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Rowan Companies (NYSE:RDC)

Q2 2010 Earnings Call

August 03, 2010 11:00 am ET

Executives

Thomas Burke - Chief Executive Officer of LeTourneau Inc and President of LeTourneau Inc

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

Mark Keller - Executive Vice President of Business Development

Suzanne McLeod - Director of Investor Relations

David Russell - Executive Vice President of Drilling Operations

William Wells - Chief Financial Officer, Senior Vice President and Treasurer

Analysts

Max Barrett - Tudor, Pickering & Co. Securities, Inc.

Ian Macpherson - Simmons & Company

Judson Bailey - Jefferies & Company, Inc.

Eric Anderson - Analyst

Matt Conlan - MKM Partners.

Kurt Hallead - RBC Capital Markets Corporation

Robin Shoemaker - Citigroup Inc

Brian Uhlmer - Pritchard Capital Partners, LLC

Michael Urban - Deutsche Bank AG

Daniel Boyd - Goldman Sachs Group Inc.

Operator

Greetings, and welcome to the Rowan Companies, Inc. Second Quarter Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Suzanne McLeod, Director of Investor Relations for Rowan Companies, Inc. Thank you. Suzanne, you may begin.

Suzanne McLeod

Thank you, Melissa, and good morning. Welcome to Rowan's second 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; Bill Wells, Senior Vice President, Chief Financial Officer and Treasurer; and Tom Burke, President and Chief Executive Officer of LeTourneau Technologies, who will have prepared remarks. Also, joining us on the call this morning is David Russell, Executive Vice President of Drilling Operations.

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

Thanks, Suzanne. Good morning, everyone, and thanks for joining us. I'd like to begin by commenting about the effect of the Macondo blowout on our safety practices here at Rowan. David Russell will be available on the call to give you more detail on the Q&A session if there's interest or questions, but I want to emphasize that we expect to have to change very little about how we manage our operations from the standpoint of safety.

At Rowan, safety is our highest priority and was long before the Macondo event. Our first reaction to the event was to reiterate to all of our drilling managers and crews the right and the obligation they have to take any action or refuse to take any action as necessary to protect our people and the environment. Rowan is well known in this industry for the capability of our crews and our equipment in providing demanding drilling services. A critical aspect of achieving and maintaining that reputation is our focus on safety.

You will get more details from others on the call this morning. But let me just say that we're pleased with our results for the quarter, especially the strong contribution from the drilling group in both revenues and cost control. We've commented in the past several quarters that the jack-up market is stratified with the most capable jack-ups enjoying higher day rates and better utilization as demonstrated by the current 93% utilization in the high-spec [high specification] market, compared to 73% for the jack-up market overall.

We expect this trend to continue, which contributes to our confidence that we'll be able to find good opportunities for the very capable N-class jack-ups we are acquiring in the SKDP transaction. We expect to begin our formal tender offer later this month and conclude it before the end of September. In the meantime, we have the SKDP management team in Houston this week planning the integration process.

And finally, let me say that Rowan has been fortunate in that the permitting delays in the Gulf of Mexico since the Macondo event have not had a material impact on our financial results in the second quarter. We currently expect our two jack-ups that have been waiting on permits to return to work in the next week or two. We've also recently entered or expect to enter into agreements to move three of our high-spec jack-ups from the U.S. Gulf to international markets. Like all of the energy service firms with operations in the Gulf, we're hoping that the legislation currently being considered in Congress doesn't become law.

In my personal view, it's an overreaction that will likely damage our domestic offshore energy industry without making it meaningfully safer, as prudent managers will be considering every opportunity to reposition our fleet to minimize any potential impact from this ill conceived legislation.

And with that, I'll turn it over to Mark Keller for comments on our rig markets.

Mark Keller

Thanks, Matt. Since our last earnings call, worldwide market utilization has soften slightly, due mostly to the market conditions in the U.S. Gulf of Mexico. According to ODS-Petrodata, there are currently 461 jack-ups worldwide, demand is 338 rigs with utilization at 73%, down 3% from its recent peak of 76%. Higher capability rigs continue to outperform the industry average with 350-foot cantilevers and above at 90% utilization or higher. International tender and inquiry activity remains strong, and we currently see open demand for more than 52 jack-ups in the regions such as the North Sea, the Middle East, India and Southeast Asia.

The drilling requirements in these tenders are increasingly stringent, and Rowan's high-spec jack-ups are well positioned to take advantage of these opportunities. Historically, Rowan is always been successful contracting our new builds prior to delivery. Recently the EXL-II was contracted with BP for three years of work in Trinidad. The rig is expected to be delivered at the end of August and should begin operations in mid-October at a contract value of approximately $164 million.

Additionally, we are very close to commitment on the EXL-III with McMoRan in the U.S. Gulf of Mexico upon its delivery in March 2011. We expect the day rate to be comparable to the EXL-I.

The addition of the N-class units further solidifies our niche in the high-spec market. Considering the long-term commitments of our current fleet of 2 million pound hook-load rigs, this acquisition enables us to respond to tenders for which we otherwise would not have had rigs available. By year-end 2012, Rowan will have 19 of the industry's 38 high-spec rigs or 50% of the sought after market.

I will now address our areas of operation. Let's begin with the U.S. Gulf of Mexico. Supply in the region is 82 jack-ups while demand is 34 rigs for a utilization of 41%, down 11% from the recent May peak of 52%. The combination of hurricane season and the regulatory uncertainty of the region, after the Deepwater Horizon incident have made it difficult for utilization to stabilize. We have nine jack-ups in the region, with a contracted utilization of 67% and an average day rate of approximately $123,000.

Recent permitting issues have had some effect on Rowan with the Rowan-Louisiana currently waiting on permit approval, and the Bob Palmer recently released from its contract with Apache. We expect the Bob Palmer to return to work within the week on a well-to-well basis in the Gulf.

Only 15 marketed jack-ups that are 300-foot cantilevers or above remain in the U.S. Gulf of Mexico, with four of those scheduled to migrate out of the region. Considering that most contractors are bidding their remaining units internationally, there is strong concern that E&P companies will not have access to rigs necessary to meet production goals for the U.S. Gulf of Mexico Shelf.

We are hopeful that as the permitting situation improves and hurricane season concludes activity will begin to recover. Despite tendering internationally, Rowan is dedicated to meeting the needs of our Gulf of Mexico customers and is optimistic about the continued success of deep-gas drilling on the shelf.

Now turning to the North Sea. Supply is 38 jack-ups while demand is 33 rigs and contracted utilization is 87%. The focus of the region remains on the heavy-duty sector as the standard jack-up market continues to suffer from a lack of long-term demand. Rowan currently has two Super Gorilla class jack-ups operating in the area. In addition, the Rowan Gorilla VII is currently en route from West Africa and scheduled to arrive in Dundee in mid-August for modifications before its contract with Apache U.K. commences in October 2010. All three jack-ups are committed on long-term contracts. The North Sea is the most active region in terms of tenders and inquiries with open demand for as many as 20 units over the next two years.

Moving on to the Middle East. The supply in this region is 119 jack-ups while demand is currently at 91 rigs and contracted utilization is 76%. The market has averaged 75% for most of 2010, significantly lower than the 90% average in 2008. Rowan has nine jack-ups in the Middle East. Six units are currently contracted at an average day rate of $131,000. We currently have several active tenders for high-spec jack-ups in the region.

Regarding our Onshore division, we have a marketed fleet of 29 land rigs located in Texas, Louisiana, Oklahoma and Alaska. Currently, 90% of our fleet is contracted at an average day rate of approximately $20,000. All 23 of our 2,000-horsepower rigs are contracted at 100% utilization as operators realize the advantage of fast-moving, high-spec land rigs.

Tender activity for high-spec land rigs remains high. The U.S. shale and gas plays continue to be the driving force of the land rig market, including the Haynesville, Eagle Ford and Deep Bossier areas, and Rowan is actively drilling in these regions.

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

William Wells

Thank you, Mark, and good morning, everyone. Starting with our drilling operations. Our second quarter 2010 revenues were $328 million, up by 2% over the prior year, but down by 1% from last quarter. As the impact of offshore fleet additions and increasing land utilization has been offset by lower average day rates.

Our current drilling revenue backlog totals approximately $1.2 billion. We expect that approximately 39% of that amount will be realized as revenue during the remainder of 2010, another 39% will occur in 2011 and the balance in 2012 or beyond.

Our second quarter drilling expenses of $139 million were approximately 2% above the prior year and last quarter as result of fleet additions between periods that are well below our previous guidance. Both comparisons reflect increases in labor and related personnel costs, reimbursables and certain other activity-based expenses that were largely offset by lower insurance costs. We expect that our third quarter 2010 drilling expenses will be in the range of $139 million to $141 million or relatively unchanged from the second quarter level, as the impact of incremental activity from the EXL-I, the Rowan-California and our land fleet should be substantially offset by the departure of the Gorilla VI from Norway and a deferral of certain cost on the Gorilla VII, while on the shipyard preparing for its next assignment. For full year 2010 estimate of drilling expenses is now approximately $575 million, down by 3% from our previous guidance, due largely to the factors mentioned previously.

Turning to our manufacturing operations. Second quarter revenues totaled $214 million, including $52 million of arm's-length sales to our drilling division. External revenues were $162 million during the second quarter, virtually unchanged from the prior year, but up by 60% over last quarter.

Our Drilling Products and Systems segment contribute a $124 million or 58% of total manufacturing revenues during the second quarter, including sales to our Drilling division. External revenues were $72 million and featured $37 million from offshore rig projects, $21 million from land rigs and $6 million from drilling equipment.

Our Mining, Forestry and Steel Products segment contributed revenues of $90 million during the second quarter, up by 65% over the prior year and by 76% over last quarter. Revenues included $46 million from shipments of mining equipment and $11 million from steel plate. We shipped 10 mining loaders during the second quarter, including one L-2350 and six L-1850 units.

Our combined aftermarket's parts and service revenue were $36 million during the second quarter, up by 14% over the prior year and by 19% over last quarter. Our average operating margin was 15% of manufacturing revenues during the second quarter, up from 9% in the prior year. But down from 17% last quarter and below our previous guidance, due largely to an estimated $15 million of additional clean-up expenses recognized during the period, including $6 million of accrued warranty costs and another $6 million of inventory and cost of sales adjustments.

At June 30, our external manufacturing backlog of $337 million included $162 million related to offshore rig projects, $60 million of mining equipment, $42 million related to land rig projects and $33 million of drilling equipment, with the remainder primarily parts and other components.

We booked approximately $105 million of new orders in the second quarter or approximately 2/3 of external revenues during the period. Over 60% of the new orders were from mining products.

We expect that approximately 86% of our external manufacturing backlog at June 30 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. Tom Burke will have more to say about our Manufacturing business momentarily.

Our second quarter depreciation expense totaled $47 million, which tracked our previous guidance and was up by 9% 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 $186 million to $188 million, including approximately $46 million to $47 million in the third quarter.

Our second quarter SG&A expenses totaled $36 million, up by 46% over last year and by 40% over last quarter and above our previous guidance, primarily due to a $4.5 million provision for the expected costs to terminate our agency agreement in Mexico. Costs associated with our corporate and drilling functions were otherwise in line with expectations. Costs associated with our manufacturing functions reflected higher-than-expected personnel costs and bad debt provisions during the quarter.

Our latest estimate for 2010 SG&A cost is in the range of $125 million to $127 million for the year, including approximately $31 million to $32 million in the third quarter.

Interest expense, net of interest capitalized, was $5.2 million during the second quarter and should be close to that level during the third quarter. Assuming no new borrowings and reflecting our full assumption of the SKDP debt on September 1, we estimate remaining 2010 interest expense will be in the range of $36 million to $37 million, about 2/3 of which should be capitalized. We are evaluating options around refinancing the SKDP debt, but 1/2 of which is non-interest bearing until December 1.

Our expected full year effective tax rate is approximately 29%, down from 31% previously forecast as a result of the out bounding of additional offshore rigs into our international structure. Thus, we provided taxes that are 27% rate in the second quarter.

Property and equipment additions totaled $109 million in the second quarter, which included $39 million for our third 240C jack-up, $47 million toward the EXL rigs and $17 million for our existing fleet, including contractually required upgrades. At June 30, we had approximately $787 million of remaining capital expenditures under our new build program, including the N-Class construction commitments, net of SKDP cash on hand. We expect that 52% of this amount will occur in 2010 followed by 44% in 2011 and the balance in 2012.

Our remaining 2010 net capital expenditures are projected at approximately $555 million, including $51 million towards the Joe Douglas, $142 million for the EXL jack-ups, $214 million for the N-Class rigs and $111 million for our existing rigs, including contractually required upgrades. The remaining $37 million includes costs of drill pipe needed improvements to our manufacturing facilities and shore bases and other enhancements. We currently intend to fully fund our capital program through existing cash or operating cash flows.

That concludes my remarks. I'll now turn it over to Tom Burke for additional comments on our Manufacturing businesses.

Thomas Burke

Thank you, Bill, and good morning. Our Mining Products business continues to accelerate. At the end of the second quarter, we had 11 loaders in backlog all for delivery in 2010. We expect to deliver 25 to 28 loaders in 2010. This compares favorably to the 14 that's shipped in 2009. This year, we anticipate selling nine of our largest loader, the L-2350, which represents impressive growth in this product line when you consider that we have sold only six of these units over the prior five years.

Our new loader, gen [generation] two hybrid power technology, which has a number of improvements over previous systems, the most important being increased fuel efficiency and lower emissions is creating significant interest in the mining market. Multiple customers are positioning to purchase only gen two loaders as soon as possible. As a result of this strong product acceptance and a sustained recovery in the commodity markets, our Mining Products business is projecting a substantial increase in loader sales in 2011.

In the drilling products group, we will have worked off most of our current backlog at the end of this year. This part of our business relies to a large extent on new jack-up rig construction, which has seen a downturn in new commitments. We are evaluating alternatives to help grow backlog in this business. One possibility is new land rig construction, we have seen an increasing quoting activity for land rig packages. We quoted 340 million in packages during the second quarter, up from 194 million in the first quarter and we have 16 bids for international delivery, outstanding at present.

Early this month, Lamprell plc shipyard in the UAE won an order for two of LeTourneau designed, high-spec Super 116E rigs. These rigs are expected to include full LeTourneau drilling packages, including top drive drill works, electrical systems and mud pumps. Although this win will not add materially to LeTourneau's backlog, as the two jack-up rig kits and one of the drilling packages has already been purchased by the shipyard, it is nonetheless excellent news and confirms a superior design of a LeTourneau jack-up rigs.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Robin Shoemaker with Citigroup.

Robin Shoemaker - Citigroup Inc

I was wondering if you could give us an update on what you're seeing in Mexico as potential market for some of your newer generation, new rigs that you're delivering here in the next year or two? You mentioned that one of your EXL rig may have a contract with McMoRan, but what do you see? Can you give us some comment on that market?

Mark Keller

We were down last week visiting with PEMEX and right now, what they have that will be issued in 2010 there's a tender for a 300-foot and a 350-foot independent-leg cantilever. It will have the 10-year rule attached to the tender. The job will start some time in January 2011. But we're hearing a lot of talk from their drilling group of increased budgets. But as of right now, Robin, that's the only two tenders that we see right now, the 300 and the 350.

Robin Shoemaker - Citigroup Inc

And you believe the 10-year rule will be enforced?

Mark Keller

Last week, when we met with PEMEX they told us that the 10-year rule would be on these two tenders.

Robin Shoemaker - Citigroup Inc

My other question then had to do with the land rig market, which continues to strengthen and you've got these 19 AC drive, AC electric rigs. And clearly, we've seen announcements from many land drilling contractors of signing quite a few long-term contracts for new construction. Probably, I'm assuming you're not really pursuing that opportunity now, but if not, then what is your thinking with regard to the ultimate disposition of the land rig business?

W. Ralls

Robin, this is Matt. We definitely would be pursuing or would have an interest in pursuing construction of new land rigs against term contracts. We have had some discussions along those lines, but they haven't led to anything at this time. So we certainly wouldn't miss an opportunity to build new equipment, where we could get an acceptable rate of return subject, of course, to board approval on that. But with regard to the longer-term question, it is still definitely our intention to separate from LTI as that opportunity presents itself. And we've been quite candid with our crews and as well as with the investment community that we do believe that at some point it will make sense to use the land rig fleet as a source of capital for further expansion and to the offshore side of the business. So we're watching for that opportunity. At this point, I would say that we probably -- even though there is some new construction, there's still quite a bit of idle equipment so that the utilization, the high utilization is at the upper end of the market. And at this point, we're not seeing what we think is kind of activity level that would give us the opportunity to get the value we think we should get for these rigs, but we continue to watch it closely.

Robin Shoemaker - Citigroup Inc

So these new term contracts that are being signed by others, I'm assuming you're looking at similar types deals. But are the economics of those not quite as compelling as you would like in terms of the rates being offered for three- or five-year term contracts on land rigs?

W. Ralls

Robin, I wouldn't say that's correct. What I'd say is we just haven't progressed the discussions far enough to feel like we've really got -- won the hook there. So we're just continuing to have those conversations and we believe that the day rates that are being achieved currently in term markets will probably be sufficient for what we would need to build new equipment, but we just need those term commitments with later start dates.

Mark Keller

Robin, this is Mark. We are starting to see more capital budget, money shifted from deepwater in the shelf to land, so you are seeing more opportunities -- companies such as Anadarko going to come out for 10 rigs, some of those potentially could be new build type rigs. And then EnCana, we have 11 rigs working for EnCana, and we're talking to them with possibilities of term contracts, but we haven't gotten to that point yet. But you are seeing the results of some budget money being shifted to land.

Operator

Our next question is from Dan Boyd with Goldman Sachs.

Daniel Boyd - Goldman Sachs Group Inc.

I just wanted to follow up on that last one, on the land drilling side, because from what I understand land drilling isn't core to the longer-term business and you would like to reallocate that capital offshore. But it's a little confusing that at the same time you would consider allocating additional capital to build more rigs. Is the plan there that you think at a date later on, you'd be able to sell those rigs? Or dispose of those rigs at a premium to new build costs?

W. Ralls

No, the expectation is that we would just grow the overall size of the land rig fleet and create value that -- we wouldn't do it unless we thought we'd get at least what we paid for them and got the earnings in the meantime.

Daniel Boyd - Goldman Sachs Group Inc.

And then just looking at the Middle East, I know there's a lot of demand out there for high-spec rigs, but you do have three idle rigs, there is the traditional 116Cs. Are there any prospects over the next maybe six months for those rigs to go back to work?

Mark Keller

We are in discussions right now with one operator in the Middle East. There are a couple of other tenders coming out from Saudi Aramco that would fit those jack-ups. They're getting ready to tender for as many as seven jack-ups here in the next few weeks. And three or four of those rigs will be oil drilling rigs and the 116s have been modified to meet Saudi Aramco's specs. Those rigs work for Saudi Aramco for three years, and we modified them to their specs. So we're hopeful in the next few weeks with those tenders, plus the other one that we're in discussions with that we can have some good news for you.

Daniel Boyd - Goldman Sachs Group Inc.

And then I'm assuming that the other three rigs that they're looking for in that tender, they're looking for the 1.5 or 2 million pound hook-loader rigs?

Mark Keller

The way the next tender -- it appears to be structured, there would be a couple of high-spec gas rigs and two to three workover rigs and the rest oil drilling rigs. But it's still uncertain as to the makeup of the tender at this time. But as of a couple of days ago, that's what it appeared to be.

Daniel Boyd - Goldman Sachs Group Inc.

Any indication on the start-up dates of those?

Mark Keller

They want to start some time in 2011.

Operator

Our next question is from Max Barrett with Tudor, Pickering, Holt.

Max Barrett - Tudor, Pickering & Co. Securities, Inc.

First question relates to the SKDP acquisition. Are you seeing opportunities firm up for those rigs? And do you have anymore clarity on whether those rigs work in Norway or other parts of the world?

Mark Keller

Right now, Max, we're seeing activity tighten up all over the world for high-spec rigs. We're in serious discussions right now with our last Super Gorilla-class rig. We hope to have, if we're successful, hope to have it contracted here in the next week or so, and that would have all of our Super Gorillas on term contract. And when we look at the markets, Southeast Asia, there's a couple of tenders. One in Australia, Southeast Asia, the Middle East with high-spec gas rigs. Certainly, the U.K. and Norway are the major focuses, and we have several tenders in each of those regions. The Saudi tenders, certainly, would be an option, and of course, target area would be Norway and the U.K. But there are other regions as we market our fleet around the world. There's definitely a high grading taking places, you've heard us mentioned before, and these specs are becoming a lot more stringent even in the last six months to a year than they were previously. So we're optimistic about it.

W. Ralls

Let me just add to that, Max, that Mark and I just made a week-long marketing trip to Europe two weeks ago, and we were very pleased with the strong, I guess, endorsement of Rowan's involvement with the SKDP rigs. There's a lot of enthusiasm for us being involved and a lot of interest in those rigs. The issue for us really is just timing on when the rigs are delivered versus when some of these opportunities will be in the market. So that's -- Mark is scouring the universe, looking for opportunities to put these rigs to work and maintain our perfect record of having our jack-ups contracted before they're delivered. So we are stone unturned.

Max Barrett - Tudor, Pickering & Co. Securities, Inc.

And then in the Gulf of Mexico, it looks like the Cecil Provine and the Gorilla II are rolling up contracts shortly. Do you expect these rigs to stay in the Gulf of Mexico? Or do either of those relocate?

Mark Keller

Max, we're tendering all of those rigs internationally, but right now, Apache has a lot of work for the Cecil Provine. And there are only currently 14 300-foot of grader independent-like cantilevers in the U.S. Gulf. And as I mentioned, four of those have already been contracted to leave. I would say all 14 of those rigs are being actively tendered today. And right now, for what we see in tender activity, we have some opportunity possibly to tender the Gorilla II, but right now, we have some projects that we're looking at in the U.S. Gulf of Mexico because of the supply side of long-legged jack-ups in the region.

Operator

Our next question is from Ian MacPherson with Simmons & Co.

Ian Macpherson - Simmons & Company

You mentioned there were three of your high-spec jack-ups in the Gulf that are leaving for international work, I presume that's the Bob Palmer and two others. Can you clarify or/and talk anymore about what those contract opportunities entail?

Mark Keller

As I mentioned, we've contracted the EXL-II to BP in Trinidad. The rig will depart sometime in September, commence operations down there in October for three years. And the other rigs that we're currently in serious negotiations right now with an operator, for the Bob Palmer and the Ralph Coffman. Can't really go into the details of that, Ian, right now, but we hope to be successful. If we are, those rigs would mobilize sometime at the end of the year or early 2011. They're term contracts also.

Ian Macpherson - Simmons & Company

The follow-up question that you mentioned the increased quoting activity for land rigs kind of LeTourneau, and you mentioned 16 bids for international deliveries. What's a typical yield in terms of order intake that might result from 16 bids? And what your scope of work or revenue opportunity is per rig there?

Thomas Burke

Well, within the yield -- and this is Tom Burke. The yield, it's hard to say. I mean it often depends on how competitive the market is in Texas, so I'm not willing to really speculate on that. But as far as the revenue per rig, there's a quite a reasonable range in the types of rigs we're bidding, in anywhere from $17 million to about $30 million is what we bid in there, depending on what the customers are pulling[ph], either drill pipe or flow pipe[ph], et cetera.

W. Ralls

Yes, and, Ian, we're a little bit of a disadvantage in that Tom is new here, and I'm relatively new to it. The last time that we sold a lot of land rigs, it was in an extremely tight market. So our previous experience really wouldn't necessarily be predictive of what we'd expect to win in this round.

Ian Macpherson - Simmons & Company

Last one for LeTourneau. Is there any visibility for more jack-up kits beyond another customer at Lamprell has options for a couple of more. Outside of Lamprell, any indications or quotes for jack-up kits probably?

Thomas Burke

Ian, this is Tom again. It does actually seem like it is. And in the quoting activity is high that it's been for almost a year now, so we're working on a number of projects. And none of them have, I would say, come to fruition nor look like they're going to come to fruition in the short term. But there is more interest and more activity in a number of areas.

Operator

Our next question is from Kurt Hallead with RBC Capital Markets.

Kurt Hallead - RBC Capital Markets Corporation

I wanted to ask going -- from a pricing standpoint. I know in the past I've had discussions with you guys. The high-spec jack-up markets been north at 90% utilization for quite sometime, however, haven't been able to really necessarily push pricing on that end because of the oversupply in the standard jack-up market. Your commentary continues to be very bullish on high-specs, maybe even incrementally so, over the course of the past three months. So are we at that point where you finally able to get some pricing power to high-spec market?

Mark Keller

Kurt, this is Mark. I do. It depends on what region of the world and what the spec is. High-spec varies, but if they need all the bells and whistles of a high-spec jack-up, those rates are beginning to increase, and I think you'll see some news in the next few weeks that support that. But we're looking at markets around the world. There's a lot of activity in the North Sea. In the U.K. sector, we continue to hear that U.K. sector is soft, but it actually isn't for high-spec rigs. And we think those rates are continuing to go up in the U.K. sector and, certainly, the Norwegian sector that we're looking at right now with the Skeie rigs. But overall, I think you're going to see an increase in day rates in the higher-spec rigs, simply because there's going to be more demand over the next year. As you've heard us mentioned before in Southeast Asia, there are a few tenders out for HPHT rigs there, once again, approaching the 2 million. They need 2 million hook load and all the bells and whistles. So those rigs are in shorter supply, and I think you'll start seeing that market increase.

Kurt Hallead - RBC Capital Markets Corporation

And are you going to see any positive fallout in terms of them pricing for standard jack-ups despite the supply overhead?

W. Ralls

Before Mark answers, I just clarify on this that we probably use a slightly different nomenclature, but the standard jack-ups to us are the over 300s, 250s that sort of thing, maybe you call those commodities. But the competition we're against with the very high-end rigs we've got are really the kind of the older super-premium rigs, like the Mod Vs and IVs. So those are very capable pieces of equipment but ours are more capable or in some cases, have a relationship or reputation with the client that enables us to get a premium. But in some cases, we need for one or two of those units to go back to work in order to really be able to move pricing. But that's happening.

Kurt Hallead - RBC Capital Markets Corporation

So then on the standard jack-up market, what's, you guys, take on pricing there?

Mark Keller

I think depending on what area of the world. Certainly in the U.S. Gulf, it's going to be relatively soft. But I think, as I mentioned earlier in my comments, as you see tender requirements becoming more stringent around the world, I think you'll start seeing the higher-end rigs in each one of those market segments start to increase in day rate and utilization.

Kurt Hallead - RBC Capital Markets Corporation

Once again, you referenced the requirements becoming more stringent. Once again, if you just kind of refresh my memory here, what is driving that increased stringency? Is it really anything to do with what just happened on the Gulf of Mexico? Or has it been a continuous stair-step function quarter-by-quarter in terms of the type of wells that are being drilled?

Mark Keller

Kurt, I think it's twofold. I think you hit it pretty well. As we market our fleet around the world, the wells are becoming more difficult to drill. There's no question that the Macondo incident in the U.S. Gulf of Mexico has affected every market that we're operating in worldwide and every market that we're looking at worldwide, and I think that's going to have a profound effect on tender requirements going forward. I think that you'll see operators go with established drilling companies with higher-spec equipment, and I don't think there's any question you're going to see that over the next year.

W. Ralls

But without that -- and we certainly got that feedback on that marketing trip we took, that operators will be more interested in well-established contractors, which is a little ironic since the event occurred with the largest contractor. But still, the well geometries, the pressures that they're drilling into, we're just seeing the drilling engineers kind of pushing the limits in trying to get bigger casing programs or go to deeper depths or higher temperatures and pressures. So that's what really generates the interest in the larger drilling packages.

Kurt Hallead - RBC Capital Markets Corporation

When you net all that out and when you went through the math, then what do you think the effective spare capacity is for capability of rig versus demand for rig capability? It can't be what the nominal number is. So what do you guys think the adjusted capacity overhang is right now in the marketplace?

W. Ralls

Yes, Kurt, I'm not sure how we'd answer that. What I would say is, to get back something I was saying earlier with regard to your first question is that we see the market as stratified not just bifurcated. So not just premium and standard, but really the high-spec units, then the premium and super premium below that, kind of on the upper end of the scale and then standard and commodity rigs at the lower end. And so you really have to look at it almost by the stratified segment as well as by the market around the world and do that sort of analysis. But generally speaking, there aren't but a couple of high-spec that is 2 million-pound hook loader grader jack-ups around the world that are in the market and looking for work.

Operator

Our next question is from Matt Conlan with Wells Fargo Securities.

Matt Conlan - MKM Partners.

I wanted to touch on the North Sea demand. You mentioned that there were 20 rigs of demand that were in that marketplace for the next couple of years. Can you break that down between Norway and, I guess, not Norway?

Mark Keller

Right now, Matt, we're looking at about seven projects that we're seeing that are long-term projects in Norway currently. The rest of those, the balance of those would be in the U.K. sector for what we see right now. We have a total -- right now, we have eight tenders submitted in the North Sea region. Some of those are in Norway, some of those are in the U.K. sector. But in our marketing, which we have seven in Norway and the balance, I would say, U.K.

Matt Conlan - MKM Partners.

Those eight tenders that are submitted, are those all high-spec rigs?

Mark Keller

Yes.

Matt Conlan - MKM Partners.

And changing gears, in the Gulf of Mexico, the Bob Palmer obviously received force majeure declaration. Have you guys accepted that? Or are you still deliberating how to react to it? And when the Palmer does go back to work, as you mentioned, is it going back for Apache?

Mark Keller

We have not accepted the force majeure. We have not contested it either, but we just -- Apache terminated the contract. We are in discussions right now with another operator, Energy 21, to take the rig for short job, and then the rig would go back to Apache for three wells and hopefully, would walk us to a shift to depart the U.S. Gulf.

Matt Conlan - MKM Partners.

So what is it that allowed Energy 21 to get a permit but not Apache?

Mark Keller

Energy 21 is a -- their situation is a recompletion type well, whereas Apache is they're new wells, and so it's a lot more involved with the NTLs. And I think Energy 21 is further long in the permit process with that project. Anyway, we're still working with them. It looks like they're about a week away from attaining their permit to mobilize the rig, roughly a week to 10 days, something like that.

Operator

Our next question is from Eric Anderson with Hartford Financial.

Eric Anderson - Analyst

I wonder if you could characterize for us the last week that Secretary Salazar paid to Ralph Coffman, I believe, on Wednesday.

David Russell

Yes, absolutely. This is David Russell. Secretary of the Interior Ken Salazar and also the Bureau of Ocean Energy Management Director, Michael Bromwich, visited the rig. They visited one of our Gulf of Mexico rigs that are drilling a ultra-deepwater gas well. And we toured the rig. They had the AP press with them, and we also reviewed all of our well-control systems. So it's a positive visit, and I think the industry has worked very well with the government. And moving forward, we have had -- in addition to that, we've had several visits by what was formerly the MMS, it's now the Bureau of Ocean Energy Management. And during those seven visits, we've had -- no improvements or deficiencies were noted. So I think the industry is moving forward along with the government to put this behind us.

Eric Anderson - Analyst

Was that a fact-finding mission do you think he was on? Or was it more of a PR exercise?

David Russell

I would say it's a little bit of both, but probably mostly fact-finding. They wanted to actually put their -- in person look at how the different systems work on a jack-up. And they also visited a floater, a semi, and they also visited a tension-leg platform that had a platform rig on it. So I think it was fact-finding in one way, and also it was good PR to come out and visit the industry.

Operator

Our next question is from Judson Bailey with Jefferies & Company.

Judson Bailey - Jefferies & Company, Inc.

First, Mark, the additional or upcoming Saudi tender that you mentioned beyond the couple of contracts are probably going to announce shortly. Did you say how many of those were incremental, and how many were just renewing existing rigs?

Mark Keller

Jud, I did not. The gas rigs will be incremental and the oil rigs, I believe, most of those would be incremental. It's just hard to say what Aramco -- they released a couple of rigs over the weekend. So Aramco is going through, right now, like a lot of operators are around the world, they're high grading their fleet. And so I think they're taking a hard look at equipment and where they want their fleet placed for the next up cycle. They got a lot of work to do, and you could actually see all of them is incremental. I wouldn't count on that, but I would say the biggest percentage of them would be certainly the gas will be, Jud.

Judson Bailey - Jefferies & Company, Inc.

Just staying on the Middle East, the 116-Cs, is there any reason -- sorry, I will just say for outside of Saudi Arabia, is there any reason, given the demand you're seeing there, that rates couldn't just continue to bleed for the rest of the year, just given the overcapacity in that region? I mean do you see any rigs moving out or enough demand that rates still continue to slip for some of the conventional rigs in the area?

Mark Keller

I think for the commodity type rigs in the area, I think those rigs will continue to slip. We're seeing tenders. We've had a couple of tenders in the Middle East where our 116s couldn't qualify, and we had to tender in EXL-class rigs or 240Cs. As I mentioned, the tender requirements have become very stringent everywhere. We've actually tendered the 116s in the Middle East to other areas, Southeast Asia, in India and some other areas to try to get a couple of them out. However, having modified, David and his team have modified the 116s that are currently idle to Saudi Aramco's specs at their suggestion, and so we're hopeful that we'll certainly be considered for those new tenders. And we're in discussions, as I mentioned earlier, with one operator in the Middle East right now for one of the 116s currently.

Judson Bailey - Jefferies & Company, Inc.

If for some reason, you didn't get the work with Aramco for the 116-Cs, would you ever consider maybe moving those to a stronger market, for instance, Southeast Asia, particularly if you can get another rig in the area with some good work?

Mark Keller

Absolutely. We are structuring ourselves in every market in the world. As we mentioned on previous call and analyst meetings that we have a marketing director in Kuala Lumpur, and we are actively tendering all over Southeast Asia. So we have tendered some 116s into that region.

Operator

Our next question is from Mike Urban with Deutsche Bank.

Michael Urban - Deutsche Bank AG

I wanted to raise the stratification comments that you've been making throughout the call and you've been talking about for a little while. Are a lot of the tenders that you're seeing there, where the specs have been steadily rising, and I realized it's the generalization and it's not all going to be the same, but are those tenders where you're seeing higher spec requirements, are those in some cases just a preference for newer or higher-spec equipments? Or are you seeing more and more where that's actually required for the wells? In other words, what I'm trying to get a sense of is, if you do see the high-spec market tightening up in terms of the pricing, would there be some operators who would be willing to trade off, like capability, for price and go to maybe the higher end of the standard market?

W. Ralls

Yes, Mike, I think there's no doubt there would be. Obviously, anytime you see an oversupply of market and the general rule of thumb is the better rig or the lesser rig that supplies the better rig, gets the job. So that's part of what's been happening is that operators have been willing to pay up a little bit to get to high grade their fleet as Mark was referring to earlier. But at the same time, there's just more demand for that, more wells that require that extra capability, which is absorbing capacity in the high-spec markets. So when that market gets tight, you'll see operators that don't need all the capability they can get for a good price now drop to the next kind of strata of rigs there.

Michael Urban - Deutsche Bank AG

And would that be a potential opportunity for some rigs, some of the maybe sub-standard rig in the Gulf of Mexico to go to, for instance, like a Mexico, where they've had high-spec requirements, but don't necessarily need them? Or does that still wait and see what the budget issues to PEMEX?

W. Ralls

That one is hard to say. I mean we're getting all kinds of conflicting data points. But based on the trip that our guys just took down there, we're hearing from them that they expect to expand their budget, but we're not seeing it in terms of a significant number of new tenders.

Mark Keller

Mike, one thing we've seen and what the NOCs and the IOCs is, they have seen over the last couple of years, certainly in the last up cycle and as we enter this trough cycle that the higher-spec rigs are drilling there wells cheaper. Even when we had, and as an example, when we had the Rowan-Paris working for Maersk at $170,000 a day and some of our competitors were at a lot less day rate because of the nature of the wells, as Matt alluded to earlier, these extended-reach wells. The Rowan-Paris was the cheapest rig, and a lot of the NOCs and IOCs have come to that conclusion. That's what you're seeing in the land rig market in the U.S. These higher-spec rigs are drilling the well. They maybe at a higher day rate, but they're drilling the wells faster, so their well costs are cheaper.

Operator

Our next question is from Brian Uhlmer with Pritchard Capital.

Brian Uhlmer - Pritchard Capital Partners, LLC

Had a question on the front-end loaded business and how we should continue to look at that going forward? And how your products are differentiated? And what that means for LeTourneau? Because something we -- most of you look but you guys don't really follow intently.

Thomas Burke

This is Tom, Brian. As far as how our products are different from the competition, well, we have a range of five loaders, and the two of our largest loaders are quite considerably bigger than our competitors. It's one area where we're different, and the second area is our electric drive system. Our competitors use a electrical-mechanical drive system where we use an electrical electric, which has a better fuel efficiency. And does that answer your question?

Brian Uhlmer - Pritchard Capital Partners, LLC

Somewhat. And then how should we look at as far as tracking orders and where you guys would take orders should, could be? Or are they sustainable on this level for extended period of time?

Thomas Burke

We hope so. We're lucky we got some good visibility in 2011, where we're seeing an increase in orders and we're projecting higher than what we're thinking will ship in 2010. Beyond 2011, it seems like the commodity cycle in iron or in copper, which are loaded business, I know copper are coal, which are loaded business, is leverage to. It seems to be fairly strong. We have a little bit of a visibility into 2012, but not much beyond that.

W. Ralls

As Tom noted in his comments, I think we sold 14 loaders in 2008. We budgeted 21 in 2010, and I think we're going to ship about 28. And we're seeing growth from those numbers in 2011. So whether or not that'll stretch out for several years is beyond our ability to say, but we're certainly very encouraged about 2011.

Brian Uhlmer - Pritchard Capital Partners, LLC

Just looking at transcript, I can't find -- did you give out a tax rate guidance? Or I just missed it or did you give it out?

William Wells

We're looking at 29% for the year now, Brian.

Operator

There are no more questions in queue at this time.

Suzanne McLeod

Okay. Well, we'll go ahead and conclude our conference call. Thank you so much for joining Rowan Companies. And if you have any additional questions, you can give Investor Relations a ring. Thank you.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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