GlobalSantaFe Corporation Q3 2007 Earnings Call Transcript

Nov. 2.07 | About: Goldman Sachs (GSF)

GlobalSantaFe Corporation (NYSE:GSF)

Q3 2007 Earnings Call

November 01, 2007, 11:00 AM ET

Executives

Richard J. Hoffman - VP, IR

Jon A. Marshall - President and CEO

Michael R. Dawson - Sr. VP and CFO

Roger B. Hunt - Sr. VP, Marketing

James L. McCulloch - Sr. VP and General Counsel

W. Matt Ralls - EVP and COO

Analysts

Arun Jayaram - Credit Suisse

Ian Macpherson - Simmons & Company

Robin Shoemaker - Bear Stearns

Geoff Kieburtz - Citigroup

James Stone - Cambridge Investments

Colin Gerry - Raymond James

Mike Drickamer - Morgan Keegan

Operator

Good day ladies and gentlemen. Thank you very much for your patience and welcome to the third quarter 2007 GlobalSantaFe Corporation earnings conference call. My name is Bill and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of today's presentation. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Richard Hoffman, Vice President of Investor Relations. Please proceed sir.

Richard J. Hoffman - Vice President, Investor Relations

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

With me this morning from the company are Jon Marshall, President and Chief Executive Officer; Matt Ralls, Executive Vice President and Chief Operating Officer; Mike Dawson, Senior Vice President and Chief Financial Officer; Roger Hunt, Senior Vice President for Sales and Marketing; Jim McCulloch, Senior Vice President and General Counsel; Sherry Richard, Senior Vice President, Human Resources; Bob Herrin, Vice President and Controller; Blake Simmons, Senior Vice President of Operations; and Steve Morrison, President of Applied Drilling Technology Inc.

To the extent I will provide this call reconciliation of any non-GAAP measures discussed in this call will be available under the webcast section on the Investor Relations page of the company's website in the form of our earnings release or other materials. The Investor Relations page of the website may be accessed by going to the company's website, globalsantafe.com and clicking on Investor Relations and then webcast.

Before I turn the conference call over to Jon Marshall, I want to comment on any forward-looking statements that might be made during the course of this conference call. We believe it is in the best interest of our stockholders and the investment community to provide forward-looking information. We've done so on our earnings release and are likely to do so in this call. Our forward-looking statements include such things as our expectations for future performance and growth and our statements regarding future market demand for oil and gas and offshore drilling rigs.

Our forward-looking statements also include such things as our expectations regarding future rig utilization, dayrates, margins, estimated costs and expenses, our capital spending plans and other statements that are not historical facts. Please understand, however, that we will not respond to questions or otherwise discuss specific earnings projections or other material items not previously disclosed.

Our forward-looking statements speak only as of today and are based on available industry, financial and economic data and our operating and financial plans. They are also inherently uncertain and investors must recognize that events could turn out to be materially different from what we expect. Please refer to our earnings release and to our latest Annual Report on Form 10-K and subsequent SEC filings for more information about risk factors that could contribute to such differences.

We caution investors not to place undue reliance on forward-looking statements, and we do not undertake any obligation to update, publicly or otherwise, revise any forward-looking statements, whether as a result of new information, future events, or other such factors that affect the subject of these statements except where expressly required by law. Also, before I turn the call over to Jon, please be reminded that during this conference call, we will not discuss or respond to any questions relating to our previously announced merger with Transocean.

With that now I will turn it over to Jon.

Jon A. Marshall - President and Chief Executive Officer

Thank you Richard and thanks everyone for joining us today. I will make a few brief comments before Mike Dawson, our CFO provides some highlights on our third-quarter results and Roger Hunt, our Senior VP of Marketing updates you on the drilling markets. As you have seen in our press release, we had an outstanding third quarter. When I look at these results, what impresses me most is the consistency with which we met or exceeded our objectives in each of our operating segments. A lot of things had to go right to deliver this level of returns. Contract drilling produced strong revenues and substantially higher operating income by holding operating costs below projections. This could not have occurred without our continuing focus on reduced downtime. ADTI also turned in a very strong quarter, and Challenger Minerals again delivered solid results. As Richard mentioned, we won't speak directly to the merger this morning, but I do want to note that I am particularly proud of our people and their response with an unwavering focus on safety and delivering the strong operational performance, while managing the additional demands of our pending merger.

Thanks again to all of you for joining us today, and with that I will turn the call over to Mike.

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

Thank you Jon. For the third quarter of 2007, we reported net income of $448.6 million or $1.96 per diluted share. Excluding $12.6 million or $0.06 per share of merger related transaction cost, net income would have been $461.2 million or $2.02 per diluted share. Sequentially these results reflect an increase of $78.8 million or excluding merger-related costs an increase of $91.4 million or $0.42 a share compared to the second quarter of this year. Those results were $369.8 million or $1.62 per diluted share. The improvement was primarily attributable to an increase in pre-tax contract drilling operating income of $114.2 million from second quarter levels. Contract drilling operating income improved sequentially primarily on the strength of higher day rates and higher utilization. Average daily revenues per rig increased almost 5% to $185,200 from $177,100 in the second quarter. Utilization increased from 90% in Q2 to 96% in Q3, primarily as a result of completing the upgrade… upgrade projects for Saudi Arabia and placing those rigs back in service. Operating costs were $329.1 million excluding $16.4 million reimbursable expense or about $21 million or 6% below my guidance in our last earnings call. Drilling management services segment had a good quarter, operating profit was $8.6 million for the third quarter compared with $16.6 million in Q2, which was one of the best in the company's history. DD&A expenses and G&A excluding merger expenses were spot-on. Our guidance and our tax rate came in slightly lower at 10.4%. During July, we repurchased $80 million of stock to bring our program total to $1.6 billion. That was done at an average cost of about $58.46 per share, and as we indicated previously that buyback program was suspended pursuant to our merger agreement with Transocean. If GlobalSantaFe were to report a full fourth quarter as a stand-alone company, I would expect our contract drilling operating expenses excluding reimbursables to be in the range of $285 million to $290 million, a similar level as we projected last quarter. Our DD&A expenses to be slightly above $90 million and our G&A expenses will probably run about $25 million. G&A would typically increase in the fourth quarter because of the normal timing of the [inaudible] equity linked long-term incentives. Finally, we would expect an effective tax rate before discrete items of between 10% and 11%. With respect to income taxes, you will see in our 10-Q that we expect to file today that we were successful in the appeal of an IRS assessment of about $50 million pending from the recent audit, and we are very happy about that. That concludes my comments and I'll turn it over to Roger Hunt for discussion of our worldwide rig markets.

Roger B. Hunt - Senior Vice President, Sales and Marketing

Thanks Mike and good morning. We continue to observe a strong market in all of our regions with the exception of the Gulf of Mexico. The ultra-deep water market still displays very strong signs with customers committing on five-year contracts at rates above 500,000 and with one short-term fixture at 600,000 per day. By our reckoning, only 20 of the 65 ultra-deepwater rigs under construction for delivery between 2008 and 2011 remain uncontracted. If one looks at the rate of contracting of new build floaters over the past three quarters, about six long-term contracts have been awarded per quarter and we continue to see demand build in all deep water regions. Very positive sign was the recent Gulf of Mexico lease sale indicating that our customers still have considerable interest in deep water exploration. In the international jackup market, we continue to observe strong demand and day rates and we believe this market will be balanced through the first half of 2008. Although we still believe the market fundamentals are sound, we lack visibility to forecast demand builds for the second half of 2008. In the North Sea, both the floater and jackup markets continue to be strong. Few recent fixtures in both segments demonstrate that day rates have held nicely and in a few cases have increased. With two of our floaters having availability in the first and second quarter of 2008, GSF is well positioned in the phase of strong demand. We also observed strong demand in the jackup sector over the seven months. Also worth noting that there will be a net reduction in both the floater and jackup fleets as rig moves to contracts elsewhere. In North East Canada, we are optimistic that we will receive a long-term extension on the Grand Banks from our existing customer. The West Africa jackup market is fully employed and customers are beginning to process bids for long-term contracts commencing mid 2008. We believe there are also several opportunities for short-term programs. As witness, the recent fixture of the Adriatic VI for 90-day project commencing late 2008 at a rate of approximately 218,000 per day. Given our significant presence in West Africa, we believe GSF is well positioned to benefit from strong demand in the area. Over the past quarter, there has been a little change in the outlook for the floater market, where strong demand for deepwater projects will result in additional rigs moving to the sector. In the Mediterranean jackup market, there was a recent fixture at the 200,000 level suggesting strong fundamentals continued for the 16-rig region. We anticipate demand will be strong for the next 12 months, and with GSF having three contracts rolling during this period, we are well positioned to secure extensions at attractive rates. The floater market in the Med is strong with the current count at 8 rigs. This number will increase over the next 12-month period. Things remain balanced in the Gulf of Suez jackup market where we recently extended Rig 141 for an additional year at 115,000 per day.

In the Arabian Gulf, demand will be driven by additional requirements in Saudi Arabia, Iran and the neutral zone. Two recent fixtures suggest rate levels are holding in the 170,000 to 180,000 range for term work and with Aramco evaluating a three-rig tender, we will have new data points soon.

With all of the new builds in the Southeast Asia region is the market we and others watch closely. Having said that, we were pleased to secure four months and two-year extensions on Rig 136 in the [inaudible] respectively at 185,000 per day. We noticed however that some contractors had accepted lower rates.

In the Gulf of Mexico, our three remaining jackups are fully employed, however at rates that are significantly lower than the international rates discussed here in. There appears to be a slight uptick in the bidding activity. So, we may say a moderate increase in demand over the next two quarters.

That concludes my prepared remarks and I will hand the call over to Bill.

Question and Answer

Operator

Thank you very much sir. I appreciate that and we will go to our Q&A session now. [Operator Instructions] Our very first question comes the line of Arun Jayaram of Credit Suisse. Please proceed.

Arun Jayaram - Credit Suisse

Good morning guys. Great results.

Jon A. Marshall - President and Chief Executive Officer

Thanks.

Arun Jayaram - Credit Suisse

Roger, we saw Transocean hit the $600,000 mark on the Pathfinder. In your opinion based on the demand patterns you're seeing, is there term work in your opinion available at this rate or higher?

Roger B. Hunt - Senior Vice President, Sales and Marketing

You know I think we will see more fixtures at that level. We already here talk of another… another fixture that is probably near announcement at or above that level. I don't really have a sense for whether it's a term fixture or not Arun.

Arun Jayaram - Credit Suisse

Okay. It is fair enough. Roger or John, can you update us on what is going on in Nigeria related to some of the permit issues and SEPA matters related to Panalpina?

James L. McCulloch - Senior Vice President and General Counsel

Yes. This is Jim McCulloch. I could address that briefly. We received an extension for one of our rigs in September and we've… I think we've probably worked out process we think it will be acceptable going forward or for that issue. There's a meeting next week. The Nigerian customs has called to discuss reforms to the TIP system, whether that is going to produce any results or not is difficult to see. Our investigation continues as I am sure the investigations of the other contractors as well, and we really have nothing we can comment on in respect of what we've found so far.

Arun Jayaram - Credit Suisse

But you don't expect any disruptions in operations, would that be correct?

James L. McCulloch - Senior Vice President and General Counsel

Yes, I think we feel much more comfortable about that now. I think we and probably the industry have found a way forward that seems to be acceptable to DOJ, and as long as the Nigerian Customs Service continues to work with us, I think that… I think we probably got that issue resolved.

Arun Jayaram - Credit Suisse

Okay. My final question, Roger, we are hearing that you are one of the finalists in the Saudi tender process, which is good news. If this is true, I was just wondering if you could comment on the process, which rigs you've bid and your opportunity set here?

Roger B. Hunt - Senior Vice President, Sales and Marketing

I prefer not to get into too many details about whether we're actually in the hunt. I mean whenever… we all know that whenever there is a bid to Aramco, there is a tremendous amount of speculation as to who the successful bidder is, but to Aramco's credit, I think they keep us very close to the cuff. So, it's all speculation. We offered up a couple of rigs against 10-K requirements, one, that's in the Arabian Gulf and one that is out in the Gulf of Mexico.

Arun Jayaram - Credit Suisse

All right. Thanks a lot.

Roger B. Hunt - Senior Vice President, Sales and Marketing

You are welcome.

Operator

Thank you very much sir. Ladies and gentlemen, your next question comes from the line of Ian Macpherson of Simmons. Please proceed.

Ian Macpherson – Simmons & Company

Hi, good morning. Nice quarter. I guess my first question would be… I'd like to get your response to competitors with Rowan's announcement this morning they are adding significantly to the jackup order book. You have been in the camp of being more restrained with your demand visibility, and it seems like all of your US competitors have been in that camp, but now Rowan seems to be the first company to really step up and do something about their aggressive view of jackup demand, so I would be curious to see if you agree with that assessment.

Jon A. Marshall – President and Chief Executive Officer

Interesting question. I don't think they are the first ones to step up in terms of increasing jackup supply. I mean there has been a very considerable increase in jackup supply.

Ian Macpherson – Simmons & Company

Well, I mean among the US contract drillers.

Jon A. Marshall – President and Chief Executive Officer

The US contract drillers have been very conservative about that. It's something that we are watching very closely. I don't really have a comment about what our competitors decide to do with their capital spending.

Ian Macpherson – Simmons & Company

Okay, I'll move on. I guess a follow-up question with regards to deepwater, Roger, I think I heard you say you expect more 600 plus type dayrates in the pipeline. Can you talk about what the opportunities are for the Development Driller II, which I think is one of the handful of earlier available rigs that are currently in the market and what types of contract structures make the most sense…

Roger B. Hunt – Senior Vice President, Sales and Marketing

And I think the question about the Development II tends to qualify my remark about whether 600 is available or not. That kind of a rate is, I think at this stage of the market development, is going to be all about opportunistic availability. If you happen to have near-term availability on one of the ultra-deepwater rigs, and I describe near-term as late '08, early '09, that kind of a rate might be available. As far as the Development Driller II, it's under contract, the current customer must declare their option to extend at mutually agreeable rates by mid-2008, and I expect that we will engage in conservations with that customer shortly.

Ian Macpherson – Simmons & Company

Okay.

Jon A. Marshall – President and Chief Executive Officer

It is our expectation that the customer ABP will wish to keep that rig long-term.

Ian Macpherson – Simmons & Company

Got you. Okay. I'll get back in queue. Thanks.

Operator

Thank you very much sir. [Operator Instructions]. Our next question comes from the line of Robin Shoemaker of Bear Stearns. Please proceed.

Robin Shoemaker – Bear Stearns

Yes. Thanks. Good morning. Roger, I wanted to ask you about the Grand Banks extension. You mentioned you are in advanced negotiations and it seems like there is really not another rig of that type in that market obviously, that is kind of an advantage. Are we looking at the kind of rates that we have been seeing for this kind of older generation semi or is perhaps there a new level?

Roger B. Hunt - Senior Vice President, Sales and Marketing

Robin, I prefer to stay away from the precise rate. You've heard me mention this in the last couple of calls actually that we have been in discussions with a customer. What I can report now is that we are under a letter of intent. They are working through their approvals. We are quite confident that this transaction will be consummated. Their deliberation was to keep, as you say, a more mature rig versus replacing it with a new build, and they've taken the decision to keep the Grand Banks. I would suggest the term as likely to be more than a year.

Robin Shoemaker – Bear Stearns

Okay. My other question was, with regard to ADTI has frequently had… always has good market intelligence actually on the Gulf of Mexico market, and I wonder what their read of that market is post-hurricane season going into '08?

Jon A. Marshall – President and Chief Executive Officer

We have actually seen a slight uptick in bidding activity in the past three to four weeks. There was a steady decline up until that point, and we anticipate probably the fourth quarter to be very similar activity levels than Q3.

Robin Shoemaker – Bear Stearns

So, the slight uptick in bidding activity is for early '08 or…

Jon A. Marshall – President and Chief Executive Officer

Some of them are actually in Q4 starting in late November. The projects probably would not earn until early Q1.

Robin Shoemaker – Bear Stearns

But nothing that in terms of activity levels that would move rates off of current levels, in your view it sounds like?

Jon A. Marshall – President and Chief Executive Officer

We haven't seen any dramatic turns. I will put it that way.

Robin Shoemaker – Bear Stearns

Okay. Thank you.

Operator

Thank you very much sir. [Operator Instructions]. We have a follow-up from the line of Arun Jayaram of Credit Suisse. Please proceed.

Arun Jayaram - Credit Suisse

Roger, looking at the fleet status report, you announced some upgrade activity on the Arctic III in the North Sea. What are your future plans beyond that upgrade work?

Roger B. Hunt - Senior Vice President, Sales and Marketing

We are looking at… we are in discussions with several customers about the Arctic III and the Arctic II. Actually, those two semis probably have the earliest availability of the entire floater fleet in the North Sea. We like that. There are a lot of customers that have got programs for the summer, so that's one possible outcome. The other income is we have offered that rig to a program in Libya and the bid evaluation process is still under way.

Arun Jayaram - Credit Suisse

Okay, and what kind of rates are you… did you bid that rig in Libya?

Roger B. Hunt – Senior Vice President, Sales and Marketing

Nice try.

Arun Jayaram - Credit Suisse

It could be your last call Roger.

Roger B. Hunt – Senior Vice President, Sales and Marketing

It could be, and I'll remain until the end.

Arun Jayaram - Credit Suisse

Fair enough, thanks a lot.

Operator

Thank you very much sir. Ladies and gentlemen, we do have a question from the line of Geoff Kieburtz of Citi. Please proceed.

Geoff Kieburtz – Citigroup

Good morning.

Jon A. Marshall – President and Chief Executive Officer

Good morning Geoff.

Geoff Kieburtz – Citigroup

You had one of the your equipment suppliers say that he thinks there is going to be a jackup ordered for every jackup delivered. I know you don't have any visibility, you always said that in the past, middle of '08 on the jackup market, but Roger, if that were in fact to be a correct prediction, what do you think it would do to the rate environment for the international jackups?

Roger B. Hunt - Senior Vice President, Sales and Marketing

I guess I'll respond by saying that, that coupled with our own bullish outlook is that these are the great signs for the industry. Clearly, there is a fundamental belief that demand is going to be very, very strong. In all seriousness, we still feel very good about the jackup market, we still see very, very robust rates, you see what we have done in West Africa. There have been some great fixtures through in the North Sea, Middle East and even in Southeast Asia. What we can't see is the latter part, in particular the late part of 2008 and beyond. So, it is our belief that all the new supply that is coming under the market in the first half is accounted for. I mean I have a view that it's quite possible, if I was a customer, I would probably guard my demand build in hopes that there is some price offering and then come to the market just in time. So, that's the way we see it, it's difficult to see in the jackup market beyond nine to twelve months out.

Geoff Kieburtz – Citigroup

Do you have any sense in the conversations that you are having today that operators may be doing that already, holding back on showing their demand plans, more so than they would have a year or two ago?

Roger B. Hunt - Senior Vice President, Sales and Marketing

Well, I do. But it depends on the area, because the bidding regime in some areas takes longer than other areas, but one example might be, there is always a healthy debate as to actually how many rigs Aramco will pick up over the next few years. What they have shown is, processing three now and likely to do three more for a January 2009 start. But their actual demand build over the next couple of years could be significantly more.

Geoff Kieburtz – Citigroup

All right. In terms of those bidding regimes, what would be the one or two markets that have the longest sort of process to securing a rig?

Roger B. Hunt - Senior Vice President, Sales and Marketing

I think Southeast Asia countries probably have the longest process, West Africa… let me stand corrected. Nigeria would be the longest process. For example, the major operators there have forecasted development programs starting up mid to the latter part of 2008 and they started that process in terms of pre-qualification etcetera six months ago.

Geoff Kieburtz – Citigroup

Okay, all right. And then a question on the ADTI comments in regards to increased inquiries, I think you said that there wasn't any meaningful movement in the rate… the day rate levels that are being discussed, did I understand that correctly?

Jon A. Marshall – President and Chief Executive Officer

With our basic rig, the shallow drafts or the shallow water jackups, the rigs have been relatively flat to slightly decreasing, realizing some of the independent laid [inaudible].

Geoff Kieburtz – Citigroup

Okay. Is there any sense that there is significant demand elasticity to pricing? Are the projects that are petering on the edge of being economic based on what the rig rate is?

Jon A. Marshall – President and Chief Executive Officer

I think that that varies depending on the operator definitely or some that are on marginal economic small reserve basis that are hinged on rig prices, service prices. I don't know, but that's a majority.

Geoff Kieburtz – Citigroup

Is it any different would you say than it was a year ago?

Jon A. Marshall – President and Chief Executive Officer

I don't think so, I think it's very similar.

Geoff Kieburtz – Citigroup

Great. Thank you.

Operator

Thank you very much sir. Ladies and gentlemen, your next question comes from the line of James Stone of Cambridge Investments. Please proceed.

James Stone - Cambridge Investments

Hi, guys.

Unidentified Company Representative

Hi Jamie.

James Stone - Cambridge Investments

Firstly, I just want to say thanks for the memories.

Jon A. Marshall – President and Chief Executive Officer

Thanks for hanging with us Jamie.

James Stone - Cambridge Investments

I appreciate it. Secondly, I just wanted to talk about the new drill ship a little bit and its capabilities. And someone asked this of Transocean yesterday as to whether or not they thought that the design of your ship relative to say, the clear leader would result in potentially a day rate premium based on the bells and vessels that you're putting on this asset. And they didn't want to comment on it, because they haven't looked at it, so they say under the terms of agreement. Perhaps you could just… you obviously know what the Transocean drill ships look like, perhaps you could comment on that and how you see things shaping up in the future, and maybe even update us on your contract discussions?

Roger B. Hunt – Senior Vice President, Sales and Marketing

Yes. I'm not sure if want to address the relativity to the clear leader, because the rigs are quite different and it depends on, you know, a particular customer's requirements, and I think one of the clear leaders is BOP [ph] Systems and that is unique to that particular vessel. We are convinced that the right customer will recognize the attributes of this rig and in particular it has three load paths and has very, very large storage area. So, it has the ability to take on some of these very, very big development projects and contribute a lot to the subsea construction side of the work process in addition to the drilling completion side of it. And as we present the vessel to our customer base, there is more and more recognition of the rigs capability. So, we are very, very confident that this rig is going to be contracted and contracted at good rates. As to the specific opportunities, it has been offered up to in terms of bids right now to two customers and they are working through the bid process.

James Stone - Cambridge Investments

And so just so I understand, when you say that the rig because of its three load paths and its storage, a greater participation in the subsea development process, is the rig going to be equipped to do anything in addition to setting trees that the rig already does, or is it just that you can do that somewhat simultaneously, you know, if it's drilling into a, I guess if you are drilling into a template and you can access set trees while you are drilling next door on the template?

Roger B. Hunt – Senior Vice President, Sales and Marketing

Well, what you think about this vessel as is the Development Driller II and the Development Driller III now is that the third load path is either a crane or a winch, so that you can lower equipment from the rig or from a boat to the seabed independent of what's going on under the two load paths in the derrick. That is unique to these vessels.

James Stone - Cambridge Investments

Okay.

Jon A. Marshall – President and Chief Executive Officer

Jamie, also because of the very large clear deck area, this rig is very accommodative to the type of fraction work that is done in the lower half of the tertiary sequence. So, it's got the room to accommodate the frac tanks and so you don't have to run them off of vessels.

James Stone - Cambridge Investments

Okay. It just sounds to me that, granted it is a much more expensive asset than we've seen other people build, but you're getting…if someone is getting $600,000 a day for the deepwater path line there, which, you know, is already a nine-year-old rig and it doesn't have more than one load path as far as I remember. It seems to me that the day rates that we've seen so far for drill ships are way too low for the…what this asset could deliver to the operator in terms of cost savings?

Roger B. Hunt – Senior Vice President, Sales and Marketing

Well, I think, you know, we should remind ourselves that the 600,000 is for a four-month fixture.

Unidentified Company Representative

Well, that is close to 550 in term stuff.

Roger B. Hunt – Senior Vice President, Sales and Marketing

Yes, that was for a customer I am sure that had a commitment that… they had to drill or lose. So, the 600 was relevant, but it was more important to be able to execute. I think in time, we will see that there will be more and more customers that will realize the value equation of a unit like this drill ship and be prepared to pay more for it.

James Stone - Cambridge Investments

It's very helpful. Thank you guys.

Operator

Thank you very much sir. Ladies and gentlemen, your next question comes from the line of Collin Gerry of Raymond James. Please proceed.

Collin Gerry – Raymond James

Great, thanks guys. I just have a couple of quick follow-up questions. That same equipment supplier mentioned the trend of the national oil companies have started building their own rigs. Is this a trend that we should view as bullish in that the demand is so high that they need to fund their own assets, or is it somewhat of a moderating event in that they want to kind of control their own destiny and not be at the whims of third party contractors? And is this in fact a trend?

Jon A. Marshall – President and Chief Executive Officer

I think it's a little of both. I think this is the best way to look at it. We've never seen overtime a very significant investment by the NOCs and rigs. I think we will see some marginal investment in the assets on a go-forward basis, but I don't think we are going to see a wholesale change in their investment philosophy.

Collin Gerry - Raymond James

Okay. So, this isn’t a strategic shift in the way they operate their business, I guess for the most…

Roger B. Hunt – Senior Vice President, Sales and Marketing

Well, I am not sure if it's a strategic shift. If you go back and look, I mean even [inaudible] 30, 40 years ago was building land rigs. They always maintained a 10%, 15% of the fleets they had in the country, you know, was owned and operated by themselves. I think if you go around the world, just about every national oil company now is building a rig or two including Aramco.

Collin Gerry - Raymond James

Okay. That is interesting. And then switching gears, this might be a little bit difficult to calculate, but if you were to look over the last two or five years on say, you know, new build cost on a jackup or even a floater, how much has that cost gone up? Is it 25% on a jackup over the last five years? What is kind of the range you would say?

Jon A. Marshall – President and Chief Executive Officer

If you look at the MOD V Bs, and go back to early ‘04, those rigs were being built in the low 100s and depending on how they were outfitted, anywhere from 110 million to 125 million. That same unit today is probably 190, 195 million. So, that is how much that has changed. If you take the development drillers that we contacted for in 2001 and look at just the ex-shipyard price of roughly $300 million, that unit contracted today is probably close on an ex-shipyard price to $700 million.

Collin Gerry - Raymond James

Okay. That is helpful, thank you.

Operator

Thank you very much sir. [Operator Instructions]. Our next question comes from the line of Mike Drickamer of Morgan Keegan. Please proceed.

Mike Drickamer - Morgan Keegan

Roger, I just want to follow up a little bit into your visibility or lack thereof into the back half of 2008 for the jackup market. In your discussions with shipyards, have you looked at or talked about or heard about construction delivery delays, and how that could affect the supply situation in the back half of 2008?

Roger B. Hunt - Senior Vice President, Sales and Marketing

You know, we watch that. There's been a month or two on some projects, but probably we are feeling a little surprised that there hasn't been more delays in the jackups, and a lot of them are under construction in Singapore yards, and particularly [inaudible] seems to be doing a pretty good job of delivering on time. So, I would probably not build in too much delay. Having said that, it could be accumulative, because all of these yards have got floater projects as well along with some refurbishments, and it might be that we will see a bit of a domino effect in 2008.

Mike Drickamer - Morgan Keegan

You think we're seeing perhaps maintenance projects in the shipyards being kind of put up at the expense of the new builds. They are delivering the new builds on time, but you know, the maintenance projects are taking longer and much more expensive than people expected?

W. Matt Ralls - Executive Vice President and Chief Operating Officer

Yes, this is Matt. I think that there is something to that, just a resource loading issue in all the shipyards. And getting back to jackups for a minute, I think that some of the later jackup and [inaudible] third tier yards out there, and I suspect that you will see more delays coming out of those than you will in the established yards, but yes there is no doubt that the large sort of primary yards are experiencing resource issues that are causing potential delays for less marquee projects, but frequently that is caused by the fact that the scope grows while the units are in the yards. So, that is probably more related to how well the projects are planned or engineered before they went into the yard than really yard [inaudible].

Mike Drickamer - Morgan Keegan

Okay. And then Roger you gave us a great rundown on the international jackup market. At this point, if you were to look and pick one that you think has the greatest growth opportunity, which one do you think that would be?

Roger B. Hunt – Senior Vice President, Sales and Marketing

You know, I think a surprise area might be West Africa.

Mike Drickamer - Morgan Keegan

Okay, even more than the Middle East?

Roger B. Hunt – Senior Vice President, Sales and Marketing

In the near term, yes.

Mike Drickamer - Morgan Keegan

Okay, that's is for me guys, thanks a lot.

Operator

Thank you very much sir. Ladies and gentlemen, we do have a follow up from the line of Ian Macpherson of Simmons, please proceed.

Ian Macpherson – Simmons & Company

Hi Mike. I think I might have just fallen behind with my pencil when you were outlining the fourth quarter cost guidance, was that 285 to 290 ex-reimbursements for the Q4?

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

Yes it was Ian.

Ian Macpherson – Simmons & Company

Did you reconcile your prior full year cost guidance to current, it seems like it has come down quite a bit?

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

It has come down some. The fourth quarter, in the last earnings call, we had targeted that at $290 million, I think it will be slightly under that. This quarter was we had projected it like $350 million and it came in about $330 million. So, we are down about $20 million there. We build these forecasts from the bottom up rig-by-rig, and there is no significant individual items that are bringing it down sort of across the board, across the fleet, good cost control, projects that are coming in on time and at or below budget. We had four shipyard projects this quarter, and all of them came in within their budget and three of the four were on schedule. The one that wasn't was just two days late. So, we have had very good performance out of our operations and engineering groups.

Ian Macpherson – Simmons & Company

That is quite unique, thanks for clarifying that. Thank you.

Operator

Thank you very much sir. [Operator Instructions]. Our next question is a follow-up from the line of Geoff Kieburtz of Citi. Please proceed.

Geoff Kieburtz - Citi

Thanks. I just wanted to come back to the comments on the cost of build changes over the last few years. Could you break down the roughly $70 million increase in jackup construction cost and the same on the $400 million increase on your deepwater unit?

Roger B. Hunt – Senior Vice President, Sales and Marketing

Geoff, I really can't. I mean there are a number of components there that substantially increased. If you look just at the commodity cycle on steel, steel costs have gone up substantially. If you look at the owner furnished equipment, typically the drilling package equipment, that has gone up substantially and because of shipyard capacity, the shipyards have been able to charge more profit. And so you've got a combination of all three of those things on all the rigs.

Geoff Kieburtz - Citi

In relative terms, could you rank-order those three?

Unidentified Company Representative

Yes, I mean if you look at the stock price, you can tell where the big chunk of increase comes from on the drilling package. The shipyards, in the number that John gave you earlier have very little, if any profit, in the shipyard component of that roughly 300 number. So, as he said, they have been able to pass along the price increases of their component materials, but they have also been able to increase their profit margin. That would probably be the second level. And then just the cost, the escalation cost and the amount of time that everybody is spending to keep these projects on track in terms of quality assurance, technical assurance and rig startup, all of that expense has gone up and probably people are spending a little bit more money in life insurance.

Geoff Kieburtz - Citi

And that rank ordering, is it applicable to both the jackups and the floaters?

Unidentified Company Representative

Yes, it would be.

Geoff Kieburtz - Citi

Okay. Great, thank you.

Operator

Thank you very much sir, and at this time gentlemen you have no further questions in queue.

Richard Hoffman - Vice President of Investor Relations

Well, thank you very much for your participation on our conference call. A replay of this call is available through the teleconferencing service beginning at 1 PM Central Time today and will continue until midnight Central Time on November 15th. The number to call is 617-801-6888. The reference code is 13643191. You may also access a webcast replay on our website at globalsantafe.com and if you have any questions, please don't hesitate to call me at 281-925-6441. Thank you very much.

Operator

Thank you very much sir. Thank you ladies and gentlemen for your participation in today's conference call, this concludes the presentation for today, you may now disconnect. Have a good day.

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