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Rowan Companies Inc. (RDC)

Q2 2007 Earnings Call

August 02, 2007, 9:30 AM ET

Executives

William C. Provine - VP of IR

Daniel F. McNease - Chairman, President and CEO

William H. Wells - VP of Finance, CFO and Treasurer

Analysts

Robert MacKenzie - FBR Capital Markets

Collin Gerry - Raymond James and Associates

Thomas Curran - Wachovia

Michael Fara - Merrill Lynch

Ken Sill

Presentation

Operator

Good day, everyone, and welcome to this Rowan Company Incorporated Second Quarter 2007 Earnings Results Conference Call. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Mr. Bill Provine, President of Investor Relations. Please go ahead.

William C. Provine - Vice President of Investor Relations

Thank you, Angelina, and good morning, everyone. Thanks for tuning into Rowan's second quarter 2007 earnings conference call. Please note that we have posted slides on our website at rowancompanies.com, where you may listen to the call and see the accompanying slides.

With me this morning is Danny McNease, our Chairman and CEO; and Bill Wells, our CFO. The duration of this call will be 60 minutes.

And I'd like to remind you that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitations statements asked to the expectations, beliefs and future 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.

Now it's my pleasure to turn the call over to our Chairman, Danny McNease.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Thanks, Bill. Good morning, everyone, and welcome to our second quarter 2007 conference call. Let me start by saying how pleased I am with our earnings results. We've had another record-breaking quarter here at Rowan, and we have a lot to be excited about.

As all of you know, our strategy is to build on and operate high specification jackup rigs to serve the niche markets in which our premium equipment and experienced crews excel. We currently have 15 of our 21 jackups under long-term contracts. 11 of those rigs are contracted for international markets for two to four years.

According to Saudi Aramco, of their current fleet of 25 rigs, Rowan's six jackups were the only ones to arrive on time ready to work without penalty. A redeployment of assets was successfully concluded and all of our offshore rigs are generating revenue. The third quarter of 2007 should give us a good quarterly run rate and demonstrate the benefits of our strategic plans.

Demands for jackups in the Middle East and many other foreign markets remain strong, and we're continuing to aggressively pursue long-term opportunities abroad. We continue to believe in our long-term viability of the Gulf of Mexico jackup market. However, we believe the migration of high-spec jackups to other operating regions will continue. Rowan expects to have fewer jackups operating in the Gulf of Mexico by yearend 2008.

I'm proud to report that all of our manufacturing capital expenditures are in place and running at 100%. We expect to reach the $700 million revenue mark in 2007. Along with Rowan, LeTourneau Technologies is constantly striving to increase their business globally. We're now operating 27 land rigs and we'll have two additional new built land rigs delivered in the third quarter of 2007. I'll go into more detail about the joint division later in the call.

Bill Wells will now present an overview of the financials for the quarter, and then I will provide the operational overview and our current view of the markets. Following our comments, we'll open the call up for your questions.

Bill?

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

Thank you, Danny, and good morning, everyone. In the second quarter 2007, our net income was a record $128.1 million or $1.14 per share, a sequential increase of 48% compared to $86.4 million or $0.77 per share in the first quarter of 2007 and a year-over-year increase of 17% compared to $109.7 million or $0.98 per share in the second quarter of 2006.

Our second quarter consolidated revenues were a record $507 million, a sequential increase of $44.7 million or 10% and a year-over-year increase of $124.1 million or 32%. The current period results included $14.6 million or $0.08 per share of gains on asset sales compared to $24.1 million or $0.14 per share in the first quarter of '07 and $24.5 million or $0.14 per share in the prior year period.

The current period gains are primarily attributable to the sale of our Alaska drilling camps in June. Our second quarter 2007 results also included an additional $4.5 million or about $0.02 per share of loss recognized on our external rig construction project, which was completed in June.

Now we'll discuss the financial performance of our operating segments. Our second quarter 2007 manufacturing revenues were $153.9 million, a year-over-year increase of $51.1 million or 50%, though a sequential decrease of $20.1 million or 12%. The year-over-year growth in revenues was primarily attributable to our drilling products and system segment, which includes our Offshore Products, Drilling Systems and Power Systems groups.

Our second quarter Drilling Systems revenues were $57.9 million, a sequential increase of $22.3 million or 63% and a year-over-year increase of $48.2 million or almost 500%. Current period revenues included shipments of 17 mud pumps and another $40.7 million of land rigs and drilling equipment packages sold through the SourceOne Marketing Alliance compared to 18 pumps and $16.5 million of rig packages in the first quarter. There were 11 pumps but no rig package revenues in the year ago period.

Our second quarter Offshore Products revenues were $46.5 million, a year-over-year increase of $6.5 million or 16%, though a sequential decrease of $20.6 million or 31%. Current period revenues included the remaining $15.7 million recognized on our external rig construction project compared to $26 million in the first quarter and $16.9 million in the year ago period. Current period revenues also included $25.4 million related to four of our seven rig kit projects in process compared to $31 million in the first quarter and $12.6 million in the year ago period.

Our second quarter Power Systems revenues were $8.2 million, a year increase of $4.8 million or 128%, though a sequential decrease of $9.2 million or 53%. Current period revenues included shipments of 85 motors and another $2.6 million of primarily AC drive and control system packages compared to 106 motors and $9.9 million of system packages in the first quarter.

Our first quarter Mining Products revenues were $29.1 million, a sequential decrease of $11.3 million or 28% and a year-over-year decrease of $11.4 million or 28%. Current period revenues included shipments of three frontend loaders, including two of the larger L-1850 model, compared with seven total units in the first quarter and eight units in the year ago period. Mining part sales totaled $12.1 million during the second quarter, down by 2% sequentially and by 6% year-over-year.

Excluding the impact of the external rig construction project, our second quarter 2007 average margin on direct manufacturing cost was 26% of remaining revenues or slightly ahead of our 25% normalized margin during the first quarter of 2007. Similarly, our manufacturing operating income, which improved to 8% of revenues during the current period, would have been 13% without affects of the rig project. With about two thirds of the revenue base, the prior year period had a higher concentration of aftermarket part sales, thus better overall margins.

Switching to the drilling division, our second quarter 2007 revenues were a record $353.1 million, a sequential increase of $64.8 million or 22% and a year-over-year increase of $73 million or 26%. The sequential increase in drilling revenues reflects the startup of our two Tarzan class jackups under four-year contracts to offshore Saudi Arabia in late March and a full quarter of activity by the Gorilla VI, which commenced operations in the North Sea in late February.

Approximately one half of the year-over-year growth in drilling revenues resulted from rig fleet additions between periods with the balance primarily driven by an increase in our overall average offshore day rate that followed our relocation of several rigs from the Gulf of Mexico to more promising foreign markets.

Our second quarter drilling expenses were $144.6 million, a sequential decrease to $2.2 million or 2% and a year-over-year increase of $24.9 million or 21%. Over half of the year-over-year increase in drilling expenses is attributable to rig fleet additions between periods, including the Hank Boswell, which was delivered in September 2006, the rebuilding of the Rowan Louisiana, which was completed in December 2006, and the construction of 10 new 2,000 horsepower land rigs.

The remaining increase is primarily attributable to higher labor, overhead, rig maintenance and towing costs associated with our relocation of several offshore rigs to overseas markets. The sequential decrease in drilling expenses was not large and did not spread across many cost categories, though it does indicate that the cost impact of our ramp-up of international operations over the past year has been fully absorbed. Our focus going forward will be on further cost operations in our existing operations where practicable.

Our second quarter depreciation expense totaled $28.9 million, a sequential increase of $1.3 million or 5% and a year-over-year increase of $6.9 million or 31%, primarily due to the rig fleet additions mentioned previously.

Our second quarter selling, general and administrative expenses totaled $22.9 million, a sequential increase of $0.5 million or 4% and a year-over-year increase of $4.3 million or 23%, primarily due to incremental incentive-based compensation costs associated with our improving operating results. The prior-year amounts reflect a reclassification from operating expenses to be consistent with the current year presentation.

Our second quarter capital expenditures totaled $145 million, bringing the year-to-date total to about $232 million at June 30, most of which related to construction of our fourth Tarzan Class rig, the JP Bussell and our first 240C class jackup at Rowan Mississippi.

We currently estimate that our full-year 2000 CapEx will be in the range of $390 million to $410 million and will continue to be financed through operating cash flows. Our debt to capitalization ratio is at 18% and our average cost of debt is just below 5%.

With that, I'll turn the call back to Danny for a review of our operations and worldwide markets. Danny?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Thanks, Bill. Let me start with an overview of our manufacturing division. LTI Drilling Systems supplies mud pumps, drawworks, top drive, rotary tables and other drilling equipment. The imported SourceOne marketing alliance is strengthening daily in its turnkey supply of drilling equipment packages.

We're currently supplying packages for three external land rigs and four offshore rigs beyond those already delivered. Our new lightning series land rig design 2000 horsepower AC, a million pound hook-load is now a mature product line. For worldwide construction of new jackups, we're supplying approximately one-third of all mud pumps.

Our new gear-driven drawworks are performing well, and they're also maturing as another new product line. Based upon our strong favorable experience with our onshore applications to date with these new drawworks, we have begun applying this new product line offshore also. Our new top drives use innovative technology and apply unique direct drive in its design.

As you know, we have succeeded in if totally eliminating the mean gearbox, which is the source of most conventional top drive failures in the growing industry. This innovation should provide much desired higher product reliability for our customers. The 750 ton is already applied commercially offshore. The 500 ton is applied commercially onshore. The 250 and 350 ton are in prototype states and soon to be tested for onshore use. Our 1000-ton top drive is in development for offshore.

We've extended into the Middle East and Singapore with further expansions to follow. Our backlog totaled $139 million at June 30th, 2007, and included 35 mud pumps, one drawworks and 103 million of rig packages sold through SourceOne marketing alliance. This backlog was approximately $151 million on July 31st. We expect most of our Drilling System backlog will be realized during 2007 with the remainder in the first half of 2008.

Overall quotation activity continues to be strong. The drilling market is definitely learning about LTI Drilling Systems. This is relatively new, but important business of growing fast. LTI Product System produces variable speed motors, drives and other electric components featuring AC, DC and Switch Reluctance technology with power distribution.

Our innovative low-speed, high-torque AC motors designed for top drives are performing extraordinarily well. Our leading-edge Switch Reluctance technology has been successfully proven on large loaders, and we're pursuing broader market application, and we're currently developing a higher capacity SR product.

Our AC drives are also performing well, and our related product development is continuing for niche applications. These innovative power designs will continue to drive new product development in each of the markets we serve. Our backlog totaled $26 million at June 30, 2007, and included 63 [ph] motors and 19 million of primarily AC drive and control system packaging. This backlog was approximately 26 million on July 31st.

LTI offshore products produces jackup rigs, rigs kit and related components and parts. This backlog totaled $166 million at June 30th, 2007, including $150 million related to our seven rig and rig kit projects in progress. We expect that approximately two-thirds of LTI offshore products backlog will be realized over the remainder of 2007 with the balance over the first half of 2008. This backlog was approximately 159 million on July 31, 2007.

Current rig quotations are for deliveries in the second half of 2008, meaning that final delivery of the complete jackups associated with these kits would be in the second half of 2009. LTI mining products produces large front-end loaders and related parts. We shipped three loaders in the second quarter of 2007 versus eight in the second quarter of 2006. We expect to ship 29 total loaders in 2007 versus 30 loaders in 2006, our best performance in many years.

Our market share for larger front-end loaders readied at 1,000 horsepower and above remains about 35%. Our market share of loaders above 1600 horsepower is close to 100%. We're expanding sales for relative new 950 and 23 series... 50 series loaders, as both new models are performing well. Our backlog totaled $24 million at June 30th and included eight front-end loaders, but increased to approximately $39 million at July 31st as we have sold another five loaders since June 30.

LTI forestry products produces large log stackers and related parts. Present backlog in new and pre-manufactured stackers is two units. LTI steel products produces carbon and alloy steel up to 7.5 inches thick. Our new installed steel plate capacity translates to increased jackup kit production to increase external steel plate sales and improved plate yield.

Now moving to our drilling division, I would like to update you on the results and prospects of our drilling division. Our offshore rig utilization was 97% during the second quarter of 2007, up from 84% in the first quarter. Rowan's average offshore day rate worldwide during the second quarter of 2007 was $157,100. Rowan's land rig utilization as 97% during the second quarter of 2007, up from 92% in the first quarter of 2007. Rowan's average land rig rate during the second quarter of 2007 was $22,400.

I'm now going to take a look at the worldwide markets, including our current area of operations and potential markets. And covering each region, I will outline our view of supply and demand day rates and utilization, contract projections and impact that each operating area could have on the global market this year and in the future.

Worldwide, the supply is 408 rigs. Demand is 375. Contracted utilizations is 92%. Average forecast of supply deficit is 25 to 31 jackups. Our worldwide fleet is currently contracted at 100%, both land and offshore. Rowan's current average day rate worldwide is $159,000 a day. For the remainder of 2007 and 2008, we will continue to expand internationally.

International jackup market as a whole remains strong, and this trend is forecast to continue throughout 2007 and 2008 with increase in dominance by national oil companies. Supply deficits continue to drive demand in almost every operating region except the US Gulf of Mexico. We're seeing tender activity in the Middle East, the Mid and the Southeast Asia, Mexico, West Africa, regions in our market and in each of these areas of operation.

The well-to-well environment of US Gulf of Mexico will continue to be a primary source of jackups required to lower supply deficits worldwide through 2007 and into 2008.

78 rigs are currently under construction or on order. However, considering the current supply deficits worldwide and the projection... the projected construction delays, we believe these deficits will not be any problem until at least the end of 2008.

Turning to the Middle East, the supply is 93 rigs, demand is 87 contracted, utilization is 94%. Our average forecast of five deficits nine to eleven jackups. Rowan's currently operating eight jackups in the Middle East region. Four of 116-C's two Tarzan rigs are working for Saudi Arabia and two 116-Cs are working in Qatar for Maersk.

Rowan currently has bids out in Qatar, Kuwait, Saudi Arabia, and the UAE. Demand in Saudi Arabia, Qatar, UAE, and Iran continues to set the pace for global demand for jackups. This trend is forecasted to continue throughout 2007, 2008. Iran is forecasting increase its Rowan in the region with demanded predicted... with demand predicted to rise by 10 jackups by the end of 2008.

In Qatar, Maersk; Qatar petroleum and RasGas have indicated that they will add additional jackups to the fleet 2007 and early 2008. In addition, Middle East reflected forecast to expand their fleets by additional 9 to 17 jackups over the next couple of years. Demand is currently at 87 jackups and based on our current forecast and region, Rowan believes an increase of approximately 20 rigs by year end 2008 is probable. Further day rates in the region range from $43,000 to $190,000.

The North Sea supplies at 35 rigs, demand is 35 rigs, utilization is 100%. Average forecast and supply deficit, currently, a supply deficit does not exist. However, there is a possible shortage of one-two... two rigs by year end 2007 and three to four rigs in 2008. The increase in demand in 2008 is largely due to project deferrals from 2007 due to jackup availability.

The North Sea is a probable region for absorption of new built jackups. Approximately 20 of the current rigs under construction will be outfitted to the work in the harsh environment area and some are already being aggressively marketed. Rowan believes the North Sea market will remain strong both in utilization and day rates through 2007 and 2008.

Independence continued to increase their presence in the region. The Gorilla V continues its work for Total and the contract has been extended for 5 to 500 days at $260,000 a day. The extension will begin after the current job is completed around November 2008. The Gorilla VI continues its operation for Talisman in the mid-290s. The project will run through November 2007, at which point the rig will begin operation for British Gas at a day rate range of $310 to $370 depended on the country of operations. The project is expected to last until approximately May of 2008.

The Gorilla VII continues working for Maersk in the mid-250s until October 2007. The jackup is currently being embedded at a higher day rate for other projects in the region in the middle fall in this well. Current day rates in the region range from $60,000 to $305,000 a day.

Trinidad supplies six rigs, demand is six rigs, 100% utilization. The Gorilla III is operating for Anadarko in a $187.5 a day. Following the Anadarko contract, Rowan will commence operations for EOG on its last option well. The work will last approximately 60 days. Day rate of $187.5. the rig will then commence operations at Petro-Canada $250 a day for approximately six months to one-year depending on the option.

Demand in the region's forecast remain constant at six rigs throughout 2007. BP, BHP, Anadarko and EOG are currently reviewing additional project in the region for 2008 commencement. Current day rates in the region range from $52,000 to $187,500.

South America supply 11 rigs, demands nine rig, utilization is 82%. Average forecast of supply deficit is one to two rigs. Although, Brazil is predominantly a deepwater environment, Petrobras is currently out to tender for two jackups and is forecast to tender for an additional two to three units in the first quarter 2007.

There is currently one tender outstanding in Argentina for approximately 9 to 10 months of work proceed pro quo. Petrobras is currently in discussion with contractors regarding multiple jackup opportunities in Venezuela.

Now, the Gulf of Mexico supplies 84 rigs, demand is 62, utilization is 74%. Nine of our 21 jack-ups are operating in the Gulf of Mexico and are fully contracted. Both are on a well-to-well and term base. Rowan's average day rate in the region is $140,000 a day. US Gulf of Mexico jackup market continues to remain the most unstable major operating region in the world in terms of day rates and utilization and this trend is forecasted to continue for the remainder of 2007.

Currently 29% of the Gulf of Mexico jackup fleet is contracted for exploration drilling compared to the 12% average internationally. If these domestic wells prove successful, more development drilling is required. There is a strong concern that the rigs needed for this work, such as 116 Tarzans drill will not be available.

We believe that the migration of the US Gulf of Mexico independently cantilevered jackup fleet to international markets will continue throughout 2007 and into 2008, thus potentially leaving an operational limited fleet in the region, making it difficult for US E&P companies to meet both lease requirements and production goes.

Currently on an 18, 300 foot plush jackups remain compared to approximately 40 rigs in the summer of 2004. 11 jack-ups have migrated out of the US Gulf of Mexico in 2007 and there are currently five additional rigs scheduled to part in third quarter 2007. Rowan continues to believe that an additional 10 to 12 jackups could lead the US Gulf of Mexico to meet supply deficits in international markets on a long-term basis by the end of 2008.

Commodity prices are forecasted to remain at levels necessary for US producers to continue to aggressively explore hydrocarbons on US Gulf of Mexico shelf. Plains Exploration extended a contract for the drill for $185,000 for an additional 180 days.

Gorilla II commenced operations for Devon for approximately 300 days at a $175,000 a day. The Bob Palmer commenced operations for Petrobras at $230,000 a day. Rowan, as you know, is contracted to Dominion at $105,000 a day for approximately 80 days following its current well new build. Current day rates in the region range from $50,000 and $225,000 a day.

New construction Rowan has three high spec jackups under construction, one Tarzan class rig and two 240-Cs. All three of these rigs are high pressure, high temp VPS drilling units capable of drilling up to 35,000 feet.

I would now review regions of world where we are not currently operating, but that have a significant impact on the global market. First is West Africa with 26 rigs, demand 26 rigs, utilization is 100%. The 26 rigs currently in the region are fully booked due to the remainder of 2007. Demand forecasted remained relatively unchanged at approximately 30 rigs through 2008 with a supply projected at 25.

Nigeria and Angola will continue to drive demand in the region from 2007 to 2008. The majors continue to set the pace for the jackup demand in West Africa. However, the independence are beginning to venture into the West African market and securing contracts with jackups in the region. Current day rates in the region range from $58,000 to $205,000 a day.

Southeast Asia, the supply is 35 rigs, demand is 35 rigs, utilization 100%. The major question in the region remains how the market will absorb the nearly new... 30 new builds scheduled to be delivered over the next year. Some operators in the regions are deferring projects to 2008 and hope of a decrease in day rates.

However, demand in other markets will likely absorb the new builds to solve their own current deficit problems, which should keep day rates robust, in North Sea, Middle East, West Africa, India, Iran the bid. Despite the small project circles of rigs, the Southeast Asia market remains strong both in utilization and day rate levels. Current day rates in the region range from $54 to $225,000 per day. New build jack-up day rate fixture range from $195 to $210,000 a day.

India the supplies 33 rigs, the demand is 33, utilization is 100%. Average forecast of supply deficit is four to five rigs throughout 2007 and 2008. India is a prime target for new build jack-ups entering the market in late 2007 and 2008.

ONGC is forecast to add additional five jack-ups to its fleet in 2007 and into 2008. Current day rates in the region range from $20 to $194,000 per day. The demand is 17 rigs contracted, utilization is 100%. Forecasted supply deficit of one to two jack-ups.

The Mediterranean region as forecast to remains strong in 2007 and 2008. Demand for jack-ups in the Egyptian sector is expected to increase by one to two rigs from the fourth quarter of 2007 to 2008. Demand in Tunisia is also forecasted to increase with tenders currently up for a long leg of jack-up for 2008 start. Egypt, Italy and Tunisia will continue to drive demand in the region. Current day rates range from $30 to $200,000 a day.

Mexico, the supply is 31 rigs, demand is 31, utilization is at 100%. Average forecast supply deficit is three to four rigs. Recent contracts and awarded in the region were raised the Mexico jack-up fleet to 34 rigs in the fourth quarter of 2007.

Additional tenders are forecast in the region for a 350 and 250 cantilever resemble the year term. US Gulf of Mexico remains the primary source for PEMEX jack-up requirement. Current day rates in the region range from $22,000 to $186,000 per day.

In conclusion we've had another record quarter. We are pleased with our continued growth in manufacturing a future further diversification internationally in our offshore fleet 2007 will be the best year in the Company's history.

And now... I will now be happy to answer any of your questions.

Question and Answer

Operator

[Operator Instructions]

We'll take our first question from Rob MacKenzie with FBR Capital Markets.

Robert MacKenzie - FBR Capital Markets

Good morning, guys.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Morning.

Robert MacKenzie - FBR Capital Markets

A question, I may have missed it earlier in the call and I apologize if I did. But, Danny you talked in the past about moving three-year or so rigs out of the US Gulf of Mexico to foreign markets, Middle East, North Sea, Latin America I think were the three regions. Can you update us on the status of getting some more rigs out of the US Gulf?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Well, we have currently 14 tenders in house that we're looking at. And we're bidding in all these areas, and we'll just have to wait and see how successful we are. But like I said early in our presentation, there's a lot of demand and people are still offering long-term contract.

Robert MacKenzie - FBR Capital Markets

Okay. And then separately, in the US Gulf itself, can you give us a feeling for whether you think the Gulf actually reached bottom yet or if there's still further downside in demand there as hurricane season progresses?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Well I mean it's flattened out and it's actually started up is the case, we got a higher day rate for the Juneau. We were able to renew the bigger rigs at the same price or higher than we were getting before. So believe it's bottomed out and started up. One thing's that's driving our fleet is the deeper gas drilling and we're getting the rate to drill deep well for BP which is... it's going to be over 30,000 feet. And people are talking to us about some additional opportunities like that. So we believe that the deep gas is going to play a big role in Rowan's future here in Gulf of Mexico.

Robert MacKenzie - FBR Capital Markets

Okay. And then separate question, you've recently had a shareholder known for being activist taking a big stake in the Company. What kind of... have they tried to put any pressure on you or what are you trying to... what are you seeing in terms of the behavior pressure or anything that would lead you to change any strategic direction?

Daniel F. McNease - Chairman, President and Chief Executive Officer

No. We haven't... he's been a good shareholder, we haven't heard a word from him. He seems to be happy. He's made money in the stock.

Robert MacKenzie - FBR Capital Markets

Okay. Thank you.

Operator

And moving on we'll go to Collin Gerry with Raymond James and Associates.

Collin Gerry - Raymond James and Associates

Thanks. Good morning, guys.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Good morning.

Collin Gerry - Raymond James and Associates

I want to hone in little bit more on the Gulf of Mexico market. On some of your conventional rigs, looking to renew in the back half of the year, obviously, there's a lot of concern on what gas is doing. It doesn't sound like you're seeing too much day rate pressure as far as those rigs go and may be what those will renew at. For my own purpose, should we think of those as kind of flat lined, we've reached somewhat of a floor there?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Yes. If you just use the current day rates as where they're at today, I think that would be the best thing for you to do.

Collin Gerry - Raymond James and Associates

Okay. And then switching gears over to the tenders you have outstanding, you mentioned I think 14. Can you tell us the mix or kind of what kind of terms some of the operators are looking at, we've seen kind of a push for longer-term and maybe, you know, sacrifice a little bit of day rate for the international contracts.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Right.

Collin Gerry - Raymond James and Associates

What kind of terms are those looking for?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Most of those are two to four-years.

Collin Gerry - Raymond James and Associates

Most are two to four years?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Yeah.

Collin Gerry - Raymond James and Associates

Okay. Thanks. And then finally, on the land rig side, what are you seeing on day rates there?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Well, it's flattened out also. And you know, we've all through this period, we've remained at 100% utilization. So you know, we think that the fact that we're focused on the deeper drilling has helped us a lot.

Collin Gerry - Raymond James and Associates

So you're not seeing too much pressure as far as leading edge rates go?

Daniel F. McNease - Chairman, President and Chief Executive Officer

No. We're actually getting a lot more calls now as far as the deeper drilling. You know, we have a two rigs coming out here the third quarter, the two new ones and we've got several different operators talking about them, the fact that they're 2000 horsepower and can drill the deeper wells, I think it give us an advantage there.

Collin Gerry - Raymond James and Associates

And what regions are those?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Those are in south Texas, East Texas and Louisiana.

Collin Gerry - Raymond James and Associates

Okay.

Daniel F. McNease - Chairman, President and Chief Executive Officer

And one or two in Oklahoma.

Collin Gerry - Raymond James and Associates

Okay. Well, thanks, guys. That helps out.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Thank you.

Operator

And our next question comes from Thomas Curran with Wachovia.

Thomas Curran - Wachovia

Good morning, guys.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Good morning, Thomas.

Thomas Curran - Wachovia

Danny, you know, for years, up until last quarter, you've reported LPI operating profit on a gross operating income basis, and then starting last quarter, you began providing a breakout of cost between direct costs and other operating costs. Can you explain the difference between the two and your reasoning for the shift?

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

Yeah. Hold on a second.

Daniel F. McNease - Chairman, President and Chief Executive Officer

The reason for the breakout, Thomas is, just the fact the manufacturing division is growing so much. It has over the last couple years, so we thought we would give more clarity on what it's doing.

As far as the difference between the direct cost and what we would call other, direct is purely the cost of those products that are going out the door where there's material labor, allocated overhead, that kind of thing. The other is primarily engineering, resource, and development and costs like that, which are obviously critical to the process, but they're not really tied to individual sales.

Thomas Curran - Wachovia

Are we to understand or expect a certain trend to emerge with one of the two cost types and that's why you started breaking it out for us?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Well, we would expect that the, I mean the direct costs are obviously going to move in tandem with sales. Obviously, as you get higher-margin sales, that spread should grow a little bit, whereas the other costs should be somewhat fixed. I mean they're going to move a little bit, but again it's mostly engineering and research and development, some other types of costs that are going on all the time, whether you're selling anything or not.

Thomas Curran - Wachovia

Okay. That's helpful. Then it looks as if, just in general, the margins you're realizing, the implied run rate margins for some of the new product lines are coming in lower than you were expecting, could you speak to why, where you were off there?

Daniel F. McNease - Chairman, President and Chief Executive Officer

I think they're coming in pretty close to what we were expecting. We've had a number of hiccups in the last few quarters that have brought the numbers down a little bit, but of course the other thing you've got to look at is the level of parts. If you go back in the last couple of years, about half of the business at times was part sales, which have very high margin to them.

As we've moved into some of these new product, the part sales as a percentage of the total has diminished, and that's been a little bit of a drain on the profitability, but as we go forward, we're hoping to move those margins up.

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

I think gross margin was 26% if you take the Perfadora and trial loss out.

Daniel F. McNease - Chairman, President and Chief Executive Officer

That's right.

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

And that's what we've been saying over the last couple of quarters, we hope to build that margin up between 25 and 30 and that's what we've been doing.

Thomas Curran - Wachovia

Okay. Yeah. So if you adjust for the new build jackup…

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

Right.

Thomas Curran - Wachovia

In terms of jackup rig kit, incoming potential orders, do you expect to receive the jack-up rig kit order for Scorpion's latest new build order at Lamprell, and then are there any other pending laterno [ph] new build jackup orders that you would expect to result in rig kit orders?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Well, we've already received the Scorpion kit order for the first Scorpion rig and Lamprell yards. There is options for four or five additional ones, but to answer your question, we have a lot of bids out worldwide right now. We think that we will get some of those. I can't tell you how many. But, you know, from the way it looks, there'll be some... there's going to be some more additional 116 each built around the world, and we think we'll be successful in that, but I can't want tell you exactly how many.

Thomas Curran - Wachovia

Thanks, guys. And then just last question turning to the offshore drilling side, could you provide a breakdown of the 14 tenders on the operator side in terms of who issued them, and then on your side, which jackups are being bid?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Well, can I give you the 14 tenders, but I'm not going to tell you which jackups we're bidding where. We got three tenders for Ramco, one for RasGas, four for KJO, that's in the joint venture deal between Kuwaiti and Ramco. We got two from Egypt, we got one from Tunisia, two from Brazil and one from Angola.

Thomas Curran - Wachovia

Great. I'll turn it back guys. Thanks.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Thank you.

Operator

And again, we'll go Michael Fara with Merrill Lynch.

Michael Fara - Merrill Lynch

Good morning, guys.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Good morning, Michael.

Michael Fara - Merrill Lynch

I've got a quick question on LeTourneau's backlog, I guess, I'm a bit confused about the direction there especially, where the decline is coming from? It looks like a drilling systems in offshore products, which is where most of the growth is supposed to come from. You saw backlog drop almost on a dollar for dollar basis with revenues. Can you sort of help me understand what happened there?

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

Yeah, Michael. I mean, basically, if you look at offshore products, I mean, as Danny allude to, there's a lot of quotes out there, but there haven't been any kits sold for some time now and so that we're just working off that backlog in present time.

But you know, as he indicated, we're optimistic that we're going to get some of those orders and that will start to build again. The drilling systems, there's a lot of quoting activity going on right now, we're very optimistic about that. They've also worked through some large sales in the last couple of months, whereas, before they were selling individual components like pumps and things like that.

Now, they're putting them together as packages, and so those have a... depending on shipments, those have a big impact on the backlog.

Daniel F. McNease - Chairman, President and Chief Executive Officer

If you look at drilling products alone, there's over $1 billion worth of equipment in outstanding quotes today. So I mean, we expect to grow that... that backlog to grow.

Michael Fara - Merrill Lynch

Okay. Danny, are you still comfortable with not just the $700 million in revenue this year, but even reaching as high as $1 billion there in maybe '08, '09, as you've talked about before?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Yeah, as I've talked about before... it remains the same and if it remains the same, we should have that production capability built into our expansion program, and we think that's achievable. And what we're seeing internationally is a tremendous amount of bids coming in to interefron the international side.

And you know the fact that we can just... those products in this year I think is going to help us get a lot of those projects. And so we're very excited about the fact that we think we can get over $1 billion next year.

Michael Fara - Merrill Lynch

Okay. And just quickly switching to the offshore drilling. A lot of tendered activity on the international side has really been led by PEMEX recently. Is there any chance you guys move back into Mexico, especially, for some of your low end Gulf jackups?

Daniel F. McNease - Chairman, President and Chief Executive Officer

We're looking at it, we have those tenders in-house, you know, we're looking at it and we just got those tenders so we're looking at what all the options are and what we think would give us the best return right now, as far as areas we've been working. If we went into Mexico, we'd have to start-up operations there, so we've taken that into consideration. But yeah, I mean, with the day rates that are been paid down here, you should have a look at it.

Michael Fara - Merrill Lynch

Okay. And then one last one on the land rig side. You said that, that you're seeing it flatten out on the day rate front. That seems a bit countered with some of the other major land drivers have been saying on conference calls. Is that because of the rig quality you guys have that you gas drilling…

Daniel F. McNease - Chairman, President and Chief Executive Officer

I mean, I always say that, but I think it's got a lot to do with the rigs... the tight rigs that we have. Our rigs can drill deeper and if you look at our average well depth its over 16,000 feet. But the main thing, you haven't grease equipment, you don't have the crews and we got those. And the operators we're working for, I think if we talk to any of them, they're very excited about the performance of our rigs.

Michael Fara - Merrill Lynch

Okay. Great. Thanks, guys.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions]

Moving on we'll take our question from Arun Jayaram.

Ken Sill

Hi. It's Ken Sill.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Okay, Ken. Go ahead.

Ken Sill

I dialed in on Arun's line. The Gorilla VI contract, I wanted to confirm the rate and where that's working and how long that's going to be for?

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

The Gorilla VI is... hold on one second. That's the one that's working for Tallsman and British gas. It's a split deal. And the reason that day rate range for the British gas part from 330 to 370, if it's working in the UK sector, it would be 330, but if it goes into Norway, it could get as high as 370, just depending on what equipment we have to add to the rig.

Ken Sill

Okay. And how long is that deal for?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Let's see.

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

With all the options, could be 915 days.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Right.

Ken Sill

And what's the firm part?

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

450, I think.

Ken Sill

That's a great contract.

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

Yes, it is. It's been a great contract for us.

Daniel F. McNease - Chairman, President and Chief Executive Officer

It was made into $200,000 a day in Eastern Canada with husky. So it's a nice move on our part.

Ken Sill

And I noticed there is a bid coming up for Canada, nobody is really working there?

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

We're responding to that tender.

Ken Sill

You're responding to that tender.

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

Yeah. We've already pre-qualified for that tender.

Ken Sill

Yeah. And when do you expect to hear back from them on that one?

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

I really can't answer that. We just pre-qualified and the rig we bid was the Rowan Mississippi, our first 240C to be able to do that job in Eastern Canada, so that's what we pre-qualified.

Ken Sill

And then just one last question, on the Gulf of Mexico, you know, we're starting to see some of the smaller rigs just kind of going down with no follow on work right here. When is you guy's... what's your roll over timing in the Gulf of Mexico over the next 60 to 90 days?

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

We've got a... let me get the contract status here in front of me. If you're talking about the smaller rigs, the Rowan acreage the roll over at the end of September. The Rowan Juneau would go all the way to the end of October with an option after that. So that's about the only two would roll over to the next 30 to 60, 90 days.

Ken Sill

So you're in pretty good shape there.

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

We're in pretty good shape there, but that's only two rigs. And like I said both operators have options on them at the end of that.

Ken Sill

All right. Well, great. Thanks.

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

Thank you, Ken.

Operator

And it appears there are no further questions. We'll turn the call back over to you, Mr. Bill Provine.

William C. Provine - Vice President of Investor Relations

Well, thank you very much, for everyone, turning into our conference call. Three months from now, we're going to do the third quarter and we expect great results. Thank you very much and see you next time.

Operator

That does conclude today's program. We appreciate your participation and have a wonderful day.

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