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Rowan Companies (NYSE:RDC)

Q2 2011 Earnings Call

August 02, 2011 11:00 am ET

Executives

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 & Associates, Inc.

Kurt Hallead - RBC Capital Markets, LLC

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.

Ian Macpherson - Simmons & Company

David Wilson - Howard Weil Incorporated

James West - Barclays Capital

Unknown Analyst -

Joseph Triepke - Guggenheim Securities, LLC

Douglas Becker - BofA Merrill Lynch

Matthew Conlan - Wells Fargo Securities, LLC

Michael Urban - Deutsche Bank AG

Operator

Greetings, and welcome to the Rowan Companies Incorporated Second Quarter 2011 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Suzanne McLeod, Director of Investor Relations for Rowan Companies, Incorporated. Thank you, Suzanne. You may begin.

Suzanne McLeod

Thank you, Rob, and good morning. Welcome to Rowan's Second Quarter 2011 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; and Bill Wells, Senior Vice President, Chief Financial Officer and Treasurer, who will have prepared comments. 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 1995, including the 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, and good morning, everyone. The second quarter of 2011 was one of significant change for Rowan Companies. For the past 2 years, we've been discussing with you 3 strategic initiatives, and during the quarter we made substantial progress on 2 of those as we announced in June both the sale of our manufacturing business to Joy Global for $1.1 billion in cash and that we had entered into contracts to build 2 new ultra-capable drill ships at a total cost of around $1.3 billion. Then in July, we announced progress against our third major strategic initiative with an agreement to sell our land rig fleet to Ensign Energy Services for total cash consideration of approximately $540 million. While it's difficult to part with either of these businesses and the thousands of loyal employees affected by these transactions, it puts us in a position to focus on our primary strategic objective of growing our offshore drilling business through the addition of high specification jack-ups and ultra-deepwater rigs. Although our balance sheet and cash flow were fully adequate to fund our fleet expansion efforts to date, the sale of manufacturing and land will give us strong liquidity position from which to look for further opportunities to acquire high specification offshore rigs.

On a more general note, we are seeing improved demand for all our rigs but especially for our high-spec jack-ups as Mark will discuss in more detail in his comments. We have added $1 billion in backlog over the past 3 months, bringing total backlog to $2.6 billion as of our most recent fleet status report. Importantly, both of our first 2 N-Class jack-ups are now on contract in the North Sea, and we have just announced commitments for the J.P. Bussell and the Gorilla II for work in Southeast Asia, an area we have been working to expand into over the past 18 months. Rig moves, downtime for contractually required upgrades, delays related to stricter regulatory approvals and customer acceptance, as well as flooding on the Mississippi and unrest in the Middle East, are having an impact on our earnings in 2011. However, we are expecting a substantial increase in earnings in 2012 when we will have most of our rigs in service with many long-term contracts.

We also announced yesterday that Tom Burke, who is CEO of LeTourneau prior to the sale to Joy Global, will be joining Rowan as Chief Operating Officer. Tom will be a great addition to our already strong management team and proved his abilities in managing complex operations as he made significant improvements in LeTourneau's operations and backlog of sales over the past year and a half. Regrettably, David Russell, our EVP of Operations, has made the decision to leave Rowan and pursue other opportunities. David has been a major influence in the many positive changes that have occurred at Rowan over the past several years, and his executive presence and operational skills will be sorely missed. All of us here at Rowan have tremendous respect for David and wish him great success in whatever he decides to do next.

With that, I will turn it over to Mark for his comments.

Mark Keller

Thanks, Matt, and good morning, everyone. According to ODS-Petrodata, there are currently 477 jack-ups worldwide. Demand is 364 rigs with utilization at 76%, the highest we've seen since May 2009. Recent contract awards further evidence the strengthening of the market. Since our last call, Rowan has successfully secured additional contracts with Saudi Aramco in the Middle East, received a letter of award with Lundin in Norway, and announced that we will be reentering the Southeast Asian market in the second half of this year. The J.P. Bussell is currently en route to Vietnam for a 240-day contract with Petronas Carigali at a day rate in the high 120s. The Gorilla II will mobilize to Malaysia later this quarter for a one-year contract with Petronas Carigali at a day rate in the high 110s. The Southeast Asian market continues to bifurcate as indicated by recent tenders requiring higher specification equipment.

We are pleased to broaden our global presence and we feel that this is a good long-term strategic move for the company. I will now address our areas of operation.

Let's begin with the U.S. Gulf of Mexico. Supply in the region is 81 jack-ups while demand is 37 rigs, for a total utilization of 46%. However, market utilization in the U.S. Gulf is 80%, presenting a much tighter market when you consider the 36 units that are cold stacked. We currently have 10 jack-ups in the region with a market utilization of 100%. Three of those active units will migrate to international markets in third quarter 2011. Despite concerns with hurricane season and ongoing issues with permitting, we remain dedicated to our customers in the U.S. Gulf of Mexico and focus on deep gas drilling.

Four of our jack-ups are currently contracted to McMoRan, who has multiple projects planned for the near future. We recently announced that the Ralph Coffman will drill an additional deep gas well for McMoRan commencing in first quarter 2012 for approximately 1 year at a day rate in the low 180s. Upon delivery in fourth quarter 2011, the Joe Douglas is expected to work for McMoRan on a deep gas well for approximately 1 year for $180,000 per day. We are proud to be a part of McMoRan's continued success.

I'd like to take a moment to discuss Central America. As previously announced, the Gorilla III will mobilize to Trinidad later this month. The rig has a one-year commitment to Niko/Bayfield at a base day rate of $120,000 per day with additional options. This will be the second rig in-country joining the EXL-II operating on a 3-year contract for BP. We are currently evaluating additional contract opportunities in Central America. This region has historically been a good fit for our high-spec jack-up fleet. As the industry is well aware, we are seeing a significant increase in tender activity in Mexico. PEMEX has indicated they will increase their fleet from 28 to as many as 40 jack-ups by the end of the year. While we are uncertain about the long-term status of the Gorilla IV with PEMEX, we expect these potential tenders to absorb some of the excess jack-up capacity around the world.

We evaluate every tender that is released from PEMEX and determine that these opportunities best fit the strategic placement of Rowan's fleet in the future.

Now turning to the North Sea. Supply is 40 jack-ups while demand is 37 rigs for a contracted utilization of 93%. Rowan currently has 6 jack-ups contracted in the region, 3 Super Gorilla-class jack-ups and 3 N-Class units. The Rowan Viking and Rowan Stavanger went to work in June for TOTAL and Talisman, respectively, and the Rowan-Norway was christened into service on June 25 and will mobilize to the North Sea later this month. As previously mentioned, the Norway will commence operations with Xcite in November 2011. The North Sea remains one of the most active regions for high-spec units as evidenced by our contracts for the N-Class units and by our letter of award with Lundin. We're excited about this commitment for an N-Class unit commencing operations in mid-2014. The contract will be for an initial 900-day term, with the day rate ranging from the mid-340s to the mid-350s. The industry is responding to the high-spec operating capability of these drilling units and we are confident that we will benefit from strong utilization and premium day rates with the N-Class jack-ups for many years to come.

Moving on to the Middle East. Supply in the region is 117 jack-ups while demand is currently at 96 rigs and contracted utilization is 82%. Over the past few months, Saudi Aramco has been aggressive in its fleet expansion in order to obtain increased production goals. With the recent contract awards, Rowan will have 8 jack-ups operating for Saudi Aramco by fourth quarter 2011. We are pleased to continue our relationship with this very important customer. We have also submitted additional tenders to Saudi Aramco for high-spec gas wells commencing in early 2012. The Rowan-California commenced operations with TOTAL Qatar in July for approximately 6 months at a day rate in the low-60s. That work will be followed by an additional drilling project with Wintershall in the mid-70s until midyear 2012. The Middle East continues to be a driver of global jack-up demand as evidenced by the number of outstanding tenders.

This concludes our market overview. I'll now turn the call over to Bill Wells.

William Wells

Thank you, Mark, and good morning, everyone. Given the recent sale of our manufacturing business and agreement reached to sell our land drilling division, we have segregated the results of these operations net of income tax effects, as well as the related assets and liabilities as discontinued in our second quarter financial statements, with all prior periods restated accordingly. Continuing operations now consist solely of our offshore drilling operations and will receive the bulk of our commentary this morning.

Our second quarter 2011 offshore drilling revenues were $223 million, up by 9% over last quarter but down by 21% from last year. Both comparisons reflect slightly higher activity levels following fleet additions between periods, though the year-over-year impact was more than offset by lower average day rates following the conclusion of work last year in Norway, West Africa and Canada. As of July 26, the date of our most recent fleet status update, our backlog of drilling commitments totaled approximately $2.6 billion. We expect that 18% of that amount will be realized as revenue during the remainder of 2011, another 42% will occur in 2012, 18% will be realized in 2013 and the balance in 2014 or beyond.

We expect another sequential increase in revenues during the third quarter. The N-Class rigs Viking and Stavanger, which commenced North Sea operations in June, together with the Bob Palmer, which we expect to commence Saudi operations this week, should yield a combined $60 million increase in third quarter revenues. On the other hand, rigs rolling off contracts such as the Rowan-Paris and Gilbert Rowe in Qatar and the Gorilla II, Gorilla III and Rowan-Mississippi in the Gulf of Mexico, as well as reduced rates on the Bob Keller and Hank Boswell in Saudi Arabia, are expected to reduce third quarter revenues by an aggregate $40 million. The 2 Qatar rigs will be entering the shipyard for life extension and upgrade projects, while the 3 Gulf of Mexico rigs are preparing for foreign assignments.

Our second quarter drilling expenses of $105 million were unchanged from last year, but 6% below last quarter and our previous estimate. In the year-over-year comparison, the impact of fleet additions was fully offset by lower insurance and reimbursable costs and reductions on rigs moving between markets or entering shipyards for modifications and upgrades. Similarly, we experienced a sequential decrease in operating costs despite higher activity levels primarily as a result of reduced insurance costs in the second quarter and unusually high levels of rig move costs and reimbursable expenses in the first quarter. We expect that our third quarter 2011 offshore drilling expenses will be in the range of $117 million to $120 million, or up by 12% to 14% over the second quarter, as the impact of fuel compensation increases effective July 1, combined with incremental activity from Rowan Viking, Rowan Stavanger and Bob Palmer, more than offsets decreases related to the rigs rolling off contracts.

Our full year 2011 estimate of drilling expenses is now approximately $470 million, down by 2% from our previous estimate due largely to the factors just mentioned.

Our second quarter depreciation expense totaled $41 million, which tracked our previous estimate, and was up by 20% over last year and by 7% over last quarter, primarily due to the rig fleet additions. Our latest estimate for 2011 depreciation is approximately $171 million for the year, including $45 million in the third quarter. Our second quarter SG&A expenses totaled $22 million, up by 17% over last year and by 4% over last quarter and slightly above our previous estimate, primarily due to fluctuations in incentive compensation costs and professional fees related to tax planning. Our latest estimate for 2011 SG&A cost is approximately $85 million for the year, including $21 million in the third quarter.

Income from continuing operations during the second quarter included a $6.1 million pretax charge to settle litigation regarding the insured value of rig loss in 2005 during Hurricane Rita, and $1.4 million of gains on asset disposals. Last year's results included a $4.5 million pretax charge for the expected cost to terminate our agency agreement in Mexico.

Interest expense net of interest capitalized was $7.4 million during the second quarter, slightly higher than our previous guidance as a result of a brief borrowing under our revolver and the write-off of unamortized debt issuance costs in connection with an amendment to our bank facility. On June 30, we changed from 2 facilities totaling $600 million to a $500 million revolving credit facility and extended the term to 2016. We estimate the remaining 2011 interest expense will be approximately $36 million, about half of which should be capitalized. For the third quarter, net interest expense should be approximately $7 million. We do not expect further borrowings under our revolver in 2011.

Our expected full year 2011 effective tax rate on continuing operations is approximately 4% or well below the 14% previously forecast following the segregation of taxes on U.S.-based land drilling and manufacturing results, and as a result of reduced contributions expected over the remainder of this year from U.S.-owned or -operated offshore rigs.

Our after-tax income from discontinued manufacturing and land drilling operations totaled $421 million in the second quarter, most of which resulted from a $660 million pretax gain on the sale of LeTourneau, offset by $240 million of total income taxes. These results are after expenses of the sale, as well as estimated costs related to closure of the Vicksburg, Mississippi shipyard.

Looking ahead to the third quarter, our after-tax income from discontinued land operations, including the estimated gain on sale, should be approximately $135 million. We expect after-tax cash proceeds from the sale of approximately $370 million.

Property and equipment additions totaled $570 million in the second quarter, which included $224 million for deposits and other costs on the 2 drill ships, $211 million for the third N-Class rig, $21 million for the third 240-C jack-up, $6 million for the fourth EXL rig, and $93 million for our existing fleet, including reimbursed contractual modifications. At June 30, we had approximately $1.4 billion of remaining capital expenditures under our newbuild program, $266 million of which is expected to occur in 2011, with most of the remainder in 2013 and 2014. We currently estimate as much as another $283 million of capital expenditures over the remainder of 2011, including $116 million of reimbursed contractual modifications, $70 million toward planned life enhancement projects, $47 million for existing fleet maintenance and upgrades, and $50 million for area, equipment spares, drill pipe and needed improvements to our shore bases.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of James West of Barclays Capital.

James West - Barclays Capital

So my first real question then is kind of where do we go from here? You are -- have a good amount of cash. Do you want to get bigger in deep water; do you want to get bigger in shallow water? And then as you look at both those areas, what's the -- where are the better economics in your mind? Is it newbuilds or is it buying assets at this point?

W. Ralls

James, let me say that our strategic objective with regard to expanding for the offshore side of the business really hasn't changed in the past couple of years, so we have been on a trajectory to try to add high specification jack-ups in ultra-deepwater assets. We spend a lot of time looking at the possibility of strategic transactions on the ultra-deepwater side. We were able to accomplish that on the high specification jack-ups side with the Skeie transaction, but ended up after frustrated attempts to do that on the ultra-deepwater side, ended up deciding on a newbuild program, which had the benefit of giving us exactly the kind of asset that we wanted to use to compete in that business. I would say overall, our preferred approach would still be to grow our presence in both high specification jack-ups and ultra-deepwater through acquisitions of existing rigs or rigs already under construction just because it does further add to the overall capacity, but at the same time, it's -- that's partly a function of what's within our control and what's not, which is why we continue to look at both of those options. And right now, we don't have any immediate plans. We've got quite a large capital program in front of us, but we will continue to look at everything out there. That's what Kevin Bartol spends essentially all of his time now working on, so we're continuing to look for ways to expand the fleet.

James West - Barclays Capital

Okay. And if you were to go the newbuild route, I guess with the drill ships, I believe you have an option. When would you have to make a decision on that option?

David Russell

This is David. We're reviewing that now and we have essentially until the end of this month to make our determination which way we'll go on that.

James West - Barclays Capital

Okay. And then just a -- sorry, just a last question from me. With LeTourneau now being owned by someone else, do you have a preferred vendor-type relationship with them? Is there -- are there any kind of options with LeTourneau to build new jack-ups?

David Russell

We do not have any options with them, but we do have a very good relationship with them, since the majority of our fleet are LeTourneau rigs.

W. Ralls

Obviously, we've been a very large customer for them and expect to continue to be an important customer for them. But -- and then with regard to the drill ship option, just to add to what David said, we do have the ability to pay, I guess a negotiable amount in order to extend that a little bit further and give us more time, so that's part of what we're looking at.

Operator

Our next question is from the line of Ian Macpherson with Simmons.

Ian Macpherson - Simmons & Company

I wanted to ask about the Lundin letter of award. Unusual and impressive to get a commitment almost 3 years in advance with that type of term and rate, and was curious when, mechanically when that letter of award will commit -- will convert to a contract, and also really what -- how one could project that letter of award into the demand prospects for the other N-Class rigs and whether you think you'll be putting big backlog additions similar to that on the other 2 rigs over the next, whenever, 6 months or near term, call it?

Mark Keller

Ian, this is Mark. We appreciate your comments about the letter of award. We're very excited about it. We have a meeting set up to finalize the contract on August 10. The letter of award is very binding, so we're 99.9% there on the contract already. So we believe that the term will go beyond that, of what we published. We're very excited about it. It's a good opportunity for our fleet. In terms of other -- of our Super Gorilla class rigs and N-Class rigs on backlog, we're getting a lot of activity. As you can imagine, people that have the rigs, we are setting up meetings, and I'm leaving for the North Sea next week and we have several meetings set up, and that's one of the big topics is where they stand on their terms. And you've heard me say on calls before and in conferences that we're tracking about 18 projects, probably about 10 or well, about 12 now, that our rigs could hit and people are looking further out in the future to commit to rigs. So that's a good thing and it was a great opportunity for us to add some backlog to that fleet.

W. Ralls

But it does exemplify, Ian, the type of projects that we see over there particularly in Norway that are multiyear projects. They're planned well in advance, very similar in some respects to a deepwater project. And so it's been unusual in our experience to contract this far in advance, but it certainly is typical of how those things get put together, like you saw the contract that ConocoPhillips gave -- awarded for another high specification jack-up. So it's -- there's a -- we have a limited appetite for these because it does leave a gap in there that we've got to manage, but we think that tying up that backlog helps us manage overall the capacity we've got in these very high-end jack-ups adding to the future.

Ian Macpherson - Simmons & Company

Great, thanks. Maybe a quick follow-up. Just wanted to get your perspective on the Gulf of Mexico. Now I know it's pretty much inscrutable in terms of permits and where activity might go month-to-month or quarter-by-quarter, but if you've got the Cecil Provine, a reasonably capable 1116C, does that rig benefit from an improving Gulf of Mexico next year? Is it a good candidate to bid to PEMEX internationally or how do you think about the domestic market?

Mark Keller

Ian, we, again, as you know, the Gulf of Mexico is very challenging right now, but we -- Apache has had that rig for about 6 years well to well. They have it in their program through this year certainly and plan on keeping it next year. However, we do tender it internationally. It's -- we've tendered it to PEMEX in the past and -- but right now, we don't have anything that's pressing for the rig internationally. But we are tendering it around the world as we have the rest of the Gulf of Mexico fleet. We have a very large presence with McMoRan and we hope they continue to have a lot of success and we add to that fleet. But as far as the Gulf of Mexico, deep gas is our major focus, and then our others rigs, we'll keep them working well to well, unless we get an opportunity to go internationally on a term basis.

Operator

Our next question is from the line of Doug Becker with Bank of America.

Douglas Becker - BofA Merrill Lynch

Matt, you mentioned in the prepared remarks that stricter regulatory approvals was resulting in some downtime. Was that concentrated in the Gulf of Mexico or more broadly in hitting other regions, and does this change the way you contract going forward? And then lastly, any quantification of what type of downtime is related to the stricter regulatory requirements?

David Russell

Yes, this is David. I'd say that, initially, post-Macondo, we did have some minimal downtime just because of increased regulatory things that BOEM [Bureau of Ocean Energy Management, Regulation and Enforcement] had put in place, but in general, I think most of it's dealing with the rigs that we're sending overseas and deals with training, and we -- the rig that was sent to Trinidad with BP post-Macondo. They have a very strict IAT inspection process and I think it took us longer to complete that than expected.

W. Ralls

That -- Ian, that comment was supposed to be -- there were several factors I mentioned and those 2 were supposed to be sort of taken together, which is the whole acceptance process both by the customer and on the regulatory side. It's just taken a bit longer than it has. It's not by any stretch a major impact. I can't quantify it for you, but it is something that's added a delay in getting some of these higher dollar day rate rigs on contract on our previously anticipated schedules. In total, it would've been just a few weeks a rig or something like that.

William Wells

Yes. In most cases, we haven't lost the revenue; we just pushed it out a little bit.

David Russell

That's right. Yes, essentially it's delayed our startup is what it's done.

Ian Macpherson - Simmons & Company

Okay, fair enough. And then Mark, maybe you could just talk about the interest in the EXL-IV as we get closer to delivery on that rig?

Mark Keller

Sure. We have the rig obviously bid all over the world. We have 3 international opportunities that we're talking to the operators about and we're also talking to an operator here in the U.S. Gulf about the rig. Mainly -- one of them is to try to walk the rig to an international contract and the other would be a longer term-type contract here in the U.S. Gulf.

Ian Macpherson - Simmons & Company

Okay. And then based on your prepared remarks, it sounded like Mexico was still not viewed as the best market for some of your rigs. I'm just hoping if you could comment on that and then the outlook for the Gorilla IV.

Mark Keller

Well, we were invited down 2 weeks ago with some other contractors to talk to PEMEX, and as you heard in my remarks, they are going to increase their fleet. It looks like, from the day we were down there, it was about 27 rigs running for them and up to somewhere around 40 jack-ups, and over this past several years they've averaged about 35 rigs, and so this is increasing their fleet substantially. They're going to a higher grade of jack-ups in their tenders and they asked us to quote rigs to them that could arrive in Mexico prior to the end of the year, and we have done that and we'll see what the outcome is. As far as the Gorilla IV, as you saw in the fleet status, we have an extension letter on our primary term. They are going through evaluation right now as to where to take the rig. We were told last night that they are going to keep the rig as far as the term, and the new day rate, I can't really tell you that right now because I don't know yet, but we are in discussions with them about extending the rig.

Ian Macpherson - Simmons & Company

Okay. And just generically on the Mexico bids that you submitted, do those include rig caps?

Mark Keller

Ours do not.

Operator

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

Michael Urban - Deutsche Bank AG

So it's good to see moving some rigs into the Southeast Asian markets, presumably you'd like to have some critical mass there. Do you see additional opportunities for rigs in the region, either in the markets where you've contracted some rigs or in other markets?

Mark Keller

Well, in Southeast Asia, we see some other opportunities to increase our fleet there. We've got several active tenders in the region right now, Mike, and our plans are to try to increase our presence there. We feel like, as you heard us say before, that particular area of the world, Petronas and different operators there hydrating their requirements, and we're certainly seeing that, and as you can see that by the Bussell being contracted in the Gorilla. So I think as we move forward, I think there's a great opportunity to press and increase our fleet there. In other areas that we're working, the Middle East, we've got a big presence there, the North Sea certainly. I think Trinidad, we'll see -- we've seen some other opportunities to increase that fleet, and so -- and we'll see what happens with PEMEX. But we're marketing the rigs all over the world and there's a lot of activity right now. We're just trying to see where the best place that fits our fleet. We're seeing some stuff hydrating in different areas like Angola with major operators, still this bifurcating market moving away from standard jack-ups. So it's encouraging to see and certainly it fits into our strategic plans and certainly in our fleet makeup.

Michael Urban - Deutsche Bank AG

Okay, great, thank you. And then in the North Sea certainly seems to be a pretty robust market as you indicated in your comments. Any indication from your customers about concerns or issues on the U.K. side given some of the tax changes over there?

Mark Keller

Not right now. In fact, we've -- I'm leaving to go over there next week and we've been in discussions about -- with our customers in the U.K. sector about what their plans are with the rigs. They know that there are a lot of tenders out and we've actually had a couple of operators. Our operators that we're working for, we have a very strong customer base, have indicated that they are going to keep the rigs, so for our particular customer base, we're not seeing any concern about that.

Operator

Our next question is from the line of Joe Hill with Tudor, Pickering, Holt.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.

Guys, just looking at the fleet status in the results in the quarter, you're reaching fairly significant levels of contracted utilization, at what point do you begin to get more aggressive in asking for higher rate?

Mark Keller

We ask for higher rates all the time, and sometimes we have to come back to what they'll pass, but in most cases, we're asking for higher rates. We're always trying to push the envelope. If you look at our fleet on a market-by-market basis where we're operating around the world, our average day rates are higher than our peer group, and we have a good fleet of rigs which certainly attributes to that, but we also push the envelope pretty strong with this bifurcating market. We feel like that we have a great opportunity to try to stay at the leading edge of the market. And so we do it all the time. We may not get the exact rate we want. We look at the deal to see if we want to go ahead and pursue it and take the contract or walk away from it. So that takes place every day.

W. Ralls

Just to add to that too, Joe, I mean, Rowan, with the quality of its crews and the reputation for execution and the quality of the rigs, I mean our rigs tend to be the early ones to go back to work, so we still need some additional tightening overall in those markets. But we're definitely seeing that with the contracted utilization for the worldwide fleet being much stronger now, so we're -- we believe that we're pretty close to an inflection point in terms of being able to more aggressively push rates. But it's not just our rigs that account for it, obviously.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay, that's very helpful. And just kind of getting into the details a little bit, on the rigs you're taking overseas, obviously you're doing a lot of modifications on these rigs. I'm assuming most of this is going to be a combinations work?

Mark Keller

There are very minor modifications to the rigs, but some of them are -- some of it's anchors. In Southeast Asia, they wanted anchors on the rig, and then most of it is POB.

David Russell

Yes, I'd say the rigs are going to work for Aramco. They do have substantial upgrades, but they're being funded by Aramco, and the rigs that were going to work in Southeast Asia, it's very minor upgrades.

W. Ralls

Yes. And there's just -- there's only one rig that's doing any combinations work, and that's -- if I understood your comment, but yes, we just have the one rig in Norway that's doing a combinations.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay, that's helpful. And then finally, the EXL-IV, on those 3 international opportunities you have for the rig, would any of them require modifications in order to pursue the contract?

Mark Keller

They would, but we have passed that CapEx on to the operator.

W. Ralls

Yes, there's very few term opportunities that don't require contractual modifications, and that's just, that's true of everyone, even if you take our Bob Palmer rig which is one of the most capable rigs in the world and needed $25 million worth of modifications to work for Aramco, plus some other expenses to get there, but...

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay. And if we think about how long it would take to perform the required modifications in the event they were required, obviously it would be market-specific, but can you give us an idea as to how long that might delay it from the October availability?

Mark Keller

It's hard to say but we have one contract that we're looking at that they want to start immediately, so there would be minimal -- it just depends on which contract we would get, Joe. It's really hard to say on that.

David Russell

Yes, the EXL-IV has all the latest equipment on it. It's just if a customer wants something specific, then we would have to look at that, so it really depends on each contract.

Mark Keller

Right.

Operator

Our next question is from Collin Gerry with Raymond James Financial (sic) [Raymond James & Associates.

Collin Gerry - Raymond James & Associates, Inc.

Most of mine have been answered. Bill, I wanted to re-ask the guidance with you real quick. On the tax rate, was -- were you thinking 4% for the balance of the year?

William Wells

Correct.

Collin Gerry - Raymond James & Associates, Inc.

And then you mentioned among capitalized interest, I guess total interest of $36 million for the rest of the year, half of which will be capitalized, so the risk to take is about $9 million a quarter of capitalized interest?

William Wells

That's right, Colin, but we estimated, I think, $7 million in the third quarter.

Collin Gerry - Raymond James & Associates, Inc.

Okay. And that $7 million to $9 million range, is that applicable, do you think, to 2012 as well? I mean you've got a pretty serious newbuild program now with the drill ships, so I'm just kind of curious what does 2012 look like?

William Wells

It ought to be pretty close, Colin. Those other payments are very back-end loaded, so those projects will -- what we've put into them so far and then we'll add to it as we go into '12, and it'll keep that interest meter running, if you will.

Operator

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

David Wilson - Howard Weil Incorporated

If I could, just given some of the previous questions and the outlook in the North Sea, do you think it's compelling enough to build another N-Class type or CJ-type jack-up on spec? Or would you need a contract to back something like that up?

W. Ralls

Well, yes, I guess that what I would say is that we do see opportunities to build new equipment against term contracts. There's not a lot of those, and we also would like to add to that end of the rig fleet, but it's a stretch for us right now to do that on a speculative basis. I don't want to rule that out. That could change if we got a different sense of the overall market dynamics, but -- so we're -- we just kind of stay in touch there. I don't see us jumping in and doing a spec jack-up anytime soon, but I don't want to rule it out.

David Wilson - Howard Weil Incorporated

Okay. And then given where you are with your cash position, your balance sheet leverage and capital commitments, what are your thoughts on, at present, with the possibility of returning some cash to shareholders either through a dividend or share repurchases?

W. Ralls

We look at that continuously. We talk to our board every quarter about that. I would say that our thinking on it right now is that we see a pretty broad opportunity set out there, potential combinations or acquisitions, and that as we sit here today, we're more inclined to see how some of those maybe mature as we look at them but -- and kind of keep our powder dry, we have not made a determination either way about returning capital, but it's something that we're perfectly willing to do if we don't see opportunities to put that capital to work.

David Wilson - Howard Weil Incorporated

I got you. And then one more kind of a little -- getting into the minutia here with a couple of rigs in Southeast Asia now, are we going to see incremental costs either through a higher average operating rates or SG&A for those -- to support those rigs over there or is it even going to be noticeable?

William Wells

Yes, it's -- I don't think it'll be noticeable.

Operator

Our next question is from the line of Kurt Hallead with RBC Capital Markets.

Kurt Hallead - RBC Capital Markets, LLC

I've got a couple of just housekeeping things to make sure I want to understand things correctly from what Bill had mentioned earlier. So first and foremost, just on the full year estimates that you provided to us, Bill, is it safe to assume that those estimates would be all excluding LeTourneau and the land drilling business from the beginning of the year?

William Wells

That's correct, Kurt.

Kurt Hallead - RBC Capital Markets, LLC

Okay. And the 4% tax rate that you provided for the full year, what should be -- should we thinking 4% also for the third quarter?

William Wells

That's right.

Kurt Hallead - RBC Capital Markets, LLC

Okay, excellent. All right. And then on the markets, what you guys referenced earlier, you said that a number of your customers are looking to commit further out. Was that specific to the North Sea and high-spec rigs or are you seeing that in a number of other markets?

Mark Keller

We've seen it in some other markets, but mainly with the announcement of Lundin, we've seen a little more activity as far as wanting to have discussions around -- several of the rigs have options, and the operators are keen to want to discuss where they're going with their plans in the future. So we'll see how that works out, but it's mostly in the North Sea, Kurt.

W. Ralls

Yes, that's -- my comments were mostly oriented to the North Sea. It's the other parts of the world, except maybe the Middle East, where Saudi Aramco has huge, long-term plans and tries to acquire assets well in advance of those or begin the process of getting rigs committed well in advance.

Kurt Hallead - RBC Capital Markets, LLC

Okay. Well, maybe along the lines of that, you guys referenced that PEMEX is looking to go from 27 to 40 rigs by the end of the year, so that's a 13-rig increment. So as you kind of walk around the globe, I was wondering if when you aggregate everything together, what sort of incremental demand do you see for jack-up rigs between now and year end? And when I say incremental, I do mean net of what's already committed.

Mark Keller

Well, Kurt, I mean, I don't have any idea, I mean, what the total would be, but I can tell you that we're averaging in-house. We probably average around probably 10 international tenders at a time to 15. It varies. So we're seeing a lot of international activity, and along with those tenders, some of those are multi-rig opportunities. So that's hard to project, but I do think the international market is staying strong and term opportunities obviously are continuing to present themselves, and I think Saudi Aramco will continue to tender for rigs. We're seeing, as we mentioned, a lot of activity in the North Sea. We're seeing a lot of activity in Southeast Asia for the higher spec type of equipment. I think you'll see certainly PEMEX and we're seeing things even in West Africa for some particular operators for newer equipment or higher spec-type equipment. So I think there's some opportunities, the number of rigs, I'm not -- I hate to forecast that, but I do think tender activity itself is remaining very strong and the opportunity is there to improve the fleet.

Kurt Hallead - RBC Capital Markets, LLC

And Mark, maybe on a sequential quarter basis, is the tender activity higher or flat over the past 3 months and maybe even over the past 6 months?

Mark Keller

I would say it's higher, Kurt, internationally.

Kurt Hallead - RBC Capital Markets, LLC

Are you starting to get a sense of urgency on the operator level?

Mark Keller

It depends. It depends on the area, as Matt talked about, with the Middle East on, because there's few rigs that can do deep -- drill deep gas. You see some of that there. The North Sea certainly, with the higher spec rigs, you see some sense of urgency there. I think certainly, I believe Lundin sees that market tightening up to go out and contract a rig out to 2014. I think they see the need for high-spec rigs certainly being tight or they wouldn't have done that. So -- but it depends. In Southeast Asia, we're seeing some shifts in different areas like Indonesia to more high spec-type tenders. Six months to a year ago, I would have told you that that's a 116-type market, a standard jack-up market. Today, we've seen a couple of tenders that have changed that. So I do see a sense of urgency in some areas, but, and that's indicative of some of the terms that are being offered, and I think the fact that Aramco is offering 3-year contracts is a good market indicator that they certainly believe that the market is going to improve or I don't think they would have offered a multiyear contract.

Kurt Hallead - RBC Capital Markets, LLC

Okay. And then lastly, in the press release, you guys mentioned more rigorous customer acceptance approvals. Can you elaborate on that more? I mean you can have some additional rigs coming, obviously ultra-deepwater rigs coming in, but is this customer acceptance testing namely for those N-Class rigs and/or is it more indicative of the operating environment?

Mark Keller

That's more indicative of the operating environment. As far as the N-Class rigs, we've budgeted an extended period of time for training, and those rigs should have a good startup, say, on the Viking, we did have a few mechanical issues but we've worked through those and we see that -- which that was serial number 1, and we do see that the next 2 N-Class rigs should go to work within our budgeted time. So some of it's training and some of it's regulatory.

Operator

Our next question is from Matt Conlan with Wells Fargo.

Matthew Conlan - Wells Fargo Securities, LLC

First of all, I just want to comment that it certainly is indicative of the change that's taking place at Rowan to hear the CEO say that he doesn't have much of an appetite to build the spec jack-up. I think next you'll be the first in 16 years that you don't have a spec jack-up under construction. So everything you're doing is looking really good, but especially I wanted to ask again about the sense of urgency that you just mentioned, particularly with Saudi Aramco in the deep gas. You don't have much availability in your high-spec jack-ups that can go to Saudi for the first half of next year. What you do have, the EXL-IV, the EXL-I comes free towards the end of the year but it's currently under with McMoRan. It's pretty clear that Chevron wants one of those rigs as well. It seems like you guys have more bidders than you have rigs available, so, I mean, can we start to see or should we expect to see rates for the EXL class rise to maybe what we saw for the Mississippi?

W. Ralls

I think we need to be a little bit careful there. How do we answer questions like that, and I think I would be more comfortable if we said that we are starting to run a little bit low on inventory of rigs that we have available to bid, so as we responded to that earlier question, I think we are seeing the opportunity to try to move rates a little bit higher. We're not the only one that's got rigs out there and so we have to be mindful of the overall market, but I don't think we'd want to get into speculating about specific day rates for uncontracted equipment for competitive reasons.

Matthew Conlan - Wells Fargo Securities, LLC

Okay. And then turning sights on to PEMEX and their requirements. Are they interested in any of your 3 Gulf of Mexico flat rigs or would you be considering moving maybe the Paris or the Gilbert Rowe from the Middle East back to Mexico? What rigs, as you mentioned, you have multiple rigs that you could be bidding in there, what rigs could you be referring to?

Mark Keller

We're bidding some rigs out of the U.S. Gulf of Mexico. We are not tendering the Gilbert Rowe and the Paris currently. We believe we're in discussions with an operator in the Middle East about those when they come out of the shipyard, when they finish up, but I'd rather not go into specific name, give rates and everything. We're in a very competitive situation there. I would rather not go into that, but we are tendering multiple rigs to them.

Operator

Our next question is from Joseph Triepke of Guggenheim.

Joseph Triepke - Guggenheim Securities, LLC

I just wanted to follow up on the Southeast Asia discussion a little bit here. Kind of trying to think about the opportunity for you guys as unconventional activity evolves over the next couple of years. Do you see the high grading that Petronas has done and obviously others as being linked to any particular resource trend in the shallow waters like HPHT? Is there something that we can kind of tie that back to on the resource side?

Mark Keller

They have quite a bit of HPHT [high pressure-high temperature] work coming up. TOTAL has already picked up a rig. They've got a couple of other operators in Malaysia that are looking at those prospects, and then Petronas Carigali has some of their own HPHT, but they're looking to increase production in Malaysia and they are definitely high grading that, we've seen a major change in their tendering requirements in, both in Vietnam and in Malaysia, and as I've mentioned before, certainly seeing it now all through the region, specs are becoming a lot more stringent in tenders, and in 2 recent tenders in Indonesia, as I mentioned earlier. So I think it's throughout the area, but there is probably in the next 12 months to 24 months, I think you're going to see more HPHT drilling in that area.

Joseph Triepke - Guggenheim Securities, LLC

Okay, very helpful. And a couple of...

Mark Keller

That's what indications are.

Unknown Analyst -

Okay, great. And kind of sticking with the theme of specification here, I know one of the things you guys have talked about a lot and then write on, quite frankly for the last 12 months or so, is the high grading and the more stringent requirements on the capabilities side. Obviously, those things are somewhat easy to quantify. We can look at unk-load [ph] and other capabilities, but is there any color you could provide in terms of any change you're seeing from operators on the safety and automation fronts? Obviously, your peers have talked to this on the floater side. Specifically in the jack-up market, what are you hearing from operators in terms of any kind of change and focus on safety and automation?

David Russell

This is David. I'd say, post-Macondo, I mean there's been a large focus on safety, and of course, automation is part of that. But it's -- with automation comes more maintenance and possibly more downtime. So it's a fine line that we walk, but yes, I mean they are interested in rigs with more automation, and of course, all of the high specification equipment from hook load all the way through to the mud pump. And I will say, whenever we talk to the operators, the first thing that -- first people that want to meet with us are HSE group, because we have a very strong safety culture here at Rowan and, obviously post-Macondo, it's very important to them.

Joseph Triepke - Guggenheim Securities, LLC

Great, thanks. And one last one, if I could sneak it in here. Just to clarify on the tax rate, I know it's a bit early for 2012, but can we assume that 4% continues next year?

William Wells

Yes. Let me answer that by taking you back a little bit. Our previous guidance for 2011 was about 14% but that was including manufacturing and land, and I think we've said on a previous call, when you carve those out, that drops the rate to in the 10% to 12% range, and -- so that's more indicative of what we would expect going forward. 2011 is really down as a result of just the contribution, the mix of income coming from some of the jurisdictions that we operate in, and in many cases where we're paying little or no tax, so we don't expect that to hold going forward as more of these rigs go back to work. But somewhere in the 10% range should be a good estimate for '12 but we'll update you as we get closer to our annual budget at the end of this year.

Suzanne McLeod

Okay. Well, that will conclude our prepared remarks for our second quarter earnings conference call. We'd like to thank everyone for joining us today and wish you a very good day. Thank you.

Operator

You may now disconnect your lines this time. Thank you for your participation.

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