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Rowan Companies (NYSE:RDC)

Q4 2011 Earnings Call

February 28, 2012 11:00 am ET

Executives

Suzanne M. McLeod - Director of Investor Relations

W. Matt Ralls - Chief Executive Officer, President, Director and Chairman of Executive Committee

Thomas P. Burke - Chief Operating Officer

Mark A. Keller - Executive Vice President of Business Development

William H. Wells - Chief Financial Officer, Vice President of Finance, Senior Vice President and Treasurer

J. Kevin Bartol - Senior Vice President of Corporate Development

Analysts

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

Todd P. Scholl - Clarkson Capital Markets, Research Division

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

David Wilson - Howard Weil Incorporated, Research Division

Robert MacKenzie - FBR Capital Markets & Co., Research Division

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Frank Harestad - Pareto Securities AS, Research Division

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

Unknown Analyst

Operator

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

Suzanne M. McLeod

Thank you, Roya, and good morning. Welcome to Rowan's Fourth Quarter and Full Year 2011 Earnings Conference Call. Joining me on the call this morning are Matt Ralls, President and Chief Executive Officer; Tom Burke, Chief Operating Officer; Mark Keller, Executive Vice President, Business Development; and Bill Wells, Senior Vice President, Chief Financial Officer and Treasurer, who will have prepared comments. Also in the room to respond to questions is Kevin Bartol, Senior Vice President, Corporate Development.

Before Matt begins his remarks, I'd like to remind you that during the course of this conference call, forward-looking statements may be made within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements about a proposed change in corporate structure, as well as statements as to the expectations, beliefs and future expected financial performance of the company that are based on current expectations and are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected by the company. These and other relevant factors have, have been and will be disclosed in the company's filings with the SEC.

With that, I'll turn the call over to Matt.

W. Matt Ralls

Thanks, Suzanne. Good morning, everyone, and thank you for joining us. Before we get into the results of the fourth quarter, I want to discuss the other release we made today. Last Friday, our Board of Directors unanimously approved a plan to change our corporate structure, which we believe will enhance shareholder value by further strengthening our long-term competitive position as a global contract driller. Under the proposed plan, our legal domicile will change from Delaware to the U.K, where we already have substantial and growing operations. This move is designed to ensure that Rowan will remain competitive in our industry over the long term and have maximum flexibility in terms of the markets in which we work. The offshore drilling industry is a global business, and over the past several years, Rowan has been steadily moving away from being a predominantly U.S.-based contractor and toward geographic diversification.

By way of example, in 2004, 10% of our revenues were generated outside the U.S. In 2012, we estimate that 81% of our revenues will be generated outside the U.S. In addition, 96% of our contract backlog is from markets outside the U.S.; 8 of our top 10 customers are headquartered outside the U.S.; and as you're aware, the overwhelming majority of our competitors are domiciled overseas.

So for us, this change continues the natural evolution of our business. Today, our U.K. group manages operations that will represent our largest source of revenues, or an estimated 38% in 2012, and is centrally located between our second- and third largest regions, the Middle East and the Gulf of Mexico. This transaction will better facilitate oversight of our global operations and communications with both our management teams and customers.

Importantly, as we enter the ultra-deepwater business, this change will put us on the same footing with our major competitors, which should mean higher returns and greater resources to reinvest in growing our company. Our U.S. operations will not be affected by this change, and we expect to continue to invest in further growth and job creation, both here in the U.S. and overseas.

We anticipate completing the merger in the spring following a special meeting of shareholders, details of which can be found in the Notice of Special Meeting of Stockholders and proxy statement and prospectus that are on file with the SEC. Following shareholder approval, our ADSs will be traded on the New York Stock Exchange under our existing symbol.

In summary, we believe this transaction serves the best interest of our shareholders by supporting and advancing Rowan's evolution as a global contract driller. With that, I'll come back to the results for the quarter and year that we announced today.

Excluding the impact of some onetime charges, our earnings for the quarter came in at consensus. Admittedly, estimates have been coming down as we made analysts aware of rig relocations, shipyard stays and operational downtime impacting the quarter.

I'll now ask Tom Burke to give you a brief synopsis of our planned rig relocations and upgrades. Then after Mark updates you on rig markets, Bill will provide guidance on what we expect for 2012 expense and activity levels.

Thomas P. Burke

Thank you, Matt, and good morning, everyone. At Rowan, we continually balance the economic benefit of moving rigs to longer-term contracts with attractive day rates, which may require significant off-rate moves and shipyard periods against working in less-certain spot markets. We determine our course of action by comparing the net present value of 2 given opportunities and selecting the opportunity with the higher long-term value creation.

To that end, in 2011, we situated many of our rigs in markets where either we had attractive term contracts or felt we had good opportunities to win additional work after the initial term of a shorter contract. In the fourth quarter of 2011, we reentered Southeast Asia with 2 rigs, moved one additional rig to the Middle East and moved one rig back to Gulf of Mexico from operations in Mexico.

Shipyard and transit time accounted for an estimated 17% of our available rig days in the quarter as we repositioned these rigs. For 2011 as a whole, we had 9 rigs moving to or preparing for new contracts, and we estimate that approximately 22% of our available rig days in 2011 were spent in shipyards or in transit.

In 2012, as we strive to maximize the value from our extremely attractive fleet, this trend of repositioning will continue -- however, to a lesser extent than in 2011. Our 2012 revenues will be impacted by shipyard and transit times of several rigs, including upgrades to the Tarzan rigs working in the Middle East and the Ralph Coffman, which will mobilize to Egypt during the summer.

Collectively, we expect 11% of our available rig days in 2012 to be consumed by shipyard stays and rig moves with an estimated 17% in the fourth quarter, when we plan to have several rigs in the shipyards, most notably the Gorilla IV in for a life extension project and the Rowan Norway, preparing for its multi-year contract with ConocoPhillips.

Beyond 2012, we see less movements, as most of our newer and bigger rigs will be on longer-term contracts. If McMoRan continues to be successful in their deep shelf gas drilling program, we would expect them to have work for at least the 4 rigs drilling for them now. If that were to change, we would see some additional moves to international markets for those rigs.

I'll now hand over to Mark Keller to discuss the market outlook.

Mark A. Keller

Thanks, Tom, and good morning, everyone. In 2011, Rowan added more than $1.5 billion to our total backlog with new contracts. In the first 2 months of 2012, we already have commitment additions of approximately $1.1 billion. These additions are primarily attributed to our recent contract announcement with ConocoPhillips in Norway. We are pleased to utilize an N-Class unit in a Super Gorilla class jack-up where their operational capabilities will be fully employed. We look forward to having the opportunity to work for ConocoPhillips once again in the North Sea.

We are proud of our accomplishments in 2012 thus far, and we are encouraged by the strengthening of the worldwide market. This morning, I would like to talk to you briefly about the worldwide jack-up market and then spend a few minutes sharing our optimism with you regarding the ultra-deepwater market. According to ODS-Petrodata, there are currently 479 jack-ups worldwide. Demand is 375 rigs with utilization at 78%. The more capable jack-ups continue to outperform the industry, as evidenced by the 94% utilization for 350-foot cantilevers or greater. Recent tender activity remains strong for higher-spec equipment as the global market continues to bifurcate. We currently anticipate international jack-up demand for Rowan rigs to be approximately 30 units, driven primarily by Southeast Asia, the Middle East and the North Sea markets.

In 2011, tender activity more than doubled from the previous year, and we anticipate 2012 to be another increasingly active year. We currently have 2 units operating in Southeast Asia, the J.P. Bussell for Petronas Carigali Vietnam and the Gorilla II for Petronas Malaysia. Petronas is currently indicating that they intend to keep both rigs for the foreseeable future. We hope to further increase our presence in this active region in 2012 with additional jack-ups.

Turning to the Middle East, we operate 9 jack-ups in the area with 8 of those units contracted to Saudi Aramco. Saudi Aramco continues to have a significant impact on global jack-up demand. We will actively participate in all tenders from Saudi Aramco, and we are hopeful to secure additional contracts with this valuable customer. Additional demand in the region includes a 5-rig tender for Maersk Oil, Qatar for their Al Shaheen II drilling prospect.

In the U.S. Gulf of Mexico, the industry is eagerly awaiting the outcome of McMoRan's well test of the Davy Jones 1. We are pleased to have developed a strong relationship with McMoRan and wish them success in their pursuit of ultra-deep gas. Rowan continues to operate 4 jack-ups for McMoRan and additional 3 jack-ups are contracted in the region. We've recently announced that the Ralph Coffman will be departing the U.S. Gulf of Mexico to the Mediterranean to drill the Notus project for BP -- BG Egypt in September 2012 after a short period in the yard. Contract duration is approximately 2 years at a day rate in the mid-220s. Notus project is a very challenging HPHT drilling program, and we are pleased to have been selected by BG Egypt to drill this high-profile project.

The Gorilla III and the EXL-II continued drilling operations in Trinidad. We believe there are several future projects for high-spec jack-ups in the region, and Rowan is well positioned to take advantage of those opportunities and possibly expand our fleet in Trinidad.

Moving on to the North Sea. Rowan has 6 jack-ups contracted in the region, and they're all fully booked through 2012 and beyond. We are pleased to see fixtures increasing as operators recognize the value in contracting high-spec equipment.

Now turning to the ultra-deepwater market. Since our last call, the market has shown considerable strengthening. Day rate fixtures are on the rise and currently average in the mid-500s. Contract terms have increased in the past few months, with 3- to 5-year project durations becoming more prevalent and operators now looking for deepwater units as far out as 24 months prior to commencement.

We continue to be well received by key operators worldwide, and we have several active tenders currently in-house for our drillships. Numerous opportunities for high-spec ultra-deepwater rigs are quickly coming to the forefront in both the U.S. Gulf of Mexico and the South Atlantic basins. These areas continue to drive deepwater demand worldwide. However, we are seeing increased fleet expansion and tender activity in frontier regions such as Mozambique, Tanzania, Australia, Black Sea, Indonesia, French Guiana and Mexico. We will continue to keep you updated on our progress in securing contracts for our ultra-deepwater fleets.

Thank you for your time this morning, and I'll now turn the call over to Bill Wells.

William H. Wells

Thank you, Mark, and good morning, everyone. Our fourth quarter 2011 revenues were $275 million, up by 17% over last quarter and 32% over last year, with both increases resulting primarily from the impact of fleet additions and rig start-ups between periods. Fourth quarter revenues were about 3% below our expectations as a result of unanticipated downtime in the North Sea and later-than-expected start dates for the three 116-Cs contracted with Saudi Aramco.

Our full year 2011 revenues were $939 million or 8% below the 2010 level as the impact on existing rigs from shipyard and transit time and lower average day rates exceeded the effects of fleet additions between periods. As of yesterday's fleet status update, our backlog of drilling commitments totaled approximately $3.1 billion, 96% of which is related to work outside the U.S. We estimate that approximately 31% of our contract backlog will be realized as revenue during 2012, another 28% will occur in 2013 and their balance in 2014 or beyond.

Our first quarter 2012 revenues should be significantly higher than the fourth quarter of 2011. We estimate that the start-up of the Joe Douglas in the Gulf of Mexico and at least 2 of the three 116-Cs for Saudi Aramco, together with incremental activity from rigs that started up late last year, including the Gorilla II, Rowan-Mississippi and Rowan Norway, will contribute approximately $45 million of additional revenues in the first quarter of 2012.

We are continuing to pursue collection of approximately 60 days of day rate during August through November 2011 that PEMEX does not agree it is covered under the contract, although for accounting purposes, we have not recognized this approximately $6 million as revenue.

The fourth quarter operating expenses of $163 million were 25% above last quarter and 63% above last year, primarily due to fleet additions and rig start-ups between periods. Operating expenses were also 5% above the upper end of our previous guidance for the fourth quarter, primarily due to higher-than-expected employee personal injury claims development and reimbursable expenses. For the full year 2011, operating expenses were $508 million or 7% above our original guidance due primarily to higher-than-expected personnel-related and rig move costs.

Looking ahead to 2012, operating expenses will increase in line with overall activity in our expanded geographic footprint. In addition, we are adding personnel both on the rig and in-shore basis to improve our planning, execution and responsiveness related to maintenance and project management with the objective of substantially reducing off-rate time for our fleet. On an expected 33% increase in operating days, we forecast a comparable increase in operating expenses in 2012 to approximately $665 million to $675 million for the full year.

Our first quarter 2012 drilling expenses are estimated to be in the range of $178 million to $180 million, which is a sequential increase primarily due to the recent and expected start-ups mentioned previously and higher labor and training costs in Norway as we transition from accommodation to drilling mode. Costs should be slightly lower over the last half of the year when we expect to incur more shipyard time for rig upgrades.

Our fourth quarter depreciation expense totaled approximately $55 million, which was in line with our previous guidance and up by 52% over last year or 9% over last quarter, primarily due to the rig fleet additions. For the full year, depreciation totaled $184 million, up by 33% over 2010. We estimate 2012 depreciation will be in the range of $239 million to $240 million, including approximately $58 million to $59 million in the first quarter.

Our fourth quarter SG&A expenses totaled $24 million, up by 4% over last year and 15% over last quarter, and higher than our previous guidance due primarily to professional fees related to our planned corporate redomestication and incentive compensation costs. For the full year, SG&A totaled $88 million, up by 12% over 2010 for the same reasons. We estimate 2012 SG&A expenses will be in the range of $103 million to $104 million for the year, including approximately $27 million in the first quarter. 1/2 of the expected increase in 2012 SG&A, or approximately $8 million, reflects incremental costs associated with the redomestication, much of which should be nonrecurring. Most of the remaining annual increase reflects additional headcount for certain functional -- in certain functional areas in support of our expanding operations.

During the fourth quarter, we recognized a $3.5 million charge from the acceleration of equity compensation costs in connection with employee severance. The full-year charge was $4.9 million, including $1.4 million of third quarter costs previously classified in SG&A. Interest expense, net of interest capitalized, was approximately $3 million during the fourth quarter, slightly lower than our previous estimate as a result of increased capitalized interest associated with the newbuild projects. Assuming no new borrowings, we estimate 2012 gross interest cost of approximately $70 million, of which we expect $31 million to be capitalized. For the fourth -- for the first quarter, net interest expense should be approximately $11 million.

Our 2011 effective tax rate on continuing operations came in at a credit of approximately 4%, which was below the 1% credit previously forecast as a result of reduced U.S. income. The cumulative impact of reducing the full-year rate was recorded in the current period, resulting in a credit of 16% during the fourth quarter. We expect our 2012 effective tax rate to remain slightly negative, a credit of 3%, as most of our earnings this year should again come from outside the U.S., and our U.S. earnings will again benefit from depreciation and the reversal of taxes previously provided on certain outbounded rigs.

Our 2012 tax benefits from the planned redomestication should be modest and fully offset by the incremental administrative costs. But we would expect benefits to increase over the long term, barring any significant changes in the tax laws where we work. As we noted in our earlier filings and press release, this transaction is the culmination of a long-term evolution in our drilling business toward international markets and puts us on a level playing field with most of our competitors.

Our after-tax income from discontinued manufacturing and land drilling operations totaled $12 million in the fourth quarter, and resulted almost entirely from a reduction in the income tax costs associated with the gains from selling those businesses. Our operating equipment additions totaled $389 million in the fourth quarter and included $222 million for the 3 drillships, $35 million toward completion of the newbuild jack-ups and the balance for our existing fleet, including contractual modifications.

At year end 2011, we had approximately $1.8 billion of remaining capital expenditures under our drillship newbuild program with $142 million required in 2012 with the remainder in 2013 and 2014. We currently estimate as much as another $391 million of capital expenditures in 2012, including $175 million of contractual modifications; $84 million toward managed life enhancement and upgrade projects; $75 million for existing fleet maintenance and upgrades; and $52 million for area equipment spares, drill pipe, and improvements to our shore bases.

During the fourth quarter, we repurchased in the open market an additional 1.4 million shares of our common stock at an average cost of $31.26 per share, bringing our total purchases at year end 2011 to 3.9 million shares at an average cost of $31.90. We have another 25 million of share authorization available.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Collin Gerry with Raymond James.

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

I want to follow up on your bullish outlook as it relates to the market. Obviously, you've done very well in investing in new equipment over the last 2 or 3 years, and the drillship program looks to be a very solid investment at this point. Given the strength in the market, is there an appetite to add a fourth drillship to the fleet? Would you like to see a contract first, or maybe just kind of walk us where the thought process is in terms of adding new capacity above what you're already doing, maybe even on the jack-up front?

W. Matt Ralls

.

Yes. Collin, what I would say is -- what I tell investors, and you can imagine we get that question a lot is, that right now probably 3 uncontracted drillships is about our limit for speculative construction. I think that on the other hand, we do feel pretty confident about what we're seeing in the markets out there for opportunities for those rigs. And as Mark said, there does seem to be some expansion in the lead time for which operators are contracting equipment. So if -- we would need a greater certainty in the way we look at the contract opportunities for those drillships than we have at the moment, but that's definitely a possibility. We have not -- we don't have any board commitment or approval for a fourth drillship, but we do continue to have that option out there, and it's something we'll seriously consider if the market plays out as strong as it appears it could. On the jack-up side, I do want to emphasize the fact that we remain completely committed to the bright prospects for the high-spec jack-up market. We continue to look at either available equipment out there that we think we might be able to buy to add to our fleet or the possibility even of new construction -- although, likely, that would be against a contract, or at least a very strong contract opportunity.

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

Okay. Is that available in the market? I mean, newbuild jack-ups with a contract backing it seems a rarity.

W. Matt Ralls

It would have to be at the upper end, Collin.

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

Okay. Second one for me, Bill, I want to dig a little bit more into the guidance. If I got your cost guidance correctly, $180 million for the -- or $178 million to $180 million for the first quarter, and for the full year of $670 million. It seems that, that implies a pretty high level of spending in the first quarter relative to what's the total going to be, if you annualize the first quarter to a higher number than that $675 million. So maybe walk us through how you expect that to maybe flow through on a progression basis. Why is it higher in the first quarter?

William H. Wells

Yes, Collin, it's -- as I mentioned, it's sort of front end-loaded because we'll have a little more shipyard time in the last half of the year. We've got some upgrade projects scheduled where, in many cases, we're able to capitalize some of the labor and associated costs. And so what hits the P&L comes down a little bit. But that's pretty much it.

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

Okay. And last one for me, if I could just follow up on one more, the guidance items here. The tax guidance seemed quite surprising, I guess, 3% credit. You get that for '12 -- I mean, is that a onetime issue? How do we think of that going beyond? Obviously, I think a lot of us try to value these stocks on a DCF basis, and the tax rate is a big deal. So is that -- I mean, what does -- where does that go beyond 2012?

William H. Wells

Yes, I'd rather not speculate on that, Collin, because that's pretty much a function of where we're working and other things. And so I think we'd rather not get into that. It is -- in 2012, it's primarily due to the fact that our U.S. income is down so much relative to our international income.

Operator

Our next question comes from the line of Todd Scholl with Clarkson Capital Markets.

Todd P. Scholl - Clarkson Capital Markets, Research Division

Just one question. First, just a clarification on your plans to redomicile. You said that there's no employees that are going there. Does that mean that no members of senior management will be relocating to the U.K.? And then secondly, my next question is just in terms of your cost guidance. I think that you basically said your cost guidance is moving up in terms of activity. So does that mean that you're not including any wage inflation in your current cost guidance on a year-over-year basis? And if you are, can you kind of give us an idea of what that is?

W. Matt Ralls

Well, let me -- this is Matt. Let me take the answer to the first question. And yes, that is what that means. And so I'll turn it to Bill for the -- to respond to the second question.

William H. Wells

Yes, in terms of the cost guidance, we do -- we are assuming a wage increase in 2012 in the 5% to 6% range. But what -- we're seeing a bit of a change in the mix. We had a number of sort of onetime items that affected us in 2011, primarily resulting from the shipyard time and transit time. So we had some additional rig move costs. We had some additional maintenance costs. So we'll -- we should see some savings on that end. But overall, our overall OpEx for '12 will be up, consistent with our increase in activity.

Todd P. Scholl - Clarkson Capital Markets, Research Division

Okay. And then just one more, if I may. Should we assume that since the Gorilla VI is taking the contract with ConocoPhillips that the Viking has prospects and we should expect to see a contract forthcoming for that rig after it becomes available in 2013, in January 2013?

Mark A. Keller

Right now the Viking is under contract with TOTAL, and TOTAL is a very, very strong customer of Rowan's. And we've had the Gorilla V with them for 6 or 7 years. So unless TOTAL releases that rig today, it's currently theirs, for them to set the course for it in the future. But we are tendering the rig in the event that TOTAL has a schedule change. But right now, there are no indications from them that they will release that rig.

Operator

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

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

With regards to more of a technical issue, have you guys explored with S&P the notion that you would get removed from the index as a function of the redomestication?

Mark A. Keller

Yes, we will be. We expect to be removed from the S&P because of the ADS share structure. And then we'll be looking at options in the future to potentially be reinvented. But there -- we have no plans for that at this point.

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

Okay. And just could you give me a hint as to what that option might afford you the ability to do readmission?

Mark A. Keller

AON recently redomesticated, and they used the Class A share structure as opposed to an ADS share structure. There is a potential that those Class A shares could be accepted by the S&P.

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

Got you, okay. And then obviously, McMoRan's a very large, important customer and the deep-shelf gas play that they're pursuing is potentially a big deal for demand. Can you give us an update on where you think they stand with regards to proving that up and prospects for the EXLs that you guys have working for McMoRan currently?

William H. Wells

Yes. Joe, I think we're going to have pretty much redirect you back to McMoRan for that. We really don't want speak for them, other than to say that we're pleased with what we understand their progress has been, and we're hopeful for a continuation of what's been a very good and fairly lengthy relationship now. So we're their biggest fans out there, but I really wouldn't want to comment publicly on what kind of success I think they're having.

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

Okay. And then you guys bought back what I think was around $44 million in stock in the quarter. You leave about $25 million left to buy. Is there any prospect for upping that at this point? Or is CapEx going to consume most of the cash flow?

W. Matt Ralls

Well, I would say that the availability of cash flow for that is a dynamic calculation, and it depends on what we see in terms of contracting opportunities for these newbuilds. But I mean, my personal philosophy -- and we're in agreement here in the management team and with the board, is that I don't like the idea of buying stock at all levels. I believe that a more opportunistic approach creates more value over the long term, and our stock has come up since we were buying shares. So at this point, we don't anticipate going back to the board for a larger repurchase program given the still-speculative nature of our new construction program. But we will always keep that in mind, and we're in favor any time we have capital that we think is available to be returned to shareholders. We're always thinking favorably about that potential.

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

Okay, well, Matt, just kind of an observation, obviously, your stock's down 5.6% today. And that's, in all likelihood, the result of perception that you're going to be removed from the S&P 500. There's not any mechanical reason why you couldn't buy back stock going into the redomestication, is there?

W. Matt Ralls

Actually, that's a technical question I hadn't addressed as far as redomestication, just because we hadn't been thinking about buying at these levels. But I'm -- none that I'm aware of.

William H. Wells

No, there are -- well, there are no limits currently to us proceeding with our buyback program.

Operator

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

David Wilson - Howard Weil Incorporated, Research Division

Matt, I wanted to circle back on the ultra-deepwater rigs, and I totally understand about wanting to -- not wanting to overcommit there. But can you give us an idea of what you're thinking, maybe what the right number ultimately is for Rowan as far as the rigs? I know the market is going to dictate a lot of that. But from your standpoint, is there -- what type of critical mass do you want to get exposed to with the ultra-deepwater exposure?

W. Matt Ralls

Yes, what we've told investors is that over the long term, we would like to see a balance between our cash flow or EBITDA-generation capacity from high-spec jack-ups and ultra-deepwater rigs, and we think there's a pretty good balance worldwide in terms of those 2 markets. Admittedly, deepwater is probably growing even more strongly than high-spec jack-ups currently. But -- so we -- right now, based on the way we see it, I mean, it would take somewhere -- it depends on what market rates were for either class of assets, but call it sort of 7 to 10 floaters would balance our fleet, possibly 6 to 10. So anyway, we're thinking about both asset classes. As I said, we would consider adding additional high-spec jack-ups to our fleet. And so the -- it will -- that calculation will change over time, but as it stands right now, we would definitely want to grow well beyond the 3 drilling rig fleet or a 3 ultra-deepwater rig fleet. And we would continue to look for both the organic and strategic opportunities to do that.

David Wilson - Howard Weil Incorporated, Research Division

Sure, sure. and Bill, maybe one kind of more technical question. It's regarding the capitalized interest. It seems like that's gone down a little bit, but yet the drillships are still under construction. Any reason from accounting perspective why the capitalized interest seems to be down a little bit?

William H. Wells

You're talking about for 2012?

David Wilson - Howard Weil Incorporated, Research Division

Yes, sir.

William H. Wells

Yes, that's really just a function that the balance that, that interest is being capitalized on probably won't change a whole lot during 2012 because most of the -- well, all the shipyard payments are sort of back end-loaded. It's really just a function of applying your interest costs to what you have in process, and that number just won't change a whole lot during 2012.

Operator

Our next question comes from the line of Robert Mackenzie with FBR Capital Markets.

Robert MacKenzie - FBR Capital Markets & Co., Research Division

I had another -- a question on the newbuild strategy. And forgive me if you answered this before. I had to hop off for a second. But what is your view to committing to additional spec newbuilds, the deepwater fleet, potentially before you get some of the existing ones contracted?

W. Matt Ralls

Yes, Robert, we have commented on that, so I'll be brief here and just say that we would consider doing that. But for right now, I mean, with none of those rigs contracted, it's probably a bit further than we're prepared to go at the moment. But we do view that as a very viable opportunity.

Robert MacKenzie - FBR Capital Markets & Co., Research Division

Okay. And then a second follow-up related to that would be, what's your guys view of potentially participating in some of the Brazilian rigs in one form or another?

W. Matt Ralls

Yes, we haven't been very close to that. We're -- that's, I think, for us, at this stage of our relatively new entry into the market, there are aspects of that, that create risks that we're -- that we don't feel like we understand very well and that we're really not prepared to take on versus the other alternatives we see in the market at the moment, so probably a low probability.

Operator

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

Kurt Hallead - RBC Capital Markets, LLC, Research Division

A question -- I'm sorry if I'm going to ask you guys to repeat something for the third time, but on the tax rate, I picked up, for the year was a 3% tax benefit. Can you just repeat for me what the -- what you thought the first quarter tax would be?

William H. Wells

Well, the way we do that, Kurt, is we make an estimate for the year, and then we apply that to each period in the year, and we'll remeasure as we go along, if warranted. But it would be the same 3%.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay, great. Then you guys referenced a revenue increase of $45 million sequentially. That was based on some late-year, as well as some early-year startups and so on, and new contracts and so forth. Is that the extent of the revenue increase, or is that just partially reflecting what you guys see happening?

William H. Wells

I think that's all we're willing to comment on at this time, Kurt.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay, all right. And I just wanted to know -- I wanted to know if there was some other things there or whether that just was just a -- something that you were immediately reflecting. So I didn't know if there was anything else on the table.

William H. Wells

No, that's just what we're comfortable with. I mean, there are other moving parts in our revenue number, as you well know, in downtime and getting rigs on contract. But that $45 million is something we're comfortable with.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay. I appreciate -- I do appreciate that. And then, Matt, you referenced the balance on your rig fleet between ultra-deepwater and high-spec jack-ups. And I was just curious as to whether or not you were referencing that in terms of revenue or in terms of operating income?

W. Matt Ralls

Yes, really, we think of it in terms of operating income the -- kind of what either asset class can kind of sort of bring to the pretax line.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay. And then you mentioned, as well, a build-versus-buy decision and the build decision would have to be backed by a contract. I'm just curious, I wasn't -- I'm not fully aware of anyone trying to sell high-spec jack-ups at the moment, for all the reasons that you've identified: a strong market, et cetera. So what is the dynamic out there? And do you think it really is an opportunity to buy some assets, or is it more likely you're going to wind up having to build some something?

W. Matt Ralls

Well, what I would say is that -- yes, I probably should clarify what I said earlier with regard to building against contracts. We're really thinking about the very high end of the market, where we -- these rigs that are very expensive and we'd want some contract backlog or at least a strong prospect of a contract before we would proceed there. But with regard to the, I guess, more normal high-spec jack-up out there, I agree with you that there are no drilling contractors to any extent that are out there looking to sell that class of rigs. But there are some smaller companies that have started out that could be potentials. And I don't really want to go beyond that but just to say that, I mean, I think there are still companies out there that might fit well with the Rowan fleet. And we would -- furthermore, I mean, we've just completed an 11-rig newbuilding program in jack-ups, and so we don't have a strong appetite to continue that right now. But that doesn't mean that at some point we wouldn't be willing to continue to add organically to our fleet, without contracts, kind of rigs that match our current capabilities.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Great. And if I may just finish up on this one. I think you guys had referenced that the incremental demand internationally for Rowan jack-ups was 30. How -- what if that's the -- what you have identified, is that what you identified for a specific Rowan opportunity? Or is that 30 in the context of global incremental jack-up demand?

W. Matt Ralls

Kurt, that's 30 opportunities that we see around the world that we think our fleet would compete for and certainly have an opportunity to be contracted.

William H. Wells

So in other words, I mean, the overall demand would reasonably much -- reasonably be much larger than that. These are just the ones that we would pay attention to and compete for.

W. Matt Ralls

That's correct.

Operator

Our next question comes from the line of Matt Conlan with Wells Fargo Securities.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

On a high level, what were the benefits of choosing the U.K. over Switzerland? You'd obviously have competitors in both.

W. Matt Ralls

Well, it's -- the circumstances for us is that we have a substantial presence in the U.K., as we've been there for over 30 years. We've got a large management team over there overseeing a substantial operation that represents 38% of our 2012 revenues and almost 60% of our total contract backlog. So it's just a -- it's a very logical fit for us in terms of the place where we could focus a lot more management and board attention. We will substantially increase the -- we'll hold all of our regular board meetings there and substantially increase the number of management meetings that we'll have in the U.K. So it's -- just going to Switzerland wasn't even a consideration for us.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Okay. And not much left but some minutia here. On the Gorilla VI, a little bit surprised that the Gorilla VI got that contract rather than the Viking. The VI, on the fleet status report, is contracted through year-end '12 with BG, but there also seems to be a 300-day option. So I mean, is that rig -- do you guys expect it to be available to go to Norway in the first quarter of 2013?

Mark A. Keller

Right now, we -- the option -- they don't have to declare their option until they spud the White Bear well, which is another HPHT well. If -- now Matt, if they don't exercise their option -- all indications are that they will finish that well sometime at the end of the fourth quarter. And if they exercise their option, they would move immediately to a well that's anticipated to take somewhere around 220 days to 240 days to drill, and ConocoPhillips is okay with either scenario.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Okay. So if the option is exercised, the contract isn't going to be swapped to another rig?

W. Matt Ralls

Well, there's always -- I mean, we have right of substitution, which does point out the fact that the Super Gorillas are very highly capable rigs, and the Gorilla VI has a AoC already for Norway. So I mean, all -- that rig and the other 3 are very competitive in that market. It's possible that you could have subsequent moves as backlog behind a particular rig changes. But right now, the way Mark explained it is the way we're thinking about it.

Mark A. Keller

Okay. As BG moves into a development program in the future, we have other rigs in the U.K. sector, and we have been in discussions with them that -- to your point, we could potentially have discussions about filling that demand.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Okay. It would seem that since the Gorilla VI does have the AoC, that's the easiest one to move.

Mark A. Keller

Yes. And to your point about you were surprised to see the Gorilla VI going to Norway, actually, ConocoPhillips was very excited to get both a Super Gorilla and an N-Class rig. They were glad to get that rig for the operating capabilities. They have some other wells that they'll use that rig on. So as Matt stated, it does have an AoC, and we're glad to see it headed to the Norwegian market.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Okay. As you guys think about the N-Class and the Super Gorillas, which model do you think is more valuable?

Mark A. Keller

We like both of them. If you talk to -- it depends on what kind of well you're going to drill. If you were going to move a jack-up today into the Norwegian sector from our fleet, obviously, the N-Class would probably attain an AoC quicker than a Super Gorilla. As Matt stated, the Gorilla VI already had one when we worked for BG in Norway. So that was an easy ship. But the Super Gorillas can obtain -- the other Super Gorillas can obtain AoCs if that market continues to increase. But today, I would view them differently that -- the N-Class were designed for Norway, so be easier to obtain an AoC.

W. Matt Ralls

It's Matt. We're not going to answer that question until you tell us which of your kids you love best.

Operator

Our next question comes from the line of Frank Harestad with Pareto Securities.

Frank Harestad - Pareto Securities AS, Research Division

You mentioned that the international jack-up market is very strong, but you have some high-spec rigs available in the Gulf of Mexico, at least the EXL-IV. And it's also uncertain, or not 100% sure, at least, that the Joe Douglas will start for McMoRan. So can we expect those rigs to go international, or at least the EXL-IV? And when can we expect some contract news for those units?

Mark A. Keller

We're currently in discussions with multiple operators for the EXL-IV now, for international contracts. All of the McMoRan rigs we continue to tender internationally. Those are one-well programs, as you're well aware. Indications are now that McMoRan, because we went to McMoRan to substitute the Ralph Coffman so it would be freed up to go to BG Egypt, that indications are that McMoRan and their partners, they have given us a verbal that they want the Joe Douglas at the conclusion of its current project, which is about a 90-day project for Rooster. And -- but having said that, we are still marketing the rig internationally but...

Thomas P. Burke

And we're in a good position on the EXL-IV. I mean, it came out of the shipyard at the end of last year. We've done a shakeout well to get -- to knock the bugs out of the rig, and so we're in a good position with that rig.

W. Matt Ralls

Yes. I think it's fair to say we see more demand for EXLs than we have EXLs around.

Mark A. Keller

That's right. That's correct.

Frank Harestad - Pareto Securities AS, Research Division

But for these kind of 2 million pound hookload rigs, you are king of getting day rates of $200,000-plus. We are also seeing some of your competitors getting the same type of day rates, while a more kind of normal premium international jack-up, the day rate is $140,000 and $150,000. So that the return on those investment is significantly higher for the 2 million pound hookload rigs than what it is for a kind of normal modified bid-type of jack-up. There are some new rigs coming to the market with both SeaDrill and Noble Drilling. Can we expect the significant day rate gap there to continue, or do you expect that to kind of come down?

Mark A. Keller

What we see right now, I mean, as you're well aware, there's 79 rigs under construction right now. 42 of those are coming out of Southeast Asia over the next few years. But what we see happening in the market is this market continues to bifurcate. We believe that those 79 rigs, or at least the higher-spec percentage of that fleet, will go into the market and replace lower-specification equipment in different areas of the world. And we're certainly seeing that in Southeast Asia. You're seeing it in the Middle East. We're seeing it everywhere. We saw it in the Med, obviously, with BG Egypt. There are rigs idle there. So I think as tender requirements around the world continue to become more stringent and this bifurcation continues, I believe you'll see those rigs absorbed into the market.

W. Matt Ralls

I think just for clarification, I mean, what I would say is that it's the biggest and highest environmental-criteria rigs that are getting that 200-type day rates you're talking about. So like our 240C going to Egypt is in that range, but that's a 2.5 million-pound hookload rig. It's a bigger rig than the EXLs. You're seeing generally the 1.5 million- to 2.5 million-pound rigs are in that other category that you refer to. And so if you look at our EXLs around the world, they're kind of in that category.

Operator

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

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

I was hoping to clarify on the 2012 cost guidance, what's included for reimbursables and shipyard expense?

William H. Wells

What's included for reimbursables and shipyard expense?

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

Right, on that broad cost number?

William H. Wells

Yes, I think that we don't expect any significant change in reimbursables '12 versus '11. And it's -- I think it's in the low double-digits range, in terms of millions. I'm not sure I understand your question about shipyard expense.

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

Just thinking about trying to disaggregate the 2012 cost guidance, and maybe I'll ask a different way. What's the general inflation rate embedded in that cost guidance?

William H. Wells

Well, as I mentioned on the labor side, we expected a -- about a 5% to 6% increase in wages. And as you know, labor and related costs are about 60% of our total OpEx. We actually expect the maintenance costs on a per-day basis to be down a little bit in '12 versus '11 and the same thing for all the remaining costs. The reason why I'm a little confused about your shipyard cost question because the way those costs are handled is they're typically either capitalized into an upgrade project, or if they're incurred in connection with a long-term contract they're amortized over the contract, so it's a little -- it's tough to pinpoint the impact on specific period.

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

Appreciate it. In the opening comments, I think you mentioned adding personnel on rigs and shore basis? And I wasn't sure you meant that as a linear increase in the employee base with the new rigs coming online, or if you meant the overall ratio of personnel to the operating rigs was also increasing?

William H. Wells

It's a little bit of both. I mean, by far, the most dramatic impact on our headcount is the fact that we've continued to add rigs, including rigs that just delivered in the last few months. But we are also adding some people on, across the fleet, as I indicated, to help us improve in the area of maintenance and project management.

Operator

Our next question comes from the line of Lucas Dahl [ph] with SEC.

Unknown Analyst

Just a quick one on -- you mentioned the opportunity or the possibility of taking the Super Gorilla out to Norway. I was wondering, to get an AoC for that, what would be the CapEx or what would be the cost associated with that?

Mark A. Keller

Well, with the Gorilla VI, it currently has an AoC. There will be some minor -- potential minor modifications required there. But the exact number I don't have offhand, but it's not much. The -- to take one of the existing Super Gorillas in there, I'm not sure what that would cost.

William H. Wells

It would be very expensive.

Mark A. Keller

It'd be very expensive. It'd be several million dollars to take it in there but...

William H. Wells

Several tens.

Mark A. Keller

Yes, tens.

William H. Wells

Yes, but that -- just to be clear on that one, it's just that rig has worked in Norway recently, got an AoC that we were able to get while the rig was working for another customer. And so it's, as Mark said, minimal expense to move back in.

Unknown Analyst

Okay. And as the market firms up, I was wondering what do you see -- I mean, one thing is day rates on the contract. But do you see any change in terms of how you are being sort of protected from downtime? Are there contractual terms? Are there improvement any -- in any significant manner in your favor?

Mark A. Keller

We haven't seen any significant changes as far as liability in our contracts. We've contracted the same way for years. I'm not going to tell you that we haven't had people try to get us to take more liability. We just resisted to doing that. But our contracts, we're...

W. Matt Ralls

I think the question here may be about the downtime protection in the contracts so...

Unknown Analyst

Yes, that's correct.

Mark A. Keller

Yes, but we -- we're not seeing anything different in terms of downtime. Restrictions, I mean, you get an allocation per month, but there's not anything different than what we've contracted before in our contracts.

Unknown Analyst

Okay, and then there is this category, J jack-up and they're coming up from Statoil around the mid-2012.

Mark A. Keller

That's correct.

Unknown Analyst

I was just wondering if you were to sort of consider building against a long-term contract, which is what this rig is going to be, how would you look at that in terms of payback time on the investment and the return? How would that affect your position as opposed to building on spec?

Mark A. Keller

Well, we've actually -- we've been in discussions with Statoil about both a CJ70 class jack-up and the CAT Js. So the CAT J tender won't come out until May, and we have a -- May, June. We haven't seen the spec on it yet, so I'm not sure how we will respond to that. But as far as looking at a return, I'll let Kevin go through that with you.

J. Kevin Bartol

Sure. We look at it like we look at every capital investment. We use a hurdle rate. And that is in between 10% and 12%. Now obviously, we could -- with less risk, given a long-term contract with a set day rate, we can take somewhat of a lower hurdle rate. But we need to earn in excess of our cost of capital.

Operator

There are no further questions in queue. I would like to turn the floor back over to management for closing comments.

Suzanne M. McLeod

All right, thank you Roya. And that concludes our fourth quarter and full year 2011 earnings conference call. We'd like to thank everyone for joining us today, and we will talk to you later.

Operator

That concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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