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Atwood Oceanics (NYSE:ATW)

Q1 2012 Earnings Call

February 02, 2012 12:00 pm 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

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

David Wilson - Howard Weil Incorporated, Research Division

G. Scott Burk - Canaccord Genuity, Research Division

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Rhett Carter

Anders Bergland - RS Platou Markets AS, Research Division

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

Operator

And welcome to today's First Quarter Results for Fiscal Year 2012 Conference Call. [Operator Instructions] Please note today's call is being recorded. Today's program will be presented by Robert Saltiel, President and CEO; and Mark Mey, Senior Vice President and CFO. It is now my pleasure to turn the program over to Mark Mey. Please begin, sir.

Mark L. Mey

Thanks, Kevin. Good morning, and welcome to Atwood Oceanic's conference call and webcast to review its company's operating results for the first quarter ended December 31, 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 were to occur or assumptions prove 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 comments.

Robert J. Saltiel

Thank you, Mark. Good day to all of you joining us for our discussion of Atwood's fiscal 2012 first quarter results. I will make a few comments on the significant developments since our last call and then provide some color on Atwood's market outlook and contracting activities before turning it back to Mark for the financial details.

The first quarter saw our company achieved another record for quarterly revenue at $184.7 million, which resulted in earnings of $65.5 million or $1 per diluted share. Because we experienced higher than normal downtime on 2 of our highest revenue rigs, the Atwood Hunter and the Atwood Osprey, our revenue recognition was significantly lower than we are used to achieving.

In addition, our quarterly drilling costs were impacted negatively by certain repair and maintenance items that were more concentrated in this quarter. The net effect of these 2 factors, which I will discuss further, was to reduce our earnings below what we had expected for the quarter. The issuing of our first public debt offering in early January, $450 million of 8-year 6.5% coupon bonds, was a major milestone for Atwood Oceanics in diversifying our debt profile and enhancing our financial flexibility. We are very pleased to have completed this offering during the prevailing market uncertainty, especially in Europe. With this initial bond issue behind us, Atwood now has the capability to access the public debt markets in the future on an expedited basis should we decide to do so.

The downtime that occurred last quarter on the Osprey and the Hunter was related primarily to subsea equipment maintenance and testing. The root causes of these incidents have been addressed through equipment modifications and/or refinement of our BOP maintenance and testing procedures. While many of our competitors have commented extensively on their issues with BOP reliability, Atwood has largely avoided significant BOP performance issues.

As part of our operations' integrity initiative, we've been working continuously since the Macondo incident to bring greater transparency and consistency to our BOP maintenance and testing. Three things are worth sharing in this regard. First, all maintenance performed on Atwood BOPs is planned well in advance by the collaboration between our headquarters subsea specialists and our rigs subsea engineering teams. The work scope, parts requirements and testing protocols are all agreed upfront. Second, execution of all agreed tests occurs under continuous supervision that follows a prescribed plan. There are no decisions about work scope that are left to the authority of an individual subsea engineer. Also, there is no pressure to work fast, only to do it thoroughly and according to the plan. And third, the BOP stack is not approved for deployment on a well until both our headquarters' team and our rigs offshore and onshore management teams have given the go ahead. Like all of our major competitors, we assess competency of our subsea personnel and invest significantly in training. But we believe the rigor of our management process will provide a key differentiation in our performance.

I mentioned at the outset of the call that our drilling services for the quarter were higher than expected. This is primarily a timing issue as we expected drilling costs for the full fiscal year will come in at the low end of the guidance that we provided on the last earnings call. Mark will provide further color on our cost outlook in his remarks.

Turning now to operations, most of our active rigs experienced little or no change in their drilling programs from our last call. I will point out that the Atwood Beacon's regulatory work has been delayed further due to extended drilling time in Guyana. We now expect that the Beacon will undergo approximately 5 days of out-of-service time in the fourth fiscal quarter after the current well is completed.

All 6 of our newbuild projects remain on schedule or ahead of schedule with no changes in budgetary guidance. This calendar year will be a busy one as we expect the Atwood Condor to be delivered by the end of June, and we anticipate that the Atwood Mako and Atwood Manta may be delivered slightly earlier than their end September and end December scheduled dates. I am pleased to report as well that the crewing for all 3 of these rigs is proceeding according to schedule.

Continuing on the topic of newbuild construction, we did allow our 2 remaining newbuild jack-up options to lapse at the end of December, believing that we had achieved our objectives already with our 3 high-spec jack-ups already committed. We do retain one drillship option with the DSME shipyard that must be exercised by July 31 of this year, and we have not made a decision yet on this option.

Turning now to our market outlook, we are residing a familiar refrain that both the jack-up and floater segments continue to strengthen. Day rates, term lengths and fixture lead times are all moving in a very favorable direction. With leading-edge day rates for ultra-deepwater rigs approaching $550,000 per day consistently and premium jack-ups in benign environments consistently exceeding $130,000 per day, we are very optimistic about our marketing efforts for both our newbuild rigs and our active rigs with near-term availability. I'll provide a brief summary of our marketing efforts starting with the jack-ups.

The Atwood Beacon is our next available jack-up, with a scheduled free day in May after completion of the program in Guyana. We are pursuing a number of potential jobs for this rig both in the Americas and across the Atlantic, and we do not currently expect to incur much, if any, idle time between programs.

Since our last call, we extended the Atwood Aurora for a 120-day program in Cameroon, which will commence after completing the current job for Noble Energy. The Aurora is now expected to be busy until at least October. We continue to field strong operator interest in both the Atwood Mako and the Atwood Manta as these rigs have favorable delivery windows before the end of this calendar year. We currently anticipate securing a contract for at least one of these rigs before the end of this quarter.

Moving on to the floaters, the Atwood Hunter is being marketed for follow-on work after it finishes its drilling program in Ghana scheduled for October of this year. Both existing clients, Noble Energy and Kosmos Energy, have additional work in West Africa that may be suitable, but we are also investigating other opportunities as well.

And finally, the Atwood Advantage is garnering very serious interest from operators as ultra-deepwater rig time in 2012 is increasingly consumed and more operators turn their site to 2013 rig availabilities.

Based on the discussions we are having and the market outlook that we hold, we feel very good about our chances to announce the contract a year or more in advance at the Advantage's delivery in September 2013.

This concludes my prepared remarks. I'll now turn it back to Mark to provide more details on our quarterly results and financial outlook. Mark?

Mark L. Mey

Thanks, Rob. I'm going to walk you through our financial results for the fiscal first quarter ended December 31, 2011. I will then compare this quarter to the quarter ended December 31, 2010, and also to the previous fiscal quarter. Finally, I will update our guidance for the remainder of fiscal 2012.

As Rob mentioned, our diluted earnings per share for the quarter ended December 31, 2011, were $1 on revenues of approximately $185 million as compared to earnings of $0.81 on revenues of $146 million for the same period in 2010. This 23% year-on-year improvement in diluted earnings per share was a result of 128 additional operating days for a total of 644 operating days during the quarter. This was mainly due to the Atwood Osprey operating for the entire quarter in 2012.

Financial highlights that key during the quarter include average day rates of 287,000 as compared to 284,000 during the same period in fiscal 2011. Revenue efficiency of 92%, which is down 5% from the previous quarter, drilling margins of 58% and net margins of 35% as compared to 60% and 36% for the same quarter in fiscal 2011.

Contract drilling costs totaled $78 million for the quarter as compared to $58 million for the same period in 2010 with the increase attributed to a full quarter of operations for the Atwood Osprey and the timing of maintenance projects in several of the other rigs during the quarter. As maintenance costs on these rigs were incurred in the fiscal first quarter while being budgeted throughout the fiscal year, we anticipate drilling maintenance cost levels on these rigs in the following 3 quarters of fiscal 2012.

Depreciation totaled $15 million as compared to $9 million for the same quarter in fiscal 2011 with the increase attributed to the Atwood Osprey addition to the operating fleet in May of 2011. Now let's compare this quarter to fiscal fourth quarter ended September 30, 2011.

Revenues increased $7 million or 4% due to the Atwood Aurora operating throughout fiscal first quarter 2012, offset by lower revenues on the Atwood Falcon due to a step-down in day rate was shown from October 24, 2011, and lower revenue efficiency on the Atwood Osprey.

Net income declined $7 million due to higher maintenance costs in the Atwood Eagle and the Atwood Aurora's increased cost while operating in a higher cost jurisdiction in West Africa as compared to previously operating in the Mediterranean plus the amortization of its mobilization costs over initial shorter-term contract.

Looking at the balance sheet, capital expenditures totaled $257 million during the quarter, which consisted mainly of a down payment on the Atwood Achiever, progress payments on the Atwood Condor and project maintenance and other payments on the remaining 4 rigs under construction.

Long-term debt remained constant, $520 million. Our cash declined by $205 million to $90 million, partially funding the aforementioned capital expenditures incurred during the quarter. We ended the quarter with a 23% debt to cap, down from 24% at September 30, 2011.

We will now provide an update to our outlook for the rest of fiscal year 2012. Firstly, the Atwood Condor is expected to be delivered from the Jurong Shipyard around June 30, 2012. We anticipate an 85-day mobilization to the U.S. Gulf of Mexico, during which we received 70% of operating rate as revenue compensation. The drilling contract will commence immediately upon acceptance of the rig by Hess Corporation in Singapore. So we will recognize the mobilization of revenue as earned during the mobilization period.

Operating costs should approximate 70% of the steady run rate operating costs during mobilization and some margin, as a percentage, should remain intact throughout the mobilization in operating periods.

Additionally, fuel and tank costs are borne by our customer during mobilization. Secondly, as noted in our previous fleet status report, we incurred -- we expect to incur 50 rate days on the Atwood Beacon in the fiscal fourth quarter related to regulatory inspections. In addition, Atwood Falcon will undergo contract specific upgrades after completing its contract with Shell and prior to departing for its 30th-month contract with Apache in Australia.

Currently, we anticipate the Falcon completing its Shell contract in early February. Thereafter, it will spend 5 days mobilizing to Jurong Shipyard before beginnings its 90-day contract specific upgrade project. Before completing this project in May 2012, we then expect a 20-day mobilization to Australia, where after the rig will be given its drilling contract with Apache. The mobilization rate to Australia is 95% of the operating day rate. Thirdly, and referencing contract drilling costs, we reiterate our prior fiscal year 2012 guidance of $315 million to $335 million with an emphasis on the lower end of this guidance range. For the second fiscal quarter of 2012, we anticipate contract drilling costs of approximately $82 million, which includes an approximately $4 million in additional cost when expensed on the Atwood Falcon during its previously mentioned shipyard project. Overall, the inflationary impact on contract drilling costs remains in the 4% to 5% range.

Turning to G&A expenses, we expect the remaining 3 quarters of fiscal 2012 to approximate $11 million to $12 million per quarter. Depreciation expense should average approximately $50 million per quarter, increasing upon the initiation of the Atwood Condor's mobilization to the U.S. Gulf of Mexico in the fiscal fourth quarter. Atwood Condor's depreciation will approximate $2.3 million per month.

We expect our tax rate for 2012 to remain around 16% as it was for the quarter and similar to actual tax rate for fiscal 2011. Having spent $257 million in capital expenditures during the first quarter, we estimate additional fiscal year 2012 CapEx to total $520 million.

Atwood Condor and Atwood Mako represent about 75% of this amount with project management costs, capital spares, maintenance costs and capitalized interest on the remaining 4 rigs under construction accounting for the remaining 25%. Of the $520 million, we estimate $140 million being spent during fiscal second quarter of 2012.

Finally, as Rob mentioned on the January 12 Atwood prices in overall senior unsecured notes raising $450 million. The net proceeds from this public debt offering will reduce our outstanding revolving credit facility balance, providing us with ample liquidity to fund the newbuild program into mid-fiscal 2014.

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

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from the side of Colin Jerry with Raymond James.

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

I got a quick one. Just -- it seems that there is some nuance to the kind of the new operating environment kind of in the post-Macondo world as it relates to getting paid for downtime from the BOPs and similar-type efforts. Could you maybe talk to, is there any kind of new language been written in the contracts or newer contracts by definition, do they need to be much different than legacy contracts as it relates to getting compensated properly for the downtime as it relates to the new BOP regulations?

Robert J. Saltiel

Yes. Obviously, what you're getting contracts is case-specific depending on each opportunity. But generally speaking, the operators as a group understand that, in this environment that we're in, proper time has to be allocated to BOP maintenance, and that time is extended because of the additional checks and inspections that are being done that were generally not always being done prior to Macondo. Everybody's risk tolerance is much lower now in the post-Macondo environment than we had in the pre-Macondo environment as it should be. The other thing that goes on is that a number of our customers are also looking to outside groups to have a third party inspect the work that we do and that all for contract drillers do on the BOP for maintenance and testing. So they have an extra set of eyes to make sure that everything is being done thoroughly and correctly. So because of all that, there's no question, the time required to do what we would have called routine maintenance on BOPs between wells has increased. Now what we're -- what we are doing as a company is ensuring that each of our contracts that we signed factors that in, where we have subsea BOPs, so that would be our ultra-deepwater floaters and deepwater floaters. So that's certainly part of what we're working into our contracts. And that's certainly becoming the norm for Atwood Oceanics.

Operator

We'll go next to the side of Dave Wilson with Howard Weil.

David Wilson - Howard Weil Incorporated, Research Division

Based upon how much you have left on your new build commitments in your cash backlog, it looks like you'd have to add, at least by my math, another $500 million to the backlog before getting in to position to add another new build assuming you want to keep that 60:40 split of funding to through cash flow versus debt. First, I want to know if it's kind of the way right way to look at it; and second, if it is, would you willing to migrate maybe to a 50:50 split or some other type of funding ratio to exercise that remaining option on that drillship?

Robert J. Saltiel

So I'm going to go ahead and let Mark comment on that when -- as it relates to our financing. Mark?

Mark L. Mey

Yes, David, that's an interesting way of looking at it, we don't typically look at this as a percentage of newbuild CapEx to be spend from cash flows versus what's going to be spend on debt. We look at it more from a credit metrics perspective, how much are we willing to put on the balance sheet with regard to our credit-rating and how much we need to get financial cash flow from operations. It just so happens that if you look back over the last 6 years from 2009 through 2014, although our $3.3 billion in newbuild CapEx, about 2/3 of that will come from cash flow from operations. I think where you're going with this question is towards the remaining source of option which we have expiring in July of this year. Obviously, at that time, management will take a view as to where we are and present that to the board, and depending where we are with regard to back contract backlog at the time, the board will make a decision as to whether we're going to go ahead and increase our exposure to the ultra-deepwater market by exercising those options.

David Wilson - Howard Weil Incorporated, Research Division

And then one final one for me. Rob, you maybe touched on this on some of your prepared remarks but given the recent contract activity in the jack-up market, are you guys still expecting kind of a 130 to 150 per day range, depending upon the region of course, for the Mako and the other newbuild jack-ups?

Robert J. Saltiel

I think that's a generally a fair mark for day rates in benign environments. I think those numbers are still good.

David Wilson - Howard Weil Incorporated, Research Division

And Rob, given that you guys have already kind of starting to crew up for that rig, at one point -- I know we're still more than 6 months out, but at what point should we get nervous about contract for that one?

Robert J. Saltiel

Well, I don't think you're going to get to the point of being nervous. I mentioned in my prepared comments that we've expected between the Mako and the Manta, we certainly expected that we could see a contract before the end of this quarter, which would be 6 months before the Mako and 8 or 9 months before the Manta. So we're feeling very good about the activity right now. I mean, you can look at utilization rates on the very high-spec jack-ups, they're about 99%. And we're seeing rigs come out of the yard and go right to work. So there's a lot of interest out there for these high-spec jack-ups. I would suggest that maybe 1 or 2 calls from now, we can have the discussion if it's still relevant. But we're feeling very good about getting contracts to the Mako and the Manta.

Operator

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

G. Scott Burk - Canaccord Genuity, Research Division

The other -- actually, I was actually going to ask about the exercising the option. You discussed that a bit already. One thing I want to clarify the sort of the DD&A guidance for the Condor when that comes online. Is that $2.3 million per month or per quarter?

Mark L. Mey

Per month, Scott.

G. Scott Burk - Canaccord Genuity, Research Division

Okay, and then...

Mark L. Mey

It's just like the cost of the rig and so about a 28-year amortization based upon our analysis.

G. Scott Burk - Canaccord Genuity, Research Division

All right. Okay. And then one other question, just kind of more broadly. You had a couple of settlement -- or not settlements, but court filings or court rulings regarding the dispute over the indemnity clause for both transition of Halliburton over the last couple of weeks. And it seems to protect -- to broadly support the language of the indemnity clause, but it looks like there's still some potential that these companies will have some exposure under the Clean Water Act. Is there any kind of driver -- do you think that will lead to a change in the contracts where you actually specify you're indemnified from clean water act find as well?

Robert J. Saltiel

So, let me first comment on the rulings because we got a lot of questions about this as we are going through our bond offering and have gotten questions from a number of investor conferences. We were absolutely very positive about the ruling with regard to upholding the general indemnity around pollution. And we had believed and continue to believe that that's going to be a nonissue for our industry. I think in the wake of these rulings, we will certainly factor those into our thinking going forward and investigate whether there needs to be some additional language introduced or considered, but I will tell you at this point that we're still digesting that.

G. Scott Burk - Canaccord Genuity, Research Division

Okay. And then one question on the Atwood Hunter. When you look at the rate that you're expecting, you had this gradually improving rate environment and -- but you're obviously rolling off of a very high-rate environment from the last contract. Can we expect something better than what you've received recently for the Eagle and the Falcon or kind of in that same range?

Robert J. Saltiel

Well, keep in mind, the Eagle and the Falcon were signed for Australia, which tend to be a higher-cost area. But I would you that 350 to 400 for rigs in the Hunter's water depth capability are probably the going rate. So if that gives you any indication that may be some guidance for you.

G. Scott Burk - Canaccord Genuity, Research Division

Perfect. And what kind of term length would that be associated with, 2 years?

Robert J. Saltiel

Well, I think it depends on the opportunities that we pursue. I mentioned in my comments that we've got existing customers who've got some existing follow-on work that we're looking at, and then we're going to be looking at other opportunities as well. So I think you can see varying term lengths. We have seen some multi-year term lengths for 5,000-foot floaters in the West Africa area. So it remains to be seen. It's something we'll be working through over the next few months given that we've got until October for that contract to run. But certainly, we'd like to get some additional term on the renewal of the Hunter.

Operator

We'll go next to the side of Brian Uhlmer with Global Hunter.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

The level of confidence about having over a year in advance to contract on the Advantage seems as if you're fairly far along in the process right now. Can you kind of get to us a little bit more detail on what's your advantage is for there, no pun Intended? Would that rig to get a contract potentially that far in advance for what you're thinking?

Robert J. Saltiel

Well, just to remind you, Brian, I mean, we're just here at the beginning of February and that contract scheduled -- that rig is scheduled for delivery at the end of September 2013. So we're still projecting 6, 7 months out in our view that we can get a contract by then. But I think what's really driving it is the perspective that ultra-deepwater capacity in 2012 and then 2013 is starting to get consumed. I think a lot of programs are starting to get formed for that timeframe. And I think there's also a realization that it works best for both the operator and for the drilling contractor when you do sign these rigs up well in advance because there's issues of third-party equipment, issues of potential modification for the rigs, working through the operating protocols that make it advantageous for both parties to have an early commitment. So based on where the market is going today in terms of activity and operator interest, we actually don't think it's too bold of a prediction to say we'll have it a year in advance, but we'll certainly shoot for that.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Okay. And based off of that, it seems like the confidence level would go up as you get real close to signing that -- to exercise the third option. Kind of as we look at your cash balance and forecast based on CapEx and what you've given us here, would you be willing to tap a little bit further into the revolver ability or absent debt in order to make that initial down payment on the third rig if you did have that contract pretty well locked up?

Robert J. Saltiel

Yes, I'll let Mark comment on the financial aspects but just to give some color on how we consider the option, we certainly are happy to have already exercised the first option to get the Atwood Achiever, so we have 2 identical drillships. We do have until July on this next option. And the considerations that will go into -- whether or not to exercise that option will be largely around the market and our contract backlog. We've got 5 rigs that are under construction that don't have contracts and we clearly want to be able to put up some attractive backlog on those rigs and as well be able to renew our existing rigs. So backlog is going to be a big part of the calculus for the decision we'll make around the exercise or not of that remaining drillship option. The other thing, of course, will be very important just will be our outlook for the market in general. We'll want to continue to have confidence in the ultra-deepwater, the momentum for discoveries and rates and operator interest. That will also be factored in, but discounted somewhat given the fact that we will be looking at a 2015 delivery. So we are going to be projecting about 2.5 to 3 years out on the decision to exercise that option. But those are the factors that will go in from a market perspective. Mark, you want to comment a little bit on the question as it relates to the revolver?

Mark L. Mey

Yes, Brian, part of the reason we went optimistically and raised the unsecured senior notes in the first quarter of this year was to give us financial flexibility. We did not need to do it. At the time, we could have done it at any time between now and middle of next year. So in the event that the board decides to agree to exercise the option of the drillship, we could use the available capacity on the revolver and not need to go to the market again until late 2013 to either upsize the credit facility or increase our senior notes offering in the public markets. So we have a lot of flexibility, a lot of flexibility, sources of capital on a go-forward basis, and time is our friend at this stage.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Right, and we're still in the 20% on that option, is that correct?

Mark L. Mey

Well, the drillships have always been 30%. So that drill will be 30% as well, yes. The jack-up's 20%.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Okay. So 30%, so we're looking at 180-ish is what will be required.

Mark L. Mey

It's actually 30% of the turnkey price, which is in the 155 range.

Operator

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

Rhett Carter

Just a question on the Southern Cross. Is there still potential to destock that rig and are you seeing an opportunity where you can potentially upgrade it to a 4gen?

Robert J. Saltiel

We talked about Southern Cross before -- the Southern Cross is not a rig that we're actively marketing, but we have had some interest in the rig, especially as we've seen the mid-water markets recover generally. At this point, I think it's too early to make a prediction about any immediate destacking of that rig.

Rhett Carter

And going forward, what percentage of interest expense do you expect to capitalize for us to 2012?

Mark L. Mey

Well, I think for the first quarter, Rhett, we capitalize about $4.8 million, so around $5 million. We should see that number increasing somewhat due to the fact that we're replacing variable LIBOR base debt with the 6.5% coupon senior notes. So that number should increase by that differential over the remaining part of this year. But for 2012, 100% of our interest costs are capitalized.

Operator

We'll go next to the side of Anders Bergland with Platou Markets.

Anders Bergland - RS Platou Markets AS, Research Division

I just want to go a little bit back on the jack-up market. And with the current state of 95% of all the premium jack-ups, you have, let's say it's 95%; on the conventional side, 91%. What's holding the market back for, let's say, day rates moving above $150,000, $160,000 level? I guess, today we saw 1 rig fixed in Columbia for $170,000 a day.

Robert J. Saltiel

Yes, I think rates are definitely moving up. And our anticipation is that the fixtures we get on our jack-ups are going to continue to proceed northward. The most recent deal that we did on the Atwood Aurora involve $134,000 with an option at $139,000. So we are already starting to see momentum toward $140,000, and that's certainly where we're offering our rigs going forward is in that north of $140,000 range. So that's a -- that justification -- that basis is really what we're using to justify the range of $130,000 to $150,000. But the question is can we breakthrough $150,000? We could certainly envision that happening.

Anders Bergland - RS Platou Markets AS, Research Division

And on the ultra-deepwater side, you mentioned yourself it was -- I mean, it's sold out for 2012 more or less, I guess, we'll see the market starting to tap into the 2013 supply as well. Are you -- or do you see in, let's say, the negotiations that you are involved in, are we talking rates from $550,000 plus or is it $530,000, $540,000 level? Is that where the market is at the moment?

Robert J. Saltiel

Yes, I don't want to say too much about discussions we would have underway. I think it's clear that the market based on recent fixtures is consistently moving towards $550,000. We've seen some higher rates for shorter terms around the world. So it's pretty safe to say that $550,000 is where the current market is heading. And we'll certainly negotiate to get the best rate we can. We think we've got the best rigs that anybody's building with the Advantage and the Achiever and that we think we'll do well with those.

Operator

[Operator Instructions] With that, we'll go to the side of David Smith with Johnson Rice.

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

Most of my questions were answered and I thought I pressed star 2, but I'll throw this one out there. There's a theory in the market that as deepwater availability gets snapped up and the contractors start getting term contracts on their 2013, maybe 2014 to build drillships, that they'll turn right back around to the shipyard with more orders. And it sounds like your decision on the third drillship option will be influenced by new contract backlog at the time. Do you expect your competitors will act likewise and just continue ordering new drillships once they're expecting newbuilds are contracted?

Robert J. Saltiel

Well, I can't really speak for our competitors. I will just say that we've got an ambitious newbuild program underway. Most of those rigs that we're building, even though we're in discussions for many of those, most of those rigs we're building don't have contracts. And so for financial prudency, we want to demonstrate that we've got additional backlog before we consider exercising the options, especially given that the option doesn't come due until the end of July. But as for our competitors, I think it's hard to say from an Atwood perspective what they might do.

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

Appreciate it. And if that does happen and we start to see the 2013 newbuilds and then the '14 newbuilds being snapped up, what stops the industry from just ordering 20 or 25 drillships a year until funding dries out or the deepwater market is oversupplied?

Robert J. Saltiel

Well, I guess the answer to that will be whatever stop the industry from doing that. This industry has a history of building together or not building together. And I guess, if your question is if there was just an extreme bullishness across the whole space, the industry, would we see more orders? The answer is absolutely yes. But predicting the magnitude of that is not something that I think we're prepared to do. There's no question though, the ultra-deepwater space is an aggressive growth phase. We're very confident that the rigs that have already been announced will be well absorbed into the market because of the growing demand, the continued demonstration of the prospectivity in the ultra-deepwater and the fact that even as we sit today, the ultra-deepwater is lightly explored. These are early days for ultra-deepwater drilling in the big scheme of things if we look back 20 years from now. So we're very bullish on ultra-deepwater, and I think that our customers are as well.

Operator

And we have a follow-up question from the side of Scott Burk with Canaccord.

G. Scott Burk - Canaccord Genuity, Research Division

One quick follow-up. Where do you -- what do you think the value of that option is at this point in terms of being in the money?

Robert J. Saltiel

Yes, I think that's something, Scott, that we're working through. Obviously, if we exercise the option, we want to make sure that it's in the money. We certainly feel like we've -- we're getting a lot of rigs for the money already and already -- and we're starting to see some inflation creep in. To be honest, I'm not prepared on this call to talk about what -- how much of that is, but it will be a factor that goes into our decision to exercise. When we go to the board and have the discussion, one of the factors will be what are we potentially giving up if we don't exercise? And to the extent that a few months from now, when we decide to exercise or not, that option is more in the money, well, that clearly gives us more impetus to exercise. But what's relevant is not so much whether it's in the money now, but as we get closer to the exercise date, how that option looks.

Operator

And we have no further questions at this time.

Robert J. Saltiel

Okay. Well, if there are no further questions, I appreciate everybody's interest in Atwood, and we look forward to having our second quarter call in May.

Operator

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

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