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Rowan Companies (NYSE:RDC)

Q4 2010 Earnings Call

February 25, 2011 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

Alan Laws - BMO Capital Markets U.S.

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

Collin Gerry - Raymond James

Robert MacKenzie - FBR Capital Markets & Co.

Andreas Stubsrud - Pareto Securities

David Wilson - Howard Weil Incorporated

James West - Barclays Capital

Douglas Becker - BofA Merrill Lynch

Robin Shoemaker - Citigroup Inc

Matthew Conlan - Wells Fargo Securities, LLC

Michael Urban - Deutsche Bank AG

Operator

Greet, and welcome to the Rowan Companies Inc. Fourth Quarter and Full Year 2010 Earnings Results Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Suzanne MacLeod, Director of Investor Relations for Rowan Companies. Thank you, Suzanne, you may begin.

Suzanne McLeod

Thank you, Dan, and good morning. Welcome to Rowan's Fourth Quarter and Full Year 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, Drilling Operations; and Kevin Bartol, Senior Vice President 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 1955, 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 thank you for joining us for our fourth quarter 2010 earnings call. It probably goes without saying that I'm very pleased with the results our company turned in for the quarter, earnings well above consensus related primarily to a continuing focus on cost control in the drilling side of our business as well as better than expected performance from LeTourneau, especially in the mining group. Bill and Tom will give more details and guidance in each of these areas.

2010 was a very good year for Rowan's Drilling business. We delivered five new high-spec jack-ups into our fleet with another delivered early in 2011 all on schedule and within budget, including two of the three N-Class rigs acquired in the SKDP transaction last year. We remain very pleased with that transaction given the commitments we've gotten for each of those rigs following delivery and the prospects for future term work in the U.K. and Norwegian sectors of the North Sea. We're also very encouraged by the success of McMoRan and their partners in the deep gas Gulf of Mexico drilling program and believe that success will lead to increased demand for our high-spec jack-ups.

We will deliver three more high-spec jack-ups in the next 12 months, further strengthening our market leading share of 2 million to 2.5 million pound hook load jack-ups. This strong position at the upper end of the quality spectrum of jack-up contractors has enabled us to build a current drilling backlog of $1.8 billion and gives us an important competitive head start as we see several other contractors placing orders for new jack-ups with the deliveries in 2013 and beyond.

We believe these new orders are a predictable response by the industry to the increasing demands of jack-up customers for newer and higher specification equipment and reflect the need for many established contractors to begin to renew their aging jack-up fleets. Over 70% of the world jack-up fleet is now more than 25 years old, facing significant competitive challenges in finding work. That reality is evident in the 90-plus percent utilization for high-spec jack-ups even at a time when worldwide jack-up fleet utilization is below 70%. We also believe that this secular industry-wide jack-up fleet renewal will be a very favorable trend for LeTourneau. They are seeing increased requests for quotations and expect to be successful in winning new kit and equipment orders. In the meantime, their new order flow from mining equipment has been outstanding and is expected to remain so in 2011.

They have a very innovative and fuel efficient line of wheel loaders that's well positioned for the growing demand from new and expanding surface mines around the world. We've been saying for the past two years that it was our intention to separate LeTourneau from Rowan when suitable market conditions existed. We now believe those conditions exist and expect to begin a process soon to either spin off or sell our manufacturing operations. Based on spontaneous inquiries, we expect strong interest from strategic buyers.

However, we also believe that LeTourneau now has the management team, sufficient earnings power and market momentum to be a very successful stand-alone public company. As always, we will look at all alternatives with the objective of maximizing shareholder value.

We can also say pretty much the same things about our Land Rig division. We believe that the strength of land drilling in the U.S., particularly with the growth in the Eagle Ford shale play, creates a favorable market for monetizing our land rig fleet and we expect to begin a process soon for this transaction as well. Our strategy is and has been to focus on building our offshore drilling fleet. We strongly believe that Rowan has true brand value among our customers that enables us to achieve industry-leading jack-up day rates in utilization. We're confident that we could bring that same level of execution to the ultra-deep water market, should we make the decision to move into that segment of the offshore drilling business.

With the new jack-up additions I mentioned earlier, 2010 has been a transformative year for Rowan Companies. If current market conditions for the manufacturing land drilling businesses hold up, as we expect them to, 2011 should result in an even more significant shift in the company's strategic position.

With that, I'll turn it over to Mark to discuss the worldwide jack-up market.

Mark Keller

Thanks, Matt. Good morning, everyone. According to ODS-Petrodata, there are currently 474 jack-ups worldwide. Demand is 328 rigs with utilization at 69%. Despite the current softness in the worldwide market, demand remains strong for high-spec jack-ups as evidenced by the recent commitments for our N-Class rigs. The Rowan Viking is committed to TOTAL in the low 220s. The rig will be working in the U.K. sector of the North Sea for approximately 19 months, commencing operations in late March. The Rowan Stavanger has received two letters of intent from Talisman. The first project is for accommodation work in Norway, lasting approximately 120 days to 150 days at $305,000. The second project is for approximately 300 days of drilling in the U.K. and Norway, with the day rate ranging from $240,000 to $315,000, depending on the operating sector. Operations are expected to commence on the first project in late second quarter 2011.

And finally, the Rowan Norway, the third of our N-Class units, will be delivered in June of 2011 and is contracted to Xcite Energy for $250,000 a day for approximately 240 days of work in the U.K. sector, commencing in November of 2011. If this project is successful, the client will have a multiyear requirement for additional drilling and production work.

We are very pleased to have secured commitments for these three new builds upon their delivery. International tender and inquiry activity remains strong and we currently see demand for more than 70 jack-ups over the next two years. The North Sea and the Middle East are driving this demand, along with the recent increase in activity in Mexico.

Recently, we have been averaging approximately 15 international tenders in-house and we are encouraged by this activity. The drilling requirements in these tenders are increasingly stringent and Rowan's fleet of high-spec jack-ups continues to be well positioned to take advantage of these opportunities.

I will now address our areas of operation. Let's begin with the U.S. Gulf of Mexico. Supply in the region is 84 jack-ups while demand is 35 rigs for a utilization of 42%, unchanged since our last call. We currently have 10 jack-ups in the region with the contracted utilization of 80%. However, our average day rate of approximately $115,000 leads our peer group by $45,000 per day. Despite the softness in the region, we are encouraged by several recent commitments.

McMoRan received its permit and the Rowan-Louisiana is now drilling the Boudin prospect at $55,000 per day for approximately 150 days with two priced options. EXL-III is also working for McMoRan. The rig is working on a shakedown well at $80,000 for 75 days and then it will increase to $140,000 per day for approximately one year. Also, the Gorilla III is contracted to Energy 21 at $110,000 per day for approximately 60 days. The Ralph Coffman continues to drill the Blackbeard East prospect for McMoRan and will likely not conclude operations as early as originally expected. The rig is currently scheduled to mobilize to the Middle East for Saudi Aramco and accordingly, we are looking at options, including the possible substitution of another Rowan rig to meet our scheduled obligations and avoid possible late delivery penalties.

We are seeing a significant increase in tender activity in Mexico and South America. PEMEX is currently tendering for six jack-ups with demand for eight more expected in the near future. The EXL-II has commenced operations with BP in Trinidad and there is interest from various operators for one to two additional units there in 2011.

Now turning to the North Sea, supply is 39 jack-ups while demand is 33 rigs and contracted utilization is 85%. Rowan currently has six jack-ups contracted in the region, three Super Gorilla class jack-ups working on an average day rate of approximately $187,000, and as mentioned, three N-Class units committed with commencements in late March, June and November 2011 respectively. All three Super Gorillas are committed on term contracts and are expected to remain with those operators through 2011 and beyond. The North Sea remains one of the most active regions in terms of tenders and inquiries with demand for as many as 18 units over the next two years. We are confident that our high-spec jack-up fleet is well positioned for these requirements and will operate in the North Sea for many years to come.

Moving on to the Middle East. The supply in the region is 118 jack-ups while demand is currently at 87 rigs and contracted utilization is 74%. Rowan has 10 jack-ups in the region, six of which are currently working at an average day rate of $131,000 per day. Currently, there is demand for 26 jack-ups in the Middle East and we are hopeful that these active tenders and inquiries will absorb some of our excess capacity in the region.

The majority of the demand is from Saudi Aramco and we are confident in our ability to secure some of these tenders given our successful relationship with them. All of our proposed rigs have passed the technical portion of the tender process and we are currently working through clarifications in the commercial phase.

Regarding our Onshore division. We have a marketed fleet of 28 land rigs located in Texas, Louisiana, Oklahoma, Alabama and Alaska. Currently, 86% of our fleet is contracted at an average day rate of approximately $21,000 per day. Tender activity for fast-moving, high-spec land rigs remains high in the U.S. shale plays especially for those areas targeting oil production. The Eagle Ford has been a recent hot spot in Texas, and Rowan is becoming active in this area in addition to our positions in the Haynesville and Deep Bossier gas plays. We currently have seven to 10 contract prospects that we're actively pursuing.

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

Thomas Burke

Thank you, Mark, and good morning. In the fourth quarter, LeTourneau produced solid financial results, introduced new products and continued to work on manufacturing efficiencies and further prepared the division for eventual separation from Rowan.

In our Mining Products segment, fourth quarter revenues were up 91% year-over-year to $89 million as conditions in the worldwide surface mining industry continue to strengthen. For the full year 2010, Mining Products generated $300 million of revenue, up 61% from 2009 as we increased loader shipment from 14 to 25 and improved our aftermarket Parts and Service business. Our mining operating margin, which is gross margin net of period cost of sales, R&D, engineering and HSE costs, improved from 28% in 2009 to 31% in 2010. This was due to a better mix in our loader shipment and higher after-market profitability.

In December, we received an order for 15 loaders from a major mining company operating in Brazil. This booking demonstrates the strength of this market and the technical excellence of our electric drive loader line. Against this backdrop, we ended 2010 with 25 loaders in backlog and we will have a total of 29 loaders in backlog today. We are particularly excited about the successful introduction of our newest addition to our loader line, the L-1150. This machine is the first to use our proprietary Generation 2 hybrid SR drive technology, which provides our customers with vastly improved fuel efficiency. We designed the L-1150 to be a direct competitor to equipment-sized mechanical machines. We placed two 1150s into customers' field tests in the fourth quarter of 2009, which were highly successful, leading to the commercialization of the 1150 last quarter. We believe that fuel efficiency of this machine is what our customers are looking for, and we have since taken orders for 10 of these loaders, eight of which will ship to China. We are currently upgrading our complete loader line to this new electric drive technology. This is a major product development step that will be completed by the end of 2011. Overall, we believe 2011 will be another strong year for our Mining Products segment.

In our Drilling Product segment, fourth quarter external revenues increased by 41% year-over-year to $110 million based on solid offshore kit activity. This quarter saw increased jack-up rig orders worldwide in our closing activity for both offshore kits and drilling capital equipment remains high.

For the full year 2010, external revenues were $310 million, down by 16% from 2009. During the fourth quarter, we received an order from Lamprell, our partnership yard in the UAE [United Arab Emirates], for Super 116E jack-up rig for Eurasia drilling. Lamprell also announced earlier this week that it had secured a Super 116E jack-up rig order from Greatship Global Energy Services. We're delighted with both these orders and we believe we will secure more offshore kit orders in the coming quarters.

Across both our segments, we are pleased with our aftermarket business where we posted $157 million in revenues for 2010, a 25% gain over 2009. Aftermarket gross margins remained consistent year-over-year in the low 40s. From an order standpoint, with the help of the loader and offshore kit orders I mentioned earlier, we booked $229 million in new business in the fourth quarter or 115% of external revenues to end the year with $299 million in external backlog. This backlog and the active quotation activity makes us optimistic about our outlook for 2011.

Operationally, we've made great strides during the quarter introducing lean manufacturing techniques to our Longview plant. This significant initiative will, over time, position us well with lower costs and greater capacity. For LeTourneau as a whole, we have strengthened our management team over the past year as we prepare for separation from Rowan. I'll now turn it over to Bill Wells

William Wells

Thank you, Tom, and good morning, everyone. In our drilling operations, our fourth quarter 2010 revenues were $260 million, up by 2% over last year, but down by 10% from last quarter. The year-over-year increase reflects the impact of offshore fleet additions and higher land utilization, which more than offset the averaging down of day rates. The sequential decrease is primarily attributable to the Gorilla III which completed work offshore Eastern Canada in October, Bob Palmer which was mobilizing to the Middle East during the fourth quarter and last quarter's completion of work offshore in Norway.

Our full year 2010 drilling revenues exceeded $1.2 billion and were within 1% of the 2009 level as the impact of lower average day rates slightly exceeded the effects of offshore fleet additions and higher land utilization between periods. As of today's fleet status update, our backlog of drilling commitments totals approximately $1.8 billion. We expected about 44% of that amount will be realized as revenue during the remainder of 2011, another 36% will occur in 2012 and the balance in 2013 or beyond.

We expect that the first quarter 2011 drilling revenues will be below the fourth quarter level as our conclusion of work offshore Egypt more than offsets the aggregate impact for the EXL-II, the EXL-III and Rowan Viking startups and the return to service of the Rowan-Louisiana. Of course, these and other scheduled startups will improve our drilling revenues beginning in the second quarter.

Our fourth quarter drilling expenses of $137 million or 12% above last year, primarily due to higher activity levels, were 4% below last quarter and well below 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 24% increase in operating days between periods. The sequential decrease occurred in these same categories and was driven by the same factors affecting drilling revenues.

Fourth quarter drilling expenses were below our previous guidance primarily due to the delayed start up of the EXL-II offshore Trinidad and lower-than-expected expenses on the Bob Palmer. Our offshore fleet additions and higher land utilization resulted in a 16% increase in operating rig days in 2010. While our full year drilling expenses were only 5% above the 2009 level, reflecting further progress on cost effectiveness. Scheduled new-build deliveries will add over three rig years to our offshore fleet in 2011, which should result in an estimated 20% increase in offshore operating days over 2010.

Thus, we expect an activity lead increase in drilling expenses in 2010 of around 11% to approximately $620 million for the full year. The first quarter 2011 drilling expenses are estimated to be in the range of $137 million to $140 million, with the sequential increase primarily due to the startups of EXL-II in Trinidad, EXL-III in the Gulf of Mexico and the Rowan Viking in the North Sea.

Turning to our manufacturing operations. Our fourth quarter revenues totaled $257 million, including $58 million of arm's length sales to our Drilling division. External revenues were $199 million, an increase of 38% over last year and 35% over last quarter.

Our Drilling Products and Systems segment contributed $168 million or 65% of total manufacturing revenues during the fourth quarter, including sales to our drilling division. External revenues were $110 million and featured $70 million from offshore rig projects and $13 million from drilling equipment. As Tom mentioned, our mining, forestry and steel products segment had a strong quarter with revenues up by 91% over last year and 27% over last quarter and including $44 million from shipments of mining equipment and $9 million from steel plate. We shipped nine mining loaders during the fourth quarter, including four each of the L-2350 and L-1850 units.

A combined aftermarket Parts and Service revenues were $48 million during the fourth quarter, up by 53% over last year and 8% over last quarter.

Our average operating margin, which is after period cost of sales, R&D, engineering and HSE costs was 17% of manufacturing revenue during the fourth quarter, unchanged from last year but up from 15% last quarter and slightly above our previous guidance.

At year end 2010, our external manufacturing backlog of $299 million included $70 million related offshore rig projects, $132 million of mining equipment, including 25 loaders, $38 million related to land rig projects and $22 million of drilling equipment, with the remainder primarily parts and other components. Almost all of our external manufacturing backlog at year end 2010 should be realized as revenues in 2011. 2011 shipments of mining loaders could be double the 2010 level and we expect another record year in the aftermarket.

In 2010, our manufacturing operations generated $610 million of external revenues at an average 16% operating margin, led by the strength of our Mining Products business, we expect that 2011 revenues will be slightly higher than 2010 and that our overall average margin in the upper teens.

We currently have no further plans for reconstruction in our Vicksburg, Mississippi shipyard following the delivery of the Joe Douglas later this year, but may continue to use the facility for other operations. Absent additional rig orders or sufficient prospects for future work, the activities at the facility would be significantly reduced at that time, in which case, we would incur additional costs such as employee severance among other charges. Closing or significantly reducing activity levels of the facility could result in cash charges ranging from $8 million to $10 million.

Our fourth quarter depreciation expense totaled $47 million, which was up by 6% over last year primarily due to the rig fleet additions, but unchanged from last quarter and matching our previous guidance. For the full year, depreciation totaled $187 million, up by 9% over 2009. Our latest estimate for 2011 depreciation is in the range of $216 million to $218 million, including approximately $48 million to $49 million in the first quarter. Our fourth quarter SG&A expenses totaled $36 million, up by 23% over last year, 4% over last quarter and $3 million more than our previous guidance due primarily to higher professional fees related to legal settlements and tax planning and additional bad debt provisions.

For the full year, SG&A totaled $133 million, up by 29% over 2009 and included almost $10 million in settlement costs and bad debt provisions. 2010 SG&A expenses were otherwise higher due to the geographic expansion of our drilling operations and personnel changes in our manufacturing operations, but in line with expectations. We currently expect 2011 SG&A expenses to be only slightly higher than 2010 in a range of $134 million to $136 million for the year, including approximately $34 million to $35 million in the first quarter.

Interest expense, net of interest capitalized, was approximately $6 million during the fourth quarter within our previous guidance. We completed the redemption of all outstanding SKDP debt during the fourth quarter, which yielded a $6 million gain on extinguishment. During this process, certain SKDP bond holders disputed our ability to redeem the bonds in 2010. Although, we believe the redemptions were valid, we placed an escrow of $15 million pending settlement for this matter. Other income also included approximately $3 million of net foreign currency translation gains primarily associated with our manufacturing operations in Australia.

We currently expect to fully draw down our $350 million term loan facility over the first half of 2011. Based on the most likely timing, our 2011 interest expense will be in the range of $80 million to $81 million, about 40% of which should be capitalized. For the first quarter, net interest expense should be in the range of $6 million to $7 million. $250 million revolving credit facility should remain undrawn.

Our 2010 effective tax rate remained at approximately 26% matching our previous guidance. The scheduled start-up of additional four known rigs coupled with a full year impact of rig movements completed in 2010 should drop our effective tax rate to the upper teens in 2011. Property and equipment additions, net of cash restricted for such purpose, totaled $174 million in the fourth quarter, which included $32 million for our third 240C jack-up, $79 million toward the EXL rigs, $8 million net for the N-Class rigs and $47 million for our existing fleet, including contractually required upgrades.

At year end 2010, we had approximately $654 million of remaining capital expenditures under our new build program including the N-Class construction commitments, all of which should occur in 2011. We currently estimate as much as another $410 million of capital expenditures in 2011, including $159 million of reimbursed contractual modifications, $51 million to our life enhancement projects, $105 million for existing fleet maintenance and upgrades and $87 million for area, equipment spares, drill pipe and needed improvements to our manufacturing facilities and shore basins.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Rob MacKenzie of FBR Capital Markets.

Robert MacKenzie - FBR Capital Markets & Co.

Tom, I guess, my question is for you, if I may. With getting closer to spinning out LeTourneau, as it pertains to the rig equipment business, do you feel at all as if there's any kind of potential incremental business to be had when someone buying rig equipment may not be buying from a competitor once this business is separated? If you do, how do you think about quantifying that?

Thomas Burke

Well, I do think there is some reluctance to buy from us because of our current initiative but it's very hard to quantify it, Rob.

William Wells

I don't think we'd be comfortable trying to put a number on that, Rob, but it's definitely the response we get as LeTourneau contacts potential clients.

Robert MacKenzie - FBR Capital Markets & Co.

How far along are you in the process to evaluate the best way to optimize value here? Is it just getting started or are you leaning one way or the other at this point?

Mark Keller

We have not started a process it. We have talked to investment bankers. And if we do decide to move ahead with the process, it would be a broad process where we would consider the sale of the company, as well as potentially spinning off the company.

Robert MacKenzie - FBR Capital Markets & Co.

And I guess my final question on this topic, if you do decide perhaps to split the company, if that's the way you think you're going to have the most value, is it structured in such a way that there's a natural split where you can separate, say, the mining from the rig business?

Mark Keller

It's not a natural split and it would take some work because the plant in Longview is shared between the Mining business and the Offshore Kit business. It would take a period, we estimate, of more than a year to separate those businesses, and so some transition agreement may have to be in place if the buyer for both parts needed the plant. It could be that a buyer for the Mining segment or the Offshore Product segment does not need or want the plant, then it would be a simpler split. We're going to look at all of that in the process.

W. Ralls

This is Matt. It brings up the complexity of kind of array of options here in terms of how we might separate it. So all of those things are on the table. We'd be looking at what we see from strategic buyers, taking into account the tax impacts of the sale versus the spend that's in there.

Robert MacKenzie - FBR Capital Markets & Co.

And final question on the conventional jack-up rigs, obviously, that's something at some point you guys would consider divesting, wouldn't typically be a complicated transaction. What do you see is the market for those rigs and when do you think we might see them be moved on to another owner?

Mark Keller

As far as slot rigs, we have a couple of companies that have contacted us and are interested. And there's some accommodations work and some work in benign areas. So yes, we've been, I guess, fielding different companies on those rigs for probably the last six to eight months.

William Wells

There's a lot of that type of equipment. There's not strong demand so it's hard to say whether or not something will occur in the near term.

Mark Keller

And as you heard in our prepared comments, this is Mark, with McMoRan picking up the Rowan-Louisiana including we have two priced options significantly above market rates. And with their shallow rig discoveries at Blackbeard East, there's a possibility for the Rowan-Alaska [indiscernible] to go into that rig.

Operator

Our next question is from James West of Barclays Capital.

James West - Barclays Capital

Bill, could you remind us what your tax basis is on LeTourneau? And then secondarily, I know you said the process for divestitures and spends isn't set up, but have you discussed with the IRS and had gotten their approval that it would be a tax-free spend if you decided to spend?

William Wells

James, the last time we look at it, which was about middle of last year, the basis was around $400 million both inside and outside basis. A part of the process that we'll be going through is recalculating that basis and firming that number up, but we do plan on going to the IRS for this if we go down the spend route.

Mark Keller

We do believe it will be a tax-free.

James West - Barclays Capital

But no conversations yet with the IRS?

William Wells

No.

James West - Barclays Capital

After you do divest LeTourneau and the land rigs, does it make sense for the legacy Rowan to redomesticate outside of the U.S.?

W. Ralls

Well, as you know, we constantly look at that issue. There are some ways to do that without a strategic transaction. They're a little bit higher risk and there are back patterns that we're not confident of with right now in terms of Rowan's ability to do that. Having said that, as Bill mentioned, our tax rate is already expected to be below 20% in 2011, so we're getting a substantial fraction of the available tax benefits. There's some treasury advantages to being an inverted company. There's also some sort of legal and legislative, I should say probably, legislative pushback against that sort of transaction. So we'll keep watching it, but right now, we don't have any immediate plans for that.

Operator

Our next question is from Mike Urban of Deutsche Bank.

Michael Urban - Deutsche Bank AG

So Matt, prior to your joining the company, Rowan had certainly built some rigs on spec, and once you joined, you kind of expressed a preference not to do that. You have a lot of competitors out there doing that and while you're certainly well ahead of the game in terms of fleet quality, you do, I think, have some renewal to do on the standard side and would just be interested on your thoughts on any additional billing that you would do on the jack-up side, your willingness to do that with or without a contract?

W. Ralls

Yes, it's, Mike, I'd have to say that your characterization of my prior position on it, with emphasis on the word prior, I guess, is that is accurate. I have always preferred, as I think most of the established contractors would, that companies not built on the spec in a cyclical industry. Having said that, there is a definite fleet renewal issue for established contractors. Obviously, we're well ahead of the curve in terms of doing that, thanks to some commitments made in the past by Rowan board and management. But as you point out, we do have some what used to be considered solid premium jack-ups, our 116Cs which are now sort of at the low end of the premium curve, but still very attractive assets that have been upgraded, so not as much urgency there. We have said many times that we're focused on expanding our offshore fleet particularly after we complete or as we consider completing these other two divestitures. So we are looking at the prospect of doing some building without contracts. I think it's very difficult in this market to get contracts ahead of signing shipyard agreements. But we have not made any determination there. We've not asked the board for approval on anything at this point, but I guess my thinking on that has evolved some, just in terms of competitive positioning.

Michael Urban - Deutsche Bank AG

And how about in the Deepwater market, to the extent you would enter into that market which you've talked about from time to time, would that have to be against a contract?

W. Ralls

I don't think so. As I've said, I really feel like it would be very difficult for any one, even a well-established, ultra-deep water contractor to get somebody to sign up for a new bill to be delivered three years later. There's just too much liquidity in that market.

Michael Urban - Deutsche Bank AG

And last question was on LeTourneau, you talked about the spin option and some interest from strategic buyers. Any interest from financial players?

W. Ralls

Yes, there has been. We really think that, I guess, the stronger appetite will come from the strategic guy. Yes, we've been approached by both.

Operator

Our next question is from Robin Shoemaker of Citi.

Robin Shoemaker - Citigroup Inc

Matt, I wanted to ask you, on the rigs, you described some work opportunities coming up in Saudi and you've got several rigs, the Boswell, Keller, Yeargain that are just imminently coming off of contracts. Do you expect a gap there of idle time for those rigs given what you're looking at it is future opportunities?

W. Ralls

Robin, I'll let Mark answer that.

Mark Keller

Robin, this is Mark. We were in Aramco's office Wednesday. The plans from Saudi Aramco currently is to extend all of the Tarzan Class rigs. We currently have 11 tenders that are active with them. Our rigs have cleared through the technical phase and they are now in commercial evaluation. We've gotten back several clarifications in our tenders and we've responded back, so hopefully, that's a good sign. But we don't anticipate any gaps. They are very happy with our operation. As you know, we've had a very long relationship with Saudi Aramco and hope to maintain that. But we talk to them every week, sometimes multiple times a week regarding that topic, and the answer every time is, we have plans for those rigs moving forward.

Robin Shoemaker - Citigroup Inc

The rates these rigs are currently earning, is that a ballpark, good estimate for where the market is now for these type of assets?

W. Ralls

I'd rather not comment on that. As I mentioned earlier, we are in a very active market over there with tenders and negotiation. And I would rather not go there, if you don't mind.

Robin Shoemaker - Citigroup Inc

My second question then is on the land rig fleet. Just looking at the contract status, a lot of these rigs are clearly on spot renewable type of contracting arrangements. And we've seen a pretty healthy long-term contract market in U.S. land emerging for AC-drive type land rigs, particularly. Is your strategy, given the impending sale of these assets, not to put some of these on long-term contracts, or what's your strategy there?

W. Ralls

No, quite the contrary, depending on what day rate we're offered to tie them up long term, we actually prefer, we have several of our rigs on term contracts right now and if the day rate's high enough for a two- to three-year contract, we would take it. But what we're seeing right now in the market for our rigs in the day rate range that we were willing to operate at, we're seeing the terms stretch out to the year as a typical contract. Some of them, we are in discussions now with a couple of operators for contracts in excess of a year. But I would say mostly around six months to a year.

Robin Shoemaker - Citigroup Inc

And is the sale of these land rigs potentially in discrete packages or is it definitely just a one single transaction for all of the assets?

William Wells

Robin, I'd say it's very probably a single transaction. We wouldn't rule anything out, but I'd say it's highly likely to be single transaction.

Operator

Our next question comes from Matt Conlan of Wells Fargo.

Matthew Conlan - Wells Fargo Securities, LLC

I wanted to ask about the Middle East. One of your competitors mentioned that there are several tenders, particularly in Saudi Arabia but mostly against incumbent rigs. I assume that the Tarzan rigs out there are part of those incumbent rigs that have tenders against them, but how about on 116Cs? What's the outlook for those?

William Wells

Right now, there are 19 jack-ups working for Saudi Aramco. And in 2011, 15 of those rigs roll off contract. There are 11 tenders that are currently -- have been submitted by various contractors and those tenders represent about 20 depending on how many rigs they elect to take, the thing you've got to keep in mind is, Saudi Aramco sometimes off one tender will take two or three rigs. So we're thinking that there's a chance of 22 to 24 rigs could be picked up. So and when you look at their fleet, they have approximately eight 250 rigs and we think some of those rigs will be replaced. So as far as incremental demand, I think you're looking at somewhere around 11 rigs if they exercise the number of rigs that we believe they're going to. To your point about the Tarzans, there was only one gas tender and that was for 1.5 million hook-load rig. We did tender a Tarzan against that tender. However, we are being told that once the land rig tenders that they have out and the offshore tenders are evaluated and awarded, then they will go, will come to us and talk to us about negotiation on the Tarzan Class rigs.

Matthew Conlan - Wells Fargo Securities, LLC

And do you think that 116-Cs are going to be able to have work in '11?

W. Ralls

We feel very positive that our 116s given our operational history and our relationship with Aramco, we feel very comfortable that we will build, put the rigs to work. As I mentioned earlier, we're in a very close contact with them. Our operations team is in their office everyday and our marketing team is in there frequently. So we feel real comfortable. We have a great relationship. Our area manager, Kelly McHenry, does a great job.

Operator

Our next question comes from Andreas Stubsrud of Pareto.

Andreas Stubsrud - Pareto Securities

I was just wondering about the rig in Egypt, the J. P. Bussell. Why is that still available? Is that more a regional question or a specific rig question because the market for those rigs are pretty good these days? Could you just update us on that rig?

W. Ralls

You bet. We are currently in discussions with an operator in the region. As you can imagine, with the recent political unrest in Egypt, it's been delayed somewhat. We were hopeful that we would be further along in the contracting process, but we are in very close communication with that operator, and feel good that hopefully, we'll have a contract for the rig soon, operating offshore region. We're also tendering the rig into other areas of the world, but we feel comfortable there.

Andreas Stubsrud - Pareto Securities

Do you feel comfortable, as I understand, in the Mediterranean?

W. Ralls

Right now, we do, yes.

Operator

Our next caller is from Colin Terry (sic) [Gerry] of Raymond James.

Collin Gerry - Raymond James

I want to follow-up on some of the jack-up commentary. The North Sea seems to be particularly strong, I heard that from your competitors as well. We're seeing it with your fleet in the fleet status with the new contracts. Any chance that you all would move any additional rigs to the North Sea? Is there an opportunity for that? And maybe just give us a little bit more color on that market in general.

W. Ralls

Collin, the market in the North Sea, as I mentioned in our comments, prepared remarks, is very strong. Last year, we responded to about 38 tenders in the region. Today, we see demand for about 18 units. We think that demand will be for higher spec units. I suspect that some of the companies that are looking at new builds today are looking at that market very hard. But our Super Gorilla class rigs, we feel like will remain on term contracts. They're positioned with operators that have a lot of work. The N-Class rigs, as I mentioned in my remarks, we feel like the Viking with TOTAL will say with them for several years. We also feel like that we're seeing a lot of demand in Norway, the same high grading of rigs is taking place of equipment in Norway that you're seeing in other places of the world. And then the rig that we put to work in Norway with Xcite Energy, we're excited about that because drilling and production. We're also seeing more demand for that type of unit. A couple of operators in the Norwegian sector, interested in the drilling and production. As far as mobilizing other rigs into the area, it's something that we look at all the time. We don't have any immediate plans to do that, but we're looking at the worldwide market constantly and we're looking at opportunities.

William Wells

We really don't have any...

W. Ralls

Not currently, that's right. With Palmer going to the Middle East, we just don't see any of our rigs coming down that could [indiscernible].

Collin Gerry - Raymond James

And just a follow-up on the production arrangement that you have on one of the N-Class rigs, in the fleets, as you mentioned, the $1 per barrel of oil produced, can you just give us a sense of maybe what the production outlook could be? Is it 1,000 barrels a day or 200? I wouldn't even have a guess.

W. Ralls

I can tell you what the operator -- I mean, just in general there, we're seeing somewhere -- it could be at a maximum, it's going to vary, obviously, 30,000 barrels a day, it could exceed that, but I really hate to quote their business, but we were glad to get that piece of the contract, but they're very excited about the prospect and could turn into a multiyear project for us.

Collin Gerry - Raymond James

Matt, switching gears, we touched on the deepwater opportunities a little bit, maybe refresh us on your thoughts on build versus buy. Are there opportunities to acquire your way into the deepwater market and if you are looking at building as a different method, would it be with one of the currently available designs or in typical Rowan fashion would you all try to go after a little bit even higher end and maybe a beefier rig than what's currently available in the shipyards?

W. Ralls

Yes. Well, what I would say is that we've said for the last couple of years, we would like to get a foothold in the ultra-deep water market and that's not changed. We expressed in the past a preference for doing it through acquisition or M&A or strategic deals or something like that. And I would say with the kind of recent strength of the ultra-deep water market, that the pricing there has sort of pushed us more toward build than buy, if we were to try to do something in the fairly near future. Once again, we don't have any commitments to do that. We don't have any board decisions on that issue. So it's all under consideration. So we have been looking at the build side of it and we've looked at various designs. We have an idea of the type design we would like. It is not out of the kind of mainstream in terms of what's being constructed out there, but it would be at the high end for sure. I mean, we would be in the 10,000- to 12,000-foot category if we were to elect to do something like that.

Collin Gerry - Raymond James

Last one for me, Bill, you mentioned on your guidance the capitalization on the interest side. With most of your rigs getting delivered over the next year or so, should we assume that the capitalization level rolls off pretty substantially in 2012?

William Wells

Right. On the interest, yes.

Operator

Our next question is from Doug Becker of Bank of America Merrill Lynch.

Douglas Becker - BofA Merrill Lynch

Matt, just hoping to get your latest thoughts on the pros and cons of large corporate consolidation and does the recent consolidation change your view on Rowan's competitiveness whether it be marketing, retaining people or tax efficiency?

W. Ralls

Well, let me take the easy answer first, the second part of that which is no. We think from a competitive standpoint, we are very well positioned. We'll have, when we complete our newbuild program, we'll have 31 jack-ups, which is a very good size fleet. We are a premier contractor in the consideration of our clients. And so I think we have critical mass. Rowan is a company that people like to work for. We've got a very favorable tax rate already and it's probably headed lower from here. So I don't think there's any thing about, say, the Ensco, Pride transaction that changes our thoughts about Rowan's ability to stand alone. And as I said in my comments, and I truly believe this, that Rowan has brand value. You can see it in our performance in day rates and utilization. There's no reason that Rowan needs to be part of a bigger company. In fact, I can make the argument that we can make more money with these rigs than another company could, so it argues for standing alone. Having said that, we would like to grow the company and a strategic transaction could make some sense. We've looked at them, we've talked to everybody out there who's interested in talking and we'll continue to pursue all avenues. But at this stage, there's nothing about the transaction a couple of weeks ago that increases our sense of urgency.

Douglas Becker - BofA Merrill Lynch

Bill, another strong quarter on the cost side, I guess, somewhat related to the EXL-II startup in the Bob Palmer, but there also seems to be some structural changes going on. What type of structural changes have been made to the cost structure and what are the opportunities for additional cost improvements going forward?

William Wells

Well, I would say over the last couple of years, Doug, most of those have been in the labor area as we've continued to try to optimize the manning on rigs not only in terms of the number, but also the source of labor. And we've got a little bit more work we could do in that area. Of course, it depends on where we're operating. And then we've also done some things. We started to put in more of a preventive maintenance program. We think there's some more opportunity there. I can't quantify what that number is, but certainly, I think, there's an opportunity and also on the procurement side, we've got an initiative that's rolling pretty well on that. We think there's some opportunity there as well. So we will keep working on it as we go forward.

Douglas Becker - BofA Merrill Lynch

And then just a housekeeping item, is there any change to operating costs when the rigs and drilling income producing mode?

W. Ralls

Yes, we think in the drilling mode will be in the 115s working in Norway per day, and then we're still defining the scope of the project on the accommodations work that we think that will be below $100,000 a day.

William Wells

You were asking though about drilling and production.

W. Ralls

Yes. In the Xcite contract, there's not going to be any difference in operating costs because when we go into production mode, all of the production associated costs are for their account in the contract. So we don't see any increase there. There'll be more people obviously on the rig, but they'll be for Xcite's account.

Operator

Our next question is from Max Barrett of Tudor Pickering Holt.

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

First, is on LeTourneau, do you expect to book that drilling kit for the Greatship jack-up in Q1? And then also, are you expecting the number of new load orders for LeTourneau design rigs to pick up?

Thomas Burke

We expect to book that in Q1, and we do expect more orders for LeTourneau kit through the next coming quarters.

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

Is it safe to say that the drilling side of LeTourneau could see book-to-bill greater than one in Q1?

W. Ralls

I don't know..

William Wells

I don't know the answer to that.

Thomas Burke

I don't know the answer as well.

William Wells

Well, and when you say booking, I mean, we'll close the order but we'll bill it as we...

W. Ralls

Yes. We'll book it.

Thomas Burke

We'll probably take the order for the kit in the first quarter, but the drilling equipment will probably come later.

W. Ralls

We're pretty confident that we're going to see improved orders for LeTourneau equipment, I would say that. LeTourneau, even in the last cycle, was a little bit -- their activity levels came sort of after -- we use deliveries pushed out and so that's one of the things that leads to higher activity level for LeTourneau, and with all the new orders, we expect those conditions to exist in the market for their equipment to get stronger.

Operator

Our next question is from David Wilson of Howard Weil.

David Wilson - Howard Weil Incorporated

Matt, we've seen a lot of newbuild announcements for high-spec jack-ups in those with the 2 million pound hook loads. Understanding, as you mentioned before, you guys got a kind of a first-mover advantage here, but more competition is not a good thing. How do you feel about the supply demand outlook for these types of rigs considering all the new builds? Are you seeing instances where customers are demanding these types of rigs even though the geology doesn't require it?

W. Ralls

Well, I guess what we've seen over the past couple of years is, that people are -- it actually applies to land, jack-ups and ultra-deepwater is that customers are looking for equipment that can meet their toughest requirements over the period they expect to have it. So everybody's looking for more capable equipment and sometimes that capability even exceeds what they absolutely have to have, but it's more efficient in drilling the wells. So that's been the case. We expect that to continue to be the way customers look at it as they really become more focused on sort of total cost of the well as opposed to just day rate. In terms of the new supply that's coming into the market, obviously, we'd prefer that nobody do that and if we kind of own this market to ourselves and a few others, but that's not reality. And the fact is that the demand growth that we're seeing is all in the high end of the market. So we expect that just like there is an ultra-deepwater, just like there is in the high-efficiency land rigs that you can have a sort of an industry-wide over supply of equipment but have the upper end equipment in very tight supply and able to attract day rates that will easily justify the capital investment. And that's what we're expecting to see. I mean, as I said in my comments, if you look at the world jack-up fleet, there's just a lot of companies out there that are facing an age problem and are going to have to do something over the next decade or so to renew their fleets or they'll be uncompetitive.

David Wilson - Howard Weil Incorporated

And then just one final one, I apologize if I missed this, Mark, but on the Gorilla II and Gorilla III here in the Gulf of Mexico, I know that Gorilla III signed a new short-term contract here. But beyond that, do you think it's likely, given the level of inquiries, tendering activity, that these rigs may leave the Gulf of Mexico for the next contracts or do you think there's enough demand here in the Gulf of Mexico to keep them here?

Mark Keller

We are currently marketing the Gorilla II and III internationally. I think right now, the best chance from what we see short-term is the Gorilla III. We're in discussions with an operator on an international contract currently. The Gorilla II, since the Bob Palmer left the U.S. Gulf of Mexico, is the only long-legged cantilever in the Gulf of Mexico that has that operating capability. But having said that, with the permitting situation here, we're always marketing that rig toward term contracts. But short term, I see the Gorilla III having the best opportunity to exit first.

Operator

Our next our next question is from Alan Laws of BMO Capital Markets.

Alan Laws - BMO Capital Markets U.S.

I don't suppose you'll be kind of interested in framing your internal estimates of the proceeds of LeTourneau on land. And I guess assuming that the proceeds will be used to enter the deepwater market, I was wondering how many deepwater rigs do you think you would start out within in the deepwater market?

W. Ralls

Well, Alan, you're pretty much correct, we're going to be elusive. I would say we wouldn't hazard a guess on the valuation. That'll be part of the whole pricing process as we contact potential interested parties. And I wouldn't even go so far as to suppose that it'll be a transaction with regard to LeTourneau that will generate a lot of cash for us. I mean, if it's a spin, it's limited to just the amount of debt that we'd be comfortable putting on LeTourneau to be spun out. So we don't necessarily tie a move into additional construction, whether its jack-ups or deepwater with these transactions. But obviously, we would expect both of these to increase our liquidity somewhat and particularly significantly, but certainly, somewhat. And so we sort of divorce those two and then just look at what we think makes sense. If we were to expand it into deep waters. It's unlikely we'll do it with a single unit, but we wouldn't do lots of units. So that's really about as far as I'd like to go with that, given the fact that it's very preliminary. As I have repeated, we don't have any commitments in that area.

Alan Laws - BMO Capital Markets U.S.

Would a spin -- if we suppose that it would be 100% spin or would you consider having even a controlling interest in this and unload it over time?

Mark Keller

Well, all those options are on the table. We're looking at all those. My personal sense of it is, is that spin or a sale to strategic buyer or buyers are probably the two most likely avenues, but any of those could occur.

Alan Laws - BMO Capital Markets U.S.

And the last follow-up I had was on the older Gorillas, the II and the III. You have said in the past that you may entertain upgrading them to a super Gorilla status and I know you're chasing contracts for them right now and it's probably you're preferred avenue here, but I wonder what the decision is or thoughts around the upgrade of those rigs might be, talk a little bit to that.

W. Ralls

Let me [indiscernible] at the high-level and then turn it over to David to talk about the upgrades themselves. It's difficult to take a rig out of the market when you can make the kind of day rates that we're seeing here and take it out of the market for several months and spend capital on it with the concomitant opportunity costs. So it's probably unlikely that that's going to occur any time before sort of the next cyclical downturn.

David Russell

If we can find a term contract with adequate return, we would do it. We've got all of the engineerings complete and if our marketing group can get the right contract then we'd probably move forward with that. But right now, we're still waiting on that.

Suzanne McLeod

Okay. So that concludes our fourth quarter and full year results conference call. We'd like to thank everyone for joining us today. And if you have any additional questions, please feel free to call Investor Relations. Until our next call, thank you.

Operator

This concludes today's teleconference. You may now disconnect your lines at this time, and thank you for your participation.

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