Hercules Offshore's (HERO) CEO John Rynd on Q2 2014 Results - Earnings Call Transcript

Jul.23.14 | About: Hercules Offshore (HERO)

Hercules Offshore, Inc. (NASDAQ:HERO)

Q2 2014 Earnings Conference Call

July 23, 2014 11:00 AM ET

Executives

Son Vann – VP, IR and Planning

John Rynd – CEO and President

Stephen Butz – EVP and CFO

Analysts

Ian Macpherson – Simmons

Walt Chancellor – Macquarie

Klayton Kovac – Tudor Pickering

Greg Lewis – Credit Suisse

Darren Gacicia – Guggenheim Securities, LLC

J.B. Lowe – Cowen and Company

Operator

Good day, ladies and gentlemen, and welcome to the Quarter Two 2014 Hercules Offshore, Inc. Earnings Conference Call. My name is Kathy and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator instructions) As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Son Vann, Vice President, Investor Relations and Planning. Please go ahead, sir.

Son Vann

Thanks, Kathy. Good morning and welcome everyone to our second quarter 2014 earnings call. With me today are John Rynd, CEO and President; and Stephen Butz, Executive Vice President and CFO, along with members of our senior management team including Jim Noe, Executive Vice President; Troy Carson, Senior Vice President and Chief Accounting Officer; Beau Thompson, General Counsel; and Craig Muirhead, Vice President and Treasurer.

This morning we issued our second quarter results and filed an 8-K with the SEC. Both documents are available on our website, herculesoffshore.com. Today John will begin the call with some broad remarks regarding our forward performance and current market conditions. Stephen will follow with a more detailed financial discussion and provide an update on our 2014 cost guidance. We will then open the call up for Q&A. Before we begin, let me remind everyone that our call will contain forward-looking statements; except for historical facts, all statements that address our outlook for 2014 and beyond, as well as activities, events or developments that we expect, estimate, believe or anticipate may or will occur in the future are forward-looking statements. Forward-looking statements involve substantial risk and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such statements. You can obtain more information about these risks and other factors in our SEC filings.

Now, it’s my pleasure to turn the call over to John.

John Rynd

Good morning everyone and thanks for joining us today to discuss our quarterly results. For the second quarter of 2014 we reported income from continuing operations of $6.6 million or $0.04 per diluted share compared to income of $16.6 million or $0.10 per diluted share in the second quarter of 2013.

There were several significant developments during the second quarter that demonstrate some of the long-term opportunities that exist in our business but also point to the near-term challenges that we are facing. In terms of opportunities, we announced a five-year drilling contract in the North Sea with Maersk Oil for a newbuild jackup rig. Strategically, this investment is another step in our ongoing effort to highgrade our fleet, diversify our revenue mix towards international markets and higher specific assets as well as expand our drilling operations into the North Sea, an area that has long-term potential for other high-spec rigs, the Hercules Triumph and Resilience.

This contract begins a new and important customer relationship at Maersk Oil, one of the most sophisticated and highly respected operators in the region. Our newbuild rig were used to developed their high-profile Culzean field which will further enhance our worldwide expertise in high-pressure, high-temperature drilling.

Financially, the five-year contract enhances our earnings visibility while reducing our speculative risk for new build rig. The contract is scheduled to commence in the third quarter of 2016 at a day rate of $225,000 plus a $9 million mobilization payment and adds $420 million to our revenue backlog. We are constructing the rig at Jurong, a well-established shipyard in Singapore. All-in delivered cost is expected to be approximately $270 million including construction supervision, commissioning, crew up and spares. Certainty of rig availability and various design enhancements were key factors in our winning the award. I believe that we can leverage this award for Maersk to open other opportunities in the region.

Staying with our international drilling segment, last month we announced the contract cancellations of Hercules 267 and our departure from Angola. As we highlighted in our 8-K filed on June 19, the unwillingness of Angola’s national oil company Sonangol to approve any of the local representatives that met our compliance standards left us no choice but to exit Angola. This decision was strictly compliance related and supported by and coordinated with our customer, Chevron. Both parties mutually agreed to terminate the contract with no financial exposure on either side as a result of the termination. But the decision did impact our ability to finalize a three-year drilling contract we had with Chevron on the Hercules Triumph as well as a long-term opportunity to Angola for one of our large lift boats. This event did not damage our long-term relationship with Chevron.

While no one wants to forego such opportunities, at the end of the day we made the right decision in leaving. We spent considerable time and resources attempting to resolve the matter in an appropriate manner. But without the cooperation of Sonangol, we were left with no other option but to leave the country. We take our compliance obligation seriously and this is evidence of that fact.

We are aggressively marketing both the Hercules Triumph and Hercules 267 along with the Hercules 260 which is currently idle in West Africa. For the Triumph, there are several short-term opportunities that we are tracking in West Africa and the North Sea. Rates for these opportunities are in the 160,000 to 190,000 per day range. There’s also some long-term opportunity in West Africa that we are monitoring with 2015 start. In any case, the Triumph will be on day rate in India through late third quarter. Thereafter, we have to wait for monsoon season to end before we can mobilize the rig out of India. We could be back on day rate with the Triumph by late fourth quarter 2014 if it is recontracted in West Africa. If the next contract takes us to the North Sea, we could be off hire into the first quarter of 2015 given the longer mobilization and high risk of weather delays during the winter months.

As for the Hercules 260 and 267, we are working on various opportunities, mainly in West Africa and the Middle East with late 2014 or 2015 start dates. Indicative rates are in the low 100,000 per day range.

Hercules 208 is doing very well and is contracted with Cairn into mid-2015, and we continue to do good work with our three rigs contracted to Aramco.

The Hercules 261 departed the shipyard yesterday after completion of its five-year survey.

Moving on to the US Gulf of Mexico, new contracting activity has been fairly soft since late 2013. One of the main reasons for this softness has been property sales and divestitures and customer consolidation moves over the past 12 months. While I believe these transaction will be positive over the long run, in the near term they have led to a temporary lull in demand as the new owners review and repriortize their drilling plans once they assume control of the properties. This takes time and in some cases not all the personnel from the prior organization move over to the new owners. That can impact how quickly the acquired assets are assimilated by the buyer.

Looking forward, the leading and lagging indicators for activity levels for the Gulf of Mexico shelf were positive. Oil prices are solid. Since the end of 2010 over $11 billion has been invested on the shelf for M&A; lease sale last March showed strong interest in shallow-water blocks with some new entrants. Interest [indiscernible] Apache is back on the shelf as they purchased 17 blocks. There’s been a decent amount of 3D wide-azimuth seismic work going on. All these indicators should lead to healthy activity levels.

We’re attracting over 30 rig prospects in the US Gulf of Mexico or over 1,500 days of rig demand. This is a healthy amount of prospects out in the market. However, the majority of these prospects are likely to start after the hurricane season and into 2015. Conversation with a big customer such as [inaudible] would suggest that they could add some rigs before year end. But in the mean time, we expect that many of the rigs that currently do not have contract coverage through the third quarter could go idle for a period of time.

For those rigs going idle, we will reduce cost principally labor to normal attrition. We also have a five-year special survey due on the Hercules 202 after it completes its contract in September that we will delay until demand picks back up. We are still actively marketing and maintaining these rigs so that when activity does rebound, we can get them back to work fairly quickly.

Despite the choppiness in demand, pricing has been very stable. All new contracts and extension signed so far this year had been at current day rates. We continue to believe that pricing can remain relatively stable in the absence of supply growth. With that said, supply in the Gulf of Mexico is something we are keeping our eyes on.

There are currently 37 marketed jackup rigs in the US including one rig that recently moved here from Mexico. There are four rigs currently working in Mexico and operated by contractors with US presence that roll-up contracts by year end 2014. And there are another 7 rigs in Mexico that have contract expirations in 2015. We believe that several of these rigs will get some form of extension that will keep them in Mexico. For the rigs that do not get extension, it is possible that they could migrate to the US Gulf of Mexico. They can also end up in West Africa, the Middle East or Southeast Asia, depending on where demand is at the time of their release. This is a fluid situation and one that we are closely monitoring.

Moving on to international liftboat business, activity levels in West Africa experienced some good months in April and May. The budget constraints from some of the large consumers of liftboats in Nigeria as well as demand weakness during the rainy season have led to a noticeable pullback in utilization during June and July. We suspect that some of the budgetary issues in Nigeria have been driven by payment problems between NNPC, Nigeria’s national oil company, and their operating partners. We expect these dynamics to continue through the third quarter, possibly improving in the fourth quarter.

Our largest vessel, the Bull Ray, has also been in the yard since late April to undergo its scheduled maintenance. The vessel will be off hire until the beginning of August when it goes back to work at an attractive rate. The Middle East liftboat market remains very firm with full utilization of all three vessels during the second quarter. We expect near full utilization with the Middle East in the third quarter. Given the weakness in West Africa, we could see overall utilization for the international liftboat segment average close to 50% during the third quarter before improving in the fourth quarter.

In closing, we are facing several near-term challenges. In the US we’ll have to get past this current demand lull but we see activity levels improving late in 2014. While the international drilling fleet has near-term availability, I’m confident that our marketing efforts will find suitable work for these rigs.

Our liftboat operations in West Africa are also – see some choppiness in utilization this year but should improve before year end. For all of the near-term challenge, the five-year contract with Maersk in the North Sea reflect some of the attractive opportunities that exist in the shallow water offshore market. It also shows that we have the right people in place to capitalize on those opportunities. With that overview, let me turn the call over to Stephen.

Stephen Butz

Thank you, John, and good morning everyone. As normal, my comments today will focus on sequential comparison of our quarterly results. I’ll also provide an update to our operating cost and capital spending guidance before opening the call for Q&A.

For the second quarter we reported income from continuing operations of $6.6 million or $0.04 per diluted share compared to income of $19.9 million or $0.12 per diluted share in the first quarter. Our second quarter results include a gain of $17.9 million related to the sale of three cold stack rigs as well as a charge of $4.8 million for debt issuance fees and early retirement cost; while first quarter results included $15.2 million in debt issuance fees and early retirement cost.

Our EBITDA excluding the rig sale gains was $76 million for the second quarter of 2014 compared to $98 million in the first quarter. Second quarter EBITDA was negatively impacted by lower utilization levels in domestic and international offshore segments as well as lower day rates for our international liftboats resulting from a shift in asset mix.

Moving on to our segment results, I’ll begin with domestic offshore. Domestic offshore reported operating income of $57 million which include a $7.4 million gain from the sale of Hercules 250 in 2002. This compares to operating income of $52 million in the first quarter. Segment results were affected by a slight decline in utilization partially offset by a modest improvement in pricing and lower operating cost. Utilization declined to 79% from 83% in the previous quarter as the Hercules 150 and 201 were down for most of the quarter to complete their five-year surveys, while the Hercules 212 incurred just over two months of downtime due in part to equipment upgrades. This is partially offset by higher utilization on the Hercules 205 and 264, both of which completed their surveys between late first quarter and early second quarter.

Our day rates averaged 108,000 during the second quarter, an increase of 1,600 from first quarter levels due to contract rollovers at higher rates on certain of our rigs.

Domestic offshore adjusted operating expenses of $71 million excluding previously mentioned asset sale gains declined from first quarter expenses of $73 million. The decrease was primarily driven by reductions in state and local sales tax expense and labor, partially offset by an increase in repair and maintenance expense.

As John mentioned, we’ve instituted various cost reduction measures given the short-term weakness in demand. These include deferment of various equipment upgrades and certain capital projects and a reduction in expected labor and burden. As a result, we believe operating expenses for domestic offshore will decline to the mid-to-high $60-million range in the third quarter. As such, we’re reducing our cost guidance for the year to the $280 million range which is approximately $20 million to $30 million lower than our previous guidance. These figures exclude the impact of gains on asset sale.

Our international offshore segment reported operating income of $7 million which includes a $10.5 million gain on the sale of Hercules 258 compared to operating income of $15 million in the first quarter.

Revenue declined by 11% to $72 million as we incurred downtime on the Hercules 261 for survey work as well as downtime on the 260 in addition to the contract cancellation on the 267. This is partially offset by a full working quarter on the Hercules 208 after completing a survey earlier this year. Overall, these factors cause the decline in utilization to 63% from 88% in the first quarter.

Average revenue per day increase by 16% to 158,000 as the mix of working rigs were more heavily weighted toward our higher-specification rigs, the Hercules Triumph and Resilience which are on higher day rates.

Adjusted operating expenses for the second quarter were $55 million, excluding the previously mentioned gain on asset sales compared to operating expenses of $48 million at previous quarter. Much of this increase is related to incremental cost from a full quarter of operations with the Resilience as well as cost related to our Perisai management agreement. We expect international offshore operating cost to increase in the third quarter to the high $50-million range. As incremental deferred mobilization cost on the Resilience are somewhat offset by expected cost reductions on the 260 and 267.

Turning to our liftboat segment. The division reported an operating loss of approximately $700,000 compared to operating income of $6 million in the first quarter. The decrease profitability was largely driven by a $5.3 million provision for an uncollectible receivable and business mix. While pricing by vessel class has been relatively stable, our average revenue per day for the fleet declined by 11% during the second quarter to 24,200 due to the shift in utilization that favored the lower priced small and mid-sized vessels. Part of that shift was due to downtime for the Bull Ray, our largest vessel in West Africa as it underwent scheduled maintenance in the dry dock for most of the quarter.

Overall utilization increased to 61% from 58% during the first quarter, primarily reflecting strong demand in April and May. However, as John discussed, activity levels in West Africa experienced a significant reduction in June and we expect the sluggish working conditions in the region to persist through the third quarter.

Operating expenses of $19 million declined slightly from $20 million during the first quarter. Third quarter operating expenses are expected to remain in the $20-million range.

Moving on to our other income statement and cash flow items. Our general and administrative expenses increased to $22.5 million from the first quarter level of $18.2 million due to the international liftboat receivable provision previously mentioned. We expect G&A expenses to range between $18 million and $19 million per quarter for the remainder of the year.

Depreciation and amortization expense was $44 million in the second quarter and is expected to remain in the mid $40-million range per quarter for the remainder of the year. Interest expense was $26.1 million compared to $22.9 million in the first quarter, as capitalized interest was minimal during the second quarter versus approximately $3 million in the first quarter. We expect to capitalize a relatively de minimis amount of interest the remainder of the year related to our new build under construction as contract of the Maersk. Therefore, interest expense is expected to remain relatively flat for the remainder of the year.

Moving on to income taxes. While the effective rate for the first half of 2014 of 32% is in line with earlier guidance, at relatively low levels of profitability and operating in the number of jurisdictions that we do, it’s easy to experience large fluctuations quarter to quarter and get rates that are not particularly meaningful. As our outlook weaken in the second quarter, it had an adverse impact on the tax rate.

Looking forward to the second half, we expect our effective income tax rate to be in the mid 40% range. However and perhaps most importantly, our cash taxes are still estimated to be less than $25 million for 2014.

As for capital and drydocking expenditures, we spent approximately $60 million during the second quarter, including the $24 million payment to Jurong shipyard for our new build jackup. We expect capital expenditures for the remainder of 2014 to be in the low $45 million range. This guidance is approximately $15 million below our prior full-year 2014 guidance when excluding the new build payment as we defer certain projects including the special survey on the Hercules 202.

We ended the quarter with $192 million of cash and equivalents and $139 million available under our $150 million revolving credit facility. In April, we redeemed the remaining $80 million of our 7 ⅛ [ph] senior secured notes. After that redemption, our entire debt balance now consist of unsecured notes with no significant maturities until 2021 except for our 200 million, 10 ¼ notes which we have the option to redeem next April and either refinance at a lower rate or retire.

In closing, our third quarter results will likely be impacted by lower utilization for our jackups in the US and liftboats and jackups in West Africa. We’ve already taken steps to reduce cost and defer spending without hindering our ability to respond to an expected turnaround in activity later in the year and during 2015. We’ve also made great strides at further pruning our cold stacked assets, including the current quarter sale of three stack rigs for $22 million. We also have a number of other sale opportunities for cold stack rigs that could materialize before year end.

Finally, our liquidity remains strong and we’ll continue to seek attractive growth opportunities such as our five-year rig contract with Maersk. With that, we’re now ready to open the call for questions. Kathy?

Question-and-Answer Session

Operator

(Operator instructions) The first question comes from the line of Ian Macpherson of Simmons.

Ian Macpherson – Simmons

Hi. Thank you. John, in your prepared remarks you suggested that pricing is going to remain flat for the time being, but clearly the demand is soft for the near term. What would it take to make pricing weaker day rate wise sooner than you expect? Do you think that we would have to see more rigs coming in from Mexico or do you think the domestic demand picture would have to get worse than what you currently contemplate in order for day rates to come under pressure this year or in Q1?

John Rynd

I think it’s going to be a combination of – I know this is pretty basic economics 101 – but you’re on, it’s either – if we don’t get an uptick in demand and we see rigs migrate back to the US, one has to assume that that will equate to day rate pressure.

Ian Macpherson – Simmons

And just with regard to the strategy going forward, are you looking at other newbuilds similar to the one that you’ve recently ordered or are there other opportunities for the market to do that and just update us on the longer-term asset strategy for high-grading Hercules going forward?

John Rynd

Thank you, Ian. We’ll continue to pursue those opportunities. There’s nothing that’s really queued up near term but we continue to pursue those opportunities as thus – the industry I think that we’re in a unique position with Maersk and we capitalized on it. And I think our stated goal is continue to be – renew the fleet but do it judiciously and carefully and I think that renewal also looks to the liftboat side of our business. We made the acquisition of a relatively new liftboat last year, the Bull Ray that has performed very well. So as we look out, it’s looking internationally, newer jackups and newer liftboats, but again, we’re going to have to be very judicious for that.

Ian Macpherson – Simmons

Are there any – could you remind me, are there any equity opportunities with the Perisai rigs going forward?

John Rynd

No, we just have a first right of refusal.

Ian Macpherson – Simmons

Okay. All right, great. Thank you.

John Rynd

Thank you.

Operator

The next question comes from Walt Chancellor of Macquarie.

Walt Chancellor – Macquarie

Hey, good morning.

John Rynd

Good morning.

Stephen Butz

Good morning.

Walt Chancellor – Macquarie

John, maybe you could put the supply side in perspective for us internationally. I know that sort of remains a question and whereas you felt like in the past you had a lot of certainty on what supply would like on the international jackup market where do you see it now?

John Rynd

Well, I think that if you look at just the order book is 148, 150. And I think you really have to question and I’m not saying that just because it’s telling our story or playing to our book. When you’ve had almost every rig that’s been ordered the last nine months, have been ordered in China with relatively no downpayment at yards that have not build rigs before, I think some of that supply is suspect. I think the supply in 2015 though, plus or minus about 64, most of that is fairly real. Some of that will slip into 16 and most of that is speculators. Again, in ‘15 it’s pretty – two-thirds of the supply coming in 2015 is back half dated. So I think as you work yourself through the first quarter of next year and really see what’s going to get delivered and when and by whom, we’ll get a better picture.

But, I mean, you have to be concerned about supplies. Supply is our enemy in our business and we’ve got potentially a lot of supply entering the market in the back half of ‘15.

Walt Chancellor – Macquarie

Great. Thanks. And then, I guess, to shift gears back to the US Gulf of Mexico and on the demand side in particular, appreciate the color on the prospects you’re looking at and out in the future, as I take a look at it, I see a number of signs of green shoots for emerging demand, but I guess my question is, of those 30 prospects that you lined out now how much of that is do you think can be realized in 2015 or are these may be even longer-term type prospects?

John Rynd

Now, these prospects that I mentioned on my prepared remarks are all fourth quarter ‘14 through about the first quarter of ‘15. These are real near-term real prospects that we’re monitoring.

Walt Chancellor – Macquarie

Okay, great. And of that, I guess, of that amount, how much of that is sort of typical blocking and tackling with existing customers and how much of that is some of these more emerging type exploratory efforts or maybe new players if you could quantify that?

John Rynd

Almost all of this is blocking and tackling with the existing customers.

Walt Chancellor – Macquarie

Okay, great. With that, I’ll turn it over. Thanks.

John Rynd

Thank you.

Operator

Thanks for your question. The next question comes from Klayton Kovac of Tudor Holt.

Klayton Kovac – Tudor Pickering

Hey, guys.

John Rynd

Good morning.

Klayton Kovac – Tudor Pickering

So first question for me is at what point do you guys decide to cold stack some of your idle Gulf of Mexico jackups?

John Rynd

Oh, that’s off in the future, right now, Klayton, [indiscernible] if we were looking at the prospects that we see in front of us that should come to pass late this year in the first quarter ‘15 it’s too early to make that call at this point, but that is a call that we’ve made before and we’ll make again if we think the market demands us to do so.

Klayton Kovac – Tudor Pickering

Okay, great. And then just as a follow up. So given you guys have a few rigs on long-term contracts in Saudi, what’s the likelihood of a rig like the Triumph going to work there?

John Rynd

It’s a possibility. Timing could be a challenge. The potential demand coming out of Aramco, it looks to be pretty solid in ‘15 and ‘16 from an incremental basis. But again, specific to the Triumph it could be a timing issue given that do you want to wait that length of time. But if we see it as a real opportunity we could play the short-term market and keep our position – keep our position open if that opportunity does arise.

Klayton Kovac – Tudor Pickering

Okay. Thanks, guys. I’ll turn it back over.

John Rynd

Thank you.

Operator

You have no questions at this time. (Operator instructions) Next question comes from the line of Mr. Greg of Credit Suisse.

Greg Lewis – Credit Suisse

Thank you and good morning. I guess I changed my name to Mr. Greg.

John Rynd

Always nice to be respected.

Greg Lewis – Credit Suisse

That’s right. Anyway, thanks, John. So I had a question for you; a couple of questions. One is, in regards to some of the softness or slowing down of activity in west Africa, when we think about the equipment that Hercules has on the liftboat side, on the jackup side, at what point does it make sense to potentially look to market these assets elsewhere and potentially move them out of the basin or at this point there is demand out there that you’re seeing and it’s just sort of a little bit of a delay.

John Rynd

Yes, that’s a good question. I think that we are marketing the assets in West Africa both in the Middle East and West Africa. And I think if you just got to do the math, if you think if the market is going to be there it’s really more economically efficient to stay and wait. If you don’t have a job anywhere else and then speculatively move the rig to another region, it’s almost the same argument, Greg, that we gave why we don’t see rigs moving from internationally back to the US Gulf of Mexico. That math still works even if you’re not where you’re trying to move into regionally. So we still think there’s opportunities in West Africa. We’ll play that out. If not, we are marketing them in other regions.

Greg Lewis – Credit Suisse

Okay, great. And then you mentioned briefly some of the questions you had or concerns you had about the potential order book with a lot of jackups being built in China. Are we at a point now where we’ve seen some Chinese shipyards start to fill up in [indiscernible] to potentially looking to sell some of these jackup orders that are in the order book?

John Rynd

We have not been approached in mass by that. There’s always one or two out there floating around but we haven’t seen a shift to where they’re really marketing those assets. And I think the interesting thing right now and we’ve talked about this before, asset values always trail a cycle, whether they’re too high as the cycle could be hit in a soft patch and they’re too low when things are rising. So I think we have not seen really the asset values on the speculative jackups come to a level where they’re going to get any interest.

Greg Lewis – Credit Suisse

Okay, perfect. Well, hey guys. Thank you for the time.

John Rynd

Thank you.

Stephen Butz

Thank you.

Operator

Thank you. The next question comes from the line of Darren Gacicia of Guggenheim.

Darren Gacicia – Guggenheim Securities, LLC

Hi. Thanks for taking my question. I wanted to ask, given the new builds that are coming that are on contracting and obviously as you kind of outline in your earlier comments, coming from probably more speculative or sort of non-standard players, as you think towards fleet renewal, what do you think the opportunity set is in a maybe to acquire some of those rigs? How would you think about doing it? How would you think about financing it as you went along?

John Rynd

Yes, Darren, I think that really as I said on the previous color with Greg asset values don’t – are just too inflated we think right now. Given the amount of the order book and we don’t know where demand is going to be in 2015, so at this point it’s just that you’re in a sit-and-wait mode to see where the whole thing shakes out, where demand is, where asset values are. It just feels like it’s a little early right now to buy anything in a speculative basis. If we could tie in to a contract, that’s a whole different kettle of fish. But right now just to go to a yard that’s about to deliver a rig and kind of pay with the current asking prices are just feels a little rich for us.

Darren Gacicia – Guggenheim Securities, LLC

Well, how does a [indiscernible] work? Do you end up talking – do you talk to the person who’s tried to – who’s contracted to build the rig? Do you talk to the yard itself kind of in a distressed asset situation or do you maybe say, “Look, we know where the contract is; we’d like to match your asset with it, can we make a transaction happen?” Like how does the mechanics of trying to like – it may give a sense of kind of timing as well as everything plays out.

John Rynd

Not to cop out but it’s kind of all of the above, depending on the situation. If you look at a lot of these rigs have been built with de minimis down payment, so the onus is on the shipyard so they have a very vested interest. So that approach could go to the shipyard. If you happen to know who’s building it and you have a relationship and you can start there.

Darren Gacicia – Guggenheim Securities, LLC

And the shipyards really haven’t got nervous yet?

John Rynd

They’re playing their cards pretty well.

Darren Gacicia – Guggenheim Securities, LLC

Understood. Thank you very much.

Operator

Thank you for your question. The next question comes from J.B. Lowe of Cowen and Company.

J.B. Lowe – Cowen and Company

Hey, good morning guys. I’m sorry if this was already gone over, but if you guys have – for whatever rigs that you guys have in the Gulf that are going to remain idle up through hurricane season, would you guys keep all the crew on board and basically have a full operating cost for the whole time or would you be able to reduce it? And if so, by how much before maybe bringing everyone back on next year some time?

John Rynd

Yes, now, what we’re doing as the rig goes idle, we’re backfilling the active rigs off the idled rigs. We’re not hiring any people. We haven’t been hiring people for roughly about 60 days to 90 days. And yes, the normal amount of attrition especially at the entry level, so we’re just using the idle equipment as bench strength. So when this thing turns and we put a rig back to work, that’s had its crews spread out, give us 30 days and we can get back. In a full kind of – we can get our cost down to roughly 20,000 a day from the current 36,000 to 38,000, depending on the rig. So we can drop almost the operating cost, not quite in half.

J.B. Lowe – Cowen and Company

Okay. That’s perfect. Thanks so much.

John Rynd

Thanks.

Operator

Thanks for your question. The next question comes from [Mike Preuss of Hodgson Capital] [ph].

Unidentified Analyst

Yes. You’ve got a couple of contract extensions with Energy 21 EPL and a new contract. Also, they give contract to Rowan Rig [ph]. Do you see that as fulfilling all of their rig needs or are they just getting started with their drilling program?

John Rynd

In regards to the Energy 21 contract extensions, I think that’s going to fill the book that they need from us. I think that’s going to set down near term on their budget cycle. They do a July to June so they’re just entering their yearly budget cycle. I think there’s potentially have some upside into ‘15 with Energy 21 and the long extension with Arena [ph] fulfills their current demand.

As you know, we have two rigs working for Arena [ph].

Unidentified Analyst

Okay. Thank you.

Operator

Thank you for your question. I would now like to turn the call over to Son Vann for closing remark.

Son Vann

Thank you, Kathy, and thank you everyone for joining us today. A replay of this call will be available on our website later on this afternoon. Give us a call if you have any further questions.

Operator

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

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.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!