Noble Corp. Q3 2007 Earnings Call Transcript

Noble Corporation (NE)

Q3 2007 Earnings Call

October 18, 2007 2:00 PM ET

Executives

Lee Ahlstrom - IR

William Sears - President, CEO

Tom Mitchell - CFO

David William – COO

Analysts

Ian Macpherson - Simmons & Co

David Smith - JP Morgan

Pierre Conner - Capital One

Geoff Kieburtz – Citi

Mike Drickamer - Morgan Keegan

Alan Laws - Merrill Lynch

Robert McKenzie - FBR

Angie Sedita - Lehman Brothers

Jeff [Spitale] – Natixis Bleichroeder

William Sanchez - Howard Weil

Judson Bailey - Jefferies

Phil Dodge - The Stanford Group

Benjamin Bell – Bernstein

Presentation

Operator

Ladies and gentleman thank you for standing by and welcome to the Noble Corporation third quarter earnings conference call. During the presentation all participants will be in the listen only mode. Afterwards we will commence a question and answer session. At that time if you have a question please press the 1-4 on your tone phone. If at any time during the conference you need to reach an operator please press star 0. As a reminder this conference is being recorded Thursday October 18, 2007. I would now like to turn the conference over to Mr. Lee Ahlstrom, Vice President of Investor Relations and Planning. Please go ahead sir.

Lee Ahlstrom

Thank you, Frank, for giving the introduction. And before I turn the call over to Bill Sears I’d like to go ahead and welcome you all to the call today and read the disclosure statement. I’ll remind everyone any statements about our plans, expectations, estimates, predictions or similar expressions of future our forward looking statements are subject to risks and uncertainties. Our filings with the U.S. Securities and Exchange Commission which are posted on our website discuss the risks and uncertainties in our business and industry and the various factors that could keep outcomes of any forward looking statements from being realized. Our actual results could differ materially from our expectations. We’ve included detailed balance sheet and income and cash flow statements with our earnings release. Also, because we’re on a international line when we get to the Q&A period we may experience a slight delay between speakers as we stop and pause to make sure an idea is fully completed. With that I’ll now turn the call over to Bill Sears our interim Chairman, President and Chief Executive Officer.

William Sears

Thank you Lee. Welcome everyone to Noble’s third quarter earnings call. We’re taking this call from Amsterdam where we gathered more than 200 of our senior personnel for a worldwide mid-managers meeting. You would be impressed with these mid-managers. They are solid, experienced, and a huge asset for Noble. We have a good report for you today. Joining me on the call are Tom Mitchell, our Chief Financial Officer who will talk about the quarterly results; Lee Ahlstrom our Vice President of Investor Relations and Planning will review guidance for the fourth quarter; and David Williams our Chief Operating Officer, will address marketing and operations. Julie Robertson, our Executive Vice President is also here with us.

You do not know me so I’ll say a few words on my background. I’m a civil engineer from the University of Kentucky and started my work career with Exxon at their Baton Rouge Refinery. After a turn in the air force I went into Exxon Upstream Business for some twenty years, and then with VP for fourteen more. I was Director of Worldwide Operations at VP in London when I retired. I joined Noble’s board in 1998. I am an interim leader here at Noble and we have all agreed that we’re not going to mark time while I’m here.

Noble has great employees and we’re focused on our core business of providing services to our customers better than all our competitors do. Although we have reported some slippage in our rig construction program, we expect to get this job done with good results. And Noble has a history in continuing strategy of augmenting growth by acquiring and building rigs. Where it has made sense we’ve bought companies; where it has made sense we’ve bought assets. We’ve also upgraded rigs and built new ones. Our current new-build program will add on almost $2 a share in 2010. Also we intend continued pursuing of strategy of being in the right geographies with good customers and in delivering outstanding economic returns to the shareholders.

Let me say just a few words about Mark Jackson’s departure. I know that it came as a surprise to you. I’m told by Lee there’s been rumors and in some cases, unflattering commentary on the subject. Here’s what I can say: the board of directors and Mark Jackson negotiated a separation agreement and the terms have been made public in an 8-K filing. That filing should make you comfortable that there’s nothing material related to Mark’s departure that we have not disclosed. And beyond this, we did plan to discuss his departure in this call. The board has appointed a committee to sit and find a replacement; that committee is looking at both internal and external candidates and we will move as fast as prudent.

It’s business as usual at the company. David Williams and our division managers have the operations firmly under control and Tom Mitchell and the financial organization have the financial side of the business running smoothly. Julie Robertson brings a lot of Noble experience and leadership skills to the table. And her support keeps us going. We’re in good shape here and we’re moving ahead. Let me conclude by saying that Noble is focused on performance and our future. We will have challenges to be sure, but we also have a great team that is pulling together. The bottom line is you have my commitment and the commitment of the entire Noble team to continue bringing the customer service and shareholder value that Noble is known for. With that, I’d like to turn the call over to Tom to review our financial form.

Tom Mitchell

Thank you Bill and good afternoon everybody. Last evening we reported quarterly earnings of $1.18 per diluted share on net income of $318 million. Earnings were up $0.10 per share or 9% over last quarter driven by rigs rolling to higher day rates. This more than offsets the increase in unpaid shipyard and staff pay which increased to 308 days from 121 in the second quarter. As planned the third quarter was our heaviest shipyard period for 2007 with about 40% of our shipyard dates falling within this quarter. Unplanned downtime was 1.8 % which meets our expectations for the summer months and weather disruptions have been minimal.

Contract drawing costs continue to be well in hand as you recall we have previously got it to a 15% increase in per day out-costs for the year versus our per day costs at the end of 2006, and we’re on track to deliver against that. For the first nine months of the year these costs were up 10.8%. On an absolute basis costs, were up 15 million but 11 million of this increase was driven by a fruitful quarter of costs from the Noble / and the delivery of the Noble Roger Lewis in September. The bulk of the remaining costs were primarily attributable to the annual fleet flyover costs for our operating personnel which was effective July 1st, and various revenue costs such as agency fees which increased as rigs in various international markets rolled a higher day rate.

A final positive note on costs, costs escalation or recoveries during the quarter totaled $5.1 million. In the engineering consulting and other line item, we incurred an additional 6 million related to the planned sale of the low cost rotary steerable system assets. On our last call we told you we believe we might see additional charges of $0.5 million during the third quarter; however as we continue to move toward final negotiation on the sale of those assets we’ve determined an additional write-off was necessary in this particular quarter.

Our D&A rate was up this quarter as expected by almost $10 million. SG&A was up almost $5 million this quarter on costs primarily related to legal and other fees associated with the independent investigation in Nigeria. Also during the quarter we incurred a charge of $3 million for Mark Jackson’s separation. We had a $1.6 million charge under hurricane losses; this is related to the resolution of a few open items from hurricanes Katrina and Rita. And our effective tax rate during the quarter was a little bit lower than our typical 19.5% - we had a $3 million dollar positive impact from one time tax credit that our tax group brought in the door. You’ll also notice some larger numbers in other income: net costs are higher by about $1.5 million dollars on a pre-tax basis. That increase reflects one-time costs related to the short-term loan agreement that’s disclosed in our 8-K filing on July 26. The funds were used to repay an inter-company loan in connection with the liquidation of the Norwegian entity associated with our Smedvig transaction back in 2006. In summary the charges for the quarter unrelated to our normal operations included $0.02 per share for a special investigation and a penny each for technology and separation package, offset by a penny for tax related benefits that I discussed.

Capital spending during the quarter was $363 million, up $20 million over last quarter. Now looking at the balance sheet our closing cash balance of $151 million is essentially flat with second quarter - that reflects continued spending during the quarter on our substantial new-build program and prevented us from building cash.

Many of your asked about the status of our share repurchase program that we put on hold during the second quarter. As you recall we believed that at the time it was prudent to suspend our repurchase program in light of our independent investigation into our Nigerian operation. That investigation is ongoing and I have no new details to report today. However going forward our expectation is that we will be able to resume our opportunistic share repurchase program using the remaining authority available in the program as approved by the board on the 2nd February of ’07. This is consistent with our long stated strategy of not building cash on the balance sheet and we also want investors to know that we are buyers f our stick at this current price. With that I’ll turn it over to Lee to provide some guidance for the fourth quarter.

Lee Ahlstrom

Thank you. I know that some of you were hoping perhaps for some guidance for next year but right now we’re right in the middle our budget cycle and it would be premature for us to discuss our numbers now before everything is scrubbed by the team and approved by the board so we’ll stick to talking about the fourth quarter. We are still on track on for contract drawing services cost that hold the line on a 15% increase per week operating day basis versus year end 2006 and the division managers and rig personnel are doing an outstanding job there.

Our major cost drivers this year have been labor and maintenance and operating types of costs, replacement parts and equipment and similar types of items. And at this point we really don’t see any relief in those areas for next year. Now as you have noted, SG&A has increased during the quarter and is likely to increase again in the fourth quarter.

Costs of the independent investigation are difficult to predict. On our last call we thought they would run about $6 million total over the third and fourth quarters, but it ran over $5 million in the third quarter alone and they could run as high as $6 to $8 million in the fourth quarter. Our outlook for G&A is somewhere between $80 and $85 million for the year.

In terms of DD&A, on the last call we guided you to somewhere between $300 million and $315 million for the full year. We now believe that number is going to be lower, somewhere between $290 million to $300 million, mainly driven by the timing of our capital spending. Next year, we expect DD&A to continue to trend upward with deliveries under the new build capital program.

In terms of capital for this year, we are on track to finish the year somewhere around $1.3 billion. Finally, on a net basis, we are not carrying any costs in the fourth quarter on the engineering consulting and other line. We continue to hold an outlook of 19.5% for the tax rate for the quarter.

With that, that concludes the guidance and I’ll turn the call over to David for some operational and marketing highlights.

David Williams

Hello, everybody. I’d like to begin today by addressing some of the concerns that we’ve heard from investors over the meetings we’ve had over the last month or so. By far the most often asked question goes to the strength of the international jack-up market. We know the fleet status report we issued at the end of August caused some investors to react negatively to what they perceived as cracks in market, but let me assure you we continue to see incremental demands in most markets and that along with our strong backlog gives us a lot of comfort in this part of our business.

Let’s talk about specifically the two rigs that caused some concern. Regarding the Noble Jordan, we announced the contract for a minimum of four months and a $160,000 a day. There are two things that are important on the contract.

Firstly the rig will not be engaged in normal drilling activity. Its primary role will be working as a combination and doing light workover operations. So as a result, our operating costs will be a little lower and our margin should be protected. Secondly, we took this job as a strategic maneuver to position the rig for another potential opportunity we had and that opportunity has some critical timing. Investors need to understand that there’s actually a strategy in how we position and price our rigs. It feels like everyone’s out trying to make the First Call on the top of the market, but one deal doesn’t make a market. So we’re still pretty happy with that opportunity.

On the Noble Roy Butler Nigeria we announced that Chevron elected to exercise an early termination right and released the rig. As we said previously, their decision had nothing to do with Noble. Chevron has been very happy with the operational and safe performance of the rig.

It’s been reported in the press that Chevron was having some payment issues with their joint venture partner, and our presumption is that’s why they released the rig, not because they were not happy with the rig and not because they didn’t have the work.

From our perspective, it’s actually a net positive. The Butler is currently working at a $130,000 a day. Chevron was scheduled to keep the rig, including time for a scheduled shipyard program, up until about mid-year next year. Now Chevron will release the rig early in December and it will be go straight into the RF schedule and it will be available in February for a new pricing opportunity and new contract.

We are right now in a number of discussions for opportunities for the rig, and we expect to lock something up here in a very short time and we expect the rate and the term to be something the market would be pleased with. So all in all we get to reprice the rig four months early. We think it’s a net gain for us.

So let’s talk about the market for jack-ups. It’s clear that the US Gulf of Mexico Shelf has not improved. A good number of rigs are idle now and more could be stacked by the end of the month. Our submersibles, which work on the Shelf, are not immune to this pressure and if the market stays as it is, we’ll have to consider options for those rigs including as we mentioned in our last rig status report, cold stacking one or two of these rigs. The earnings impact of this would be minimal, maybe $0.03 a share per submersible for the year, but we’ll be able to better use the crew someplace else.

Internationally we are not seeing new or higher leading edge rates but the rates we are seeing seemed to have stabilized at very healthy levels and that gives us some upside for a number of rigs in the fleet, and we should continue to deliver some strong margins.

We’re continuing to see demand for incremental jack-ups and some of the tenders and expressions of interest that we are currently following are in Mexico, we just saw Insco receive an award on a 300-foot requirement. We’re not aware of any additional rigs that could be tendered this year, but believe Pemex could have some additional requirements in 2008.

The North Sea remains a balanced market but we’re going to see some tightening there over the six months or so. Insco we believe has a rig moving to Tunisia. We’ve heard that Roland is moving one of their big rigs to West Africa and the Noble Cold Sky; the rig that we operate under a variable charter from its owner, will leave the area shortly after the first of the year and move to the Russian Arctic. All of this we think is very good news for the North Sea and in fact, we are currently in discussion for extensions of at least one of our rigs for a program in the North Sea at rates north of $200,000 a day.

In West Africa, we have five or six incremental rig needs, three or four of those will be in Nigeria, one will be just up the coast in Cameroon, one Equatorial Guinea. In the Middle East, we are hearing the Saudis talk about a significant number of incremental rigs over the next few years. Right now, there’s a tender out for four rigs from Saudi Orinco and we are participating in that opportunity. We would love the opportunity to serve Saudi Orinco and believe we should be able to bid rates that will preserve our margins when compared with our other markets where we operate in the Middle East.

We also understand there is a need for two units in the neutral zone between Saudi Arabia and Kuwait and maybe five or six more rigs in the UAE. We believe that there is not much more additional capacity in Qatar right now; we think that market is basically balanced as we sit today.

In other places around the world we see additional opportunities in Iran, India the broader Southeast Asia region and there’s even a tender out for a jack-up in Brazil right now.

Let’s move on to the deepwater market, which as you know, has been and continues to be a very strong place. In fact when people focus on the jack-up market, I think they’re missing a great story that Noble has in its deepwater fleet. Between now and mid-2009 we have eight deepwater rigs that will have opportunities to reprice. That means we have about 40% uncontracted days in 2009. Now with drill ships, we have about 60%. That represents a significant upside for us.

We’re already discussing opportunities around some of these rigs to work in that timeframe. We are also excited about the results in the recent lease in the Central Gulf of Mexico and think that’s been a strong signal for a strong deepwater market in the Gulf for a long time.

Finally, let me talk about safety and turnover performance. Our overall safety performance continues to be very strong. We did have regrettably have two serious incidents during the quarter. We spent a good deal of time here at the rig managers meeting reemphasizing the need and refocusing our efforts to be ever vigilant. We work in a hazardous business and we can’t ever forget it, particularly since the industry is working so hard to bring so many rigs into service right now. Ensuring that our colleagues remain the safest workers in the business is my top priority.

The news on turnover is very good. Through the third quarter our fleetwide turnover rate is running at about 7.5%. Annualized we continue to be on track for our best year ever in terms of retention, with a number that looks like just under 10%. On our key group of 420 people turnovers earn about 3.5% through the nine months or less than 5% annualized. We are very pleased with those numbers.

With that I will turn the call back over to Bill.

William Sears

Thank you, David. Operator, I think we are ready to take questions.

Question-and-Answer Session

Operator

Our first question comes from Ian Macpherson - Simmons & Co.

Ian Macpherson - Simmons & Co

Good afternoon. David, I just wanted to follow up with your outlook on the jack-up market for Mexico next year. I wonder if you were seeing any signals that Pemex might be interested in capitalizing on the current weakness on the US side of the market to try to set some pricing ahead of time now, or if you think that the Mexico market should be fairly well insulated from the pricing that is in the Gulf of Mexico currently?

David Williams

Well Pemex has been trying to figure out how to capitalize on the US Gulf weakness for some time. What I think they’re coming to realize now is that Mexico is an international market, and they haven’t been very successful. Our last renewals there were much more reflective of international business than the Gulf of Mexico business.

We don’t see any real effort from Pemex right now to do anything else before the end of the year. It is really too early for us to comment about what they might do next year. But we don’t see that they are trying to work to market because of the Gulf of Mexico situation.

Ian Macpherson - Simmons & Co

I wanted to ask about the contract status for the Noble Jim Day. It’s been six or seven months since the LOI was announced. I just wonder where you are with Marathon and if they have moved closer to signing the contract and what your expectations are for extending that to a four-year contract term?

David Williams

That contract is already executed for its two-year primary term. Marathon has conversion rights to turn that into a four-year contract, and that conversion right comes up about mid-year next year. The contract is already executed, and given Marathon’s position lately we feel pretty good about it. I mean they still have that right and they have not executed it yet.

Operator

Our next question comes from the line of David Smith - JP Morgan.

David Smith - JP Morgan

I was wondering if you have an estimate of the number of jack-ups under construction that would be suitable for North Sea work?

David Williams

I don’t have the number on top of my head. The bulk of the rigs that are under construction are intended primarily for deepwater operations not in the North Sea. There are some of those rigs that are under construction specifically in the North Sea, but I’m going to say it is probably 15% of the total number, I don’t have the number on top of my head, but I think that’s pretty close.

David Smith - JP Morgan

I was just thinking about the jack-ups under construction?

David Williams

That’s what I am referring to. Most of the jack-ups that are under construction are not intended specifically for harsh environment operations. They are trying to get as much leg out as the can and those environments, they are really not being heated up or quartered up for North Sea operations.

Thomas Mitchell

You realize that two of our jack-ups that are going to North Sea are going there under firm contracts already.

David Smith - JP Morgan

Just looking at M&A and growth opportunities, how do you think about the level of construction risk ultimately that you will be comfortable with?

David Williams

We have seven rigs under construction. I think we are pretty happy with that. We have delivered two, we delivered the [inaudible] drill and it came out smoking the drill its first well under budget. We delivered the Roger Lewis now; it will start it to contract pretty soon. We have five remaining to do, and I think we are pretty comfortable with that in terms of construction risk.

David Smith - JP Morgan

Absolutely, you guys have been doing a great job. I just think in terms of looking at the M&A opportunities and maybe other projects that are underway when looking at growth opportunities there?

David Williams

I think that depends on how much comfort we can give if you talked about the M&A activity as it relates to acquiring a rig under construction I think the level of structure of risk will depend on the structure of the contract under which and how much comfort we can get that the delivery price was firm. Or, if we had to assume that risk how we can get that to be predictable. So it varies from project to project based on how much comfort we can get.

Some we could get very comfortable with because we understand how the delivery contracts are structured. Some are widely variable depending on what their construction plan is. So that’s very project-specific.

Operator

Our next question comes from the line of Pierre Conner - Capital One.

Pierre Conner - Capital One

A question on the submersibles, I realize it is a small piece of business and you just told us you considered it cold stacking, again, the earnings impact is small. My question relates to the thought process. You were getting pretty good cash margin on that rig. Was it your perspective of the outlook, was it people availability? Just a little bit more on the decision to cold stack that one and what does that say about putting more in the market?

David Williams

Well, we’ve got three of those rigs and that sector of the market particularly hurricane season when all of the active rigs in the Gulf of Mexico, jack-ups and submersibles, are de-rigged, they have a pretty narrow band of operation. The customers that operate those rigs are, since Katrina and Rita, very risk adverse. So we have not cold stacked one of units yet, we have discussed it because it’s only favorable for us, we actually just landed a job or just about to land a job on one of those rigs at a cash margin we’re pretty happy with.

We’ll have to see how the next few weeks develop. There may be some opportunities for these rigs but if it becomes apparent that we are going to be beating the bottom of the market with some of these other numerous jack-ups that are out, I think it’s going to be our best interest and best for shareholders to cold-stack them.

We have the rigs that are down we have down land, we’ve got plenty of use for the people. We don’t have a people issue but with the shipyard products we have and the other opportunities in the fleet, we have plenty of use to the people. So we don’t have a people problem either too many or too few right now. So it’s a math problem; if they become a cash drain, we are not going to do it and we don’t want to wait too long because we would rather make the decision early.

Pierre Conner - Capital One

The other one relates to jack-up markets and specifically the Roger Lewis. Relative to the rate that it’s going to work, do you see that is where the market is now, was that contacted a month ago and the market has changed since then, that is the point you made not setting a new leading edge. But where is the current leading edge relative to that contract, I guess?

David Williams

Well, that deal was done long, long ago. That rate in no way reflects the current market or frankly any other rig in our fleet that jacks up and down. We think that that rate would be for renewal right now, would be well above that and I would argue, I hope Shell is on the call, I think they might have a per diem.

Pierre Conner - Capital One

But to that and again I was just trying to get a window of what you think that current market rate is?

David Williams

We haven’t started a discussion with Shell. I certainly think that we are looking at renewals in the North Sea right now for our other rigs north of 200. Roger Lewis is classed to be able to work in that market. So I would certainly think that would be a certainly a better range for that asset in the market today.

Operator

Your next question comes from Mike Drickamer - Morgan Keegan.

Mike Drickamer - Morgan Keegan

Bill, I don’t know if anyone else caught this, I may be more sensitive to this than anyone else, but given this past weekend’s football game I found it awfully ironic, you started at University of Kentucky and your first job was in Baton Rouge?

William Sears

That’s the truth and I became a pretty good Tiger fan while I lived there. But I celebrated after the Kentucky win.

Mike Drickamer - Morgan Keegan

I don’t want to hear that. Tom, I’m not sure how much you can help me with this. But you guys posted good results in the quarter, what I’m trying to figure out how to get better at modeling it next year. One of the things I think I may have been off in was in the performance bonuses. Can you tell me what the impact on the quarter was from the performance bonuses?

Thomas Mitchell

I don’t have that in front of me Mike. We can get that back to you. We are separated from our team unfortunately so our number generating capacity is not with us right now. I don’t have that level of detail right now.

Lee Ahlstrom

Mike, give Brook a call later, she is back in the office with the accounting team. She can get some details for you on that.

Mike Drickamer - Morgan Keegan

Going forward, the rule of thumb I have used is that I give you guys credit for about half the performance bonus for each of the rigs. Is that a good rule of thumb or do you think I should be higher or lower with that?

David Williams

That’s hard to predict, it is a bonus for a reason and Petrobras is a very tough customer. So I mean sometimes we do great, and sometimes we don’t. I think that is something that you need to take a shot at. Some of the rigs are earning their bonus a high percentage of the time, some of them very rarely do, but our bonus performances moderates from time to time.

Operator

Your next question comes from Geoff Kieburtz - Citi.

Geoff Kieburtz – Citi

Tom, just to clarify, were any of the non-recurring charges in the operating expense line?

Thomas Mitchell

No they wouldn’t have been. They would have been in G&A and in engineering, consulting and other.

Geoff Kieburtz - Citi

For David, you mentioned on the Lloyd Butler, the background on that rig. Can you give us some idea of what you think the market rate is for that rig now; I mean a range that doesn’t limit your flexibility?

David Williams

I can tell you the rig was at 130. Our most recent renewals for that class of rig have been well north of 150, 155 up to as high as 170. So I think somewhere in that range is reasonable.

Geoff Kieburtz - Citi

You mentioned the bidding by Aramco and it seemed some speculation in the industry press that Aramco might be shopping the market, just to make sure that they were still paying the right rate. Is there any way you have of discriminating between genuine incremental requirements versus a customer just trying to check the market?

David Williams

Well we don’t read a lot of the same stuff that you guys read, what we talk about is we try to report what we hear from our customers. The information that we get and that we report comes straight from the Saudi Aramco. We have to take them at their word. They are out for tender right now and we have to believe and our expectation is they are going to going to have the rigs.

Geoff Kieburtz - Citi

You believe they are incremental demand?

David Williams

We believe they are. They actually showed up at our office and asked us if we will participate in their tender processes. So we have to believe that they’re serious about it. They came to visit us, they called us out, wanted to know what our position in the Middle East was, why we were not more active with them, and so we decided to go ahead and pursue that opportunity with them. Yes, we believe they’re incremental.

Geoff Kieburtz - Citi

Bill, I don’t know if you can answer this question, but from our perspective what would you advise us in terms of expectation of timing and being able to identify and land a permanent replacement in the CEO position?

William Sears

Well, you know I’m not in total control of that, but just talking about how these searches go with the company that’s helping us, they put out a range to me of three to six months, and I’m a retired person, so I’m looking for it to be on the short side.

Operator

Your next question comes from Alan Laws - Merrill Lynch.

Alan Laws - Merrill Lynch

The first one is really a follow-up question to the contracting environment in Mexico. We see a recent picture from one of your competitors that moved to an index provision after a year. You have four weeks rolling in ’08; what are your thoughts around this kind of contract agreement?

William Sears

Well, we saw some of those last year. We declined to offer them. We’re aware that one of the strategies PEMEX is trying to utilize. We have not historically bid those, and it’s too early for us to speculate on what the opportunities might be and when they come up. We’ll have to see what PEMEX does. We have not historically bid on those kind of projects in Mexico.

Alan Laws - Merrill Lynch

If you have these rigs that roll off and they come with these type of things, are you prepared to pull the rigs out of the market? Is that fair?

William Sears

We will have to review that and see what the opportunities are at that time. I can’t speculate. PEMEX came out with some of those index rates before we renewed our last rigs, and we don’t have those terms in our contract. So when they came out with some of those index rates mid-year last year we declined to bid. Some people did, some people didn’t. But when they didn’t get the rigs they wanted, we weren’t forced to take those terms.

So, they’ve used them from time to time, and they have used them from time to time. So I can’t speculate on what we might do next year. Obviously our preference is not to accept those rates.

Alan Laws - Merrill Lynch

Can you speak to your reluctance to take down those rates with a firm one year and a second year follow-on with variable? Are you concerned at all with the overall market? What’s the reason why you don’t want to participate in those?

William Sears

Well, because we bid a firm term contract. We want to know that it’s firm for the term. If the rate floats, you can’t predict the cash flow and we might have other opportunities in other markets that we have more predictable cash flow. So it’s all about, when we examine the opportunities, whether they’re short term or long term, we can price anything if we know what it is. The issue there is that you can’t really predict exactly what it is if it’s got a formula tied to it.

I’m not going to tell you we won’t. I’m going to say we prefer not to, and in the past we’ve been able to get around that and be able to bid our rigs on firmly priced firm term contracts that we are very comfortable with. That is our preference.

Alan Laws - Merrill Lynch

This last question is a little more tougher question, but it looks like a pretty solid market for the jack-ups as it stands now with some capacity coming in kind of a larger way next year. You were bullish in your comments there during your prepared statement on the jack-up markets and I just wonder if you could comment on why you think the market hasn’t topped, if the leading edge rates have plateaued and the contract term duration essential evaporates? What would you characterize as a topping process?

William Sears

I think what we’ve describe is we have seen the leading edge rates, the growth of those rates slow down, and we haven’t seen the leading edge rates move up is what we’ve seen. But at the same time, we’ve still got a lot of repricing opportunities in our fleet; rigs that are working under old contracts that we’ll get a chance to reprice at current levels.

We’re still very comfortable with the pricing levels that we’re seeing for our rigs on roll rates coming up when rigs come off contract. So we’re not seeing the rate of growth; we have seen some things flatten out, but we’re still seeing good terms and good rates. So we’re very satisfied with where we are right now.

Alan Laws - Merrill Lynch

So it’s a lagged process then; as the leading edge tops, there’s still lots of opportunity here to benefit at the top of the market?

William Sears

Look, when you’re rolling as an industry, the whole fleet is rolling over to 30 days, the market moves very quick. You can count on one hand -- on just a couple fingers -- the number of jack-ups we have got available between now and next year, or between mid next year. The rate of growth is going to slow down when the number of bids and the number of new contracts slow down. So the market just doesn’t move as fast.

David Williams

Alan, if you look at last year versus this year on contract and international jack-ups signed year to date, the average term last year was about 450 days. The average term on rigs signed this year is about 500 days. So this idea that there’s no term out there just isn’t supported by the data.

Alan Laws - Merrill Lynch

I see. When all the backlog for all the jack-ups, including yours out there, which has been shrinking for the last six months comes off and we have another 25 or so rigs coming to the market, the thoughts are that this is holding up and that this is not a situation where the rates roll? Is that fair?

William Sears

Well, I mean, I think what you need to look at is as the rigs come into the markets and the opportunities are there, we’re seeing incremental demand still in markets. We’re still seeing more demand than the market can supply.

For our fleet, what we see is most of our rigs are already booked. I think we’ve already got 75% of our jack-ups booked through 2008. So , we are not looking for jobs next week, we’re bidding rigs that start in mid to late 2008 and 2009. The jack-up market has never seen that kind of backlog and strength. We’re still seeing incremental demand and we are still seeing opportunities. That tells us there’s still more demand than there is supply.

Alan Laws - Merrill Lynch

Lee, so the numbers that you’re using there, the rigs that have rolled onto new contracts and contracts that have rolled on happen to be extended, so these are contracts that were signed before and they’re just rolling on? Is that fair?

Lee Ahlstrom

I think that is probably fair Alan. This is data that we’ve pulled our rigs down, and basically looked at contracts.

Alan Laws - Merrill Lynch

It started in the first-half.

Lee Ahlstrom

Year to date in ‘06 versus what we’re seeing year to date in ‘07. Average day rate is actually about flat in ‘07 and I think number of contracts being signed is down a bit, but I think that goes right back to what David was saying. Everybody’s fleet is pretty much booked up. So the fact that there aren’t a bunch of new contracts being signed is really just tied to the fact that everybody’s booked.

Operator

Your next question comes from Robert McKenzie - FBR.

Robert McKenzie - FBR

Good afternoon, guys. My first question is kind of a derivative of David’s earlier question surrounding potential M&A activity. Phrasing a different way, if there were to be M&A activity apart from the project risk, how many rigs would you guys still be able or comfortable with staffing up, given the known projects that are out there?

William Sears

I think given our fleet capability, I think that we have talked about our ability, the breadth of the which we’ve got and the number of people we’re working on our fleet. I think we have said previously and still continue to believe, given the fact we’ve got very little turnover, we could probably manage five or more jack-ups and maybe three or so semi submersibles, or shifts. So we wouldn’t want to have to staff three shifts too deep, but I think that given a project and organization where we would bring them in over time, given our ability to grow hands and the fact that we’re already in the process of growing hands for the other rigs, I think we would be very comfortable at that level.

Robert McKenzie - FBR

My next question, ODS a couple of days ago was reporting that [inaudible] have signed a six-month contract, but there is no rate in there. Would you be able to share that rate with us?

William Sears

I think we talked about where we’re headed. I think what I said is north of 200 for one of the rigs in the North Sea, and I think that would be a good guess.

Operator

Your next question comes from Angie Sedita - Lehman Brothers.

Angie Sedita - Lehman Brothers

David, have you started discussions in the Middle East on the three jack-ups you have rolling over, early March?

David Williams

We have opportunities hanging right now, Angie, for just about everything that’s coming up before mid-year next year. So we are engaged in either conversations or bidding exercises for everything. We don’t have anything that we’re ready to report and we don’t have anything locked in yet, but we have opportunities, and I think that’s the best way to put it. We still have targets for all of those.

Angie Sedita - Lehman Brothers

Is your expectation that they would stay with the current customer and the current region or not necessarily?

David Williams

Well, it varies from rig to rig. Angie, we have opportunities for some of the rigs outside of the region, and I don’t want to get too specific, but with our breath of jack-up fleet we might be bidding one rig in there, an at the same time bidding another rig out of the area because we are trying to reassess certain assets that have might opportunities with certain customers. So we’ve got opportunities for the rigs both in the area and outside the area. I think I talked about incremental demand in the UAE and some Saudi Aramco services, certainly some of these rigs have been bid to Saudi Aramco and in at least a couple cases we’ve got some opportunities outside of that area. So I just can’t get too specific yet.

Angie Sedita - Lehman Brothers

Fair enough. Then also coming up in March of ‘08, have you seen some interest there? Are you assuming it will stay in the Gulf of Mexico or are you bidding it into other regions potentially on a longer-term contract?

David Williams

Well, the answer to that question is, yes. We have opportunities, we have dialogue going on for both short-term and long-term work in the U.S. Gulf, and we have the rig bid outside the U.S. Gulf on a couple of programs that we think provide good term and good rate visibility. So that rig rolls early, and it’s 4,000-foot capability so it has got some appeal. So we’ve got a number of opportunities for it.

Angie Sedita - Lehman Brothers

Expectation one way or the other whether it will stay here or go abroad, or evenly split at this point?

David Williams

Up until about two days ago I would have said our odds are better outside the Gulf of Mexico. We’ve got an operator who we’ve had dialogue with on and off for a good while. It’s kind of come back into the mix a little more aggressively. It is just going to depend on who jumps up and commits first and where the best opportunity is. We would certainly prefer to have a term commitment for that rig at a real rate, so we’ve got good opportunities for the rig at different places. It will just be interesting to see how this thing develops because we’ve got some opportunities.

Angie Sedita - Lehman Brothers

Finally just a follow up on the PEMEX question. We saw one of your competitors, Insco, bid a pretty decent spec rig there at a lower rate than what you have some of your rigs at currently in the region, and certainly another customer also had some renewals that came down lower. I would assume there is going to be some pressure?

David Williams

Angie, that’s why I like Noble, because there were people bidding lower than we did before we did our last bids; we had people underbidding us and we were still able go to 150 for 250-foot rig. I mean, I can’t tell you why Insco bid a 350 foot rig on a 300 foot requirement, I don’t know why they did that. But that’s what they did.

I mean, our 300-footers are all priced right at 171. They came in I think on their bid in the low to mid 160’s or so plus or minus. So they’re not far off of our number, but it’s a higher spec rig than what we would have bid on that job.

Our marketing guys have done a very good job, and our guys in Mexico have done a very good job of right-sizing our rigs and right-timing our availability to be able to put the rates in. We had people undercutting our rates and we were still able to deliver the numbers.

Angie Sedita - Lehman Brothers

When would you expect to begin conversations with PEMEX regarding the rollovers? Is it early 2008 or even late this year?

David Williams

My expectation would be early 2008. I’m sure our guys in Mexico are already having some conversations about future plans, but I think it is too early for Mexico really at this point to be able to predict exactly when they will be ready to go to tender.

Mexico has a very transparent process, and they’ll do it on their own time, but when they’re ready the bids will flow out, but in their budget cycle I think it’s a little too early right now. I’m sure there’s dialogue going on, but it’s not very specific yet. I think it’s too early to predict when and what kind of term.

It is clear that PEMEX is going to have issues and can’t drill and continue to have those issues. So I think the expectation is that they’re going to need every rig they’ve got now and hopefully more.

Angie Sedita - Lehman Brothers

The timing on the budget issues out of PEMEX that seems to be more applying to incremental rigs rolling into the region versus rigs that are already there rolling over?

David Williams

I don’t think PEMEX ever goes out for bid for anything that they don’t have funding approved for. So I can’t speak in great detail to Pemex’s budget process, but I have to assume they’re in the middle of the same exercise that we’re in. So my guess is this is early for them to start predicting exactly what their needs will be for ’08 yet.

Operator

Your next question comes from Jeff Spitale – Natixis Bleichroeder.

Jeff Spitale – Natixis Bleichroeder

First, Asia Pacific is not an area that you have participated in thus far but could you assess, I guess the opportunity a little further down the line there with respect to incremental jack-up demand and what sort of opportunities that could present for you?

David Williams

We’re not averse to that area. Our rigs are all tied up. We’ve actually bid some jobs in Southeast Asia and Australia, both actually for jack-ups and floaters, but it’s a function of proximity and other opportunities that we have in other parts of the world.

We will give great strategic weight to a real opportunity, but right now we’ve got good opportunities where we are. So we’re certainly not cutting our rates trying to put a rig in Southeast Asia right now. There are opportunities. It is the one region of the world where we don’t have a big presence. But every time you look at a jack-up job, or any job for that matter, you weigh the value of that to you and your shareholders against other opportunities you might have; and to date, our best opportunities have been where our current rigs are sitting or other places, so we haven’t pursued those as vigorously as some others have.

Jeff Spitale – Natixis Bleichroeder

Then for Petrobras, you mentioned potential incremental demand for a jack-up unit. Are they giving you any indications of interest potentially down the line in terms of de-bar units?

David Williams

Oh, yes. I mean, we’ve had had multiple conversations with Petrobras about our existing rigs and incremental rigs. They’ve been out expressing interest for some deepwater bore rigs, very recently within the last 60 days, and there is talk of another expression of interest coming out. So Petrobras, it appears, has a very strong continuing demand. They certainly have indicated very strong interest in keeping all the five rigs that we had had active down there, and then some. So yes, we’ve seen a lot of interest from Petrobras about the incremental opportunities.

Operator

Your next question comes from William Sanchez - Howard Weil.

William Sanchez - Howard Weil

Tom, you commented on the share repurchase program. I was unclear, however, if that suspension has in fact been lifted at this point and are you back in the market currently buying back shares?

Thomas Mitchell

Well it is an opportunistic program, so I’ll lead in with that. We would come in and I said we are buyers at this point. We have not initiated any transactions yet, and our lawyers are looking at it right now, and we’re optimistic that we will be able to begin again.

William Sanchez - Howard Weil

So you haven’t gotten, I guess, formal clearance yet to begin repurchasing shares if you so choose to do so?

Thomas Mitchell

No, and I would like to go ahead and come out with our 10-Q, because it gives us an opportunity to add some more robust disclosure around the issue. You can imagine there are a lot of people working on it, and it gives everybody a chance to think about it and work through what we do and do not disclose.

William Sanchez - Howard Weil

David, for you. You commented on the Roy Butler. I was curious on the Lloyd Noble, which is also with Chevron in Nigeria. My understanding is that rig also has an early termination provision. Given a contract to July of next year, can you talk a little bit about your thoughts on that rig? Am I correct in the assumption that it does have an early termination? What do you expect Chevron to do with that rig?

David Williams

You are correct on the assumption. Those are old legacy contracts that kind of keep getting extended. Those rights are embedded. We have no indication from Chevron that they don’t want to keep the rig in the future at this point in time.

I would say quite the contrary to that, the indications they have given us have been that they do have a continuing program for the rig. So I mean we don’t have a reason to believe that there is gong to be any issue with the renewal of the Butler. We haven’t commenced a conversation in earnest, but we don’t have anything yet to tell us there’s not an ongoing program for the rig with Chevron.

Operator

Our next question comes from the line of Judson Bailey - Jefferies.

Judson Bailey - Jefferies

David, one more question on international jack-up market. We look at demand, as you noted, there seems to be incremental requirements in a few different regions like the Middle East, West Africa, et cetera. But we look our in India and Southeast Asia, there are a couple of instances where contractors have agreed to a little bit lower rates and there is one jack-up actually idle and potentially another one going idle.

I’d be curious to get your thoughts on how we reconcile those two things and how you see things playing out as far as maybe the rate structure? Will that come into play in other parts of the world?

David Williams

I think there have been a number of issues in play in India, one being there have been some indigenous contractors building rigs and I think they don’t have a frame of reference for the experience level where they are comfortable bidding those rigs around the world in other markets. It is kind of like Brazilian contractors work for Petrobras. I think they feel like they are more comfortable working there and to the extent they have opportunities, they have priced to get that work.

I think on the other opportunities where non-indigenous contractors have been asked to match some of those bids, I think they look at the opportunities for those rigs and you bid those rigs there on a term job or a multi-year job and the rig is getting a very low rate by comparison to other rigs in the markets; it has probably been in India for a long time, some of those rigs have been in India for a while. To take them and kit them up for other international markets and to move them out of that area and take down time to move them and do all of that, it just doesn’t make a lot of sense.

You say I will take 147 a day, I think was what the rig went for, or 145, or whatever the rate was. Or, I have to spend some capital and then I have to move it and I have to deal with that.

I think that is a choice that contractor made based on the economics they had in front of them, and the bottom line is it is just better to take that job then it is to go fight another day in other market.

Contractors, we have all got strategies and we have all got different circumstances. What one contractor does on one job does not necessarily mean the sky is falling. You get a rig stuck in a market like that,, that may be the opportunity you are faced with, you take it.

I don’t think that means that the world is falling apart. We think India and we see good incremental opportunities in India; we are certainly watching that market closely. We bid in and out of that market sometimes, we frankly were face with a similar question on one of our bids not long ago and we elected not to match the rate. We thought we had better opportunities someplace else, and I think we proved that to ourselves. It just depends on the circumstances you have at the time.

I don’t think it changes the market dynamic. I have been in this business so long, I look at that and think it’s comical we are talking about jack-ups at $150,000 a day. That’s a big rate for a 30-year-old jack-up.

Judson Bailey - Jefferies

Understood. If I could follow up on India. You mentioned some of the indigenous contractors. With several more popping up here, is it going to make it more difficult in your mind for some of the U.S. companies to expand into that market or are we look at a situation where some of those companies are just going to continue to undercut so they can get work for their rigs and stay close to home?

David Williams

Well, it depends on how much demand they have. We certainly saw there are indigenous Mexican contractors, and we’ve dealt with those guys for 15 years. We saw an indigenous, a good Mexican contractor have a new build rig, and when we started our renewal process about a year ago, they went well below us on renewal for 350-foot rig, and they got the first job. We figured they might do that.

But when we did our renewals, we got all of ours done that we wanted to at rates that we’re very proud of. So it’s another dynamic in the market. It depends on how much demand is there. I would expect that there are indigenous Indian contractors. Of course, I can’t speak for them. They’re very smart people. They’re very capable, they can do whatever they are comfortable doing. But I would expect that they’ll be more like the Mexican contractors and the Brazilian contractors and they’ll want to work close to home. That’s just another dynamic in the market. I don’t think if there’s the kind of demand that we expect out of India that it’s going to be just a huge damper on those opportunities. There’s only so many of them out there. Once they go to work, all bets are off.

Operator

Your next question comes from Phil Dodge - The Stanford Group.

Phil Dodge - The Stanford Group

I wonder if you could go through your new builds in any cases where there have been significant delays from the original timetable?

David Williams

We can. I think we disclosed in the last fleet status report what our current situation is, and our situation today has not changed for those disclosures. We delivered the Roger Lewis and it was about five or six weeks late. The next rig in the queue is the Hans [Dual] and we reported a five-month delay on it. The rig behind that is the Dave Beard and we reported four months on that. The Scott Marks, it is very early in that process yet but just seeing what we’re facing on the other rigs we gave guidance of a three-month delay on that rig. Then the two rigs in Singapore, the Noble Danny Atkins, we gave advice of a one-month delay. Again, it’s very early. We got all the equipment and in Singapore, one month, they’ve got not a bad shot of making that up and we have given that guidance. On the Jim Day we think we’re still in good shape. So those are the delays that we disclosed previously, and that’s still where we are today.

Operator

Our final question comes from the line of Benjamin Bell - Bernstein.

Benjamin Bell – Bernstein

You didn’t mention in your comments about India and the Asian market, the shelf explorer, which I believed someone previously asked about. If you had any thoughts on why the transaction had that hot stacked in the market in that area?

David Williams

I don’t have any comment on it. I don’t know what Transocean is doing with that rig, if it’s hot stacked I don’t know whether it is between jobs or they have some work they need to do to it, I really can’t comment. I don’t know.

Let me say, one rig hot stacked in the market doesn’t scare me. When you work jack-ups, it’s not unusual to have critical timing between one operation and the other. You may be waiting on a heavy lift shift, you may have shipyard work. There is a litany of issues that could impact that. So one rig being hot stacked is not worrisome to me.

Benjamin Bell - Bernstein

Just lastly on Shell, they have announced the recent JV to build their own rig. Does this now mean that rig rates are at a level where the majors are saying they’ll build their own rigs, rather than come to you guys for new rigs?

David Williams

Every time this market moves into a cycle where we are now the majors start talking about building rigs, Petrobras has talked about it; BP in its past has owned their own rigs, most of the majors at one time or another have either owned rigs or been in partnership with rigs. I think there are some people at Conoco that would certainly talk about their last experience owning drill ships.

So I don’t see where a major operator’s hurdle rate or cost of capital is any better than ours; and they’ve got to generate the same kind of return for their shareholders that we’re looking for, for ours. So I don’t know what goes into their thinking. Their partnership may have issues, there is a whole lot of reasons why. I don’t see where they really derive the benefits of doing that, but I don’t think you’re going to see wholesale rig construction opportunities with major operators.

Lee Ahlstrom

Frank, that is going to conclude the number of questions that we take today. Ladies and gentlemen, thanks for joining us on our call and spending the last hour with us. We hope that we were able to answer all the questions that you had.

We remind everybody that a replay of the call will be available beginning today at 5 pm Central time at numbers that you can reference there in the press release. With that, we look forward to continuing to see you on the road at conferences and visiting with you at our next call. Thanks very much.

Copyright policy: All transcripts on this site are copyright 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.