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Executives

Suzanne M. McLeod - Director of Investor Relations

W. Matt Ralls - Chief Executive Officer, President, Director and Chairman of Executive Committee

Mark A. Keller - Executive Vice President of Business Development

William H. Wells - Chief Financial Officer, Vice President of Finance, Senior Vice President and Treasurer

Thomas P. Burke - Chief Operating Officer

Analysts

Douglas L. Becker - BofA Merrill Lynch, Research Division

David Wilson - Howard Weil Incorporated, Research Division

Ian Macpherson - Simmons & Company International, Research Division

Robin E. Shoemaker - Citigroup Inc, Research Division

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

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

Andreas Stubsrud - Pareto Securities AS, Research Division

Richard Haydon - Yield/Capital Appreciation Management

Rowan Companies (RDC) Q1 2012 Earnings Call May 2, 2012 11:00 AM ET

Operator

Greetings, and welcome to the Rowan Companies, Inc. First Quarter 2012 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Suzanne Spera, Director of Investor Relations for Rowan Companies, Inc. Thank you. Suzanne, you may begin.

Suzanne M. McLeod

Thank you, Robin, and good morning. Welcome to Rowan's First Quarter 2012 Earnings Conference Call. I'd like to take a moment to remind you that Rowan will host an Analyst and Investor Day in New York on Wednesday, May 30. The event will feature executive and management discussions on Rowan's strategy for continuing to grow the company, operational strengths and challenges, offshore drilling marketing plans and opportunities, financial overview and flexibility for growth. Complete details on the event can be found at the homepage of Rowan's website under Upcoming Events. We look forward to seeing you there.

Joining me on this call this morning are Matt Ralls, President and Chief Executive Officer; Tom Burke, Chief Operating Officer; Mark Keller, Executive Vice President, Business Development; and Bill Wells, Senior Vice President, Chief Financial Officer and Treasurer, who will have prepared comments. Also in the room to respond to questions is Kevin Bartol, Senior Vice President, Corporate Development.

Before Matt begins his remarks, I'd like to remind you that during the course of this conference call, forward-looking statements may be made within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements about the change in corporate structure, as well as statements as to the expectations, beliefs and future expected financial performance of the company that are based on current expectations and are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected by the company. Other relevant factors have been and will be disclosed in the company's filings with the SEC.

With that, I'll turn the call over to Matt.

W. Matt Ralls

Thanks, Suzanne, and good morning, everyone. I'll be brief this morning. We're pleased with our results for the first quarter and believe that these results reflect an upward trend for the company. While over the past few years, we've often rolled from high day rate contracts signed during the last peak to new lower day rates, we're now in a position where virtually all rigs moving to new contracts will be getting higher day rates.

We continue to have a few rigs in transition as we reposition our fleet into the markets where we believe they have the best longer-term opportunities, but we expect the pace of those relocations to reduce over the balance of this year. These moves have helped us add substantial contract backlog, bringing our total backlog to $3.5 billion, and we're hopeful and pretty confident that we'll be adding significant deepwater contract backlog over the coming months.

I believe that Rowan is in a great position, with a growing fleet of very high quality rigs, the best people in the industry and a renewed strategic focus on excellence in both jack-up and deepwater drilling. Also, as disclosed in our filing earlier this week, we believe we're on track to complete our redomestication to the U.K. through a transaction utilizing Class A shares rather than depository receipts. I believe that if we're successful in staying in the S&P 500 Index, as expected, it will have been worth the effort and expense of using the Class A structure, notwithstanding any market turbulence that may have been associated with the uncertainty around that issue.

And finally, we had an incident this morning involving the EXL-I. As she was being towed toward the entrance of the Corpus Christi Ship Channel, a passing ship lost power and collided with the rig. All hands aboard the rig are safe and the situation is stable, but the port side of the rig was damaged and will require repairs prior to being able to be mobilized to Southeast Asia as planned. We will update our mobilization plans in the next fleet status report.

With that, I'll turn it over to Mark.

Mark A. Keller

Thanks, Matt, and good morning, everyone. In the first 4 months of 2012, we are proud to have added more to our total backlog than the entire year of 2011.

With recent commitments of additional jack-up contracts in Southeast Asia, the U.S. Gulf of Mexico and extensions in the North Sea and our previously announced ConocoPhillips and BG contacts, we have exceeded $1.5 billion in additional backlog. We are encouraged by these contracts and the positive market dynamics of the jack-up sector. Worldwide utilization is the highest it's been in over 2 years, average earned day rates worldwide were up approximately 10% among our peer group over the past 6 months, and tender activity for more capable jack-ups continues to remain strong.

This morning, I would like to talk to you briefly about the regions of the world where we currently operate jack-ups, and then spend a few minutes updating you on our entry into the ultra-deepwater market. According to ODS-Petrodata, there are currently 478 jack-ups worldwide, demand is 384 rigs, with total utilization at 80% and marketed utilization at 92%. As the global jack-up market continues to bifurcate, tender activity is primarily focused on higher-spec equipment. We currently anticipate international jack-up demand for Rowan rigs to be approximately 40 units, driven primarily by Southeast Asia, the Middle East and the North Sea markets.

Since our last call, we have commitments to mobilize 2 additional jack-ups to Southeast Asia, doubling our presence in the region. EXL-IV is currently en route and scheduled to commence operations this month for Carigali Hess in Malaysia, on a 31-month contract at a day rate of $145,000 a day, plus a $6 million mobilization fee. EXL-I was scheduled to mobilize into the region in July of this year for a minimum 9-month commitment with Hess Indonesia, at a day rate of $160,000 a day, plus a $12 million mobi. However, after the events of this morning, this schedule could be delayed. These 2 rigs join the J.P. Bussell and the Gorilla II, both currently operating for Petronas in Vietnam and Malaysia, respectively.

Turning to the Middle East. We have 11 jack-ups in the area with 9 of those units contracted to Saudi Aramco. We currently see an increase in demand of at least 15 additional jack-ups in the region, based on current and upcoming tenders from Maersk Qatar and Saudi Arabia -- Saudi Aramco among others.

In the U.S. Gulf of Mexico, our marketed fleet of 5 jack-ups is fully utilized. EXL-I and Ralph Coffman are scheduled to mobilize out of the region in the second and third quarter of 2012. Operators are realizing the importance of retaining high-spec jack-ups in the region, and we are pleased to announce a 1-year contract for the Gorilla IV with Walter Oil & Gas. The rig will commence operations at a blended day rate of $165,000 a day in third quarter 2012, following a limited shipyard stay.

Two of our units continue operations with McMoRan, and we eagerly await the results of the Davy Jones well test. We still expect the Joe Douglas to go to work for McMoRan at the completion of its current well. Gorilla III and EXL-II continue drilling operations in Trinidad. We are currently tracking several future projects for high-spec jack-ups in the region, and Rowan is well positioned to take advantage of those opportunities and possibly expand our presence in Trinidad.

Moving on to the North Sea. Rowan has 6 jack-ups contracted in the region, and they are all fully booked through 2012 and beyond. 53% of our total contract backlog is in the North Sea. We are pleased to have a strong presence in a region focused on high-specification equipment. We recently extended the Gorilla-VII contract with Apache to 30 months. The first year will be at $216,000 a day and the remaining 18 months of the contract will be at $280,000 a day.

Now turning to the ultra-deepwater market. Since our last call, this sector continues to strengthen as day rate fixtures average in the high-500s to the low-600s with continued upward pressure. Acute shortage in near-term ultra-deepwater availability has added increased pricing leverage for contractors with obtainable units through the first half of 2013. Standard contract terms are consistently for 3 to 5 years, and operators are now actively seeking ultra-deepwater drillships for late 2013 and early 2014 commencement.

We're currently tracking 16 active requirements, including several outstanding proposals. While we continue to monitor activity in the frontier regions of the world, the focus of our recent tender activity has been in the U.S. Gulf of Mexico and West Africa, specifically Angola. We will keep you updated on our progress in securing contracts for ultra-deepwater drillships.

Thank you for your time this morning, and I will now turn the call over to Bill Wells.

William H. Wells

Thank you, Mark, and good morning, everyone. Our first quarter revenues were $333 million, up by 21% over last quarter and 62% over last year, primarily from the impact of fleet additions between periods and higher utilization of existing rigs. First quarter revenues were reduced by the earlier-than-expected relocation of the EXL-IV from the Gulf of Mexico to Southeast Asia, during which time the rig was off rate, and the later-than-expected start dates for the 3 116-Cs contracted to Saudi Aramco.

As a result, our collective shipyard and transit time during the first quarter was approximately 11% of our available rig days. We expect similar shipyard and transit time between 10% to 12% in each of the remaining quarters, consistent with our previous guidance. Our second quarter 2012 drilling revenues should be slightly above the first quarter level on an expected 2% to 3% increase in operating days between periods. This incremental activity from the rigs just mentioned more than offsets the impact of relocating the EXL-I from the Gulf of Mexico to Southeast Asia.

The backlog of drilling commitments is approximately $3.5 billion, up from $1.7 billion at this time last year. Most of the growth is in the North Sea and Middle East markets, which collectively comprise 82% of the current total. We estimate that approximately 26% of our contract backlog will be realized as revenues during the remainder of 2012, 31% will occur in 2013, 23% will occur in 2014 and the balance in 2015 and 2016.

Our first quarter operating expenses of $182 million were 12% above last quarter and 64% above last year, primarily due to the impact of fleet additions, rig relocations and startups between periods. Excluding the variance in reimbursable expenses, operating expenses during the first quarter were in the middle of the range of our previous guidance. We estimate second quarter 2012 operating expenses in the range of $182 million to $185 million, comparable to the first quarter. We are experiencing higher costs in certain areas during the first half of this year, such as crew costs in the North Sea and maintenance costs in the Middle East, which we believe will moderate over the second half of the year.

In addition, personnel-related costs will continue to be recognized in operations during the relocations of the EXL-I and EXL-IV to Southeast Asia over the first half of the year, whereas increased shipyard time expected for other rigs over the last half of the year should absorb more of these expenses and capital costs. Accordingly, our quarterly run rate of operating expenses should be slightly lower over the last half of the year.

Our full year 2012 estimate of operating expenses is now approximately $710 million to $715 million or 6% above our previous guidance. This increase results from the items previously mentioned, in addition to the impacts of expected higher activity levels in Norway, startup activities in Southeast Asia and amortizing mobilization costs, primarily on EXL-I. However, generally speaking, we are not experiencing significant inflationary pressures in our daily operating expenses, and most of the cost increases are associated with, and more than offset by, higher revenues. As a result, we expect our average gross margin as a percentage of revenues to improve throughout the year from the mid-40s in the first quarter to the low-50s in the fourth quarter 2012.

First quarter depreciation expense totaled $59 million, which was in line with our previous guidance and up by 8% over last quarter and by 55% over last year, primarily due to rig fleet additions between periods. Our latest estimate for 2012 depreciation is in the range of $244 million to $245 million for the year, including approximately $61 million in the second quarter.

Our first quarter SG&A expenses totaled $23 million, up by 11% over last year but down by 6% from last quarter and below our previous guidance, primarily due to fluctuations in incentive compensation and travel costs and professional fees. Our latest estimate for 2012 cost is in the range of $96 million to $97 million for the year, including approximately $25 million to $26 million in the second quarter.

We recognized $4.6 million of charges and other onetime expenses in the first quarter, which included $2.9 million to write down the carrying value of steel left over when we canceled the 240C #4 project in early 2009, and $1.7 million of transactional cost associated with the redomestication. We expect to incur an additional $10 million to $12 million of redomestication cost over the course of the year, which is higher than our original estimate, largely due to expenses of converting from ADRs to the Class A share structure, which we expect will keep Rowan in the S&P 500 Index.

Interest expense net of interest capitalized was approximately $11 million during the first quarter, within our previous guidance. Assuming no new borrowings, we estimate 2012 gross interest costs of approximately $67 million, of which we expect $31 million to be capitalized. For the second quarter, net interest expense should be approximately $10 million.

As previously reported, we are in the process of redeeming our outstanding Title 11 debt. On April 28, we redeemed the Gorilla VII notes, and on May 1, we redeemed the Scooter Yeargain and Bob Keller notes. Including scheduled principal and interest amounts, these redemptions have required payments totaling approximately $140 million, including $10.6 million of make-whole premiums paid in March, carried as restricted cash at March 31 and to be recognized as a loss in the second quarter. We currently expect to make another $110 million of payments in connection with the Bob Palmer redemption on July 16, including an approximately $10 million make-whole premium to be paid in June and recognized as a loss in the third quarter.

The first quarter and expected full year effective tax rate is a credit of approximately 1%, slightly above our previous forecast as a result of higher taxes in Southeast Asia. Most of our 2012 earnings should come from outside the U.S., and our U.S. earnings should continue to benefit from depreciation and the reversal of taxes previously provided on certain outbounded rigs. For 2012, tax benefits from the redomestication should be modest. We would expect benefits to increase over the long term, barring any significant changes in the tax laws where we operate. Our after-tax loss from discontinued manufacturing and land drilling operations totaled $6 million in the first quarter and resulted primarily from foreign income and state sales tax, taxes associated with those businesses.

Property and equipment additions totaled $116 million in the first quarter and included $23 million toward the 3 drillships, the balance for our existing fleet, including contractual modifications. On March 31, we had approximately $1.7 billion of remaining capital expenditures under our drillship newbuild program, with $141 million required in 2012 and the remainder in 2013 and 2014. We currently estimate as much as another $359 million of capital expenditures in 2012, including $180 million of contractual modifications; $81 million toward managed life enhancement and upgrade projects; $59 million for existing fleet maintenance and upgrades; and $39 million for area equipment spares, drill pipe and improvements to our shore bases.

That concludes our prepared remarks. With Robin's assistance, we'll now open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Douglas Becker with Bank of America Merrill Lynch.

Douglas L. Becker - BofA Merrill Lynch, Research Division

Just wanted to get a sense for how early, if everything falls into place, we could see a contract for the newbuild drillships?

Mark A. Keller

Well, right now, as I said in our prepared remarks, we're tracking 16 projects. We have approximately 8 active tenders that are out -- that are currently out. Douglas, it could happen any day. It's just hard to predict. As operators do their due diligence, as Matt said in his opening remarks, we feel good about where we are. The feedback from the operators remains very strong, and we're getting a lot of interest. But to give you a timeframe of when we'll get awarded the job is very difficult.

Douglas L. Becker - BofA Merrill Lynch, Research Division

Fully appreciate that, but it does sound like it could be in the second quarter the way things are shaping up. And how does that...

W. Matt Ralls

I think some of those will be awarded in the second quarter. It remains to be seen who gets them but...

Douglas L. Becker - BofA Merrill Lynch, Research Division

Fair enough. And how does that relate to the fourth drillship option? I think it was set to expire maybe a month or so ago. Was that renewed? And just the outlook for that relative to the very robust outlook for drillships that we see right now.

W. Matt Ralls

Yes, Doug. We're still keeping that option alive. It runs currently until the end of this month, but we fully anticipate that we can continue to kind of keep rolling it as we evaluate the opportunities for additional equipment. I'd say that right now, we're pretty optimistic and enthusiastic about what's going on in the ultra-deepwater market, but we need to, for our purposes, we need to see some contracting activity on our ships before we feel good about adding a fourth speculative rig. And as we've said, we feel pretty good that could happen, but it hasn't yet.

Douglas L. Becker - BofA Merrill Lynch, Research Division

Good. And then, a quick housekeeping item for Bill. When we just take a look at operating days and average day rate and compare it to the revenue, a little bit higher than the difference we've seen in the past. Was there anything particular in the first quarter revenue number that is notable?

William H. Wells

No, I can't think of anything there, Doug.

Operator

Our next question comes from the line of Dave Wilson with Howard Weil.

David Wilson - Howard Weil Incorporated, Research Division

Mark, with your increasing presence in Southeast Asia, have you come across any opportunities for your more conventional jack-ups, the Alaska or the Louisiana, where it's worthwhile to move those over there? I know there's a lot of capacity coming in that region, but was wondering if there's any opportunity there even from a maybe a tender-assist type capacity for those rigs?

Mark A. Keller

We have approached the operators in the region for skid-off, as you know. As you just mentioned, there's a lot of tender-assist activity in the region. Nothing have -- none of them have materialized as of yet. We've done presentations for Petronas and all the major operators. But we're still working on it, it just hasn't happened yet.

David Wilson - Howard Weil Incorporated, Research Division

Okay. And then just kind of a follow-on, on the drillships. I know there's been a lot talk in the industry of labor, wage inflation. But I just wanted to delve a little deeper into how or what the current plans are to staff up these rigs.

Thomas P. Burke

Well, we've got a good -- this is Tom Burke -- we've got a good plan. We're starting early. We've actually hired our first rig managers and OIMs and captains for the first rig, and we're staffing up. So I -- we think we've got a attractive company to work for and are not anticipating significant issues.

W. Matt Ralls

The management team that runs that group has a deep history in this part of the industry, and we believe a very good reputation should -- we're quite confident in their ability to attract the right kind of people. We'll be -- obviously, from a drilling standpoint, we'll be -- A substantial number of the new people will come out of the Rowan fleet.

David Wilson - Howard Weil Incorporated, Research Division

Sure, sure. Okay. And then one final one, if I could sneak one in here. On the Gorilla IV, the status of any collection from PEMEX, is there any update there?

William H. Wells

Yes, the only thing to say there, Dave, is we do expect to receive everything that we recorded. I mean, there's another amount that's in dispute that we've never recorded, and it's hard to say what the prospects for that are. But everything that's been recorded, we expect to receive. Just to be clear, we firmly believe we're owed everything that -- and we have made that position known to PEMEX, and we're embarking on the administrative hearing process to try to get some traction on that issue.

Operator

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

Ian Macpherson - Simmons & Company International, Research Division

Bill, I know you're going to not want to answer this, but I'm just curious with your cost guidance, it implies -- well, not implies, you have said your third and fourth quarter costs this year should be a little bit below what we see in Q1 and Q2. And holding activity constant, would that, do you think that, that 170 to 180 per quarter range might be a reasonable projection as our starting point for 2013 costs?

William H. Wells

Yes, I think all the things being equal, Ian, it probably would be. We obviously haven't delved too far into 2013, but I think that's probably a safe assumption. I mean, we don't have any additional rigs coming online, things like that or rigs moving around. [Indiscernible] as well that this is what's caused some of the fluctuations in the past.

Ian Macpherson - Simmons & Company International, Research Division

Okay. Are there any prospects near term for getting idle jack-ups back working, either with the Paris in the Middle East or any of those idle rigs in the Gulf of Mexico? Or is that really becoming more of a marginal opportunity as you're focused on your higher-value rigs at this point?

Mark A. Keller

Ian, we market them on a consistent basis to see if there's a project that would justify the modifications necessary to put them in the market. But we're also looking at opportunities to sell some of those assets that you're aware of. And Kevin's working on that, Kevin Bartol. But we're constantly looking at tenders in different areas of the world to see if it's possible, as I mentioned earlier to Dave, is for skid-off and different unique or niche-type opportunities where the rigs could go to work.

Ian Macpherson - Simmons & Company International, Research Division

If I could ask just one more quick follow-up with you. There continues to be an apparent rising demand for jack-ups in Mexico, and given the payment dispute history, does that impact your thoughts towards bidding against those requirements this year?

W. Matt Ralls

Yes.

Ian Macpherson - Simmons & Company International, Research Division

Is that a no, you're not interested?

Mark A. Keller

Matt answered it. He said yes, it does impact our decision.

W. Matt Ralls

It would be unlikely for us to work down there on this round of bids.

Operator

Our next question comes from the line of Robin Shoemaker with Citigroup.

Robin E. Shoemaker - Citigroup Inc, Research Division

I wanted to ask a little further on the 16 active deepwater requirements. Are those for 2013? I mean, we can see that there are quite a few rigs scheduled for delivery in the second half of 2013. I don't know if it's 16 or slightly more or less. But what is the timeframe at which those active requirements are, the rigs are expected to start?

Mark A. Keller

They vary, Robin. They vary from different times in '13 to early '14, some in '14. But there are other rigs coming in, new capacity coming in, as you referred to. But the type of projects that we are looking at, we feel like our ships are -- we separated those ships from the market given the redundancies and the operating capability of those rigs, and we're starting to see a lot of interest. We've seen it for a couple of -- a few months. And as Matt said, we feel really good about where we sit. We do have 8 active tenders out currently, and we anticipate more coming into the queue shortly. But they do vary from '13. The contracting window is getting to-- is started to -- since the last 6 months has expanded from probably 6 months to 1 year to 18 months. So you're starting to see more operators, as the ultra-deepwater market continues to tighten and strengthen, you see more and more operators starting to move their projects forward into the tender process.

Robin E. Shoemaker - Citigroup Inc, Research Division

Okay. And could I ask if those -- any of those 16 active requirements are from Petrobras?

Mark A. Keller

No, they are not.

Robin E. Shoemaker - Citigroup Inc, Research Division

Okay. So I mean, clearly Petrobras is going to be hiring rigs within this timeframe that we're talking about.

Mark A. Keller

Yes.

Robin E. Shoemaker - Citigroup Inc, Research Division

And you mentioned that, I believe, that your priority would be Gulf of Mexico or West Africa. So in terms of tenders that Petrobras may have out, would those be of interest either for your initial rig or some of the ones that would come subsequently?

Mark A. Keller

Robin, we are in contact with Petrobras, and we're tracking their activity very closely. Our preference would probably be to secure a contract in the Gulf of Mexico or West Africa or even some of the frontier regions. And there is many -- as you've heard our peers talk about and you've heard us talk about, the deepwater landscape has changed a lot with all the discoveries that have been made, and so there are a lot of opportunities in Mozambique, Tanzania and different frontier areas as they grow. And we are talking to operators that have projects in all those regions. But we do continue to monitor what's going on with Petrobras, and it's possible we could put a rig to work for them. But of the 16, none of them are for Petrobras.

Robin E. Shoemaker - Citigroup Inc, Research Division

Okay. That helps clarify. If I could ask one last question on the newbuild front. Am sure you keep very close tabs on the cost of newbuilds, both high-spec jack-ups and drillships of the type you have under construction today. Do you see any upward creep in new construction costs either for the type of jack-ups you might build or drillships coming, let's say, in the latter half of the year or in the timeframe when you might be in a position, having secured 1 or 2 contracts for your rigs, your speculative build rigs, to order some more?

Mark A. Keller

No, we do not. We're in contact with all of the shipyards where we might build these jack-ups in, and of course with HHI, and we don't see cost pressure at this point.

Operator

Our next question comes from the line of Joe Hill with Tudor, Pickering.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Just a few questions from me. I didn't pick up on this in the commentary, but can you give us a status update on the Viking and what the prospects are right now for signing it for '13?

Thomas P. Burke

I can give you a status on the Viking as far as the situation with the Elgin. So we have -- it seems like the flow rate from the well has decreased. We believe that Total is going to do their attempt a dynamic kill in the next couple of days, if not sooner. The Sedco 714 is drilling a relief well, and Gorilla IV is standing by or finishing its temporary abandon [ph] of the well it's on and ready to -- sorry, the Gorilla V is finishing the well it's on and standing by to start the second relief well. So we are very hopeful that the dynamic kill will be successful.

Mark A. Keller

As far as the contract extension, Joe, our contract -- our current primary term ends sometime in December, and we'll be in discussions with Total. We've had a very long relationship with Total. As you know, the Gorilla V has worked for them for several years, and we feel very optimistic with that relationship and being able to contract the rig. We are -- in the North Sea, just to give you some flavor of the demand there, there are 5 or 6 operators in the North Sea that are looking for rigs like that to try to fill their projects. So we feel very good about the prospects for a rig rolling off contract with that capability.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. That's very helpful. Just a quick question about the EXL-I. Obviously, the accident just happened. Can you give us an idea as to what kind of insurance coverage you have on that asset? And obviously, a visual inspection and all that stuff has to be done. And I guess, you wouldn't be willing to comment on the extent of the damage, not knowing it yet. But just, I guess, how would it work from a compensation standpoint via the owner of the ship that hit it? Or would you guys have to pay out under your policy?

W. Matt Ralls

Well, needless to say, it's very early in making those determinations. We would expect that, that ship which, obviously, hasn't gone anywhere since it didn't have power, that it will be insured and that we will collect under their insurance for the damages to the rig. We do have our own insurance if, for some reason, that insurance weren't available. There is a deductible, and we'll be getting more detail on that as this situation unfolds. The damage was to the port side crane and side shell, with some water taken into some of the outboard tanks in the hull. So it's too early to say how long it will take to make repairs. But I mean this is the kind of thing we do with rigs on a routine basis. So we'll -- but we have -- we don't believe this will have an impact on our contract in Southeast Asia, other than, obviously, being a little bit delayed getting there.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And then Matt, finally, are you worried about saturation in the high-spec jack-up market at all? I think we've got 38 2 million pound-plus hook loads out there and another 32-ish coming to market over the next 2 or 3 years. Do you think that market appetite is there to absorb that capacity? Or do you worry about a little bit of a [indiscernible] pressure?

W. Matt Ralls

Well, I mean, we any time there's new capacity coming, we worry about it a little bit. But I would say is what we have said for the last couple of years, is that all the demand we're seeing is at the high end of the market, so we believe that there's adequate demand to absorb these new units, many of which are not -- I mean, there are a number of high-spec rigs coming into the market. But a lot of the overall new jack-up capacity is in the 1.5 million pound or smaller. So we think that, yes, the market will stay in balance. We're not -- we're certainly not seeing any pressure yet in terms of what we've been contracting out into later this year and into '13.

Mark A. Keller

I agree, Joe. You're exactly right. It's 32 of 84 high-spec rigs that will be entering the market, but I agree with Matt that what we're seeing around the world, there's been a major shift toward higher-spec equipment. And we feel like those rigs will stay working. If you look at the recent trough that we, we're coming out of, now those rigs maintained a utilization rate of above 90%. So we anticipate that being the case going forward.

Operator

Our next question comes from the line of Matt Conlan with Wells Fargo Securities.

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

Matt, first of all, congratulations on the Gorilla IV and the Gorilla VII contracts. They sound -- very good day rates. You mentioned the Joe Douglas, you still expect it to drill a well for McMoRan starting midyear. What about the EXL-III, did you mention that?

Mark A. Keller

We did not Matt, this is Mark. The EXL-III is on the Davy Jones 1 well test. The plans for the rig currently, as you know, it's outfitted with 20K and now 25K equipment, which cost several million dollars to install. So the plans are now is for the rig to finish its operations at Davy Jones 1, go to work for Energy 21 until all the equipment for the well test for Davy Jones 2 arrives, and then the rig would move to Davy Jones 2 and do the well test there. They do have plans to keep the rig beyond this current term, but that's the current plans, right now, Matt. As far as the Joe Douglas, the Joe Douglas will finish in early June on its current contract with Rooster. And we have some other contracts in the Gulf lined up. If there's a permit issue with McMoRan for one of their deep gas wells, however, the indication is that they still want that rig and they're going to take the Joe Douglas. So as we've said many times in calls and analyst conferences, that we continue to market those rigs and we do have some potential contracts in the event we need to walk the rig to do a deep gas project or an international project if that becomes the case.

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

Okay. On the EXL-III, good to hear that there is some backlog on that beyond what's on your fleet status for right now. Are you getting any upward rate movement as those types of rigs are becoming more scarce in the Gulf?

Mark A. Keller

Matt, we have had just a brief discussion on it. We're waiting until Davy Jones 1 well test -- it's been such uninvolved operation. But our plans are to have those discussions in more detail with Jim Bob. He's been very straightforward and very fair throughout the last 3 years with us. And so we have a very strong relationship there, and we anticipate that given the latest fixtures that we're posting around the world, he's very aware of those because we talk to him before we move those rigs out of the Gulf. So he knows there's upward pressure on rates, so we'll have those discussions here in a few weeks.

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

Great. And Bill, on your debt situation, when you gave your interest expense, I think you provided a caveat that, that was good in case you -- assuming you didn't have any additional debt that the company raised. Given the MARAD debt requirements, to repay that, I mean, should we anticipate that you have additional debt coming onto the balance sheet in the next quarter or 2?

William H. Wells

Well, not just yet, Matt. I mean, we're certainly kicking that around internally, but we don't think we have to do that. We have plenty of liquidity, even with the MARAD situation, and we have a $0.5 billion revolving credit facility available as well. But we also understand the debt capital markets are very attractive right now, so that's something that we're kicking around internally.

W. Matt Ralls

So just add to that, it is an attractive market right now. So we wouldn't rule out the possibility of a debt issuance, but we just haven't made that decision.

Operator

[Operator Instructions] Our next question comes from the line of Andreas Stubsrud with Pareto Securities.

Andreas Stubsrud - Pareto Securities AS, Research Division

I have 2 contract questions, the first one on Rowan EXL-I. Can you just give us some flavor on the actual day rate and the mobilization on that contract with Hess?

Mark A. Keller

The contract with Hess Indonesia, the day rate is $160,000 a day. The mobilization is $12 million, and we were scheduled to depart here in May, but with the recent events this morning, as Matt and I both said, there will be some delay. We have talked to Hess, and they're fully aware of the situation. But that's basically the breakdown of it -- of that contract. It's 9 months. They intend -- their plans are to keep the rig beyond the 9 months. There are some priced options in the contract, and we're looking at utilizing the rig in other areas also.

Andreas Stubsrud - Pareto Securities AS, Research Division

Okay. Because $12 million is a lot kind of for a short-term contract. So you're saying there are some priced options? Can you give us some day rates for those priced options?

Mark A. Keller

Well, right now they're fairly short. They're about 80 days, but it's $160,000. The rate's the same. But it's $12 million, is the mobi.

Andreas Stubsrud - Pareto Securities AS, Research Division

Yes, $12 million. And the other contract question was related to your prepared remarks about the Gorilla VII. Can you just repeat that? Was 216 for the first 6 months and then it was...?

Mark A. Keller

It's 280 for 18 months beyond. The 216 were 2 priced options that we agreed to in its original contract 18 months ago with Apache, we had a 20% cap. So we went to 216 for a year and then 18 months at 280.

Andreas Stubsrud - Pareto Securities AS, Research Division

18 months after the 2 6-month options at 280 in day rates?

Mark A. Keller

That's correct.

Operator

Our next question comes from the line of Richard Haydon with Yield/Capital.

Richard Haydon - Yield/Capital Appreciation Management

I'm sure this question is going to sound a bit naive, but does the company have an internal hurdle rate on CapEx? And is the company positioned over the next few years to earn a 15% return on equity?

William H. Wells

Well, yes. We definitely have an internal hurdle rate, and we talk about it publicly. So we believe our cost of capital is somewhere in the 10% range. We shoot for a hurdle rate that's more like 12%. We don't make future earnings projections, so you'd have to do your own -- make your own estimates on return on capital employed, which is a period calculation, but you'd have to make your estimates of earnings for whatever period you are looking at.

Operator

There are no further questions in the queue at this time. I would like to turn the floor back over to management for closing comments.

Suzanne M. McLeod

All right. This is Suzanne. I'd like to thank everyone for joining us on the call this morning, and remember to join us at our Analyst Day in New York on May 30. And we plan to hold our next quarterly conference call on August 2. Thank you very much. Bye.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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