Grey Wolf Q3 2007 Earnings Call Transcript

Grey Wolf, Inc. (GW)

Q3 2007 Earnings Call

October 29, 2007 10:00 am ET

Executives

David Wehlmann - EVP and CFO

Tom Richards - Chairman, President and CEO

David Crowley - EVP and COO

Ron Hale - SVP, Business Development

Analysts

Jim Rollyson - Raymond James

Jeff Tillery - Tudor Pickering

Ian Macpherson - Simmons & Company

Mike Urban - Deutsche Bank

Mike Kelly - Kennedy Capital

Bill Sanchez - Howard Weil

Wagar Syed - Tristone Capital

Mike Clark - Satellite Asset Management

James Mooney - Decade Capital

John Curber - Bennett Management

Presentation

Operator

Welcome to the Grey Wolf third quarter 2007 Earnings Call.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded today, Monday October 29, 2007.

I would now like to turn the conference over to Mr. David Wehlmann, Executive Vice President and Chief Financial Officer. Please proceed, sir.

David Wehlmann

Good morning, everyone. We'd like to welcome you to Grey Wolf's third quarter 2007 earnings conference call and webcast.

We released earnings this morning before the market opened. If you need a copy of the release, one is available through the Investor Relations page on our web site at gwdrilling.com.

Participating with me today on the call are: Tom Richards, our Chairman, President, and Chief Executive Officer, and David Crowley, our Executive Vice President and Chief Operating Officer. Ron Hale, Senior Vice President of Business Development is also in the room with us here today.

We believe that it is in the best interest of our shareholders and the investing community for us to make forward-looking statements in our press releases and in today's call. All statements made today that are not statements of historical fact, are forward-looking statements.

The specific forward-looking statements cover our expectations and projections regarding dayrates, average daywork revenue and EBITDA per day, rig activity, expected new rig delivery schedules and costs, availability of term contracts, the future success of turnkey drilling, rig supply and demand, our projected tax rate, interest expense, depreciation, and capital expenditures. The forward-looking statements made in today's call are subject to a number of risks and uncertainties, many of which are beyond our control.

Please refer to our 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2007, for additional information concerning risk factors that could cause actual results to differ materially from the projections made in today's call. These forward-looking statements may be relied upon, subject to the previous Safe Harbor statement as of the date of this call, and may continue to be used until November 12, 2007.

Now, I'd like to turn the call over to Tom Richards.

Tom Richards

Thank you, David, and good morning to everyone.

I will begin by discussing our third quarter 2007 results and recent additions to our rig fleet. David Crowley will provide details on activity in our various markets. David Wehlmann will then review financial information on the Company, before I conclude with a few brief remarks on our market outlook prior to the Q&A session.

Net income for the third quarter was $0.17 per share, compared with $0.25 per share a year ago. Third quarter EBITDA totaled $83.7 million, with daywork generating $73.6 million, and turnkey $10.1 million of that total. Daywork EBITDA, per day, was $8,379. That is down from the second quarter of '07 amount of $9,430 per day.

Turnkey EBITDA was $12,133 per day, and this is down approximately $400 per day from the second quarter of this year. An average of nine rigs ran on turnkey contracts during Q3. Turnkey represented approximately 9% of the total days worked, and more than 12% of EBITDA.

Overall, the Company averaged 104 rigs working this past quarter,--the same as the second quarter, which is down three rigs from the third quarter of '06. While Grey Wolf continues to generate strong operating results, the influx of newly built drilling rigs in the market is pressuring Grey Wolf's year-over-year average rig days, as well as contract renewal rates.

A year ago, leading edge bid rates were $18,000-$27,000 per day. In the past several months, rates have been fairly flat at $14,000-$22,000 per day. Other contractual areas, such as mobilization recoveries, are also experiencing downward pricing pressure.

We are protected, however, from these market fluctuations, to some extent, by our significant long-term contract portfolio, which allows us to focus intently on Grey Wolf's long-term growth strategy. Our high quality rig fleet is capable of addressing the technical challenges our customers face today.

I would like to recap some of the quarter's events, whereby we continued to upgrade our fleet in a very financially prudent manner. In early July, we closed on a purchase of two 1500-horsepower rigs that were built in 2006. The seller, in turn, signed a three-year contract for each of the rigs for Grey Wolf to operate the rigs in East Texas.

In August, we deployed a newly built 1,000-horsepower SCR rig under a two-year term contract in Colorado. We have taken delivery of all six new 1500-horsepower rigs that we ordered last year. All are working under long-term contracts.

We entered into contracts with two exploration and production companies to deploy two new 1500-horsepower built-for-purpose AC rigs, under three-year commitments in the Rockies. These rigs will be delivered next year.

And now, I'd like to turn the call over to David Crowley, to discuss activity in each of our respective markets.

David Crowley

Thank you, Tom, and good morning to everyone.

Today, Grey Wolf is marketing 121 rigs, versus 112 a year ago. Of those, 61--or 58% of the 106 rigs working--are under long-term, daywork contracts; 37 are working under spot market daywork contracts; and eight are working under turnkey contracts.

We estimate 40 more new builds will enter the market before year-end, with another 40-60 units expected in 2008. This would bring the new build entries to 370 in 2006, 288 in 2007, and an estimated 50 in 2008.

The tapering off of market entrance is more pronounced in the refurbishment market. Older rigs put back into service, or refurbished rigs, totaled 130 in 2006; 52 in 2007; and we expect a negligible amount, if any, to enter the market in 2008. Of note, 30 new build units entered the market in Q3 2007, compared to 85 in Q3 2006, with nine refurbished units coming back into service in Q3 '07 compared, to 30 in Q3 '06.

Turning now to a comparison of permitting for new wells, mid-October year-to-date 2006, versus 2007, our Ark-La-Tex and Gulf Coast operating divisions were essentially flat, with the Mid-Continent division showing a 5% increase in permitting in the oil provinces of West Texas where Grey Wolf currently operates, and an 11% decline in permits issued for Oklahoma.

The Rockies showed a 6% decline in permitting, which can be attributed to a 10% decline in the Pinedale area in Wyoming, where our clients are currently waiting for a completion of Phase I of the Rockies Express pipeline, which is expected in Q2 '08. We expect the commissioning of this pipeline to be the catalyst for an incremental increase in activity in Wyoming in the second half of 2008.

Lastly, South Texas division showed a 10% increase in permitting year-over-year, and we will continue to take advantage of opportunities to redeploy units into this area. We have an average of, approximately, 58 rigs contracted under term contracts for the remainder of 2007, and 31 rigs committed in 2008. We have eight rigs working on turnkey contracts today, and we expect an average of seven to nine rigs working turnkey in the fourth quarter of 2007.

Top drives also continued to add value at the well site. These units are commanding a premium of up to $3,000 per day, in addition to our dayrate. We currently have a total of 29 units deployed.

Before I recap activities in our various markets, I want to point out that you can see the breakdown of average rigs, running by market area, in the press release distributed today. You also can go to our web site to see a complete list of rigs.

In the Ark-La-Tex market, the Company averaged 25 rigs running in both the second and third quarters of 2007. We are marketing 29 rigs in the Ark-La-Tex, and 26 are currently contracted. This market area has been one of the highest concentrations of term contract demand and activity, with 19 of the 26 rigs working on term contracts.

In the Gulf Coast region, we have 25 rigs marketed. We averaged 22 rigs running in the third quarter of 2007, compared with 24 rigs running in the second quarter. There are 21 rigs currently contracted. Four of these rigs are working turnkey in this market area, and another eight rigs are under term contracts.

In our South Texas division, we have 31 marketed rigs. We average 28 rigs running in the third quarter, compared with 27 running in the second quarter of 2007. There are 29 rigs working this morning, with four of these drilling under turnkey contracts.

We recently moved a 900-horsepower unit from the Ark-La-Tex division into South Texas, in order to optimize utilization for this asset class. We have 11 of our rigs in the market working under term contracts.

In the Rocky Mountains, our fleet totaled 16 rigs; and we average 14 rigs working in the third quarter, compared with 13 rigs running in the second quarter of 2007. 14 are working today; of the 14 rigs, 10 are under term contracts.

A new 1500-horsepower rig, and the 1,000-horsepower rig we constructed, were both deployed in the Rockies in the third quarter, and three previously marketed rigs were moved to inventory. Our two build-for-purpose rigs scheduled to be delivered in 2008 will be deployed in this market, under three-year term contracts.

The Mid-Continent market area encompasses West Texas, Oklahoma, New Mexico, and the Barnett Shale area in North Texas. We have 18 marketed rigs in this division.

We average 14 rigs working in the third quarter of 2007, compared with 15 rigs running in the second quarter. 14 are at work today. We have 11 rigs working term contracts in this market.

Turning to international. In Mexico, two rigs commenced operations in the third quarter. Both of these rigs are from our fleet of 3,000-horsepower diesel electric rigs, and are working under three-year term contracts. We are actively pursuing opportunities to deploy more units into the northern and central areas of Mexico, either directly with Pemex, or through contracted integrators as Halliburton and Schlumber Jay.

That completes my remarks, and I will now turn it over to David for his financial review.

David Wehlmann

Thank you. I'll start with the income statement. As Tom mentioned, net income for the third quarter of 2007 was $35.6 million, or $0.17 per share, compared with net income of $55.3 million, or $0.25 per share, for the third quarter of last year. Net income for the second quarter of this year was $41.7 million, or $0.19 per share.

EBITDA for the third quarter of 2007 totaled $83.7 million, compared with $91.7 million for the second quarter of 2007. EBITDA for the third quarter of '06 was $108.9 million.

Third quarter daywork EBITDA was $73.6 million, compared with $82.2 million in the second quarter. Daywork EBITDA per rig day was $8,379, and that compares to $9,430 in the second quarter of this year.

Turnkey EBITDA per rig day was $12,133, down about $400 from the second quarter. Please see our press release for disclosure on EBITDA per day for daywork and turnkey, and a reconciliation of EBITDA to net income.

Turning to the balance sheet, we had cash of $255.1 million, and working capital of $336.2 million as of the end of the quarter here, on September 30th, and our debt to total capitalization ratio was down to 29.5%.

Our long-term debt is $275 million. The fourth quarter interest rate on our $125 million of floating rate convertible notes is 5.2% per annum. $69 million of our $100 million credit line remains available, with the difference being outstanding letters of credit for insurance purposes.

Total assets at the end of the quarter were $1.2 billion, and stockholders equity was $657.5 million, again, at the end of the quarter.

Under our previously announced plan that authorized the repurchase of up to $150 million of Grey Wolf common stock, the Company has purchased 13.6 million shares, and has spent approximately $93.1 million of the authorization under this program. This represents 7% of the common shares outstanding, when we started the program back in May of 2006.

Capital expenditures for the quarter were $67.3 million, and $190.1 million for the first nine months of this year. For the entire year, we remain on track for capital expenditures to be between $200 million-$210 million.

We currently have 61 rigs working under term contracts. On average, we would expect to have approximately 58 rigs working under term contracts for the last quarter of '07, and we have 31 rigs committed in 2008, and 17 rigs committed in 2009.

When you translate this into days, we have 5,340 days contracted for the fourth quarter; 11,350 days committed in '08; and 6,070 rig days in 2009. Obviously, this is a point in time measurement, and, as we add additional term contracts, the totals could increase.

Now, looking into the fourth quarter of '07, we expect to average somewhere between 97-100 rigs working, with seven to nine of those performing turnkey services. Our average daywork EBITDA per day is expected to increase by about $600-$800, in response to fewer rigs working and pricing pressure on contract renewals and mobilization recoveries.

Depreciation expense is expected to be $26.7 million, interest expense of approximately $3.4 million, and an effective tax rate of approximately 37% ,are expected for the fourth quarter.

I'll now turn it back over to Tom for some closing remarks.

Tom Richards

Thank you, David. In closing, as David mentioned, additional new rigs are still coming into the market, and this is creating excess capacity. The effect of these additional rigs can be seen in the percentage utilization of the public drilling contractors and in pricing in the market. However, we believe that the vast majority of new rigs will be delivered by the end of this year.

In the meantime, the commodities outlook remained strong, which should cause customers to maintain significant development budgets through 2008. The 12-month strip for oil is over $87 per barrel. Natural gas prices remain very strong, with a 12-month strip near $8 per million BTU.

We can't predict the short-term fluctuations in natural gas prices, but we believe in the long-term future of the commodity, given steep decline rates from existing wells. Given our long-term belief in the commodities, and the continued attrition of the supply rigs, we believe that the long-term future for our business is extremely good.

We appreciate your participation on this call. And now we'd be happy to answer any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Jim Rollyson from Raymond James. Please proceed, sir.

Jim Rollyson - Raymond James

Good morning, guys.

Tom Richards

Good morning, Jim.

Jim Rollyson - Raymond James

Tom, could you maybe expand on whether you guys have seen…I guess…in the past few months here, you've had opportunities to purchase rigs from former customers, and sign contracts, and still sign a couple of additional rigs for new builds--specific purpose built rigs. Do you still see opportunities on both those fronts as you look forward?

Tom Richards

We would expect that trend to continue, Jim. I think that what you'll see is a number of people got into this business over the last few years that, probably, shouldn't be in the business, maybe don't have the strongest balance sheets or the capabilities to operate the rigs, and I think that those will present good opportunities for Grey Wolf. Our emphasis, of course, is always going to be on the quality assets.

Jim Rollyson - Raymond James

Got you. And, obviously, today you're seeing some softness in pricing, and just you mentioned mobilizations and a few other things. Anything you can do, or planning to do, over the next couple quarters, say, on the cost side and try to bring costs down?

I've heard a couple other guys talk about maybe cutting back on the training programs or things you normally do when things are getting a little bit softer, to help bring costs back in line. Any plans in that regard?

Tom Richards

Well, we're always focused on the cost side of the business. I think that we'll exert pressure on our vendors. Their markets are getting more competitive, too. The one thing that we won't focus on is our safety programs, and probably our training programs, as well, because in the end, utilization is important, and the work goes to those contractors that are most confident.

Now, what you will see to kind of offset the measures that Grey Wolf and other contractors do to reduce costs…obviously, as you have fewer rigs working, you have to spread your overhead against a smaller base, so that tends to kind of work against you. So, although we are focused on cutting costs, I don't think you'll see any dramatic declines there.

Jim Rollyson - Raymond James

I understood. Then, lastly--maybe David…your commentary talks about how spot rates here in the last few months have been relatively stable. Can you, maybe, give us a sense of magnitude on the delta between where spot rates are today, versus where your fleet average is on rates, or margins, or whatever metric you want to use, just to get an idea that as you roll off some of these term contracts over the next few quarters--maybe how much room is left to go?

David Wehlmann

That's a good question, Jim. Yes, it just depends on where those rates are when they roll off. I mean, our average dayrate for the third quarter was $18,738. That's all contracts. That's term and spot.

So with an average of 14-18 in the current bid range, obviously, as things roll off of term, those rates will be going down. I mean, just in this quarter we had some contracts that were in the $23,000 range that are now down around 18, and you do see that.

We've seen that kind of change from a year ago. Dayrates are down. The spot bid rates are down somewhere between 20%- 25% from a year ago.

So I know I haven't really answered your question, but, like I said, the average was about 18.7 in the third quarter's dayrates, and if we're bidding 14-18; I mean, if you pick a mid-spot there, but we have several rigs committed for '08 and '09. Hopefully, that helped a little bit.

Jim Rollyson - Raymond James

Yes. That helps. Thanks.

Operator

And our next question comes from the line of Jeff Tillery from Tudor Pickering. Please proceed.

Jeff Tillery - Tudor Pickering

Hi. Good morning.

Tom Richards

Good morning.

Jeff Tillery - Tudor Pickering

You guys have fared better than a number of the peers in the past couple of quarters, in term of utilization and rig count. It looks like in Q4 you're expecting to feel some of that pressure.

Could you talk about--is the 97-100 rig count kind of anticipatory, or is it what you're seeing already in the September and October actual utilization?

David Crowley

Justin, I'd say, as you know, we have significant contracted backlog in the fourth quarter. I would say that's probably towards the low end. As you've noticed from the notes from the call, we've redeployed a unit from our Ark-La-Tex division in South Texas, and we're migrating towards the areas that having the higher permitting, so I guess my advice is, that'd be the lower end.

David Wehlmann

And for the first three weeks of this fourth quarter we've averaged right at 101 rigs working, and we expect a couple more to roll off as the quarter goes along here; but at this point in time, there isn't a lot of visibility. We've got rigs that are stacked that we're bidding every day, and on occasion you'll get a call one day, and you'll put the rig to work within that week,\. So this is just our estimate of where we'll be for this quarter, and may, hopefully--maybe it can come out a little bit higher.

Jeff Tillery - Tudor Pickering

Thank you. And then just, qualitatively, can you talk about either regionally, or rig class, rig sizes; what is faring best; what are the most competitive markets at this point?

David Crowley

Regionally, South Texas and Ark-La-Tex are the most, I would say, robust markets. As noted in the call, Mid-Continent is fairly flat, but, of note, if you look further in the Mid-Continent region, the area under pressure due to lack of permitting, is Oklahoma, and we do not currently have any units deployed there.

We do feel confident in the fact that Mid-Continent, particularly in West Texas, is more of an oil province, so you saw permitting is fairly robust there. So I would say that Rocky Mountains is down, due to that Rockies Express issue that we hope is, more or less, just a time dependent, and Gulf Coast and Mid-Continent are flat for now.

Tom Richards

You know, I think one thing that we feel fairly good about, is that as our term contracts roll over, we still are able to put a high…place a high percentage of those, extend them on term contracts, and correct me if I'm wrong, David, but in the third quarter--of 11 contracts that came up for renewal, seven of them were extended again, on term contracts. So, we would basically, on balance, think that utilization is going to remain fairly flat, while the supply continues to modestly increase from this point forward.

Jeff Tillery - Tudor Pickering

All right. My last question is just around the mobilization recoveries. In market nine, twelve months ago, mobilization was basically full dayrate. What would that pricing be today?

David Crowley

I'm going to let Ron answer that question.

Ron Hale

What we're seeing is varied pricing on mobilizations for our customers. Some are asking for 90% and 80% of the dayrate, instead of the $500 less than the operating dayrate, and that's what we're having to go to, in order to secure the work. We're seeing more of that today than we have been, and I expect that to continue as the supplies stays at the level it's at.

David Crowley

And another thing that's happened in that market, is that a year ago there were no maximum days on the moves. There were no caps. And today there are caps on the move days.

Tom Richards

One of the things, though, that I would focus on--there's nothing that Grey Wolf, in general, can do about a market that has a temporary over supply of rigs today. But what you should look at is on a relative basis, and the fact that we currently have 61 rigs under term contracts is a tremendous plus for Grey Wolf, because what that means, if you also take the turnkey rigs out of there, we have a very small percentage of our fleet that's actually on the spot market that is influenced by the pricing pressure on the mobilization; so on a relative basis, Grey Wolf is well-positioned.

Jeff Tillery - Tudor Pickering

Alright. Thank you very much, guys.

Tom Richards

Thank you.

Operator

Our next question comes from the line of Ian Macpherson from Simmons & Company. Please proceed.

Ian Macpherson - Simmons & Company

Hey, good morning.

Tom Richards

Hi, Ian.

Ian Macpherson - Simmons & Company

First question, I guess, is if you have any other irons in the fire with regards to customer-supported new builds, and, if so, would you anticipate three-year contract opportunities to still be out there for specialized equipment?

Tom Richards

I'd rather not talk about what's in the mill or what's not in the mill. Obviously it's a competitive market. We think that you will see, continue to see, some purpose-built new rigs and the length of the term could be two years to two or three years, or maybe even longer.

Ian Macpherson - Simmons & Company

Tom, when you announced your last new builds, also indicated that a few of the rigs were moving out of the marketed fleet and into the inventory pile. Is there a number of rigs that we should think about in the Grey Wolf fleet that would be considered marginal, that we might want to maybe consider using as at least decoys for being taken out of the fleet throughout '08, if the rig count does not improve?

Tom Richards

No, Ian. In fact, thank you for giving me this opportunity to address our high-quality fleet. As you will recall, we took five rigs out of our fleet last year, and we've continued to do that over a period of time.

And what we did, was we took--unlike a lot of people--instead of building brand new rigs, we took advantage of the market over the last two or three years to significantly upgrade our existing fleet, and we did that on the basis of long-term contracts, and in many cases, converted rigs to SCR rigs; and in all cases, significantly improved the mobilization and the performance of the rigs. So, I don't think that you will see any more announcements of this type from Grey Wolf, although, hopefully, you would expect to hear something from our competitors.

David Wehlmann

Yes, Ian, this is David. We've been very proactive about this. I mean, if you--like Tom said--we actually sold five rigs in early '06, and then we took seven and moved them to inventory in '06, and then we've done that here again in '08--the three; so our 121 rigs that we are marketing today are top notch rigs.

Ian Macpherson - Simmons & Company

Got you. Thanks, David. If I can have one quick follow-up for you.

I'm not sure when the contracts with Pemex started in the third quarter, but can you say if those rigs influenced your cash margins or dayrates, either upward or lower, based on kind of when they started, and what influence we might see of them sequentially from the third quarter and the fourth quarter, in terms of impacting your margins?

David Wehlmann

In the third quarter, we got started in August--late August--on one of the rigs, and in mid-August on the other. We had all of our start-up costs basically in the second and third quarter, so it was basically a breakeven; a little bit of a loss in the third quarter on this stuff, and then, the fourth quarter will be what we expect, going forward as far as profit margin.

Ian Macpherson - Simmons & Company

Okay. Great. Thank you.

Tom Richards

Thank you, Ian.

Operator

Our next question comes from the line of Mike Urban from Deutsche Bank. Please proceed, sir.

Mike Urban - Deutsche Bank

Thanks. Good morning.

Tom Richards

Good morning, Mike.

Mike Urban - Deutsche Bank

Guys, you gave a pretty good rundown of the market, in terms of where you see rates and capacity additions, and was trying to get a sense from the various players in the market, yourselves included, what your sense is of both rigs leaving the market to Mexico--not only your own, but others as well, as what the overall level of attrition is, if you have a sense for it?

Tom Richards

David, do you want to try that?

David Crowley

Yes, Mike. On the Mexico front, I'll just give you a band, but we see in 2008 somewhere between six and 24 units going to Mexico, and that's the very broad end of the spectrum.

David Wehlmann

That's the industry.

David Crowley

In the industry, yes. And then, as far as attrition goes, I think I mean activity, about th--Tom and his experience here--I will say this, that there are different style issues with the contractors. We've actually taken rigs out of service; others may put them down as idle. I think you can probably read between the lines better than I can on this, but I defer to Tom on that.

Tom Richards

Historically, the attrition rate has run around 40-50 rigs a year. I think, because of the opportunities internationally, and Mexico, as well as other places, you'll see more rigs taken out of service than that.

And also, technological obsolescence will some of the low end, smaller, lower horsepower, inadequate hydraulics that are on some of these older mechanical rigs--because of technological obsolescence, you'll see a number of those that don't return to the marketplace.

Mike Urban - Deutsche Bank

And I apologize if you answered this before, I don't know if I missed it…David, it sounded like you said you're expecting an increase of $600-$800 a day in the margin. Was that meant to be a decrease, or I may have just heard it wrong?

David Wehlmann

It's a decrease.

Mike Urban - Deutsche Bank

Okay. That's what I figured.

David Wehlmann

That's from contracts rolling over and stuff at lower rates.

Mike Urban - Deutsche Bank

Okay.

David Wehlmann

What we have talked about.

Mike Urban - Deutsche Bank

Okay. Great. That's all for me. Thank you.

Tom Richards

Thank you.

Operator

And our next question comes from the line of Mike Kelly from Kennedy Capital. Please proceed.

Mike Kelly - Kennedy Capital

Hi, Tom.

Tom Richards

Good morning, Mike.

Mike Kelly - Kennedy Capital

You said in your press release that your ultimate plan is to bring value to shareholders. With the stock down 20% over the last year, I just want to hear, get some more clarity, how you think shareholder value could be created going forward? It seems that slowly adding and refurbishing rigs hasn't really done the trick.

Tom Richards

Well, it depends upon from whose perspective that you look at. I mean, we have the greatest earnings that the Company has ever experienced in '06 and this year just a little bit less than that. We've grown the Company, improved the balance sheet, and we're focused on the long-term rather than the quarterly basis.

We're buying back shares. We bought back almost $100 million, and what we expect to do going forward is to continue that. But we're going to take a longer-term view at it as opposed to a short-term view.

Mike Kelly - Kennedy Capital

Okay. So primarily share buyback, then, would be the catalyst?

Tom Richards

No, really, what we'd like to do is grow the business, we can do that through accretive acquisitions as well as the addition of additional assets that are based upon term contracts, nothing on speculative basis, but our real goal is to grow the Company, and I think that there will be opportunities to do that as we go forward.

Mike Kelly - Kennedy Capital

Okay. Thank you.

David Wehlmann

Thank you. Operator, Adam, do we have any more calls?

Operator

(Operator Instructions). Our next question comes from the line of Bill Sanchez from Howard Weil. Please proceed.

Bill Sanchez - Howard Weil

Good morning.

Tom Richards

Good morning, Bill.

Bill Sanchez - Howard Weil

David, a question for you. The depreciation expectation fourth quarter, up again sharply from the third. Just talk to us about--is this strictly just a function of the higher CapEx we're spending to-date here? I know you retired three rigs during the quarter, and the new builds don't come until '08. What's the thought process behind the big jump there, and then, maybe you can give us some insights in '08?

David Wehlmann

Yes. The big change is because we put a lot of new rigs to work in the second and third quarter of this year. If you go back and look at it, I mean, we bought two rigs, we constructed two rigs, and we put, I think, four of the NOV rigs to work in the second and third quarters. So that type of capital going to work led to the increased depreciation.

Not only that, we have two rigs that went down to Mexico, and we spent about $14 million on those, and that's being depreciated. Some of that is on a little bit shorter life because of the nature of the asset that went down there being a lot of drill pipe.

Also, the three rigs that we moved to inventory we cut the useful lives of that equipment which adds to depreciation as well, so it's a combination of all of those things.

Bill Sanchez - Howard Weil

Okay. Okay. Any sense, David, in how you kind of think about '08 depreciation at this point?

David Wehlmann

I would expect, I mean…hang on…let me look at something here. We expect it to be $26.5 million. I would think that a $27 million to $27.5 million per quarter run rate would be pretty good for '08. Of course, we'll update that as we go along, but it shouldn't change dramatically.

When we add the two new rigs, you can look at that, it's about 20-$21 million a piece over a 15-year life, so that can help you there, as far as adding depreciation. Those will each add about $1 million a piece, so as we move later into next year, the amount will jump by $1 million, or so, a quarter. I mean, on an annual basis--so it's be about $250,000 a quarter for each of those new rigs.

Bill Sanchez - Howard Weil

Okay. One other question. Tom was asked earlier about cost management here. You made the comment about fewer rigs running, and you're spreading more costs now to those rigs. Is it safe to say, then, that on average for the fourth quarter, given that you're going to be running fewer rigs, that your average operating cost on the daywork side is probably up on just a per-rig basis as a result? Is that a fair assumption?

Tom Richards

It may be up modestly, but we are going to--I don't mean to give the impression that we're not working on a cost side of the business, too--it's just that as you spread a fixed overhead for insurance and taxes, and things like that, against a pure working rigs, that's kind of swimming uphill a little bit.

David Wehlmann

Another thing to remember, that I'd like to point out, is that the operating expenses on our Mexico operations are higher than they are in the U.S. The revenue per day is also--the dayrate--is also higher; it's just the nature of the international work. So, as we move further in, you just need to pay--we need to all pay--attention to that differentiation.

Bill Sanchez - Howard Weil

Thank you, all.

Tom Richards

Thank you, Bill.

Operator

Our next question comes from the line of Ian Macpherson from Simmons & Company. Please proceed.

Ian Macpherson - Simmons & Company

David, I just needed a quick clarification. I thought I heard you say earlier that you referred to leading edge bid range in the $14,000-$18,000 a day range. Is that what you said?

David Wehlmann

No, $14,000-$22,000.

Ian Macpherson - Simmons & Company

Okay.

David Wehlmann

Yes, what happened, a year ago they were $18,000-$27,000. That's probably where you got it. But now they're $14,000-$22,000.

Ian Macpherson - Simmons & Company

Thanks.

David Wehlmann

You bet.

Operator

Our next question comes from the line of Wagar Syed from Tristone Capital. Please proceed.

Wagar Syed - Tristone Capital

Wagar Syed, from Tristone. Good morning. David, I believe you'd previously given sometimes the backlog in revenues of term contract revenues. Do you have those numbers for '08 and '09?

David Wehlmann

I have them for all of '07 and for '08. Bear with me, just a second. Our 2007 revenue from term contracts is expected to be $531.6 million, and for '08 it's expected to be $253.6 million.

Wagar Syed - Tristone Capital

Great. Okay. And Tom, do you have any early thoughts on '08 Cap Ex?

Tom Richards

We're in the middle of that process right now, but it will be, you know, in the absence of any opportunities to build new rigs, it'll be significantly down from where it is right now.

Wagar Syed - Tristone Capital

Okay.

David Wehlmann

We'll have --

Wagar Syed - Tristone Capital

And then looking at international opportunities, other than Mexico, are you looking at any opportunity and if there is what regions?

David Crowley

We are answering tenders for opportunities in some countries in the Middle East, and we're also exploring opportunities in North Africa, and in and South America.

Wagar Syed - Tristone Capital

And these would be, primarily, for new builds, or do you see basically moving equipment out of the U.S.?

Tom Richards

It could be both. Obviously, our preference would be to move existing equipment out of the U.S.

Wagar Syed - Tristone Capital

Okay. And then there have been some talk out of Canada to move rigs from there into the U.S. market. What is your sense of what the magnitude of those, the number of those rigs could be, coming into the U.S. market?

David Crowley

Well, we haven't seen a lot of that. I know there's been a few rigs that have moved down from Canada, but we haven't--our marketing team doesn't see that as being an issue.

Tom Richards

It certainly hasn't been, and I wouldn't expect you to see very much of it. Where you have, you know, your significant mobilization costs, and it doesn't make a lot of sense to do that when there's idle rigs in the Rockies right now.

Wagar Syed - Tristone Capital

Yes.

David Crowley

And I would add to that, that there's specific rig types: there are coiled tubing drilling units that have been fairly successful in Canadian market, with the lowering of demand there; they're trying to encroach on certain areas in the West.

Wagar Syed - Tristone Capital

Right. Okay. Great. Thank you very much.

Tom Richards

Thank you.

Operator

(Operator Instructions). Our next question comes from the line of Mike Clark from Satellite Asset Management. Please proceed.

Mike Clark - Satellite Asset Management

Good morning, gentlemen.

Tom Richards

Good morning, Mike.

Mike Clark - Satellite Asset Management

Now that we're getting a lot closer to '08, I was wondering if you guys would mind running through how the 31 average contracted rigs in '08 looks by quarter?

David Wehlmann

Yes, be glad to do that, Mike.

Mike Clark - Satellite Asset Management

Thanks, David.

David Wehlmann

In the first quarter--you want days or rigs?

Mike Clark - Satellite Asset Management

Either way.

David Wehlmann

Rigs in the first quarter is 42; second quarter 31; 27 in the third; and 25 in the fourth.

Mike Clark - Satellite Asset Management

Thanks a lot, guys.

David Wehlmann

You're welcome.

Tom Richards

You bet.

Operator

Our next question comes from the line of James Mooney from Decade Capital. Please proceed.

James Mooney - Decade Capital

Good morning, gentlemen.

Tom Richards

Hey, James.

James Mooney - Decade Capital

Two quick questions. First, did I hear you correctly that you expect the Rockies Express to be on in the second quarter, not the first quarter of 2008?

David Crowley

The clients that we're speaking to, basically, are saying that that western leg will take effect or an appreciable effect by the second quarter. We do understand that there's a target for January.

Tom Richards

Correct.

James Mooney - Decade Capital

Okay. So when you say effect--that's incremental drilling, not effect of getting gas out of the basin?

David Crowley

I think it's the, you know, fully functional--and up to 100%--efficiency by the second quarter, so I am talking about gas exportation.

James Mooney - Decade Capital

Got you.

David Crowley

Then, the latent demand that we're hoping will kick in, would be second half of next year.

James Mooney - Decade Capital

Okay. And second question. It looks like kind of given the…the market at least…where the market's heading, and the fact that your Cap Ex is going to be significantly reduced, and looking at kind of your historical maintenance, that you guys could be finding yourself in a significant free cash position next year--assuming that you don't find any more of these three-year contracts for new builds. Should we expect that you're going to buy back more shares with the cash, or if we are in this situation, where you do have free cash--a large excess of free cash--what are your plans for that cash flow?

Tom Richards

I will just--that's an option for us, certainly; and the one thing that you won't see us do is just continue to see it build on the balance sheet. But our preference of the two is, as I expressed earlier, to make an accretive acquisition, or take advantage of some opportunity through the deployment of rigs internationally, which takes capital that it will basically grow the Company and provide more value for the shareholders. But in the absence of things like that, we'll continue to look at our share buyback program.

James Mooney - Decade Capital

And we should expect any international acquisition would also be based on long-term contracts, similar to your plans for domestic new builds?

Tom Richards

Yes. We don'--we try to avoid investing capital on a speculative basis….

James Mooney - Decade Capital

Thanks.

Tom Richards

…or without the benefit of term contracts.

James Mooney - Decade Capital

Thank you, very much.

Tom Richards

Thank you.

Operator

Our next question comes from the line of James Bennett from Bennett Management. Please proceed, sir.

John Curber - Bennett Management

This is actually John Curber. I'm wondering if you could comment on the infrastructure growth of LNG, and whether that is impacting the demand for rigs domestically?

Tom Richards

I don't think that I'm competent--I try to read the analysts reports on that and understand the significance of it on our business, but I can just say, today, that I don't think that LNG is having any bearing on our business. Our business is relatively strong. It's been impacted, I think, mainly by the fact that there's a few too many rigs out there.

John Curber - Bennett Management

All right.

Tom Richards

What we see is a continued acceleration in the decline rates of the wells that we're drilling; the smaller reserves.

And so you can look, and the number of wells being drilled has increased dramatically over the past couple of years, but the reserve base, or the production base--and/or the production base--has only had modest increases, so it's taken more and more wells just to maintain the same level of production.

John Curber - Bennett Management

All right. Thank you.

Tom Richards

Thank you.

Operator

There are no further questions at this time so I'll turn the call back to you.

Tom Richards

Operator, I'd just like to thank everybody for joining us on the call today. There is different ways to add shareholder value, but I can just tell that you that we look in each and every one of those and we're definitely focused in trying to do what we feel is best for the shareholders because all of us around this table are shareholders ourselves. And with that, we'd like to wish everyone a great day.

Operator

Ladies and gentlemen, that does conclude the conference for today. We thank you for your participation and ask that you please disconnect your lines.

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: [e-mail].  Thank you!