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Atwood Oceanics (NYSE:ATW)

Q4 2011 Earnings Call

November 18, 2011 10:00 am ET

Executives

Mark L. Mey - Chief Financial Officer, Chief Accounting Officer and Senior Vice President

Robert J. Saltiel - Chief Executive Officer, President, Director and Member of Executive Committee

Analysts

Matthew H. Beeby - Global Hunter Securities, LLC, Research Division

Andreas Stubsrud - Pareto Securities AS, Research Division

Darren Gacicia - Vertical Research Partners Inc.

Christopher W. Wicklund - Wells Fargo Securities, LLC, Research Division

Truls Olsen - Fearnley Fonds ASA, Research Division

David Wilson - Howard Weil Incorporated, Research Division

Douglas Garber - Dahlman Rose & Company, LLC, Research Division

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

G. Scott Burk - Canaccord Genuity, Research Division

Judson E. Bailey - Jefferies & Company, Inc., Research Division

Stewart Glickman - S&P Equity Research

Rhett Carter

Operator

And welcome to today's program. [Operator Instructions] Please note today's call is being recorded. It's now my pleasure to turn the program over to Mark Mey, Senior Vice President and CFO of Atwood Oceanics. Please begin, sir.

Mark L. Mey

Thanks, Kevin, and good morning. Welcome to Atwood Oceanics' conference call and webcast to review the company's operating results for the year ended September 30, 2011. The speakers today will be Rob Saltiel, President and CEO; and myself, Mark Mey, Senior Vice President and CFO.

Before we begin, let me remind everyone that during the course of this conference call, we may make forward-looking statements which are not historical facts and are based upon management’s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us. These statements involve a number of risks and uncertainties, including the risks which are described in the company's most recent Form 10-K and other filings with the U.S. Securities and Exchange Commission. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements if one of these risks or uncertainties would occur or our assumptions are proved incorrect. Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. Now let me turn the call over to Rob for opening remarks.

Robert J. Saltiel

Thank you, Mark, and good morning to all of you joining today's call. I will make a few comments on the highlights from the fourth quarter and the key developments for Atwood and our industry since our last earnings call. Mark will then provide the details on the quarter's numbers and offer cost guidance for the fiscal year ahead.

I'm pleased to report that our company enjoyed another solid quarter of financial results. In fact, our quarterly revenue of nearly $178 million was the best in our company's 43-year history. Earnings were very strong as well at just under $73 million or $1.12 per diluted share. These results allowed us to achieve record high earnings for the 2011 fiscal year of $272 million or $4.15 per diluted share. Our fiscal year revenue of $645 million was just shy of last year's record of $651 million. These excellent results are once again due to delivering reliable drilling services to our clients, while managing our costs prudently. Our rig operations teams continue to drill our wells, maintain our equipment and respond to our clients' needs in accordance with our expectations as a top-performing drilling company. This is how we achieved a fleet-wide reliability factor of 97% for the fourth quarter. I will add that the Atwood Osprey concluded its first complete quarter of operation, with a 94% uptime.

Our asset management team in Houston is spending significant time with our rig teams to identify and scope maintenance projects well in advance of their due dates to ensure that potential supply chain issues do not jeopardize our fleet reliability down the road. Reliability and revenue recognition depend on solid execution, and our people continue to execute very well.

On the cost side, we are working to manage both onshore and offshore costs, even as we expand the Atwood team to accommodate our rig fleet growth over the next few years. We are adding some very talented people to Atwood who bring skills, experience and fresh ideas to our organization, however, we are very protective of our efficient structure and streamlined decision-making processes, and this is helping us to keep the costs in line.

Turning to our fleet operations for the quarter. We completed our planned regulatory work and associated maintenance on the Atwood Hunter in less than our expected out-of-service time prior to the rig's move from Ghana to Equatorial Guinea. We also completed maintenance work on the Vicksburg without incurring any lost revenue due to some good planning by the rig and our Houston technical team.

The regulatory work that we anticipated completing on the Atwood Beacon in the fourth quarter has now been delayed until at least this current quarter, owing to the extended duration of the drilling program in Suriname.

This past quarter and the month of October, we're very busy for our marketing team as we achieve 3 significant fixtures, which I will discuss in more detail. Altogether, these 3 agreements added more than $890 million to our contract backlog.

Our revenue backlog stands at approximately $1.8 billion as of November 1, which is approximately 50% higher than it was on this date a year ago. The first 2 significant fixtures were for the Atwood Eagle and Atwood Falcon, as both rigs committed to drill for Apache offshore in northwest Australia. The Eagle's program is for 18 months and will commence upon conclusion of our 6-month contract with Chevron next year. We anticipate this to occur around September of 2012, meaning the Eagle will be busy with Apache until March 2014.

The Falcon's drilling program is for 30 months and begins once the rig has completed planned maintenance and contract prep work required for compliance with Australia's National Offshore Petroleum Safety Authority regulations. We expect the Falcon to mobilize to Singapore, our shipyard, to complete this work once its current program is completed in early calendar 2012. I will add that the Falcon has been under contract with Shell in Southeast Asia since 1998 and was recently awarded Shell's Floater Rig of the Year based on its excellent safety and operational performance. We are very pleased to have received this honor and commend the Falcon rig team for their fine results.

Our third notable fixture was for the Atwood Condor, our 10,000-foot water depth semi-submersible under construction at Jurong Shipyard in Singapore. The Condor's inaugural contract is with Hess Corporation for a 21-month campaign in the Gulf of Mexico. We are very enthusiastic about returning to the Gulf and to be working with a client with whom we have an established relationship and a lot of good drilling history. The Atwood and Hess teams are now working together to achieve a safe and reliable delivery of the Condor by late June of 2012. Once delivered, the Condor will mobilize to the Gulf to complete its final field test prior to commencing drilling.

Last month, we exercised our option to build the Atwood Achiever, an identical drillship to the Atwood Advantage at the DSME shipyard in South Korea. This latest expansion of our high specification ultradeepwater fleet makes sense economically, and it allows us to leverage synergies around its construction, operation and maintenance with the Advantage. The Achiever is expected to be delivered by June 30, 2014, at a total cost of approximately $600 million, including project management, drilling and handling tools and spares. We have one remaining option with DSME to build an additional identical drillship if we exercise by July 31, 2012. We also retained 2 options with the PPL Shipyard to build high specification jack-ups identical to the Atwood Mako, Atwood Manta and Atwood Orca. These options expire at the end of December this year, and we will be meeting with our Board in early December to discuss our next steps.

To close on the subject of our new builds, all rigs that we are constructing remain on track with no schedules to note from our previous guidance on budgets and schedules.

Turning now to our market outlook. Both the jack-up and floater segments continue to see improving activity and demand visibility. As I have mentioned on previous calls, we keep a tally of our in-house quarterly bid and inquiry activity, and we are on pace for this to be our sixth consecutive quarter of sequential increases.

Starting with the jack-up segment, we have seen an increase in overall demand and utilization of the worldwide fleet, and marketed utilization is now at 90% overall and better than 95% for the high spec rigs. This has led to positive day rate momentum as we are finally seeing rates break out of the $120,000 to $140,000 per day range for high spec assets. In the deepwater and ultradeepwater floater segments, the story is similar. In recent weeks, we have seen the number of data points above $500,000 per day on ultradeep rigs, including our own Atwood Condor, while deepwater rigs are trending toward the high $300,000s. New build rigs are being absorbed at an increasing clip into multiple regions, and 2012 newbuild deliveries are virtually sold out.

As an anecdote, all 3 of the semi-submersible new builds being completed at Jurong, including the Condor, were contracted since the last earnings call.

On the marketing front, with the contracting of the Condor, our focus has shifted to the newbuild jack-ups and the renewal of our existing rig fleet. We are actively bidding the Atwood Mako and the Atwood Manta on programs in multiple regions. We continue to receive positive feedback from our customers on the technical aspects of these rigs, so we feel quite good about their prospects. Our other 2 high spec jack-ups with calendar 2012 availability, the Atwood Beacon and Atwood Aurora, are also pursuing follow-on work that looks promising. With the Atwood Eagle and Atwood Falcon under long-term contracts, the Atwood Hunter is the focus floater for renewal after it completes its program in Ghana in October 2012. We are currently assessing drilling opportunities both in West Africa and outside the region.

My final prepared comment relates to Atwood being named, once again, to Forbes' list of best companies with less than $1 billion in revenue. We came in at #18 on their 2011 list, and we're the top-rated company in Houston. On a practical level, this recognition affirms our consistent performance to our stakeholders and assists our recruiting efforts for the growing Atwood team. This concludes my opening remarks, so I will turn it back to Mark to provide more details on our quarterly results and elements of our financial outlook for fiscal year 2012. Mark?

Mark L. Mey

Thanks, Rob. Let me now walk you through our financial results for the fiscal fourth quarter and the year ended September 30, 2011. I will then compare this quarter to the quarter ended September 30, 2010, and also to the previous fiscal quarter. Finally, I will discuss our expectations for fiscal year 2012.

Our diluted earnings per share for the quarter ended September 30, 2011, were $1.12 on revenues of approximately $178 million. This compared to earnings of $0.99 on revenues of $161 million for the same period in 2010. This 13% year-on-year improvement in diluted earnings per share was achieved despite 161 fewer operating days during the quarter as the 3 cold stacked rigs contributed an aggregate 200 days in the fourth quarter of 2010, partially offset by our full quarter of operations from the Atwood Osprey in 2011. Note also that the Atwood Aurora operated for only 3 days during this past quarter.

Financial highlights achieved during the quarter include average day rates of $331,000 as compared to $230,000 during the same period in 2010 and also up $28,000 from the previous quarter. Excluding the Atwood Hunter's planned newbuild [ph] and maintenance project resulting in 12 days of 0 rate, we achieved a revenue efficiency of 97% for the fleet during the quarter and also up 4% from the previous quarter. Revenue efficiency of 96% was achieved for the fiscal year 2011, and then finally, good operating and G&A cost control for the fourth consecutive quarter. Note that included in other expenses net for the fourth quarter is a $5 million impairment charge on our cold stacked rigs. Contract drilling costs totaled $52 million for the quarter as compared to $65 million for the same period in 2010. Operating and net margins remained at 48% and 41%, respectively, for the current quarter and marginally higher than the margins achieved during the same period last year. Margin gains from the Atwood Osprey's full quarter of operations were offset by the Atwood Hunter's 0 rate days, and the Atwood Aurora being between contracts almost the entire quarter.

Let's compare this quarter to the third fiscal quarter ended June 30, 2011. Revenues increased $15 million or 10%, but net income declined by $2 million due to the Atwood Hunter's 12 days at 0 rate due to the planned newbuild [ph] maintenance project.

Looking at the balance sheet, capital expenditures totaled $16 million during the quarter and consisted primarily of progress payments on the Atwood Condor and project management and other payments on the other rigs under construction. During the quarter, long-term debt increased from $400 million to $520 million, while cash also increased $113 million to $295 million during the quarter in preparation of large CapEx payments in early October. Note that we target a cash balance of $75 million to $100 million on an ongoing basis. Our resulting end-of-year net debt to cap was 10%.

I will now look towards fiscal 2012 and discuss our expectations for the year. First is the Atwood Condor is expected to be delivered by the Jurong Shipyard on June 30, 2012. We anticipate an 85-day mobilization to the U.S. Gulf of Mexico, during which we receive 90% of operating debt as compensation. The drilling contract will commence immediately upon acceptance of the rig by Hess in Singapore, so we will recognize the mobilization of revenue as earned during the mobilization period. Operating costs will approximate about 70% of the steady run rate during the mobilization period. Note also that fuel in tanks are for the account of our customer.

Secondly, as noted in our November fleet status report, we expect to incur 5 0-rate days on the Atwood Beacon during the first quarter related to regulatory inspections. In addition, the Atwood Falcon will undergo contract-specific upgrades after completing its contract with Shell and prior to reporting for its 30-month contract with Apache in Australia. We expect to spend approximately 95 days on tow, too, and completing the work in the shipyard in Singapore. We then expect a 20-day mobilization to Australia at 95% of operating day rate.

Thirdly, we totally expect total drilling costs for fiscal year 2012 to be between $315 million and $335 million and around $74 million for the first quarter of 2012. The year-on-year increase is due primarily to planned maintenance projects budgeted for but not performed in 2011, not projected to occur during the first 2 quarters of 2012; the Atwood Osprey operating for a full year in Australia; expensing approximately 40% for the Atwood Falcon's upgrade and then operating from May 2012 in Australia, a higher cost jurisdiction; the Atwood Aurora operating for a full year in 2012; drilling expenses of one month of operating costs on the Atwood Condor during its mobilization to the U.S. Gulf of Mexico; and finally, we expect the annual inflationary impacts on operating costs to approximate 4%.

We currently expect that our G&A expenses for fiscal 2012 and the first quarter of 2012 to approximate $49 million and $17 million, respectively. As you are aware, the first quarter is typically a higher cost quarter for us as compared to our subsequent quarters due to short-term and long-term compensation disbursements occurring during that time period.

Depreciation expense averaged approximately $14 million per quarter, increasing upon the initiation of the Atwood Condor's move to the U.S. Gulf of Mexico in the fourth quarter of 2012. We expect our tax rate for 2012 to remain around 16%, which approximates our actual tax rate for fiscal 2011.

Turning to capital expenditures for 2012, we expect to incur approximately $750 million for the year, excluding any capitalized interest. This includes a down payment on the Atwood Achiever, which was paid in October 2011 and the final payments on the Atwood Condor and Atwood Mako.

Finally, our current contract backlog of $1.8 billion is expected to provide approximately $1 billion in future asset tax cash flows, which, in addition to our forecast of uncontracted cash flows and the availability under our credit facility, plus the $250 million upside accordion, we believe we can fund our new book construction program through fiscal year 2013. The requirements for any additional debt is reviewed in conjunction with our ongoing growth initiative on a regular basis, and any further decision with regard to capital structure adjustments will be made at that time.

That conclude my prepared remarks today. I will now turn the call over to Kevin for questions.

Question-and-Answer Session

Operator

[Operator Instructions] With that, we'll take our first question from the side of Dave Wilson with Howard Weil.

David Wilson - Howard Weil Incorporated, Research Division

Rob, on the cost front and the 0-rate days, do you guys feel you're doing something differently as far as schedule maintenance on the BOP subsystems and the like versus some of your peers where you've been able to have better cost controls and overall utilization?

Robert J. Saltiel

It's hard for me to know exactly what our competitors are doing as a comparison, but I will say that we've really gotten ahead of this issue ever since these regulations were becoming clear and the requirements of our customers were being communicated around expectations for BOP maintenance. I think we've done a good job historically of maintaining our BOPs, so we didn't have a large number then that were coming out of compliance. I think we've done a good job of maintaining spares, and I think we've also done a good job of working with our suppliers and vendors to be in compliance. All of our BOPs are NTL-05 certified, and we're going to continue to stay ahead of it.

David Wilson - Howard Weil Incorporated, Research Division

Okay, great. And then kind of switching gears a little bit. Mark, you mentioned the impairment, but I wanted to know, yes, and just to kind of remind us how much the cost drag is on the company of the noncore fleet. I know we've talked from time to time about the [Southern] Cross, the Richmond and the Seahawk, but is the option value -- is there still some option value there for those rigs going back to work?

Mark L. Mey

On the cost drag, as you put it, Dave, it's about $12,000 a day for all 3 rigs. So obviously that's de minimis in the grand scheme. So we believe there is option value there, and we are seeing inquiry on those rigs on a irregular basis.

David Wilson - Howard Weil Incorporated, Research Division

Okay, great. And then finally, Rob, regarding the outstanding new build options, I think you know you're going to get a question on these, so I'll go ahead and ask it. After the one that was exercised in October, I wanted to get kind of your current take in heading into the board meeting in December on those, and if you could frame those in terms of current shipyard costs and your capacity to increase leverage on the balance sheet.

Robert J. Saltiel

Well, Dave, we didn't give much away on the last call and we exercise an option, so you shouldn't expect anything differently on this call. I will say that when we entered into these agreements initially with the shipyards, we built in that optionality with the hope that we would be able to exercise one or more options, and we've been fortunate on the jack-up side to have exercised one option, and now we've done the same on the drillship. There's obviously value in having multiple copies of a similar designed vessel, and that's one of the challenges, I think, our industry has had is having too many one-off designs, and now we've got 3 jack-ups and at least 2 drillships. And we feel very good about where we are today in terms of having achieved the initial goal and entering into these contracts with that optionality with the shipyard. Looking forward, we really have to take a view at when do we feel we've got enough on our plate and versus the opportunities that we've got embedded in those contracts for optionality. I will say that we want to guard against overcommitting ourselves, biting off more than we can chew, and in any way degrading the quality of our performance, which I made a big deal about in our prepared comments. So those factors all go into that decision process, and you'll just have to stay tuned.

David Wilson - Howard Weil Incorporated, Research Division

Sure, sure. And then one final one on the possible extension of the option on the jack-ups beyond year end. Do you imagine you have to pay the shipyard or equipment providers to hold those, or do you think those will be somewhat free options for the extensions?

Robert J. Saltiel

Yes, I think we'll have to see where that all comes out.

Operator

We'll go next to the side of Scott Burk with Canaccord.

G. Scott Burk - Canaccord Genuity, Research Division

I wanted to ask you about the rates that you're looking at for next year. You kind of talked about favorable rate trends for both jack-ups and the high end drillships and floaters. What kind of term structures are you seeing now? Are you starting to see more kind of 2- and 3-year terms for jack-ups, maybe 5-year terms for floaters, maybe you could get something like that for the Hunter, what do you see for term structure?

Robert J. Saltiel

Well, I think you're seeing a spectrum of terms out there from one-year deals on ultradeep up to 5-year deals. I think you've seen the spectrum there. Our deal is kind of in the middle with 2 years on the Atwood Condor, 21 months, 2 years with the mobilization. I think on the jack-up side, it's a similar story, but definitely the term lengths are growing. So we're definitely seeing some multiyear opportunities on the jack-up side, and as well as some short term stuff. Clearly, when you bring out new build rigs, there's a benefit in continuity in having a contracted stum [ph] duration in order to get the rig through a breaking in period and then a period of steady state operations. It also demonstrates a bit of commitment on the client side to work with us on a longer-term basis, and even though we've got 21 months committed with our client in the Gulf of Mexico, based on our long history with them and some of their future plans, we would hope that, that program extends beyond that. We definitely have a bias toward longer-term programs for the new builds to the extent that the rate structure makes sense, and we also have a bias, I will add, for working with clients that we've got good working history with. And again, I think in the case of what we were able to do on the Condor, we were right in the middle of a fairway. We've got a great relationship with Hess Corp, and we think we've got a reasonably good rate structure there, as well as a good term. So that's what we're shooting for in marketing our new builds. When you mentioned the Hunter in particular, again, I think we'll have to take a look at what opportunities are available to us. We're looking obviously in West Africa, because that's where we are and where we had been, floating between Ghana and Equatorial Guinea, but we're also looking outside the region to see what makes sense for that rig.

G. Scott Burk - Canaccord Genuity, Research Division

Okay, terrific. And do you see a big discount as you're going from, say, a 2.5-year term, a 2-year term to a 5-year term, do you see a big discount in rates when you make that kind of change? Or is it -- you're able to maintain a pretty decent rate level?

Robert J. Saltiel

Well, I think it depends on the client and the particular negotiation. I think some clients have an expectation that if you're entering into a longer-term contract, that there should be some volume discount, and I think generally speaking, the industry has accommodated that. I think you have to take those case-by-case.

G. Scott Burk - Canaccord Genuity, Research Division

Yes, okay. I wanted to ask kind of a follow-up on the charge in those and other expenses, what exactly was that charge for again, Mark?

Robert J. Saltiel

Yes, we've got 3 cold-stacked rigs, and as part of our regular accounting treatment, we have to assess the value of those relative to book. And we took the view that the value on the books was higher relative to where they would be on a kind of a fair market value basis, and we took the write-down in this quarter.

G. Scott Burk - Canaccord Genuity, Research Division

Right, I see. So that's just kind of a sum of all 3 of those, not one particular ship? Or one particular...

Robert J. Saltiel

It was an adjustment that we felt was necessary for, given the fact that these rigs have been out of service for about a year's time.

G. Scott Burk - Canaccord Genuity, Research Division

Right. And speaking of that, there have been several mid-water contracts we've seen at pretty decent rates, kind of in the $200,000 day range, in $200,000 to $300,000 a day, which kind of seems favorable for the Southern Cross specifically. You mentioned a couple of opportunities you're seeing for that rig, are you seeing an opportunity in that same kind of range or how are things looking for the Southern Cross?

Robert J. Saltiel

Well, let me be clear that we're not actively marketing the Southern Cross. The rig is cold-stacked and demanned, but I will also say that, as Mark has indicated as well, we've gotten some inquiries about reactivating the rig. And what I will say about that is that when you reactivate a rig, that's a pretty significant event, getting that rig ready to go, especially in a post-Macondo environment, remanning it with competent and full crews, and so we're not going to do that lightly. It's going to require a significant contract, both term and rate to justify the work that's going to be required to reactivate. But I will agree with you that the trend in mid-water is very positive. We are seeing trending up both in the North Sea and outside the North Sea in the mid-water market day rates, and clearly, that increases the probability that we'll reactivate the rig, but I still wouldn't put it in your models.

G. Scott Burk - Canaccord Genuity, Research Division

Okay. All right. Very good. And then one final small question here. Regarding the timing of the delivery on the Condor, can you just walk me through -- you mentioned some dates, but walk me through when it actually starts making revenue, when the expenses starts to hit just so we can kind of model that out kind of on a month-by-month basis.

Mark L. Mey

Yes, Scott. Couple things over there. Obviously, we can capitalize most of the costs associated with the new build, but training costs for the crews are going to be expensed so probably starting around about 6 months when the rig been delivered. It's expected to be delivered by June 30 of next year, so as soon as it gets accepted by Hess in Singapore, the way we structure the contract, we can recognize the day rate and resulting operating costs during the mobilization from Singapore to the U.S. Gulf of Mexico. So if that rig leaves July 1 of next year, you'll start seeing both the revenue and the costs been hitting the books from that day.

Operator

We'll move next to the side of Rhett Carter with Tudor, Pickering, Holt & Co.

Rhett Carter

Just recently, you've seen some signings in the Gulf of Mexico with, for example, the Condor. I just wanted to -- it feels like operators are getting more willing to make commitments there and wanted to get a feel for what your sense on the region was and if you saw any other opportunities for your other new builds there.

Robert J. Saltiel

Well, there's no question that the permitting activity has increased in the Gulf of Mexico and is approaching pre-Macondo levels for ultradeepwater, deepwater drilling, and that's obviously been long overdue but very welcome for our industry. And the fact that our client has been willing to sign up for a long-term program for the Condor this far in advance, knowing that they have to navigate the permitting process, I think is a sign of confidence that, that's manageable now for deepwater E&P operators. So you're seeing other rigs as well coming to the Gulf of Mexico that haven't been here before for new programs, so there's really a sense in the industry now that the deepwater Gulf is back in business. Obviously, if you look at the rigs that we're building at the DSME shipyard, the Atwood Advantage and the Atwood Achiever, 12,000-foot highly capable rigs, both in terms of drilling and in terms of completions for subsea tree deployment. Those are great assets for considering deployment into the Gulf of Mexico, and we will continue to look down the road as we market those rigs at opportunities to bring them to the Gulf, because with that kind of drilling capability, the Gulf of Mexico lower tertiary, a lot of drilling through salt, those rigs are particularly well-suited for that.

Rhett Carter

Okay. And then just on the technical front, everybody's putting a lot of emphasis on 2 million-pound plus circular jack-ups. I know you guys kind of have some different thoughts around that and wanted to just hear your thoughts on why you think the 1.5 million-pound hook load is kind of the sweet spot there right now.

Robert J. Saltiel

Well, I could tell you that based on what we're seeing in terms of market inquiries and the opportunities we're looking at for both our existing high spec jack-ups and the new build jack ups, specifically the Mako and the Manta, we're very comfortable with the design that we've picked. There are plenty of opportunities out there for those rigs, and our view is that the extra hook load is reserved for a very small segment of the market, just like we're not in the harsh environment segment of deepwater drilling, where we chose to not be in that 2.5 million-pound segment for jack-ups because we feel it's a niche market, and we weren't confident that we'd get return on the additional capital.

Operator

We'll go next to the side of Matt Beeby with Global Hunter Securities.

Matthew H. Beeby - Global Hunter Securities, LLC, Research Division

Rob, I had a question, you discussed the jack-up market and utilization rates obviously looking better and better. That might lend itself to potential reactivation of cold-stacked jack-ups. Could you maybe discuss your expectations or quantify that, and then how that additional competition could potentially affect your decision to exercise your options at the end of the year?

Robert J. Saltiel

Well, there's no question that the lower end of the market has picked up, and obviously, the rising tide tends to raise all boats, so that's actually been directionally favorable, I think, even for the higher end. And most of the rigs that are stacked tend to be lower-end rigs, so there is obviously an opportunity for some reactivation of those rigs. I think that there's always going to be a segment, a customer segment and a technical capability segment in terms of the wells for those rigs, but we see that as a shrinking segment. And we see our customers both requesting, due to the assurance that they get with the higher spec rigs, as well as requiring because of the technical aspects of the wells that they're drilling, these higher spec assets. So there is no question that we may see some reactivation, but we don't see it as a significant threat to the progress that we've seen in the high spec space. Going forward, we think a lot of these rigs that are in the stack are going to be, frankly, uneconomic to reactivate. The longer they sit, the longer the maintenance has been deferred, the higher the cost of reactivation. And again, you couple that with customer preferences and requirements. Again, I think it's going to be a small set that make their way back.

Matthew H. Beeby - Global Hunter Securities, LLC, Research Division

Okay, that's helpful. A quick follow-up there, what kind of lead time are you expecting as far as finding a contract ahead of the delivery of these new builds? Could you give any color on that?

Mark L. Mey

Yes. We'd like to get as much lead time as we can is the short answer. We were saying for a long time on the Condor that we would like 6 to 9 months, and we basically closed it about 8 months in advance of the delivery of that rig. With regard to the jack-ups, I don't think we need quite the lead time we do on an ultradeepwater floater, but we would certainly like to get contracts in the early part of calendar 2012, certainly for the Mako, which is scheduled for September, and then you can add 3 months to that if you want to think about what our target would be for the Manta. The Atwood Advantage, I'll remind, comes out in September, at the end of September in 2013, so we've got a bit of time on that one. We're just a little bit less than 2 years out. I will also say, though, that we've had inquiries about the Advantage already, and I think that's in contrast to where we were on the Condor, because the market has strengthened and people are looking further out now as they think about their ultradeepwater rig needs. So that's a positive development because we certainly would like to get in early with any client that we're working with on a new build.

Operator

We'll go next to the side of Stewart Glickman with S&P Capital IQ.

Stewart Glickman - S&P Equity Research

I'm going to take another stab at the new build option question. When you look at your fleet, say, 4 or 5 years out, do you have any kind of target, if you will, for either revenue exposure to floaters versus jack-ups or perhaps operating income floaters versus jack-ups that you're aiming for?

Robert J. Saltiel

Well, I've said before that we're going to put more of our capital into the ultradeepwater space than we will in the jack-up space. Now given that one ultradeepwater rig equals about 3 jack-ups, that may not be saying that much in terms of tipping our hand, but frankly we feel good about both segments, and we think that as we grow our company, we definitely want to have a significant presence in high spec segments for both floaters and for jack-ups. But unfortunately, given your additional effort, I'm not sure I'm going to tell you much more than that.

Stewart Glickman - S&P Equity Research

Okay, fair enough. Second question, you alluded early on in the call today to supply chain, I guess trying to stay ahead of the curve on that. Can you speak to what aspects of supply chain you're thinking the most about, whether it's long lead-time items or building out onshore bases, things like that?

Robert J. Saltiel

Yes, I think it's a combination of long lead items, but as importantly or more so, it's getting equipment into shops that are required for certification of BOP. So to get OEM certification, which we're now doing across our fleet for BOPs, there's just a limited number of shops, and you have to get in early and you have to manage the process, and you also have to be able to verify the records of previous maintenance so that you don't run into a problem with the OEM saying, "Well, I can't really verify all that's happened before now, and therefore, I'm going to ask you to start over on this piece of the BOP." So it's those sorts of things that we're really spending a lot of our time on to make sure that they don't impact our ability to deploy and operate our rigs in the future.

Stewart Glickman - S&P Equity Research

Okay. And then just kind of one quick follow-up on the long lead time stuff. Are you seeing those aspects of your operations getting any better, any worse than, say, last quarter?

Robert J. Saltiel

I'm not sure we're seeing much of a trend, I think that at least over the last quarter, I think we've been seeing this really for the last 6 to 9 months, and we've been focused on it. And so far, we've done a very good job of executing against it.

Operator

The next question from the side of Judd Bailey with Jefferies & Company.

Judson E. Bailey - Jefferies & Company, Inc., Research Division

A couple of quick questions. First on the drillship option, did you disclose this? I apologize if you did, but is that one as attractively priced as the one that you just exercised in terms of pricing at the yard?

Robert J. Saltiel

Are you talking about the remaining option, Judd?

Judson E. Bailey - Jefferies & Company, Inc., Research Division

I'm sorry, yes, the remaining option.

Robert J. Saltiel

Yes, the remaining option is similarly priced to what we just exercised.

Judson E. Bailey - Jefferies & Company, Inc., Research Division

Okay, all right. And then next question is one of your competitors this morning announced a 4-year contract for ultradeepwater rig starting in late '13, and I was just curious if you could provide any color with the dialogue you're having with customers for jobs now starting in 2013 and maybe how that compares to what the dialogue was like maybe 3 or 4 months ago. It seems like it's stepping up quite a bit, but I'd just be curious to get your perspective.

Robert J. Saltiel

Yes, I mean, as markets strengthened, the lead time to fixing contracts lengthens as well, and that's what you're seeing is that as the ultradeepwater has increased in terms of demand and utilization, our customers are coming to us earlier to have these discussions. As I mentioned a little earlier on the call, we are having discussions around the Atwood Advantage. The Atwood Advantage is going to be delivered in just less than 2 years' time, so we're also having discussions about our rig delivery in 2013. And again, as the market continues to strengthen, you can expect that lead times and contract durations will increase.

Judson E. Bailey - Jefferies & Company, Inc., Research Division

I assume day rates, perhaps, too.

Robert J. Saltiel

They tend to follow along as well.

Judson E. Bailey - Jefferies & Company, Inc., Research Division

Okay. And then if I could slip in one more on the Hunter, you mentioned where it may work. In terms of the potential contract length, are you looking at a range of options, short term, long-term? Can you maybe talk about that a little bit more?

Robert J. Saltiel

We are. We are looking at a range of options.

Operator

We'll go next to the side of Darren Gacicia with Vertical Research Partners.

Darren Gacicia - Vertical Research Partners Inc.

First, a couple things kind of on the broader market side. It strikes me that if you have a lot of the sort of deepwater rigs tied up in kind of certified BOPs, not just you, but the industry in general, there may be sort of a premium that can be found possibly on day rates for BOPs and deepwater rigs that have BOPs that have been certified. Is there anything that's kind of skewing supply and demand on that kind of a set basis on the deepwater side that may drive rates above kind of the high $300,000s?

Robert J. Saltiel

I'm not sure I can tie the certification of the BOPs directly to day rates. I think the focus for those of us in the industry and particularly Atwood, is making sure that the rigs that we've got within our fleet are ready to run at all times. And so our focus is on making sure we're out ahead of the BOP maintenance programs, again, working with the supply chain, making sure we're keeping careful records of BOP maintenance in the past and going forward and working with our clients to make sure they understand what our plan is for, for that required maintenance because we certainly want to avoid any out-of-service time because it impacts our clients as well. But that's about as far as I can go in terms of time, our focus on that aspect and how it relates to the market.

Darren Gacicia - Vertical Research Partners Inc.

Sure. And then kind of second, if you look at -- obviously day rates are moving higher in the ultradeepwater side as people have seen the scarcity of rigs for 2012. It also strikes me that you have sort of an increase in duration starting to kind of creep in the market as well. Are people starting to now -- operators now and customers now starting to think about having the rig market being tight in '13 and '14 even with deliveries, or is that something that's a little bit further off?

Robert J. Saltiel

Well, there's no question there are more deliveries in 2013 than there are in 2012, and I think the focus on 2013 is due in part because 2012 is getting sold out. I think as we go forward, our view is that the talk is going to be about 2013, and the more fixtures that we start to see and discussions that we have about 2013, the more that additional number of new builds that are scheduled is going to get contracted and tightened up. Keep in mind, we still haven't heard anything in a real way from Petrobras about what they're going to do with their rig needs, and there's no question, anybody's analysis says that if they're going to hit their production targets of over 5 million barrels a day, they are going to have to have a lot more ultradeepwater floaters than they've got currently, and that their indigenous build program won't be enough and won't be on time to achieve those objectives. So we expect that Petrobras will enter this market, and they will take some of that rig supply. Keep in mind, that we've been adding a lot of ultradeepwater rigs over the last 5 or 6 years. If you go back to 2005, 2006, there were 25 or so ultradeepwater rigs, we're over 100 today in the current fleet, and of course, we're building 65 or so more over the next 3 or 4 years. So we believe that as this market continues to grow it'll absorb the capacity, and we'll be in a good position when the Atwood Advantage comes out in September 2013.

Darren Gacicia - Vertical Research Partners Inc.

Sure. And I mean with that, if you think that people are starting to get more concerned, is it more likely you'll try to kind of hold out on contracting that, trying to see if you catch a bigger part of that updraft? Or are you still sort of looking to put it in the contract early as possible?

Robert J. Saltiel

Well, we're not very good at holding out when we have good opportunities ahead of us, and so we're going to continue dialogue with the potential clients, and as and when we've seen the right opportunity, the combination of rate and term, then we'll enter into that deal. Keeping in mind, that there is an advantage to getting these things signed up. You have time to work with your client before the rig's delivered.

Operator

We'll go next to the side of Truls Olsen from Fearnley.

Truls Olsen - Fearnley Fonds ASA, Research Division

Just a few quick housekeeping items, really. First on the remaining new build CapEx, can you just go through that status as of in this quarter?

Mark L. Mey

As I've said, Truls, for the year we have $750 million of CapEx for the first quarter of 2012. As I've mentioned, we've made the down payment on the Achiever, which was $155 million. We also have about $170 million of CapEx payments on the Condor during this quarter, and then there's about another $10 million, which is project management and some other costs on the remaining rigs under construction.

Truls Olsen - Fearnley Fonds ASA, Research Division

I was thinking about total remaining CapEx, including what's to come in 2013.

Mark L. Mey

2013 and 2014? That's going to total about $1.6 billion, $1.7 billion.

Truls Olsen - Fearnley Fonds ASA, Research Division

And I think on the Falcon, you said that there would be some of the upgrade yards cost that would be expensed, could you give us some color on how much that is?

Mark L. Mey

The total cost for the upgrades, that's about $35 million, and about 40% of that we intend to expense with the remainder being capitalized to the rig.

Truls Olsen - Fearnley Fonds ASA, Research Division

Excellent. And then lastly, I just noticed a big increase in accounts payable for the quarter. I guess that is just related to some yard issues and stuff like that, and that's going to get dropped down to the sort of normal run rate levels in the next quarter.

Mark L. Mey

That's correct, Truls. The Atwood Condor is the last we'd actually had progress payments, so there's a progress payment that was made in early October that's included in the accounts payable at the end of the quarter.

Operator

And we'll go next to the side of Andreas Stubsrud with Pareto.

Andreas Stubsrud - Pareto Securities AS, Research Division

I just have a quick question about the jack-up market. What do you see out there? Because we get some indication that in the jack-up market, the demand is kind of maybe starting to be a little bit flat because the smaller E&P companies, the smaller independent e-companies are dependent on financing. And as you know, the bank and the bond market is pretty difficult these days. Do you see any of that yet, or are you afraid of a flat or decreasing demand in the jack-up market?

Robert J. Saltiel

We're not seeing it for the rigs that we're marketing. We've got the Atwood Aurora and the Atwood Beacon, both looking actively at a number of opportunities. And then as I mentioned before, the Atwood Mako and Atwood Manta are also bidding on opportunities right out of the yard for 2012 starts. So we're not seeing that for the high spec rigs that we're marketing.

Andreas Stubsrud - Pareto Securities AS, Research Division

Okay, good. And with your experience, you have some experience here. Are you afraid of what I'm asking about in terms of the smaller independent oil companies, or do you think the total demand based on the commodity prices is good enough?

Robert J. Saltiel

Well, there's no question when capital markets were loosened up, a lot of people entered the space on the E&P side, so directionally, the lack of credit does impact demand on the margin. But again, for the clients that we're working with, it hasn't been an issue, and the ones that we're talking to, it won't be an issue.

Operator

And we'll go next to the side of David Smith from Johnson Rice.

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

Sorry if you addressed this and I missed it, but what was your depreciation guidance for next year?

Mark L. Mey

$14 million per quarter.

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

And could you please help me understand just kind of how we're walking down from $15.6 million in the fourth quarter and in conjunction with the Condor coming on in the last quarter?

Mark L. Mey

The Condor comes on, as we said earlier, it starts getting depreciated once the rig's accepted by Hess in Singapore. So we expect that to be at the end of June, beginning of July of next year, and the Condor should add just about between $2 million and $2.2 million per quarter in depreciation.

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

And going from $15.6 million this quarter to a $14 million run rate, what accounts for that decline?

Mark L. Mey

Yes, the fourth quarter had some adjustments on the Osprey that we included in the quarter. That shouldn't be recurring next quarter.

Operator

We'll go next to the side of Matt Conlan with Wells Fargo.

Christopher W. Wicklund - Wells Fargo Securities, LLC, Research Division

This is Chris Wicklund filling in for Matt Conlan. Question on your most recent, I guess, contracts, have you been able to work in more favorable, I guess, verbiage or clauses to shield your revenue efficiency against unplanned maintenance downtime that may be incurred on site? Or have there been any changes?

Robert J. Saltiel

I would say there haven't been material changes. I think that the contracts that we're signing, both overseas and here in the Gulf, are representative of standard contracts for the industry.

Operator

We'll go next to the side of Doug Garber from Dahlman Rose & Company.

Douglas Garber - Dahlman Rose & Company, LLC, Research Division

My first question is on the reactivation cost for your various rigs. Do you have an estimate for how much it would cost each rig to be reactivated at this point?

Robert J. Saltiel

Yes, we do.

Douglas Garber - Dahlman Rose & Company, LLC, Research Division

Is that something you would share at this point?

Robert J. Saltiel

I would say, just to give you rough numbers, between $5 million and $15 million for each rig, some lower than others. So we think the Richmond would probably be around $5 million, Seahawk might be little on the higher end between $10 million and $15 million and kind of shoot for the Southern Cross right there in the middle.

Douglas Garber - Dahlman Rose & Company, LLC, Research Division

Okay. And would you guys need a full pay back on that upgrade cost in order to reactivate it?

Robert J. Saltiel

We would need more than a full payback, so we want to make sure that we would be fully covered for, obviously, all the costs of reactivation and operation. And we want to make sure that in the event that we didn't find follow-on work, if we were reactivating for a particular job that calls for potentially restacking the rig, we'd be fully covered. And then there has to be a significant enough profit component on top of that to justify the effort. So we're not going to do this lightly. We're not going to do it on a breakeven basis or because we think the market is turning, and we can catch another piece of work later. We want to make sure that any reactivation is fully justified on its own basis in the event that, that's the only work that we get.

Operator

And I'm showing no further questions in queue at this time.

Robert J. Saltiel

Okay. If there are no further questions, Kevin, thank you very much for your help on the call, and thanks to all who joined. We'll pick it up next quarter.

Operator

And this concludes today's program. Have a great day. You may disconnect at this time.

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