Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Rowan Companies (NYSE:RDC)

Q1 2011 Earnings Call

May 03, 2011 11:00 am ET

Executives

Gordie Beittenmiller -

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

Collin Gerry - Raymond James

Ian Macpherson - Simmons & Company

David Wilson - Howard Weil Incorporated

Robin Shoemaker - Citigroup Inc

Michael Urban - Deutsche Bank AG

Daniel Boyd - Goldman Sachs Group Inc.

Operator

Greetings, and welcome to the Rowan Companies First Quarter 2011 Earnings Results Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Suzanne McLeod, Director of Investor Relations for Rowan Companies. Ma'am, you may begin.

Suzanne McLeod

Thank you, Alexis, and good morning. Welcome to Rowan's First Quarter 2011 Earnings Results 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 a comment. Also in the room to respond to questions are David Russell, Executive Vice President, Drilling Operations; Kevin Bartol, Senior Vice President Corporate Development; and Gordie Beittenmiller, Chief Financial Officer of LeTourneau Technologies.

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

Thank you, Suzanne. Good morning, everyone, and thanks for joining our first quarter 2011 earnings call.

Our earnings for the quarter came in at $0.24 net of the small gain or $0.05 below consensus estimates. The end of performance mainly reflects the effects of delayed loader shipments at LeTourneau and some nonrecurring expense items in our Drilling business. Bill and Tom will give you more detail on these items in their comments, but I'll note here that we expect the LeTourneau shipping delays to be caught up by the third quarter of this year.

In general, the outlook is good for all of our businesses. We are optimistic about putting some of our idle jack-ups back to work over the next several months and already have the Rowan-Louisiana back on contract. We expect to have the Rowan Viking on day rate later this month and the Stavanger by mid-June. After a dip in utilization for our land rigs earlier this year, utilization has increased to 96% currently for our marketed rigs and we expect day rates for our higher end equipment to continue to improve in 2011.

For LeTourneau, the Mining business continues to be strong and the drilling products businesses are improving. The strength we're seeing in both land drilling and manufacturing underscores our comments on our last call, when we indicated that market conditions appeared favorable to separate these 2 businesses from Rowan. We have now engaged advisors for each of these potential transactions. We've approached the market preliminary expressions of interest on the land rig fleet and we're pleased with the first round of responses. Regarding LeTourneau, we're working toward being able to file spinoff documents with the SEC within the next 10 days and while we haven't formally approached potential buyers yet, we've seen strong interest following our earlier comments.

We continue to believe that the South [ph] would create very attractive small-cap equipment company and Tom will assemble a strong management team to take the company forward, should we decide that route would create the most shareholder value.

So in summary, we're very pleased with the outlook for our high-quality jack-up fleet and optimistic that market conditions will remain favorable for us to execute on our long-stated strategy of separating our manufacturing and land businesses, and focusing on growing our strong position in offshore drilling.

With that, I'll turn it over to Mark to discuss the relevant rig markets.

Mark Keller

Thanks, Matt, and good morning, everyone. According to ODS-Petrodata, there are currently 477 jack-ups worldwide. Demand is 349 rigs, with utilization at 73%, which has seen a steady increase from the January 2011 low of 68%. International tender and inquiry activity further supports the strengthening of the market. In the first 4 months of 2011, Rowan has already submitted as many tenders and inquiries as we submitted in all of 2010. The Middle East, the North Sea and Mexico are currently driving global jack-up demand.

We are recently averaging between 10 to 12 international tenders and inquiries in-house and we're encouraged by this level of activity. We continue to see an increase in the complexity of operators drilling programs and our high-spec fleet of jack-ups is strategically placed around the world to meet the challenges of these tender opportunities. By year-end 2011, we will own 51% of the high-spec jack-up market. Fixtures for this caliber rigs are currently averaging nearly double the rates of 350-foot cantilever jack-ups. 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 41 rigs for a utilization of 49%. We currently have 10 jack-ups in the region with a marketed utilization of 100%. Our average day rate of approximately $119,000 leads the average for all other jack-ups in this market by $53,000 per day. We remain focused on deep gas drilling and on our relationship with McMoRan. Five of our jack-ups are currently contracted to them with multiple projects planned for the near future.

It is possible that we may mobilize either the Rowan-Mississippi or the Joe Douglas to Saudi Aramco for the gas drilling contract previously assigned to the Ralph Coffman depending on the first availability. Whichever way that goes, we expect to keep 2 our 240Cs working for McMoRan for the foreseeable future.

I'd like to take a moment to discuss Central America. We are pleased to announce a contract for the Gorilla III in Trinidad with Niko and Bayfield. The rig has 1 year commitment and a base day rate of $120,000 per day with additional options. This will be the second rig in their country joining the EXL-II currently operating on a 3-year contract for BP. As the industry is well aware, we are seeing a significant increase in tender activity in Mexico. We're currently evaluating multiple tenders for PEMEX and determining if these opportunities best fit the strategic placement of Rowan's fleet in the long-term.

Now turning to the North Sea. The supply is 40 jack-ups while demand is 35 rigs for a contracted utilization of 88%. Rowan currently has 6 jack-ups contracted in the region; 3 Super Gorilla class jack-ups, working at an average day rate of approximately $187,000; and 3 N-Class units committed as previously announced with commencements in May, June and November of 2011. Once all the units are working in the fourth quarter of 2011, Rowan's average day rate will increase to approximately $220,000 per day. The North Sea remains one of the most active regions in terms of tenders and inquiries with demand for approximately 14 to 18 units over the next 30 years. Of those, Rowan only considers 7 to 10 projects as potential opportunities for our fleet due to our current contract commitments. Our N-Class units were specifically designed and targeted for the challenging environment of this market and we are confident that they will enjoy strong utilization and premium day rates for years to come.

Moving on to the Middle East. Total supply in this region is 117 jack-ups while demand is currently at 86 rigs and contracted utilization is 74%. The Middle East [Audio Gap] the lead global demand with tenders currently open for 19 jack-ups. Over the past few months, Saudi Aramco has been aggressive in its fleet expansion in order to attain increased production goals. We expect multiple high-spec gas tenders from Aramco later this year in addition to the 14 bids outstanding. We remain optimistic that we will be successful in multiple contract and extension awards with this important customer.

Regarding our onshore division, we have a marketed fleet of 28 land rigs located in Texas, Louisiana, Oklahoma and Alabama. Currently, 96% of our marketed fleet is contracted and we've seen recent fixtures range in the $20,000 to $24,000 per day average. We're encouraged by new commitments and extensions we've signed with Chesapeake, EOG Resources and Crimson exploration. It is evident that operators have been hydrating their fleets in the recent months as fast-moving high-spec land rigs are in short supply. Rowan's utilization and presence in the U.S. shale and gas plays is proof of the desire for higher quality equipment. Approximately 70% of our fleet is operating in these areas including the Eagle Ford, Haynesville and Deep Bossier.

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

Thomas Burke

Thank you, Mark, and good morning. Though our first quarter had mixed results due to temporary shipment delays, we are anticipating that 2011 is going to be a strong year for LeTourneau. A robust business environment appears to be leading to a record year in our Mining business and we are seeing significant promise in our Drilling Products business as well. During the first quarter, we continued improving our manufacturing operation. And as Matt mentioned, we have stepped up our work on separating Letourneau from Rowan. In our Mining Products segment, first quarter revenues were up 45% year-on-year, 74 [Audio Gap]as the worldwide surface mining industry remained strong. In addition to increased loaded shipments during the quarter, we also realized a 36% gain year-on-year in our aftermarket business. We did ship fewer loaders than planned as we reconfigured our facilities and introduced our second generation Switch Reluctant hybrid drive system on to the production line. These delays resulted in decreased throughput and reduced absorption of fixed plant costs, which in turn contributed to a lower operating margin this quarter versus the first quarter of last year.

While these challenges will also affect our second quarter shipping schedule, we believe they are now addressed and we expect that we will be back-to-plan by the end of the third quarter. We still expect to ship approximately 50 loaders this year.

In the first quarter, we added 11 loaders to our Mining Products backlog, which increased 21% compared to the end of 2010. The inquiry levels continue to be high and we remain encouraged that we will see another year of healthy order intake. In our drilling products segment, first quarter external revenues decreased 20% year-on-year to $40 million due to fewer offshore and land kit shipments. However, this was partly offset by an improvement in our aftermarket business. We also experienced some shipment delays that was associated with customer change orders and with repairs to electrical test equipment, and again, expect to be back on plan by midyear.

Our Vicksburg shipyard, which is located on the lower Mississippi River, will experience flooding in the coming weeks due to recent heavy rainfall through the midsection of the U.S. The impact of this on our operations is yet to be determined, but it will delay completion of a Joe Douglas rig under construction there. Market activity continues to increase for both our drilling equipment and our offshore rig kit businesses. During the quarter, we received 2 orders, the Super 116E jack-up, the first from Lamprell for Greatship Global Energy Services and the second for Keppel AmFELS for Perforadora Central. We have excellent relationships with both Lamprell and AmFELS, and believe we have good prospects to further rig kit orders from these shipyards later this year.

On the strength of these kit orders, as well as new orders in drilling equipment, our external drilling products backlog increased 65% to $246 million at March 31 compared to $150 million at the end of 2010. With worldwide interest in new jack-ups continue at a high-level, we are focused on increasing our capacity to deliver kits. Overall, we are optimistic about the trends we see in the jack-up market and our opportunities to participate in this build cycle.

From manufacturing standpoint, we are investing in better supply chain performance, have recently hired an experienced supply chain leader and strengthened our procurement team. Early results from these efforts are encouraging.

In summary, we are encouraged by the strong market demand for the kind of products and services we offered at LeTourneau. We believe we will recover from our delayed loader shipments by the third quarter and are pleased to make progress in several fronts, including order intake, capacity expansion and supply chain. I'll now turn it over to Bill Wells.

William Wells

Thank you, Tom, and good morning, everyone. In our drilling operations, our first quarter 2011 revenues were $250 million, down by 24% from last year and by 4% from last quarter. Both changes reflect further averaging down of offshore day rates as rigs reset from previous high rates obtained at the peak of the last cycle to current market rates. The effects of which more than offset the impact of fleet additions between periods.

Our second quarter 2011 drilling revenues should be well above the first quarter level primarily as the result of the expected startups of the Rowan Viking in May and the Bob Palmer and Rowan-Stavanger in June in addition to full quarters from EXL-II and EXL-III.

As of April 28, the date of our most recent fleet status update, our backlog of drilling commitments totaled $1.7 billion. We expect that approximately 39% of that amount will be realized as revenue during the remainder of 2011, 37% will occur in 2012 and the balance in 2013 or beyond.

As Mark mentioned, the Joe Douglas is currently slated to be substituted for the Ralph Coffman to fulfill the contract with Saudi Aramco starting in the fourth quarter of this year. However, if the Rowan-Mississippi becomes available by the end of this month, as expected, we would likely send that rig to the Middle East and keep the Joe Douglas in the Gulf of Mexico. While this change will reduce our drilling revenues in each of the second and third quarters of 2011, it will also likely enable us to commence the Saudi Aramco contract earlier than we otherwise would and help to minimize potential contract penalties for late delivery.

Our first quarter drilling expenses of $143 million were 5% above last year's, following fleet additions, and 5% above last quarter and above our previous guidance due primarily to higher than anticipated reserves for personal injury claims, rig move costs and reimbursable expenses, each of which is expected to return to a more normal level going forward. We expect our second quarter 2011 drilling expenses to be in the range of $148 million to $150 million, with a sequential increase from a normalized first quarter level primarily due to the startups mentioned previously and expected higher land rig activity. We're holding our full year 2011 estimate drilling expenses at approximately $620 million with the year-over-year increase due largely to fleet additions and expected activity increases.

Turning to our manufacturing operations. Our first quarter revenues totaled $155 million, including $41 million of arm's length sales to our Drilling division. External revenues were $114 million, an increase of 13% from last year but a decrease of 43% from last quarter. Our Drilling Products and Systems segment contributed $81 million or 52% of total manufacturing revenues during the first quarter, including sales to our Drilling Division. External revenues were $40 million and included $22 million from offshore rig projects and $12 million from aftermarket parts and services.

As Tom mentioned, our Mining, Forestry and steel products revenues totaled $74 million and included $23 million from shipments of mining equipment, $31 million from parts and services and $15 million from steel plate. We shipped 5 mining loaders during the first quarter, including 3 L-1850 units. Our combined aftermarket parts and service revenues were $46 million during the first quarter, up by 55% over last year, but down by 3% from last quarter. Our average operating margin was 14% of manufacturing revenues during the first quarter, down from 17% last year and last quarter, and below our previous guidance due to the factors that Tom discussed.

We continued to believe that margins will improve over the last half of the year and average in the upper teens for all of 2011. At March 31, our external manufacturing backlog totaled $437 million and included $116 million of related offshore rig projects, $159 million of mining equipment and $60 million of drilling equipment, with the remainder primarily parts and other components. We booked approximately $250 million of new orders in the first quarter or 219% of external revenues during the period, with each market segment contributing to a 46% increase in backlog. We continue to believe that 2011 revenues will be slightly higher than the 2010 level.

We currently have no further plans for rig construction at our Vicksburg, Mississippi shipyard following the delivery of the Joe Douglas later this year, but expect to continue using the facility for other operations. Absent additional rig orders, the activities at the facility will be significantly reduced starting in the second quarter. We estimate that closing our significantly reducing activity levels at the facility will result in cash charges ranging from $8 million to $10 million, $3 million to $4 million of which will likely be reported in the second quarter with the balance of the charges incurred over the last half of the year.

Our first quarter depreciation expense totaled $49 million, which tracked our previous guidance and was up by 9% over last year and by 4% over last quarter, primarily due to the rig fleet additions. Our latest estimate for 2011 depreciation continues to be in the range of $217 million to $218 million for the year, including approximately $53 million to $54 million in the second quarter. Our first quarter SG&A expenses totaled $32 million, up by 26% from last year but down by 10% from last quarter, and below our previous guidance, primarily due to fluctuations in incentive compensation costs and professional fees related to tax planning. Our latest estimate for 2011 cost continues to be in the range of $134 million to $136 million for the year, including approximately $34 million to $35 million in the second quarter.

Interest expense, net of interest capitalized, was approximately $5.3 million during the first quarter within our previous guidance. We currently expect to fully draw down our $350 million term loan facility during the second quarter of 2011. Based on the most likely timing, our 2011 interest expense will be in the range of $79 million to $80 million, about 40% of which should be capitalized. For the second quarter net interest expense should be approximately $7 million. Our $250 million revolving credit facility should remain undrawn.

We also recognize approximately $2 million of gains on asset disposals during the first quarter, most of which related to the sale of our land trucking business.

Our first quarter and expected full year effective tax rate is approximately 14%, reflecting an expected start up of additional 4 known rigs coupled with the full year impact of rig movements completed in 2010. Property and equipment additions totaled $349 million in the first quarter, which included $238 million for the second and third in class rigs, $26 million of the third 240C jack-up, $23 million for the fourth EXL rig and $57 million for our existing fleet, including reimbursed contractual modifications.

At March 31, we had approximately $354 million of remaining capital expenditures under our newbuild program, including the N-Class construction commitments, all of which should occur in 2011. We currently estimate as much as another $361 million of capital expenditures over the remainder of 2011, including $132 million of reimbursed contractual modifications: $51 million toward planned life enhancement projects; $98 million for existing fleet maintenance and upgrades; and $80 million for area equipment spares, drill pipe and needed improvements to our manufacturing facilities and shore bases.

That concludes our prepared remarks this morning. With Alexis' assistance, we'll now open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from the line of Dan Boyd of Goldman Sachs.

Daniel Boyd - Goldman Sachs Group Inc.

I just like to follow-up on Letourneau and what happened during the quarter that caused the shipment delays and what that means potentially for the future output of the facility, but also from a margin perspective, if that changes the way you think about the potential of that division.

Thomas Burke

So to answer your first question, Dan, what happened during the quarter was -- as I mentioned in my remarks, was that we introduced our second generation hybrid drive system and that took more time than we expected to get it onto the production line. And as also, we reconfigured our facilities with some of the lean initiatives and we made quite a significant reconfiguration to re-layout the main facility in Longview that produces the loaders, and that slowed down what happened in the first quarter. However, we believe we'll catch up for the rest of the year and as far as how it would change our margins, I don't believe -- Gordie, I don't believe this thing is going to change our margins at all?

Gordie Beittenmiller

No, I don't believe there's an expectation then will we had some under absorption of fixed cost due to lower throughput in the first quarter, but we now believe those are addressed through the third quarter and our absorption should be back-to-plan levels.

Daniel Boyd - Goldman Sachs Group Inc.

Okay. Just one follow-up, as you think about your margins and your backlog, how they change over time, maybe over the past 3 quarters?

Thomas Burke

Just to repeat, your question was, how do we feel about the margins and our backlog and how they are changing over time?

Daniel Boyd - Goldman Sachs Group Inc.

Exactly. That's exactly my question.

Thomas Burke

So as far as the mining backlog margins, we think the margins are improving. And as far as the drilling products margins, we also -- what we booked in the first quarter is improving versus the fourth quarter of last year and the third quarter of last year.

Operator

Our next question is coming from Robin Shoemaker with Citigroup.

Robin Shoemaker - Citigroup Inc

You mentioned in your remarks, Mexico and -- I wonder if the conventional jack-ups you have in the U.S. Gulf are suitable for the tenders you've seen so far and what do you believe or what do you think of the price ceilings that are part of these new tenders?

W. Ralls

Robin, as I've mentioned in my remarks, we're going through those tenders right now. We have demand in house, currently, of approximately 13 to 15 rigs. They all vary in term. They do have day rate and capital expenditure caps on them. When you look at the overall requirement of most of the tenders, they require a significant upgrade to a conventional Gulf of Mexico jack-up. Even the Cecil Provine, those type of rigs on 116-C would undergo a substantial upgrade to -- if they stay with the requested spec. So to answer your question, we're reviewing all of that. If the day rates that they have put on -- the day rate ceiling that they put on the tenders, it doesn't look very attractive for our fleet right now. I think we can do better in other places.

Robin Shoemaker - Citigroup Inc

I see. My other question is for Tom. You mentioned that the number of kits, there's quite a significant demand for kits in the market beyond what you've already won and that you have or are adding your capacity to produce kits. Could you remind us what is your capacity to produce kits annually today? And what would you expand it to?

Thomas Burke

Well, historically, it has been about 6 kits a year depending on the configuration of the rig. Obviously, the larger the rig, the less we can produce. That's roughly about 6 today. However, we've upgraded it. So we believe we've -- through our reconfiguring on our manufacturing facility and in our steel mill, we've moved it to 11 kits a year, about 1 every 5 weeks.

Robin Shoemaker - Citigroup Inc

Is that your capacity now?

Thomas Burke

That's our capacity now.

Robin Shoemaker - Citigroup Inc

Okay. So you've already undergone the expansion kit capacity that you explained?

Thomas Burke

We have planned the expansion. We've made the configuration changes in the steel mill. We have yet to make the configuration changes in the pipe mill, but they're small changes that we know we can make.

W. Ralls

It's really more de-bottlenecking.

Robin Shoemaker - Citigroup Inc

Okay, got it. And of the various jack-ups that have been announced and, of course, there's a lot of options associated with those, do you have a sense of what percentage of those have already committed? Or I guess, what percentage of the kits have not been awarded as yet?

Thomas Burke

In general? Or generally in the market?

Robin Shoemaker - Citigroup Inc

Yes. In the market as a whole from what we know has been ordered.

Thomas Burke

So I wouldn't be able to tell you off the top of my head, Kevin might. But as far as what options have been exercised and what haven't, I don't have that in front of me, I'm afraid.

Robin Shoemaker - Citigroup Inc

I was just referring to the number of kits that you think are still could be awarded based on known commitments to build.

Thomas Burke

Well, we know that -- what I could say is that our partnership, we don't -- let me rephrase that. I know with one of our partner shipyard, I believe, has 3 options out there for super 116 new jack-up.

Robin Shoemaker - Citigroup Inc

You're also talking to some other yards...

Thomas Burke

Yes.

Robin Shoemaker - Citigroup Inc

All of the new shipyards that might be able to...

Thomas Burke

Or other orders in our current shipyard.

Operator

Our next question is coming from the line of Mike Urban of Deutsche Bank.

Michael Urban - Deutsche Bank AG

It sounds like quite a bit of activity and potential activity coming out of the Middle East from Saudi and elsewhere. How much of that is just activity that is kind of been underlying or latent activity? And how much of that, if any, at this point, is coming, kind of, from a, let's say, a renewed sense of urgency given the ramp that we're beginning to see in Saudi?

W. Ralls

Well, Mike, the biggest thing is when all process made such a big jump. Aramco had a lot of tenders in the wings ready to come out. But they have -- out of their fleet, they have 20 rigs currently under contract, 20 jack-ups, and they had 15 of them rolling off contract in 2011. So they were going to have to re-contract several of those rigs. They're also looking to high grade. So you sell the first wave with 11 tenders and we've since received 3 more, so there's 14 active. But I think most of the activity is being generated because of the higher oil price, personally.

Michael Urban - Deutsche Bank AG

And then more broadly in the region, I mean, so obviously higher oil price helps. Do you think that you're again now seeing that higher sense of urgency whether be it because of higher oil price, because the Saudis are ramping up and you saw a lot of capacity being pulled into that market? Or is the level of demand that's out there now, which is pretty good, is that what you kind of expect to see going forward? Or in other words, would you see that even further improvement in demand perspectively?

W. Ralls

The word out of Saudi Aramco right now, in our meetings with them last week, you're going to see some more tenders come out this year. They've got some new production goals for the year and they've increased the activity at Manifa, which will ramp that project up, which at its height, originally, was going to operate 18 to 19 jack-ups. So they're slowly increasing the activity there. As I mentioned earlier, you're seeing them high-grade to some other rigs. Their drilling requirements have gotten more stringent. We are anticipating some high-spec gas tenders, at least 2, in the next few months. So I think those will be inbound shortly. And those will be rigs along the lines of the Bob Palmer and the 240C Ralph Coffman that we've contracted previously. But I think overall in the region, we're seeing a lot more activity. We're seeing some activity in Qatar, but certainly Saudi Aramco is driving that market.

William Wells

Yes, Mike, I would just add to that, I think part of the way we all characterize this is that it's sort of a resumption of activity. And the Saudis hit their production goal, capacity goal, a few years ago. They decided that they were going to be less active on the oil side until there was a call for their spare capacity. Obviously, that's been occurring in the last several months. And so this is kind of what they've talked about in the past, this building back their jack-up fleet. In addition to that, they have been challenged to meet their commitments for natural gas and so that's why you're seeing them pick up some of these bigger rigs.

Michael Urban - Deutsche Bank AG

Right. So you don't necessarily see the ramp in oil coming at the expense of the gas rigs?

William Wells

That's correct.

Operator

Our next question is coming from the line of Collin Gerry of Raymond James.

Collin Gerry - Raymond James

I missed most of it due to a fire alarm, or a fire drill, I should say, in the building. But I want to touch on the Saudi rigs, it seems like, or at least in my model, a big factor here going forward is plays, but how we think about some of the, I'll call them standard rigs, but kind of the 116-Cs and the Tarzan Class rigs you have renew in there. What are you comfortable, kind of, telling us in terms from a modeling perspective, should we model downtime in between contracts? Are we confident those will roll on and stay fully utilized? Is it kind of a mix of both? Can we maybe get into that? Or is it still too early?

William Wells

In the case of the Tarzans, Collin, I think you can model those rigs going forward. We're in discussions with Aramco right now. As you've heard me state, in earlier calls and in analyst conferences, that we're very optimistic that they're going to extend those rigs.

William Wells

There is mods if they do some downtime.

W. Ralls

Yes, there could be some modifications. However, those are still being negotiated right now. But if there's any downtime at all, as Bill said, it would just be for mods. But their plans are to extend those rigs. As far as the 116-Cs, we're in discussions with them about some of the 116s that we bid on the 11 tenders. Nothing has been finalized yet, but we are optimistic that we'll be able to put...

William Wells

That's still a competitive situation.

Collin Gerry - Raymond James

That's helpful color. And then again, I apologize if I missed this, but going back to Letourneau and Matt, your commentary being consistent with what we said last quarter, and analyzing the opportunities for monetizing the land rigs from Letourneau, could you maybe tell us, how do you think about a tax-free spin? Is that high on the priority list? Or is it a sale that seems to be more viable at this point? There's probably a limited amount of detail you can give us, but is the tax rate spend a possibility and is that a strong consideration?

W. Ralls

Yes, I would say, it is a strong consideration. It's potentially a very good outcome because, as I've said in my comments, we think it would be a good-sized company for what the investment community is looking for in small cap equipment companies. So it's got a strong management team in it. And the spin, as you note, is tax-free so that's got one set of advantages. If we could find a buyer for all or the significant part of the company and could generate substantial cash that's not as obviously efficient from a tax standpoint, although it's not terribly burdensome to us from a sales standpoint because there's some potential savings that we may be able to facilitate through some NOLs, but loss carryforwards. But it does have the benefit of giving us liquidity to advance our expansion on the offshore drilling side. So all of those things are viable alternatives and we'll continue to consider all of those as we move forward in this transaction.

Operator

Our next question is coming from the line of Ian Macpherson of Simmons & Company.

Ian Macpherson - Simmons & Company

Matt, it would seem that sales versus spend would facilitate accelerating your fleet investment as you said. But at the same time, it looks that we're beginning to see inflationary forces coming to bear with you build drill ships, which I know has been one of the options that you've been looking at closely. So does ordering drill ships or ordering new rigs follow a linear path in terms of LeTourneau and land rigs? Or are you comfortable trying to get in front of the inflation curve and expanding the fleet before you get anything done with any potential sales?

W. Ralls

Well, I guess the way I would answer that is, that we don't feel that 1 is dependent on the other. So we think we've got the balance sheet and the cash flow strength. We will be concluding, by the end of this year, a $3 billion capital program over the last 3 years. We'll have delivered 11 new high-spec jack-ups. And so not only does the CapEx fall off, but the cash flow generation picks up in 2012 and whatever we do in terms of fleet expansion to the extent it's based on new construction is likely to have a back-ended cash flow impact. And so we think we can pursue our expansion strategy irrespective of which way it goes on LeTourneau sale or spin or whether we end up consummating either transaction. Obviously, it kind of fits together nicely if everything were to come together. But we're not dependent -- we're not waiting on that and we are cognizant of inflationary pressures, although I'd say, at this point, we feel like there's still some time to continue to consider that strategy.

Ian Macpherson - Simmons & Company

Okay. And if I can ask a follow-up question to you or to Mark, I was positively surprised by the extension rate that you got for the Scooter Yeargain and I wonder if we should look at that as indicative of the market rate for the Tarzan Class rigs? Or if we should think about the short-term extension differently than how we might think about long-term extensions for all 3 of those rigs with Aramco?

Mark Keller

Ian, I don't have any idea what you're talking about. I'm just kidding with you. We haven't finalized anything on the Tarzans as of yet.

W. Ralls

Were you under the impression that...

William Wells

I think that was just an extension of work on the original contract deals.

Ian Macpherson - Simmons & Company

Yes. I thought that they added days to your contract at the same rates. So I may have misinterpreted that, so never mind.

Mark Keller

I understand you but that's correct, they did extend the Yeargain a little bit.

W. Ralls

Just to be clear, since there's others listening, I mean we do not expect to roll over the same day rates we had before, so it's kind of a flee to the [ph] market.

Ian Macpherson - Simmons & Company

And then separately, it seems like while the outlook broadly for the Middle East is improving significantly, it seems like the timing for the opportunity for the idle 116s to get back to work isn't -- it's not imminent, not necessarily this quarter. Is that correct? And how should we think about the timing of ramping back up the 3 or 4 idle rigs in the region over the next 2 or 3 quarters or whatever it is?

Mark Keller

Ian, I agree with you. I think the best opportunity for the 116s is to work there in the Middle East for Aramco. As I mentioned earlier, we're in discussions with them. I would say that the earliest, it's taking them a lot longer to award the contracts than they previously had hoped. There are some modifications that will be done to whoever is successful on those 11 tenders. But I would say the earliest would be looking probably at the fall, probably September.

Operator

Our next question is coming from the line of Dave Wilson of Howard Weil.

David Wilson - Howard Weil Incorporated

Mark, I just wanted to get a little more clarity around the Joe Douglas and the Rowan-Mississippi as far as the roll in Aramco and I'm trying to get a view of Aramco around the delivery date and the potential penalty that could be applied. Can you kind of give us a little insight to what they're thinking about that, whether or not there will be a penalty applied if it's beyond June 15th?

Mark Keller

Well, as you stated in the contract, our arrival date is June 15th, this is as far as we could push it back because we had told Aramco originally we were on a 30,000-plus well in the U.S. Gulf, and as you know, well, more issues can happen. So the current situation, David and his team and we're in discussion with Aramco constantly, but we're trying to work out a situation where one of the Tarzans would start doing some of the drilling and then when the 240C arrives, would replace that rig, and the Tarzan would go back to gas drilling. We're in discussions with Aramco about that. And as far as whether it would be the Douglas or the Mississippi, I'm not sure, I'll let David elaborate on it. But we're still, we have been in constant contact with McMoRan and Aramco, as I've mentioned, both companies are fully aware of the situation. And McMoRan has told us that they will do whatever to help us to make our contract obligations with Saudi Aramco. So we're looking at both of the rigs and I'm not sure which one will come up first.

David Russell

We should have further clarity on that within the next week or so.

David Wilson - Howard Weil Incorporated

And just a follow-on to that. Would the Rowan-Mississippi require any kind of upgrades or anything like that to do work over there?

Mark Keller

Yes, it would.

David Wilson - Howard Weil Incorporated

And how long will those take?

W. Ralls

Probably in all about 4 to 5 months, that's including transit time.

William Wells

And those mods are in the contract and to be -- reimbursed.

Operator

There seems to be no further questions in our queue. So do you have any closing comments?

Suzanne McLeod

No, we do not, but we'd like to thank everyone for joining us today. Thanks very much. Have a good day.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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

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

Source: Rowan Companies' CEO Discusses Q1 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts