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Executives

Son P. Vann - Vice President of Investor Relations & Planning

John T. Rynd - Chief Executive Officer, President and Executive Director

Stephen M. Butz - Chief Financial Officer and Senior Vice President

Analysts

Collin Gerry - Raymond James & Associates, Inc., Research Division

Ian Macpherson - Simmons & Company International, Research Division

Robert MacKenzie - FBR Capital Markets & Co., Research Division

Catherine O'Connor

David C. Smith - Johnson Rice & Company, L.L.C., Research Division

Todd P. Scholl - Clarkson Capital Markets, Research Division

Rhett Carter - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Hercules Offshore (HERO) Q1 2012 Earnings Call April 26, 2012 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2012 Hercules Offshore, Inc. Earnings Conference Call. My name is Brian, and I will be the operator for today's call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. Now I would like to introduce to you Mr. Son Vann, Vice President of Investor Relations. Please proceed, Mr. Vann.

Son P. Vann

Thank you, Brian. Good morning and welcome to our first quarter 2012 earnings conference call. With me today are John Rynd, Chief Executive Officer and President; Stephen Butz, Senior Vice President and Chief Financial Officer; and members of our senior management team, including Jim Noe, General Counsel; Troy Carson, Chief Accounting Officer; and Craig Muirhead, Treasurer. This morning, we issued our first quarter results and filed an 8-K with the SEC. The press release is available on our website, herculesoffshore.com.

Following our usual format, John will begin the call with some broad remarks regarding our quarterly performance and current outlook. Stephen will follow with a more detailed discussion on the financial results as well as provide cost guidance. We will then open the call up for Q&A.

Before we begin, please note that this conference call will contain forward-looking statements. Except for statements of historical fact, all statements that address our outlook for 2012 and beyond, activities, events or developments that we expect, estimate, project, believe or anticipate may or will occur in the future are forward-looking statements. Forward-looking statements involve substantial risks and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such statements. You can see more information about these risks and factors in our SEC filings, which can be found on our website as well as the SEC's website, sec.gov.

Now it's my pleasure to turn the call over to John.

John T. Rynd

Thank you, Son, and good morning, everyone, and thanks for joining us today. This morning, we reported our first quarter 2012 results. We also filed an 8-K disclosing how we recently received notice from the Department of Justice that they have concluded their FCPA investigation and will not pursue any enforcement action against the company. We're obviously pleased with the result. One of the factors cited by the Department of Justice in closing the inquiry was the company's thorough investigation conducted through a special counsel and cited the company's existing compliance program and ongoing efforts to strengthen our program. We also believe that our strong cooperation with the DOJ throughout the investigative process contributed to this outcome.

Regarding our quarterly results, we reported a net loss from continuing operations of $38.3 million or $0.28 per diluted share during the first quarter of 2012, compared to a loss of $13.6 million or $0.12 per diluted share for the first quarter 2011. As we previously discussed on our prior earnings call, the first quarter 2012 was a transitional trough period for us as we incurred significant shipyard downtime, primarily on our international rig fleet, with the Hercules 261 and 262 each recently completing their multiyear contracts with Saudi Aramco, and in the shipyard further refurbishment and contract preparation work as we prepare the rigs to commence their new 3-year contracts with Aramco.

The quarter was also impacted by the normal seasonal decline in our Domestic Liftboat business, together with an episodic uptick in the number of rigs in the shipyard for their 5-year ABS special surveys or other repair work. Some of this shipyard time will extend into the second quarter 2012, but the bulk of the downtime, particularly with our international rig fleet, should conclude before quarter end, after which our company be well positioned for a much more robust performance during the second half of 2012. And we expect to have most of our international rig fleet back in operations and our domestic jackup fleet rolling to high day rate contracts that we have secured over the last several months.

Our first quarter financial results masked what was otherwise a very successful quarter for us strategically, starting with the acquisition and concurrent contracting of the Ocean Columbia, which we have renamed the Hercules 266. Between the rig acquisition, mob and contract preparation costs, our all-in investment is estimated at $85 million. Once the rig has completed the contract prep work, it will commence on a 3-year contract with a 1-year option for Saudi Aramco at a day rate of 125,000 per day. We will also receive a lump-sum mob fee of $25 million from Aramco, which if you amortize this fee across the 3-year term, the effective day rate is closer to 148,000 per day. We estimate full payback of the investment within the 3-year contract term.

Along with contributing a substantial amount of earnings and cash flow to our international drilling operations, this contract builds on our relationship with Aramco, a key international client. And I am confident that Aramco will be a good customer of this rig for many years to come after this initial term. We have already closed on the acquisition of the rig and are currently preparing it for heavy lift journey to the Middle East, scheduled for early May. Based on our current schedule and estimates, the rig will be on hire by late this year.

We followed up the contract award and well received refinancing of a substantial portion of our debt. This included the issuance of $500 million of new notes, which we used to pay off our term loan and a $75 million revolving credit facility. We also issued approximately $100 million of equity to fund the rig acquisition. These transactions are significant as they enhance our credit profile and liquidity of the balance sheet, and effectively extend our most significant debt maturities into 2017.

Our refinancing also gives us more operational flexibility, particularly with our ability to make strategic investments and by eliminating many of the restrictive covenants associated with our prior term loan. The recent transactions are a big step forward in addressing our leverage, and we will continue to look for opportunities to further improve our credit profile while delivering attractive returns on our equity to our shareholders.

Turning to a review of each of our business segments. The jackup business continues to show positive market dynamics. On the demand side, we're seeing strong signs of capital flows into the region as several clients have announced capital budgets for the Gulf of Mexico properties. In recent months, we have also seen several new private-equity-backed ventures looking to reinvest in the Gulf of Mexico shale. As our last Fleet Status Report issued last week, this is confirmation of this strength. Leading-edge day rates for our 200 mat-cantilever rigs are now in the low $70,000 range, which is almost $10,000 per day higher than the leading-edge rate at the end of last year. For our 250 mat-cantilever rigs, leading-edge rates are now in the mid-80s, or roughly $25,000 higher than year-end 2011.

Our domestic backlog grew by almost a month on average per marketed rig since our prior fleet status in March, and it is an all-time high of 158 days per rig. We now have contracts extending as far out as May 2013.

The movement in rates and our ability to add backlog is very telling, as they were achieved during the period when natural gas prices really weakened to the current $2 level. This is further evidence to us that the incremental demand in the region is driven by oil and liquids-rich drilling. With crude oil prices for Louisiana light sweet at $120 a barrel, our customers' economics are significantly enhanced for crude-relating drilling activity. We estimate that roughly 80% of our existing contracts are targeting oil or liquids-rich prospects. In cases where it's not liquids-driven, the customer is either drilling to maintain lease ownership or for P&A related work.

The business dynamics in the Gulf of Mexico continue to improve. The total number of marketed jackups continued to shrink and now stands at only 40, as rigs like our recently acquired Hercules 266 are scheduled to leave for international markets. Excluding the small workover rigs that we don't typically compete against, the true drilling-capable rig count stands at 36. All 36 are contracted, with an average backlog that extends into late third quarter. We own 18 of those 36.

Given where leading-edge rates are and our ability to increase the backlog, the economics to reactivate a stacked rig becomes incrementally more attractive. But while we are marketing the opportunity to our customers, we remain disciplined in our decision to reactivate, understanding it is a $2 natural gas price environment. Furthermore, we wouldn't want to do anything speculative that would hurt the positive business dynamics we are seeing in the Gulf.

The international jackup market remains fairly tight with market utilization in excess of 90%. National oil companies remain active in adding to their jackup fleets, and international jackup pricing is also on the rise. A case in point is our contracting of the Hercules 266 to Saudi Aramco. If you go back to this time last year, these types of rigs were getting in the low $60,000 range with Aramco. When we renewed the Hercules 261 and 262 a little over 6 months ago, pricing moved up to the low 80s. With the Hercules 266, the day rate is 125 and includes $25 million mob. This is equivalent to the prior peak day rates achieved in 2008.

Beyond the Middle East, we are seeing strong pricing moves in other global jackup markets as capacity is tight across all major regions. In terms of supply, 18 new build jackups have entered the market since the beginning of last year. Most are now under contract, so there hasn't been a significant market impact from these recent deliveries. However, there are still some 84 new builds scheduled for delivery over the next 3 years, 3/4 of which are uncontracted. Keep in mind though that some of these new builds are constructed for captive markets such as Russia, China or Iran. There are also a number of ultra-high spec new build rigs, including the 2 that we are constructing with Discovery Offshore, which are really targeting a new market segment for jackups.

Regarding stack capacity, there are currency 29 cold-stacked jackups in international locations. In recent weeks, it has been reported that a few have been sold to buyers for what appears to be conversion purposes for non-drilling use. There's also been a select few reactivation announcements coming on the heels of some very attractive contract rates. But with the exception of a select few cases, we expect the majority of this capacity to stay offline.

Looking at our international rig fleet, starting with the recently acquired Hercules 266. We have reserved a heavy lift to transport the rig to the Middle East. The move is scheduled to take place next week and take about 45 to 50 days to arrive at the shipyard. Once there, we expect contract prep and upgrade work to take about 5 months or so based on the current scope of work. If all goes as planned, we expect the rig to be on contract in December.

The Hercules 261 has completed its ship work -- yard work for Aramco and recently commenced its 3-year contract at $84,000 per day. We are in the shipyard with the Hercules 262 now for at least another month. Our current expectation is that the rig will complete its yard work and be back at Aramco in June. We will certainly apply lessons learned on both the Hercules 261 and 262 while we're in the shipyard for the Hercules 266.

After a long weather delay, we were finally able to move the Hercules 208 out of Vietnam to its current location in Indonesia, where it is on contract at $100,000 per day through mid-July. The operator has 2 45-day options at the same price, and we're also talking to other interested parties about keeping the rig in the region.

The Hercules 260 is on contract through at least September with a good chance of an extension for another 6 months. We are optimistic on the rig's future in West Africa.

On the Hercules 185, we -- the rig recently arrived in Rwanda and is currently undergoing required ABS inspection. It could take a couple of weeks to complete all the inspection details, so we now expect the rig to return to service for Chevron around mid-May.

Platform Rig 3 remains on its current drilling program with PEMEX, and we are marketing the Hercules 170 and 258.

The inland barge segment had a fairly slow start to the year with utilization of only 50% during the first quarter. In the past month or so, we have seen activity levels improve. All 3 of our marketed barges are currently working, and we have good opportunities to keep them working over the next several months. Barge pricing, which was also choppy at the beginning of the year, appears to be firming with leading-edge rates in the mid-20,000s before rebillables compared to low 20s at the beginning of the year.

Turning to our liftboat business. In West Africa, results were impacted by the loss of one of our 170 class vessels in a fire that started on a nearby rig and our decision to stack a couple of our smallest vessels at the beginning of the year. We also had less activity for our 200 class vessels versus year ago levels, in part due to delays in timing of certain projects that were earmarked for these vessels. As a result, the number of operating days declined by approximately 14% year-over-year. As we have discussed on prior calls, while liftboat demand is strong in West Africa, we are seeing supply in the region grow, which will likely impact our utilization. On a positive note, pricing has held up quite well. In fact, average day rates across most of our vessel classes were either steady with or ahead of year-ago levels.

In the Middle East, liftboat demand has picked up considerably since last year, driven by several large-scale construction and well servicing projects in the region that have been delayed over the past few years but are now starting up. We've been able to contract both our Middle East vessels into the third quarter with options that would keep them working into the fourth quarter. There are a number of good prospects thereafter. The region is very active and if you have the right assets, we expect liftboat demand to be robust for quite some time in the Middle East.

In the U.S. Gulf of Mexico, as many of you are aware, historically liftboat demand typically experiences a seasonal slowdown during the winter months. Our first quarter 2012 domestic liftboat utilization level is consistent with the seasonal trough. Utilization appears to be modestly improving in April, and we expect the activity levels to gain momentum as we progress through the second and third quarters, when the majority of the platform maintenance, construction and plug-in/abandonment work occurs during the year. However, liftboat capacity in the Gulf of Mexico remains oversupplied.

Given the market dynamics in the U.S. while demand in the Middle East is expected to be in the early stages of a multiyear uptrend, we have elected to mobilize the Kingfish, one of our 2 30-foot class vessel liftboats in the Gulf of Mexico, to the Middle East. We will use the same heavy lift for the Hercules 266 to move the Kingfish to a shipyard in the Middle East. Once there, we will need to upgrade the vessel to meet international standards and local market requirements. Total capital investment of the upgrade and mobilization is expected to approximate $5 million, and we have roughly 4 months of shipyard time to perform the upgrade. Upon completion, we expect to contract the vessel in late 2012.

Before handing the call over to Stephen, I want to thank all those who supported us on the recent debt and equity offerings, as well as long-time holders of our securities and lenders over the years. Since late 2008, we have had to operate under some extremely difficult conditions and we had to make some very tough decisions along the way. But I'm excited for what lies ahead. Business conditions are improving. We removed a big overhang with the refinancing, and I see more opportunities to open up to expand our footprint and put capital to work.

With that said, we need to stay disciplined with these opportunities, continue to execute on our shipyard projects and keep a close eye on safety and cost controls. Our motto for 2012 is "survival to success," and I firmly believe we are well on our way. Thanks. And again with that, I'll turn the call over to Stephen.

Stephen M. Butz

Thank you, John. I'll follow our typical format, with a review of our first quarter 2012 results in comparison to the fourth quarter of 2011 and provide some forward-looking commentary on our cost expectations, capital spending plans and an update on our liquidity and capitalization.

For the first quarter, we recorded a net loss from continuing operations of $0.28 per share, compared to a fourth quarter loss of $0.16 per share. First quarter results include $3.4 million of insurance gains related to the loss of the Starfish and Mako liftboats, while fourth quarter results include $15.6 million of gains from asset sales.

Overall, we expect our first quarter results to represent a trough, given the limited availability we had in our international drilling fleet due to shipyard time, which should abate as we move forward. We had 4 of our 6 international contracted rigs down for some or all of the quarter. Two of the 4 rigs are back on contract, and the third should go back to work over the next few weeks, and the fourth rig is scheduled to return to work in June. Their return, coupled with the higher day rates that we expect to achieve in our domestic drilling fleet, should result in what we expect to be a meaningful increase in revenue moving forward through 2012.

Moving to our segment results. Domestic Offshore generated operating income of $1.8 million compared to $9 million in the fourth quarter. Excluding this segment's gains from asset sales of approximately $15 million during the fourth quarter, operating income improved by $7.7 million, driven by higher utilization and day rates. Utilization increased to 90% from 86%, as the Hercules 150 and 201 returned to work during the first quarter after spending most of the fourth quarter in the shipyard. We also had a full quarter of operations from the 251, 253 and 300. We did, however, incur some downtime in the first quarter which limited our utilization gains, mainly with the Hercules 214 undergoing its 5-year survey and on the 350, which incurred about a month of downtime due to the change in the lineup of customer contracts and weather-related delays during the rig move.

Average revenue per day increased by 6% to $56,000, with the improvement reflective of the progression of our domestic rigs to higher rate contracts. Given the current contract coverage, which now extends through the third quarter of 2012, we expect to realize strong moves in our average revenue per day over at least the next 2 quarters.

Segment operating expenses were $59.9 million, which is basically in line with the prior quarter when you exclude the $15 million of gains that reduced fourth quarter expenses. Looking forward, we expect operating expenses for Domestic Offshore to remain in the high $50 million range per quarter, excluding the impact of any asset sales for the remainder of the year.

Our International Offshore segment reported an operating loss of $20.8 million in the first quarter versus a $6 million loss in the fourth quarter. As previously discussed, this decline was due to extensive shipyard downtime. As a result, we had only 247 revenue days during the first quarter, which is about half the number of operating days we had in the fourth quarter.

Furthermore, the rigs that incurred the downtime were some of the highest earners in our international fleet. This contributed to the 15% sequential reduction in revenue per rig per day. This combination of less operating days, with those days coming from our lower earning rigs, led to a $22.9 million decline in revenue during the first quarter. Revenue should rebound in the second quarter and into the third quarter, with the Hercules 208 and 261 back on contract and the 185 and 262 expected to return to work in May and June, respectively.

International Offshore operating costs declined by 30% to $24.1 million. A portion of the decline was driven by higher deferred costs on the rigs that were in the shipyard during the current quarter. Fourth quarter expenses also included higher costs associated with the Hercules 208, related to its move from Vietnam to Indonesia. International Offshore operating expenses are expected to increase back to the high $20 million range for the second quarter as our rigs return to service.

Turning to our Inland segment. Inland reported an operating loss of $4.6 million compared to a loss of $3.1 million in the prior quarter. A reduction in utilization to 50% from 82% drove a $2.6 million decline in revenue. Partially offsetting lower utilization was a slight increase in revenue per day, which averaged $31,600 during the first quarter.

Operating expenses declined to $5.7 million compared to $6.3 million in the fourth quarter, primarily on lower R&M and labor costs. As John previously mentioned, we are seeing utilization for our barges improve in the second quarter. With that improvement, we expect operating costs to rise modestly from first quarter levels but remain in the $6 million to $8 million range per quarter for 2012, consistent with our prior guidance.

Moving to our liftboat operations. The Domestic Liftboats segment reported an operating loss of $2.3 million, compared to a loss of $2.5 million in the fourth quarter. First quarter results include a gain of $1.8 million related to the insurance proceeds received for the Starfish liftboat that was lost last September. Activity levels during the first quarter historically represent the lowest seasonal demand period for the Domestic Liftboats segment. So while operating days declined by 17% from fourth quarter levels, they were basically flat with the first quarter of 2011 levels. Average revenue per day of $7,800 was essentially flat with fourth quarter levels.

First quarter operating expenses of $8.5 million include the gain on the Starfish. Excluding this gain, operating costs were roughly in line with fourth quarter operating costs of $10.5 million. We expect operating costs to remain relatively fast -- flat for the remainder of the year.

International Liftboats generated operating income of $8.6 million compared to $4.8 million in the fourth quarter. The improvement was driven by a 9% increase in average revenue per day. The results also include a $1.6 million gain from the insurance proceeds received for the Mako liftboat, which was lost in early January. The loss of this vessel also led to a 7% decline in operating days. Excluding the impact of the gain on the Mako, operating costs declined to approximately $14.6 million. We continue to expect international liftboat operating costs to be in the $14 million to $16 million range per quarter for the remainder of the year.

Now let's move to the other income statement and cash flow-related items. Consolidated general and administrative expenses were $17.7 million during the first quarter, a modest increase from $16.8 million in the fourth quarter, partly on higher professional fees. On a normalized basis, we estimate second quarter consolidated G&A to be in the same range of $16 million to $18 million.

However, as we announced in the 8-K filed on April 9, we received a $10 million payment from Angola Drilling Company earlier this month. Of this amount, $8.8 million will be recorded as a benefit to G&A during the second quarter, with the remainder recorded as revenue in the International Offshore segment. Hence, our consolidated G&A estimate for the second quarter will be closer to $7 million to $9 million. We are still owed $54.4 million from ADC, and any future collections will be recognized as revenue in the International Offshore segment.

Our first quarter depreciation and amortization expense was $43 million, down slightly from $43.9 million in the fourth quarter. We expect depreciation and amortization to gradually move higher during the second quarter and as the year progresses, primarily due to higher capital spending expectations during 2012. We continue to expect full year depreciation and amortization to be in the high $170 million range.

First quarter interest expense was $19.7 million, down from $20.1 million in the fourth quarter on our lower debt balance. In early April, we issued $300 million of senior secured notes with a coupon of 7.125% and $200 million of senior unsecured notes with a coupon of 10.25% for an overall blended rate of 8.4% on the recent debt issuances. Proceeds from the notes were used to pay off our $435 million term loan, which recently carried a rate of 7.5%. Over the near term, the slightly higher average interest rate and slightly higher notional amount of debt outstanding will result in a modest increase in interest expense to slightly over $21 million per quarter.

With respect to income taxes, we recorded a benefit of $8.9 million for the first quarter, which equates to an effective rate of 19%. We expect our tax rate for the full year to remain in the high teens.

As for capital and drydocking expenditures, we spent approximately $60 million during the first quarter, which includes the $40 million to acquire the Hercules 266. For the remainder of the year, we expect to spend approximately $130 million in CapEx and drydocking. This estimate reflects our original expectations that we laid out at the beginning of the year, as well as the incremental $45 million on the Hercules 266 to mobilize and perform the contract prep work, and the $5 million mobilization and upgrade costs on the Kingfish liftboat. We expect to be reimbursed in lump-sum payments totaling approximately $45 million by our clients for contract-specific capital spending requirements this year.

With respect to our balance sheet and liquidity, the March 31 balance sheet reflects the closing of the equity offering and the acquisition of the Hercules 266. However, it does not reflect the proceeds from the notes offering or the repayment of our term loan, as both of these transactions closed in early April. So while our unrestricted cash balance at the end of the quarter was $165 million, adjusting for the notes offering and term loan paydown, our pro forma cash balance is approximately $220 million. We also replaced our prior revolving credit facility with a new $75 million revolver, which is currently undrawn and doesn't mature until 2017.

Between our unrestricted cash balance and availability under our new revolver, we expect to be able to meet our capital spending plans and to deal with the convertible notes of approximately $96 million that will likely be put to us in May 2013, and still continue to maintain ample cash on hand for operations. Aside from the convertible notes, our next significant debt maturity isn't until 2017. We will, however, have early redemption options for all of our notes, starting with our existing 10.5% notes, which are now unsecured, commencing in late 2013.

There are a few other points that I think are worth highlighting about the recent financings. With the repayment of the term loan, we no longer have any maintenance financial covenants we are required to meet each quarter. Our new revolver does have a maximum secured debt-to-EBITDA covenant of 4.25x, stepping down to 3.5x starting in the fourth quarter of 2012, but this is tested only when the facility is drawn. We also increased the size and flexibility of our investment and restricted payment basket.

All in all, our new capital structure provides significantly greater operational flexibility, which will be important on a go-forward basis as we reposition ourselves for growth. Since our formation in 2004, the company has grown rapidly through acquisitions. The challenges we faced during the last 3 years resulted in a heightened focus on restructuring and cost cutting. However, with the recent financings and the ongoing improvement in the industry fundamentals, we once again expect to more actively pursue growth opportunities for both International Liftboats and jackup drilling rigs. We will continue to focus on improving our credit profile while remaining disciplined with our investments, making sure that any investment is consistent with our strategy and can deliver attractive long-term returns to our shareholders.

With that, we're now ready to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Collin Gerry of Raymond James.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Stephen, I may have completely misheard you, and this is kind of a nitpicky question, but what was your SG&A guidance? I didn't catch if there was something coming down with the elimination of the FCPA investigation.

Stephen M. Butz

The guidance remained in the same range of $16 million to $18 million per quarter. However, I think the detail there is that in the second quarter it will be much less than that because of the benefit related to the ADC payment of about $8.8 million, and so the second quarter will be in the $7 million to $9 million range.

Collin Gerry - Raymond James & Associates, Inc., Research Division

But that's not a go-forward range.

Stephen M. Butz

No. The go-forward range after the second quarter is in that same range, $16 million to $18 million.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Okay, so more talk on the market. So, John, you did a good job laying out kind of the supply/demand balance in the jackup space. I hate to say what -- talk about rates going higher from here because they are very high relative to where we thought they would be a year ago, but it seems to me that there are some independent leg rigs in the Gulf of Mexico, and the independent market globally is looking pretty strong. The 250-foot ICs, I mean, as those reprice over the next 6 months or so or maybe have international opportunities, do you see further rate expansion potential in the Gulf of Mexico?

John T. Rynd

Yes, I think there's potential for rates to continue to move, obviously not at the level we've seen over the last 12 to 15 months. I think you've got -- the positive factors on rate movement is obviously the few number of rigs that are in the Gulf of Mexico, and they're all fully utilized, and with the potential for some of the independent leg rigs specifically to exit the Gulf of Mexico. And I think it's going to be interesting to see, especially on the long legged, the 350 and greater rigs in the Gulf of Mexico already in short supply, if they're pulled out of Gulf of Mexico, what happens to the pricing dynamics on those types of assets.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Yet, it seems interesting to me on the supply side. You didn't make a case that we get tighter. But on the demand side, too, you mentioned the capital that's coming into the Gulf of Mexico. I mean, talk to us. Have you seen that show up in firm demand for rigs? Because it seems relatively recently, we've seen the private equity and some of the other CapEx numbers come through. Has that showed up in your tendering and in your bidding for rigs? Or is that on the comp?

John T. Rynd

No, yes, it has. There's -- to our knowledge, there was 4 new private-equity-backed management teams focused on the shelf. Of those 4, we currently have contracts with 2 of them for future work. They're not working today, but as we progress through the year.

Collin Gerry - Raymond James & Associates, Inc., Research Division

And then last one for me, give us an update on Discovery. Has the strength in the Gulf of Mexico and your cash flow opportunity going forward accelerated your plans on making a bigger investment there? Or is it still kind of just you're going to bide your time and do it when you see the right opportunity?

John T. Rynd

Well, we continue to evaluate our position at Discovery Offshore. As you're aware, we own currently about 28% of the equity due to Luxembourg laws where the rig -- where the company is domiciled. If we go to 33%, we have to make a tender offer for the remaining shares outstanding. So we're not ready to do that, so we're just monitoring where we are. And we like where we are currently, but we continue to monitor that.

Operator

And your next question comes from the line of Ian Macpherson from Simmons.

Ian Macpherson - Simmons & Company International, Research Division

John, it sounded like you wanted to hedge a little bit on your last response as to why jackup rates could go higher, but might not go up as much as you've seen over the past year. And you provided the reasons why they can go up, supply and demand, but I don't think you finished your thoughts on why they might go up by less. And I'd just like to test you on that as to why they can't continue to go up by $10,000 per day on a leading-edge basis per quarter from here.

John T. Rynd

Great catching it, because I did not finish my thought. I think the -- where you've got to be worried, the governor, if you will, on the continued rate increase is we are in a $2 natural gas environment, and I think you can't look past that. I think that's the primary governor right now, if you ask us what's the upside, downside to continued rate improvement. Again, our day rates are purely reflective of our customers' well economics. And right now, 16 of our 18 rigs are drilling oil or liquids-rich. Those economics at $120 a barrel Louisiana light sweet are robust. So I think that's the one governor. I would always historically caution -- well, post-Katrina and Rita, what's the impact of hurricane season? Do we have a pullback in demand? But if you look at our Fleet Status Report, 16 of 18 of our rigs are now contracted through kind of the heart of hurricane season. So we have less, very minimal exposure to if there is a pullback during hurricane season. So again, it's -- we always take a conservative view. If the rates are there, we'll get them. So we'll monitor the business as we go forward this year.

Ian Macpherson - Simmons & Company International, Research Division

Okay. Follow-up question on the international side. What would be practical expectations timing-wise for your 2 warm-stacked rigs, the 170 and the, I think, 258, I believe, for those to get on contract this summer presumably?

John T. Rynd

Well, this will be kind of almost like a repeat of the last 3 first quarter earnings calls on the 170, where we've had multiple opportunities over the last 3 years to put it to work. In fact, we've even in the past achieved LOIs, could never come to agreement on a contract. We're in that same situation right now. We have a couple of opportunities on the 170 that we're working on. Again, just caution that we've been in this position over the last 3 years and weren't able to close. So we're optimistic, and if we're successful on the 170 in particular on either of the opportunities that we're pursuing, that will be a late fourth quarter start -- fourth quarter 2012 start, given it needs shipyard time, it needs mob time and those kind of just get ready time. So I would anticipate if we're successful on either of the 2 opportunities, it will be a late 2012 start. On the 258, there is some interest in the region. And as I think we talked on the last call, we're a little bit with a chicken and the egg on that rig, in that we have probably in excess of $10 million of CapEx required. It's got a 5-year special survey due and other things after the rig worked for almost 4 years straight for ONGC, to catch-up on some of the maintenance that you can't do while you're operating. And so we're just going to have to make the call, is a 90-day job worth spending $10 million? But again, we're actively marketing the unit, but we're not close to -- we're not even negotiating or anything like that. It's just in the marketing phase.

Ian Macpherson - Simmons & Company International, Research Division

Okay, good. And then, anything shaking with asset sales near term, including cold-stacked rigs on the jackup side? Or any thoughts on the inland barge fleet as well?

John T. Rynd

There's a lot of deal flow on the stacked assets. But it's -- given the buyer universe, it's tough to handicap when you get closed. I mean, if you go back, we closed 7 sales in the fourth quarter 2011. It can be done but again, it's just -- it's tough to handicap given the buyer universe. And on the barge side, we could sell off a couple of the 17 we have left in a package of 2 or 3. We'll evaluate that and look at what the dollars will bring in on a go-forward basis.

Operator

And your next question comes from the line of Robert MacKenzie of FBR Capital Markets.

Robert MacKenzie - FBR Capital Markets & Co., Research Division

I wanted to follow up with some comments you made earlier, John. Obviously, you've got, what, 5 to 6 special surveys this year, all of which you kind of noted are 45 days in length. And how would you kind of give us kind of the variability? How short could they be, how long could they be, depending on what you find?

John T. Rynd

Well, I think given the environment we're in right now, I don't think there's much ability to shorten it much below the 45 days. If you look back over the last kind of 8 months on our special surveys, we had one outlier, the Hercules 120. The others have come in that 40- to 50-day range, so -- and we do a pre-inspection before the rig comes in. And if so, if there's no significant surprises, we budgeted roughly $4.5 million per special survey in 45 days. As you know, following this industry for as long as you have, there's always a risk to the more money and more time. But we're trying to do everything we can to mitigate that.

Robert MacKenzie - FBR Capital Markets & Co., Research Division

Got it, okay. And the 253, does that survey just need to be started before midyear?

John T. Rynd

That's correct. We're scheduled right now in the third quarter.

Robert MacKenzie - FBR Capital Markets & Co., Research Division

Okay, so that should start right after the Tana contract, correct?

John T. Rynd

Yes, that's correct.

Robert MacKenzie - FBR Capital Markets & Co., Research Division

Okay. Housekeeping question on the income statement or cash flow statement. You gave us your book tax rate. How do you expect your cash tax rate to play out this year?

Stephen M. Butz

Yes, we still expect that to be pretty similar to the last couple of years, in the $10 million to $15 million to $20 million range.

Robert MacKenzie - FBR Capital Markets & Co., Research Division

Okay. And how would that -- would that change much on a quarterly basis when you put some of the international jackups to work?

Stephen M. Butz

It's a relatively small number but yes, I guess, that will be more back-half loaded with the international operating days increasing during the second half.

Robert MacKenzie - FBR Capital Markets & Co., Research Division

Okay. And then back to a strategic question to John, if I may. John, you mentioned you weren't ready to tender for -- increase your position and potentially tender for Discovery. What are you looking for? And what would the situation look like perhaps where you might be willing and ready to do that?

John T. Rynd

Well, I think there's a lot of factors. I mean, I think as we look -- we're very optimistic on the outlook for that class of asset around the world. That's a very positive business. You've seen just 3 recent fixtures: Rowan mobilized one of their EXL to Malaysia for north of 200, Noble got 230 in the North Sea, Prospector just got 195 in the North Sea. So the outlook is very positive. I think we just have to balance where our Hercules business is. We just did a very effective refinancing, and we still -- Discovery still owes 80% of the rest of the capital in each rig. That's about $340 million in round numbers. So we just have to balance the whole picture.

Operator

And your next question comes from the line of Catherine O'Connor from Deutsche Bank.

Catherine O'Connor

I guess I'm thinking about this new fleet report we saw yesterday. I'm just wondering, you had spoken to the market on the road show obviously pretty recently, but the results seemed pretty positive in the fleet report. And I'm just wondering, sort of did you know all these were going to come online? Or did they just happen that quickly and flow through the report? And I guess after you comment on that, can you just talk about what the likelihood of those sorts of step changes happening in the future are, given what you saw in this last month?

John T. Rynd

Yes, Catherine, good question. I think it's hard to handicap when you're going to close these opportunities because if you look at the backlog we have, it's not pressing that you sign it that day, given that you've got -- at the time when we were on the road, I think we had 123 days of backlog per our last Fleet Status Report. So the urgency to get a contract signed is not as relevant as if you have 2 days to work. So it's hard to handicap, yes, the deal's going to come together. We're actually going to get it signed. And we constantly have -- I think right now, today, we have about 600 days of backlog in negotiation. That's been as high as 1,200 -- so it's just tough to handicap that, yes, we're going to get these signed and move on. So yes, we always have deals in the works. With 18 rigs, you're talking to people all the time about extensions and new contracts. It's just tough to handicap on timing of when you're going to get it done. Because if you go back to the March fleet status and go to February of this year's fleet status, the backlog went down by about roughly 20 days or 15 days. That's just because we weren't able to close any of these contracts we had under negotiation. So going March to April, we obviously closed on some of those. Next month, it may be down because we didn't close on some of those contracts. That's not reflective of activity.

Catherine O'Connor

Okay, that's helpful. And then when you're quoting -- just to be clear, when you're quoting that backlog of anywhere from, say, 600 possible backlog or additional businesses anywhere from like 600 to 1,200 days, I'm always, when you're quoting that for Gulf of Mexico, dividing by 18 to figure out what that would be on a per-rig basis, right?

John T. Rynd

That's correct.

Catherine O'Connor

Okay. And then, in terms of the new contracts that you put on this last month, I know you keep saying that 16 out of your 18 Gulf of Mexico contracts are oil related. Is it still the same? Are those all still oil related? I would assume yes.

John T. Rynd

You are correct, Catherine.

Catherine O'Connor

And then, when you're trying to talk about the downside in terms of leading-edge rates, just to go back to that discussion a little bit, I know nat gas obviously affects your guys. But can you just talk a little bit more specifically then if you have these contracts that are more related to oil than gas? And what makes you have that level of trepidation if oil seems to be driving the market?

John T. Rynd

Just getting beat upside the head over the last 30 years gives you a little caution in this business. And to take a look at it in a very simplistic view, if we have 20% of our rigs exposed to nat gas, being the market leader, that's probably a pretty good proxy for the other 40 rigs that are working in the Gulf of Mexico, so that gives 8 rigs are exposed to gas. Again, this is a simplistic view, but if you have 8 rigs exposed to gas and they are not able to secure oil- or liquids-rich-related contracts, do they go out or what's their pricing dynamic, those things, you got to pay attention to that.

Catherine O'Connor

Okay, that's fair enough. And when you're quoting the 8 and the 20%, you're just now applying that across the entire fleet.

John T. Rynd

Yes, just as a proxy. If you think -- because we're the largest provider of jackups in the Gulf, so that's a good a proxy for what's going on in the Gulf of Mexico. And again, it's a simplistic view, but it's just something we watch.

Catherine O'Connor

Okay, but that 8 you're talking about, you're saying of the total supply and demand in the Gulf of 40, you said 20% were related to nat gas.

John T. Rynd

Yes, that's how I get to the 8.

Catherine O'Connor

Okay, and then just maybe one question on the PE-backed ventures on the shelf in the Gulf of Mexico. I mean, they're obviously moving towards E&P plays. But do you think that those same PE guys will go after some fleets that -- some jackup fleets that are -- that some of your competitors might not want in the Gulf of Mexico? Like, do you see PE moving into your area or coming in to try and take over some of those fleets that may be for sale? Or what's your viewpoint on that?

John T. Rynd

I think that if you look at the domestic market, I don't think their appetite is that robust. And really, there's not a whole lot for sale in the Gulf of Mexico, number one. Now if you look to the international markets, it has characteristics that are very different historically from the Gulf of Mexico, term contracts, a little better cash flow visibility, et cetera. There's probably some kick in the tires internationally, but I don't see a big move on the domestic market.

Operator

And your next question comes from the line of David Smith from Johnson Rice.

David C. Smith - Johnson Rice & Company, L.L.C., Research Division

Congratulations for all you've accomplished in the last quarter as well as the letter you just got from the DOJ. But regarding your comment that your focus on growth includes International Liftboats, is that just for the Kingfish? Or are there other International Liftboat opportunities on your radar?

John T. Rynd

No, we have been and remain very optimistic on the International Liftboat business. And there is opportunities there that again we're somewhat agnostic when it comes to, is it a drilling rig or is it a liftboat? Are the returns there? As Stephen mentioned in his prepared remarks, as we look at these various opportunities, if it's accretive to our shareholders and it's credit profile enhancing, we're going to look hard at them.

David C. Smith - Johnson Rice & Company, L.L.C., Research Division

Does that include further mobilizations from the Gulf? Or...

John T. Rynd

It could be organic or acquisition.

David C. Smith - Johnson Rice & Company, L.L.C., Research Division

Okay. Also hoping to get an update on the expected cost and timing of potential reactivations for the Gulf of Mexico cold-stacked jackups.

John T. Rynd

Yes, as we've mentioned before, we have 16 cold-stacked jackups in the Gulf. We've currently identified 200-foot mat-cantilevers as potential reactivation candidates. We've done all the legwork to understand what we need to do. The cost is between $10 million and $12 million per rig, minimum of 120 days of reactivation. And if you look at the current leading-edge rate for a 200 mat-cantilever is in the low 70s, given that CapEx, it's about a 10- to 11-month payback. So the math is getting very compelling, and that will take care of itself. The market will be there or it won't be there. So where we're focused more on, really, as a management team is -- as I said in the prepared remarks, I don't want to overplay the $2 gas because it is very much being dominated by oil right now, but you cannot look past that. And given the dynamics, is it the right thing to reactivate on speculation? We don't think so. So as I mentioned, we are marketing both those units for availability to our clients. And we will not at this point -- never say never. But at this point, we will not reactivate on speculation.

Operator

And your next question comes from the line of Todd Scholl of Clarkson Capital Management.

Todd P. Scholl - Clarkson Capital Markets, Research Division

I just kind of wanted to have you guys look into the crystal ball a little bit. You guys talk about the 84 new jackup rigs that could be coming online in the next 36 months or so. So I guess, like my question is, what are the risks down market? Because my assumption is that most of the high-spec rigs that are working will continue to work, and it will be standard jackups probably in the international markets that could be displaced. What -- do you guys see any potential threat that those standard jackups could come to the Gulf of Mexico and potentially end up bidding for work that you guys are working for?

John T. Rynd

That's always a risk. I mean, in our business, supply is our enemy, so we keep pretty good tabs on the supply side of the equation. A couple of comments on the 84 under construction. As I mentioned in the prepared remarks, a number of them really won't go and be competing day in and day out with the global fleet as they go to Russia or China or Iran. And then, there's a fair amount that are kind of like the Discovery rigs are really going after wells that the current fleet are not capable of drilling. So there shouldn't be a one-on-one rig-on-rig competition there. And the other thing that gives me some comfort -- 2 things that gives me a little -- 3 things, I guess, gives me a little comfort. One, if you think oil this is going to stay 80 to 110, you're going to have double-digit CapEx growth year-over-year, and that's going to increasingly get a big pull on demand for jackups. Secondly, a vast majority -- and this will be a rough number. Almost 80% of the rigs under construction are being built by drilling companies now. The speculators have been flushed out. That leads to good customer contacts around the world, typically pricing discipline. And I think the other key is, as I mentioned in the prepared remarks, there's currently 29 cold-stacked jackups in the international market, the bulk of those controlled by one drilling company. And they have shown to date good discipline about bringing those rigs out. So I think if you have that -- that combination of that gives us some comfort that we're not going to crush the market given the backdrop, if you think oil is going to be very robust. Now the second leg, will they come to the Gulf of Mexico? That's hard to say because if you look right now at economics of what's going on, the international jackup market now in almost every region of the world, day rates for the commodity rigs are in excess of $100,000 a day. For them to leave that market, they'd have to absorb that mobilization cost because no one will pay -- no Gulf of Mexico client currently will pay you to mobilize a rig back to the Gulf. So they'd have to absorb that. They'd come to a well-to-well environment. Labor's tight, high tax rate, high insurance costs, all the things that had people start leaving the Gulf of Mexico through the decade of 2000 are still in place. So that's one barrier to entering as you look at your opportunities if you're sitting internationally.

Todd P. Scholl - Clarkson Capital Markets, Research Division

I guess one of my other questions is, is the difference in OpEx between the standard jackup and your mat jackup significant enough to also make that a deterrent? And then after that, I've got one other follow-up.

John T. Rynd

No, if you look at our 350, the Hercules 350, its operating cost is in the kind of -- runs, let's say, low 40s, $40,000 to $42,000 a day. On our mat rigs, they run in the low 30s, so it's -- let's say it's a $8,000 to $10,000 delta. But we're also getting $105,000 a day on the 350, and we're getting leading edge at 70 on the 200 mat-cantilever, so no, that's not a deterrent.

Todd P. Scholl - Clarkson Capital Markets, Research Division

Okay, and then finally, I guess, I wanted to touch base just on kind of the barge rig, the inland barge unit. Can you give us an idea of what level of kind of day rates and utilization you would need to get that back to breakeven? And I guess, with natural gas prices where they are, I mean, are you even remotely optimistic that, that could happen in the next 2 years?

John T. Rynd

Two years, yes. But over the next 6 to 12, it's tough to see right now. We drove -- in 2009, we drove about 75% of the cost out of that business, and we're the market leader in taking capacity off the market. So as we look out, we had a rough first quarter. We had a very good second half of 2011 in that business, and we're basically breakeven in the second half of '11. So we're getting close to where this year, we could be breakeven as we see fairly decent backlog and opportunities to keep those 3 running.

Operator

[Operator Instructions] And your next question comes from the line of Rhett Carter of Tudor, Pickering & Holt.

Rhett Carter - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Just from a capital deployment perspective, over the near term, do you think you're more likely to de-stack or make something like another acquisition? And would any further acquisition have to be backed with a contract guaranteeing a payback?

John T. Rynd

I think that's just a ballast, Rhett, on opportunities because it's hard to handicap, to replicate an Ocean Columbia opportunity. And so, I think an acquisition in the international market, on a one-off rig basis, we would prefer it to be tied to a contract, and it would not necessarily have to be a payback contract. Depending on region, the customer, obviously the economics would have to be robust enough to pull the trigger on the acquisition. And obviously, our target would be to get full payback. But if we didn't get full payback, it wouldn't mean we wouldn't do the deal.

Rhett Carter - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Right, okay. And then just on the Angola payment, was the $54 million remaining balance -- I mean, is this something -- I know it's difficult to predict timing, but is this something you'd expect to have resolution to relatively soon? Or could this be a rather drawn-out process?

John T. Rynd

It's been a rather drawn-out process, and we consider it to be probably drawn-out, even though we continue to have dialogue and put pressure on the party that owes us the $54.4 million.

Operator

And, ladies and gentlemen, that will conclude the question-and-answer session for today's call. I will now turn the call back over to Mr. Son Vann for any closing remarks.

Son P. Vann

Thank you, Brian. Thanks, everyone, for joining us today. A replay of this call should be available on our website in about an hour. And as always, if you have any follow-up questions, feel free to give us a call. Thanks a lot.

Operator

Ladies and gentlemen, that concludes today's conference call. You may now disconnect your lines, and have a nice day.

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