Rowan Cos. Plc (RDC) Thomas Peter Burke on Q2 2016 Results - Earnings Call Transcript

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Rowan Cos. Plc (NYSE:RDC)

Q2 2016 Earnings Call

August 02, 2016 11:00 am ET

Executives

Chris Pitre - Vice President-Investor Relations & Corporate Development

Thomas Peter Burke - President, Chief Executive Officer & Director

Mark A. Keller - Executive Vice President-Business Development

Stephen M. Butz - Chief Financial Officer & Executive Vice President

Analysts

Ian Macpherson - Simmons & Company International

Sean C. Meakim - JPMorgan Securities LLC

Gregory Lewis - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

James West - Evercore Group LLC

Judson E. Bailey - Wells Fargo Securities LLC

J.B. Lowe - Bank of America Merrill Lynch

Haithum Nokta - Clarksons Platou Securities, Inc.

Mark William Brown - Seaport Global Securities LLC

Operator

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Rowan Companies Second Quarter 2016 Earnings Results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

Chris Pitre, Vice President-Investor Relations, you may begin your conference.

Chris Pitre - Vice President-Investor Relations & Corporate Development

Thank you, operator, and good morning everyone. Welcome to our second quarter 2016 earnings call, and thank you for your interest in Rowan. A copy of the company's earnings report issued earlier today can be found on our website at rowan.com.

Joining me on the call this morning are Tom Burke, President and Chief Executive Officer; Mark Keller, Executive Vice President-Business Development; and Stephen Butz, Executive Vice President and Chief Financial Officer.

Before I turn the call over to Tom, I'd like to remind you that expectations expressed during this conference call are forward-looking statements and are subject to risks and uncertainties, such as market conditions, commodity prices, offshore drilling activity levels, and other risks and uncertainties that could cause actual results to differ materially. Please refer to our earnings release and SEC filings on our website, which more fully describe the forward-looking statements, risk factors and other events that could impact future results.

Please note that information contained herein is as of the date of today's call and may be outdated at the time of any replay.

With that, I would like to turn the call over to Tom Burke, Rowan's President and Chief Executive Officer. Tom?

Thomas Peter Burke - President, Chief Executive Officer & Director

Thank you, Chris. Good morning. I would like to add my welcome to the call and thank you for your continued interest and investment in Rowan. We had a great second quarter of 2016 in the face of difficult industry conditions. We had earnings of $1.72 per share in the quarter. Excluding the effects of the Rowan Relentless contract termination and our early retirement of debt, our earnings would have been $0.75 per share, still above consensus estimates of $0.72 per share.

Our estimated EBITDA was $256 million versus consensus EBITDA of just under $240 million. This performance was mostly due to better-than-expected utilization and lower-than-expected drilling and overhead expenses. Stephen will go into greater detail on each of these items later in the call.

We had our best safety performance to-date in the quarter, which continues our trend of improved safety performance over the last three years. I'd like to take this opportunity to both thank and congratulate all of our employees and especially our offshore crews on this fantastic achievement. Our uptime performance was also impressive with approximately 1% operational downtime for our entire fleet, including nearly zero downtime for our drillships.

We believe our focus on safety, reliability and efficiency are key to securing incremental backlog. We remain focused on cost control. Compared to the same quarter last year, we have systematically lowered our direct operating costs by 18%.

As a backdrop to that reduction, during the same period, our revenue-producing days increased by about 29% for deepwater and decreased about 19% for our jack-up fleet. This means that less than half of the cost savings are attributable to idling or cold-stacking of rigs.

In the same manner, comparing the second quarter of 2015 to the latest quarter, SG&A costs decreased by approximately 16% due to lower labor costs, largely due to labor force reductions and lower share-based compensation. During the quarter, Rowan's Executive Management Team and Board of Directors agreed to reduce executive compensation by 10% for at least a year. We took this step to show visible leadership to our workforce and further reduce costs in these tough times.

While we are pleased with our ability to reduce costs, we remain absolutely focused on safe and reliable and efficient operations. We will not reduce necessary spending on training or maintenance and we continuously communicate this message to our crews and rig management.

Turning to our marketing efforts, Mark will go into greater detail, but I'd like to comment on a few highlights for the quarter. As mentioned in previous quarters, we have been in blend and extend conversations with numerous customers and executed our first blend and extend contract extension for the Rowan Resolute this quarter.

We also extended a jack-up contract in Norway and added significant new contract term to another jack-up in the United Kingdom. While I'm mindful of the challenges ahead to secure a new contract for the Rowan Relentless, I'm quite pleased with our ability to add this crucial backlog at this point in the cycle.

As you're already aware and echoing remarks made last quarter, the offshore drilling market continues to be severely challenged with uncertain timing of the recovery. Until a more substantial and sustained recovery in commodity prices occur, we expect our customers to continue delaying their drilling plans.

Even after healthy drilling demand levels return, the industry will likely still have significant rig oversupply. The market will need attrition of older rigs before we see improved utilization and pricing. Nevertheless, Rowan is prepared to weather the tough times ahead however long they last.

Finally, as you might expect, optimum capital allocation remains the primary focus for us. We further improved our balance sheet during the quarter by the early retirement of some of our long-term debt, while continuing to grow our cash balance to over $760 million. With a $1.5 billion revolver that remains undrawn, our liquidity position is robust and is expected to remain low. We continue to look for opportunities to improve our fleet while asset prices are at low levels.

Now, for a look at the market where Rowan competes, I'll hand the call over to Mark.

Mark A. Keller - Executive Vice President-Business Development

Thanks, Tom, and good morning everyone. As we reach midyear 2016, we appreciate the improvements in commodity price from the beginning of the year. But our focus turns to the anticipation of where those prices will range during the budget season, which will heavily impact drilling activity levels for 2017. While we are encouraged by our customers' ability to sanction programs at lower commodity price levels and the resulting possibility of improved utilization, we remain prepared for an extended downturn.

Exhibiting that preparedness and willingness to partner with our customers through this trough cycle, we are pleased to announce our blend and extend agreement with Anadarko on the Rowan Resolute. Starting July 1, the day rate was lowered to $180,000 per day for an estimated 210 days. In exchange for the day rate reduction, Anadarko agreed to extend the contract past the primary term by 1.3 days for every day of reduced rate.

Currently, we estimate an extension to August 2018 or 273 days at $580,000 a day. This is a win-win agreement for Anadarko and Rowan as we were able to help them with short-term cost savings while adding additional term that hopefully bridges us to a more favorable market environment.

The Rowan Renaissance and Rowan Reliance continue their contracts with Repsol and Cobalt, respectively, and we are actively tendering the Rowan Relentless, which is currently warm stacked in Curaçao following the contract cancellation from Freeport-McMoRan earlier this quarter.

Now, turning to the jack-up market, we continue to deliver contract commitments despite the arduous environment our industry is currently facing. In the second quarter, we added approximately 800 days of backlog to the jack-up fleet with the Ralph Coffman work in Suriname, the Lundin blend-and-extend option on the Rowan Viking, and the Gilbert Rowe contract extension with Saudi Aramco through the end of 2016.

Additionally, we're pleased to announce that we have extended the contract on the Gorilla V with Total in the North Sea for approximately eight months plus an option period. We appreciate our longstanding relationship with Total and look forward to our continued operations.

We're relentlessly pursuing contracts for idle jack-ups by actively tendering worldwide and creatively approaching all opportunities, but projects with operations commencing in 2016 are scarce. Market utilization has slipped to 72% and jack-up contract roll-off appears greater than tender activity for the next six months.

We believe our high-spec jack-ups are well positioned to secure contracts when work is available, albeit at pressured day rates. Historically, the more capable rigs are able to maintain higher utilization through downturns, and we expect similar outcomes in this trough cycle.

Jack-up demand remains weak worldwide with the exception of the Middle East, the only region with a currently forecasted demand increase over the next two years. As a reminder, we have the J.P. Bussell, EXL I and EXL IV currently positioned and available for work in the region.

Competition for future projects both in the jack-up and ultra-deepwater markets is fierce, but we are steadfast in our efforts, confident in our fleet and backed by an outstanding workforce that delivers safe and reliable operations. We will survive this downturn, and we are poised to emerge a stronger company that will continue its more than 93-year history of excellence.

This concludes my remarks this morning, and I will now turn the call over to Stephen.

Stephen M. Butz - Chief Financial Officer & Executive Vice President

Thank you, Mark, and good morning, everyone. On the call today, I will review our second quarter 2016 operating results compared to the prior quarter and provide you with an update to our cost and capital spending guidance before opening the call for questions-and-answers.

Our exceptional financial performance continued in the second quarter despite strong market-related headwinds. Even when excluding the positive impact of the contract termination for the Relentless on our second quarter results, our adjusted EBITDA margin of 52% was nearly on par with the record margin that we generated in the first quarter. We further strengthened our balance sheet by generating $166 million of cash even after retiring $31 million of debt.

Despite these strong results and further reductions in our cost guidance, which we will outline on this call, we expect our second half results will weaken significantly as the cost reductions will no longer keep pace with the expected decline in revenue in the third and fourth quarters.

Turning to our financial results, we generated earnings of $1.72 per share or $0.75 per share when excluding the positive impact of the contract termination settlement for the Relentless and a small gain on debt retirement, which together added about $0.96 to our earnings per share. As previously announced, our customer agreed to pay us $215 million to settle all outstanding receivable balances and terminate the contract, which resulted in our recognition of $120 million of incremental revenues during the quarter.

Separately, we also recognize the gain of $1.8 million on the early extinguishment of long-term debt. Excluding these items, our adjusted EBITDA of $256 million was only $10 million less than the first quarter level. However, second quarter adjusted earnings per share declined to $0.75 from $0.98 in the first quarter, primarily due to increased income tax expense.

Our ability to post strong results in the face of declining average jack-up day rates stemmed from reduced idle time for the jack-up fleet, high uptime for rigs under contract and sustained cost control measures.

Second quarter revenue was $485 million, excluding rebillable items and the effect of the Relentless contract settlement. The $10 million decline from the first quarter level primarily resulted from the impact of a blend and extend agreement related to the Rowan Viking, which we believe will benefit the company in future quarters, partially offset by 108 additional operating days for the jack-up fleet primarily in the Middle East and Suriname. This same factor caused the 10% reduction in average jack-up day rates. The average day rate on our drillships remained within 1% of first quarter level.

For the jack-up fleet, our out-of-service time was exceptional at only 3% of available rig days. Our idle time, which reflects periods when a rig is not contracted, but is available to work, improved to 22% of available days versus 24% in the prior quarter.

Moving on to expenses, second quarter operating expenses excluding rebills were essentially flat at $200 million. We are reducing our full year cost guidance by $30 million to $795 million to $805 million. Reductions in operating costs on the Relentless are expected to account for about half of these savings.

Operating costs in the third quarter 2016 are expected to approximate $205 million, slightly higher than the second quarter levels, due primarily to the timing of repair and maintenance activities for the jack-up fleets. As a reminder, this excludes rebillable items, which are offset by an equal increase in revenue.

Our guidance reflects the continued realization of widespread cost control measures, including the reduction of various support costs, increased efficiency in certain activities, and the centralization of a number of functions.

Our second quarter SG&A expense was approximately $26 million, which was lower than our guidance and slightly lower than the expense incurred in the first quarter. We are holding our full year SG&A expense estimate flat at $105 million to $110 million, but still 5% to 10% below the 2015 level. We expect third quarter SG&A expense to approximate $29 million.

Our second quarter depreciation expense totaled $100 million in line with our guidance and slightly higher than the prior quarter. We are narrowing our range for full year depreciation expense guidance to the low end of our previous range at $400 million to $405 million with approximately $102 million expected in the third quarter.

Gross interest expense, which was $38 million during the second quarter, was also in line with our guidance and slightly lower than the prior quarter as we realize the benefit of our debt retirement during the first half of 2016 which totaled nearly $50 million. We expect to incur gross interest expense of approximately $155 million for the full year.

Our second quarter effective tax rate was 9.5% at the high end of our previous guidance of upper-single-digits. We still estimate that our full year effective tax rate will be in the mid-single-digits. However, as we operate in numerous jurisdictions around the world, including some with in-profit (16:24) regimes where taxes are based on revenue, and as our results deteriorate towards breakeven or even to a loss, we will likely see overall quarterly income tax rates, which are volatile and are not meaningful, as the expense or benefit may still be a very small dollar amount.

With respect our balance sheet and cash flow, we have continued to exercise discipline as reflected in our capital spend of only $31 million, essentially in line with our first quarter spend of $33 million. We are reducing our full year CapEx guidance by $25 million to a new range of $145 million to $155 million.

Cash generated during the second quarter was $166 million, exceeding the first quarter level of $111 million, despite the aforementioned debt retirement and a build in working capital.

The working capital increase is largely due to the remaining Freeport-McMoRan receivable of $130 million at June 30, $15 million of which has already been received with the remaining amount payable in late August. As was the case last quarter, our $1.5 billion revolving credit facility, which doesn't mature until January 2021, remains undrawn but available.

In closing, once again our operations personnel continue to deliver exceptional performance for our customer. Our marketing group yet again secured meaningful new work for both our jack-ups and drillships, and the company operated in an efficient and cost-effective manner, which is reflected in our solid second quarter financial results.

However, as good as we feel about the company's performance, the recent pullback in crude oil prices reminds us all that it's a industry we're not out of the woods in relation to the severe downturn. While we have strong conviction that offshore demand will recover as it remains a vital and meaningful source of oil and gas supply, we remain concerned about the timing of the recovery in deepwater drilling and the supply overhang of offshore rigs in general, which further dampens our outlook.

Looking forward, it's a tough road ahead. You should expect our strong capital discipline to continue, our cost reduction efforts to remain as focused as ever, and our commitment to our shareholders and to maintain a strong credit profile to continue unabated.

With that, we're now prepared to open the call for questions. Operator?

Question-and-Answer Session

Operator

The first question is from Ian Macpherson with Simmons. Your line is open.

Ian Macpherson - Simmons & Company International

Good morning.

Thomas Peter Burke - President, Chief Executive Officer & Director

Morning.

Stephen M. Butz - Chief Financial Officer & Executive Vice President

Hi. Good morning, Ian.

Mark A. Keller - Executive Vice President-Business Development

Good morning, Ian.

Ian Macpherson - Simmons & Company International

Mark, congratulations on the Total extension Gorilla V. I think you forgot to mention the day rate there.

Mark A. Keller - Executive Vice President-Business Development

Yeah. That might have been on purpose, Ian.

Ian Macpherson - Simmons & Company International

Any...

Mark A. Keller - Executive Vice President-Business Development

But, Ian, I will tell you that it's – yeah, we're in a very competitive situation and we'll have a fleet status out in a few weeks, but I'll just tell you it's below $100,000 but it's above our OpEx. I'm not trying to be coy or vague on it. We're just in a very competitive situation with a lot of other rigs and so we're really happy the Total has continued to extend the rig. We've been with them for 11 or 12 years and we're looking forward to staying with them a lot longer. So...

Ian Macpherson - Simmons & Company International

Absolutely. Any work is good work.

Mark A. Keller - Executive Vice President-Business Development

It is.

Ian Macpherson - Simmons & Company International

Yeah. Stephen, so with your working capital movements, can you quantify I guess specifically the Freeport fees that you expect to unwind this quarter? But generally, how do you see in total your working capital move in the second half of the year compared to the first half? I think you're at about $150 million of a build to the first half. Will most of that unwind in the second half, do you expect?

Stephen M. Butz - Chief Financial Officer & Executive Vice President

Yeah. Ian, the biggest piece there and biggest variance quarter-over-quarter was the – related to McMoRan. And so, of the total settlement amount, there was a payment schedule over 90 days and they've been paying on schedule as expected. We received another $15 million in July that's not reflected on the balance sheet, but then in late August, we expect to receive the final payment of $150 million.

Ian Macpherson - Simmons & Company International

Okay.

Stephen M. Butz - Chief Financial Officer & Executive Vice President

So that will significantly unwind.

Ian Macpherson - Simmons & Company International

That's helpful. Okay. Thanks.

Stephen M. Butz - Chief Financial Officer & Executive Vice President

Sure.

Thomas Peter Burke - President, Chief Executive Officer & Director

Thanks, Ian.

Operator

The next question is from Sean Meakim with JPMorgan. Your line is open.

Sean C. Meakim - JPMorgan Securities LLC

Hey. Good morning.

Thomas Peter Burke - President, Chief Executive Officer & Director

Hey, Sean.

Sean C. Meakim - JPMorgan Securities LLC

So we had a little bit of news out today. Cobalt announced the dry hole at Goodfellow and then it seems like the block sales in Angola might be falling through. Just in light of that information coming out today, just curious if any of that context has any impact on your outlook for blend and extend. Just kind of a broader update there would be great.

Thomas Peter Burke - President, Chief Executive Officer & Director

With Cobalt, obviously, there's a lot going on over there and I really can't sort of comment too much about that press release and I believe their earnings call is ongoing at the moment. But what I can say is, obviously, there's been a big change in management. We've had some very good discussions with them and worked with them very closely, and had a lot of conversation in the last three, four weeks as our management team has changed and we feel reinvigorated our blend and extend discussions.

Clearly, we obviously don't have any kind of agreement with them because we would have disclosed it. Although we disclosed it, but we've been working really hard to see if we can come to an agreement.

Sean C. Meakim - JPMorgan Securities LLC

Okay. No, that's fair enough. And then, I'm just thinking about the drilling expense, were there any – you noticed some of the savings you expect in the second half, but were there any onetime costs or anything else in your 2Q numbers related to the Relentless? Are they worth discussing maybe from a deep move or a stacking basis?

Mark A. Keller - Executive Vice President-Business Development

Sean, there really wasn't anything material in the quarter related to that. Good question, though.

Sean C. Meakim - JPMorgan Securities LLC

Okay. And then I guess just one last piece and will be – and so in your updated guidance for the second half, are there any – are you embedding any additional same rig cost efficiencies in those numbers, maybe just to learn a little bit more about how you're doing at managing those costs down on a same rig basis?

Mark A. Keller - Executive Vice President-Business Development

Yeah. As we brought down the cost guidance, about roughly half of that was related to the Relentless. The reductions there are due to its idling, yeah. And then, of course, we've got our assumption for the rest of the fleet. So, a good portion of that is just lower cost across the fleet, but there is idle time on the rigs that we're assuming as well. So it's a combination.

Sean C. Meakim - JPMorgan Securities LLC

So that means that, that implies that you're still trying to work down cost...

Mark A. Keller - Executive Vice President-Business Development

We still are driving...

Sean C. Meakim - JPMorgan Securities LLC

...on a per rig basis, yeah.

Mark A. Keller - Executive Vice President-Business Development

Yeah. That's right. So some of it is related to the increased idling, but some of it is related to our continued effort to drive costs down. But we do expect some further cost reductions in the second half, although, of course, as we noted, it is getting tougher and tougher.

Sean C. Meakim - JPMorgan Securities LLC

Right. No, fair enough. Okay. Great. Thanks a lot.

Mark A. Keller - Executive Vice President-Business Development

Sure.

Thomas Peter Burke - President, Chief Executive Officer & Director

Thank you.

Operator

The next question is from Gregory Lewis with Credit Suisse. Your line is open.

Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker)

Yes. Thank you, and good morning.

Thomas Peter Burke - President, Chief Executive Officer & Director

Hi, Greg.

Mark A. Keller - Executive Vice President-Business Development

Hi, Greg.

Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker)

Hi. Stephen, just following up on Sean's previous question, when we try to back into deepwater revenue, if we take the day rate and days, we get a little bit and then adjust for the contract termination. It looks like we're missing about additional $20 million, $20 million-plus of revenue, and we're just – what – any sort of guidance on what that was attributed to in the quarter?

Stephen M. Butz - Chief Financial Officer & Executive Vice President

Well, one piece of revenue that you may not be accounting for was there was a contingent payment with the McMoRan settlement and we have to value that under GAAP as a derivative, so there was some revenues related to that. That was about $6 million. But then, we also – revenues that would have been deferred and recognized over the life of the contract, that was accelerated as well. Although that total is a similar amount, so that doesn't get you all the way to your $20 million, but that's a big portion underway there.

Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker)

Okay. Great. That's very helpful. Thank you very much for that. And then just, Mark, as we look about maybe China get some of the available rigs back to work, I mean, obviously it's very competitive right now. Is there any areas where you feel a little bit more confident about getting some rigs back to work in any of the specific basins, realizing that you have some idle rigs across the fleet?

Mark A. Keller - Executive Vice President-Business Development

Sure, Greg. Right now, I'll take them separately, jack-ups and deepwater. But on the jack-up side, we're seeing some demand in West Africa. Certainly, the Middle East, as we said in our comments and South America, we see some demand there. And also in Mexico, as you saw with the Gorilla V extension, we see some opportunity to extend one or more of the rigs in the North Sea. We're not seeing a huge uptick in activity there, but we are seeing some opportunities for some term contracts in some areas for higher-spec equipment, and we're pursuing those very vigorously, obviously.

On the deepwater side, we're tracking demand for about seven ships right now, staying close to those tenders and those operators, certainly. We're still pursuing, as Tom said, keeping discussions open on Cobalt for blend and extend and – but we are seeing some demand.

The oil price can help us a little bit keep – turn back the other way, but right now, there is some demand out there, and our marketing teams are all over those operators, both the NOCs, IOCs and around the world.

Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker)

Okay. Hey, Mark. Hey, thank you guys very much for the time. Have a good summer.

Mark A. Keller - Executive Vice President-Business Development

Thank you.

Thomas Peter Burke - President, Chief Executive Officer & Director

Thanks, Greg.

Stephen M. Butz - Chief Financial Officer & Executive Vice President

Thanks a lot, Greg.

Operator

The next question is from Robin Shoemaker with KeyBanc Capital Markets. Your line is open.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Thank you. Good morning. I wanted to just ask...

Thomas Peter Burke - President, Chief Executive Officer & Director

Good morning, Robin.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Thank you. Is the situation we're on the Saudi jack-up rates, is it likely to play out as it did last year with the ongoing negotiations about what rate you go to after December 31? Has that begun, or is it something that's going to be pushed way out to the end of the year most likely?

Thomas Peter Burke - President, Chief Executive Officer & Director

Well, it's a very good question, Robin. I think relative with – as Aramco is our biggest customer, we do spend a lot of time across the Saudi. I would guess it would play out similarly to the last year. The differences would be perhaps that we have less contract backlog in the contracts, which we got a couple years ago, but we had expected it to start again, although have to say it hasn't started yet.

But if you think about what's going on in the sort of the calendar in Saudi, we just finished Ramadan. We've had Eid (29:13). August is always a really slower month generally. And in September, we have the Eid holiday. So it's sort of a time where it's rather like just the summer in the U.S. So in the Western financial markets, it's just kind of a little bit slower in the summer. So I would expect it to have – I can't project anything, but I would expect it to happen a little later on this year.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Okay. And on the North Sea broadly speaking where you've got some high-end rig availability, and I mean, we all know over many years, North Sea very sensitive to oil prices, very sensitive to North Sea tax rates. And so, is this – are you seeing anything changing on the tax rate side, or anything that would be helpful to the North Sea market and particularly the mature field developments there?

Thomas Peter Burke - President, Chief Executive Officer & Director

I'll let Mark talk a little bit more about that. But I would say one thing that has happened in the UK sector of the North Sea. There has been a change in the, I guess, the oversight or the regulation with respect to the Oil and Gas Authority, which is headed up by a former executive from an E&P company. And I do believe that they are absolutely focused on trying to – in the UK sector just really try to sort of break down the obstacles and get wells drilled.

But I do believe and I would say there's been a lot of changes over time with tax rates, Robin, as you know, as you talked about in your question. But I do believe there is a real desire there from industry and from the regulation to regulate the Oil and Gas Authority to really and drive improvements in the activity there. So, there's a will for sure.

And I also think on the other side of the North Sea in the Norwegian continental shelf, there's a lot of work there and a lot of demand over time. Although, like you said, it is very slow compared to what it was a couple of years ago.

We were in a business review last week in London and one of our marketing executives made a comment, I've been in the industry 20-odd years and even when I started, they said the North Sea was dead, right? So, I would say that there's a lot going on in that base and we feel generally positive that it will improve over time.

Mark, more specifically.

Mark A. Keller - Executive Vice President-Business Development

Yeah. Robin, we're seeing some limited demand in Norway, some P&A work and stuff like that. You saw the JV with BP and Det Norske.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Yeah.

Mark A. Keller - Executive Vice President-Business Development

We're working on some things there.

We're looking also at a project right now. We're in discussions on the Gorilla VII to try to bridge the Gorilla VII beyond its current term into 2017 to win Apache, could be ready for the rig again in later 2017. So we've got a tremendous relationship with Apache and we're trying to work together with them.

Also with the Stavanger, trying to work on some P&A and also some drilling projects, but we're also tendering those rigs out of the North Sea. There are some opportunities to take those rigs out; it's just a question of timing. Unfortunately, as we've all seen, the operators' schedules don't always fit with ours, but they – there is some work with those rigs outside of the North Sea right now and we're looking at all those options, Robin.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Okay. Well, that's a good explanation. I appreciate it. Thanks a lot.

Mark A. Keller - Executive Vice President-Business Development

You bet. Thank you.

Operator

The next question is from James West with Evercore. Your line is open.

James West - Evercore Group LLC

Hey. Good morning, guys.

Mark A. Keller - Executive Vice President-Business Development

Hey, James.

Thomas Peter Burke - President, Chief Executive Officer & Director

Good morning.

James West - Evercore Group LLC

So, Mark, in your comments, you talked about a creative approach with your customers and I think you described a few of those. Maybe could you go into some more detail on in terms of kind of what that means, what your customers are potentially asking for, or how you are thinking about being more creative here to keep the rigs working?

Mark A. Keller - Executive Vice President-Business Development

Well, James, we're certainly focused on close relationships with our clients. That's been Rowan's forte for several years as repeat business. We have a great operations team and a tremendous fleet. But aside from that, we're trying to work with the customers if there's some backlog, if we can blend and extend what you've seen with Lundin and with Anadarko, but we're trying to get creative as far as looking at performance and things like that with the operators.

For instance, with Aramco, even when we had guaranteed contracts, we still felt like, from a relationship standpoint long-term, it behooved us to work with Aramco as a long-term partner and we did that, and I think that will pay benefits to us in the future.

As Tom answered the previous question about where that would stand and we will continue to work with Saudi Aramco, just like we will with our other customer base. But, James, that's the way we look at things. Every operator has different needs and different demands. We're just trying to do what's best to try to bridge through this trough cycle to get to a better market and sometimes, that's going to take some creativity to do that.

James West - Evercore Group LLC

Okay. I think I got you, Mark. And then, one last question from me. On the seven tenders you mentioned for deepwater that you're chasing right now, any of those for work starting this year or is this all 2017 and on?

Mark A. Keller - Executive Vice President-Business Development

Mostly all of them are 2017.

James West - Evercore Group LLC

Okay. Got it. Thanks, guys.

Thomas Peter Burke - President, Chief Executive Officer & Director

Okay. Thanks, James.

Stephen M. Butz - Chief Financial Officer & Executive Vice President

Thank you.

Operator

The next question is from Jud Bailey with Wells Fargo. Your line is open.

Judson E. Bailey - Wells Fargo Securities LLC

Thanks. Good morning. Tom, I'd be curious several...

Thomas Peter Burke - President, Chief Executive Officer & Director

Good morning, Jud.

Judson E. Bailey - Wells Fargo Securities LLC

Good morning. Other contractors, to varying degrees, have talked about some of the opportunities that are starting to appear maybe for 2017 and you guys are seeing the same. But at the same time, the oil price remains very volatile.

I'm just curious to get your thoughts. As you talk to customers, how -kind of where is their head, if you can provide any color on that, and how are they thinking about oil price versus kind of activity levels next and how has that evolved? And, yeah, just if you can talk about that and maybe the differences between the jack-up and the deepwater market on how customers seem to be looking at it next year between those two segments.

Mark A. Keller - Executive Vice President-Business Development

Sure. Jud, as you know, it's early in the budget cycle for the E&P companies and we're talking to them continuously. Obviously, they're not happy with the recent pullback in oil prices. But right now, as I mentioned, we're seeing some demand in 2017 for drillships.

A lot of the companies haven't really had an exploration program until – since the first half of 2014. So I think a lot of them, the operators in deepwater, are focused on some of that. There are some lease situations on a operator-by-operator basis that they have some demand there, but for the most part, it's kind of a mixed bag, Jud.

Some of the operators that have a lot of backlog to run on deepwater rigs are going to remain flat. Other operators that were looking out into the future, what they have in 2017 and 2018 are showing an increase in demand. So there's no really set answers. It's kind of on a regional basis and also on a customer-by-customer basis.

On the jack-up side, as I mentioned, we're seeing some demand in some areas for multi-year contracts, Jud, on West Africa, Middle East, South America. We're seeing some early demand in Mexico there from U.S. companies. But we're following everything. We believe we'll get some extensions in the North Sea. If we don't, we'll pull those rigs out of the North Sea and get creative there.

But to your question, I do think there's some demand out there. It's just a question of where oil prices are going to wind up in that critical window of October through December fourth quarter when these management teams go and try to get their budgets approved with their boards.

Judson E. Bailey - Wells Fargo Securities LLC

Okay. And if I could ask a follow-up on Mexico, with the dynamics changing down there, can you talk a little bit about, like, what are you hearing from some of the non-Pemex customers on work scope and opportunities? Is it too early to tell? Or could you get a feel for how long or how big the opportunities may be?

Mark A. Keller - Executive Vice President-Business Development

Jud, we're in discussions. We have some active tenders down there currently with U.S. companies. We are in discussions with other companies to have some work coming up down there, the non-Pemex companies. But we feel like the demands and the – what we're seeing in the tender requirements that our fleet would fit that demand pretty well.

Judson E. Bailey - Wells Fargo Securities LLC

Okay.

Mark A. Keller - Executive Vice President-Business Development

The EXL class rigs, in particular.

Judson E. Bailey - Wells Fargo Securities LLC

Got it. Thanks. I'll turn it back.

Mark A. Keller - Executive Vice President-Business Development

Thanks, Jud.

Thomas Peter Burke - President, Chief Executive Officer & Director

Thank you, Jud.

Operator

The next question is from J.B. Lowe with Bank of America. Your line is open.

J.B. Lowe - Bank of America Merrill Lynch

Hey. Morning everyone.

Mark A. Keller - Executive Vice President-Business Development

Good morning.

Thomas Peter Burke - President, Chief Executive Officer & Director

Good morning, J.B.

J.B. Lowe - Bank of America Merrill Lynch

My question was on you guys have a pretty decent amount of cash in the balance sheet and a lot of availability under revolver. Given the direction of the market it continues to have, how much of that do you feel comfortable, I guess, using for, I guess, other uses such as debt pay-down or opportunistic M&A and give kind of an idea of what the actual ability to use that cash would be?

Thomas Peter Burke - President, Chief Executive Officer & Director

I'll start that then and I'll hand it over to Stephen. I do feel that we probably have more flexibility now than we have had for some time. And so, I do think we're actually in a fairly good position as far as our balance sheet and we have a number of choices.

As far as the opportunistic M&A, we can have a look to distressed assets – continue to look at distressed assets, but we have pretty healthy return requirements given the outlook in the market so – and we continue to look at that. But I don't think we would go and do distressed assets in a big way. We may buy using our cash because liquidity is very important.

Stephen?

Stephen M. Butz - Chief Financial Officer & Executive Vice President

Yeah. Tom, I don't have a lot to add to that, but J.B., we can't give you a hard and fast amount because, again, it's always changing with our outlook. But I would say just to – with our complex legal structure, we need to maintain a minimum cash of roughly $150 million, and of course, we probably wouldn't want to go quite that low. And then, it will just vary depending on our outlook and how attractive those opportunities are.

J.B. Lowe - Bank of America Merrill Lynch

Okay. Fair enough. And you guys also lowered your CapEx guidance for this year by about $25 million. Can you give some commentary on what that $25 million you're taking out is and is that $145 million to $155 million kind of a good run rate to assume going forward for maintenance CapEx?

Stephen M. Butz - Chief Financial Officer & Executive Vice President

Well, we haven't provided our guidance for next year, but it will probably – we will continue to try to push that down and be more and more efficient. This year is a heavy year for special surveys, so there could be just a natural decline. Next year, we'll probably roll that guidance out, preliminary guidance on our next call.

In terms of the reduction this year, there wasn't any one huge item. Our refurbishment estimates for one of our rigs were a bit lower than what we had estimated.

Thomas Peter Burke - President, Chief Executive Officer & Director

Yeah. Obviously, it's fairly episodic, as Stephen said, depending on what rigs, special surveys we get back in inspection, and we have to do more work than we thought or less work than we thought. So, it is a little bit dependent on what special surveys we have, five-year inspections, et cetera, that are coming, J.B. So, obviously, we're assessing that, and as Stephen said, we'll give the comments in November.

J.B. Lowe - Bank of America Merrill Lynch

Okay. That's helpful. And then last one, I guess, Mark, I appreciate that you can't give the rate necessarily on the Gorilla V, but you said it was above your operating costs. Are those operating costs still in the low $60s million for the UK North Sea there, or has that moved in the last couple months?

Mark A. Keller - Executive Vice President-Business Development

No, that's about accurate, J.B.

J.B. Lowe - Bank of America Merrill Lynch

Okay. That's all from me. Thanks, guys.

Mark A. Keller - Executive Vice President-Business Development

Thanks, J.B.

Operator

The next question is from Haithum Nokta with Clarksons Platou Securities. Your line is open.

Haithum Nokta - Clarksons Platou Securities, Inc.

Hi. Good morning, guys.

Thomas Peter Burke - President, Chief Executive Officer & Director

Hi, Haithum. How are you doing?

Mark A. Keller - Executive Vice President-Business Development

Good morning.

Haithum Nokta - Clarksons Platou Securities, Inc.

Good. Thank you. I wanted to ask a little bit about the Relentless, can you just talk about – I know you mentioned a few tenders out there for 2017. Can you kind of remind us of your cost to stack that rig in the near term? And I guess another way of asking it really is, what's the level of readiness that it's at today? And kind of separately also, if you do contract the rig kind of sooner than the original Freeport contract, does Freeport have some recourse on their termination?

Thomas Peter Burke - President, Chief Executive Officer & Director

Okay. There's a few questions there. Freeport doesn't have any recourse...

Mark A. Keller - Executive Vice President-Business Development

They don't.

Thomas Peter Burke - President, Chief Executive Officer & Director

...on the termination. I'll answer that one. Okay, you two answer the others.

Stephen M. Butz - Chief Financial Officer & Executive Vice President

Yeah. So our stacking costs, we've gotten them down to the $50,000 to $60,000 range. And in terms of the level of readiness, I believe that was the third question. (44:28)

Mark A. Keller - Executive Vice President-Business Development

Yeah. The rig is – it's warm-stacked. We could put it back into operation. We'd probably need 30 days to 60 days to put it back in operation. We were actively tendering it. You have to keep rigs in a warm-stacked mode or you will – now the market has changed. One of the aspects of the market today from previous trough cycles is the operators are not going to talk to you if you don't have your rigs ready to go. If you cold-stacked it in alternating quarter shift, you won't be on the tender list, and they will audit your stacking process.

So, we've been told that by multiple operators. So, we are keeping the rig ready to go. As I mentioned, we have some active tenders, and we're pursuing that vigorously, trying to put the rig to work.

Thomas Peter Burke - President, Chief Executive Officer & Director

Yeah. Haithum, I'd just add to that is that we are, as far as bringing down our operating costs and knowing well our operating costs should be, what we do know is we do see some work where we want to have the rig ready to respond, and we don't want the customers to come to look at it to find it just basically in cold-stacked mode. So we need to have it warm-stacked.

Now, we are only a few weeks really into our warm-stacking process. And so, having not had much experience currently, we're at sort of 50 days to 60 days. That may go down. It may stay where it is, but that is yet to be determined.

Haithum Nokta - Clarksons Platou Securities, Inc.

No, I think that's sensible to keep the rig as hot as possible for marketing. So that makes sense. I guess, Mark, also, I wanted to ask about the jack-up market. I mean, you've spoken quite a bit about it. But I mean would you say with what you know today, I mean with the rollovers that are expected broadly over the next – through the end of the year, do you think the jack-up demand could be in the process of troughing by the end of 2016?

Mark A. Keller - Executive Vice President-Business Development

It all depends on what oil prices do. If oil prices don't show an upward trend, it reverse the trend of the last few days, then that's hard to say. I think most operators that we're dealing with today believe that oil prices will go back up in north of $50. And if that occurs, then I think you will see some activity.

We are looking at the potential of our rollover. As I mentioned earlier, we see some opportunities for term contracts in West Africa and the Middle East, and so we're pursuing those. You're going to see us probably shift some rigs around the world a little bit, which is pretty commonplace in down-cycles, but like a giant chessboard. But we feel like we're in good position with our fleet.

We would like to see more of them obviously working today, but we do think the opportunity is there. Whether or not we're at the bottom of the market, that's hard to say right now. If oil prices had remained in the high $40s, $50, I would probably tell you you're pretty close to the trough. But today, that's a hard call.

Haithum Nokta - Clarksons Platou Securities, Inc.

Got it. Appreciate it. And just one last quick one, Stephen, will you be discontinuing the disclosure for the personnel costs, rig moves, and the rebillables going forward?

Stephen M. Butz - Chief Financial Officer & Executive Vice President

Yes. We will probably continue to provide rebill color on the earnings call, but we have revamped our release and disclosures. And we're providing some additional information, and of course, we're looking at what our peers are providing as well. And we think the incremental information we're providing is more valuable than that level of granularity on the different categories of OpEx.

Haithum Nokta - Clarksons Platou Securities, Inc.

Got it. All right. Thank you. Appreciate it.

Stephen M. Butz - Chief Financial Officer & Executive Vice President

Sure. Thank you.

Thomas Peter Burke - President, Chief Executive Officer & Director

Thank you.

Operator

The next question is from Mark Brown with Seaport Global Securities. Your line is open.

Mark William Brown - Seaport Global Securities LLC

Hi, guys. I just wanted to know if you had...

Thomas Peter Burke - President, Chief Executive Officer & Director

Hey.

Mark William Brown - Seaport Global Securities LLC

Hi, if you had any comments on the EXL I and EXL IV. You've moved those to the Middle East. I think those are the only two rigs in that region that are not on a contract. If you see any increased demand, would those be the ones that would go to work?

Mark A. Keller - Executive Vice President-Business Development

Yes, Mark. That's one of the reasons we moved them there out of Southeast Asia. We were seeing a lot of pressure in the market in Southeast Asia, particularly with Petronas forcing operators to use their rigs that are under contract first and then use local rigs. So we made a business decision to move those rigs into the Middle East.

We believe that from that position, we're seeing a lot of demand coming there for jack-ups in UAE and Qatar. Saudi Aramco, still up in the air, where they're going to shake out with their fleet, but they have about eight jack-ups rolling over this year and they're always looking to high-grade their fleet. So we've been in discussions with them on those rigs.

As I mentioned earlier, demand in West Africa, those rigs are perfect to work in that region of the world and certainly in South America and Mexico.

Mark William Brown - Seaport Global Securities LLC

Okay. Good. And then, the other question I had was just on the Rowan Renaissance, if you have any comments on what your plans would be for that rig in terms of – I guess it's on a standby rate at the moment, but maybe you could just give us a quick update on your discussions with the customer.

Mark A. Keller - Executive Vice President-Business Development

Sure. We've had numerous discussions with Repsol regarding blend and extend of the Renaissance. It is on standby right now in the U.S. Gulf of Mexico. They are looking at projects in different areas of the world themselves to keep the rig working. We have talked to them about doing blend and extend, utilizing jack-ups in their acquisition of Talisman in the North Sea, with us having the Stavanger and the Norway idle. Those were options that are on the table.

We have met with them both in Madrid and Houston. Tom and I were just there a few weeks ago and the status is, right now, they are looking at where they think they can respond. But until that point, we've given them numerous scenarios to try to work something out, but so far, it's – the ball's in their court as to where they're going to head with that.

Mark William Brown - Seaport Global Securities LLC

Okay. And just one other quick question. Just the EXL III in the Gulf, is there any reason why you wouldn't consider moving that to the Middle East as well if there seems to be more demand in that region?

Mark A. Keller - Executive Vice President-Business Development

If there was enough demand certainly short-term, that we would warrant moving it. Of course, absolutely, we would. But we're looking at a potential in the U.S. Gulf of Mexico with an operator that's got up to a year's worth of work.

We're also looking at Mexico, as I mentioned earlier, and to mobilize the rig to West Africa from the U.S. Gulf is going to be about the same as from the Middle East. So, we think it's in a good spot. We're just trying to – we're hopeful that some of these jobs would have materialized earlier. Unfortunately, some of them have been pushed back a little bit, but that's the current plan for the rig right now, Mark.

Mark William Brown - Seaport Global Securities LLC

Well, thank you very much.

Mark A. Keller - Executive Vice President-Business Development

Thank you, sir.

Thomas Peter Burke - President, Chief Executive Officer & Director

Thank you. Thank you.

Operator

We have no further questions at this time. I'll turn the call back over to Mr. Pitre for closing remarks.

Chris Pitre - Vice President-Investor Relations & Corporate Development

All right. We'd like to thank everyone for your interest in Rowan and joining us on today's call. If you have any additional questions, Carrie Prati and I will be available to take your calls. We look forward to speaking with you again next quarter. Chris, thank you for coordinating the call and good day everyone.

Operator

You're welcome. And ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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