Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  
TRANSCRIPT SPONSOR
Wall Street Breakfast

GlobalSantaFe Corp. (GSF)

Q2 2007 Earnings Call

August 2, 2007, 11:00 AM ET

Executives

Richard J. Hoffman - VP, IR

Jon A. Marshall - President and CEO

Michael R. Dawson - Sr. VP and CFO

Roger B. Hunt - Sr. VP, Marketing

Stephen Morrison - ADTI

Analysts

Arun Jayaram - Credit Suisse First Boston

Kurt Hallead - RBC Capital Markets

Ian Macpherson - Simmons & Company

Robin E. Shoemaker - Bear Stearns & Co.

Roger Read - Natexis Bleichroeder

David Smith - J. P. Morgan

James Stone - Cambridge Investment

Ole Slorer - Morgan Stanley

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Quarter Two 2007 GlobalSantaFe Corporation Earnings Conference Call. My name is Paul and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. [Operator Instructions].

I would now like to turn the conference over to Mr. Richard Hoffman, Vice President of Investor Relations. Please proceed sir.

Richard J. Hoffman - Vice President, Investor Relations

Thank you very much Paul and welcome ladies and gentlemen to GlobalSantaFe Corporation's conference call following the release of the company's earnings report for the second quarter ended June 30, 2007. We trust all of you have received a copy of our press release, we wish to thank you for your interest in GlobalSantaFe.

With me this morning from the company are Jon Marshall, President and CEO; Matt Ralls, Executive Vice President and COO; Mike Dawson, Senior Vice President and CFO; Roger Hunt, Senior Vice President of Sales and Marketing; Jim McCulloch, Senior Vice President and General Counsel; Bob Herrin, Vice President and Controller; Black Simmons, Senior Vice President of Operations; and Steve Morrison, President of Applied Drilling Technology, Inc.

To the extent not provided in this call, reconciliation of any non-GAAP measures discussed in this call will be available under the webcast section on the Investor Relations page of the company's website in the form of our earnings release or other materials. The Investor Relations page of the website may be accessed by going to the company's website, globalsantafe.com and clicking on Investor Relations and then webcast.

Before I turn the call over to Jon Marshall, I want to comment on any forward-looking statements that might be made during the course of this conference call. We believe it is in the best interest of our stockholders and the investment community to provide forward-looking information. We've done so in our earnings release and are likely to do so in this call.

Our forward-looking statements include such things as our expectations for future performance and growth, and our statements regarding future market demand for oil and gas and offshore drilling rigs. Our forward-looking statements also include such things as our expectations regarding future rig utilization and dayrates, margins, estimated costs and expenses, our capital spending plans and other statements that are not historical facts.

Please understand, however that we will not respond to questions or otherwise discuss specific earnings projections or other material items not previously disclosed. Our forward-looking statements speak only as of today and are based on available industry, financial and economic data, and our operating and financial plans. They are also inherently uncertain and investors must recognize that events could turn out to be materially different from what we expect.

Please refer to our earnings release and to our latest annual report on Form 10-K and subsequent SEC filings for more information about risk factors that could contribute to such difference. We caution investors not to place undue reliance on forward-looking statements and do not take any obligation to update publicly or otherwise revise any forward-looking statements whether as a result of new information, future events or other such factors that affect... released statements except where expressly required by law.

And also before I turn the call over to Jon, please be reminded that during this conference call we will not discuss or respond to any questions relating to the previously announced merger with the Transocean. With that now, I will turn it over to Jon.

Jon A. Marshall - President and Chief Executive Officer

Thank you, Richard and thanks to everyone for joining us today. We appreciate your interest in GlobalSantaFe and we look forward to answering your questions this morning.

I am going to make a few brief comments about our results and what we were seeing in the world oil markets. Then Mike Dawson, our CFO will walk you through the details of our financial and operating results for the quarter, followed by Roger Hunt, our Senior VP of Marketing, who'll provide you an update on the drilling markets.

First I'd like to briefly mention how pleased I am by the outstanding efforts that our people have made to improve our safety and operational performance through the first half of this year. We continue to see a substantial reduction in unplanned or mechanical downtime through the first half of 2007 compared to the same period last year. And while there is always room for improvement, the gains we made in this area clearly could not have occurred in this demanding environment, without a lot of effort at every level of our operations.

And our people delivered this performance while maintaining cost in line with our projections through the first half of the year. Additionally, I would like to report that all four of our jackups that we moved from the Gulf of Mexico to Saudi Arabia have commenced their 4-year contracts with Saudi Aramco.

As Roger will tell you in greater detail, we see a lot of positive indications of strong demand across the international drilling markets. This is especially through the deep water, but we continue to be pleasantly surprised by demand in the international jackup markets.

In terms of our macro view, world oil demand continues to surprise us even if in the face of historically high oil prices, the falling dollar continues to support foreign currency buying power and productivity gains as well as infrastructure growth in the developing world has added to the strength of this demand. OPEC has been using oil inventory levels as their primary determinant for production levels and even though they've been disinclined to increase near term production, the anticipated fourth quarter seasonal increase in demand will have to be met with increased OPEC production.

Supply risk continue from the geopolitical tensions of the Mid East, demand problem in Nigeria, Iranian nuclear ambitions as well as the increasing nationalization of the resource base in many of the producing countries. When you view all of these issues through the lens of increasing depletion rates, we see an oil supply demand scenario that could support robust demand for our services for many years to come. Thanks again to all of you for joining us and with that, I will turn the call over to Mike.

Michael R. Dawson - Senior Vice President and Chief Financial Officer

Thank you, Jon. For the second quarter of 2007, we reported net income of $369.8 million, or $1.60 per diluted share. These results compare to net income of $248.5 million or $1.01 per diluted share for the same period of 2006. Our last year's second quarter results included hurricane damage and insurance related gains of $63.7 million or $0.26 per diluted share. Excluding those gains, net income through the 2006 quarter would have been $184.8 million or $0.75 per diluted share.

In the first quarter of this year... the first quarter this year included hurricane damage insurance related gains of $42.5 million or $0.18 per diluted share. Excluding those gains, net income from continuing operations would have been $299.2 million or $1.28 per diluted share, compared to $369.8 million reported this quarter resulting in a sequential improvement of $70.6 million or $0.32 per share. That improvement came from the following areas: Contract drilling, operating income was up $48.6 million. Drilling management services' operating income was up $15.9 million and oil and gas division's operating income was up $6.5 million.

The contract drilling results improved primarily on the strength of higher dayrates. Average revenues per day increased 11% to 177,100 a day from $159, 500 a day in Q1. Drilling Management Services Group had a very strong quarter; operating profit was $16.6 million, even after a deferral of $10.2 million on wells in which our oil and gas subsidiary held an interest. This compares to $700,000 in the first quarter. This performance benefited significantly from good results on three North Sea wells that we drilled in the second quarter compared to none in the first quarter.

Our oil and gas subsidiary reported operating income of net $8.6 million up from $2.1 million in the first quarter. As you may recall, our first quarter oil liftings in the North Sea were down due to the fact that only one lifting was made. Liftings were trued up to year-to-date production in the second quarter.

Corporate expenses were $5.2 million lower in the second quarter, primarily due to timing of equity awards in the first quarter.

During the second quarter, we repurchased $240 million of stock, bringing our total to flat $1.53 billion under our March 2006 authorization. In July, we repurchase another $80 million of stock bringing the total to 1.6 billion. Now presuming to our merger again with Transocean, we have suspended our share repurchase program and quarterly dividend pending the close of the transaction. I think that many of you may have modeled that continuation of the buy back program somewhere and make a special point that we would not be continuing to reduce our share count over the remainder of the year.

Turning to forward guidance, in our January cost guidance call, I indicated that we expected full year contract per earnings expense, net or reimbursable expenses to be about $1.29 billion. Our four year expectations remain at that level. Actual growth cost were slightly higher due to higher incentive compensation accruals but are slightly offset by higher intersegment eliminations.

Third quarter cost excluding reimbursable expenses are expected to be around $350 million and then declining to the mid 290s in the fourth quarter. Third quarter is higher primarily because it represents the peak of scheduled R&M spending for the year and because intersegment expense eliminations are low in comparison to other quarters. Fourth quarter cost and drop offs are an in decline, dry dock expenses decline and intersegment expense eliminations increased bringing the number down further.

For DD&A our expectations are for the high 80s in the third quarter and G&A expenses are expected to do... remain around $20 million. Our tax rate is expected to be in the 11% to 12% range before discrete items.

Now I will turn the call over to Roger Hunt for a discussion of the worldwide rig market.

Roger B. Hunt - Senior Vice President, Marketing

Thanks Mike. We continue to observe a very strong deep water market as our customers commit to long-term contract, at rates over $500,000 a day for all deep water rigs. During this past quarter, we confirmed the commitment to the deep water rig Celtic Sea for a 2 year contract operating in both Brazil and Nigeria at rates ranging form $455,000 to $485,000 per day depending upon the country.

As to the international jackup market, strong demand keeps existing rigs fully employed and with regions such as Mexico, West Africa, Middle East, and India having additional incremental demand, we continue to believe that new rigs entering the market for the balance of 2007 and the first half of 2008 will be fully employed at rates near recent level.

In the North Sea, despite some concern about soft gas prices, we continue to see strong demand and robust pricing at all classes of rigs, particularly in Norway, where our competitor secured a 4-year contract on a drillship at $550,000 a day. For the next 12 months, we believe the North Sea Florida market to benefit from rigs that are parting the regions of the mid. In the jackup sector, fixtures are still about 200,000 for standard jackups and at $270,000 to $300,000 range for the larger rigs.

In Northeast Canada, we are well positioned to receive a term extension on the Grand Banks and we are also bidding on a new program for a big jackup.

In the West Africa jackup market, there have been no new fixtures on jackups during the last quarter. However, we still observe strong demand for additional jackups in 2008. In the West Africa Floater sector, we observed strong demand for floaters and are very pleased to report that Sunoco [ph] will extend the elution key for an additional year from July 2008 at a rate of 350,000 per day.

In Brazil, we observed the fixture on a 6000 foot floater at a day rate of about 500,000. And we look for Petrobras to continue to contract for additional new build rigs.

In the Mediterranean jackup market, there was a recent fixture reported at 190,000, suggesting strong fundamentals for this 16 rig region.

We anticipate that demand will continue to be strong for the next 12 months and with GSF having three contracts rolling during this period, we are well positioned to secure extensions at attractive rates. The floater market in the Med is very strong. The current count is of 8 rigs and we look Bolivia [ph] and Egypt to increase activity over the next 12 months.

In the Gulf of Suez jackup market, they have been a couple of fixtures during the past quarter at rates of 110,000 to 120,000 range and we are confident of securing follow-on work for Rig 141 when it is released later this month at similar rates.

The story in the Arabian Gulf is one of very strong demand, as evidenced by recent fixture on a competitor's rig at 190,000 per day for two-year contract. We continue to believe that incremental demand will build through 2008, influenced primarily by Saudi Arabia, the neutral zone and Iran.

In Southeast Asia, we have observed good rate fixtures over the past quarter, despite building supply pressure from the new builds in the region. Looking at global demands for jackups, we still conclude there are sufficient incremental demand though during the first half of 2008 to keep the new capacity in balance with demand.

In the Gulf of Mexico, we had only 3 jackups left in this market and evaluating opportunities for work abroad. That concludes my remarks and I'll hand the call over to Paul.

Question And Answer

Operator

[Operator Instructions]. Your first question is from the line of Arun Jayaram with Credit Suisse. Please proceed sir.

Arun Jayaram - Credit Suisse First Boston

Good morning guys. Mike, I was wondering if you could maybe walk us through the operating cost guidance for Q3 and Q4 and just maybe help us understand the intersegment piece and the R&M piece and how you go from about 350 million if I heard you correctly, to the mid 290. I just want to understand that little bit better, in terms of sequential change?

Michael R. Dawson - Senior Vice President and Chief Financial Officer

Yes, a lot of it AJ gets involved with the expense eliminations and it hasn't... haven't shown up as a major visible item in the past because we didn't ADTI didn't utilize too many of GlobalSantaFe rig and when they did, it was in the Gulf of Mexico and right now ADTI is using Galaxy II and the Artic II at 300,000 plus dayrates. So the numbers get to be pretty significant and so because we can't reflect revenue in our company transactions, we've got to eliminate that revenue from the revenue line and it's got to be offset in cost and expenses. Typically, you might think about doing that against ADTI's cost, we eliminate the revenues in the contract drilling segment and eliminate cost in ADTI. But the margins are so much so differential that to eliminate cost in ADTI would totally distort the result.

So essentially, whatever revenues we have used to those rigs reduce our revenues and reduce our expenses in a like amount. That gives our consolidated revenues stated correctly, our consolidate expenses are stated correctly, our consolidated net income is right and it give segment operating profits, stated profitability but it does shows some distortion in the revenue and expense line from what we would see if we were looking for a third party. So in the third quarter, the expense eliminations will be in the neighborhood... in the third quarter the revenue eliminated between divisions will be about $45 million and in the fourth quarter that will be on the order of $60 million. So that's a significant part of that variance is just in sort of the accounting treatment and not in anything that is actually expended by the company.

Arun Jayaram - Credit Suisse First Boston

And would the balance then be the lower R&M expense?

Michael R. Dawson - Senior Vice President and Chief Financial Officer

Lower R&M expense, a lot of the dry dock cost. Then the third quarter mobilizing as rigs to Saudi Arabia and the jack line some of those costs roll off here and you don't see that in the fourth quarter, and that's probably about $10 million of that cost as well.

Arun Jayaram - Credit Suisse First Boston

Okay that's helpful. Second question, I guess I'm wondering if you could comment the U.S. Gulf of Mexico jackup market has been relatively soft in Q3, just wondered if you could comment on ADTI bidding activity and when do you anticipate we'll see an improvement in terms of demand in the Gulf of Mexico.

Stephen Morrison - ADTI

Well, this is Steve Morrison of ADTI. Our bidding activity has been varied variance over the last 2 or 3 months. We'll see increased activity and then a substantial drop-off. We are anticipating that to light us right now through end of the fourth quarter.

Arun Jayaram - Credit Suisse First Boston

Okay that's helpful. And last question Jon; can you give us a sense of your evaluating any new build opportunities for another DD rig or another drillship?

Jon A. Marshall - President and Chief Executive Officer

We continue to evaluate those opportunities because we see incremental demand in the market place for ultra-deepwater rigs in 2010, 2011 time frame.

Arun Jayaram - Credit Suisse First Boston

Okay, thanks a lot guys.

Michael R. Dawson - Senior Vice President and Chief Financial Officer

Thanks AJ.

Operator

Your next question is from the line of Kurt Hallead with RBC Capital, Please proceed.

Kurt Hallead - RBC Capital Markets

Hey, good morning.

Michael R. Dawson - Senior Vice President and Chief Financial Officer

Good morning Kurt.

Kurt Hallead - RBC Capital Markets

Yes. Also a follow-up question for you Mike on the OPEC. We had a diamond out last week, talked about a 20% year-on-year increase on operating costs; couple of other... one of your other very close partners to be announced 10% to 12% operating cost increase for '08. Could you give us some general sense as to what you maybe expecting as you head out into next year on a standalone basis?

Michael R. Dawson - Senior Vice President and Chief Financial Officer

Kurt, we haven't been through a budgeting process, so really can't give you a lot of help in that. We do a bottoms-up approach and look at each and every rig in and the work, the R&M, particularly down on that rig and budget, labor cost increases. I won't tell you that in terms of raw materials and supplies, we are seeing about a 6.5% increase year-over-year right now and in terms of capital items that's probably run in closer to 10%.

Kurt Hallead - RBC Capital Markets

Okay, alright. And then a follow-up question on the markets specifically on the international jackups. I know it's been a very high topic of interest here It seems like very major player in the industry is suggesting that the market should be fine at least through the first half of next year. Some are willing to extend it out beyond through the whole year of 2008. Clearly, the best of market is not really willing to buy into it. So how do we kind of reconcile with what you guys are seeing on the industry side with respect to what the investors are up betting at this point? What is that you guys know that the markets are the fully appreciated this point may be a better way to put it?

Jon A. Marshall - President and Chief Executive Officer

Kurt, I don't know how to speculate on what the investor should thinking. As we were sitting here this time last year, we had a similar view and that was that we can see a net incremental demand last year to consume the rigs that were scheduled for delivery through the end of the year. But we were uncertain of what '07 look like because we just didn't have enough visibility on it. And I am still in that camp that we see enough incremental demand to consume all the rigs that are scheduled to be delivered, notwithstanding some may be delayed, but they are scheduled to be delivered through the end of the year and into the early quarter of '08. But we just don't have enough visibility because of the way the jackup demand is usually structured; we just don't have enough visibility beyond that.

Kurt Hallead - RBC Capital Markets

Okay. Fair enough. Thanks.

Operator

You next question is from the line of Ian Macpherson with Simmons & Company. Please proceed sir.

Ian Macpherson - Simmons & Company

Yes, good morning. My first question is about your two jackups left in the U.S. Gulf of Mexico and I was wondering if you could quantify now many opportunities you are evaluating? At present how many specific tenders you are looking it and should it be our default assumption that you are looking to get all three of them out of the U.S.?

Roger B. Hunt - Senior Vice President, Marketing

Ian in terms of the number of opportunities that are rather responsive it in terms of the types of area that we look at. Just as of now, we actually have 3 jackup placed in the Gulf of Mexico. The areas that we will be looking at are Mexico, West Africa and the Middle East. And Mexico is out for 314 right now, we are up for I think later in the East start-up, West Africa, the market is imbalance right now, but it looks to us come the end of the year, beginning of next year there expect to be five to six rigs short. And then as a series of tenders, rather in-house i.e. Aramco and other companies later in the year for the Middle East. So they are the three areas that I think we would be looking at as potential destination.

Ian Macpherson - Simmons & Company

Thanks Roger. It's been a while since you are saying the lot of this High Island contracts incurred a 150 to 165 dayrate range. Would that still be held prevailing leading edge rate for those ICEs in West Africa?

Roger B. Hunt - Senior Vice President, Marketing

I think so yes.

Ian Macpherson - Simmons & Company

Okay. And I could just have one quick follow up, I noticed what looks like a pretty substantial... is that a cost escalation adjustment on the development drill 1 from kind of 180 to 195. Could you refresh me how those mechanics work in the contract in terms of the frequency of the adjustment and where we might look for them on other rigs near term?

Michael R. Dawson - Senior Vice President and Chief Financial Officer

I mean best that we call you back and give you... walk you through the details on that because every contract is quit unique under itself.

Ian Macpherson - Simmons & Company

Yes, I will give Richard a call, thanks.

Michael R. Dawson - Senior Vice President and Chief Financial Officer

Okay, I think that's probably the best way.

Ian Macpherson - Simmons & Company

Thanks.

Operator

Your next question is from the line Robin Shoemaker with Bear Stearns.

Robin E. Shoemaker - Bear Stearns & Co.

Yes thanks. I was noting in your commentary some comments about the Eastern Canada market and I hadn't heard much about that in a while. What did you say about the prospects for the Grand Banks there and could you address what you see as the floater and the jackup requirements in East Canada?

Michael R. Dawson - Senior Vice President and Chief Financial Officer

There are two floaters operating in the area now Robin. We are in active discussions with our customers today about an expansion on the Grand Banks. I think that will sort itself back over the next month or two. You know we are relatively confident that the unit will stay in that sector. And what I referred to was there is a couple of customers looking at bringing in a harsh environment big jackup through [indiscernible] program. And that, the timing on that would be first or second quarter next year.

Robin E. Shoemaker - Bear Stearns & Co.

And do you have a rig available... harsh environment rig available for that timing?

Michael R. Dawson - Senior Vice President and Chief Financial Officer

Yes, we probably be looking at one of the units that comes off contract about that time next year in the North Sea.

Robin E. Shoemaker - Bear Stearns & Co.

Okay. And I just wanted to ask since turnkey drilling and oil and gas had such a strong quarter on a combined basis compared to well quite a while, if ever. Is the opportunity there improving? Are the risks greater with the high dayrates you paying for rigs to pursue these turnkey jobs and therefore rates return ought to be improving?

Jon A. Marshall - President and Chief Executive Officer

Robin, in terms of latter part of your question, there is still the same balance of risk versus profit and still the same opportunities at these higher prices. Fundamentally, we are not taking on wells that have substantially different risk profiles and what we have always taken on. So that risk to opportunity balance remains the same. Then I've forgotten the first part of your first question.

Robin E. Shoemaker - Bear Stearns & Co.

Well, yes just that the earnings as a operating income of these 2 combined was probably the best they've had on a quarterly basis. I just wondered if that reflects a different kind of margins that you are seeking or obtaining in turnkey work?

Jon A. Marshall - President and Chief Executive Officer

No, I think that we are staying fairly consistent on that. But one of the features of this particular quarter is particularly when you compare to last year, we had availability of some rigs to us in the North Sea that we didn't have last year. And so we had a very good quarter end in the North Sea and that contributed significantly to these results.

Robin E. Shoemaker - Bear Stearns & Co.

Yeah, Okay. Thank you.

Operator

Your next question comes from the line of Read Roger of Natexis Bleichroeder. Please proceed.

Roger Read - Natexis Bleichroeder

Yes. Good morning gentlemen.

Jon A. Marshall - President and Chief Executive Officer

Good morning Roger.

Roger Read - Natexis Bleichroeder

Quick question, I believe Roger you mention floaters would be leaving the North Sea for other markets given that rate seem pretty healthy for floaters and the elusion key [ph] rolled in similar rates than what you would be seeing a leading edge rate in the North Sea. What's the impetus for that?

Roger B. Hunt - Senior Vice President, Marketing

I think, it's all about our growth market in the Mediterranean, 8 floaters there now. There is lot of leasing activity in Libya, a lot of interest by our customers in that new region. So I think its all about an opportunity maybe to get a long term fixture; that's the other thing that's going on right now. We looked for these first rounds of awards in Libya to be of the two to three year range.

Roger Read - Natexis Bleichroeder

Okay and kind of a follow up along those lines; the elusion key rose at a similar rate to I guess maybe even the same rate that it had before. Getting back to the cost escalation question earlier, is there a reason to that rig wasn't up? I mean cost has got to be higher than when that initial contract was signed; the one that will complete here shortly. Is there some other adjustment in that contract? If it's there was this an option that's being exercised?

Michael R. Dawson - Senior Vice President and Chief Financial Officer

I appreciate the question. No, it's not an option but at the feature of the extension condition is that actually the base date for the escalation starts at the original contract date. So we actually recover escalation all the way back to when we started in November 2006.

Roger Read - Natexis Bleichroeder

Okay, well that's pretty nice feature. And final question, the DD2contracts up at the end of... near the end of '08. Are you actively bidding that rig now? And could we expect to see a contract sign before year-end?

Michael R. Dawson - Senior Vice President and Chief Financial Officer

The DD2contract finishes up November, December 2008. The option must be extended, exercise by a six month prior to that, so May, June next year, the customer has to commit. And so we look for the customer to just start conversations on that unit pretty shortly.

Roger Read - Natexis Bleichroeder

And is that your cap on what that rate could be?

Michael R. Dawson - Senior Vice President and Chief Financial Officer

Any cap on that rate --

Roger Read - Natexis Bleichroeder

You said an option, I weren't aware that there was any option on other than --?

Michael R. Dawson - Senior Vice President and Chief Financial Officer

No, it's --

Roger Read - Natexis Bleichroeder

Okay.

Michael R. Dawson - Senior Vice President and Chief Financial Officer

WTO bring on rate.

Roger Read - Natexis Bleichroeder

Okay. Great thank you.

Operator

Your next question is from the line of David Smith with J. P. Morgan; please proceed.

David Smith - J. P. Morgan

Good Morning.

Jon A. Marshall - President and Chief Executive Officer

Good morning, David.

David Smith - J. P. Morgan

Just look at fleet status update, I noticed a three month contract with the Adriatic VI, looks like it was marked down to the high 160s versus the low 180s on last fleet status. Also saw the qualification for the contract filler listed a low 210s on last fleet status qualified a 210 in Cambodia or 190 in Thailand on the update. Just wondering if you could add some color on those items, maybe where else we might see exposure to downward revisions on existing commitments.

Richard J. Hoffman - Vice President, Investor Relations

Yes. David this is Richard. On the Adriatic VI, that 160 is net of tax. It probably should really be shown at the low 180s. We've just reflected what the actual dayrate is for the operators obligated bill to tax. I think to be consistent with the rest of fleet status, we'll probably show that again in the next fleet status of 180. On the other rig you talked about with different rates, we just wanted to mention it dependent on where it would go, would have a different rate structure. But again, it is a tax issue, the difference or different tax issues in different countries so, net other taxes, we get the same thing.

David Smith - J. P. Morgan

Okay, so no concerns about maybe being marked down on a --?

Richard J. Hoffman - Vice President, Investor Relations

Sometimes we backed on because of a market issue which is because of the tax issue.

David Smith - J. P. Morgan

Okay great, thank you.

Operator

[Operator Instructions]. And your next question is from the line of Lucas Darrell [ph], please proceed.

Unidentified Analyst

Good morning. I was just wondering, you mentioned the standard dayrates for jackups; I didn't really catch that, could you repeat that please.

Michael R. Dawson - Senior Vice President and Chief Financial Officer

You might be referring to the comment about the North Sea where we said the rights on standard jackups for the Southern North Sea are north of 200 and we differentiated that from the harsh environment jackup sort of capable working in the Central North Sea which were at a much higher level.

Unidentified Analyst

Yes, that's what I was referring to, thanks. And the other question was regarding the visibility, you mentioned first quarter '08 I would believe that few quarters back this... the visibility was a bit longer, do you share the same view?

Michael R. Dawson - Senior Vice President and Chief Financial Officer

Are you speaking to the jackup market?

Unidentified Analyst

Yes.

Michael R. Dawson - Senior Vice President and Chief Financial Officer

Visibility really hasn't changed, we can see about 12 months out from now and hence that drives out confidence that appears to be still sufficient to land to keep not only the existing play to jackups internationally busy but also to some... all 15 new builds that will be delivered between now and mid next year.

Unidentified Analyst

Okay. Thank you.

Operator

Your next question is from the line of Ian Macpherson. Please proceed.

Ian Macpherson - Simmons & Company

Hi, just a quick follow-up. I heard the question asked about may be building another development driller and I was wondering if I could get your thoughts on where the leading edge costs are for the rig like that today?

Jon A. Marshall - President and Chief Executive Officer

Ian, the indications are that rigs of that type will be ex-shipyard probably $750 million.

Ian Macpherson - Simmons & Company

Okay. That would be all in cost?

Jon A. Marshall - President and Chief Executive Officer

No. that would be an ex-shipyard cost.

Ian Macpherson - Simmons & Company

Okay.

Jon A. Marshall - President and Chief Executive Officer

That would be an ex-shipyard cost. That would not include capitalized interest, it wouldn't include the crew up start up for the rig mobilization to the first location, costs like that.

Jon A. Marshall - President and Chief Executive Officer

Okay. Thanks Jon.

Operator

And the next question is a follow-up from A.J. Please proceed.

Arun Jayaram - Credit Suisse First Boston

Hey Roger, on Rowan's call, they mentioned speaking on North Sea that they had received a commitment on the Gorilla VI jackup at a dayrate kind of ranging from 330 to370 with the Thomson BG Group. Are you seeing similar opportunities for the Galaxy class rig in that price threshold?

Roger B. Hunt - Senior Vice President, Marketing

Yes, I will be reluctant to comment on AJ. Do you have a sense of what the term was?

Arun Jayaram - Credit Suisse First Boston

It was 450 days firm with options that could be up to 915 days. It is very interesting and it could be drilling in production but I was just trying to getting your senses of that fixture?

Roger B. Hunt - Senior Vice President, Marketing

e certainly see in our series of project that class of rig will access mid next year and then obviously replace to say, that kind of prices.

Arun Jayaram - Credit Suisse First Boston

And just on a technical

Roger B. Hunt - Senior Vice President, Marketing

We are able to get 300,000 on a short term project here on the Magellan shale, the rates that I referred to was I think the company was Rowan, the last fixture was at 270.

Arun Jayaram - Credit Suisse First Boston

Okay, that's helpful, Roger. Thanks.

Operator

And your next question is from the line of James Stone with Cambridge Investment. Please proceed.

James Stone - Cambridge Investment

Hi. I just want to delve into kind of look the outlook of the jackup market. I understand based on what you have in terms of visibility, contracts that you see right now, but if you kind of sat back and try to do a actual demand model aside from what you have in hand. Would you think that the jackup market stays in balance down mid '08 based on what you know, what your customer demand, may look like kind of an outlook for oil demand growth etcetera, or is that kind of factored into your outlook when you say you can see out until middle of '08 things are kind of balanced?

Jon A. Marshall - President and Chief Executive Officer

Jamie, I tried to answer this earlier and I really haven't changed my thoughts on this. We just don't have visibility after that point and we took the same position last year at this time, we just didn't have visibility out that far.

Michael R. Dawson - Senior Vice President and Chief Financial Officer

And one comment I would also add to that is that I think in this kind of a market, our customers ought to be quite reluctant to share what the demand might be on jack-ups. Just in-house that that they may can cool things down a little bit. So I think that's part of this element that you don't get visibility much beyond 12 months.

Jon A. Marshall - President and Chief Executive Officer

And Jamie, just to be clear, I am not trying to sent a signal by that comment that I am making, it's just how I have viewed the markets for quite some time.

James Stone - Cambridge Investment

Okay. I guess are you surprised that your customers thought that the market was going to loosen up gone the middle of next year, are you surprised that they are not already putting more downward pressure on rates given that booming supply?

Jon A. Marshall - President and Chief Executive Officer

Well, it may say something to their actual perception of what the market's going to be that they haven't attempted to do that. I don't know Jamie, it's really speculation.

James Stone - Cambridge Investment

Okay. Thanks.

Operator

And your next question is from the line of Ole Slorer with Morgan Stanley. Please proceed.

Ole Slorer - Morgan Stanley

Yes, thank you very much. If you look much of the import market and you look at the number of rigs that are under construction, the number of projects that are being contemplated beyond what's under construction. What would it take for you to get concerned in an environment when the oil price outlook is a reflection of the strip, concerned about potential over supply?

Jon A. Marshall - President and Chief Executive Officer

Well, not in elements to that Ole. The... I've always been concerned about the growth in new builds. One of the issues that has given me comfort recently in the deep water market has simply been the identifiable demand that we see into the out years. One of the things we've seen recently is the... with this continuing increase in new build announcements, it appears as though that the number of rigs that are uncontracted in the new build queue hasn't substantially changed, so that incremental demand is accommodating the continued growth. In terms of the oil price, I am not as focused on the strip as I aim on the out, on the five year deferred price and if you look at that, we are still on back gradation on the five year deferred price and the deferred price seems to be supporting near term prices and I think it's reflective of the overall supply demand dynamics and I spoke of them in my comments.

Ole Slorer - Morgan Stanley

What you think might be the trend that the Pemex appear to be following Petrobras in disintermediating the sort of less than drillers by helping start-up local companies to build a local supposed service base in what the latest contract awards. And do you think that others like ONGC or in Malaysia or Indonesia also that follow that trend and try to create the backing of local contractors?

Jon A. Marshall - President and Chief Executive Officer

Ole, I think that is true, I think if you look at the increasing nationalization of the resource space, you can expect to see a domino effect down through the oil service sector, where there will be a clear preference over time for national drilling contractors and I think it may change the strategic model for a number of companies; I think that, that will be the trend.

Ole Slorer - Morgan Stanley

Okay, thank you very much for sharing your thoughts on that.

Operator

And we have no further questions and I would like to turn the call back to Richard.

Richard J. Hoffman - Vice President, Investor Relations

Thank you very much Paul and thank you for your participation on our conference call today. A replay of this call is available through the teleconferencing service beginning at 1 PM Central Time today until midnight Central Time on August 16th. The number to call is 617-801-6888; the reference code is 42335869. You may also access the webcast replay on our website at globalsantafe.com and obviously, if you have any questions please don't hesitate to call me at 281-925-6441. Thank you very much.

Operator

Thank you for attending today everyone. This concludes the presentation, have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: GlobalSantaFe Corp. Q2 2007 Earnings Call Transcript
This Transcript
All Transcripts