Rowan Companies CEO Discusses Q3 2010 Results - Earnings Call Transcript

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Rowan Companies (NYSE:RDC)

Q3 2010 Earnings Call

November 02, 2010 11:00 am ET

Executives

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

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

Mark Keller - Executive Vice President of Business Development

Suzanne McLeod - Director of Investor Relations

David Russell - Executive Vice President of Drilling Operations

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

Analysts

Robert MacKenzie - FBR Capital Markets & Co.

Collin Gerry - Raymond James

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

Ian Macpherson - Simmons & Company

Arun Jayaram - Crédit Suisse AG

Matt Conlan - MKM Partners.

James West - Barclays Capital

Robin Shoemaker - Citigroup Inc

David Smith - Johnson Rice & Company, L.L.C.

Douglas Becker - BofA Merrill Lynch

Michael Urban - Deutsche Bank AG

Operator

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

Suzanne McLeod

Thank you, LaTonya, and good morning. Welcome to Rowan's Third Quarter 2010 Earnings Conference Call. Joining me on the call this morning are Matt Ralls, President and Chief Executive Officer; Mark Keller, Executive Vice President, Business Development; Tom Burke, President and Chief Executive Officer of LeTourneau Technologies; and Bill Wells, Senior Vice President, Chief Financial Officer and Treasurer, who will have prepared remarks. Also in the room to respond to questions are David Russell, Executive Vice President of Drilling Operations; and Kevin Bartol, Senior Vice President of Corporate Development.

Before Matt begins his remarks, I'd like to remind you that during the course of this conference call, certain forward-looking statements may be made within the meaning of the Private Securities Litigation Reform Act of 1995, including statements as to the expectations, beliefs and future financial performance of the company that are based on current expectations and are subject to certain risks, trends and uncertainties that could cause the results to differ materially from those projected by the company.

With that, I'll turn the call over to Matt.

W. Ralls

Thanks, Suzanne. Good morning, everyone, and thanks for joining our third quarter 2010 earnings call. I want to begin by noting that in September, we completed our acquisition of Skeie Drilling in production and its three in class high specification jack-up rigs, and I want to take this opportunity to welcome the SKDP employees joining Rowan.

The talented team at Skeie has worked hard with the Keppel FELS shipboard in Singapore to help design and deliver this new generation of rig that will be certified to work in the demanding Norwegian sector of the North Sea, where we see increasing demand for high-spec jack-ups. This design also provides our customers the flexibility of using a jack-up for simultaneous drilling and production operations.

We are proud to own these exceptional drilling rigs and look forward to working with our new team members from SKDP to make this a successful investment.

On that note, I am very pleased to announce that we've received a commitment for the Rowan Viking, the first of the three in class rigs to be delivered. We are not yet at liberty to disclose the customer pending partner approval, but we believe the customer could have work in the U.K. sector for the rig well beyond our initial 19-month commitment. The rate is in the low 200s which is slightly below our target day rate to achieve a 12% internal rate of return. However, the anticipated contract commencement date in early March 2011 allows us to go straight to work following mobilization and operational and regulatory startup.

We thereby avoid idle time following operational availability, which was always a risk for this rig since we had so little time for marketing prior to delivery. We still see multiple opportunities which Mark will discuss in his comments for the second and third in class rigs that Rowan Stavanger and the Rowan Norway when they're delivered next year and continue to believe that we can meet or exceed our hurdle day rates.

This commitment continues our unbroken string of having work for our new builds following delivery and operational readiness. It also brings our total new contracts and commitments, added during 2010, to $1.3 billion, which is a significant achievement considering that utilization for the worldwide jack-up fleet has been in the low to mid-70% range this year. It is a testament to the ongoing demand for high-spec jack-ups.

I'm pleased with our results for the quarter, which reflect our continuing focus on cost-effectiveness and the progress we're making on reducing our effective tax rate. As Bill will explain, the quarter included a rate adjustment related to an expected full year tax rate of 26%. As our new rigs are delivered to our offshore drilling subsidiaries, our effective tax rate is projected to continue to improve.

Our balance sheet following the SKDP transaction remains quite strong, and we expect to extinguish all of the SKDP secured debt in the fourth quarter, utilizing cash provided by our unsecured debt offerings in 2009 and 2010. Capital expenditures related to our newbuild program, including the SKDP rigs, will largely be completed between now and the end of 2011 with an expected peak net debt to capitalization ratio in the mid-20% range, in line with our intention to maintain and invest in great credit profile.

Turning to LeTourneau. We are continuing to improve efficiencies and overall execution as new people are added to the management team and these strategic priorities are steadily bringing LeTourneau closer to an eventual separation from Rowan. In the meantime, the mining group continues to see strong demand for its innovative line of front loaders while the recent announcements regarding new and potential rig orders have boosted our optimism regarding improved demand for the drilling systems and offshore products groups.

With that, I'll turn it over to Mark to discuss the market for our rigs.

Mark Keller

Thanks, Matt. According to ODS-Petrodata, there are currently 468 jack-ups worldwide. Demand is 328 rigs, with utilization at 70%, down 6% from the May peak of 76%. Despite the softening in worldwide demand, high-spec jack-ups continue to outperform the industry with a consistent utilization rate of 93%. Rowan's high-spec fleet is currently fully contracted.

Demand remains strong for these units as evidenced by our recent contract awards. As I mentioned on our last call, the EXL-II has contracted the BP for three works of work in Trinidad. The rig is in the final stages of modifications and acceptance and is expected to commence operations in late November. The EXL-III received a verbal commitment from McMoRan for one ultra-deep gas well commencing upon delivery in January 2011 at a day rate of $140,000 and that Joe Douglas also received a verbal commitment from McMoRan for one ultra-deep gas well commencing upon delivery in third quarter of 2011 at a rate of $180,000. Additionally, the Bob Palmer and the Ralph Coffman were recently contracted for three-year terms to Saudi Aramco for a total contract value of approximately $540 million. And as Matt mentioned, the Rowan Viking will go to work in the U.K. sector of the North Sea at a rate in the low 200s for approximately 19 months, commencing in February or early March 2011.

International tender and inquiry activity remains strong, and we currently see demand for more than 70 jack-ups over the next two years. Regions such as the North Sea, the Middle East and Southeast Asia are driving this demand. The drilling requirements in these tenders are increasingly stringent and Rowan's fleet of high-spec jack-ups is well-positioned to take advantage of these opportunities. I will now address our areas of operations.

Let's begin with the U.S. Gulf of Mexico. Supply in the region is 81 jack-ups while demand is 33 rigs for a utilization of 41%, remaining flat since our last call. We currently have nine jack-ups in the region with a contracted utilization of 78%. However, our average day rate of $119,000 leads our peer group by $49,000 per day. Four of our jack-ups are currently on contract with McMoRan, and we are very pleased with the partnership we built with them over the past few years. They currently have plans to expand their deep shelf exploration program and we expect to do all of their deep gas drilling.

While we have been fortunate in not being significantly impacted by permitting delays in the Gulf of Mexico, we continue to await permit approval for the Rowan Louisiana on the boudan [ph] well. The uncertainties surrounding the permitting process has caused contractors to tender their premium rigs out of the U.S. Gulf of Mexico. After the Bob Palmer and the Ralph Coffman migrate to the Middle East, only 10 marketed jack-ups that are 300-foot cantilevers or above will remain on the shelf. This remains a point of high concern for U.S. E&P companies.

Now turning to the North Sea. Supply is 38 jack-ups while demand is 31 rigs and contracted utilization is 82%. Rowan currently has three Super Gorilla class jack-ups in the area with an average day rate of $179,000. All three jack-ups are committed on long-term contracts. The Gorilla VII has completed modifications in the Dundee shipyard after mobilizing from West Africa. The rig is currently waiting on weather and is expected to commence operations for Apache sometime this week.

The North Sea remains one of the most active regions in terms of tenders and inquiries for high-spec jack-ups, with demand for as many as 25 units over the next two years. We remain confident in our ability to contract the Rowan Stavanger and the Rowan Norway prior to their respective delivery dates and consider the North Sea our focus market for these rigs.

Moving on to the Middle East. The supply on this region is 116 jack-ups while demand is currently at 87 rigs and contracted utilization is 75%. Rowan has nine jack-ups in the Middle East, six units are currently contracted at an average day rate of $131,000. The Middle East is expected to see an increase in demand in the near future, with Saudi Aramco up for tender for an additional six units, two in the Al-Khafji Joint Operating [Operations] area and recent approvals for South Pars projects in Iran. We are hopeful that these opportunities will absorb some of the excess capacity currently in the region.

Regarding our Onshore division, we have a marketed fleet of 28 land rigs located in Texas, Louisiana, Oklahoma, Alabama and Alaska. Currently, 93% of our fleet has contracted at an average day rate of approximately $20,000. All 23 of our 2,000-horsepower rigs are contracted at 100% utilization as operators realize the advantage of fast-moving high-spec land rigs. Tender activity for high-spec land rigs remains high. The U.S. shale and gas plays continued to be the driving force of the land rig market, including the Haynesville and the deep Bossier areas and Rowan remains active in these regions.

This concludes our market overview. I will now turn the call over to Tom Burke.

Thomas Burke

Thank you, Mark, and good morning. This is another quarter of progress for LeTourneau, as we strengthened our management team, increased our focus on manufacturing efficiencies and saw a growth in our Mining business and a significant upturn in prospects for new jack-up orders. Mining markets continue to be very active.

Indices of mine commodity prices reached new highs this quarter, with continuing strength expected. These trends have led to significant greenfield mine startups, as well as replacement machines for existing fleets. Against this backdrop, we ended the quarter with 13 loaders in backlog, another 20 loaders, where we are well along on finalizing orders and a strong ongoing Pars business. This activity reflects our highest levels in several years. As a result, we expect solid growth in top and bottom line mining results in 2011.

In our Drilling Products business, jack-up quotation activity picked up significantly in the quarter. In fact, it was more active than we have seen for some time. This seems to come from a combination of both fleet replacement efforts and specific contracts opportunity. While it is too soon to say how this trend will affect our sales, conditions seem favorable for adding kits to our backlog over coming quarters.

As an indication of this trend, on October 19, Lamprell PLC, a shipyard in the UAE, entered into an MOU with Eurasia drilling for the construction of a LeTourneau design super 116E jack-up rig to work in the Caspian Sea. We're delighted with this announcement and are working with Lamprell to bring this project to fruition.

In our Drilling Capital Equipment business, we have been working through our backlog over the last several quarters and as with jack-up rig kits, floating activity has recently increased, leading us to be more optimistic for this business unit over the intermediate term.

As I mentioned earlier, we continued strengthening our management team this quarter, with our latest addition being Pharr Smith who will lead the commercial activities for all LeTourneau's oilfield businesses. Pharr started his career with LeTourneau, and brings a deep background of industry experience and contracts, having most recently served as VP Engineering, Project Management and New Construction for Transocean.

That concludes my prepared remarks. I will now turn it over to Bill Wells.

William Wells

Thank you, Tom, and good morning, everyone. Starting with our drilling operations. Our third quarter 2010 revenues were $290 million, up by 12% over the prior year, but down by 12% from last quarter. The year-over-over increase reflects the impact of offshore fleet additions, and increasing land utilization, while the sequential decrease results primarily from lower average day rates following the completion of work offshore Norway and West Africa.

We expect that our fourth quarter 2010 drilling revenues will be down from third quarter levels as the impacts of the Gorilla III, which completed work offshore Eastern Canada in October and the Bob Palmer which is on route to the Middle East, offset the late Q4 start up of the EXL-II offshore Trinidad and the return to service of the Gorilla VII in the North Sea this week. Our current drilling revenue backlog totals approximately $1.6 billion. We expect that approximately 16% of that amount will be realized as revenue during the remainder of 2010 and another 41% will occur in 2011 and the balance in 2012 or beyond.

Our third quarter drilling expenses of $142 million were approximately 17% above the prior year and 2% above last quarter as a result of fleet additions between periods, but only slightly above our previous guidance. The year-over-year increase reflects higher labor and related personnel costs, maintenance, reimbursables, and certain other activity-based expenses resulting from a 37% increase in operating days between periods that were partially offset by lower insurance costs. The sequential increase results primarily from higher reimbursable expenses.

We expect that our fourth quarter 2010 drilling expenses will be in the range of $147 million to $150 million, a 4% to 6% above the third quarter level, with most of that increase associated with the EXL-II, the Gorilla VII and the first in-class rig, the Rowan Viking. That would bring our full year 2010 drilling expenses to approximately $565 million or down by 2% from our previous guidance reflecting further progress on cost effectiveness.

Turning to our manufacturing operations. Third quarter revenues totaled $197 million, including $49 million of arm's length sales to our Drilling division. External revenues were $148 million during the third quarter, up by 10% over the prior year, but down by 9% from last quarter. Our Drilling Products and Systems segment contributed $127 million or 65% of total manufacturing revenues during the third quarter, including sales to our Drilling division. External revenues were $78 million and featured $52 million from offshore rig projects and $13 million from drilling equipment.

Our Mining, Forestry and Steel Products segment contributed revenues of $70 million during the third quarter, up by 68% over the prior year, but down by 22% from last quarter. Revenues include $22 million from shipments of mining equipment and $10 million from steel plate. We shipped four mining loaders during the third quarter, including two L-2350 and one L-1850 units. Our combined aftermarket parts and service revenues were $44 million during the third quarter, up by 48% over the prior year and by 23% over last quarter. Average aftermarket margins as a percentage of revenues have remained consistent among these periods in the low to mid-40s.

Our average operating margins is 15% of manufacturing revenues during the third quarter, up from 13% in the prior year, but unchanged from last quarter and slightly below our previous guidance due largely to warranty costs and inventory and costs to sales adjustments. At September 30, our manufacturing backlog of $267 million included $112 million related to offshore rig projects, $49 million of mining equipment, $39 million related to land rig projects and $23 million of drilling equipment, with the remainder primarily parts and other components. We booked approximately $59 million in orders in the third quarter or approximately 40% of external revenues during the period.

We expect that approximately 62% of our external manufacturing backlog at September 30 will be realized as revenues in the fourth quarter, in which case, external revenues in 2010 will slightly exceed 2009 levels. Based on the expected mix of sales, our average operating margin in the fourth quarter should remain in the mid-teens. Our third quarter depreciation expense totaled $47 million, which tracked our previous guidance and was up by 8% over last year and by 2% over last quarter, primarily due to rig fleet additions.

Our latest estimate for 2010 depreciation is in the range of $189 million to $190 million, including approximately $50 million to $51 million in the fourth quarter. Our third quarter SG&A expenses totaled $35 million, up by 44% over last year, but down by 4% from last quarter and above our previous guidance, primarily due to settlement costs, including an additional $0.7 million provision to terminate our agency agreement in Mexico and $1.9 million to settle a nine-year-old dispute in Chile. Costs were otherwise in line with expectations.

Our latest estimate for 2010 SG&A cost is a range of $129 million to $130 million for the year, including approximately $32 million to $33 million in the fourth quarter. Interest expense, net of interest capitalized, was $8.2 million during the third quarter, above our previous guidance as a result of our $400 million bond offering in August. Assuming no further borrowings and reflecting our full redemption of outstanding SKDP debt before year end as planned, we estimate fourth quarter 2010 interest expense will be in the range of $20 million to $21 million, about 1/2 of which should be capitalized.

Our expected full year effective tax rate is approximately 26%, down from 29% previously forecast as a result of the outbounding of one additional offshore rig into our international structure. Following the MARAD's approval, we were finally able to move the Gorilla VII to a foreign subsidiary, thus we provided taxes at a 19% rate in the third quarter.

Third quarter cash flows attributable to the SKDP acquisition included $259 million of SKDP cash on hand, less $39 million of SKDP debt purchased by Rowan, part of the acquisition effective date, $13 million paid for SKDP equity and $6 million of transaction costs. The resulting $201 million of net cash acquired included $193 million dedicated to the final shipyard payment on the Rowan Viking. Another $44 million of SKDP debt was purchased during the third quarter after the acquisition effective date.

Property and equipment additions totaled $111 million in the third quarter, which included $13 million for our third 240C jack-up, $56 million for the EXL rigs and $34 million for existing fleet, including contractually required upgrades. At September 30, we had approximately $964 million of remaining capital expenditures under our newbuild program including the N-Class construction commitments, of which approximately $568 million will occur in 2010 followed by $364 million in 2011 and the balance in early 2012.

Our estimated remaining 2010 capital expenditures include $33 million towards the Joe Douglas, $78 million for the EXL jack-ups, $456 million for the N-Class rigs and $71 million for our existing rigs, including contractually required upgrades. The remaining $23 million includes the cost of drill pipe needed improvements to our manufacturing facilities and shore basis and other enhancements. We currently intend to fully fund these 2010 expenditures through existing cash or operating cash flows.

Our outstanding debt totaled approximately $1.7 billion at September 30, including the $400 million of new seven-year bonds and the remaining $485 million of SKDP debt at fair value. We have another $600 million of bank financing available, including a $350 million term loan facility and a $250 million revolver. We expect to complete the redemption of outstanding SKDP debt in the fourth quarter without drawing on the term loan facility, which would reduce our outstanding debt to approximately $1.2 billion or 24% of book capitalization at year end.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from James West with Barclays Capital.

James West - Barclays Capital

Matt, given this moving improvement that's underway in the Mining business and big CapEx numbers for next year for the miners and then, of course, the new jack-up rig construction cycle that's materialized in the last kind of six to eight weeks, has your thinking around the timing of the separation of LeTourneau changed or has that changed given that their market environment for their products is quickly getting better?

W. Ralls

Well, I wouldn't say it's changed at all, James. But this does bear on our decision about what the right timing is. I would say at this point in the year, it's our feeling that we probably wouldn't try to pursue anything before year end financials are available. But I would say that if these trends continue, 2011 is likely to be a good time frame for us to do something there.

James West - Barclays Capital

And what are the specific steps you need to take before or a separation can occur at some point in 2011?

W. Ralls

Yes, it just depends on which route we decide to go, and that'll be influenced by kind of what we see in the market and what interest level we're perceiving from the parties not be interested in being involved. So I mean, as we've said all along, we should look at it transactionally. We actually just sell LeTourneau. We could look at a spinoff of LeTourneau. We could look at a strategic transaction with another company in the same business. So as we get through the financials, we'll start to look at what we think our list of opportunities are and make a decision about which route to go, and we may look at some sort of separation as a sale of the unit, with the back-up being the ability spin it off if we think the market would be supportive of that. And so to make a long story short, nothing has really changed except that I feel like what we said all along is that we didn't want to sell at the bottom of the market, and we feel like we're now coming off the bottom. And so it's becoming more attractive to look at something.

James West - Barclays Capital

The Gorilla III, I believe, it's idle offshore Eastern Canada right now. What's the outlook or the prospects for that rig as we go into 2011?

Mark Keller

This is Mark Keller. We have the rig tendered in the multiple international markets. We're looking at some projects in South America and India and in Southeast Asia. We have the rig also tendered in Australia.

James West - Barclays Capital

And what will be the timing of those contracts if you were successful?

Mark Keller

Some of them could be awarded in probably the next 30 to 45 days, and they're all first, second quarter starts in 2011.

Operator

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

Michael Urban - Deutsche Bank AG

So both at LeTourneau and otherwise obviously seeing quite a bit of interest in newbuild jack-ups out there, and you guys have done a great job in both maintaining a high-end fleet and growing it. But as you look forward, is there any concern in at least relative terms of the industry finally kind of gets around to renewal here, kind of, losing that relative gain? And as you look toward the end of your capital program next year, do you look at rolling that forward in terms of newbuilds? And if so, would you do that on an uncontracted basis?

W. Ralls

Let me take a stab at it and then I'll let anybody else on the management team who wants to add to that. But generally speaking, I mean, we don't like to see -- speaking for just Rowan now, we don't like to see new capacity coming into the market. But it's inevitable given the age of the world jack-up fleet out there, that there's going to have to be fleet renewal. A lot of the units that were once considered premium rigs are now in the standard or almost into the commodity brackets. And so I think the other contractors whose fleets are much older than ours and with less capable units are going to be faced with, what we believe, is kind of a steady building program for the next several years in order to upgrade their fleets. But as we've said numerous times, the thing that's helping us is that there's been new capacity that's come into the premium category. Of course, we differentiate ourselves and call ourselves high-spec because of the heavy drilling packages on the rigs that we've been delivering, but even on the premium categories, there's been a lot of new rigs delivered. But that's where all the demand is coming from. So that's why despite a lot of new capacity coming into the upper end of the jack-up market, the utilization overall for 350s and above has been in the high 80s even 90% where in the high-spec, for us, it's been running 100%. So we think that we will continue to be differentiated. There's very little of the equipment that's being -- or none of the equipment has been ordered and very little of it has been rumored is competitive with the most capable units in our fleet. And we expect that to continue to be a fairly narrow market with the strong returns into the market because of just the capital cost of that sort of equipment similar to the Skeie rigs.

Michael Urban - Deutsche Bank AG

So do you feel like you've carved out enough of a niche in the high-spec market or in some of these somewhat protected market efforts in Norway where you certainly gotten much bigger in recent days and in months relative to, again, the growing premium jack-up fleet? I know that you're not necessarily worried about losing ground in relative terms as the rest of the industry plays catch-up?

W. Ralls

Mike, certainly not on the very upper end rigs. I mean, if you look at our two Gorillas, the Skeie rigs, the workflow class rigs, 2.5 million hookload rigs the rigs with very high environmental criteria, so those are rigs that don't have a lot of competition. So in terms of that end of the market, we feel like, so far, there hasn't been much that's going to compete with those when that capability is required. But just as in the -- and I'll take this opportunity to say little bit more about this contract for the Rowan Viking that we just took in the low 200s, that's a contract that didn't need all the capabilities of that rig. There are contracts out there that do need all the capabilities of those rigs, and we believe we will get very attractive day rates on those and could have on the Viking. The problem with the Viking is its delivery is imminent. So there we were faced with do we wait for some of this work that we know is out there, kind of mid-year or even later in 2011. And when you look at it, we need somewhere in the 240s to achieve a 12% rate of return in the U.K. on this equipment. And if we had to wait three months to find work in that day rate, that's the equivalent of the contract that we took. So that's the rationale for that. But this rig beat out other high-spec rigs that have -- that could do the work and that bid actually substantially below what we got, but it's just a preferred class of equipment. And I think you'll see that when we're in the Norwegian market, which has such limited competition, or as we get -- find work in the other sectors that need that capability, that we'll see differentiated day rates.

Operator

Our next question comes from Collin Gerry with Raymond James.

Collin Gerry - Raymond James

Matt, I wanted to follow up on the Viking talk. You've been pretty clear on this rate being something that you got as sort of a timing situation. I wonder, was that somewhat baked into your decision when you made the purchase of Skeie? I know kind of calibrate this contract relative to your prior expectations. And then just a follow up on that, you've got the second rig come and you've mentioned that there is bidding activity for that. Are you comfortable with the time frame there, that maybe some of these higher spec requirements will be able to get that rig? Is the timing a better situation there?

W. Ralls

I'll let Mark speak to the second part of it. But I will say, generally, yes, we're much more comfortable with that timing. But I didn't go back and look at our transcript when we actually announced this, but if my memory serves me, we even spoke in that discussion about the fact that the first rig was going to be delivered very quickly after transaction closed and that we may have to do something to sort of walk the rig out to some of these higher-end opportunities that are out there. Now in this case, we're very pleased to get this rig with this customer because we think that they could have a lot of work beyond this. And from a tactical standpoint, putting this rig away makes increased scarcity value for the other two rigs which in turn, we think, when they get contracts, will ratchet up the expectations for these very high-spec units as far as future renewals on that rig. So we remain as confident, this is not a change in our game plan. It's something that we knew all along. It could be something that happen to us because of the timing of the first unit. Mark?

Mark Keller

To expand on what Matt said, we're currently tracking 17 projects worldwide, most of which are in the North Sea, and the Norwegian sector and in the U.K. sector. We're also still tracking projects in the Middle East with Saudi Aramco, and we're talking to operators, one operator in Southeast Asia. But as Matt mentioned, as a tactical move, we had a very short window to put the rig to work. This operator could respond quickly, and we thought it was a good move to take the contract. It has gotten the interest of other operators that we've been talking to and that group of 17 and in fact, I'm leaving Sunday to go meet with one of them next week. So it has gotten their attention and as I said in my prepared remarks, we feel confident that we are going to be able to contract the rigs. But I think we've said in previous calls, as Matt alluded to, that we may have to walk the rigs to some long-term contracts in Norway and other areas of the world and this was one of those. And we thought it was a good tactical move to take this contract.

Collin Gerry - Raymond James

A follow-up question, Bill, you gave us some very detailed guidance. I wonder on the Viking contract itself, from a modeling perspective, how should we be thinking about, are there any sort of mobilization, amortization of a live contract situation or anything unique to how we should think about modeling that?

William Wells

Collin, there's no mob fee in the contract, there maybe some small mods, but it ought to be pretty close to that 205 rate going forward.

Collin Gerry - Raymond James

And just as a reminder, could you give us the cost differential between Norway and the U.K. for a rig of this caliber?

William Wells

It's roughly $50,000 a day. Based on our experience, Norway has been running in the low $100,000, around $110,000, and we expect the U.K. to continue to be in the mid-upper $50,000.

Operator

Our next question comes from Rob MacKenzie with FBR.

Robert MacKenzie - FBR Capital Markets & Co.

I wanted to inquire in terms of what you guys are seeing broadly, not just in the Middle East but elsewhere, how the trend is developing and operators requiring greater hookload, 2 million pound and above. Specifically, how many are starting tenders with that, but more broadly how much of a trend is that in the industry?

William Wells

I would answer that question, Rob, the 70-plus tender requirements that the rig demand that I alluded to in my prepared remarks, approximately 30 to 35 of those rigs require HPHT or higher spec jack-ups of those 70-plus rigs. We're seeing a trend not only in the Middle East, but Southeast Asia. You've heard us mentioned before, we are opening a marketing office there, because we're seeing a big change in Southeast Asia as far as tendering activity toward HPHT-type rigs. We're seeing it certainly in the Middle East. The tenders part of your question was the tenders I talked about in my prepared remarks, two of those are gas tenders. However, they are, however, there are 1.5 million hookload requirement, they are not the high-spec gas tenders that are still being evaluated by Aramco currently. We still believe there will be some of those tenders issued, they just haven't been issued yet. Four of the rigs are 116-Cs, two of them are extended-reach well prospects. They require a little more of a modified 116-C class rig which our rigs would certainly fit. They've used those rigs in the past, so we feel good about that. The North Sea, we're seeing demand for about 25 rigs. As Matt talked about earlier, the requirements from the operators have changed dramatically. There is some very upper premium jack-ups that have been stacked for over a year there that haven't secured jobs because the operators in the region are looking at Super Gorilla class or in-class type rigs to fill those needs. As I've mentioned also, that's one of the major focus areas of the N-Class rigs in our marketing effort. But what we're seeing in all different areas of the world, we're seeing it in South America, we're seeing it in Mexico. David Russell and I met with the Head of PEMEX a few weeks ago, and certainly, his vision is to hydrate that rig fleet and increase the operating capability of that rig fleet. And you're seeing it in different basins and med for HPHT requirements certainly in West Africa in certain cases. But it's pretty widespread. There's no question, you've heard us it say before, that tender requirements worldwide have become more stringent. I think you would see in the next couple of years out of the 70-rig demand scenario, you would see that number be higher than 30 in the next two years. I hope that answers your question, Rob.

Robert MacKenzie - FBR Capital Markets & Co.

I guess my follow-up question is, obviously, the resumption of building your jack-ups can benefit manufacturing, but it poses a risk to the longer-term economics of the jack-ups segment. How do you guys think about your contracting strategy going forward the next couple of years with what looks like to be a resumption of new building?

Mark Keller

Well our contracting strategy remain the same. I think that when we talk to NOCs and IOCs around the world, Rob, it's not just the capability of the rig, it's the operating history of the company, the people that you put on the rig, those are the main focus of operators worldwide today. Anybody can pull up with a 2 million hookload rig, but you have to have all the components to go with that. And Rowan's operating history has been phenomenal, and we have the best people in the industry. So it's post Macondo. I think you're going to see more emphasis on that worldwide. I know we're certainly seeing it in our marketing visits around the world both from a marketing side and our operational side.

Operator

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

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

In the Middle East, you've got the three Tarzan Class rigs rolling up contract next spring. I think you've talked about Saudi's desire to extend these. Could you give us a feel for the possible day rate we might see for the type of rig?

Mark Keller

I can't really do that right now. The indications are, we're in our offices a little over a week ago and their plans today are to extend the contracts of those rigs. But we haven't entered into any kind of day rate discussions at this point. The tenders that are out right now for the two gas rigs are not against the Tarzan Class rigs. We asked that question specifically, should we tender the Tarzans on those bids, and the answer was no. But we are in a very competitive situation there as you can imagine, so I would hate to speculate on day rates.

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

And then I guess switching to your land drilling operations. Haynesville rig count has seen some recent weakness led by operators like EnCana. With any of your rigs currently working Louisiana rolling out contracts in the next, say, one to six months, what is the likelihood that these rigs suffer any downtime? Do they stay in the Haynesville or gets redeployed elsewhere?

Mark Keller

Well, right now, EnCana is taking a look at extending the term of eight of our rigs currently. We're going to modify the rigs somewhat and extend the term. But right now, our tender activity is remaining steady because of the demand for those high-spec rigs. We currently in-house, this morning, had eight tenders for higher spec land rigs. We're also in the final stages of contracting one of our 3,000-horse rigs. So I understand the concern with gas prices being down, but as of right now, our customers are still staying with the higher spec rigs. There are a lot of lease expirations that they're facing in the next year in the Haynesville areas, and so I think that's part of it too.

Operator

Our next question comes from Doug Becker with Merrill Lynch.

Douglas Becker - BofA Merrill Lynch

Mark, you've mentioned the Saudi Aramco tenders a number of times and that they fit Rowan's 116-Cs pretty well. What's the timing of when those tenders will be awarded and the contracts actually start?

Mark Keller

Their desired start for the extended-reach well rigs and the work over rigs is first quarter, February 2011 is their desired start. However, if you have a rig that's working, they'll work with you somewhat on that startup. But right now, the desire to start is like mid-February 2011. And we're excited about the tender. We have a tremendous relationship with Saudi Aramco, as you know. Our operations team and our area manager there do a fantastic job. So we're excited about the outcome of these tenders.

Douglas Becker - BofA Merrill Lynch

Switching geographies. Maybe an update on Mexico. Tender activity there certainly seems to be picking up. There's talk of the age restriction being relaxed, but not removed. I want to get your thoughts on the latest you're hearing from PEMEX and Rowan's interest in that market?

Mark Keller

As I mentioned earlier, David Russell and I met with Carlos Morales, who is head of PEMEX, a few weeks ago. And he is very proud of the fact that they've been able to enforce some of these restrictions. And along this line, they're trying to upgrade the fleet, is what they're trying to do. And he spent a lot of time talking about that. And so that's why you're seeing, on the first two tenders, there's a 350- and a 300-foot tender, one was for 486 days and the other one was for 662 days. They had the 10-year restriction, we did not tender those because we didn't have rigs that were available that would meet that requirement at the time. They've also come out with some fast-track tenders. I believe, there are four of them. And those are just a bridge to the end of the year, give them time to get some tenders approved. And they had like 40 to 60 days in term on them, and mainly for incumbent rigs that are operating there. But they're in review currently. They have a 350 for 730 days and two 300-foot cantilevers coming out in excess of 700 days and then one that we're really interested in taking a look at it is there's a tender requirement for a little over 800 days that possibly one of our skid-off rigs out of the U.S. Gulf of Mexico could be contracted for. So we're very excited about seeing that tender when it comes out. And then they're in review right now for as many as seven to nine additional tenders currently that's why you saw those short-term fast-track tenders.

Douglas Becker - BofA Merrill Lynch

Now we've been hearing that some of those tenders may not accept rigs built earlier than 1990. Is that consistent with your conversations?

Mark Keller

Doug, you hear varying stories. I think the preference is to get the best rig. They're trying to relax some of the requirement on the age. But as I mentioned earlier, Carlos Morales hopes that they get newer or higher spec equipment working for PEMEX in the future. I think that's where he would like to see them had in their Operations division.

Douglas Becker - BofA Merrill Lynch

A quick one for Bill. Just thinking about tax rate in the 2011, I understand a lot of it depends on how the geographic breakout goes. But are there any sign posters we should be looking for in terms of being able to mobilize rigs that might be able to get that tax rate lower in 2011 from, I guess, the 26% that you're talking about?

William Wells

You're right, Doug. It does ultimately depend on where you're working, which rigs are working and what areas. But we think based on the expectations for '11, that we could have the rate in the low 20s.

Operator

Our next question comes from David Smith with Johnson Rice.

David Smith - Johnson Rice & Company, L.L.C.

A real quick one on the Viking, when was that scheduled to arrive in the North Sea?

W. Ralls

David, we're going to load it on our the heavy lift November 10, and we'll arrive in Dundee around the end of the year, and we have some customer upgrades. We'll finish our safety case, but we will continue to work on our AoC process, and we'll commence operations in early March.

David Smith - Johnson Rice & Company, L.L.C.

And just to make sure I understood from the cost guidance, it looks like that move would be capitalized?

Mark Keller

That's right.

Operator

Our next question comes from Matt Conlan with Wells Fargo.

Matt Conlan - MKM Partners.

In the U.K. sector, the North Sea, there are several semisubmersibles that are working in 400 feet of water or less. Has there been any discussion about replacing those with an N-Class rig?

W. Ralls

Matt, we've talked to several operators in Norway and in the U.K. sector about jobs that both rigs could do the job. However, at the end of the day, in most cases, not all cases, but in most cases, the operators are tending to lean more toward the jack-up if it's available due to obvious reasons of weather downtime and things like that. But right now, what we're seeing is kind of, not in every case, but the majority of the case is leaning towards the jack-up.

William Wells

Matt, we're not seeing a lot of opportunities to bid against existing floater contracts. Most of the opportunities we're seeing are for new projects. And in those cases, they frequently consider whether or not a floater is appropriate for that. But there's just whole lot of operational reasons why jack-ups prefer that type of equipment.

Matt Conlan - MKM Partners.

So I understand you wouldn't be actually kicking a rig off of a current job, but as new jobs are coming forward, it would seem that before these N-Class rigs existed, there weren't very many rigs that could do that work, many jack-ups. So you're saying that you would be competing head on head against semisubmersibles for some of these opportunities?

William Wells

For some of them, we will be. Most of them are not candidates for floaters, but there are some where a floater could be a competitor.

Matt Conlan - MKM Partners.

And then just a quick housekeeping, the Louisiana was waiting for permit for most, if not all, of the third quarter. Did you record any revenues at all on that rig?

William Wells

Yes, Matt. We did record the minimum amount that we thought was obtainable under the force measure provisions of the contract. The contract is still in effect. This has not been terminated, but we are negotiating for a standby amount, but we did book the minimum, which I believe was just over $1 million.

Matt Conlan - MKM Partners.

So you did not record whatever a standby rate that you might ultimately get to?

William Wells

That's right.

Operator

Our next question comes from Robin Shoemaker with Citigroup.

Robin Shoemaker - Citigroup Inc

Just one more question, Matt, on the Skeie rigs. I know when you acquired them, your goal was to acquire those rigs in a subsidiary that would have a low tax rate. Is that the case and what kind of tax rate are you assuming in your 12% return calculation?

William Wells

Rob, and this is Bill Wells. We are in the process of moving those rigs into our structure. We moved one of the rigs, and we'll move the other two. And of course, it depends on where you operate, but we expect each of those rigs to achieve a low-single digit effective rate, whether they're in the U.K. sector or the Norwegian sector or in a case, the Middle East.

Robin Shoemaker - Citigroup Inc

So really well below your average across the fleet, I mean, most single-digit tax rate would apply Middle East, Norway, U.K., is that correct?

William Wells

Right.

W. Ralls

Right. That's part of the reason that, as Bill mentioned, that we expect our tax rate to continue to go lower in 2011 as we get contracts for these rigs.

Robin Shoemaker - Citigroup Inc

And then my other question was for Tom. The shipyard -- the quotations we've seen and the prices we've seen for jack-ups that have been announced for high-spec appear to be about 20% below peak price levels and shipyards are hungry, we know that. They are bidding aggressively. How about to what extent is the rig equipment provider here sharing in the cutting of pricing in order to encourage a few new rig orders?

Thomas Burke

You mean as far as the capital equipment versus the rollouts...

Robin Shoemaker - Citigroup Inc

Yes, just your general -- your rig head, your overall offerings on the rig equipment side in terms of the tendering you're seeing or opportunities for these new jack-ups. Is the pricing as good as three years ago or is it significantly more competitive?

Thomas Burke

It's more competitive. I mean, the market has come down not across the board on all products, but the market has come down and I think everybody's hungry, wanting to get those orders. So we've come down, somewhat.

Operator

Our next question comes from Ian Macpherson with Simmons.

Ian Macpherson - Simmons & Company

I wonder if it's too early to ask if you could provide for us any significant downtime events for major projects across your jack-up fleet for next year that we should be aware of?

David Russell

This is David. We still have a couple of the Middle East rigs that are in the shipyard and those should be complete by the first quarter and probably the middle of the first quarter. Then we have, of course, the rigs going to Saudi which the Bob Palmer departed this weekend and it will make the total and then we have about 30 days of shipyard time once it arrives. So it had been off rate for probably about one full quarter, and we should probably expect the same thing for the Ralph Coffman, when it departs, which it should depart the Gulf of Mexico probably, say, in January or early February. We would expect the same downtime on it as we see on the Palmer.

Ian Macpherson - Simmons & Company

So basically as we see it on the fleet status today, there's nothing else beyond that?

David Russell

I'd say that's probably correct and then we did discuss Gorilla III, and it's in the Halifax Harbour now, and we're undergoing some just inspections and routine maintenance. So once we determine where that rig will go to work, then we'll mobilize it, which we do have a demog [demography] from our last job, so the jury is still out on where we'll move that.

Ian Macpherson - Simmons & Company

And then maybe separate unrelated follow-up for Tom, last question was about jack-ups. Can you update us on what the revenue opportunity is for rigs like the Eurasia Drilling unit. And also may have mentioned this, what the outlook is for quantity of potential orders that you see in the pipeline for jack-ups kits or equipment or otherwise over the next couple of quarters?

Thomas Burke

Well, as far as what the opportunity is, as I've mentioned in my remarks, we've been very busy as far as quoting and it's often hard for us to tell if the quotes that were given to the shipyards are going to multiple projects or the same projects, so it's a little hard for us to say with the ultimate end-user, you've got three drilling companies bidding on one package, all looking for new rigs. As far as the revenue opportunity, I mean, it's hard to say what that will be. It really just depends how many rigs we win. I'm not quite sure if that answers your question.

Ian Macpherson - Simmons & Company

I seem to recall historically it's been closer to $40 million if its the kit only, but maybe it's twice that much if you're selling a lot of additional equipment.

Thomas Burke

Yes, that's about right. I mean, obviously, it'll differ between a Super 116 workhorse and a Super Gorilla, but somewhere Super 116 and a workhorse about that on a rig kit depending if we have cranes and wenches. And in the drilling equipment depends how much we sell them as far as the whole package, but about that, yes.

Operator

Our next question comes from Arun Jayaram with Credit Suisse.

Arun Jayaram - Crédit Suisse AG

I want to dig a little deeper on the Norwegian jack-up market. As you guys realize, it's a virtual duopoly with Mercican SeaDrill [ph] there. So first question is if you could just comment on perhaps some of the unique capability of the N-Class rigs versus your competitors in that market.

W. Ralls

These rigs were designed with the work environment, that was one of the main goals, and we had actually included the labor union, the Norwegian labor union, in looking at the design of the rig to make sure that there were no issues with the work environment. So that's one thing that's very different with these rigs. Also, it has the capability to be able to drill and produce at the same time, and we can skid the entire drill package 26 feet to the port. And you can use that even if you're not using it in the production mode, you can slide it over just to allow for more deck space. And it meets all of the Norwegian requirements to receive an AoC, which we're all working with the PSA. So that's one thing when we moved one of our Super Gorillas, Gorilla VI, into the Norwegian sector, we spent several months in the shipyard and several million dollars in meeting that requirement, these rigs are designed to meet that requirement.

Arun Jayaram - Crédit Suisse AG

Are any of the other rigs in Norway, can they do the production as well?

W. Ralls

Some of it, I think a CJ 70 can. They can be modified to do it.

Arun Jayaram - Crédit Suisse AG

Mark, you mentioned 25 opportunities, I think, broadly, I think that's the U.K. as well for demand of that market. How many of these opportunities do you think would use the unique requirements of the rig which is the production mode as well?

Mark Keller

The production mode, right now we have three opportunities that are tendered, and we are in discussions with. Of the 25, there's probably one or two more, but there are a lot of operators in Norway. They're taking a look at it, though.

Arun Jayaram - Crédit Suisse AG

I know that ConocoPhillips says -- I'll just echo out there, Lundeen tells us that -- but I was just trying to gauge what the market looks like.

Mark Keller

I'll tell you this, in all of our trips, the management team's trips to Norway, Rowan acquiring these jack-ups has been received very favorably, not only in Norway, but everywhere in the world that we travel, but particularly in the U.K. and Norwegian sectors. They are very excited about it, and as Matt mentioned earlier, that's part of the reason for the tactical move to put one to work and let's put them all to work.

W. Ralls

We don't believe that we have to find a contract that requires that we use the production mode to exceed our hurdle rate. There are other capabilities this rig has that a very few others have.

Arun Jayaram - Crédit Suisse AG

And the leading edge I think is in that 340 range. Is that correct?

Mark Keller

A little above that, yes.

David Russell

In Norway.

Arun Jayaram - Crédit Suisse AG

Last question is, obviously the tax rate came down. Bill, you mentioned that you transferred the Gorilla VII to I guess an international subsidiary. Is there any costs associated with doing that? And are there more opportunities across the fleet to do that some more?

William Wells

Well, there was no cost associated with that, Arun, because that rig had never operated in the U.S. But it was a financed rig through the Title 11 program so we obviously had to get permission to do that and which we finally did. There are other opportunities for some of our existing rigs, but there are varying costs associated with those so we kind of look at them on a case-by-case basis, and it just depends on the likelihood of them staying outside the U.S. for the most part.

Arun Jayaram - Crédit Suisse AG

But in general, this may have been more of a one-off?

William Wells

Well, we actually moved three rigs this year, which is why the rates have been sort of progressing down throughout the year. We moved the California when it went into work in Qatar. We moved the Gorilla V and now we moved the Gorilla VII. So we're going to look for further opportunities as we go forward. But even if we don't, we think based on where the Skeie rigs are likely to work, we still can achieve that low 20s next year.

Suzanne McLeod

Okay. Thank you. This concludes our question-and-answer session for our third quarter conference call. We'd like to thank everyone for joining us today, and we'll talk with you all very soon.

Operator

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

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