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Atwood Oceanics, Inc. (NYSE:ATW)

Q2 2010 Earnings Call

August 5, 2010 11:00 am ET

Executives

Robert Saltiel – President, Chief Executive Officer

James Holland – Chief Financial Officer

Analysts

Collin Gerry – Raymond James

Dave Wilson – Howard Weil

Brian Uhlmer – Pritchard Capital

Scott Burk – Oppenheimer

Mike Brigade – Hodges Capital.

Operator

I’d now like to turn it over to Mr. Jim Holland. Please go ahead sir.

Jim Holland

Good morning, and welcome to Atwood Oceanics Conference Call and Webcast to review the company’s operating results for the quarter ended June 30.

Speakers today will be Rob Saltiel, our President and CEO, and myself, James Holland, currently Senior Vice President and CFO.

However, as stated in our 8K filed on July 19th, after a 33-year career here with Atwood, I will step down from my position effective the close of business on August 10th.

As the Investor Relations Officer for these many years, it’s been one of the highlights of my career to have had the opportunity to visit with analysts and shareholders. I want to thank everyone who’s helped make the investor relations functions of my career so enjoyable.

Before I turn the conference call over to Rob, let me, as usually, remind everyone that during the course of this conference call, we may make forward-looking statement based upon management’s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and therefore involve a number of risks and uncertainties.

We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.

The words belief, estimate, impact, intend, anticipate or predict convey uncertainty of future events or outcomes. Undo rely should not be placed on these forward-looking statement, which are applicable only on the date hereof.

I will now turn the conference call over to Rob.

Robert Saltiel

Thank you, Jim. Good morning, and welcome to all of you joining on today’s call. I’ll say a few words on our actions here at Atwood, our financial results and our market outlook before turning it back to Jim.

As Jim mentioned, with his pending retirement, this will be his last earnings call with Atwood Oceanics. Jim’s been on the Atwood team for 33 years and has provided financial leadership as CFO for the past 29 years. Clearly, the longest serving CFO in our industry.

Jim has always performed his duties with the highest standards of ethics and integrity and one of his legacies to Atwood is its strong balance sheet on which to build our future growth. We thank Jim for his many contributions and he will be greatly missed.

Over the next few weeks, Jim will work with his successor during his on-boarding process.

After an extensive search, we will welcome next week our new CFO, Mark Mey. I know that many of you on the call already know Mark, but for those of you who don’t, Mark brings 17 years of financial leadership in offshore drilling, plus strong personal attributes that will be of great benefit to Atwood.

Once he gets settled in, Mark will soon be out on the road joining me visiting with investors and analysts.

Turning now to our business, this is clearly been a challenging quarter with the Macondo Well blowout in the daily news, and the uncertainties that it has presented for our industry in the Gulf of Mexico and worldwide.

Even though we at Atwood have limited rig exposure to the Gulf, and no deep-water presence currently, we are just as keen as everyone in this industry to see this moratorium end and for sensible regulations to be implemented.

To this end, we participated in industry taskforce meetings for both the equipment and procedural systems where development and review of industry recommendations are made.

We play an active role in all IADC and API work groups to help in the development of rules, regulations and requirements. And we have representatives from our technical staff who are involved in writing and review of new equipment guidelines and requirements.

Closer to home, we continue to conduct our internal operation’s integrity assessment to ensure that our people, processes, and equipment are fully effective. We continue to allocate significant recourses to maintain a strong safety culture on our active rigs and to establish that same culture on our new builds so that all Atwood employees are strong safety leaders.

2010 is shaping up to be one of our best years for safety in the company’s history. Yet we know that each day represents a new challenge and that compliancy is our greatest enemy.

Turning to our financials, our third quarter established an Atwood record for quarterly revenue with $167 million. So Jim is going out on a high note.

The strong revenue story was aided by the Atwood Hunter, the Atwood Eagle and the Atwood Falcon all working at their highest day rates in their history, coupled with solid operations performance across the fleet during the quarter.

Shifting to the markets, we’ve seen the moratorium overshadow the fact that the fundamentals of our business are improving. After bouncing around quite a bit, oil prices seem to be steadying in the high 70s and low 80’s as confidence grows in a recovery world economy.

We are starting to see some evidence that NOCs and other oil companies will increase their budgets in 2011 over 2010 levels.

However, with that said the supply overhang that I talked about on our last call is still with us. And the uncertain future of rigs in the Gulf of Mexico has added it to this issue. We are still seeing light contracting activity across the floater segment, and with growing competition in some cases from displaced Gulf of Mexico rigs. This has led to declines in recent floater day-rate fixtures.

On the jack up side of the business the high spec category continues to strengthen will lower spec rigs still face headwinds.

Regarding Atwood’s fleet since our last conference call, we announced fixtures on two of our jack ups. These contracts were expiring in 2010. We extend the Vicksburg at its current rate $90,000 for nine additional months in Thailand as our customer’s program there was expanded. Also we signed the Atwood Beacon for two fixtures totaling 280 days that has taken the rig to Ivory Coast before departure to South America to drill for a trio of operators.

We released an updated fleet status report on Monday and our revenue backlog currently stands at 1.3 billion as of August 1st.

I will comment briefly on a few rigs in our fleet before turning it back to Jim for the financials.

The Atwood Southern Cross mobilized to Tunisia in June and is currently drilling there. We don’t know how long the rig will stay in Tunisia as following our work opportunities are currently being discussed. But suffice to say that the moratorium in the Gulf does not help the prospects for the Southern Cross as competitor deep-water rigs have announced their mobilization to the Mediterranean from the U.S. Gulf as a result of the moratorium.

The Atwood beacon is currently drilling in Ivory Coast for ENI. We did experience some idle time between the conclusion of our last job and the beginning of our work; and after the current well, the rig will mobilize to South America for the previously announced program.

The Seahawk is concluding its drilling operations for Hess Corp in Equatorial Danay. We bid the rig on other jobs that would have delayed starts. We’re planning to stack the rig depending on following our work prospects and may end up having to cold stack it.

The Richmond’s One Well program in the Gulf was impacted by the moratorium. And we agreed with our client to advance some regulatory and repair work to assist that client in the permitting process. We except to complete the ongoing work in the next week and return to work shortly thereafter.

Looking beyond that job, we do see addition prospects in the Gulf that are suitable for the Richmond.

And finally, our two deep-water semi’s being constructed [inaudible] Ship Yard, continue to make good progress.

The guidance we provided on our last call pertaining to delivery timing and construction cost still holds.

As a reminder the Atwood Osprey is scheduled for completion in the first quarter of 2011, and the second unit is expected by mid-2012.

I’ll now turn it back to Jim to provide more details on our operating results and financial outlook.

James Holland – Chief Financial Officer

Thank you, Rob. Before I address certain items that will have an impact on operating results for the fourth quarter, I will make a few comments concerning our third quarter operating results.

Our diluted earnings for the third quarter of $0.91 included a $0.21 reduction resulting from a recording from approximately 14million non-cash deferred-tax evaluation allowance as reported in our 8K file on June 22nd against our total U.S. net operating loss care reports.

As reported in the 8K filing, even though the NOL does not commence expiring, do not commence expiring until 2028, due to the current uncertainties of United States off-shore drilling market including uncertainties resulting from the Macondo Well incident, management cannot be assured that sufficient future United States taxable income will be generated by the company or to utilize the NOLs.

This evaluation allowance resulted in our effected tax rate for the third quarter being 30% compared to our initial guidance at the beginning of the quarter of 17% and our revised guidance of 33% disclosed in the June 22nd 8K.

We still expect that our effective tax rate for the fiscal year end will 21% in line with what we recorded in our June 22nd 8K filing.

At this time, we expect our affective tax rate for fiscal year 2011 to be around 20%.

We incurred approximately 63 million in drilling cost for the third quarter compared to our guidance of 67 million. This difference is related to fact that the Atwood Southern Cross was initially expected to commence drilling in June, which would have resulted as reported in our May conference call, a one-time expense of approximately 3.5 million for additional equipment costs required for rig to commence during operations. With the rig not commencing during operations for July, the one-time expense of 3.5 million was recorded in July and not in June which increased earnings per share in the third quarter and will reduce earnings per share in the fourth quarter by approximately $0.05.

I will now comment on certain items that could impact results for the fourth quarter fiscal year 2010 and possibly the fiscal year 2011.

First I will address zero-rate time for the fourth quarter. As Rob stated, Richmond is currently undergoing some regulatorial and repair work before returning to work in August and will have approximately 45 days of zero-rate time during the fourth quarter.

With the future contract status of the Atwood Southern Cross uncertain at this time, the rig could incur around 45 days of idle time in the fourth quarter if there is no immediate, following our order – following the completion of its current contract in Tunisia in August.

As Rob stated, we continued to work on building backlog for the rig; however, there is no guarantee that we will not incur some idle time on this rig during fiscal year 2011.

As Rob also indicates, following the expected completion of the Seahawks contract in mid-August, the rig will be stacked and if ultimately cold stacked, could incur significant idle time.

Thus, it is very difficult to predict when this rig might return to work.

The Atwood Beacon occurred nine of its 21 days of zero-rate time in July, while waiting to commence its contract in the Ivory Coast.

The Vicksburg is expected to incur 10 zero-rate days during the fourth quarter for required regulatory inspections.

The Atwood Eagle is expected to earn approximately 27 million of revenues for the fourth quarter compared to approximately 37 million in the third quarter.

The 10 million expected reduction in Atwood Eagle revenues is due to the rig drilling 35 days at a day rate of around 170,000 for a previous deferred drilling program, and to the rig’s expected to incur 10 zero days at the end of September for required regulatory inspections with another 10 zero days expected to be incurred at the beginning of October to complete these inspections.

We currently expect total drilling costs for the fourth quarter of fiscal year 2010 to around 66 million. The primary reason for this increase over the total drilling cost incurred in the third quarter is due to the Atwood Southern Cross having, as previously, stated the one-time expense of approximately $3.5 million.

With this one-time expense coupled with approximately 45 days of full operating costs, we expect that the rig’s average operating cost in the fourth quarter will be around 105, 000 per day compared to its operating cost of 40,000 per day incurred in the third quarter.

Expected per-day operating costs on a rig-to-rig basis for the fourth quarter are as follows. Atwood Hunter, 100,000; Atwood Eagle, 140,000; Atwood Falcon, 75,000; Atwood Southern Cross as previously stated, 105,000; Atwood Aurora, 55,000; Atwood Beacon, 60,000.

This expected per-day cost below the approximately 90,000 occurred in the third quarter due primarily the determination of cost of 25,000 per day of amortized mobile expense related to the rigs previous contract.

The Vicksburg, 45,000; Seahawk, 70,000; Richmond, 45,000 and other costs of around 20,000.

The current expect that our general and administrative expenses for the fourth quarter will remain at the same level incurred in the third quarter of around $9 million. Depreciating expense expects to remain around 10 million for the fourth quarter which will result in around 39 million depreciating expense for the year.

I will now comment on expected total capital expenditures for the fourth quarter for fiscal year 2010, and fiscal year 2011 and 2012.

Through June 30, 2010 we have expended in total for both rigs approximately 730 million toward the construction of the Atwood Osprey and to our to-be-named [inaudible] positioned semi-submersible, which leaves approximately 645 million remaining to be expended on the construction of these two rigs.

Our current projection of total capital expenditures for the fourth quarter is around 110 million, which will result in total expenditures for the year of around 250 million.

Assuming no additional growth or any significant upgrades to our existing fleet, we current expect capital expenditures for fiscal year 2011 and 2012 to be around 400 million and 300 million respectively.

With our current contract backlog expected to provide approximately 750 million of future after-tax cash flows, we perceive no issue with our current facilities. With the expected cash flows from our current contract backlog and our available boring capacity with current interest costs around 2%, we believe we can complete the funding of the construction of our deep-water semi-submersible and maintain a strong balance sheet without requiring any additional sources of capital.

I will now turn the call back to Rob.

Rob

Thank you Jim. And that concludes our prepared comments.

I will turn it over to the Operator. We will be happy to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Collin Gerry with Raymond James. Your line is open.

Collin Gerry – Raymond James

Hey, good morning, guys.

Robert Saltiel

Good morning, Collin.

Collin Gerry – Raymond James

Jim, congratulations on a great career at Atwood, and you’re certainly going out in some interesting times in the industry. But based on most of the things we’re hearing, it seems to be on an upswing. So congratulations there.

I guess to the questions, I want to start on the jack-up side. You’ve all been able to secure some nice kind of extensions and some shorter-term work on your jack ups. I was curious, you know, it seems to me that the higher end of the jack up market is performing a lot better. And I think that would speak to your fleet. Are you seeing opportunities for more term work in the similar day-rate range that you’ve been able to get some of the most recent announcements?

Robert Saltiel

I’ll take that one, Collin. You know, we felt pretty good about the extensions that we got. Obviously they were timely given that we had the Vicksburg and the Beacon coming to the end of their contracts. And in both cases, we’ve ended up putting on more than nine months of work. You know, one is right at nine months and the other one was slightly in excess of that.

It’s still slightly unusual in this market to see what I would call one-year plus work. We’re still seeing a preponderance of shorter-term work. But we now do have a little bit of luxury of time for really all three of our jack ups, the Aurora included in that, to hopefully see the market solidify further on the higher-spec jack-up side.

A lot of our competitors have been talking about the bifurcation of the high-spec jack ups and the low-spec jack ups. Clearly the utilization is significantly higher there and we are seeing substitution of the higher-spec newer rigs for the lower spec and typically older rigs.

So I think that that trend is working in our favor. But I think it’s probably too early to say that the market is tight enough to see a lot of longer-term programs. I think people are still generally contracting for what they need. And until we get through the full digestion of the jack up new-bill programs and more confidence in that market going forward, we’re probably likely to see more shorter-term programs than longer ones.

But again, as we go to renew our rigs over the next, you know, three to six months, we’re hoping to see some more strength so that we can dial in on some term programs that still have strong day rates.

Collin Gerry – Raymond James

Right. I guess switching gears to the floater side, you know, obviously new regulations are coming and there’s a lot of uncertainty on that front. Just what we know about – I get lost in the acronyms, I think it’s NTLL5 and NTLL6, could you talk about your fleet and how it relates to what may be coming down the pipe in terms of what the regulations are in the Gulf of Mexico? And do you think that those are going to spread out to all regions?

Robert Saltiel

Well, keep in mind, we just have the one rig in the Gulf of Mexico currently, which is the Richmond, which is a submersible rig. It works in very shallow water depths. That rig is obviously affected directly by the regulations that come out for the Gulf of Mexico, NTL05 and 06 included. 05 is really more around certification and compliance with equipment, and having the right BPO and other equipment for drilling a particular well. 06 is a bit more onerous in that it really gets into discussions of blow-out scenarios and what kind of measures you have in place to enhance your ability to prevent a blowout, or then intervene if you do have a blowout.

So there’s a lot of calculations, a lot of technical work that has to be done. And not just to put that together, but to review that.

So of the two regulations that have come out, NTL06 is clearly the more onerous of the two, and it’s the one that’s really holding up permitting in the Gulf of Mexico right now. And even if the moratorium is fully lifted early, I think NTL06 is still going to be a challenge for the industry here in the short-to-medium term.

As it affects our fleet, since we’re not directly impacted on any of our other rigs, we are considering how do we make our rig fleet fit for future operations in other jurisdictions even where it’s not required to comply with tighter regulations.

And I would just tell you that right now, we’re working with our clients and we’re working internally to figure out what makes sense for our fleet to increase our level of operation integrity.

I talked about our operation integrity assessment, that’s part in parcel of that, is to put together the plan for that is to put together the plan for that.

But as a lot of the notice to lessees and potentially pending legislation is still being developed. It’s fair to say that our clients are also thinking through what kind of measures they think about prudent to put in place. And obviously, we will work with them to make the right decision for the Atwood fleet.

Collin Gerry – Raymond James

All right. That’s it for me, guys. Thanks a bunch.

Robert Saltiel

Thank. You’re welcome.

Operator

All right. And we’ll take our next question from Brian Uhlmer with Pritchard Capital. Your line is open.

Brian Uhlmer – Pritchard Capital

Good morning, everybody.

Robert Saltiel

Good morning, Brian.

Brian Uhlmer – Pritchard Capital

I have kind of an interesting question. I was just wondering, when you’re looking at your carry forward on your loss, if you would consider – you have the potential value of that, and looking at some of the jack ups that are potentially leaving the Gulf of Mexico, if being inquisitive for something in the Gulf of Mexico actually makes sense because of that, or if that’s any part of your strategy?

Robert Saltiel

I mean, obviously, it gives us some relief on future tax rates in the Gulf of Mexico. And from that perspective, it’s an enhancement. I’m not sure there’s enough there to drive us to do a deal, but as we’ve said before, we do want to grow this company. And we’re going to look for opportunities in all the major offshore markets of the world, Gulf of Mexico included.

So it’s one of those things that, as Jim says, it’s got a long life to it. We fully expect that we’ll use those NOLs someday. But how that plays into an acquisition in the short-to-medium term, I think just remains to be seen.

Brian Uhlmer – Pritchard Capital

Okay. Fair enough. And while we’re on the tax treatment, is the strategy, and I just got interrupted, so I hope I didn’t just miss this. Is the strategy at all looking at ways to view how you’re incorporated right now? How is that being looked at and thought about?

James Holland

Well, I think right now we still believe being U.S. dollar’s solid is where we want to go. You never say never, I mean, you’ve got to see what develops in the future with the company. But we still believe we could maintain an effective tax rate, a very good tax rate going forward in our current situation.

So you know, we’re always looking at ways to enhance our structure and still be U.S. dollar solid at this point. But there could be some, you know, minor changes at some of our international structure to get the best thing. We spend a lot of time and a lot of effort with all our advisors and company management in trying to get the best tax answers we can. And we’ll continue to do that. That’s a big focus to use every quarter and we’ll continue to do that and do the best we can.

We believe the current structure still give us that opportunity to maintain a very effective tax rate, and we’re not looking to anything from a foreign inversion at this point.

Robert Saltiel

But I mean, just to clarify, Brian, we’re not looking at any plans to re-domesticate the company? But as you know, tax legislation evolves and as Jim says, we want to make sure that we’ve got a structure that is shareholder value friendly. And so we constantly take a look at that. But there are no plans to re-domesticate the company.

Brian Uhlmer – Pritchard Capital

Good deal. And great career, Jim. And Mr. Mark Mey is an outstanding replacement as well. So I look forward to talking to you guys in the future. I’ll turn it over. Thank you.

Robert Saltiel

Thanks.

Operator

We’ll take our next question from Dave Wilson with Howard Weil. You line is open.

Dave Wilson – Howard Weil

Thanks for taking my call. Good morning, gentlemen. Just real quickly, Rob, on the Atwood Eagle and the potential for getting another contract with Chevron post your delivery of the Osprey, can you relay kind of your expectations? I know you kind of feel comfortable about that, or you’ve mentioned that in the past. But as far as timing goes, anything here during this quarter or next quarter on expecting anything from Chevron?

Robert Saltiel

Well, you know, keep in mind that the Eagle is under contract until the commencement of the Osprey. And that in itself is a slightly uncertain date. You know, we expect delivery of the rig in the first quarter of 2011, as I mentioned. But obviously we’ve got to go through an acceptance and commissioning process.

So the backend on that is a little uncertain, but we believe that there’s an opportunity to extend that rig with Chevron. There’s certainly been no commitments made or anything like that. By the same token, we’ve got to look for alternative opportunities as well, or look at our alternative opportunities as well in the event Chevron doesn’t extend.

And let me just make a comment that we do see other opportunities in the Australia market in other parts of the world near Australia that we think could be interesting and suitable for the Eagle.

So we’re going to cove our basis a bit when it comes to thinking about the Eagle’s longer-term. But we certainly enjoyed a good relationship in Australia with Chevron. Obviously, we’re extending that relationship with the Osprey if there’s an opportunity to do some more work with them there, you know, we’d certainly like to look at that.

Dave Wilson – Howard Weil

Okay. Great. Thanks for that. And just real quick, a followup on the Cross. Outside the Mediterranean, what other region looks – I know it’s not, yeah, kind of difficult but more – kind of on top of the attractive list of potential for that rig?

Robert Saltiel

Well, that’s a good question. You know, I would say with some confidence that the mid-water markets right now are pretty difficult. And we do see some opportunities in West Africa and some other parts of the world. But you know, we really felt like the Med, with the bathometry

there, on other words the water depths being suitable for the kind of work that the Southern Cross does, that that would have been the place that we’d like to have kind of kept the rig rather than move it around the world.

So we’re still working hard to try to keep the rig active in the Mediterranean starting with Tunisia and then going from there. But there are opportunities in West Africa and elsewhere that we will look at. We just want to make sure that we make the right call on the rig longer term.

Dave Wilson – Howard Weil

Great. Thanks, Rob. That’s it for me.

Robert Saltiel

All right. You’re welcome. Thanks.

Operator

We’ll take our next question from Scott Burk with Oppenheimer. Your line is open.

Scott Burk – Oppenheimer

Yeah, I have a follow-up question on Southern Cross as well. You talked about the competition for mid-water work, and stacking the other mid-water you already have. Just what is the likelihood that the Southern Cross could also be stacked as the current contract?

Robert Saltiel

Well, you know Scott, it’s a little difficult to say right now given that we’ve got, you know, things under discussion for potential extensions of the rig. And clearly, our intent has always been to keep that rig active and we’ve talked about it and seen a lot of prospects for the rig in the Mediterranean that to date have not come to fruition.

Obviously if we get to the end of the current work and we don’t see viable prospects, we’re going to have to consider idling the rig and then if that becomes extended, then cold stacking it, or certainly reducing the crew compliments significantly towards a cold stack.

But at this point, I can tell you our energy is around keeping the rig active. And we’ll just have to cross that bridge when we come to it. And hopefully we won’t come to it.

Scott Burk – Oppenheimer

Right. Okay. And then I wanted to ask, you know, the BP moratorium or the moratorium in the Gulf of Mexico seems to be one of the drivers of the weakness or the pressure that’s seen in mid-water rates. If that moratorium were to end at the end of November when it’s supposed to, what do you think is the likely impact and how long would it take for things to kind of normalize?

Robert Saltiel

Are you talking specifically about mid-water, or the markets generally?

Scott Burk – Oppenheimer

For mid-water specifically.

Robert Saltiel

You know, I think the moratorium is an issue. But I also think there are other issues out there with regard to uncertainty about where the world economy was going and potentially even some sublet activity and some over contracting that’s taken place in that segment.

I think it’s hard to say what an immediate end to the moratorium would do to the mid-water market. But clearly, the rigs in the Gulf of Mexico that are losing the work that they had signed up for are in a scramble to find opportunities overseas. And as a result of that, a lot of those rigs are working below their capability.

And so if you have a deep-water rig that’s working in mid-water depths, and ultra-deep water rigs are working deep-water depths, so when you have that cascading effect, it’s the mid-water rigs that get crowded out.

So we certainly would see a direct relationship between the elimination of the moratorium and the strengthening of the mid-water market. But there’s always frictions on these things. You know, once rigs move over, then they’d have to move back. And do they have to re-contract in the Gulf? Is there a new tender process? How do they get back to work?

So unfortunately, and we’ve tried to make this case as an industry to the legislators who are helping decide the future of our business, these things take time to work through once you export rigs and capability outside of the Gulf of Mexico.

So I would say the same thing on the way back in. If you get rid of the moratorium tomorrow, there’s going to be a friction for the movement of rig capacity and other services back to the Gulf of Mexico and that friction time will still be, you know, will still play havoc with the mid-water market.

Scott Burk – Oppenheimer

Yeah. Understood. Okay. And I just wanted to ask about your kind of growth plans. Obviously you’re main growth plans are still your two new builds that are in the works, and that’s where most your CapEx is going to be focused the next couple of years.

But can you talk about any opportunity that you may be seeing on the acquisition front? And also, if you would prefer to go for another new build or prefer to go second hand when you start looking at the next big build?

Robert Saltiel

Yeah, good question. We’re obviously seeing in the industry some pick up in M&A activity. Some of our competitors have consolidated some rigs on both the jack up and the floater side. And I think we are also seeing, you know, as a catalyst to M&A activity, some of the folks who are holding rig capacity that have not contracted that capacity are becoming a bit more aggressive in their desire to look for deals to let’s say move some of that capacity.

So the bid ask seems to be narrowing a bit from where it was before. But that said, you know, the day-rate environment has been challenged as well. So those two tend to work together. But the M&A space is certainly something that we are taking a look at. But we’re going to continue to evaluate the buy versus build decision every time we look at the market.

You know, we like the fact that we’re building rigs that are fit for purpose and that we know the technology that’s being incorporated in those. And that, you know, as long as we can build on an economic basis relative to buying, we’re going to look at that opportunity as well.

So it’s really one of those things where depending on what the market offers us, we can go one way or the other. But I do think that we’re likely to see over the next year or so an increase in M&A activity as started here over the past couple of months.

Scott Burk – Oppenheimer

Okay. All right. Thanks very much. And Jim, congratulations and good luck on the golf course.

James Holland

Thank you.

Operator

(Operator Instructions) We’ll take our next question from Mike Brigade from Hodges Capital. Your line is open.

Mike Brigade – Hodges Capital

Okay. Just a couple of questions. You had indicated that there was some delay in starting out Souther Cross, possibly the cause of the Tunisia [inaudible]. So did you see more foreign governments taking a little longer to approve work while they wait on some idea of what caused the Gulf of Mexico disaster?

Robert Saltiel

I’ll take that one. I’m not sure that the delay in Southern Cross was related to government. I mean, it was really more the client had a couple of particular issues in terms of getting their program together. But it’s a fair questions that, you know, does the moratorium export to other markets, and there’s certainly a potential for that.

I don’t think we’ve seen any knee-jerk reaction in any jurisdictions that we’re aware of where folks have said, hey, you know, we’re going to impose a Gulf of Mexico like moratorium on drilling. I think that most foreign governments understand the situation that occurred here in the Gulf is highly unusual. It was a very specific set of circumstances and facts. And that our industry as a whole has drilled thousands of wells very safely and therefore, to cripple an entire industry on the back of the single incident is probably not the prudent thing to do.

But that said, I think there will be a lot of eager viewing of the investigation findings on the Macondo Well incident and due to the extent that those findings suggest regulations here that are prudent, there’s a potential for those regulations to export to other markets in which we operate.

Mike Brigade – Hodges Capital

Okay. Your bigger rigs are not expiring, the contracts are not expiring anytime soon, but do you see some of your customers maybe taking advantage of current weaknesses in day rates? Do you want to extend those contracts at possibly [inaudible] that they might think is more advantageous now than what they could get a year from now?

Robert Saltiel

Most of our customers contract rigs to meet program needs. And they don’t adjust their programs depending on where day rates are. There’s not a lot of elasticity between day rates and demand. I think with the exception of maybe a couple of the NOCs, like PetroRoss, you know, have very large programs where they can balance rigs around and they can be more responsive. The customers that we’re working with today are really more driven by program than by day rate. So that’s not really factoring into decisions to extend or not to extend at this point in time.

Mike Brigade – Hodges Capital

Okay. And then I assume it’s too early for you to be actively marketing your dynamic positioning?

Robert Saltiel

Yeah. It’s never too early to begin marketing it, and we are marketing it. We’re having discussions with clients concurrently on the rig’s capabilities and the timing for its delivery. It may be a bit early to agree a definitive contract on that rig given the uncertainty that’s in the marketplace right now in some of the day rate expectations that are out there.

As I’ve said on a previous call, we think that the market will be stronger in 2012 when the rig comes out of the yard, certainly than it is today, and it’s likely to be stronger a year from now than it is today. And really, you know, the sweet spot for us contracting that rig is really sometime next summer into early autumn so that we’ve got 9 to 12 months before the rig is delivered to work with the client for its delivery. So given our expectation that the market strengthens over that intervening period, we’re not in a rush right now to sign it up definitively.

Mike Brigade – Hodges Capital

Okay. Thank you. And the last comment I just wanted to say, it’s been a real pleasure to work with Jim over the years, and I wish him the best.

James Hudson

Thank you, Mike. I appreciate it.

Operator

We have no further questions at this time.

Robert Saltiel

Okay. Thank you for your interest in Atwood. Bye.

Operator

This concludes today’s teleconference. You may now disconnect and enjoy the rest of your day.

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Source: Atwood Oceanics, Inc. Q2 2010 Earnings Call Transcript
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