the land rig package and a loader that were expected in the first quarter but will now occur in the second quarter.

Also after a rigorous review of both the condition and rate of consumption of our substantial inventory, we determined that a reduction in the carrying value of inventory was appropriate. Bill will give you more details on that in his comments, but I would note that as the non-cash charge, it does not reduce our optimism about the future for Letourneau.

And finally, I'd like to say that despite some recent headlines following a couple of press interviews I gave, there has been no material change in the strategy we've been discussing with you over the past year nor in our thoughts on timing. We continue to be strategically focused on growing the offshore drilling side of our business. We'll consider the possible separation of the manufacturing and land drilling operations when market conditions for those businesses are such that we feel we can get good value for our shareholders.

Now I'll turn it over to Mark for a review of the [indiscernible]market.

Mark Keller

Thanks, Matt. Our offshore fleet of 24 jack-ups is currently contracted at 79% utilization with an average day rate of approximately $171,000. 15 of our 24 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. The remaining nine jack-ups are located in the U.S. Gulf of Mexico including the EXL #1 delivered this weekend. As I mentioned in the last call, we have established a marketing presence in Kuala Lumpur. We’re positioning the company to take advantage of the higher spec HPHT requirements in the Southeast Asia region.

Tender and inquiry activity has improved in 2010, and we are currently seeing open demand for more than 40 jack-ups in regions such as the U.S., Gulf of Mexico, Central and South America, Mexico, the North Sea, the Middle East, India and Southeast Asia.

While we are encouraged by the increased demand, we do not anticipate a significant increase in day rates until some of these tenders have been awarded and more of the excess capacity has been absorbed. The market has remained relatively steady since our last earnings call in March. According to ODS-Petrodata, there are currently 460 jack-ups worldwide. Demand is 350 rigs with utilization at 76%, the highest it's been since May 2009.

As Matt mentioned, utilization for 350 independent-leg cantilever jack-ups and greater is at 90%. For this class of rig, day rate fixtures over the last six months are averaging 122,000 per day, approximately 38,500 per day higher than the 300-foot independent-leg cantilevers currently in the market.

63% of Rowan's jack-ups are in the 350-foot-or-greater classification, and we will continue to benefit from the high grading of the worldwide fleet that the industry is currently experiencing.

I will now address our areas of operation. Let's begin with the U.S. Gulf of Mexico. Supplying the region is 81 jack-ups while demand is 42 rigs for a utilization of 52%. This is the first time the U.S. Gulf has been above 50% since March of 2009. We have nine jack-ups in the region with a contracted utilization of 89% and an average day rate of approximately $129,000 [indiscernible]. The EXL #1 will begin operations in mid May, and we are pleased to expand our relationship with McMoRan and their partners by adding another jack-up to their deep-gas drilling program.

The Davy Jones discovery has potential to trigger a resurgence of activity on the U.S. Gulf of Mexico shipment. While geographic diversity is still an important part of our overall strategy, we remain focused on meeting the domestic deep-gas demands with our high-spec fleet of [ph] jack-ups.

Regarding the remainder of our domestic fleet, we’re in constant communication with operators working through the issues of the upcoming hurricane season to maximize utilization of our commodity rigs in the region. With respect to the Horizon incident, all of our rigs are located west of the oil spill, and we do not expect our operations to be affected by the clean-up efforts.

To briefly mention Mexico, we have received PEMEX extenders for five independent lake cantilever jack-ups, three 300-footers, one 350 and one 250. All tenders but the 250 are required to be less than 10 years of age or have undergone major modifications during that same time period. We believe this puts Rowan’s gem fleet [ph] in a strong competitive position in this bidding process. We are actively participating and hopeful to mobilize additional rigs into the region to join the Gorilla IV currently working for PEMEX.

Moving on to the North Sea. Supply is 37 jack-ups, while demand is 32 rigs and contracted utilization is 86%. Despite the softness in the region for standard jack-ups the marketed utilization for 350 independent-leg cantilever jack-ups or greater is 100%. Rowan currently has two Super Gorilla class jack-ups operating in the area and as previously reported the Gorilla VII will mobilize into the region on its completion of Cabinda Gulf contract in West Africa to commence operations for Apache U.K. All three jack-ups are contracted through second quarter 2011. Rowan is actively tendering for additional prospect projects in the North Sea.

Now turning to the Middle East. The supply in this region is 119 jack-ups, while demand is currently at 90 rigs and contracted utilization is 76%. 16 of the available units for 300-foot independent-leg cantilever is greater, resulting in strong competition for outstanding tenders. Rowan has nine jack-ups in the Middle East. Five units are currently contracted at an average day rate of $143,000 and the Rowan-California will commence operation for Wintershall later this quarter.

Saudi Aramco currently has outstanding tenders for two gas rigs and two workover rigs. Rowan is being considered for all projects and we are encouraged about the opportunity to continue our relationship with Saudi Aramco. The remainder of our fleet is relatively unchanged since our last call. The Gorilla III is in Eastern Canada on contract within Canada, the J.P. Bussell continues its contract with Shell in Egypt and the Gorilla IV continues operation with PEMEX. The Gorilla VII contract in the Cabinda Gulf has been extended in West Africa for additional well at $315,000 per day.

The well is expected to last approximately 85 days before the unit mobilizes to the North Sea for Apache U.K. in late summer. And finally, I'll mention our Onshore division. We have a marketed fleet of 30 land rigs located in Texas and Louisiana, Oklahoma and Alaska. Currently 87% of our fleet is contracted at an average day rate of approximately $20,000. 88% of our contracted fleet is operating in the U.S. shale and gas plays, including the Haynesville and Deep Bossier. Rowan currently has the deepest average well depth of approximately 16,000 feet, proving that our customers recognize that our fleet of high spec land rigs is designed to meet the operational challenges presented by deeper or more difficult wells.

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

William Wells

Thank you, Mark, and good morning, everyone. As noted in our press release our results for $0.56 per share, after an inventory charge of $42 million or $0.25 per share related to non-conforming and slow-moving items in Letourneau's Drilling Products and Systems segment. During the past two months LTI's new management team performed a thorough bottom-up assessment of the Houston-based inventory of drilling components and parts. As a result we determined that a significant number of items have experienced some level of deterioration, such as they are out-of-tolerance with original specifications or no longer conform to minimum quality standards. Full provision has been made to the cost of items that cannot be efficiently reworked, and we have taken steps to avoid any further physical deterioration.

In addition, notwithstanding increased quotation activity for land rig packages, we have thus far in 2010 continued to work off existing drilling products backlog. The quantity and age of slow-moving inventory items has continued to grow in 2010, a trend that we currently expect will continue for the foreseeable future. Thus, we have recorded an additional provision to reflect reduced recoverable value of slow-moving inventory. While this provision reflects our best estimate at this time, it does not in most cases provide a 100% reserve against the slow-moving items. The total charge was almost 15% of LTI's drilling equipment inventories and was spread across all major product line.

Turning to our drilling operations, our first quarter 2010 revenues were $331 million, down by 13% in the prior year, but up by 30% in last quarter, both changes driven primarily by fleet utilization. The addition of the Ralph Coffman in early January of this year contributed to the sequential increase.

The first quarter also benefited from above market rates temporarily obtained by two of our Gulf of Mexico slot rigs as part of a contract work out on a third rig. As this above market arrangement will be fully concluded by mid-May, these two rigs will experience a reduction in revenues during the second quarter. However, we expect that this impact will likely be substantially offset by the aggregate affects of the Ralph Coffman, delivery of our first EXL class rig and increased land rig activity.

As of April 21, the date of our most recent fleet status update, our backlog of drilling contracts totaled approximately $1.2 billion. We expect that approximately 63% of that amount will be realized as revenue during the remainder of 2010, 31% will occur in 2011 and the balance in 2012 or beyond. Our first quarter drilling expenses of $137 million were 6% below the prior year, 12% above last quarter and that the low end of our previous guidance. Year-over-year reduction was primarily in maintenance and reimbursable costs, whereas the sequential increase resulted from 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.

We expect that our second quarter 2010 drilling expenses will be in the range of $145 million to $150 million with a sequential quarter increase due to the expected reactivation of certain rigs and the startup of the EXL #1. We’re holding off our full year 2010 estimate of drilling expenses at approximately $595 million, with the year-over-year increase due largely to the factors mentioned previously.

Turning to our Manufacturing operations, our first quarter revenues totaled $147 million, including $46 million of arms length sales to our Drilling division. External revenues were $101 million, a decrease of 11% from the prior year and 30% from last quarter. The Drilling Products and Systems segment contributed $96 million or 65% of total revenues, including sales to our Drilling division. External revenues were $50 million and featured 23 million from offshore rig projects, and $15 million from land rigs and $4 million from drilling equipment.

Our Mining, Forestry and Steel products revenues totaled $51 million, including $15 million from shipments of mining equipment and $10 million from steel plate. We shipped three mining loaders during the first quarter, including one each of our large L-2350 and L-1850 units. We've seen an increase in quotations in bookings and have a total of 16 units in our March 31 backlog. We expect to ship 21 units in 2010, up from 14 units in 2009.

Our combined aftermarket parts and service revenues were $30 million during the first quarter, down by 12% from the prior year, but unchanged from last quarter. Our average operating margin was 17% of Manufacturing revenues during the first quarter, down from 21% the prior year, but unchanged from last quarter. At March 31 our external manufacturing backlog of $392 million, included $185 million related to offshore rig projects, $63 million related to land rig projects, $65 million of mining equipment, $28 million of drilling equipment, with the remainder primarily parts and other components.

We booked approximately $79 million of new orders in the first quarter or 78% of external revenues during the period over of one-half of which was mining products. Our estimated backlog-at-risk remained at $15 million or less than 4% of our external backlog at March 31, 2010.

We expect that approximately 90% of our external manufacturing backlog at March 31 will be realized as revenues in 2010. We indicated earlier this year that we expected 2010 external revenues to be flat to slightly up, when compared to 2009, and that average operating margins would increase to the upper teens. We continue to believe that these results are obtainable.

As previously mentioned, we have no further plans for reconstruction at our Vicksburg, Mississippi shipyard following delivery of the Joe Douglas in 2011. Absent additional orders or sufficient prospects for future work, the activities at the facility will be significantly reduced at that time, in which case we would incur additional costs, such as employee severance among other charges.

Closing our significantly risking 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 $10 million. The carrying value of our investment in the facility and related inventories totaled approximately $51 million at March 31.

Our first quarter depreciation expense totaled $46 million, which tracked our previous guidance and was up by 12% over last year and by 2% over last quarter, primarily due to the rig fleet additions. 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 second quarter.

Our first quarter SG&A expenses totaled $26 million up by 5% from last year, but down by 12% from last quarter and below our previous guidance, primarily due to fluctuations in incentive compensation costs and professional fees related to tax planning. Our latest estimate for 2010 costs is in the range of $116 million to $118 million for the year, including approximately $30 million to $31 million in the second quarter.

Interest expense net of interest capitalized was $5.7 million during the quarter, assuming no new borrowings our 2010 interest expense should be in the range of $51 million to $52 million, about one-half of which would be capitalized. Our first quarter and expected full year effective tax rate is approximately 31%.

Property and equipment additions totaled $103 million in the first quarter, which included $18 million for a third 240C jack-up, $61 million for the four EXL rigs and $18 million for existing fleet, including contractually required upgrades. At March 31, we had approximately $425 million remaining to be spent under our newbuild program over the next three years, 62% of which is expected to recur in 2010, followed by 31% to 2011 and the balance in 2012.

Our [audio gap] 2010 capital expenditures are projected at approximately $408 million, including $82 million towards the Joe Douglas, $180 million for the EXL jack-ups and $105 million for existing rigs, including contractually required upgrades. The remaining $41 million includes the cost of drill pipe, needed improvements to our manufacturing facilities and shore basins, 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 Everett’s assistance we will now open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today comes from the line of Collin Gerry with Raymond James.

Collin Gerry

Matt, what’s your kind of initial stab as to what this could possibly mean for drilling going forward in the Gulf of Mexico? Recognizing it's very early, we don't what happened, but just maybe what are -- enlighten us kind of the internal conversations you all are having in terms of what you see coming down the pipe?

W. Ralls

Collin, I guess that we have been talking some about that. But we believe that our policies and practices are sufficient for safe operations. We've got a long history of safe operations as does the whole industry. It’s been by various counts somewhere around 40,000 wells drilled in the Gulf of Mexico. This is the first spill in my memory of any consequence and very unusual circumstances. There's been a lot of uncertainty, but. So we are just refocusing our people on all of our policies and practices. We feel like everybody's going to be pretty well set because they've handled it before. Now I do expect that they’ll be additional regulatory oversight for maybe -- even additional testing procedures or something like that, that could follow along. I’ve read some accounts to that effect. But I don't really see -- certainly, it's going to, well, in my opinion, I shouldn’t say, certainly. I expect that it will slow down if not stop them from opening up any additional areas to drilling. But for Rowan that’s not of much consequence because we believe that the areas that have been opened are the areas that have the best opportunities for our high-spec jack-ups. So we don't really think that sort of opportunity extends to the Eastern Gulf anyway. So from our perspective, we're not really expecting much more. We think the primary outcome will be more regulatory attention there.

Collin Gerry

And I guess, do you think that maybe that involves a higher level of redundancy and safety equipment? I mean, can you see some sort of legislation coming down that requires more pressure control equipment? Or more redundancy on a rig? Do you think it would go something like that?

W. Ralls

Collin, I'll let David respond to that. I mean, once again, this is a very, very rare occurrence. Nobody understands why the BOP won’t actuate. Some folks in the next several months will know that. But just -- and maybe there's something that will come out of that. But for right now, I mean our practice is completely reliable or almost completely reliable up to this point. David?

David Russell

Yes. I mean, I will say that our systems are not as complex as the deep water rigs, but we do service our well control systems. It’s based on OEM requirements and also API Specification 16A and also API Recommended Practice 53 [ph]. So I mean, we're very comfortable with the condition and capability of all of our well control equipment worldwide. So like Matt had said there may be some additional regulations and additional testing, but I think we’re in good shape.

Collin Gerry

Follow-up for me on the LeTourneau side. I guess I would have thought orders would maybe have been picking up a bit more. Maybe tell us what you’re seeing in Q2 and kind of what type of orders you're seeing? Also if we kind of just go back to the long-term strategy here, I think if I recall a couple of years ago when we we're trying about Letourneau, it was bulking it up and getting it some critical mass before spinning it out or something strategic with it. Is that still the kind of way we think about it? Or then maybe update us on your thoughts there?

W. Ralls

Let me take the second part first and then turn it over to Tom for additional comments to answer your first part of that question. But yes, our intention, as I've said in my closing comments, are to wait for this, for a more positive trajectory in this business before we try to do something internally like selling or spinning in this business in order to separate it out. We remain committed to the concept that everything will be better. It will be better off standing alone as opposed to be owned by a contract driller. But I do think that there maybe some opportunities in the near term to buy other companies, small companies with product lines that would shift with LeTourneau. We haven't seen anything like that or done anything toward that objective. Right now, our principal objective is to improve our manufacturing efficiencies in the Drilling products group and that's what Tom has been focused on in his first 100 days or so on the job.

Thomas Burke

Yes, with respect to looking forward in Q2 and beyond. The drilling convergence we've seen a lot more closing activity and we’ve had some wins, but, obviously, not as much we’d like. It does seem though that it’s getting busier and we’re hopeful on the outlook there. On the Mining Products segment, it’s very busy. We've got a good backlog and adding more load to that. So it's pretty bright and unless there’s something, something big happens we suspect in the Mining Products to look bright for next year also. The Offshore Products, which is the jack-up rigs and other related products. We are working through. We have a lot of backlog. We're working through that. We were quite slow in Q4 and Q1 as far as how many closing activities, but we’re definitely seeing some light there and some people with more interest.

Operator

Our next question comes from the line of Jeff Tillery with Tudor, Pickering, Holt.

Jeff Tillery - Tudor Pickering

I wanted to see if you could talk about the EXL rigs coming to market over the next six to nine months or so. Just regionally, where are those targeted at? Are they like to end up in the Gulf of Mexico? I just wanted to hear how you talk about those qualitatively.

David Russell

As Matt mentioned in his remarks, we christened the EXL #1 this past weekend. The rig is under contract to McMoRan. It's going to go out in the Gulf of Mexico and drill about 70- to 80-day shakedown well. Then it'll go to the Lafitte prospect, which is a 30,000 foot well, plus well in the Gulf of Mexico. The EXL 2, EXL 3 and the other rigs they’re all being tendered all over the world. We're currently -- we have tenders in [indiscernible] and PEMEX. We’re tendering there. We’re tendering in South America. We're tendering in the Med and the Middle East and shortly in Southeast Asia. So the answer to your question. All over the world. Yes, sir.

Jeff Tillery - Tudor Pickering

And for some of the longer distance mobilizations in that list, is that something that Rowan would likely bear? Or is that something the customer is still willing to at least foot part of the bill for?

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David Russell

Jeff, it just depends on the project. It depends on the tender. If it's a tender that requires a $2 million hook load rig with all the capabilities of and EXL or a 240C class rig or a Gorilla class high-spec rig, then there's some potential to get the operator to pick up at least a portion of that mob [mobilization]. If it's a project that does not require that, then we would have to make a business decision to take a look at those mobs.

William Wells

Or if there's equipment in that market that has the capability that also makes it difficult to recover a multiple stage [ph]. But we're fortunate in that there aren't all that many high-spec rigs in the world and so it's helpful just to look at some newer markets in terms of the prospects for getting some of them [indiscernible].

David Russell

Thus far, we've seen a willingness for the operators to pay some of the mob costs or all of the mob costs in some cases for this high-spec rig.

Jeff Tillery - Tudor Pickering

Matt, just want to hear your thoughts on how you think about Rowan potentially participating in a deepwater market and as to whether you're seeing opportunities out there that you think are starting to make sense for Rowan to participate in.

W. Ralls

Well as I said, again, in my closing comments, our strategic approach hasn't changed. I would say that there are a number of individual units or small companies that we think are potential targets for moving into that. But it's probably gotten somewhat more complex from the fact that the shipyard newbuild price is going to come down so dramatically that in many of those cases, those speculative companies that have entered the business still owe shipyards as much or more as you'd have to pay for a brand-new unit. So it's probably serve to keep the bid-ask gap wider than you could really make something happen with currently. But following all of those, we remain committed to expanding the fleet, whether that's in high-end jack-ups or ultra-deepwater floaters. So we feel like it's very important to be patient here. There's a lot of uncertainty, obviously, in what's going to happen in the ultra-deepwater, certainly, in the deepwater markets over the next year to 18 months. So we're just waiting and watching.

Operator

Our next question comes from the line of Phillip Dodge with Tuohy Brothers Investment Research

Phil Dodge

Could you elaborate on your thought that the discovery of Davy Jones is going to lead to expanded deep shelf drilling and particularly whether you're talking to other companies about that, the McMoRan?

W. Ralls

Yes, we have talked about that some in the past. I mean right now, all the opportunities we see sort of directly in front of us are from that same group of companies who had discovered Davy Jones. But I mean McMoRan and that group have gone from one rig to four rigs just in the past 60 days or so. I have to say that we feel pretty good about [indiscernible] our statement. But as far as some of the other contractors getting in -- sorry, some of the other operators ramping up their activity on some of their rigs, and we think there's good potential for that, but we never thought that, that was something that was right around the corner. I think that, that's probably more 2011 [indiscernible].

Phil Dodge

And another question about your relative concentration in the Middle East, would you expect, looking a year or two ahead, whether you would have the same number of rigs there, more or less?

Mark Keller

It depends on -- as we look at it today, with Saudi Aramco ramping up their deep gas drilling, I can see us having a larger presence there because the high-spec rigs that they're tendering for, they're currently out for tender right now. They expect to pick up somewhere between three and six deep gas rigs over the course of this year. And those certainly will be very high-spec rigs, which our rigs are certainly capable of operating there. We have a great relationship with Aramco. As far as 116-Cs and the EXLs, I could see potential in Qatar, as the extended-reach wells there become more and more difficult there, that some of the 116s are getting maxed out on their capability. I see potential there. But yes, I can see us increasing our fleet over the next year or two.

Operator

Our next question comes from the line of Mike Urban with Deutsche Bank.

Michael Urban - Deutsche Bank AG

Matt, I realize it's early on with respect to the fallout from the accident in the Gulf of Mexico but I would tend to agree with your view that you're going to see more regulation and so on and so forth. What's your gut feel? Does that change your view as to how you might want to have your fleet allocated between U.S. Gulf of Mexico and other markets? I mean you already have hurricane season impact. In a lot of cases, you might be facing a higher regulatory burden. Again, just kind of your general sense for things. Does that impact your fleet allocation going forward?

W. Ralls

Mike, it really doesn't. Our objective has been to get our commodity rigs out of the Gulf of Mexico. That's difficult to do in this kind of market, but we tended to look for opportunities to do that. With regard to the high-spec jack-ups, first, they've got much higher environmental criteria. Second, they've got the newest systems on our rigs. And third, just by happenstance, most of them are drilling in relatively shallow water. So with our -- I don't expect that the regulators are going to be as concerned about surface stacks as they are subsea stacks. So I'm just not expecting -- I mean because there've been so many wells drilled out there with no incident and because you can actually see the equipment and test it [indiscernible] a little bit more easily. I just don't think there's going to be much impact from a regulatory standpoint other than just more attention. David?

David Russell

I agree. That pretty well covers it.

Michael Urban - Deutsche Bank AG

And I guess thinking about the competitive environment you guys have certainly been big believers, and correctly so, in having an operating premium equipment and seeing that operator preference. Would you expect to see a shift? Or does that accelerate that shift, either by being forced to, by higher regulation or just operators having an even greater preference or accelerating the shift to premium equipment away from commodity-type rigs?

W. Ralls

Well, I think the operators that need the higher capability equipment because of the types of wells they're drilling, I think that will occur irrespective of the Horizon incident. And a lot of the older, smaller equipment tends to work for smaller operators, and they're probably not going to be binded [ph] to high-grade equipment just as a result of that incident. It would be my speculation.

Michael Urban - Deutsche Bank AG

So that would be more if they were required to rather than by preference.

W. Ralls

Yes, it'd be more if the wells required that. The kind of wells we're drilling with the 240s and will be drilling with the EXL are much more demanding in terms of the capabilities of the rigs than the -- I mean we don't even compete with the lower-end commodity jack-ups [indiscernible].

Company Speaker

Yes, I guess the one other thing to that point is that several years ago, the MMS did increase the requirement to have blind-shear rams on all surface stacks, so I think they have been proactive in making the system safer.

Operator

Our next question comes from the line of Ian MacPherson [ph] from Simmons & Company.

Unidentified Analyst

Matt, you mentioned the nice increase with McMoRan's activity from one to four rigs, and you've got a couple of your 240Cs, the Coffman and Mississippi that roll off their current contracts later this year. Do you have pretty good visibility that those rigs will be retained for a longer term? And when would you expect to see that happen? And secondly, would you continue to expect those rigs to garner a premium to say the EXL class rigs in terms of day rate?

Mark Keller

Ian [ph], this is Mark. Ian [ph], right now all plans with McMoRan, if you look at their schedules and we're in constant communication with them, as late as this weekend, when Mr. Moffett, Chris and EXL #1 [ph] in talking with Jim Bob, their plans are and their group of partners are to keep those rigs. However, we are tendering those rigs on international contracts in the event there's a change of plan in the market. But right now, their plans are if Davy Jones, the second well of Davy Jones is successful, they're talking about increasing the number of rigs that we currently have, as Matt mentioned before. That number could increase, and certainly, they would be the higher spec, 2 million pound hook load rigs we're dragging [ph]. But as to when that would occur, I'm not exactly sure. We're in constant communication with them. And so I don't have a real good feel for when that would occur. Right now, we're keeping them abreast of all international tendering that we're doing with the rigs, and he is very well aware of that.

W. Ralls

I think it's -- just a general statement, it's fair to say that if they continue to have the kind of success they have on the Davy Jones well that there will be a demand for a lot of equipment for a number of years.

Unidentified Analyst

You still have three of your 116s idle in the Middle East and you've talked about opportunities for one or more of those to get back to work in the second half of this year. And maybe could you just update us on the timing of those opportunities and whether or not we should be factoring in any significant contribution for any of those rigs in our 2010 estimates?

Mark Keller

Ian [ph], we're on the short list with one of the rigs currently. We hope to find out the results of that in the next two to three weeks, hopefully. Two of the rigs were tendered on this last tender to Saudi Aramco. They're through the technical evaluations and are into the commercial portion of those tenders. We're hopeful that we’d be successful there. We also have two other tenders we were talking with operators in the region that are wanting to pick up 300 to 350 jack-ups above the standard 116C, which are rigs as they've [ph] been modified in the Middle East, certainly fit that criteria. And we're also tendering the rigs in other areas. But to answer your question, we're on the short list for one. We have a tender that's in commercial review right -- two tenders in commercial review right now.

Operator

[Operator Instructions] Our next question comes from the line of Kurt Hallead with RBC Capital Markets.

Kurt Hallead - RBC Capital Markets Corporation

I just wanted to circle back around, made the comments this morning here about the high-spec utilization and 90% to 350 independent-leg cantilevers at 90%, and 300s, I think you're still just under 80%. Typically, when you cross that 90% threshold, you get pricing power, you did reference, the situation with the 300-footers may be limiting your ability to get pricing. But can you elaborate a little bit further on how much more leveraged you feel you're getting in your discussions with operators? Are the operators realizing how tight the upper end of the market is getting? And are they beginning to act in a way that gives you indications, you're starting to get -- the pendulum's starting to swing in your favor?

W. Ralls

Well let me say, Kurt, that as we've said in the past, I think there's been a very positive steady flow of new opportunities that the rigs will [ph] work, so that's been a real positive. What my comments were intended to say with regard to the 350s is that customers are now picking up 350s where 300s could do the work, and so the consequence is you could get the work but you can't really move the pricing much higher. But that is the normal mechanism for putting enough rigs back to work in each category so that you can finally get pricing power. And so as we've said in the past, we felt like somewhere toward the end of this year or early next year, we should start to see pricing power improve, and at rate of absorption and certainly seeing the 350s get to 90% is an important first step because operators [indiscernible] where they can get more capable rigs for the same amount of money, that's obviously what they're going to do. And as that subset of rigs gets put back to work, then it ultimately will result in upward pressure in the day rate. But I mean, we really can't -- it's not as though we see this tidal wave of new tenders coming toward us, but it has been very steady, which is traditionally how you soak up excess supply and get your [ph] reach to [indiscernible].

Kurt Hallead - RBC Capital Markets Corporation

Wanted to also follow up on the commentary there about the Middle East, the tenders and the bids. And obviously, you have three rigs that are still not working there right, the Arch Rowan and Charles Rowan, Middletown. So given the number of rigs that are looking for work in that region, given that the tenders that you're on here, how would you probability assess the chance of those three rigs going back to work as you get out into the second, third quarter?

W. Ralls

But let me say before he answers that, I mean, we really just don't know. I mean their competitive tenders will always know who all has bid, but I just don't know the answer to the commercial tenders [indiscernible]. So Mark, you want to?

Mark Keller

Kurt, as Matt said, it's very difficult to forecast that, but as I mentioned to Ian [ph] earlier, we are in the shortlist with one tender. We should have an answer on that in the next few weeks. And as I said, we're in a commercial review right now with two of the 116s with Saudi Aramco, and we have a couple of other tenders that are inbound that we should have here in the next few weeks that require that type of rig. We were also bidding those rigs out in the Middle East, and we bid them into India. We were not successful. Our tenders were higher than what was awarded. But we are continuing to tender those rigs in other areas of the world, but to give you an exact time line is very difficult.

Kurt Hallead - RBC Capital Markets Corporation

Segue here into Mexico and the comment about those rigs, four of the five rings having a requirement of less than 10 years old or significantly modified, what kind of semantics are we dealing with in the commentary about significantly modified? Does that mean you need to put a new mirror in the bathroom or something? What does that really mean to us?

W. Ralls

I'm not really sure, to be candid. But there supposedly, when you meet with PEMEX, it has to be a major modification to the rig that actually change the capability of the rig. It had to be a substantial upgrade, Kurt. It can't just be changing some steel plate, painting it, things like that. It has to be a substantial upgrade. And so as you know, that changes -- if they stay with that rule and as of last week, they are staying with that rule. That changes the scope of the tenders quite a bit.

Kurt Hallead - RBC Capital Markets Corporation

Just can we get a quick update on what the operating cost differential is for those high-spec jack-up rigs between the U.K. and Norway sector?

W. Ralls

I'll have to say it's more than I expected [indiscernible]

William Wells

Kurt, this is Bill Wells. If we just look at direct cost per day for those rigs, we're probably in the 50s and 60s for the U.K. sector. And Norway's tracking just over 100 right now. So it's a significant difference.

Operator

Thank you. We have no further questions at this time. I'd like to turn the floor back to you, Suzanne.

Suzanne McLeod

Well, at this time, we thank everyone for joining us. If you have any additional questions, please feel free to give me a call. Thank you, again, until next quarter.

W. Ralls

Thank you.

Operator

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

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