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Hercules Offshore (NASDAQ:HERO)

Q3 2011 Earnings Call

October 27, 2011 11:00 am ET

Executives

John T. Rynd - Chief Executive Officer, President and Executive Director

Stephen M. Butz - Chief Financial Officer and Senior Vice President

Son Vann -

Analysts

Collin Gerry - Raymond James & Associates, Inc., Research Division

Chris Enright - Weeden & Co., LP, Research Division

James Woods - FBR Capital Markets & Co., Research Division

Darren Gacicia - Vertical Research Partners Inc.

David Wilson - Howard Weil Incorporated, Research Division

Eric Johnson - Silver Lake Credit

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

Unknown Analyst -

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Hercules Offshore Earnings Conference Call. My name is Stephanie, and I'll be your operator for today. [Operator Instructions] I would now like to turn the call over to your host for today, Mr. Son Vann, Director of Investor Relations. Please proceed.

Son Vann

Thank you, Stephanie. Good morning, and welcome to our third quarter 2011 earnings conference call. With me today are John Rynd, Chief Executive Officer and President; Stephen Butz, Senior Vice President and Chief Financial Officer; and members of our senior management team including Jim Noe, Senior Vice President and General Counsel, and Troy Carson, Chief Accounting Officer.

This morning, we issued our third-quarter results and filed an 8-K with the SEC. The press release is available on our website, herculesoffshore.com. John will begin today's call with some broad remarks regarding our quarterly performance and current outlook. Stephen will follow with a more detailed discussion on financial results, as well as provide cost guidance. We will then open the call up for Q&A.

Before we begin, please note that this conference call will contain forward-looking statements. Except for statements of historical facts, all statements that address our outlook for 2011 and beyond, activities, events or developments that we expect, estimate, project, believe or anticipate may or will occur in the future are forward-looking statements. Forward-looking statements involve substantial risks and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such statements. You can obtain more information about these risk factors in our SEC filings, which can be found on our website as well as SEC's website, sec.gov.

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

John T. Rynd

Good morning, everyone, and thanks for joining us today. This morning, we reported a third quarter 2011 net loss from continuing operations of $17 million or $0.12 per diluted share compared to a loss of $16.1 million or $0.14 per diluted share for the third quarter 2010.

We are encouraged by several positive developments that occurred in the third quarter and have extended into this current quarter, notably, the strong improvement in our U.S. Gulf of Mexico drilling operations that I will discuss in greater detail later on the call.

We are also successful in recontracting the Hercules 261 and 262 for 3 years to Saudi Aramco at very attractive terms, which is a testament to the solid operational performance of these rigs and our strong relationship with this key international customer. Hampering these positives were 2 unexpected events that occurred at the end of the quarter. First, was in the International Offshore segment where the Hercules 185 suffered a loss of one of its spud cans and leg damage. We previously filed an 8-K. But to recap, on September 18, while undergoing a required inspection of the rig, we discovered that the spud can had detached from the starboard leg. Upon this discovery, the rig was immediately moved to the nearest sheltered point, which is in Congo, to secure the rig. The rig was subsequently towed to Port Gentil, Gabon in preparation for a loadout on the heavy lift to the shipyard for repairs.

We reviewed several shipyards and elected to go with Signal Yard in Pascagoula, Mississippi as it offered the best option in terms of overall cost, yard capability and logistics. We expect the load on the heavy lift carrier by no later than this weekend, and commence the anticipated 24-day voyage to Pascagoula. Once at the shipyard, we can complete the inspection of the damage, assess the full extent of the damage and identify the scope of the repairs, reinstall new spud can and perform all other repairs to the rigs. Stephen will discuss in detail the financial impact of the incident. But in total, we continue to expect the rig to be out of service for approximately 6 months. We have kept Chevron Angola informed of all developments, and the client continues to express their desire to accept the rig back and get to work once again once the repairs are complete.

The second incident occurred in the Domestic Liftboats segment, where on September 30, one of our 140-foot class vessels, the Starfish, was hit by multiple waterspouts that converged on the vessel, causing it to capsize. Waterspouts are essentially tornadoes over water. All 5 crew members onboard evacuated and were rescued shortly after the incident. Aside from minor injuries, all 5 are doing well.

Our underwriters has determined that the Starfish is a constructive total loss. Consequently, we received the fully insured value for the vessel of $2.5 million. We have received U.S. Coast Guard approval for our wreck removal plan and engaged a third-party service provider to perform the salvage operation, which began this morning. We have insurance coverage for the costs of the salvage operation. Needless to say, the Starfish incident was unfortunate but I have no doubt that our heavy emphasis on safety training led to the crews' rapid response. We continue to review the incident and we'll use what we learned from the investigation to further improve on our training and operational procedures.

I also want to thank publicly the Stone Energy employees on their nearby Ship Shoal Block 114 production platform, who were the first responders and sent a rescue boat immediately to the scene, rescued the crew from the water and rendered first aid back on their platform. In addition, I want to thank Chevron for providing a helicopter that flew the crew to a nearby hospital.

Moving on to review each of the business segments. Domestic Offshore continues to build on positive momentum that began late last year and has accelerated in recent months. The key driver of this is very limited amount of excess jackup rigs in the region. Currently, there are 40 marketed rigs in the U.S. Gulf of Mexico excluding cold-stacked rigs and the rigs preparing to leave for international opportunities in the coming months. Of these 40 rigs, only 5 rigs are without contract. And of these 5 rigs, several are lesser capable workover rigs that don't directly compete against us on many jobs, while other rigs are not fully crewed and probably need some time to get back to ready working condition. Our latest fleet status report issued last night showed all 18 of our marketed jackups contracted with an average backlog of 77 days per rig compared to a recent low of 46 days in March. Half of our rigs have contracts extending into 2012. We are negotiating with Chevron to extend contract terms on 4 rigs that, if successful, would add another 6 months of backlog on these rigs. In terms of pricing, the leading edge dayrates for 200 mat-cantilever rigs are currently at $48,000, approximately $15,000 higher than the average dayrate for the same class of rig a year ago and almost $10,000 higher than the most recent quarter.

Our 250 mat-cantilever rigs, currently leading edge rates are at $60,000 compared to the mid-40s when we acquired these rigs from Seahawk in April.

I've been asked how these pricing gains have been achieved in a low natural gas price environment. Aside from tight capacity, one of the primary reasons why our rig rates seem to have diverged from natural gas price is because our customers have increasingly shifted their activity target prospects with greater levels of oil in Coniston. We began noticing this shift in late 2009, given the disparity between crude oil and natural gas prices. However, after Macondo, more scrutiny was placed on drilling permits that targeted high levels of liquids content. This put a halt on the momentum in all related drilling activity because operators were either not getting these permits or took a very long time to get them approved. In recent months, liquids-rich permits, while still heavily scrutinized, are now getting through the system more efficiently.

As a result of this trend, crude oil prices have become more critical element of drilling economics on the Gulf of Mexico Shelf. When you look at the production profile of our Gulf of Mexico customer base, they have anywhere from 1/4 to over half of their overall volumes in liquids.

Much of this oil is sold at Louisiana Light Sweet posted prices, which is trading at a premium to WTI prices. Even during the recent volatility in oil prices, Louisiana Light Sweet remained north of $100 per barrel and is currently selling around $110 per barrel. So far, the recent commodity price volatility doesn't seem to have changed the tone from our domestic customers. We haven't seen any signs that they are holding back on their drilling programs heading into 2012. In fact, we are in active negotiations with several parties on rig commitments well into 2012, and we will continue to look for spots to push rates where the opportunities present itself. As for the current pace of permit issuance, we have seen a bit of a pickup in recent months.

Our 18 shallow water permits issued in September and 22 in October through yesterday. This compares to an average of less than 14 permits issued in the preceding 4 months. Further, the backlog of permit applications seeking approval is near the highest levels that we have seen just the new offshore drilling regulations were imposed last year. Over half of this backlog is for new wells, another strong sign that E&P companies want to stay active in the Gulf of Mexico Shelf.

Turning to the international jackup market. Rig capacity continues to tighten as rising demand overseas has soaked up a lot of the excess capacity. The 408 international jackup rigs in existence today, 64 without contracts, now almost half of these rigs are cold-stacked. That leaves only about 34 actively marketed rigs readily available in international markets. There are approximately 77 new builds that will add to the jackup supply over the next 3 years. However, we've seen new build capacity get absorbed fairly quickly once it enters the market. Of course, the question on most people's mind is how the current macro environment and recent volatility in oil prices will affect the E&P spending going forward.

Our international clients tend to have a longer-term planning horizon, and in our discussions with them, we have not picked up any signs that the drilling and development programs have been delayed or curtailed. Furthermore, a good portion of our international fleet under contract is locked up through 2014.

Taking a look at our international rig fleet. As I mentioned at the beginning of the call, we were successful of recontracting the Hercules 261 and 262 to Saudi Aramco for the next 3 years. Dayrates on both rigs were at the high end of our expectations, partly reflecting the tightness in the jackup market. We expect each rig to incur some downtime for upgrade work, most likely during the first half of 2012. We received a lump-sum payment, which we estimate will cover much of the anticipated capital upgrade expenditures.

The Hercules 208 is on location in Vietnam and has commenced work on a 9-day contract with Quad Energy. We have an LOI entering contract negotiations with another client that would take the rig in direct continuation after Quad. The contract on our discussion is for a minimum 90-day job, and has the potential to have additional follow-on work to keep the rig working through mid-2012.

Both our Hercules 260 and Platform Rig 3 are on location and proceeding as scheduled. For the Hercules 258, although we didn't win the tender from ONGC, we will remain on contract with ONGC through the end of the year at a rate of approximately $48,000 per day retroactive back to July 7 of this year.

Given the very low dayrate that we have locked ourselves into for the next 3 years, we believe we priced our services appropriately. Considering the improvements in the Southeast Asian jackup market, as well as the dayrates that we have achieved on the 208, we are optimistic that the Hercules 258 will find suitable work and more attractive economics in the region. We are actively marketing the rig and pursuing opportunities in Southeast Asia.

During the quarter, we made several open-market purchases at Discovery Offshore common stock at very opportunistic levels, increasing our ownership stake to 28%. Our latest purchases were at price levels that carried an implied construction cost of less than $200 million per rig.

That compares favorably to our turnkey bill cost of $2008 million when Discovery placed the original order in January, and the recent prices for similar rigs in the $240 million range for 2014 deliveries. Construction on both rigs is progressing as planned and delivery is set for the second and fourth quarter of 2013.

Turning to the Inland Barge segment. We continue to see modest positive upward movement in pricing. Our leading edge rate is currently in the mid-$20,000 per day range. This is up from the high teens at the beginning of the year and low 20s in the third quarter. Industry utilization remains high. However, most jobs are well to well and terms remain short. To the credit of our marketing team, we have been able to find work for our 3 marketed barges deep in the Mat [ph] or near full utilization throughout most of this year. However, we haven't been able to build much backlog for the segment. Lack of backlog keeps us on the sidelines in terms of rig reactivation, although the economics are improving.

Turning to our Liftboat business. Third quarters are typically the hardest production and maintenance season for the Domestic Liftboats segment, and this year was no different. Utilization rose to 70%, up from 65% in the second quarter. Plugging and abandonment work continues to be a driver of activity. Year-to-date, this accounted for 21% of revenue compared to only 8% during this time last year.

We expect P&A work will continue to provide a solid base of business for our Domestic Liftboats. As we progress through the fourth quarter, we expect utilization to experience its normal seasonal decline. So far through October, our utilization has averaged in the low to mid-60% range. Our International Liftboats segment saw modest improvement from second quarter levels, although third-quarter results continue to be hampered by delays in drydocking of several vessels in West Africa. These delays are due to shipyard and equipment availability, as well as third-party labor disputes in the region.

We are working with the shipyards to resolve these issues in a timely fashion, however, we expect the drydocking delays to extend into the fourth quarter.

Weakness in West Africa was offset by strong results from our Middle East operations. We have 2 of our largest liftboats here, and both vessels operated at near full utilization in the third quarter. Both vessels are coming off jobs during the fourth quarter before commencing on their next contract. So there will be some near-term utilization gaps. Overall, however, activity levels and opportunities in the Middle East appear to be picking up over the next year or 2 relative to 2011 activity, driven by large construction projects planned in Abu Dhabi and Saudi Arabia.

Before closing out, I want to give a quick update on our asset sales program. During the third quarter, we closed on the sale of 2 retired jackups, the Hercules 190 and the Hercules 254, for a combined proceeds of $4 million. We also sold the Hercules 152 and closed that jack up for $5 million, which we previously disclosed on our last earnings call.

Year-to-date through the end of the third quarter, we have generated approximately $62 million of total proceeds from asset dispositions. Spare equipment sales accounted for over $17 million of gross proceeds, with almost half of this equipment is from Seahawk, another example of the hidden value in our Seahawk transaction.

So far in the current quarter, we are about to close on the sale of the Hercules 800, the smallest cold-stacked rig acquired from Seahawk for $1 million from scrap. We have also agreements in place to sell the Hercules 256, 2502 and 2503, cold-stacked rigs all acquired from Seahawk. Estimated proceeds from all of these 3 rig sales are in the $18 million range. In addition, we have an agreement to sell the Hercules 2000, 2005 and the 2008 to a scrap yard for $4 million. We also have another $5 million or so of additional spare equipment earmarked for sale, and we continue to be in discussions with others to sell off-stacked assets.

Assuming we are successful in closing the sales agreements we have in place, we will have sold 11 rigs year-to-date, reducing stacking cost by slightly over $5 million on an annualized basis. Around $32 million of the gross proceeds can be attributed to Seahawk rigs and spare equipment or a little over 20% of the purchase price for Seahawk. As a reminder, we paid $25 million in cash and issued 22.3 million Hercules shares to fund the acquisition.

2012 is shaping up to be a very interesting and challenging year. The acquisition of Seahawk is providing to be very timely. Given the pickup that we experienced in the Gulf of Mexico, it is providing revenue growth to offset the decline in international revenue that we knew was coming. We were able to renew most of our international rigs at rates that exceeded our expectations. With further improvements anticipated in international jackup market, this can only help us in our marketing efforts overseas.

With that, let me turn the call over to Stephen.

Stephen M. Butz

Thank you, John. I'd like to start with a quick review of our third quarter results from continuing operations in comparison to the second quarter of 2011. And I'll wrap up with an update on our cost expectations for the fourth quarter.

For the third quarter of 2011, we recorded a net loss from continuing operations of $0.12 per share compared to a loss of $0.11 per share in the second quarter. Third quarter results include $8 million of payments from Angola Drilling Company. In our last earnings call, we disclosed a $6 million payment, which we had received from ADC. Since that time, we received another $2 million. These payments are recorded in the International Offshore segment as a reduction to the G&A. With this payment, ADC has paid us a total of $18 million, leaving unpaid invoices totaling approximately $67 million.

We remain hopeful that customer will continue to be in a position to ultimately fulfill their obligations under our contract, however, the balance remains uncertain and difficult to forecast.

Moving onto the segment results, Domestic Offshore recorded an operating loss of $12.8 million in the third quarter compared to a loss of $17.2 million in the second quarter. The improvement was due to higher average dayrates and the increase in operating days. Average revenue per day increased by 7% to just over $49,000. We also had 169 additional operating days during the third quarter due to a combination of having a full quarter with the Seahawk rigs and higher utilization for the legacy Hercules fleet.

Segment operating cost of $53.2 million increased by $7 million due mainly to a full quarter with Seahawk and higher labor expenses, driven by offshore wage increases.

Third quarter operating costs include the benefit from gain on asset sales of approximately $2.9 million compared to $1.4 million of gains recorded in the second quarter. On a unit basis, our operating costs per marketed rig before shore-based expenses was approximately $28,600 per day in the third quarter, compared to $27,500 per day in the second quarter. Our cold stacking cost averaged $1,300 per day compared to $1,000 per day on the same period. The increase in unit operating cost was led by higher labor expenses as we adjusted our compensation levels during the quarter to address offshore attrition.

We expect fourth quarter daily operating cost will average in the $30,000 to $31,000 range for marketed rig, and we expect the cold-stacked cost to remain flat. Based on these estimates, we expect total operating cost, including shore-based cost, for Domestic Offshore to be in the mid- to high-$50 million range for the fourth quarter.

Moving onto International Offshore, third quarter operating income declined by $5.3 million versus the second quarter. As previously mentioned, these results include an $8 million benefit from payments by ADC, while the second quarter was negatively impacted by the permanent and importation costs of Rig 3 for approximately $7.6 million. Excluding the impact of both of these items, adjusted third quarter operating income was $4.9 million compared to $25.8 million in the second quarter, driven by a 30% reduction in revenues.

The revenue comparison was particularly challenging this quarter, primarily as a result of the recontracting of the Hercules 208, 258, 260 and Rig 3 at lower market rates. Of course, we've all expected this for some time. The prior contracts on the Hercules 258 and 260 also had some fairly significant revenues related to the marine package and other rebillable items, which are not present in their current contracts. These items contributed to a 22% decline in average fleet revenue per day.

Utilization also declined to 69% from 78%, mainly due to some downtime on these rigs as they transition to their new contracts, as well as 20 days of downtime on the Hercules 185 during the quarter.

International Offshore operating costs were $29.1 million compared to $36.9 million in the second quarter. Excluding the importation expense on Rig 3 taken during the second quarter, operating costs were relatively flat as lower expenses on the 258 and 260 were offset by higher expenses on the 185, an unusually low shore-based cost during the second quarter.

The third quarter included an estimated $2 million of expenses related to repair work on the 185. We expect insurance will cover the repair cost on the Hercules 185, but, of course, we still have to cover the $3.5 million deductible. Although we're still very early in the claims process, we currently believe the majority of the cost incurred in the third quarter will be applied to this deductible. Therefore, we expect to incur approximately another $1.5 million during the fourth quarter. If total repair cost exceeds -- estimates exceed 80% of the insured value of the rig, this computes to $28 million. There's the possibility that the rig would be deemed at total constructive loss, and we would be entitled the full payment of the insured rig value of $35 million. At this time, we do not believe the repair cost will exceed that 80% threshold.

All in all, taking into account our having a full quarter of operation from several rigs that have recently been recontracted, International Offshore operating expenses are forecasted to range between $32 million and $34 million in the fourth quarter.

Moving on to Inland. Our Inland segment generated operating income of $900,000 during the quarter, up from a loss of $2.2 million in the second quarter. Third quarter results include approximately $2.6 million in gains from asset sales. Revenues improved by 7% to $8.1 million due to an 11% increase in average revenue per day. We've now achieved near full utilization for the segment for 2 consecutive quarters. Third quarter operating expenses when excluding the gains on asset sales were essentially flat with second quarter levels of $6.1 million, and we expect cost in the fourth quarter to be at similar levels of between $6 million and $7 million.

Our Domestic Liftboats segment generated operating income of $600,000, down from $1.9 million in the second quarter. Our utilization improved to 70% from 65%. Average revenue per day declined by 7% to approximately $7,400 per day, due mainly to a shift in revenue mix which favored our smaller vessels. Third quarter operating expenses were approximately $900,000 higher than the second quarter, primarily on higher workers compensation and the accrual of the $250,000 deductible, the salvage costs of the Starfish.

Our current expectation on the Starfish is that we will collect the $2.5 million insured value of the vessel, resulting in a gain of approximately $1.8 million during the fourth quarter, given our relatively low book value on the vessel. Third quarter daily operating cost averaged approximately $3,500 per vessel, and we anticipate unit costs to remain at similar levels in the fourth quarter excluding any impact from the Starfish.

Our International Liftboats segment generated operating income of $8.5 million, up from $6 million in the second quarter. Utilization improved to 64% from 61% in the second quarter, while average revenue per day of $21,000 was essentially flat. Near full utilization of our liftboats in the Middle East offset extended shipyard downtime in West Africa. Despite the shipyard issues, we still managed to increase third quarter revenues by 7% to $28.9 million. Operating costs of $14.1 million were down modestly by $400,000. We expect International Liftboats costs to remain in the similar range during the fourth quarter.

Now I'd like to just cover a few of the other income statement and cash flow items. First, general and administrative expenses were $10.8 million, which again is reduced by the $8 million payment -- total payment from ADC during the quarter. Excluding those payments, adjusted G&A expense was $18.8 million for the third quarter, up from $16.8 million in the second quarter. Much of this increase was due to higher legal and professional fees, which we expect will moderate going forward. Fourth quarter G&A is anticipated to be in the $16 million to $17 million range. Depreciation and amortization expense increased by approximately $900,000 during the third quarter due mainly to the inclusion of a full quarter depreciation from the Seahawk rigs. Fourth quarter depreciation should remain at a relatively similar level.

Interest expense was relatively flat at $20.4 million and should also remain flat in the fourth quarter.

Our other expenses. During the quarter, we recorded other net expenses of $1.6 million. This primarily reflects the mark-to-market adjustment to the value of our Discovery Offshore warrants. We also reported an income tax benefit of $7.9 million for the third quarter. This translates to an effective rate benefit of 32%. We expect our forecasted tax rate for the full year to be in the mid- to high-30% range.

As far as capital spending, we've spent $46.1 million for the year including our deferred drydocking expenditures. Depending on the timing of certain projects, we expect fourth quarter expenditures to approximate $15 million.

In closing, the third quarter was a very challenging one. We were pleased by a number of items including the strong long-term contracts with Saudi Aramco that we secured at very attractive rates, continued improvement in our Domestic Offshore fundamentals and the significant progress that we've made on our asset sale initiative. So with that, we're now ready to open the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Dave Wilson with Howard Weil.

David Wilson - Howard Weil Incorporated, Research Division

John, I know I've asked this before, but $24 million investment for 28% stake into your high spec jackups seems like a pretty good deal. I know you said you'll be opportunistic about adding to that ownership, but has your view changed here at all given the generally positive outlook for the industry? And along those lines, given your involvement with Discovery, can you all comment on the outstanding options on 2 more jackups? Where do you stand on those?

John T. Rynd

Yes, good question. Yes, our optimism continues to grow in that sector of the business, and we're still very confident that we made the right decision investing in Discovery. The options we're in negotiations with the shipyard, both on timing and dollars. So that negotiation is ongoing.

David Wilson - Howard Weil Incorporated, Research Division

Okay. And then in the past, you've mentioned needing to see higher levels of backlog before reactivating stacked rigs. And I know it may be a quarter too early to ask this, but you alluded to it in some of your preferred remarks. But what are you seeing as far as early signs for a more robust demand pictures, excuse me, for 2012, especially as you mentioned again considering the permitting game, so to speak, has been playing out this year and operators have a better idea of what they needed to do to get a permit?

John T. Rynd

Yes, I think we will be ready to reactivate a rig. We will know what to do costwise and also engineering and scope. So timing and cost will have that nailed well in advance of the opportunity. But saying that, we anticipate the first rig to reactivate will cost us between $6 million to $8 million, all-in plus capital and labor and take roughly 120 days. So it becomes simple math. Right now, the leading edge rate on the 200 mat-cantiliver, which will be the type of unit we would reactivate, is $48,000 a day. Our cost is low 30s as Stephen outlined in his prepared remarks. We're almost there. I think we need to see further rate growth and the backlog -- the confidence that the backlog will stay in the 70- to 90-day range where we've been able to keep for the last 3 months. So we're getting closer, but we're not going to do it on a speculative basis.

David Wilson - Howard Weil Incorporated, Research Division

Sure. And then one final one, if I can, get 3 in here. On the Liftboats, utilization on the international side ticked up. Gulf of Mexico, as you mentioned, ticked down. But broadly speaking, do you think that rent levels where we can expect some just kind of monthly variation kind of plus or minus a few percent outside the seasonal factors, but do you see an opportunity for anything like a step change possible going forward where utilizations dramatically move up from here maybe something like P&A in the Gulf of Mexico or something like that, get off this kind of high 60s, low 70s type utilization?

John T. Rynd

No. The domestic front, I think that we are where we are. As you know, well know, the Domestic Liftboats business is an event-driven business to really gist the utilization rates, i.e. hurricanes or as we experienced last year in the third quarter, unfortunately, we had activity spikes due to the oil spill related to the Macondo well incident. So we'd rather not have a hurricane. So I think that we're going into our seasonal decline here late in the fourth quarter through midway to late in the first quarter. As utilization drops, if it goes in the stage of 60, I think we'll be pleased with what we've seen in the last 2 first quarters in 2010 and 2011. Albeit, we are at a better base with the P&A. As we mentioned, P&A is becoming almost a quarter of our Domestic business where it had been less than 10%. So that may bring -- that bring up the bottom part of that utilization trough. Internationally, we've kind of impacted our sales in West Africa by the delay in the shipyard. That will change. Those rigs -- those boats will get out. So that will be additive to the West African fleet. And as I outlined, the outlook in the Middle East is very positive. So I think as you look at the International, it should improve quarter-over-quarter as we get the boats out and get focused on achieving higher utilizations in West Africa. And it looks like we're setting out to have a good start to 2012 in the Middle East.

Operator

Your next question comes from the line of Collin Gerry with Raymond James.

Collin Gerry - Raymond James & Associates, Inc., Research Division

I got a question. I haven't asked this in the past. Have you guys accrued a certain level of NOLs in the U.S. Gulf of Mexico that if we do see activity come back or the trend continue, I should put that way, that as you get more profitable, you could have a tax benefit going forward?

Stephen M. Butz

No. At year end 2010, the last tax return we've filed, we've had NOLs totaling about $500 million. Of course, unfortunately, we've generated more this year. I mean, closer to $600 million. But sure, if we get an extended run, we could start to utilize, certainly utilize those benefits. So we wouldn't anticipate paying cash tax in the U.S. for some time.

Collin Gerry - Raymond James & Associates, Inc., Research Division

And then that would be in the event where from an EBIT perspective you turn profitable, like the operating income, if you had your domestic jackups in your Domestic Liftboats, say, start earning profit there, that would be on a tax-free basis essentially, right?

Stephen M. Butz

It's just the pretax income. And it's really a little more complicated than that because some of our foreign assets may be taxed in the U.S. as well depending on how they're structured, what entities they're in. But generally speaking, that's fair.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Okay. So it sounds like it's well over my head. But generally speaking, should business continue to improve, we could actually see a tax benefit?

Stephen M. Butz

Well, I mean, again, we're recording a benefit, tax benefit now. We just wouldn't -- we wouldn't pay cash tax as we're not now in the U.S. We have a small amount of international cash tax.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Okay. All right. Well, switching gears. I guess the most important thing to me is the Gulf of Mexico. And John, you went in a lot of the dynamics there. So I have to ask you obligatory permitting question. What are you hearing from your customers? Are they saying that they're getting more comfortable with the BOEM, or is there increased confidence from their standpoint on the process? Just what's the general outlook?

John T. Rynd

I would say the outlook is becoming more positive and it's reflective, I gave the numbers. We've been averaging 14 through August of this year. We went to 18 in September and we're at 24 through yesterday -- 22 through yesterday, excuse me. In conversations with our clients, they're still a little frustrated with the process, but I think the bottom line is it's not costing them or us rig days at this point. They haven't seen that impact.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Okay, that's helpful. And then last one for me, you highlighted the fact in the Gulf that more of the demand is being driven by liquids or oil. I don't know if you gave this or if you have this, what would you guess the percentage of your rigs or Gulf of Mexico jackups, whichever is an easier number, is drilling for pure natural gas versus kind of this liquids oil economics?

John T. Rynd

I haven't checked that in a couple of weeks. But at the time, about 70% of the rigs of the 18 were focused on liquids contents. So it's gas with liquids. And there is some strictly oil provinces as well, but about 70% now are focused on some form of the production is going to have liquids associated with it.

Operator

Your next question comes from the line of David Smith with Johnson Rice.

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

Regarding the U.S. Gulf jackup surveys due in 2012, is there an average duration and cost that we should be assuming for those?

John T. Rynd

We've been averaging about 45 days per survey and the numbers have ranged between kind of 3 and 6. And I would say probably as we go in the latter half, it's going to be at the upper end of that.

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

Okay. And the other -- it's minor, but I was real curious on what happened with the 105-foot International Liftboat dayrate in September and the fleet side at $23,600 a day from $9,300 the prior month.

Stephen M. Butz

Yes, there was revenue, I guess some revenues that were in dispute on one of the vessels, and there's only 3 or 4 vessels in that unit. But the dispute was about $500,000 in total and that kind of skewed the numbers. But if you kind of strip that out, the numbers would be close to about $10,000 a day.

On these monthly numbers on the liftboats with a small number of vessels, we can get noise in those for sure.

Operator

Your next question comes from the line of James Woods with FBR Capital Markets.

James Woods - FBR Capital Markets & Co., Research Division

I'm on the line on behalf of Rob MacKenzie, but I had a quick question. My first one is about the $8 million benefit that you guys recorded this quarter, and I wondered if you could sort of refresh us on the history of the Angola Drilling Company thing and sort of handicap for us the probability that you guys are going to be recording benefits like this again in the future, having said that there's a lot more that they owe you.

Stephen M. Butz

Sure. When we acquired TODCO, one of the customers that they had worked for was the Angola Drilling Company, same rig. Nick continued to work for them and we generated, us and TODCO, a substantial amount of revenue over the years from that customer. But then we commenced a new contract back in mid-'09, if my memory serves me right, and we announced in the January of 2010 that they were significantly behind and we were establishing a reserve to about plus or minus $27 million. And, of course, the contract continued for one more year because there was only 6 months into the -- 18-month contract. The contract was supposed to run from mid-'09 to the end of 2010 -- I'm sorry, to the end of 2011. And we've continued to build a customer. Again, the total receivable over that period would have been about $90 million. But right now, what we're doing is we've received small payments. We're offsetting that allowance. And so that allowance that we established, it was $27 million. It's now been cut in half. It's closer to $13 million. Now if we receive payments in excess of that, then we would start to book revenue under that contract. That's involved to the accounting for the rig.

James Woods - FBR Capital Markets & Co., Research Division

Okay. But up until that $13 million, you're going to be booking benefit?

John T. Rynd

There's a reduction in our G&A.

James Woods - FBR Capital Markets & Co., Research Division

Okay. So I guess the second part of the question was, how do you handicap the probability that they're going to continue paying these small increments? I mean, did they stop paying because they were in financial distress or what's the likelihood that you actually recover more from them?

Stephen M. Butz

It's a credit issue. They don't dispute any of the balance. So we're hopeful by that. I mean, if they had intended just to walk away from the contract, then, of course, we would have taken much more stern action, but they've continued to make these modest payments. And we're, again, hopeful that they'll continue. But certainly from an accounting perspective, there's nothing that would be firm enough for us to change or reverse that reserve at this point.

James Woods - FBR Capital Markets & Co., Research Division

Okay, that's helpful. I guess my next question is sort of, you guys had previously broken up your cold-stacked rigs into the 24 rigs and you talked a little bit in response to a previous question on the prospects for reactivation. And I'm wondering now, where did the remaining rigs stand in terms of being able to sell them? What sort of value do you think you'll be able to recover other than the ones that you mentioned already?

John T. Rynd

We're going to probably hold 6 back for optionality and we'll just -- we'll watch that. It may go to 4, it may go to 3. But right now, with the excess that we have that are available for sale, holding 6 for optionality is fair, and I think the values we will receive are reflective on our prepared remarks below $1 million to upwards of $5 million.

Operator

Your next question comes from the line of Ian Macpherson with Simmons.

Ian Macpherson

John, with the 258 in India, I think you mentioned that you might be pursuing work in Southeast Asia. What is the history of that type of rig outside of India in Southeast Asia, and is there any benchmark for dayrate expectations and [indiscernible]?

John T. Rynd

I mean, the benchmark we're using, Ian, is the 208 because that's the only Mat rig in the region. Now it's the first Mat rig in the region really since the mid to early 80s. So there really hasn't been a history to say that here's the earnings capacity of those rigs, but we are benchmarking it off the very excellent performance that the 208 has been doing for the last 3 years, and the acceptance in the community of the applicability of a Mat rig in the region.

Ian Macpherson

Okay. In the Gulf, the supply side for jackups is pretty clear and you really have the ability to dictate it to a great extent, and it sounds like the demand side, the end isn't within sight yet. So how good is your visibility with regards to incremental dayrate momentum from here forward, it's a crystal ball question essentially? Can you see it going up in the $10,000 a day in 6 months or more than that?

John T. Rynd

That is a potential that the rates could continue to move, but it's always -- it's a tough call. We have to kind of get through this year, see where budgets fall out, see activity levels as we enter 2012, but you have to be optimistic. We're not bullish yet, but we are optimistic. If you look at our contract status, we have a large portion of the fleet, relatively speaking, already committed into 2012. And that's an anomaly. We haven't experienced that in quite a number of years. So there's your baseline for your optimism and our rates will just be dictated really on the well economics by our customers. And as we said in the prepared remarks, as more of their wells have more liquids and oil content, their base economics on these wells are improving, and that's where we're able to secure higher dayrates and improve our margins.

Operator

[Operator Instructions] The next question comes from the line of Darren Gacicia.

Darren Gacicia - Vertical Research Partners Inc.

I noticed during the quarter there was a settlement on the bankruptcy side for Seahawk. I think it created an overhang as they were distributing the shares that you used to pay for assets. Can you remind me kind of the number of shares in that again, and do you have any sense of whether that's already kind of passed through because it seemed to have -- may had had an impact to kind of a one point in trading during the quarter?

Stephen M. Butz

Yes. When the bankruptcy plan was confirmed, their deep land or the second deep land they had was distributed some shares, about 4 million shares, and so that may have created some pressure during the month for a day or 2 as that got absorbed into the market, assuming they sold. The remaining shares remain in the trust, and of course we don't -- that's not up to us, and we can't tell you exactly when those would be distributed. I think most people expect that it would be sometime late this quarter.

Darren Gacicia - Vertical Research Partners Inc.

Okay. Great. And then on, I think, last quarter, the West Africa, the liftboats, there had been some kind of -- I think there'd been some thoughts that supply demand maybe a little imbalanced. Is there any kind of change on that front or what's the outlook there?

John T. Rynd

No. There's been no significant change to the outlook that we gave in the previous quarter. There is supply creep. We're watching it. Again, we have the largest position, so we're trying to behave properly. But we've seen no impact on our ability on our rates. We have not seen margins get compressed [ph].

Operator

Your next question comes from the line of Eric Johnson with Silver Lake.

Eric Johnson - Silver Lake Credit

Stephen, this is for you. It looks as though you paid down about $2.3 million of long-term debt during the quarter. Could you carve that up for us a little bit, and also give us the outstanding balance on the converts currently? And anticipating that you all are going to probably generate anywhere from $25 million to $35 million of additional cash between now and year end from asset sales and probably a little bit of free cash flow from operations, you'll have close to $170 million, $175 million of cash on the balance sheet by year end. How are you all going to put that to work?

Stephen M. Butz

Sure. As far as the debt repayment, we have normal quarterly maturities of a little over $1 million. And our convert balance today is about $95 million, that's the nominal amount outstanding. They can be put back to us on May of 2013. As far as what we'd do with the proceeds from asset sales this quarter on cash generation, any of the proceeds from the significant asset sales, any of the rigs or vessels that we’ll receive the rest of the year will go to reduce our term loan. So you likely won't see that cash build to the magnitude as you mentioned. We will utilize those proceeds to pay down the debt.

Operator

[Operator Instructions] Next question comes from the line of Stephen Copel [ph] with Crédit Suisse.

Unknown Analyst -

Just a follow-up to the last question. First on the maturities, kind of what's the plan to go forward there to deal with those and timing and what form of capital and such, given that we're only 18 months away from the first maturity there?

Stephen M. Butz

Sure. Earlier in this year, and as we've said kind of repeatedly on our calls, we'd like to address those as soon as possible, and this is here [ph]. But yet, we don't have to yet. And certainly, you've seen some of the dislocation on the capital markets that occurred starting in really July, August, September. It wouldn't have been a good time for the company, appropriate time to tackle that, given the timing, we still have remaining. But we're encouraged by the thaw we're seeing in the capital markets for really the last few weeks. There's been a significant amount of improvement in the trading levels on our debt. And so we just continue to monitor that every day. And as far as how we're going to approach it, everything is on the table. We're going to have to just evaluate what's best for the shareholders at that point in time when we move. But I know there's not a lot of time, but there's still time with mid-2013 maturities and the improvement we're seeing in our business and the capital markets right now.

Unknown Analyst -

Is there an optimal level of debt as you look at the business on an absolute basis?

Stephen M. Butz

I don't want to speak in an absolute basis like that because, of course, our business has a lot of volatility and we've seen our debt to EBITDA. We can have very, very low levels of debt to EBITDA when the business is good and very high when it's floor. Obviously, we'd like to continue making some progress in paying down that debt given the capacity that we've had to stack over the last cycle, but no stated target other than we want to continue to reduce the debt.

Unknown Analyst -

But no timing concerns at this point?

Stephen M. Butz

No.

Unknown Analyst -

And what's your ability to buy back converts in the open market at this point? I guess, in essence, what is the restricted payment baskets under the bank as well as the bonds at this point?

Stephen M. Butz

They're really fairly small at this point. We've utilized much of that ability through our purchases and investment in Discovery Offshore.

John T. Rynd

Thanks a lot. Operator, we probably have time for one more question.

Operator

And the final question comes from the line of Chris Enright with Weeden & Co.

Chris Enright - Weeden & Co., LP, Research Division

I apologize, Stephen, I think I missed your cost guidance on International Offshore. Could you remind me of that?

Stephen M. Butz

Sure. We expect our cost for the quarter to range from $32 million to $34 million.

Chris Enright - Weeden & Co., LP, Research Division

What's driving the incremental increase?

Stephen M. Butz

Really, it's largely driven by the amortization of some Moby expense on 2 relatively short-term contracts.

Chris Enright - Weeden & Co., LP, Research Division

Okay. And so we would expect in 2012, I guess, depending on rig relocations, the number to come down to more into the high 20s?

Stephen M. Butz

That's possible. Again, depending on the duration of contracts, the Moby expense and other factors. And of course, we're continuing to see pressure on the labor and burden front and R&M. But generally speaking, we'd expect it to come down a bit.

Operator

With no further questions in queue, I would now like to turn the call over to management for any closing remarks. Please proceed.

John T. Rynd

Thanks a lot, Stephanie. And thank you, everyone, for joining us today. We'll have a replay of this conference call in a few hours on the website. And as always, if you have any follow-on questions, feel free to give us a call. Thanks a lot.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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