Executives
Sun Van – Director, IR
John Rynd – President and CEO
Stephen Butz – SVP, CFO and Treasurer
Analysts
Collin Gerry – Raymond James
Ian Macpherson – Simmons & Company
Max Barrett – Tudor Pickering Holt
Luke Lemoine – Capital One Southcoast
James Gorman – Stifel Nicolaus
Mike Breard – Hodges Capital
Matt Beeby – Global Hunter Securities
Michael Mallardi – Wells Capital
Chris Taylor – FBR
David Smith – Johnson Rice
Richard Repania (ph)
Hercules Offshore, Inc. (HERO) Q3 2010 Earnings Conference Call October 27, 2010 11:00 AM ET
Operator
Good day, ladies and gentlemen, and welcome to the third quarter 2010 Hercules Offshore earnings conference call. My name is Shontelle and I will be your facilitator for today’s call. At this time, all participants are in listen-only mode.
We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the presentation over to your host for today’s call, Mr. Sun Van, Director of Investor Relations and Finance. Please proceed, sir.
Sun Van
Thank you, Shontelle, and good morning. I’d like to welcome everyone to our third quarter 2010 earnings conference call. With me today are John Rynd, our Chief Executive Officer and President; and Stephen Butz, our Senior Vice President and Chief Financial Officer; along with members of our senior management team, including Jim Noe, our Senior Vice President and General Counsel; and Troy Carson, our Chief Accounting Officer.
This morning we issued our third quarter financial results and filed an 8-K with SEC. The press release is available on our website at herculesoffshore.com.
For today’s call, John will begin with some general remarks and discussion regarding our most recent quarterly performance and current business outlook. Stephen will follow John with a more detailed discussion of third quarter 2010 financial results, offer cost guidance for the fourth quarter, and give an update on our cash flow and liquidity before opening the call up to Q&A.
Before John begins with his remarks, I’d like to remind everyone that this conference call will contain forward-looking statements. All statements other than statements of historical fact that address our remaining outlook for 2010 and beyond, activities, events or developments that we expect, estimate, project, believe, or anticipate will or may occur in the future are forward-looking statements.
Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results and actual future results could differ materially from those described in such statements. You can obtain more information about these risks and factors in our filings with SEC which can be found on our website and the SEC’s website, sec.gov.
Now it’s my pleasure to turn the call over to John.
John Rynd
Thank you, Sun, and good morning, and thank you for joining us today on the call. This morning, we reported our financial results for the third quarter 2010, which show a net loss from continuing operations of $15.1 million or a $0.13 loss per diluted share, compared with a loss from continuing operations of $37.2 million or $0.38 loss per diluted share for the third quarter 2009, excluding the effects of nonrecurring items.
Before I begin my discussions on our operating results, I would like to take a moment to thank our Gulf of Mexico customers as well as our domestic offshore team in their tireless efforts to keep our shallow water rigs active during a very challenging time for the industry.
As many of you know, since the new Federal regulations on offshore drilling were imposed in June due to notice of lessees 05 and 06. Operators have had a difficult time in interpreting these new regulatory requirements.
Consequently the number of shallow water permits approved by the BOEM has been significantly curtailed since June, running roughly at about half the pace prior to the new rules. In particular, permits to grow new wells were virtually nil during the initial three months after the regulatory changes with only four new well permits approved between June to mid-September.
During this time, we were fortunate to have found work for our domestic jackup fleet with operators who had shifted their activities to workovers and sidetrack jobs. These type of jobs have not encountered us much permit delays to the new well applications, largely because they typically only require compliance with the NTL 05, which deals primarily with equipment safety and certification. New well permits have had to comply with both NTL 05 and NTL 06, the latter dealing with worst case discharge scenario and spill response measures.
E&P operators have always had submit this information even prior to the new regulations. But the hang-up with NTL 06 lies in a new methodology of the calculation. As a result of this shift in the types of work, we are able to keep an average of seven rigs working out of our 11 marketed rigs which were available throughout the third quarter. While there is certainly a lot of room for utilization to improve, this is higher than we would have expected during the early days of the new regulations, when we always saw handful of permits issued for the entire shallow water industry.
Over the last month or so we have seen some encouraging signs to shallow water permitting process maybe improving. Since mid-September, the BOEM has approved another eight permits for new wells, along with a number of permits for sidetracks and workovers. While this is still well below the previous rate of permitting from prior to the Macondo incident, it is a big improvement from just four new well permits in the first three months after the issuance of NTL 05 and NTL 06.
Furthermore we are seeing permits approved for new wells that are targeting prospects with associated liquids as opposed to the first few permits which were dry gas wells. In terms of the overall number of permits including workover, sidetracks, and et cetera issued since June 1, the BOEM has now approved a total of approximately 58 permits. This is up from just 19 total permits issued when we had our second quarter earnings conference call at the beginning of August.
Clearly, there are a 112 exploration and development plants submitted since April with 30% of these been approved with 63 plants waiting for approval. Typically, these plants have three to five wells per plant, a fairly significant backlog.
On October 21st, the date of our last league status report, 10 of our 11 marketed jackups were working with the 11 and final marketed rigs yet to begin a contract tomorrow. This improvement is due in large part to our customer’s ability to obtain necessary permits, some of whom have been waiting for permit since June. We hope that this is in reflection of some improvement in the permitting process. In addition of having fully utilization, we have been able to lock in work for a number of our rigs till the end of this year.
Clearly, our marketing group are doing a great job with our domestic fleet, which is doing quite a bit better than the overall industry. Currently there are 45 marketed jackups in the Gulf of Mexico in which 35 rigs are contracted, which equates a 78% utilization on a marketed fleet.
If there is one positive development that has come out of the tough regulatory environment, it is at that number of marketed jackups in the US Gulf of Mexico has run considerably since May, when there were 50 marketed jackups in the Gulf. Excluding rigs that have announced plans to move overseas, the number of visible marketed rigs have shown a drop to 42.
Furthermore, we estimate that the number of rigs immediately available for work is even lower as we believe that several of our competitors owns that rigs are under crewed and would require time to get a full crew complement together. With 35 rigs contracted today, you can see how it wouldn’t take much for the business to absorb the number of idle rigs.
Turing to the international offshore segment, we continue to benefit from this strong and steady cash flow generated by our six contracted rigs. We have seen an increase in tender activity in recent months. We believe this is indicative of the growth and operator of capital spending overseas, which will help absorb the excess global jackup supply and alleviates some of the pricing pressures we go through 2011.
In terms of our three one stack international rigs, we have signed a LOI for a three-year contract with a Chevron subsidiary in Angola for the Hercules 185 and expect the rig to commence operations under the contract by the end of this year.
We are currently mobilizing the Hercules 156 from Gabon to Bahrain for several reasons. First, the rig has better visible near-term prospects in the Middle East and Asia, versus Africa. Secondly, should it be successful to carrying work, the rig needs some spud can repairs which will be much cheaper and lower risk to complete in the Middle East shipyards than in West Africa, which would more than pay for the mobilization. Lastly, the rig does not secure work stacking cost too much low in the Middle East than West Africa, so the investment should have a quick payback in all scenarios.
As I alluded to earlier, bidding activity for both the Hercules 156 and Hercules 170 has picked up. And we believe there are very good opportunities for these rigs to get on contracts sometime during the first half of next year.
The first of our six rigs scheduled to come out of contract is the Hercules 260. The contract is set to expire on March 30th, 2011 with ONGC. While ONGC has not established a formal bid process, based on our conversation with the operator and ONGC’s recently announced discovery drilled by the 260, we feel confident that ONGC will continue to use our rig.
Repricing of the Hercules 260 as well as our other rigs rolling off contract throughout 2011 will be subject to market rates which remain challenged due to the idle jackup supply in the various international markets that we compete in.
In Saudi Arabia, the Hercules 261 is currently incurring downtime for [inaudible] that should be complete by November 14th. All told, we expect the rig to experience three weeks to down time.
There are currently 90 idle jackups, inclusive 36 cold-stacked jackups in the international market. In addition, there are currently seven uncontracted newbuilds scheduled for delivery by yearend with 12 uncontracted newbuilds schedule for delivery in 2011.
Given our strong safety and operational performance and income at rig status, we are very confident in our ability to maintain utilization of our international fleet. However, current market rate for these rigs are considered to be lower than the existing contracted rates.
Moving on to Mexico, Pemex recently issued some short-term tenders for rigs that are expected to carry them through the end of this year. And Pemex released their tender yesterday for one 350-foot Independent Leg Cantilever and two 350-foot Independent Leg Cantilevers all set to commence in February 2011 and all must be 10 years or newer.
Currently there are 29 jackups in Mexico, with Pemex having 20 rigs under contract, off eight of which have contract that is set to expire by the end of this year 2010. At this point, it is uncertain how the tender process will play out and the net impact of incremental rig demand from Pemex. But our initial take is that a good portion of the incumbent rigs will be absorbed as well as a few additional rigs to meet their future drilling needs.
As for our platform rig working or Pemex, our contract extends through late April of next year. They have not issued a new tender for this work, but based on our performance we feel confident with our position on rig three.
Our inland segment continues to exhibit modest, sequential improvements in day rate and utilization. For the third quarter, we effectively had full utilization of all three marketed barges and the average day rates has improved to low 20s. Industry-wide there are 26 marketed barges, of which 20 are currently contracted.
Demand has increased in the low teens in early August and is interesting to note that the improvement of barges relation incurred in an environment when natural gas prices have fallen to the mid $3 range.
We are probably still not there yet on pricing and industry utilization to justify our reactivation of our coal stack barges. But if pricing continues to firm and industry-wide utilization can be sustained at or slightly higher than current levels, there may be some opportunity to revisit this.
Moving on to our domestic liftboat segment, we operated at a record utilization of 92% during the third quarter, reflecting the boost and demand from the cleanup efforts related to the Macondo well incident. Pricing also improved by about 7% for our domestic liftboat fleet.
During the quarter, we had up to 11 vessels working for BP. Cleanup efforts have subsided since the end of the quarter, and today, we have only two of our smaller vessels working for BP. Despite the drop-off in work from BP, we continued to have very good utilization so far through October, averaging in the mid 70% range.
We expect utilization to slip a bit further in the fourth quarter due to normal seasonal declines, however, we don’t anticipate a further substantial decline in utilization, because operators have an opportunity to complete some of the work that they had previously planned to do early in the year, but couldn’t do due to lack of available liftboats.
Looking forward to latest NTL issued by the BOEM, NTL-G05, what we call idle iron NTL to set a more definitive timeline when operators are required to plug in abandoned wells and non-useful structures in the Gulf of Mexico.
P&A work has already in the area of growth for domestic liftboat fleet accounting for 15% of 2009 revenue, compared to just 9% in 2008. We believe that the new idle iron NTL with a very least provide a solid base of demand for liftboats and possibly a source of strong growth over the next several years as operators seek to comply with the requirements of the new NTL.
Results for international liftboat segment were slightly ahead of our second quarter 2010 results. We generated an increase in average pricing, now almost a 1000 per day, and continue to tie-in operating costs. These actions translated to a nice improvement in gross margin, averaging 53% during the third quarter, up from 45% in the second quarter. However, utilization for our international liftboat fleet remained disappointing, averaging a mid 50% range throughout the third quarter.
Utilization continued to be hampered by project delays and light demand for our smaller class of liftboats in West Africa in one of the two vessels in the Middle East outlook for the quarter. Since early October, we have experienced a modest improvement of utilization and expect fourth quarter utilization for the international liftboat to trend higher as we exit 2010, evidenced by both of our liftboats in the Middle East being on the payroll today.
Delta Towing continued to benefit from spill remediation work throughout the third quarter. Improvements in pricing and utilization led to segment to turn an operating profit of $2.4 million during the third quarter. This is the first quarter of operating profit for Delta since the fourth quarter of 2008.
Swimming toward to our domestic liftboat segment, we expect some slippage in the fourth quarter at Delta. With our tight watch on operating cost, we believe Delta can continue to generate positive cash flow.
Turning to our asset sales effort, in September we closed a sale to retire jackup Hercules 255 with growth proceeds to $5 million. During the quarter, we also sold two tug boats and a posted barge to Hercules 10 for combining gross proceeds of $2.3 million. This brings year-to-date asset sales to just over $15 million. We also have an agreement to sell retired jackup Hercules 155 for $4.8 million, which is expected to close during the fourth quarter.
With the sale of the Hercules 155, we have sold three retired jackups out of the business this year with a permanent drilling restriction in all three rigs. We continue to look for opportunities divest of our noncore assets.
I would like to closeout my comments by saying that, while the number of shallow water drilling permits have increased in recent weeks, the pace remains well below historical levels. We as an industry need to continue our communications push with the Department of Interior and the BOEM in order develop a more effective process to not just get drilling applications, but also exploration plans to the system.
As you know, the shallow water drilling industry does not have the benefit of long dated contracts with some contracts covering less than one month. Any slowdown in permitting can put immediate pressure on offshore jobs as well as the many jobs that are in support of the industry.
With that, let me turn the call over to Stephen.
Stephen Butz
Thank you, John. I will provide a review of our financial results for the third quarter of 2010 in comparison to the second quarter 2010, provide an update on our cost expectations for the remainder of the year, and briefly discuss our cash flow, liquidity and covenant compliance.
For the third quarter 2010, we recorded a loss from continuing operations of $0.13 per share compared to a loss of $0.17 per share in the second quarter 2010. Third quarter results included a $3.2 million gain from the sale of the retired rig Hercules 255. This was more than offset by an accrual of $5.9 million, split equally between domestic offshore and inland segments related to a multiyear state sales and use tax audit.
Now I will address the operating results and our cost expectations by segment starting with domestic offshore. Our domestic offshore segment recorded an operating loss of $32.1 million in the third quarter as compared to a loss of $20.5 million in the second quarter, mainly driven by lower revenue, which declined to $25.1 million from $34.1 million.
The reduction in revenue was the result of a decline in utilization to 63% from 90%, which we believe was largely caused by the difficult permitting environment our customers have faced in the wake of the Macondo incident.
Additionally, the Hercules 350 incurred 45 days of down time during the third quarter for schedule, inspection, and maintenance. Lower activity was partially offset by an increase in average revenue per rig per day, which increased by 11% or approximately $4,000. The increased stemmed from a significant increase of about $20,000 per day on the Hercules 350 and modest price increases for our mat-supported rigs from second quarter levels.
Domestic offshore operating expenses increased by $1.5 million to $38.7 million during the third quarter. As previously discussed, third quarter operating costs included an accrual of approximately $3 million related to a multiyear state sales and use tax audit which was offset by a $3.2 million gain from the sale of Hercules 255. However, the second quarter comps also included a $3.1 million gain from the sale of one of our retired rigs, the Hercules 191.
When adjusting both quarters for gains on asset sales mentioned in the sales and use tax accrual, domestic offshore operating costs actually declined by $1.4 million to $38.9 million in the third quarter from $40.3 million in the second quarter. Average operating cost per rig before allocation of shore based expenses was approximately $28,600 per day on 11 marketed rigs during the third quarter. This declined from $30,600 per day on 12 marketed rigs in the second quarter.
Contributing to the improvement was lower repair and maintenance expense as a result of less operating days and reduced workers’ compensation expense. Our cold stacking cost per rig averaged approximately $4,700 per day, largely in line with the estimates we provided during last quarter’s call of $4,500 per day.
We estimate domestic offshore operating expenses including shore based and cold stacking cost will total between $37 million and $39 million during the fourth quarter. This estimate excludes any gain or loss on asset sale.
Our international offshore segment generated operating income of $26.9 million in the third quarter, an increase of $2.7 million. Third quarter revenue was $74.4 million, up approximately $1 million, mainly because of the Hercules 208 operated the entire quarter, but had incurred some downtime in June for light repairs.
International offshore operating costs declined by $1.5 million during the third quarter as compared to the second quarter, again due in part to the lower repair and maintenance costs on the Hercules 208.
We estimate fourth quarter operating costs in our international offshore segment will approximate $35 million. The expected increase compared to third quarter operating cost is driven partly by the mobilization of the Hercules 156 from Gabon to Bahrain, which is expected to cost approximately $2 million.
We are also expecting higher costs on the Hercules 185 as we raise the rig to start work on its new three-year contract in late December. And lastly, as John mentioned, we will also incur some repair costs on the Hercules 261 during the quarter.
Moving on to inland, our inland segment reported an operating loss of $8.6 million for the third quarter versus an operating loss of $7.7 million in the second quarter. Inland revenues increased by 11%, due to improvements in average revenue per rig which edged up by $600 per day with $21,400 and due to a slight increase in operating days.
Operating expenses increased to $8.3 million from $6.4 million in the second quarter, largely due to the $3 million multiyear state sales and use tax accrual, partially offset by lower workers’ compensation expense.
We expect our inland segment operating cost will range between $6 million and $8 million in the fourth quarter. This includes higher rebuilds for added marine package and extra crew members on the Hercules 17 and Hercules 49.
Our domestic liftboat segment generated operating income of approximately $9.4 million in the third quarter, more than tripled to $3 million reported in the second quarter. The significant improvement was driven by record utilization and higher average day rates across the domestic fleet. Third quarter utilization averaged 92%, up from 72% in the second quarter, and average revenue per vessel increased by 7% to $7,700 per day.
Domestic liftboat benefited from a full quarter of incremental demand stemming from the Macondo well incident and related oil spill remediation work. By the end of the third quarter, BP began releasing a number of vessels as this type of work began to wind down. We currently have two of our smaller liftboats working for BP compared to 11 that we had working for them at the peak.
Despite the decline in Macondo related work, we have been successful at redeploying some of these vessels to other operators. While we anticipate utilization will go its normal seasonal decline during the winter months, we are expecting fourth quarter utilization to exceed last year’s fourth quarter levels. Operating cost per vessel were relatively flat at approximately $3,200 per day in the third quarter and we don’t anticipate any significant change in the fourth quarter.
International liftboats generated operating income of $9.4 million in the third quarter, up from $6.5 million in the second quarter, due to the slight improvement in average day rates and a reduction in operating costs. Average revenue per liftboat was approximately $23,200 per day, up $1,000 per day relative to the second quarter level.
Utilization averaged 57% during the third quarter, essentially flat sequentially. Operating cost declined to $13 million from $14.9 million, driven by lower repairs and maintenance costs.
For the fourth quarter, we expect operating cost for the segment to trend back up to the $14 million to $16 million range on increased utilization. As John mentioned, we have been able to find work for a few of our larger vessels in recent weeks and expect international liftboat utilization to improve during the fourth quarter.
Our Delta Towing segment generated operating income of $2.4 million, compared to a loss of less than $300,000 in the second quarter. Vessel demand and pricing benefited from the increase in coastal restoration activity and oil spill response work. We reactivated three tugs and five crew boats out of cold stack during the quarter in response to the increase in demand. Utilization is expected to decline modestly during the fourth quarter as the BP related work continues to wind down.
Moving on to general and administrative expenses, our consolidated G&A expenses were $14.5 million, roughly flat sequentially. We don’t anticipate any significant change in G&A expense as we move into the fourth quarter.
Our interest expense was also essentially flat at $21.4 million during the quarter. Our interest rate collar which added approximately $2.7 million to interest expense during the third quarter expired on October 1st. As a result, we expect fourth quarter interest expense will decline to the $18 million to $19 million dollar range.
We reported an income tax benefit of $7.8 million for the third quarter, which equates to an effective tax rate of 34%. Year-to-date our effective income tax rate has averaged 44%, consistent with prior guidance. We estimate our fourth quarter income tax rate will remain in the mid 40% range.
Turning to our cash flow and liquidity, we ended the third quarter with approximately $300 million in total liquidity. This consisted of unrestricted cash and cash equivalents of approximately $135 million and available under our revolving credit facility of $164 million, which is net of $11 million and letters of credit.
Our fourth quarter cash balance will be impacted by the timing of interest payments on our term loan in semiannual payments on our senior notes. All told, we expect to have actual cash interest payments during the fourth quarter of about $36 million, much of which has already been made to date. As a result, as of today, our cash and equivalents are just over $100 million.
Capital expenditures and deferred dry docking costs for the third quarter totaled a modest $8.7 million. We currently estimate fourth quarter capital expenditures and deferred dry docking costs will approximately $15 million.
Lastly, we are in compliance with the financial covenants contained in our credit agreement. Our total leverage ratio was just below 6.7 times at the end of the third quarter, well below the required maximum ratio of 8 times. Our fixed charge coverage was approximately 1.3 times versus the minimum requirement of 1 time.
And, with that, we are now ready to open the call for questions. Operator?
Question-and-Answer Session
Operator
(Operator Instructions). And your first question comes from the line of Collin Gerry of Raymond James. Please proceed.
Collin Gerry – Raymond James
Hi, good morning, guys. Strong quarter. I wanted to follow up I guess the big news this quarter was the well abandonment and decommissioning rule that were laid out by the new regulation. Give me a sense of what are your customers saying about this. I mean is this for real? And what sort of increase in the business can we expect? When we run our numbers, it looks like we’re doing about 600 wells plugged per year and there is quite a bit of room for growth there. I just kind of wanted to get your sense in terms of magnitude and maybe even timing based on some of what you’re hearing from your customers?
John Rynd
Yes, Collin, thanks. I think as we said in prepared remarks, the positive is we have a timeline of three to five years where this work has to get done. We believe as a minimum, it’s a very solid based to our operating levels for our domestic liftboats and potentially with Delta. It’s a little early to get a read on what the impact is early in 2011. If you look back, as you mentioned, there has been a fairly steady state of P&A and platform removal over the last three years prior to NTL. So I think we’re going to see modest growth as we enter 2011. And again the upside for us is you’re going to take the base level of business up and [inaudible].
Collin Gerry – Raymond James
Right. Okay. As it relates to that liftboat business, I mean we did, I think you’re reporting in the operating but if I just look at EBITDA, it looks like about $13 million in domestic liftboat business. Obviously that’s boosted by Macondo but I guess I’m trying to figure out to what extent that’s repeatable as we implement some of these new abandonment and decommissioning of them. In other words, does the fall up in Macondo gets fully replaced by the uptick in the rest of the business?
John Rynd
You know Collin that’s the – we’re hoping for that but I think it’s a little early to bake that in as the operators are going through their plans and their schedule is out the P&As in the platform renewal. So we’re not there yet internally, just again it’s early in the process and we’ll have more clarity as we go through the first quarter to look the plan of attack is for our customers.
Collin Gerry – Raymond James
Okay, and then last one from me if I just switch gears to the international offshore, you went through some, I mean obviously we’ve got a lot of rigs for you guys repricing here. You went through some of the likely, I think you mentioned the 260 in your confidence level there. I may have missed it, but maybe just walk us through briefly again what your outlook is for some of those rigs that are currently working and their ability to renew. And as a sidebar to that I think y’all mentioned in the fleet set the 185 recently got a contracted. Can we get the duration on that?
John Rynd
Yes, I think big picture on all the renewals next year. I think utilization is lesser risk, and what’s the price going to be. We’re seeing increased demand throughout this year and if you look at the level of bid demands around the world, it’s increasing as we look into 2011. So utilization risk is being needed and it will be what it’s a day rate issue. And if you look at kind of current fixtures for those class of rigs that we operate around the world, they’re in the 60,000 to 70,000 range today. Now we’ll say we should get pricing momentum as we progress through 2011. So I think we’re comfortable that we’re not at a significant utilization risk.
Collin Gerry – Raymond James
Right.
John Rynd
Again we were incumbents, we got a very good job operationally with the customers. So I think it’ll be a priced discussion as we progress through 2011. The program with these Chevron subsidiary, Angola is for three years. And as we mentioned, commencing it would be late this year or early next year. We’re targeting very late this year.
Collin Gerry – Raymond James
Okay, that’s it from me. Thanks a bunch.
John Rynd
Thank you.
Operator
Your next question comes from the line of Ian Macpherson of Simmons. Please proceed.
Ian Macpherson – Simmons & Company
Hey John, can you hear me?
John Rynd
Yes, I’m clear Ian.
Ian Macpherson – Simmons & Company
Great, two quick questions. Just an update on further prospects for asset sales, $5 million for cold-stacked rigs, sounds like a winter. How many – how repeatable might that be going forward and then the other question would be on just an update on opportunities for third-party rig management gigs out there?
John Rynd
All right, on the retired asset sale, we anticipate to close the $155 million in this quarter. And that will leave us two more, the retired jackups that we have to sell. There has been power kickers to that. So and we’ve had good success, Stephen and his team have closing of these acquisitions. So we’re not baking anything in but would not surprise if we close those to sometime to 2011.
We also have one more retired barge to sell that we have some interest in that we could move on that. On the third-party management, we’ve got the mini drill situation and right now don’t see a lot more than that we are obviously in discussions with a lot of people that have – that need some help for one reason or another but nothing imminent beyond the current mini drill situation.
Ian Macpherson – Simmons & Company
Is mini drill still promising at this point?
John Rynd
It’s subject to market, I mean that flow rate is going out late this year and be fully commissioned sometime in the first quarter. And we’re actively marketing it around the world and we’ll find work for it.
Ian Macpherson – Simmons & Company
Okay, well congratulations on a good quarter and good luck with that.
John Rynd
Thank you very much.
Operator
Your next question comes from the line of Max Barrett from Tudor Pickering Holt. Please proceed.
Max Barrett – Tudor Pickering Holt
Hi good morning guys.
John Rynd
Good morning Max.
Max Barrett – Tudor Pickering Holt
John, I think you talked about Gulf of Mexico permitting levels being roughly 50% below kind of pre Macondo levels. Does this – does the rate of permit insurances continue to accelerate kind of Q4 and beginning of 2011 and kind of – could you hazard a guess as to when that gets back to normal?
John Rynd
Max, I would love to hazard a guess, but it’s given what we’ve witnessed since June 18, the issuance of NTL 06, I would probably guess wrong. We are pleased that we have seen a recent pickup in the permitting process and I will say there is a lot of man hours being devoted both from the industry and from the BOE standpoint to get to the bottom of this and get these things flowing at a more normal pace. But it’s tough to handicap right now.
Max Barrett – Tudor Pickering Holt
Okay, and then sticking with Gulf of Mexico drilling, you mentioned industry wide utilization being at 78%, and I was seeing day rates in some of your mat rigs tickup a couple of thousand dollars a day. Just wanting to know, just given where utilization stands today, kind of with maybe permitting picking up a little but, just wanted to see maybe where day rates get to 2011. It’s kind of $40,000 a day for spot day rate for mat jackup reasonable?
John Rynd
I think that’s achievable, I think we’ve been kind of focus as an industry on the permitting process. And hats off to our customers who are spending a lot of time and efforts along with the coalition to work through these issues. And we’ll see as we get more clarity, we can’t forget, we got $3.40 gas this morning. So but yes given the tightness in the Gulf of Mexico, supply and demand scenario pushing up rates modestly is very achievable.
Max Barrett – Tudor Pickering Holt
That’s it for me. Thank you.
John Rynd
Thank you Max.
Operator
Your next question comes from the line of Luke Lemoine of Capital One Southcoast. Please proceed.
Luke Lemoine – Capital One Southcoast
Hi good morning.
John Rynd
Good morning.
Luke Lemoine – Capital One Southcoast
John, just looking at the work in the Gulf of Mexico that jack has been awarded over the past several months, more or less most of this has been worker reprogram since sidetracks. I guess kind of going forward, do you think you’re still significant amount of this work out there that can keep rigs business while the BOEM continues to drag the fleet a bit in regards to permits for new wells?
John Rynd
Yes, I think that there is. If you go back – we went back Luke to last year and started tracking our domestic jackup activity, work over sidetracks versus new drills. And we were running even then pre Macondo at about 50-50 split. So going forward, you would think that that split would be like it is this morning, we were about 70-30 work over sidetracks versus new drills that that could continue.
Luke Lemoine – Capital One Southcoast
Okay, that’s it for me. Thanks.
John Rynd
Thank you. Operator, do we have any additional questions? (Operator).
Operator
Mr. (Taylor) please check your line for the mute feature. Your line is open. Your next question comes from the line of James Gorman (ph) of Stifel Nicolaus. Please proceed.
James Gorman – Stifel Nicolaus
Good morning gentlemen that’s Stifel Nicolaus. Just one quick question, I know you mentioned this before, but you were speaking very quickly. What was your exact under the bank credit agreement, you leverage ratio at the end of the quarter?
Stephen Butz
So the requirement was for a maximum leverage ratio of eight times. We came out at 6.67 times for the quarter.
James Gorman – Stifel Nicolaus
6.67 times.
Stephen Butz
That’s right.
James Gorman – Stifel Nicolaus
Okay, thank you very much guys.
John Rynd
Thank you.
Operator
Your next question comes from the line of Mike Breard of Hodges Capital. Please proceed.
Mike Breard – Hodges Capital
Yes, on the drilling permits in the gulf. Is the delay just from the read tightly or how many rigs do you know that have actually been turned down because they weren’t equipped properly or how many of the NLT 06 request have been turned down because they weren’t adequate?
John Rynd
On the NTL 05 which was the equipment and certification process, the industry got compliant with that in a matter of weeks. So nothing has been turned down relative to that NTL, that’s NTL 05. NTL 06, I would not say anybody has been turned down that we’re aware of but permits have not been, have been slow and coming as we mentioned in our prepared remarks, working through the calculation in the methodology of worst case discharge.
Mike Breard – Hodges Capital
Okay, so the –.
John Rynd
That’s the bottleneck is that really the NTL 06 on the flood rates and the discharge.
Mike Breard – Hodges Capital
Okay, so it’s just read tightly and it’s not inadequate plans by the industry.
John Rynd
No I think the industry has always had very robust plans and safety measures in place. So it’s really down. It appears just methodology of the calculations.
Mike Breard – Hodges Capital
Okay, thank you.
Operator
Your next question comes from the line of Matt Beeby of Global Hunter Securities. Please proceed.
Matt Beeby – Global Hunter Securities
Thank you, good morning everyone.
John Rynd
Good morning.
Matt Beeby – Global Hunter Securities
When y’all look at the US Gulf, what you need to see in terms rates and rig backlog to think about bringing stacked rigs back into the marketed fleet and where you pre Macondo considering bringing out some stacked rigs?
John Rynd
Yes, in fact second piece of that first. Pre Macondo we had 12 rigs contracted with an excess of 100 days of backlog and we were contemplating reactivating a 13th rig. We have since gone down to 11 marketed rigs so the 12th rig obviously is that was working back in April, is there to be put back in the market I think to your question, we need – right now our backlog is about 40 days. We’d like to see that stretch 60-90 to get some comfort as we go into the first quarter. And probably need to see the rates move up, another 3,000 to 5,000 a day inclusive of the backlog. Those two combined together we would look hard at it.
Matt Beeby – Global Hunter Securities
Okay, great. And then on the 185, I was just curious if you all – if you’re comfortable giving any kind of guidance on the operating costs on a daily basis for that rig?
Stephen Butz
Yes, it’s about 40,000 a day consistent with all of our international jackup operations.
Matt Beeby – Global Hunter Securities
Thank you.
John Rynd
You’re welcome.
Operator
Your next question comes from the line of Michael Mallardi (ph) of Wells Capital. Please proceed.
Michael Mallardi – Wells Capital
My question has been answered, thanks.
John Rynd
Thank you.
Operator
And your next question comes from the line of Chris Taylor of FBR. Please proceed. Mr. Taylor you may proceed.
Chris Taylor – FBR
Yes, can you hear me?
John Rynd
Yes.
Chris Taylor – FBR
The covenant, it’s pretty obvious that by the end of next year or early 2012, you will be in violation even if there is a decent improvement in your results. And even if somehow you’ve managed to muddle through, it strikes me that the same problem that you have to constrain CapEx and your fleet keeps aging. There needs to be a strategic adjustment here. What are you considering, what alternatives are you looking at for your bank debt and reducing your overall amount of debt?
Stephen Butz
Well the first as far as a conclusion that you came to, that we would reach the covenants by late 2011 or early 2012, I mean I think it’s very early to come to that conclusion given the fact that we have six different business segments with different dynamics and each of them that content to move in varying directions. So don’t know that we would get to that same conclusion. But it’s true the leverage requirements set down within our business over time. But with the good momentum we had in some of the segments right now, domestic offshore is coming off bottom. Our domestic liftboats that outlook has improved significantly as John mentioned with the new NTL that came out.
Our international liftboat business has good growth. Our international offshore business, while the rates – market rates are lower today for some of the contracts that we have internationally. We are putting incremental rigs to work. We just announced the three year contract for the 185. We have improving prospects for the other two idle rigs. So we do think that you could see a nice improvement in the results as we move forward. And then it goes without saying that we’re always just constantly evaluating various capital market opportunities to replace our debt and extent the maturities as we did last year.
Chris Taylor – FBR
Well, but let’s assume that operating results improves only modestly. And what alternatives do you have for the bank debt if you don’t manage to have a dramatic improvement in operating results?
John Rynd
Well there are a number of mitigating measure we can take, I mean we do have a fair amount of cash, we can use to pay down debt. We also have – we can sell assets, we receive pro forma treatment on asset sales, so the extent we sell an asset that’s losing money that can dramatically improve the cushion under our covenants, as well as provide cash to pay down some of the debt. So that’s just to mention one that is an alternative as well.
Chris Taylor – FBR
Have you given any consideration to getting out of the US jackup business because your other entities the liftboat businesses and the international jackup businesses are doing very well. And it seems like the US jackup business clouds of prospects of the other businesses. Is that something you’ve given consideration to?
John Rynd
Yes, I think we’re giving consideration to almost every alternative that is available to us or it may not even be on the radar showing a number of people. The problem is when you’re selling at the bottom, you’re getting a drastic reduced value. So that’s always tough to swallow. And given out they – as we walk through the supply and demand numbers, the business can make sense fairly quickly given the reduced supply of jackups in the Gulf of Mexico.
So and right now the values you would achieve really below our expectation level. So we’ll fine tune it again. We were on the cusp, in the first quarter of this year to make it a profitable business. We think that we can with our good cost control, get back there again. But yes we’ve considered it. At this point it just hadn’t made the right sense to us at the right time.
Chris Taylor – FBR
When do you plan to approach the bank group, assuming there is a not a significant improvement in EBITDA about covenants adjustments or do you plan to wait for a while before doing that?
Stephen Butz
Again we haven’t approach them at this point because we don’t see anything on the near term horizon, thinking back to 2009 and late 2008 after Lehman went bankrupt and the financial crisis began and our industry turned down. And it became evident that at some point it would be difficult to require – to comply with the requirements in the credit agreement. We approached the banks fairly early, very proactively.
It was actually, I think we launched an amendment in late June or early July of 2009. And we wouldn’t have reached those covenants until really March of the following year. So we went early, when we had good visibility of the breach. But again we don’t have any plans to go today.
Chris Taylor – FBR
Thanks.
John Rynd
Thank you.
Operator
Your next question comes from the line of David Smith of Johnson Rice. Please proceed.
David Smith – Johnson Rice
Hi guys, thank you taking my call.
John Rynd
Sure.
David Smith – Johnson Rice
I apologize if you went over this already, but I think you mentioned improving activity in the barge market. I am seeing permits continue to ramp up for the inland waters despite the current gas price. Can you discuss what you think of driving this and what you would look for to reactivate a unit or more?
John Rynd
I think what’s driving it, also I think when you look at the permits David, you got a dissect them on the depth of the permit in the type of well, because for our fleet we need a deeper kind of 15,000 foot and greater to really be competitive. And a lot of that work has been the shallow wells as you will know.
I think one thing that it is driving, it is the – there is no lack of clarity on the rules and regulations. It’s under the governorship of the Louisiana Department of Natural Resources. And the permits are flowing and they know that the – they know the rules that you’re playing under. So I think that has been part of the driver from the low of kind of mid-teens to now in the 20 barge demand.
David Smith – Johnson Rice
I appreciate it. And just on that last part, what would it take to reactivate the unit or more. What would you look for in terms of rate and duration.
Stephen Butz
Well I think that as we said in the prepared remarks, we need a little bit better visibility, albeit we are getting good visibility. We need a little stronger visibility to bring the fourth one out and probably a modest uptick in rates. We can bring a couple of barges out relatively cost effectively but we don’t want to add capacity to a market that may not had the legs and not gives the pay back. We would like to do it to get the surety of the incremental capital back during the term of the contract.
David Smith – Johnson Rice
It makes sense. Thanks again.
John Rynd
Thank you.
Operator
Your next question comes from the line of Richard Repania (ph) (inaudible).
Richard Repania
Thank you, good morning. I have two quick questions, two quick questions, I wish – I hope that you could clarify. One is your working capital this quarter appears to have been positive, a swing to the positive after a negative quarter in last quarter. Could you tell us a little bit more about what’s going on there and what you project for the fourth quarter?
Stephen Butz
Well moving into the fourth quarter, it really depends on your revenue outlook but to the extent, I think most of the analyst today forecast fairly flat revenue overall, looking at the consensus as we move into the fourth quarter. So we shouldn’t have a dramatic change in our working capital in the fourth quarter.
Richard Repania
Okay. And then again could you give a little detail on your cash balance today, I know you gave some detail but could you walk us through the 134.6 you said I think that were close to about $100 million in cash as of right now?
Stephen Butz
That’s right. We’re just over a $100 million and the reason for the reduction was that the timing of our interest payments. We had our interest payment on our bank loan and our interest rate derivative on October 1st and then our semiannual bond payments were due on the 15th. And so that’s really what drove that reduction.
Richard Repania
Does it look you’ll be free cash flow positive again in the fourth quarter from where you’re sitting today?
Stephen Butz
Yes, I mean our CapEx requirements are fairly low this quarter. We mentioned, we’re expecting about $15 million. So from where we are today, I think it would be positive.
Richard Repania
Okay, thank you very much.
Operator
At this time, there are no further questions in the queue.
John Rynd
Thanks a lot everyone for joining us, and we will see you guys probably part of next year for our fourth quarter call.
Operator
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a wonderful day.
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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
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