Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Jeff Chastain - VP, IR

David Williams - Chairman, President and CEO

James MacLennan - SVP and CFO

Roger Hunt - SVP, Marketing and Contracts

Analysts

Dave Wilson - Howard Weil

Kurt Hallead - RBC Capital Markets

Robin Shoemaker - Citi

Mike Urban - Deutsche Bank

James West - Barclays

Ian Macpherson - Simmons

Matt Conlan - Wells Fargo

David Smith - Johnson Rice

Waqar Syed - Goldman Sachs

Alan Laws - BMO Capital Markets

Noble Corporation (NE) Q1 2012 Earnings Call April 19, 2012 9:00 AM ET

Operator

At this time, I would like to welcome everyone to the Noble Corp first quarter 2012 earnings call. (Operator Instructions) I would now like to introduce Mr. Jeff Chastain, Vice President of Investor Relations. Mr. Chastain, you may begin your conference.

Jeff Chastain

I'd like to welcome everyone to the Noble Corporation's first quarter 2012 earnings call. A copy of the company's earnings report issued last evening along with the supporting statements and schedules can be found on the Noble website at noblecorp.com.

Also I'd like to once again use this opportunity to remind you that members of the executive management of Noble will host an Analyst Day on Thursday, May the 24th. The event which will begin with a reception on the evening of May 23 will cover strategic, financial, operations and marketing discussions and will include a tour of the company's subsea control center in North Houston. Complete details on the event can be found at the home page of the Noble website. We look forward to seeing you in May.

Before I turn the call over to David, I'd like to remind everyone once again that any statements we make about our plans, expectations, estimates, predictions or similar expressions for the future, including those concerning the drilling business, market outlook and industry fundamentals; financial performance, operating results, fleet condition, performance and downtime; also tax rate, spending guidance, backlog, dayrates, contract opportunities, tenders, announcements, commitments and extension; letters of intent and finally growth opportunities, newbuild delivery costs and dates; and plans and objectives of management for future operations. These are all forward-looking statements and 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 these forward-looking statements.

Also note that we may use non-GAAP financial measures in the call today. If we do, you will find the required supplemental disclosure for these measures including the most directly comparable GAAP measure and an associated reconciliation on the website.

I'll now turn the call over to David Williams.

David Williams

Thanks, Jeff. Good morning and welcome to everybody. Joining with me today in Geneva in addition to Jeff are James MacLennan, Senior Vice President and Chief Financial Officer; and Roger Hunt, our Senior Vice President of Marketing and Contracts.

I plan to make just a few opening comments covering some of the things that we've accomplished so far in 2012, and I'll be followed by James, who will give you a rundown on the first quarter financial performance. Roger, then will give us some commentary on the excellent offshore drilling business climate and I'll then offer some closing thoughts before we begin to take your questions.

We've experienced an excellent start to 2012 with some achievements having positive long-term implications for the company. Several of these achievements occurred late in the quarter or into the month of April, so let me quickly note some of the more meaningful highlights.

We commenced operations on the Noble Bully I and the Noble Bully II, two of eight new ultra-deepwater drillships that will be added to the fleet before the end of 2014. Bully I began its five-year contract in U.S. Gulf of Mexico in late March and Bully II began its 10-year contract all through Brazil in early April. In addition, the ultra-deepwater drillship Noble Globetrotter I arrived in the U.S. Gulf of Mexico to begin final testing and commissioning before commencing its 10-year contract currently expected later this month.

Our remaining newbuild projects comprised of five ultra-deepwater drillships and six higher specification jackups are progressing on schedule in the three shipyards where they are currently being built. Collectively, these 14 premium asset additions are driving an impressive earnings and growth profile that begins this year.

Our marketing effort so far in 2012, that resulted in a significant position of the floating rig fleet availability being committed to new contracts. We secured contracts on the deepwater semisubmersibles Noble Homer Ferrington, Noble Max Smith, Noble Amos Runner and the Noble Jim Day, which recently signed an estimated 45-day contract at $605,000 a day, further evidence of a tight supply and demand fundamentals that exist in today's market.

Our contracting successes were not limited only to the floating rigs, several contracts were secured for our jackups in Mexico, the Middle East and the North Sea, where Noble continues to push the leading edge dayrate per standard units.

Furthermore, I'm delighted to announce an LOI on our first of six JU3000N higher specification jackups covering 80 months of operations in the North Sea at a dayrate of $230,000 per day. This first unit is expected to be delivered early in 2013 and should commence operations following acceptance testing and mobilization some time in the second quarter 2013, depending on the timing of heavy lift ship.

As of March 31, our contract backlog which gives us revenue visibility out into the year 2023 was at $14.5 billion, up from $13.7 billion at the end of 2011. As we close the first quarter of 2012, 77% of the available days remaining in 2012 in the floating fleet were committed to contracts some 74% in 2013 while our jackup fleet had 75% of the available days remaining in 2012 committed to contracts with 42% committed in 2013.

Absent from this backlog figure and committed days in 2013 beyond are the contracts we will ultimately signed on our three-remaining ultra-deepwater drillships and all six of our newbuild jackups. In addition to the commitment on the first jackup which I just talked about we're seeing a good deal of client demand for all of our newbuilds. Roger will cover this in his discussion and market here shortly.

Finally our first quarter operating results reflect a reduction of out-of-service timing in our floating release primarily with the U.S. Gulf and Brazil based deepwater units.

I'll spend some time on the last two conference calls addressing the systems and processes we put in place in an effort to mitigate this exposure and while we see improvement we are not where we want to be at and this effort remains a primary focus the quarter going forward.

And with that I will turn the call over to James for summary on the first quarter financial performance.

James MacLennan

Thank you, David, and good morning to everyone on the call. I've enjoyed the opportunity to meet many of you during my initial few months at Noble and I look forward to developing a meaningful dialogue as we move forward.

This morning, I will cover some details regarding the first quarter 2012 results. A few comments on the balance sheet and I will close by updating our financial guidance for the remaining quarters of 2012.

As you saw from the press release issued last evening, Noble reported first quarter net income of $120 million or $0.47 per fully diluted share on total revenues of $798 million. These results compared to net income in the fourth quarter of last year, of $127 million or $0.50 per diluted share on revenues of $751 million. A year ago, the company reported net income of $54 million or $0.21 per diluted share with revenues totaling $579 million.

I know you will recall that results from a year ago were significantly curtailed by permitting delays following the U.S. Gulf of Mexico drilling moratorium. We're happy to say that that event is behind us in most regards.

Reviewing our contract drilling services business, revenues for the first quarter of 2012 increased $27 million to $746 million. This represents an increase of approximately 4% compared to the fourth quarter of 2011. The revenue increase was attributed to four major items, first, we saw a reduction in unplanned downtime especially among our deepwater rigs in the U.S. Gulf of Mexico and Brazil and primarily driven by improved performance on the Noble Jim Day, Noble Driller and Noble Paul Wolff. This had a combined favorable impact of $19 million.

Second, we recorded higher mobilization and demobilization revenues about $16 million, mainly due to the Noble Max Smith with the relocation of this fleet to the U.S. Gulf and the Noble Paul Ramano which moved to the Eastern Mediterranean in late 2011 from the U.S. Gulf.

Thirdly, improved dayrates were experienced relative to several rigs including the Noble Jim Day which moved from 485,000 per day to 530,000, the drillship Noble Discoverer which began at two-year contract in February at 240,000 a day and in the North Sea jackup sector the Noble Lynda Bossler and Noble George Sauvageau whose dayrate improvement to 105,000 and 115,000 respectively reflects strong regional fundamental which Roger Hunt will address in detail shortly.

Also, as David mentioned, the drillship Noble Bully 1 began its initial contract in March which contributed $5.6 million to revenues in the quarter. In total, higher dayrates added approximately $15 million to revenues in the first quarter. And fourthly, we experienced higher incentive bonus revenues driven primarily by improved performance by our rigs in Brazil.

These positive factors were partially offset by an increase in out-of-service time in the first quarter resulting in a decline in fleet utilization to 74% in the first quarter of 2012 from 79% in the fourth quarter of 2011.

The out-of-service days occur primarily in our jackup operations in Mexico and the Middle-East. In Mexico, where utilization of our 12-jackups fell to 54% in the first quarter from 84% in the previous quarter, the Nobel Bill Jennings lost 60 days, while transitioning between contracts with Pemex, while the Noble Leonard Jones, Sam Noble, Earl Fredrickson and Noble Tom Jobe, each lost all of the substantial portion of the quarter for maintenance and repairs.

We can report that the Jennings and the Jones are back on contract while the contract of Sam Noble is currently expected to commence in May 2012.

The Fredrickson and Jobe remain idle but are both under consideration for new contracts. In the Middle-East region\where first quarter utilization of our 15 jackups declined to 75% from 87% in the fourth quarter of 2011.

The Noble George McLeod was idle while the Gus Androes, Chuck Syring, Charles Copeland and Harvey Duhaney were in shipyards for maintenance and repairs. The Duhaney and Syring have since return to work while the Copeland is expected to commence a three-year contract with Aramco in July. The McLeod and Androes remain idle and promising opportunities building in the Middle East region.

Contract drilling services costs for the first quarter were $420 million or approximately $5 million to $10 million below the range of guidance that we offered during our last conference call. The favorable performance relative to expectations was driven primarily by the timing of the startup of operations on the new drillships.

When compared quarter-over-quarter, contract drilling cost in the first quarter grew by approximately 10%, resulting primarily from the mobilization and demobilization of the semisubmersibles Noble Max Smith and Paul Romano, which added $15.5 million. Increased startup cost on our newbuilds just under $9 million and increased fleet activity $4 million.

Higher labor and repair and maintenance cost constituted the remainder of the balance or approximately $9 million. DDMA for the first quarter was $171 million, essentially flat with the fourth quarter of last year and below our previously provided range, also due to the delayed timing of the new vessel startup. SG&A expenses of $23 million compared to $18 million in the fourth quarter of 2011 and were in line with guidance.

The effective tax rate for the first quarter of 2012 was 16% compared to 20% in the fourth quarter and below our guidance, due mainly to favorable exchange rate impacts on our tax positions. This reduction in rate is likely to reverse in later quarters and our guidance for the tax rate for the full year remains unchanged. Capital spending during the quarter was $368 million of which $133 million was associated with our fleet expansion program. Capitalized interest during the quarter was approximately $41 million.

Addressing certain key balance sheet items, firstly, cash and equivalence closed the quarter at $209 million, down slightly from $239 million at December 2011. Accounts receivable experienced a billed of $151 million quarter-over-quarter, primarily due to large client billings associated with the mobilizations of Noble Bullys I and II and the Globetrotter I.

In February 2012, we issued $1.2 billion in senior notes with maturities of five years, 10 years and 30 years. We were delighted with the response from investors as our average coupon rate was as low as we have ever achieved as a company at 4.1%. Net proceeds of the offering approximately $1.19 billion were used to use to repay indebtedness on outstanding debt under our revolving credit facility, which increased our debt as a percentage of total capitalization to approximately 35% at the end of the first quarter. This ratio remains within our target range which caps at 40%.

Before I turn the call over to Roger, I'd like to offer some updated guidance for certain expense items and CapEx in 2012. First, we continue to expect unpaid downtime in the Noble fleet for 2012 to be close to 3.5%. We expect our contract drilling services cost to be in the range of $1.7 billion to $1.75 billion in 2012. This is slightly down from the $1.7 billion to $1.8 billion range that we mentioned in January, due primarily to timing.

For the second quarter, contract drilling services costs are expected to be in the range $425 million to $435 million consistent with our previous guidance. This increase is consistent with our expectation in January, but the cost spend was expected to move upward by about $5 million in each successive quarter.

DDNA for the full year is estimated to be in the range $780 million, with our second quarter number still expected to be in the range $190 million to $200 million. SG&A is still expected to fall in the range $95 million to $105 million, but the cost split about evenly across the quarter.

Interest expense, net of capitalized interest will range from $90 million to $100 million, which is lower than the guidance that we gave on the last earnings call, due primarily to increases caused by related startup with the three newbuilds and also lower than expected borrowing cost. Net interest expense in the second quarter is still expected to increase by $10 million to $20 million to $25 million, and increase a further $5 million in the third quarter and remaining at this level through the fourth.

As a reminder, the Noble Bully I and II drillships are in the 50-50 joint ventures with Shell, so we'll report a minority interest in our P&L in 2012. This will be identified as non-controlling interest. This is expected to amount to about $40 million per quarter, beginning in the second quarter of 2012.

We're still expecting our tax rate for the full year to be in the range of 17% to 20%. As you are aware, any changes in the geographic mix of sources of revenue, levels of profitability, tax assessments or settlements or changes in exchange rates can all affect this line.

Finally, our capital expenditures are expected to be around $1.9 billion in 2012. This includes several components; in our newbuild program, we spent $133 million in the first quarter of 2012 and anticipate spending a further estimated $500 million by yearend. Remaining CapEx in 2013 and beyond related to that program should total approximately $2.5 billion. Major projects for the full year are still expected to total approximately $800 million.

We've spent $123 million in the first quarter of which $25 million was attributed to the enhancement of our subsea program. Sustaining capital is still expected to represent $275 million of the CapEx spend in 2012 and capitalized interest is anticipated to total $125 million to $135 million. As previously guided, capital spending for the second quarter is expected to be a little over $500 million and the third and fourth quarters should run at approximately the same level each quarter.

That concludes my comments and Roger will now cover the market outlook.

Roger Hunt

Thank you, James. Good morning to everybody. We're only one quarter into this year and it looks as that will be a good vintage. The main build is brisk, particularly in deepwater and we observe excellent fundamentals. As that concludes my remarks and I'll hand the call back to David.

News of fixtures on deepwater rigs with improving dayrates and expanding contract terms is becoming a routine event. During the past quarter, over 40 rig years of commitments have been made, excluding the 26 Petrobras contract at dayrates ranging from $460,000 to $605,000. There is virtually no available ultra-deepwater capacity remaining in 2012 and operators have shifted their focus to contracting 2013 newbuilds.

The extremely tight capacity in the ultra-deepwater segment of the business is also producing strong opportunities for conventionally moored deepwater rigs. We are now witnessing tight capacities throughout the floating rig sector as evidenced by a recently reported extension on a conventionally moored semi Amos Runner in the Gulf of Mexico at a dayrate of $460,000, up from $360,000 on its current contract.

This tight capacity is not unique to the floating rigs. The standard jackup are continuing to post higher utilization and improving dayrates in most regions. It's difficult to find an offshore region, where marketed utilization of floating and shallow-water units, excluding those rigs that are cold stack and not actively marketed by the owner is less than 90%.

As David mentioned earlier, our marketing efforts during early 2012 have produced a number of nice contracts for the Noble fleet. On the floating side of our business, we secured several contracts on the semi Jim Day, essentially filling the 2012 window of availability, with dayrates ranging from $550,000 to $605,000. Also semi Homer Ferrington received an additional 150 days of work in the Eastern MED at $415,000 placing the rig under contract through the first quarter of 2013.

Following completion of its assignment in Mexico, the semi Max Smith was awarded up to three years of work in Brazil at a dayrate of $407,000, plus a bonus opportunity of up to 15%. Finally as I noted earlier, Amos Runner secured a 14-month extension at $460,000. Please note that the Ferrington, the Max Smith and the Amos Runner are all conventionally moored semi.

On the jackup side, we continue to set leading-edge pricing in the North Sea standard jackup sector, as evidence by a recent contract on the George Sauvageau, which was awarded another year at a dayrate of $140,000. Given the strong industry fundamentals, we are once again in a position to build backlog as clients increasingly look for longer-term contract duration to lockup available rigs.

Backlog as of March 31, totaled $14.5 billion with the floating rigs accounting for $12.6 billion or 87% of the total, and jackups $1.9 billion or 13%. Expressed in terms of backlog per year, we have $2.7 billion for the remaining three quarters of 2012 with an estimated $3.1 billion in 2013 and $2.8 billion in 2014. I should note that the backlog does not reflect contribution from the three Hyundai drillships and the six high-spec jackups.

I would now like to focus my comments on the deepwater sector and the firming fundamentals that are driving rapid change in this sector. The deepwater sector continues to benefit from high crude oil pricing and a growing conviction by our customers that the oil price will be sustained above the target price assumptions that drive future spending plans. The average rent price during the first quarter of 2012 was $118 per barrel. The price has not traded below $100 since late January 2010.

Also we continue to see encouraging exploration drilling successes, which is leading to an expanding base of development projects around the world. Although, we are just four short months into 2012, we have already seen 10 discoveries with an average water depth of 6,600 feet. This follows the 28 announced discoveries in 2011. Some of these discoveries have already entered or will soon enter an appraisal phase and if deemed commercial will become a field development project requiring additional years to complete.

While operator are interested in established basin such as offshore Brazil, Angola and the U.S. Gulf continues to be strong, expansion into new emerging plays is increasingly evident. For the 10 discoveries thus far in 2012, were in emerging plays offshore Mozambique, Sierra Leone, Tanzania and Israel. The remaining six discoveries were offshore Brazil and Angola.

It comes as no surprise that we have recently seen an uptick in client tendering activity focused on West Africa, especially Angola. A look at open demand from operators in 2012 and 2013 define this pretenders, tenders, probable or possible demand covering exploration appraisal and development means indicate 40 operator needs, located from Morocco to South Africa, including eight projects offshore Angola and seven offshore Nigeria.

Finally, we are seeing increased access to promising new basins. During 2011 and into 2012 we have seen offshore acreage awards by Angola, Australia, Indonesia, Kenya, Mauritania, Namibia, New Zealand, Romania, Sao Tome and U.S. Gulf. Another U.S. Gulf sale, the Central Gulf sale is scheduled for June 20, 2012. We also expect to ramp up in leasing in the Eastern MED countries following discoveries in Israel and Cyprus.

As these fundamental strengthen, so too the demand for our deepwater rigs. As you can imagine, we're delighted to be in a position to offer ultra-deepwater capacity into this healthy market environment. Operator interest in our 3M confected Hyundai ultra-deepwater drillships is building. At present, we're evaluating enquires on all three drillships, including six on our second Hyundai drillship to be delivered in late 2013.

It is increasingly clear that sustainable crude oil prices are driving operators to reassess their drilling plan. Many are well into an exercise of hygrating or prioritizing prospects around the world. We believe that some operators have already concluded that more rigs are needed to address the revised billing outlook.

Also, a trend is developing where some of the smaller EMP companies are considering trading attractive prospects to larger players in an effort to reduce their risk and the risk of their cost and the risk of operatorship. This places attractive prospects into the hands of well-capitalized names. These developments and trends that are having a positive influence on the deepwater sector are also supporting higher activity in the shallow water sector.

In addition to the commitment on our first JU3000, recently named the Noble Regina Alan, we're evaluating approximately 20 prospects for our JU3000 newbuild fleet. The capabilities of these rigs, which include 2.5 million pound hook load, 75,000 barrel of liquid mud capacity and estimated 15,000 ton of variable deck load and 159 quarters are attracting considerable operator interest.

Finally, I'll close with some comments on regional activity. In the Gulf of Mexico, Bully I and Globetrotter I has joined the fleet and will begin addressing Shell's deepwater portfolio in the region. We're eager to demonstrate the capabilities of the new Huisman multi-purpose tower configuration on these units.

The Gulf of Mexico remains one of the most active deepwater basins as it rebounds from the events of 2010. Near-term floating rig supply is essentially committed, leading to a series of rig imports over the coming months. In Mexico, 10 of our 12 jackups are on contract, two units for Tom Jobe and the Earl Frederickson are expected to return to work shortly. In the North Sea, we continue to enjoy solid contracting opportunities for our fleet of eight standard jackups of which five are now committed into 2013.

As mentioned earlier, the one-year contract for the George Sauvageau at a dayrate of $140,000 committing the rig through 2013. For the immediate future we expect contract rollovers on our jackup fleet to produce higher dayrates than those currently in place. Also note that our semi in the North Sea, the Ton van Langeveld was recently awarded two more years of work at a dayrate of $275,000 per day. The rig is now contracted into late 2014.

In the Middle East region 13 of 15 Noble jackups are under contract, four units have availability during the first half of 2012 with a promising outlook for additional assignments. Demand from Aramco will continue to have a positive impact on this region. In Brazil, we believe there will be more opportunity, although Petrobras has placed orders for 33 locally build rigs, we would not be surprised to see lengthy construction delays before initial units are ready for deployment. As a result, it's likely that Petrobras will be accessing the existing rig market to obtain additional deepwater capacity.

That concludes my prepared remarks. And I'll turn the call back to David.

David Williams

Thanks, Roger. I will reiterate the measurable progress that Noble continues to make on several fronts. First, we received an LOI on our third JU3000M jackup newbuild for 80 months at $230,000 a day in the North Sea.

Second, we've started operations on our initial deliveries of ultra-deepwater drillships, these first three units, Noble Bully I, Bully II and Globetrotter I should add approximately $500 million per year in annualized revenues, which is just a fraction of what all 14 of our newbuild assets, all eight drillships and six jakcups will contribute once they have completed and entered service between now and the end of 2014.

If you make some very general market favored assumptions and add to that, the $2.7 billion in revenues we generated in 2011, you'll began to see the magnitude of the real potential growth of revenues and earnings power coming out of the newbuild program going forward and again as Roger said, we really like what we see in the marketplace today.

As a final comment on the newbuild program I understand the concerns some of you have regarding the timely delivery of our newbuild drilling units. Considered the following the initial three deliveries of the 11 projects have remained, 10 of the 11 are located in Tier-1 yard Hyundai and Jerome. These are very well known yards and have a very long history of execution. Because of this consolidation of projects we believe the project execution risk has been lowered and the likelihood of pro-significant project delays in ship yards has reduce.

Some of you have also expressed the concerns regarding future utilization in some of our existing deepwater floaters such as the EVA designs. We've not shared these concerns and the market has supported these highly capable assets in fact as you see in the recent weeks we are continuing to place these deepwater rigs on attractive contracts as evidence by the awards on the Homer Ferrington, the Max Smith and the Noble Amos Runner very compelling rates.

Collectively our five EVA designed deepwater semis have an average of two years of contract backlog and we believe these units will continue to play an important role in the operators future deepwater drilling plans.

Also one paid downtime was a significant concern in 2011. We've approached this in a proactive manner especially pertains to subsea control systems and we expect to experience reduce levels of downtime in 2012. We still have work to do but we believe our efforts will payoff.

Finally I'm aware of the questions relating to our non-core assets divesture strategy. I want to emphasize the ongoing evaluation of our fleet will remain a component of the company's strategy as we work to reposition the Noble fleet to a more premium status. The absence of any transaction to date should not be interpreted as a change of mindset rather we are focused on delivering appropriate value for the assets.

In summary, we continue to work address the average age and the capabilities of the fleet. We're in the process of creating and in our view one of the industry's most capable fleets. With utilizing our engineering and engineering capabilities along with the talents derived from skilled and motivated workforce drive solutions for operational challenges and we're in a position to benefit from an excellent industry-fundamental environment.

We're driving increased fleet utilization, higher dayrates and numerous opportunities for our contracted premium deepwater jackup capacity. In short you are beginning to witness the true potential and investment value at Noble.

Now I will turn the call back to Jeff and we'll take some questions.

Jeff Chastain

Regina, we're going to go ahead and enter the question-and-answer phase of the call so if you will begin assembling the queue, I would like to ask you everyone to again honor our one-question, one-follow up rule, so that we can address as many questions in the time remaining, thank you.

Question-and-Answer Session

Operator

(Operator Instructions) The first question will come from the line of Dave Wilson with Howard Weil.

Dave Wilson - Howard Weil

Regarding your operations in Brazil, just kind of a bigger question to how has the recent situation down the Chevron and Transocean affected your view of operations down there, has it changed the way you see, Brazilian market longer-term or is it too early to kind of jump to any conclusions yet.

David Williams

We are jumping at conclusions, I think it is novice in the market that the market doesn't need, Dave, it's certainly a distraction. It's something that concerns all of us. It's not just an issue for Transocean and Chevron, its something that we as an industry are watching very closely.

We've got a lot of extra patriots down there, not only U.S. citizens but other nationalities and when government start doing things like this it makes people nervous. We haven't seen anything yet, it's not affecting our operation but clearly we are watching along with the entire industry.

Dave Wilson - Howard Weil

And this is a follow-up, the industry is talking a lot about labor inflation over the past couple of quarters, kind of in the high single-digits in terms of percentage increases. But given all the rigs coming in the market over the next 18 months, do you see the risk at this rate of inflation, labor inflation could even accelerate more and specifically how are you guys prepared to crew up your newbuilds being delivered over this time and are you doing anything different from what you've done in the past.

Roger Hunt

There is risk. I mean I don't think it's huge that you see the rates accelerate that fast in the 12-month period. I think we've got enough visibility. We've given I think three raises offshore in the last about 22 months or so, our plans is to stay ahead of it. Our turnover for senior rigs staff is very low, I don't think we've lost a Subsea Engineer since late last year.

And so I think at least for Noble, we've got our crews, we've got our crew development programs under control for the foreseeable future there. It's highly likely, there is going to be inflation in the wages, I don't think its naïve the way it will be. The way we're addressing it is we are developing our crews; for the way we are dressing our newbuilds we're developing our crews early. We've already got crews identified for the first two rigs for the senior positions.

We're in the process of identifying the senior rig personnel for rigs three and four. In some cases, those guys are already working in the fleet in training capacity and other places. We've got as we've talked about the subsea development, we've got subsea capability, we've got lots of subsea engineers working and training throughout the fleet. One of the things that's good about the Noble's story is we've got a lot of brand royalty with the work force. Our turnover senior rig personnel runs generally 3.5% to 4% per year, so it's very, very low.

So we have a great stable work force of senior operating personnel. So manning our newbuild rigs won't be a particular challenge for us, it will be a challenge, but nothing that we can't handle cleanly within our fleet. And we're planning for it now and we are working extras in the fleet. That's one of the reasons I think some of the expenses are little higher than we would like to see. We can't run the rig without the people and we are already working with some of these people extra in the fleet.

Roger Hunt

I might just an additional remark to Dave. With this pressure on the work force a customer sees the same kind of pressure, but they also value the contribution, that experienced people, competent people, will offer the operation. And because of that as we encourage them to think about cost escalation provisions in a long-term contracts, the more amenable to agreeing to that kind of the contract provision. So there is a way of dealing with this inflation.

Operator

Your next question will come from the line of Kurt Hallead with RBC Capital Markets.

Kurt Hallead - RBC Capital Markets

So you guys obviously paint a very strong picture for the supply demand dynamics in the offshore markets. My question relates to the potential demand pool, as you mentioned, Roger, on some of the moored rigs. Do you expect to see a similar market dynamic that occurred essentially from 2005 through 2007, a lot of stack, mid-water floaters right now coming back to work? And do you expect to see significant increase in pricing on those assets as well? So do you think the ultra-deepwater is going to do the same as it did last cycle and drag everything else up along with it?

Roger Hunt

Yes, I'd be cautious about the term, everything. The first round that you're seeing is as we're observing with our EVA class that are capable of working in 7,000 feet. The rigs that are capable in the 5,000 feet to 7,000 feet, whether they be active or not, that's where the pool is going to occur first.

I think it's a little bit early to talk about a floating rig just because that the floating rig is going to be a beneficiary of this pool. But clearly, the mid-range deepwater semis are going to benefit from in the near term the shortage.

Kurt Hallead - RBC Capital Markets

When you guys have assessed the supply demand dynamics for the floating rig market and if you can go by class on this. What is the supply shortfall as you look at into '13, not sure if you have a window visibility out into '14, yet? And if you just kind of go through ultra-deepwater, deepwater, et cetera, how do you see the supply demand balance over the next couple of years?

Roger Hunt

Well, if you look at the numbers, depending on what they look at it, that maybe somewhere between 28 to 31 newbuild ultra-deepwater rigs that are yet to be contracted. And that's from today through the end of the 2014 that we know about.

Additionally, there is some 71 ultra-deepwater rigs under contract. It's our view that most of those 71 rigs that the operators have had them, will keep them. So then if we are talking about a demand build for an additional 28 to 30 rigs, you heard me say that we're looking at 40 prospects and that's basically a West Africa story. Depending on what happens in Brazil, Brazil could have a significant impact on the demand build.

And now the data point we have mentioned over various calls is that at this construction rate or availability rate, you got to take about three rigs a month off the market. And during the first quarter of 2012, there was 14 taken off the market. So when we look at the global demand picture, one could argue that the ultra-deepwater market is imbalanced and possibly short through 2015.

Operator

Your next question will come from the line of Robin Shoemaker with Citi.

Robin Shoemaker - Citi

I wanted to ask about Mexico and the jackups that you have there, including the two that are not yet contracted, the Frederickson and Joe. Just given what's happened as you've described the jackup market globally and given the number of jackups you have in Mexico and the kind of market conditions there. Are your jackups in Mexico being marketed outside the Gulf of Mexico? And is it likely that they just or is it likely, I should say that they just continue to work for Pemex under kind of day and rig structure that you can achieve their.

James MacLennan

Yeah, Robin the way I would answer that is, you know we have a great reputation with Pemex that we have contributed probably more uptimes than anybody. Yes, there was some kind of structural disruptions over the past 12 to 18 months, but clearly Pemex needs more rigs. The rigs that are there, the number of rigs that are there are well suited to their needs for now. It would take substantial capital investment to export them, so I would say that it's likely those rigs will stay right where they are and we believe there will be demand and support them.

Robin Shoemaker - Citi

And will that market continue to have like dayrate caps as it has the last recently?

James MacLennan

Well, already they are stepping outside the formal procedures and they are direct negotiating and that is a story that we're engaged in now. It's going to be a supply and demand situation and the market will dictate how Pemex can prevail with these caps Rob, and I think it's going to be put under test here in the future.

Robin Shoemaker - Citi

One another question that had to do with the rig construction cost in Korea, Singapore. It sounds like from the way you describe the market that once you get a few more jackups and maybe one or two more of your ultra-deepwater rigs committed, you probably be looking at newbuilds. And the recent costs that we've seen announced are very low. And do you think by the time you might be in a position in the future to build additional rigs and negotiate new rig construction contracts that pricing will have meaningfully escalated from where it is today.

Roger Hunt

I wouldn't look for meaningful escalation, no. I mean the beauty of what's going on with the newbuild programs in the industry right now is primarily being driven by drilling contractors and not investors. But into 2005, 2008 it was a lot of speculation in the market, capital was available. That's not the same story, its being primarily driven by drillers now who have limited capacity and limited appetite.

So I think there is a lot of capacity in the shipyard right now. My expectation is that the prices will flatten or possible comedown some later this year or over the next year, and we look forward to that opportunity.

Operator

Your next question will come from the line of Mike Urban with Deutsche Bank.

Mike Urban - Deutsche Bank

I wanted to follow-up on those last couple of questions their on the newbuild side, I would agree with you that the market does look pretty tight; the work that we've done would suggest do you need additional rigs. And it sounds like you are considering it, what would be kind of the trigger for you, is it getting some of the additional builds, contract, is it anything around asset sales, that you've firmed up the balance sheet here a little bit with nice debt offering, what are some of the criteria that you're looking to go forward with additional construction?

Roger Hunt

Well, I mean we still got three uncommitted newbuild ships and we've got five uncommitted jackups, that's a very aggressive newbuild program that still have lot of capacity. We've got a lot of confidence in where we are and I must say, we've got floating side certainly a lot more dialogue going on that we have assets.

So to get some more of those book I think it would be meaningful. Right now we have still 11 construction projects facing us. That's by any measure a lot. We'd like to get those little further down the road, I think. But I think if you see as contract the rest of these and have good visibility on some other rigs, some of the jackups, I guess our point is, I wouldn't surprise to see us back in the yard.

We don't have immediate plans to get back in the yard. We still have some options that are available to us. But I guess we think the strength of this cycle will support everything we're doing and potentially more. So I guess the point is, don't be surprise, if you see us back in yard by the end of the year.

Mike Urban - Deutsche Bank

And then you talked about the clearly about strengthening market out there, both in the deepwater and the shallow water market, that's manifesting itself with higher rates, higher utilization, higher demand. What about in terms of the terms and conditions associated with the contracts and prior calls you've talked about trying to adjust to the new realities especially the floater side in terms of more perhaps equitable sharing of downtime risk. I just wonder if you could comment on that and if you are seeing ability to get more favorable terms and conditions as the market tightens.

James MacLenna

I like the way you say equitable sharing. I'll let Roger comment on exactly what we're working on.

Roger Hunt

Mike and the answer is yes. Since we last spoke, a quarters past and we have been able to execute a couple of contracts. And I would say that in all of those contracts if you looked at those types of provisions versus the previous contract, it's been an improvement. We got those provisions to where we believe they should be. It's going to be a journey and as you see the rates go up, then we all should be paying attention to the underlying contracts. So there is a good opportunity to have a more equitable contract in lots of provisions and that's a big one. So I assure you we're focused on it. It's a condition of all of our proposals and we're having a degree of success in moving it, the way we wish.

Operator

The next question will come from the line of James West with Barclays.

James West - Barclays

David, just a quick question for you about the newbuild drillships, there are obviously seen a lot of interest right now, what are the conversations about term on contracts for those rigs. Are we talking about three to five year contracts where you might get almost full payback?

David Williams

I'll let Roger answer that, but I can tell you we're seeing a full range from two to five and four, so I'll let Roger to give some more color.

Roger Hunt

James, let me address your question from a kind of a view point of what are we saying with operators behavior. When I think about our conversations over the past 12 months, particularly let's say, a year ago, we would characterize operators behavior as taking more of adjusting time approach.

They saw a supply bill and they thought like they had absolute plenty of access to rigs when they needed them. And so when you look back five six years ago, whereas the lead time on the project might have been two to three years, 12 months ago, people were just looking 12 months out.

There was a few exceptions, there were a couple of operators that basically saw deepwater assets as strategic assets and they contracted very long, 10 years. Of course, with Petrobras they're going with 15 year deals and that's a particular situation.

Today we see a lot more concern about access to the right rig; the right crews and I do believe it is becoming more of a strategic decision. So as you question about term, I think we'll see everything. But we're seeing you know two, three, five but you'll also see some customers go longer than five.

James West - Barclays

And obviously the psychology in the market has changed fairly dramatically in the last 12 months the way it sounds like, as you guys think about your contracting strategy versus you've obviously got a potential additional newbuild as well in the market, with the market where rates are rising fairly rapidly and it's probably hard I would think even for maybe your marketing people to know exactly where rates at certain points because they're going up so quickly. So how do you think about holding off from contracting in some of your newbuilds to given six more months or 12 more months for the ones that are build further out to see where rates go or we rather just go ahead and have the comfort of those newbuild being contracted?

James MacLennan

Holding rigs off the market to kind of wait the market out is a dangerous strategy, you know it's a cyclical business and you never know what's going to happen. We price our services and in our view is if an operator gives us a legitimate opportunity, we can price it, if it's one well or ten years, we can come up with the pricing strategy that we're happy with.

So we may strategically price if an operator asks for a two-year quote or five-year quote, there will certainly be a lot of (inaudible) that goes into how we develop that pricing structure. But if somebody gives a good opportunity on a three or five-year deal, we're going to take it.

I mean that right there, if we can get the rest of and that gives us an opportunity more and to miss an opportunity and then impact the value of the enterprise longer term is not probably what we're going to do. So if we get a good opportunity we'll take it.

Operator

Our next question will come from the line of Ian Macpherson with Simmons.

Ian Macpherson - Simmons

I know it's just been a few weeks but can you comment on what you're seeing performance wise out of the Bully rigs and give us some ideas how we should think about the utilization for those rigs over the first few quarters and service?

David Williams

So far we haven't seen anything that scares us. The rigs are operating as they're designed to operate. We have a construction side and the drilling side on the floor both sides are working beautifully, so with any new assets there are running issues, as there is newbuild rigs, there is kinks in the armor to work out but frankly the Bullys have done very well so far, so we're pleased with the kit, we're pleased the level of support that we're getting from the manufacturers.

To guide you specifically on utilization I can't do that. But we've seen no surprises and we haven't seen any reason to change our view that we're excited about the kit.

Ian Macpherson - Simmons

Then just a quick follow-up from me, back to setting dynamics for ultra-deepwater, can you measure or can you appreciate the significant difference in the pricing power that your first Hyundai drillship has with a late '13 available window compared to the contracts that we've seen on early available rigs, say rigs with '12 availability that have gotten the three to five year terms in the high 500 or 600 better, is there a backwardation today and is that shrinking, just I want to think about how to frame expectations for contracts that you might announce later this year?

David Williams

I don't want to get too specific Roger is grinning. As we eat up the 2012 capacity and as, Roger, correctly points out, the operator is looking for 2013 that shrinks it, shrinks the available capacity. In terms of expectation, I'll let Roger comment before but I don't want to set too much of an expectation. But again, we're pretty excited, what we see in the marketplace right now.

Roger Hunt

Ian, I really don't have an epiphany here that we're in the middle of a lot of discussions. And so therefore we are pricing. So we'll refrain from getting into predictions, but you'd capture the call that some of these recent fixtures have been taking advantage of being the last, girl on the dance floor. And that situation has gone. And so now operators have a little bit breathing room now, because they're now looking at projects that start 2013 and beyond. But the fundamentals that we spoke to are very strong. And so I think from a pricing perspective, we are really pleased with what we see.

Ian Macpherson - Simmons

I liked your comment that sounds appropriate.

Roger Hunt

I was concerned that the audience may not have knowledge of what I was speaking to but I was assured that it did.

Operator

Your next question will come from the line of Matt Conlan with Wells Fargo.

Matt Conlan - Wells Fargo

So I wanted to touch on the divestiture possibilities as you continue to evaluate the different avenues, a bulk sale, individual assets sales or spin-off. Has anything, any avenue become more likely or more attractive over the last three months?

David Williams

No. We continue to look at opportunities. There have been opportunities out there. We continue to look at them. Matt, we looked at one and two sale opportunities that are out there. It's one of the challenge we've got with the fleet is they're just about all working or committed somewhere. So that is just an element that that complicates any kind of divestiture. I would say that that our preference is going to be something in bulk, not 1zs or 2zs, but you don't always get your preference.

I mean the market dynamics and our desires haven't changed, likewise they don't really match up and so the challenge really is getting an appropriate value. And as I've said before, we just haven't seen a transaction yet that we can execute, that broaden up value and the door that we thought was reasonable. So as I said in my comments, we haven't given up on it. It's just getting rid of rigs, when the market becomes as energized as it is right now, it's just challenging. So we're still looking at it.

Matt Conlan - Wells Fargo

And as a follow-up, are there any prospects for reactivating the Bouzigard?

David Williams

The Bouzigard is not really on our radar screen, right now. With what's going on in the Gulf of Mexico, from a BOP configuration, it's probably better suited to an international opportunity. And if the right one pops it to that, we'll certainly pursue it vigorously. But right now, there is no method on the radar that's looks really exciting for the Bouzigard.

Operator

Your next question will come from the line of David Smith with Johnson Rice.

David Smith - Johnson Rice

Question is for, David Williams. David, am I correct in recalling that you were the VP of Marketing at the Diamond in '04 and '05?

David Williams

Well, in '95, I did sort of time at Diamond Offshore. I've been with Noble now since 2006.

David Smith - Johnson Rice

So the '04, '05 period, you probably remember that the rapid move in deepwater demand that saw the average deepwater rig backlog, you go from 400 days per rig in 4Q '04 more to you more than doubled to a 1000 days per rig in 4Q '05.

David Williams

I did.

David Smith - Johnson Rice

You were there when operator started to realize, they just couldn't get the rigs they wanted, when they wanted. So I want to ask given your background and the history, what kind of urgency you're seeing from the operators today. How that has changed, maybe versus six months ago and whether do you think operators adequately anticipate just how tight the markets are becoming?

David Williams

I would say, operators don't ever accurately anticipate how fast the market is coming. Almost all operators operate almost all prospects in partnership with other operators. So they do share information. I would say based on what our marketing guys are telling us now, Roger and his guys, who are far better marketing team then I ever dreamed to be in.

The level of excitement and I don't want to call it a panic, but the forward view of the operating community now is probably more tightly focused than it was at that time, previously. And I think it's because they have fewer alternatives, North American gas doesn't look very exciting. U.S. Gulf on the shelf doesn't look very exciting. So deepwater around the world, A to have access, and B, there is been a lot of, as Roger talked about a lot of success. So I think that they are tightly focused on those opportunities. So I think everybody is a little bit better forward looking now than they were in the past.

David Smith - Johnson Rice

And quick follow-up question, regarding the comments that you're evaluating the hygrating fleet and you're focused on getting the appropriate value. Do you have an opinion on whether a private or public sale could be the best path to secure that appropriate value?

Roger Hunt

Either way, we could entertain any kinds of transaction that brought the appropriate value for our shareholders. The shareholders own them. And we have these bankers come in and say we get a half-turn must be given away. We don't want to give them away. And we think they got value. So it's either, you know, private equity or public company, either one would be a reasonable access strategy for us, given the strength of whoever the buyer is. And the value that we can derive from what the assets is involved in transaction.

David Smith - Johnson Rice

So if you have not seen that value yet from the private side, so is it safe to assume that you're looking at maybe working towards the public side.

Roger Hunt

I wouldn't assume anything other than what we have already said. We're just going to assume that it's a deal that we couldn't do.

Operator

Our next question will come from the line of Waqar Syed with Goldman Sachs.

Waqar Syed - Goldman Sachs

You had mentioned a number of times access to the right rig, what are the key features you think on let's say a fourth-gen rig that EMP company or operator is looking for that may differentiate one rig from another and similarly for a second or third-gen rig. You know is the word right rig that I just wanted to get some more color on the definition?

David Williams

Depending on when you ask that question, I think you'll get a different answer. I think you're trying to get to what kind of drawer somebody refer to in terms of as ultra-deepwater rates go up. You know one of these less capability floaters, what are we going to see there.

I think one of the big differentiating feature is probably today is the rig up of the BOP subsea system. I think there will be certain standards, but some of these all the rigs may have difficulty in meeting as operators take their standards from the Gulf of Mexico to other areas. So that would be one feature that you would look closely at.

Waqar Syed - Goldman Sachs

And second, just one quick question on your CapEx, the newbuild CapEx $2.5 billion that you have coming up, could you split it for 2013 and 2014, what is due in '13 and what is due in '14?

James MacLennan

We have not provided that guidance. We will update the CapEx guidance each quarter but we've not broken it out by year beyond the next 12 months.

David Williams

Most of the newbuilds are back and loaded where I think 60% is due of the construction prices due on delivery. So you can probably do the math and the total value, it's back into the number.

Operator

The final question will coming from line of Alan Laws with BMO Capital Markets.

Alan Laws - BMO Capital Markets

Two quick ones, West Africa, it's clearly a hot market deepwater, but also it seems like there is a more of a material uptick in demand for jackups. Even in Nigeria there has been some nice increases in dayrates. You got a number of rigs their to finish the contracts later this year, could you talk a little bit about your rate expectations and the importance of the Nigerian market to add to what is already kind of a tightening Africa situation?

Roger Hunt

Nigeria is a very important market for the last 10-20 years. Unfortunately there are so many kind of structural hurdles that our customers have to work through now as we do with local content issues. There is a lot of confusion in that market. So it's very important. If you have removed all of these kind of geopolitical type of issues then, I think there will be a big demand build. In the absence of that these dayrates changes that you're seeing now, nice as they are. Industry has done a good job of kind of limiting the fleet there. Hats off to the some of our competitors.

The other aspect is that cost increases in Nigeria and new cost are delivered to us everyday. So a lot of this dayrate jump is just catching up with cost, it's a very expensive place for the business now. But having said all that, you're right. Recent jackup fixtures for 250 where around 140 and that's where they needs to be. So any rollovers that we have, we would certainly be looking for market rate.

Alan Laws - BMO Capital Markets

Another quick one here to more general one, it seems like the cost shocks are declining for you and really the sector at large. I want to know, has the storm now passed or is there more volatility to come, maybe essentially, are you sort of, Dave, you'd like this one, you stand in your ground with your hands around the throat of the cost (inaudible), can you provide your thoughts on that?

David Williams

Alan, we're always trying to stand our ground. There is going to be cost creep. We're not uncomfortable where we guided you through this year. We feel good about our assets to labor. What happens in individual markets that's where the shocks going to come from. But we feel good about where we are right now.

I think we've got a hand along what we got in front of us. We'll see how it goes next year. There is a lot of things to play into it. I mean if the deepwater market or if the newbuild market kind of slows a little bit that will impact the price of goods and services, rope, soap, and dope. If it starts to accelerate again that has a different impact. So right now, we feel pretty good about where we are. Again, it's naive to believe the costs are going to go up, but I don't think they'll going to be crazy.

Jeff Chastain

Okay, well with that we'll go ahead and close today's call. I'd like to thank everyone for your participation today. Make a note that our second quarter '12 earnings release will be on July 18 with the call on the 19 and we'll confirm those dates about three to four weeks out. I am available to take any follow-up questions over the day. Regina, thank you once again for your coordinating the call. Good day, everyone.

Operator

Thank you, ladies and gentlemen. This does conclude today's conference. You may now disconnect.

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: Noble's CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts