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Executives

Mark L. Mey - Chief Financial Officer, Chief Accounting Officer and Senior Vice President

Robert J. Saltiel - Chief Executive Officer, President, Director and Member of Executive Committee

Analysts

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

John D. Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

David Wilson - Howard Weil Incorporated, Research Division

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Nigel Browne - Macquarie Research

Michael Breard

Atwood Oceanics (ATW) Q2 2012 Earnings Call May 2, 2012 9:00 AM ET

Operator

Good day, and welcome to the second quarter results for fiscal year 2012. [Operator Instructions] Please note this call may be recorded. I would now like to introduce our speakers: Mr. Rob Saltiel, President and CEO; and Mark Mey, Senior Vice President and CFO. Please go ahead, Mr. Mey.

Mark L. Mey

Thanks, Clint. Good morning, and welcome to Atwood Oceanics conference call and webcast to review the company's updated results for the second quarter ended March 31, 2012. As Clint mentioned, the speakers today would be Rob Saltiel, President and CEO; and me, Mark Mey, Senior Vice President and CFO.

Before we begin, let me remind everyone that during the course of this conference call, we may make forward-looking statements, which are not historical facts and are based upon management's current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us. These statements involve a number of risks and uncertainties, including the risks which are described in the company's most recent Form 10-K and other filings with the U.S. Securities and Exchange Commission.

We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements, if one of these risks or uncertainties were to occur or assumptions prove incorrect. Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof.

Now let me turn the call over to Rob for opening remarks.

Robert J. Saltiel

Thank you, Mark. Good morning to all of you joining our call today to discuss Atwood Oceanics' fiscal year 2012 second quarter results. I will make a few brief comments on our second quarter performance, provide an update on our rig projects and discuss our recent contracting success and our market outlook.

For the second quarter, we achieved revenue of $171.6 million, resulting in earnings of $59.5 million or $0.90 per diluted share. Our results were driven by 3 positive factors that Mark will cover in greater detail: better revenue efficiency this quarter than the previous quarter, operating expenses that were marginally lower than our previous guidance and resolution of a foreign jurisdiction tax examination that lowered our effective tax rate for the quarter significantly.

These positives were offset to some degree by our planned Atwood Falcon upgrade project that commenced in mid-February and is still ongoing, which resulted in no revenues and higher OpEx for the Falcon for approximately half of the second quarter. All in all, we were pleased with the quarter's results and the more reliable operating performance versus our first quarter.

Turning now to current operations, we've had some changes in rig operation since our last earnings call. As mentioned, the Atwood Falcon is undergoing an upgrade project in Singapore, and I'm happy to report that the project remains on schedule. We expect the Falcon to depart the shipyard by the middle of this month for Australia and the inception of our 2.5-year drilling program with Apache.

The Atwood Eagle has concluded its short program with BHP and has now commenced the 6-month campaign with Chevron, also in Australia. Following this, the Eagle will undergo regulatory maintenance work for a period of approximately 25 days prior to commencing its 18-month contract with Apache, again, in Australia.

The Atwood Hunter has moved from Equatorial Guinea to Ghana and is now drilling for Kosmos Energy there. The Hunter will remain in Ghana until it concludes its current contract in October, after which, it will undergo approximately 30 days of 0-rate time for regulatory and maintenance work before commencing a new 3-well program for Noble Energy in Cameroon and Equatorial Guinea.

The Atwood Aurora is nearing completion of its current drilling program also for Noble Energy and will be moving to its next program in West Africa later this month.

There's been no change in drilling status for the Atwood Osprey, Atwood Beacon or the Vicksburg, since our last call.

Our 6 new build projects continue to make excellent progress. Our near-term focus is squarely on the Atwood Condor. We are commissioning the rig's major systems and advancing our crew's familiarity with the rig, its equipment and our safety and operations protocols. Barring any adverse developments, we now expect the Condor to be delivered within a month of its original June 30 delivery date.

The Atwood Mako continues to proceed ahead of schedule, so we should be ready for operations approximately 2 weeks earlier than our original September 30 delivery date.

The Atwood Manta, originally scheduled for delivery by year end, is also trending toward an earlier delivery. And while it is early days for the Atwood Advantage and the Atwood Achiever, both drillships are making good progress in the DSME shipyard.

On the subject of new builds, I'll remind that we retain one drillship option with the DSME shipyard that expires July 31 of this year. Although I fully expect that some of you will try to get us to divulge our thinking on this, we haven't made a decision yet so we won't have much to add on today's call.

Shifting to marketing, since our last call, we announced a number of attractive new contracts for both our existing rigs and our earliest delivery newbuild jack-up. We secured a 3-year extension on the Atwood Osprey with Chevron in Australia that will keep that rig busy until May of 2017. With the Osprey having less than a year's worth of operating history and being Atwood's first ultra-deepwater floater, this significant extension signifies that the quality of our people, our assets and our commitment to operational excellence makes a real difference.

As I alluded to earlier, the Atwood Hunter gained a 3-well commitment from Noble Energy that will commence after the current contract ends and the 30-day out-of-service period is complete, expected to begin in December of this year. We are pleased to continue our working relationship with Noble on the Atwood Hunter.

The Atwood Beacon secured 6 months of follow-on work that will have it moved to Israel after it completes its current program in Guyana. And finally, we secured our inaugural contract on the Atwood Mako in Thailand, a market that is relatively low cost and one in which Atwood has extensive operating experience.

In aggregate, these 4 fixtures represent approximately $650 million of potential revenue, bringing Atwood's total revenue backlog to a company record $2.2 billion.

Looking forward, our market outlook remains very positive for both floaters and jack-ups. Oil prices remain very healthy. The world economy appears to be stabilizing and the Gulf of Mexico continues to attract further interest in future drilling activity. At Atwood, we have seen more bid and inquiry activity in March and April than in any 2-month period over the past 3 years.

In the deepwater and ultra-deepwater segment, the combination of recent discoveries that will lead to expansion of existing plays and the opening up of new plays over the next few years, combined with expanding inquiries for uncontracted newbuild rigs for deliveries in 2013 and beyond, confirms our bullishness.

In the jack-up segment, the absorption of newbuild rigs continues in an orderly fashion, and we are seeing higher day rate contracts being secured for both existing and new jack-ups.

With the success of this past quarter's marketing efforts, we've concentrated our future marketing efforts on the Atwood Advantage. We are very encouraged by the large number of visible, suitable drilling programs that are calling for a calendar year 2013 start. As a result, we are discussing opportunities for the Advantage with multiple operators. We are also actively marketing the Atwood Manta, which will be available before the end of this year; and the Atwood Aurora, which becomes available in the October time frame. The Manta and the Aurora are the only 2 rigs in the marketed Atwood fleet with calendar year 2012 availability, and we expect that the strengthening market bodes well for securing favorable contracts.

With that, I'll conclude my prepared remarks and hand it back to Mark before we open it up for questions. Mark?

Mark L. Mey

Thanks, Rob. Let me now walk you through our financial results for the fiscal second quarter ended March 31, 2012. I will then compare this quarter to the quarter ended March 31, 2011, also to the previous fiscal quarter. Finally, I will update you on our guidance for the remainder of fiscal 2012.

Our diluted earnings per share for this quarter were $0.90 on revenues of approximately $172 million, as compared to earnings of $1.08 on revenues of $159 million for the same period in 2011. The increase in revenues is due to 43.5 additional operating days during the most recent quarter, while the reduction in earnings per share is a result of the Atwood Falcon's 53.5 0-rate days, as the rig continues to prepare for a 50-month [ph] contract with Apache in Australia. The additional operating days during the quarter were due to the Atwood Osprey operating during the entire quarter in 2012. Note also that our tax rate for the quarter was unusually low at 6% due to a favorable foreign jurisdiction tax settlement during the quarter.

Financial highlights achieved during the quarter include average day rates of $294,000 per day, identical to the average day rate achieved during the same period in fiscal 2011 and up $7,000 a day from the previous quarter. As Rob mentioned, revenue efficiency of 94%, up 2% from the previous quarter, and contract drilling margins of 54% and net margins of 35%, as compared to 58% and 35% for the fiscal first quarter of 2012.

Contract drilling costs totaled approximately $79 million for the quarter, as compared to $50 million for the same period in 2011. The increase is attributed to a full quarter of operations for the Atwood Osprey. The Atwood Falcon in Korea increased repair and maintenance costs whilst in the shipyard and certain maintenance projects being accelerated on the Atwood Hunter during the quarter.

Depreciation totaled $15 million as compared to $9 million for the same quarter in fiscal 2011, the increase attributed to the Atwood Osprey addition to the operating fleet in May of 2011.

Now let's compare the quarter to the fiscal first quarter ended December 31, 2011. Revenues decreased $13 million or 7%, primarily to the Atwood Falcon only working 37.5 days during the quarter due to the rig entering the shipyard in early February as discussed above. Net income declined by $6 million or 9% due mainly to Falcon's revenue reduction discussed above, offset by a lower quarterly tax rate of 6%, also previously mentioned. In addition, the Atwood Eagle incurred $3.6 million less in operating costs offset by the Atwood Falcon's increased costs of about $3.9 million during the quarter.

Looking at the balance sheet, capital expenditures totaled $140 million during the quarter, which consisted mainly of progress payments on the Atwood Condor and project management and other payments on the other 5 rigs under construction.

Long-term debt increased by $80 million to $600 million, partially funding the aforementioned capital expenditures incurred during the quarter. Cash on hand increased $32 million to $132 million. And we ended the quarter with a 25% debt to cap, up 2% from the previous quarter.

Let me now provide an update to our outlook for the rest of fiscal 2012. Firstly, the Atwood Condor is expected to be delivered from Jurong Shipyard around June 30, 2012. We currently anticipate the rig will complete acceptance testing and mobilization preparation activities during July and depart in this 3-month mobilization to the Gulf of Mexico around August 1.

As previously discussed, we will then begin earning and recognizing both day rate, as well as operating costs, during the mobilization period. As a reminder, day rate is 70% of operating day rates, and we estimate operating costs also at about 70% of the steady run rate operating costs during the mobilization period. Finally, fuel and tank [ph] costs are borne by our customer during mobilization.

As Rob mentioned, the Atwood Mako is anticipated to be delivered about 2 weeks early and to start its contract with Salamander in mid-September in Thailand.

Turning next to other service days, we expect the following projects through the remainder of calendar 2012. The Atwood Falcon's ongoing shipyard projects should be completed within the next 2 weeks, followed by a 20-day mobilization to Australia, where after the rig will begin its drilling contract with Apache. The mobilization rate to Australia is 95% of operating day rate.

We expect to incur 5 0-rate days in Atwood Beacon in the fiscal fourth quarter related to regulatory inspections. The Atwood Eagle is anticipated to incur approximately 25 0-rate days for regulatory inspections and planned maintenance and this in on October of 2012, so fiscal 2013. Also in fiscal 2013, the Atwood Hunter is expected to incur a 30-day out-of-service after its completion of its current contract with Kosmos in Ghana in late October 2012. Whilst in the shipyard, the rig will complete its regulatory inspections and perform planned maintenance activities.

As to contract drilling costs, we reiterate last quarter's guidance subject to mobilization and contract start dates of the Atwood Condor and Atwood Mako. If you recall, we are guiding to fiscal 2012 contract drilling costs of $315 million to $325 million.

For the fiscal third quarter of 2012, we anticipate contract drilling costs of approximately $88 million, which includes approximately $10 million in shipyard-related costs and expense on the Atwood Falcon project. Overall, the inflationary impact of contract drilling costs remains in the 4% to 5% on an annual basis.

Turning to G&A expenses. We expect the remaining 2 quarters of fiscal 2012 to approximate $11 million to $12 million per quarter. Depreciation expense should average approximately $15 million per quarter, increasing upon the initiation of the Atwood Condor's mobilization to the U.S. Gulf of Mexico and the Atwood Mako's contract start in September. The Atwood Condor's depreciation should approximate at about $2.3 million per month, while the Atwood Mako would add an additional $500,000 per month.

We expect our tax rate for 2012 to revert back to around 15% for the remaining 2 quarters and average 13% for fiscal 2012. Having spent $297 [ph] million in capital expenditures during the first half of 2012, we estimate additional fiscal year 2012 CapEx to total $384 million for the remaining 2 quarters.

The Atwood Condor and Atwood Mako represent about 80% of this amount with project management costs, capital spares, maintenance costs and capitalized interest and the other 4 rigs under construction accounting for the remaining 20%. Of that $384 million, we estimate $194 million being spent during the fiscal third quarter of 2012.

I should also mention, we now anticipate recognizing some interest expense later in the year, given the timing of the delivery of the Condor and the Mako. At this time, I would guide you to approximately $2.5 million in the fiscal fourth quarter of 2012.

Finally, we expect to fund this capital expenditures with cash flow from operations, cash on hand and by increase in the amounts drawn under our revolving credit facility to approximately $350 million by the end of fiscal 2012.

That concludes my prepared remarks comments. I will now turn the call over to Clint for questions. Clint?

Question-and-Answer Session

Operator

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

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

When I look at your story, it's obviously one of pretty big transformation over the next couple of years in quality of the fleet and also just size of the fleet. Rob, help us understand how challenging it's going to be? I just imagine there's a lot of back office and hiring and rig personnel, operational staff, just preparing the organization for that change, how nervous are you about that? How far along in that process are you? And maybe describe some of the challenges and maybe some of the victories you had in getting there.

Robert J. Saltiel

Well, you're right that the process we're undergoing here at Atwood is a transformation in terms of the quality and the size of our fleet and obviously, requisite with that is the need to hire people from outside the company who bring in skills and experience that we can leverage right away because we're very much in the midst of this on a day-to-day basis, in terms of getting our rigs out ratably over the next 2.5 years. One of the things that I think has helped us is the way we've staggered the delivery of our big rigs. So a key hallmark of our organic growth strategy is not to try to do too much too fast. So we've been committed to delivering one of our ultra-deepwater floaters each year starting with the Osprey in 2011. We'll have the Condor this year and then we have the Advantage and the Achiever in 2013 and 2014. So pacing the addition of the large rigs to our fleet gives us some allowance for being able to both train internal people from Atwood to migrate to the newer rigs, as well as bring new people in from outside the company. I will say that because of the exciting things that are happening here at Atwood, I think we really have become an employer of choice. We've had a number of people from outside Atwood but who are in the industry approach us. I think they're excited about our addition of new high-spec modern rigs and what that bodes for the future, in terms of employment opportunities and career opportunities. And I also think that the success of the company as being a safe and reliable and efficient operator and our relationships with clients also has served us well in attracting new talent to the company. So we fully take on board and agree with the comment that it's a challenge for a company like ours, even though we've been in business for over 40 years. What we're doing now is very ambitious and exciting. But we feel very good about where we are in terms of our progress and, obviously, the results we've gotten on the Atwood Osprey and our clients' commitment to us for an additional 3 years gives good support for the fact that we know how to do this, and we'll continue to do it with our future newbuilds.

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

Absolutely. Kind of in the conversation of quality of the fleet, you guys are building some new stuff. How should we think -- do you -- is there a market, a, to maybe monetize some of your older assets; and b, is that something that you would look to do over the next couple of years?

Robert J. Saltiel

Well, we have 3 idle assets as you know. And if you looked at our recent fleet status report, we have entered into a definitive agreement to sell the Richmond. It's not finalized yet. It's conditional on a couple of things, but we expect that the sale is likely to go through. So we do have 2 other idle assets that will either return to work, if the market allows, but we don't see that happening any time in the near term or potentially will divest those rigs. When you look at the rigs in our active fleet that are a bit older and you look at our 3 5,000-foot [indiscernible] rigs, they all have healthy backlog on them. In fact, we just got a renewal on the Atwood Hunter. Of course, the Eagle and the Falcon are booked in Australia well into calendar year 2014. The Vicksburg has a great niche in Thailand, and we see good opportunities to keep that rig busy. So at this point in time, we don't have any intentions to divesting of our active older rigs. Because we've always had a small fleet at Atwood, these rigs have been extremely well maintained. And as a result, our clients continue to commit to those rigs for renewals. So no near-term plans to divest of the revenue-producing assets even as we grow our fleet with the new assets we are adding here over the next couple of years.

Operator

The next question comes from the side of John Lawrence with Tudor, Pickering, Holt.

John D. Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Just a question on the Advantage, a lot of optimism there. Would you say 550 is a [indiscernible] an asset?

Robert J. Saltiel

Well, as I mentioned in our opening comments, we are in discussions with a number of operators and I really don't want to say too much about what to expect on a day rate. I think you can look to a number of recent markers in the ultra-deepwater market to get a sense of where fixtures have been. Clearly, they're trending northward and they're well above the levels that we anticipated when we made our decision to invest in the rig. We do feel very good about our opportunities to market the rig and get a contract well in advance of delivery. So at this point in time, that's probably all we're prepared to say about that.

John D. Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay, fair enough. And then with the Falcon going to Australia, you will have 3 rigs in the region. Could you talk about labor availability down there and wage inflation? I think for the most part, you have cost escalators in those contracts, is that correct?

Robert J. Saltiel

We do. We feel very good about Australia. Atwood has been operating in Australia since 1974. It's been a core market for our company. And we had a lot of success there. And of course, now we'll have 3 deepwater floaters there: 2 of the 5,000-foot rigs and the Atwood Osprey. So we're very excited about our position there. We think it's a great market. As I was mentioning in a previous -- to the previous question about our ability to attract talent, obviously, we've had to bring on some Australian personnel to crew that rig, the Atwood Falcon. And again, we've done quite well in being able to supplement the existing team with people from Australia, who have been in the industry maybe with some of our competitors but who wanted to join the Atwood team. So we feel good about our ability there to attract personnel to work on all 3 of those rigs, and we're hoping for a long run on all 3 rigs in Australia.

Mark L. Mey

John, let me just add for a second here. The costs in Australia are high, but they aren't very high inflationary-wise. So if you look at our average cost per year, they've been going up about 3%.

John D. Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And then I guess, just one more on the Osprey real quick. On the extension with Chevron, that was part of the original contract, right? The 470 extension?

Robert J. Saltiel

The original contract had a provision for an extension at that rate. And -- but we elected to renew with Chevron because we really want to do again continuity with that client. We felt like we were getting a fair rate. We also did modify some of the terms and conditions in the contract as it relates to equipment, maintenance and time allowances. So all in all, we felt like it was a good deal for the company.

Operator

[Operator Instructions] The next question comes from the side of David Wilson with Howard Weil.

David Wilson - Howard Weil Incorporated, Research Division

Thinking about the ultra-deepwater rigs coming in the market, the Advantage and the Achiever, I know we're still a ways out on delivery in both. But was wondering if you had a preferred region to place those rigs, I know at the end of the day, they're going to go where they are going to go, but if you could control it, what region would you prefer they were from a cost side? And then I guess, I mean, access to labor there and then maybe from a more beneficial tax regime?

Robert J. Saltiel

Well, a good question, David. You're right, we'll ultimately go where the opportunities present themselves. But we're excited about returning to the Gulf of Mexico with the Atwood Condor. We've been in this market before. We hadn't been in the market recently in the deepwater. And so bringing the Atwood Condor over here establishes the nice position for us here. Obviously, with our headquarters here in Houston, a lot of our technical support here, that's an area from which we can relatively easily support our rigs. So as we look at the ultra-deepwater rigs that we're building behind the Condor, the Advantage and the Achiever, certainly, one place that we'll look to place those rigs will be the Gulf of Mexico. We're obviously very encouraged about the rebirth of the Gulf, the ultra-deepwater gulf in terms of the issuing of permits and the continuing prospectivity and excitement I think that operators are showing for this market. I think you'll see a lot of interest in the Center Gulf lease sale later this summer, which will confirm the interest in the Gulf. So we think that the Gulf of Mexico is certainly a good target area for us to think about for one or both of those rigs. But clearly, you have to include the entire golden triangle. West Africa has got a number of new areas that are being pursued. Obviously, we're active in -- have been active in Ghana and Equatorial Guinea in terms of deepwater drilling but there's a number of new areas that are being opened up along the Atlantic transfer margin and in areas as far north as Mauritania and then around the Horn there to East Africa as well. So we'll certainly look at West Africa and at [indiscernible], Brazil, certainly an area that we'll continue to look at. And then over in the east, as you know, Indonesia, Malaysia, those are ultra-deepwater markets as well. So I don't want to be too definitive, but I will say that having put a rig into the Gulf of Mexico with the Condor, I think, gives us some optimism that we can have another rig to join it over the next couple of years.

David Wilson - Howard Weil Incorporated, Research Division

Okay. And then just kind as a follow-on on that is -- I might have missed it in some of your prepared remarks. But you mentioned discussion with several operators on the opportunities around the Advantage. Is it safe to assume that there are some new customers in those discussions beyond kind of your current customer base?

Robert J. Saltiel

Absolutely, absolutely. Yes. We've got a pretty long list here. And right now, we've got a pretty small fleet. So we're definitely talking to folks outside of our current client base.

Operator

We'll go next to the side of Matt Conlan with Wells Fargo Securities.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

I realize you're focused on marketing the Advantage at this point since it's due out 9 months earlier than the Achiever. But are you having significant discussions to get on the Achiever? And aside from little less urgency, are there any noticeable differences in the discussions you're having on the Achiever compared to the Advantage?

Robert J. Saltiel

I would say that our discussions around the Advantage typically include the Achiever because they are identical rigs and because the number of the clients that we are talking to have multiple rig needs that will go beyond 2013 starts and into 2014 and beyond. But the more serious discussions about getting a fixture here over the next few months have centered around the Advantage. But I do think a number of clients out there are excited about the fact that we're not just building one ultra-deepwater drillship, but we're really starting to build a fleet of ultra-deepwater rigs, and we can be more of a full-service provider and maybe even a core supplier -- somebody in the ultra-deep, and we certainly haven't had that capability before. So that's really where the discussion of the Achiever at this point tends to come into the play.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Okay. And a question about the option trying to not ask anything that I know you won't answer. But is there a lot of value in the option?

Robert J. Saltiel

Well, we think that there's certainly some value in the option. We've seen our competitors announce some additional drillships that we think don't quite meet up to our technical standards and at rates that are higher than where we think we will renew our option, if we decide to do that or extend our option. So we feel pretty good about where we are in terms of the rate. I wouldn't tell you that there's a lot of inflation involved there versus the exercise price. But we do definitely think that there is some. But what we've said at the outset about our potential to exercise the option is that we wanted to make sure that we still had confidence in the market. We wanted to demonstrate that we were growing our backlog on our existing rigs and that we still felt very confident in the technical merits and marketability of the previous drillships, the Advantage and the Achiever. And I'd say that on all those dimensions, we're feeling pretty good. We certainly see the market trending up. We feel very good about the backlog that we've grown on our existing fleet. And again, a lot of interest in the Advantage in particular and as well as the Achiever. So we are feeling pretty good about where we are there. But these decisions to exercise an option, their board and management joint decisions and it's something that we just won't entertain until later on in the coming couple of months before we make a definitive decision.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Okay. Would you classify the signing of the Advantage to a contract prior to exercising it? Is that just a strong preference? Or is that a hard prerequisite?

Robert J. Saltiel

Yes. I wouldn't say we have any hard prerequisite, just more of a preponderance of that evidence that we would look at to make the decision. But there's no question that the signing of the contract on the Advantage would be a pretty compelling step toward demonstrating the marketability of the design and, of course, taking one more speculative rig off our roster. So from that perspective, it would certainly be a welcome addition to solidify a decision, if we did decide to exercise the option. But I won't say it's a hard and fast requirement at this point.

Operator

[Operator Instructions] We'll go next to the side of Nigel Browne with Macquarie.

Nigel Browne - Macquarie Research

Just wanted to ask, piggybacking on that location question. Just wanted to ask whether you guys view your operating location footprint as a competitive advantage. Given geopolitical risk and client mix, do you see that as being a sustainable advantage versus some of your peers?

Robert J. Saltiel

When you say operating location, what...

Nigel Browne - Macquarie Research

Particularly, just disproportionate, not really exposed to Brazil or some of the other higher political risk regions.

Robert J. Saltiel

Yes. I think that we certainly are active in a number of the world's markets. And I think you are right that some areas that have gotten maybe more challenging recently are areas that we're not currently active. But that's not to say that we don't look at all the markets where we are and where we could be with our expanding fleet. Obviously, as we expand our fleet, we're going to have to be more open to look at markets other than those in which we currently are active. But we do feel good about the Australian market. I mean, we have 3 rigs there. Southeast Asia has been a good market for us, and we're going to have 2 rigs working in Thailand. And of course, where we're working in West Africa, Ghana and Equatorial Guinea, Cameroon, we really haven't had any significant issues there that make us get concerned about those markets. We're not in Brazil. And so when you look at it in an aggregate, I do feel pretty good about the geopolitical risk at least that our current fleet is facing. But again, as we add to this fleet, as we expand our capabilities, we're likely to find ourselves in some of these markets going forward. And it's just something that we'll have to consider as we market our rigs, making sure that we balance the risk against the potential rewards.

Mark L. Mey

And, Nigel, from my side, I know political risk is a key part of your question there but if you look at some of the higher inflationary environments right now, Brazil, Angola, Nigeria, we aren't in those 3 markets. So from a cost guidance and inflation guidance we've been giving over the last few quarters, we've remained at 4% to 5% with some of the competitors are seeing double-digit increases in costs. So I think it's a big benefit to us as well in trying to retain margins over the longer term.

Nigel Browne - Macquarie Research

That's very helpful. And just wanted to see whether you guys are observing any pricing trends in terms of all-in costs from newbuilds? What -- could you comment on what you're seeing now versus -- for delivery in the outer years versus what you've seen in perhaps this cycle and the last cycle in terms of all-in costs on -- especially on the floating side of the business?

Robert J. Saltiel

Yes. As I mentioned in a previous answer from your previous question, we haven't seen a lot of inflation. Certainly, in the yards where the drillships are being built, those yards and we've been focusing on Korea, those yards depend quite a bit on the worldwide shipping and container industry. And as a result of some of the challenges of the world economy slowing down in that industry, there has been a fairly well available capacity in those yards, and it remains available to construct additional drillships. And as a result, that's really kept the inflation quite low. We don't normally see the kind of disconnect that we currently have between rising day rates and relatively flat build costs. In the last cycle, as day rates were moving up to the levels that we've got today, the cost of building rigs was moving up to $750 million, $800 million. So as a result of that, the opportunity to build rigs of $600 million in a market that's arguably north of $500,000 a day or more on the ultra-deepwater side is something that's a fairly unusual occurrence, again, based on previous cycles. And it is one of the driving forces, I think, for some of the newbuild programs that our industry is undertaking here today.

Operator

There are no more questions at this time.

Robert J. Saltiel

Okay. Well, if there are no more questions, I want to thank everybody for their interest in Atwood Oceanics, and we'll join for the third -- we do have a question? Okay. It looks like, Clint, there is a question that came in.

Operator

Yes, one just came in from Mike Breard with Hodges Capital.

Michael Breard

Just one quick question. If by some chance you were to exercise that new option, is it possible that rig delivery time might be shorter than expected?

Robert J. Saltiel

I think that as you build multiple rigs within the same yard with the same design, which is what we would certainly aim to do because the Achiever is identical to the Advantage. And if we decided to build a third drillship, we would basically freeze the design. I do think there's a learning curve effect. We've seen it on the semi-submersible that we're building in Singapore because it's a late copy in a long series. And so we do expect that there's certainly an opportunity for those rigs to come out earlier basis the experience factors that the shipyards work together, keeping in mind, though, that there's a lot of major equipment provided by vendors that is key to constructing these rigs that is oftentimes outside of the control of the shipyards. So when you talk about the drilling package, when you talk about the BOP or the riser, those are major components that come from OEMs. And to the extent that the OEMs have issues themselves in meeting their commitments, those kind of things can delay future deliveries. So I think you have those 2 effects potentially working against each other, the shipyard getting more experience and capability maybe to produce quicker but potentially having the OEM's challenge to keep up because their orders have grown, as we've gone through this newbuild cycle. So I think it's one of those things that we will have to watch and have a better view on it when and if we decide to exercise our option.

Operator

And it looks like that was the last one.

Robert J. Saltiel

Okay. At the risk of another false start, I'll thank everybody for joining our first quarter call and look forward to picking it up in 3 months as we review our third quarter call. Thank you.

Operator

This concludes today's conference. You may disconnect at any time.

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