Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Pride International Inc. (NYSE:PDE)

Q1 FY08 Earnings Call

May 1, 2008, 11:00 AM ET

Executives

Jeffrey L. Chastain - VP, IR & Communications

Louis A. Raspino - President and CEO

Brian C. Voegele - Sr. VP and CFO

Kevin C. Robert - Sr. VP, Marketing & Business Development

Analysts

Geoff Kieburtz - Citigroup

Roger Read - Natexis Bleichroeder

Dan Pickering - Tudor Pickering Holt

Ian Macpherson - Simmons & Company

Jud Bailey - Jefferies & Co.

Walter Lovato - Passport Capital

Arun Jayaram - Credit Suisse

Gary Stromberg - Lehman Brothers

Tom Curran - Wachovia

Operator

Thank you for waiting, and welcome to the First Quarter 2008 Earnings Conference Call hosted by Pride International. Today's conference is being recorded. As a reminder your lines are currently muted and will be open at the end for formal presentation for a live question-and answer-session.

I am now pleased to introduce your conference host today, Jeff Chastain. Please go ahead, sir.

Jeffrey L. Chastain - Vice President, Investor Relations & Communications

Thank you, Amie. Good morning, and thank you for joining us for this review of first quarter 2008 financial results of Pride International. A copy of the press release covering the financial results, along with supporting statements and schedules is posted on the company's website, that's prideinternational.com. Also you will find historical financials, segment results, supplemental operating statistics and the most recent monthly fleet update, which was issued last evening, April 30.

Also, in case it was overlooked, the company announced the contract award just before the first quarter results were reported this morning for its ultra-deepwater drillship, currently under construction, and with an expected deliver in mid-2010. We will discuss this award in little more detail today, and the full details on all on the company's website.

Joining me on this morning call are the following Executive Officers of Pride International, Louis Raspino, President and Chief Executive Officer; Rodney Eads, Executive Vice President and Chief Operating Officer; Brain Voegele, Senior Vice President and Chief Financial Officer; Kevin Robert, Senior Vice President of Marketing and Business Development; and Len Travis, Vice President and Chief Accounting Officer.

Before I turn the call over to Louis, I have been asked to remind you that during the course of this conference call, certain forward-looking statements maybe made. These statements may relate to, among other things, our expectations of future performance, demand for drilling services, future results and cash flows and completion of asset sales. Any such forward-looking statements in addition to other information discussed in this call or within the Safe Harbor provided by Federal Securities Regulations. These statements reflect our current views, but actual results could differ materially from those projected due to factors discussed in the call or in other filings with the SEC. Those filings are posted on our website at prideinternational.com. Also please note that, we will use various numerical measures in the call today, which are or maybe considered non-GAAP financial measures under Regulation G. You will find the required supplemental financial disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation on our website.

Okay. With that I will turn the call over to Louise Raspino.

Louis A. Raspino - President and Chief Executive Officer

Thank you, Jeff, and thank each of you for joining our call today. I am going to open with some comments and then Brian is going to provide the financial detail. Kevin is going to review the market perspective and then I am going to return for some closing comments.

We've had a very busy and a very successful opening to 2008 at Pride. After an equally busy and equally successful full year of 2007, where we existed that year having effectively completing the transition of the company, from a highly diversified asset base with multiple business lines, to one that is almost purely focused in the offshore market, with strong emphasis now on the deepwater sector which will continue to grow.

During the first quarter we had a number of significant accomplishments in our company, with very positive long term implications. Results for the quarter, included excellent financial performance, with records revenues, and record income from continuing operations. Earnings were better than the high end-of our guidance. And our adjusted EBITDA increased 20% over the last quarter to $244 million. This demonstrates the significant operating leverage this company has, as we continue transitioning to our higher price contracts in the future years, to start up of our new deepwater assets.

Now, supporting the financial results, was continued excellent operation's execution, with utilization improving throughout the fleet, compared to the fourth quarter of '07. And for an example, in our deepwater fleet, overall utilization was 97%, with 8 rigs operating at utilization of 98% or higher. And in the US Gulf we operated at under 2% mechanical downtime. This is an exceptional performance for this type of asset class.

Our engineering and technical team completed four shipyard programs, including the water depth upgrade of the semisubmersible Pride Mexico. This was a significant 10-month shipyard project that was completed within budget. And the rig is currently in transit to Brazil to begin a five year contract in late June with Petrobras.

We also recorded outstanding results in our marketing efforts, especially as it pertains to our deepwater business. As previously reported during the quarter, we were awarded contracts on two of our ultra-deepwater drillships been constructed at Samsung. One with BP covering five years and total revenue is expected of about $876 million, and one with Petrobras covering five to seven years with total expected revenues of $916 million to $1.2 billion depending on term.

We also signed three our existing deepwater rigs to multi-year contracts. The semis, Pride Rio and Pride Portland operating offshore Brazil with Petrobras, each received six year extensions to 2016, with expected revenues of $768 million per rig or $1.5 billion in total, inclusive of bonus opportunities.

And following a lengthy regulatory approval process, the Pride Angola was awarded a five year contract from Total, negotiated almost a year earlier for continued drilling offshore in Angola, with expected revenue of $862 million, inclusive of a bonus opportunity.

And finally, as we reported just this morning our third ultra-deepwater drillship, been constructed by Samsung, with an expected delivery in mid -2010, was awarded a five-year contract from BP, to work in the US Gulf of Mexico and possibly other BP deepwater for interest. Expected revenues contract in this $984 million or $539,000 per day.

And we have previously announced that this rig would be completed as a dual activity rig. However, at the request of our client the rig will not initially have the dual-activity functionality for the term of this contract. It can be modified to include this functionality in the future. Instead, as discussed in the press release, the design of the rig has been amended to include a 160 metric ton active-heave compensated construction crane that allows the rig to perform sub-sea construction without obstructing the critical path of the deepwater drilling. As a result, this rig will be one of the most advanced deepwater exploration and development rigs in the world. Essential identical to the design of our new drillship also contracted to BP.

And we are very pleased with this contract, as it expands our critical mass in the US Gulf, expands our strategic relationship with BP, one of the most active deepwater ILC in the world. It supports the addition to our fleet, one of the most advanced rigs in the world, and the economics are very attractive, with payback of over 85% and IRR using market norms in the mid to high-teens.

With this contract all of our new build assets are now committed to long-term contracts. And we will be pursuing additional growth opportunities. In total, year-to-date in 2008, we've been awarded contracts with total expected revenues of $5.5 billion, inclusive of bonus opportunities and representing up to 34 rig years.

Our revenue backlog now stands at $9.4 billion or $10 billion, including bonus opportunities, providing cash flow and earnings visibility through 2016.

Finally, we continued significant success in our asset rationalization program, with a closing of the sale of our tender-assist fleet. In the quarter proceeds from the sale of non-strategic assets totaled $226 million.

And concerning our mat jackups, we've talked for quite sometime now about the fact that we consider these assets to be non-core, long-term. While they continue to provide several short-term benefits, including high cash flow, high return on capital, critical mass and an excellent training grounds for our future deepwater manpower needs. During the quarter, we made significant progress on improving our optionality, related to possible future strategic alternatives for this fleet.

We are now almost complete with three years of called-out audits for these assets. And during the quarter we restructured our organization to consolidate all of our Gulf of Mexico jackups, in the US and in Mexico, under one operating management team, to allow for an easier transition of these assets in the future.

Now, in addition our significant investments, which provide an attractive return on capital, during the quarter, we took a significant step to provide a return of capital to shareholders. During the quarter, we announced the call of our [inaudible] convertible bonds. And as currently planned this will have essentially the same effect as the $300 million share repurchase program, representing approximately 7 million shares of our fully diluted share count.

With our transition to a pure offshore drilling company largely complete, we are now focused even more intently on growing our business and establishing a even greater presence in the deepwater and other high specification assets. We are in environment ripe with opportunities for growth and we have several currently under review.

And following Brian and Kevin's comments covering the financials and the markets, I will close with some thoughts on our news last week regarding our shell to Right Plans in Seadrill, Brian?

Brian C. Voegele - Senior Vice President and Chief Financial Officer

Thanks Louis. I am going to take a few minutes just to make some brief comments highlighting key points about the quarter and talk a little bit about what we expect from the future. The first quarter marked another quarter of record revenue and strong earnings. Net income from continuing operations totaled $136 million or $0.77 per fully diluted share on revenues of $557 million, an increase of 16% and 11% over the prior quarter respectively. These results include the gain recognized on the sale of our minority equity investment in a land drilling and work over joint-venture, which resulted in an additional $0.06 per share after tax to the quarter's results.

Excluding, net gain income from continuing operations was $0.71 per share exceeding our previous guidance for the quarter of $0.66 to $0.70 per share. Our better than expected performance was driven largely by our floating fleet, which contributed 68% of our operating income for the quarter, up from 58% in the prior quarter. In particular, our deepwater fleet operated better than 97% efficiency resulting in higher than expected day rate revenue and performance bonuses. The strong performance by the deepwater fleet was partially offset by higher than expected repair cost and the impact of 11 additional days in the shipyard for the Pride South East during the quarter, also reflecting the strong improvement in revenue. Adjusted EBITDA for the quarter of $244 million represented an increase of 20% from fourth quarter adjusted EBITDA of $203 million.

Driven largely by improvement in both day rate and utilization of our floating fleet, we experienced the sharp increase in revenues. Our deepwater fleet contributed about $31 million of this increase largely as a result of the Pride North America commencing a new three year contract at a day rate of $443, 000 per day, up from it's previous contracted day rate of $188,000 per day. In addition, the Pride Rio returned to service in January after completing repairs related to the flooding incident that occurred early in the fourth quarter.

The Rio was operating for total of 77 days during the current quarter compared with 24 days during the fourth quarter. Strong operational performance by our deepwater fleet also contributed the improvement in revenues for the period, with 7 of our 8 active units experiencing less than 2% mechanical downturns.

The return to service of the Pride South America after completing contractually required upgrade and the completion of the Pride South East special periodic survey along with day rate increases for the Pride South Atlantic and the Pride North Sea helped our midwater fleet contribute another $8 million to the revenue increased for the quarter. In addition, increasing activity levels by our customers in the US Gulf of Mexico resulted in a slight improvement in spot market jackup day rates.

Second, we'll have more to say about the Gulf of Mexico market in the few minutes. Perhaps more importantly, utilization improved to 72% during the quarter from 58% in the fourth quarter, as we experienced 61 fewer days of idle time. These improvements resulted in the contribution of an additional $9 million to the top line. Our US Gulf of Mexico jackup business also continued to deliver strong operating performance with our fleet experiencing less than 2% mechanical down turn.

Total operating cost reported for the first quarter increased $25 million from the fourth quarter to $294 million. Increased drilling activity as the Pride South America and Pride Texas returned to service after undergoing short scheduled shipyard stage during the fourth quarter, combined with the cost of demobilizing the Pride Nevada back to the US gulf resulted in activity related cost increase of approximately $3 million. Increases in reimbursable cost also contributed additional $4 million to the total increase for the quarter,

In addition, higher repair cost resulted in an additional $6 million to $7 million of unexpected maintenance cost. Unfavorable resolution of legal claims added another $2 million to total operating cost. All total activity differences in discreet items resulted in a total of $15 to $17 million of the $25 million increase in operating cost for the period with the balance of the increase resulting from cost pressure from higher activity levels in the industry. Excluding the impact of these specific items, our core operating cost for the first quarter were over 3% higher than similar fourth quarter operating costs, and slightly above our expectations of 2% to 3% that I discussed in the last call. This increase is largely the result of wage adjustments given to our field operating personnel at the beginning of the year.

For the second quarter as in recent quarters, we expect industry inflationary pressures to persist, causing our core operating cost to continue to trend higher, particularly labor and equipment costs. As a result of these inflationary pressures, we expect cost increase by approximately 2% to 3% in the coming quarter with our expectations for full year increases to be in the 12% to 13% range unchanged from our prior guidance.

The effective tax rate for the quarter was about 25% and our effective cash tax rate was 15% without any further changes in the geographic mix of our operating income or the implementation of further tax planning strategies, we expect our effective tax rate to be in the range of 25% to 27% for the reminder of the year.

Now, just a few brief comments about our current capital structure and capital commitments. At the end of first quarter total long-term debts stood at about $1 million resulting in debt to total capital ratio of 22%. During the period, we repaid our drillship loans, which were approximately $139 million. These loans, which were secured by our deepwater drillship operating in Angola, represented our highest cost of borrowing. With the retirement of our convertible debenture, which is scheduled to occur by May 16th our long-term debt is expected to be about $700 million, with debt to total capital at approximately 16%.

Cash in short-term investments at the end of the first quarter, which reflected proceeds received from the sale of our tender barges and our minority equity interest in the land drilling joint venture was about $750 million. Previously, I had indicated that we expected capital expenditures for the full year including expenditures related to the construction of our three ultra-deepwater drillship's to be about $995 million. Our expectations remained unchanged. During the first quarter, we incurred $319 million of capital expenditures of which approximately $188 million related to our drillship under construction.

Another $50 million related the completion of Pride Mexico water depth upgrade. Aggregate remaining construction obligations are currently $1.7 billion with $422 million expected to be paid during the remainder of the current year. We expect to fund these obligations with cash on hand, cash flow from operations and additional borrowings. We also anticipate using cash on our balance sheet capacity, to further fund deepwater expansion, and as Louis mentioned on the near term horizon, we have sold our 3.25% convertible debentures for redemption on May 16, with our stock currently trading well above the conversion drives the 2570. These debentures essentially represent equity and are currently reflected as such in our fully diluted share count.

Coupled with the coupon, these instruments represent our highest cost of capital. With this in mind, we expect substantially all the debentures to be converted prior to the call dates. And we currently, intend to repay the principal portion of the convertible debentures with cash and sell the remaining conversion amount of shares. Economically, this has the same effect as the $300 million share repurchase. If our repayments were made based on the yesterday's closing price, we would reduce the number of shares in our fully diluted share count by approximately $7 million shares.

We also continue to evaluate the potential of return in capital to our shareholders either through share repurchase or dividend or both. Whether we ultimately pursue either of those options depends on a variety of factors including our near term growth opportunity, the timing of capital investments relative to cash flow, the timing and extent and form of non-poor asset divestitures, the tax impact to the company of moving cash to where it can be used as a return of capital and the impact of restrictions within our existing debt covenants.

Looking forward to the second quarter, with Pride Rio and Pride South East working for the entire quarter, we expect modest improvement in revenue. In addition, we expect further operating income improvement, with decrease in event related repair cost and legal client that we experienced during Q1. Considering these factors and excluding the reduction on the fully diluted share count from the repurchase of our convertible debentures, we expect income from continuing operations for the second quarter to be in the range of $0.74 to $0.78 per share. Now, I will turn the call over to Kevin to make some comments about the drilling market.

Kevin C. Robert - Senior Vice President, Marketing & Business Development

Thank you Brian. This morning I will give my comments with the brief discussion on Mexico with United States gulf. As everyone is aware, PMEX is taking longer than usual to define its 2008 drilling program due to changes in their budgeting procedures. They are only now starting to clarify their 2008 offshore drilling program and we are talking to PMEX to better understand their program and prospects to Pride suite of jackups currently working in Mexico.

We continue to expect that PMEX's jackup demand in 2008 will be stable or slightly exceed their current demand. However, we continue to have concern over the uncertainty of their requirements. We expect they may increase the number of independent rig, cantilever rigs, and decrease the number of mat rigs that they need. However, PMEX does contract more independent-leg cantilever jackups, it will likely have to get them from United States, further reducing the rig supply of their and strengthening the mat rig market in the US. In this span, we've been told by PMEX that they have finished the work plan that was scheduled for the Pride California, and they are looking for other work for the rig. If PMEX cannot find other wok for this slot rig, then they have given us notice that they would release the California and if so, we plan to mobilize the rig to United States, Gulf of Mexico and work it in that market.

We are also moving to Colorado and the Alabama out of Mexico in order to perform their special periodic surveys. We do not have contracts for these two jackups, but we believe PMEX needs these rigs back in Mexico at some point in the future.

We are seeking term work for these rigs and will stack them and defer the SPS until we can obtain a long-term contract that economically justifies the SPS investment. We are meeting PMEX within the next week to discuss their expected work load in 2008, including that with respect to the California, and should have better clarity on their drilling needs after those meetings.

Meanwhile, the U.S jackup market is rebounding nicely, as we've been able to built backlog and raise day rates during the quarter. The U.S jackup fleet marketed utilization is about 86% compared to about 75% at the low point of the market in the first quarter. We are marketing our mat slot rigs at day rates from 60,000 to 65,000 per day. Our mat cantilever day rates at 65,000 to 70,000 per day, and our 250 mat cantilevers at 70,000 per day or higher.

There are currently about 58 working jackups in five hot stack rigs in the region. This compares to 51 working rigs and about 14 hot stack rigs in early January. Mat rig day rates have increased about 10% since mid-January, and we believe the U.S jackup market will maintain current rates throughout the storm season.

If commodity prices remain at current levels and we have a quiet storm season, we could see some increase in the rates later this year. Rigs supply is still a big driver for the United States and Mexico jackup markets, but we are continuing to pursue alternative markets for our mat rigs. We believe we will successfully develop

pursue well time to market for our mat rigs. We believe we will successfully develop business in the Eastern hemisphere for some of our western hemisphere jackup fleet, which will again help to further strength in the market in the Gulf of Mexico.

Now turning to floater markets, let me discuss midwater, which we define as water depths between 1000 and 4500 feet. A midwater is a stable fleet, but we will still grow from a 120 to 126 rigs between now and 2011. Demand in the midwater market is not quite as strong as the deepwater markets, but the midwater fleet is still busy and has enjoyed strong day rates.

We believe there are about 15 rigs available in 2008 and 34 available in 2009. Contracts for midwater rigs are typically less than two years and we recently agreed to a six-month contract for the 1500 foot water depth Pride Venezuela at a leading-edge rate of $375,000 per day, an increase of more than $100,000 per day from it's prior rate. We are discussing project with customers in Africa, Latin America and Southeast Asia for our midwater fleet, with focus on our midwater semis that are available in 2009.

Now turning to deepwater, demand for deepwater rigs continues to be extremely strong as we are experiencing a number of enquiries both formal and informal for rigs available in 2009 and 2010. Record increases in the backlog of the worldwide deepwater drilling fleet are being driven by long-term contracts design by our clients to ensure that they have rig availability for their production and exploration programs.

We believe customers have finally accepted that the kind rig shortage will likely extend beyond 2010. Recession of a rig is valuable commodity and we expect clients to extend the terms of in common rigs well in advance of their contract exploration.

In order to ensure rig availability, customers are pursuing contracting strategies such as increasing their ultra-deepwater rig count in order to maximize the flexibility of their fleet on a worldwide basis. As they are pursuing rig sharing relationships with other operators and some are considering investing in partial or full ownership of drilling equipment. Of course the demand for deep-water equipment is forcing the expansion of the fleet for a new build rigs.

When added to the existing rig count, new builds will grow the worldwide deep water fleet by about 80% from 89 rigs to date to over a 162 rigs by 2012. New builds projects are adding capacity to the fleet with over 70 floating rigs under construction for delivery between 2008 and 2012. There are about 43 semisubmersible and 30 drill ships on the order book, but all the new built floaters scheduled for delivery in 2008 and 2009 have either a contract or a letter of intent for employment.

Excluding the deep water new builds, and looking at the existing fleet, over 90% of the available rig days for the existing worldwide deepwater fleet are under contract for 2008, leaving only 5 rigs un-contracted. Assuming that all available rigs obtain contracts by the end of the year that they are open, we can identify only 14 rigs without contracts available in 2009.

As I mentioned, there are no new build rigs available in either '08 or '09. 32 floaters, including nine new build rigs are available in 2010, and in 2011, 27 are available. Seven of the 27 rigs are new build drill ships. It is interesting to note that the average contract term for a new built drill ship is six years and for a new built semi is five years. Long term contract for the deep water fleet extend into 2017, so we believe according to planning and advance more than ever, and in most cases more than 36 months forward. We are currently answering more than a half-a-dozen enquiries for deep water rigs with terms anywhere from one to five years. We are currently evaluating opportunities for a new contract for the Pride South Pacific which is available in the second half of 2009. Clients are also already inquiring about the availability of the Pride North America and the Pride Africa in 2011. And as Louis mentioned, we also continue to propose new build drillships available in 2011 to our customers.

Now I want address a few at a deepwater hot spots around the world. First, Brazil, a rig demand offshore Brazil continues to impress as both international oil companies and Petrobras actively pursue renewal and growth of the floater fleet working in the contour. Petrobras is evaluating the responses to tenders for 2400 and 3000 meter water depth floaters, all for long-term contracts of at least six years. The technical requirements for these rigs can only be satisfied by ultra-deepwater equipment. The [2P] development is still being evaluated, but like many fields in the [sub south lake, 2P] will require many complex and time consuming wells.

Petrobras is also growing their international portfolio. Therefore, we believe that Petrobras will add numerous high spec, new built floaters to their portfolio between now and 2012, in order to satisfy increased drilling demand both, worldwide and in their domestic projects. Petrobras, like many of our customers, is also addressing the reality that field development work takes a lot rig years, often leaving exploration activities short of rigs.

In the deepwater Gulf of Mexico, operators continue to stress rig supply as they also seek additional rig time for execution of their exploration in development programs. Deepwater Gulf of Mexico wells are also very complex and time consuming, which puts additional pressure on high-spec rig supply. We believe demand will continue to outstrip supply through 2010 with dynamic positioned rigs capable of drilling in 10,000 feet of water with high mud weights and Gulf of Mexico station-keeping ability.

With this demand for high spec rigs in the Gulf of Mexico is not a surprise that two of our new build drillships are planned to operate initially in United States. Outside of Brazil, and the United States, we have also seen rig commitments for emerging deepwater plays as other deepwater plays, as customers committed to deepwater rigs who work in India, Southeast Asia and the Black Sea during the first quarter.

All of these supports are believed that strength in deepwater is a long-term trend and not just a short-term cycle. We expect that deepwater will continue to offer good opportunities for contracting our existing deepwater fleet while still offering us attractive opportunities to grow our asset base through investing in more new build rigs.

Thank you. And now I'd like to turn the call back over to Louis.

Louis A. Raspino - President and Chief Executive Officer

Okay. Thank you, Kevin. And just to summarize, we've just completed the first quarter in a very strong fashion with excellent execution across the board with that strong operational results, strong financial results, continued divestiture of non-core assets at attractive values, strong contracts on our floating fleet and exceptional backlog growth.

All then, we're continuing to successfully execute our multi-pronged long-term strategy as we believe this will provide long-term sustainable success for Pride and returns to our shareholders. And the deepwater sector is demonstrating undeniable strength, producing contract reach with earnings and cash flow visibility that is unique to our industry and the market is taking notice of Pride's success.

Our shares have delivered the highest total return year-to-date through yesterday's close of 24% compared with eight publicly traded drilling companies. We believe this is only just the beginning, and we continue to view Pride as a compelling value for investors in the offshore drilling sector.

Now before we move to the Q&A portion of our conference call, I'd like to briefly address our news last week concerning Seadrill.

As you know, on April 22nd, Pride issued a press release disclosing that we had been notified by Seadrill of its pending acquisition through forward purchase contracts and other acquisitions of approximately 9.9% of Pride's outstanding common stock. Seadrill also notified us that it had made a Hart-Scott-Rodino filing to acquire an unspecified amount of Pride securities.

We publicly disclosed Seadrill's accumulation because we believe it was in the best interest of all Pride stockholders and so the market would fully informed. Since our request to obtain information from Seadrill concerning their intentions we're unsuccessful, our board decided to take action under our rights plan to lower from 15% to 10%, the threshold level with respect to Seadrill that would trigger the rights. The decision regarding the rights plan was taken our board to protect the interest of all our stockholders, against undisclosed market accumulations.

As I have said many times in recent years, our board and our management team recognize the numerous benefits that could be achieved from further consolidation of our industry. We believe further consolidation will occur and we are always open to considering opportunities that would be compelling to our shareholders. We are well aware of our due share responsibilities, and you can be assured that we will always endeavor the act in the best interest of all of our stockholders.

Our board and our management team remained focused on continuing to create stockholder value by moving forward with our strategic business plan and effectively managing our day-to-day operations. For those of who have been following Pride for sometime, you know that we've had tremendous success in transitioning this company to a pure play offshore drilling company with growth focused on deepwater. Through a sharp focus on financial discipline, infrastructure growth, divestiture of non-core assets totaling approximately $1.5 billion to date, and executing deepwater growth transactions totaling approximately $3 billion to date, we are now well positioned for substantial growth in the years to come, driven primarily by our deepwater operations.

Now, with that we have said all we are prepared to say today about Seadrill, and we will not answer any question on today's call regarding this matter. We will, however, now be pleased to address your questions on other topics.

Question and Answer

Operator

Thank you. (Operator Instructions). We'll take the first question from Geoff Kieburtz with Citigroup.

Geoff Kieburtz - Citigroup

Thanks. Good morning.

Louis A. Raspino - President and Chief Executive Officer

Hi, Geoff.

Geoff Kieburtz - Citigroup

I'm going to test the boundaries here a little bit Louis. Could you share with us your thoughts in regards to the critical elements that would make a good spit between drilling companies in a consolidation environment?

Louis A. Raspino - President and Chief Executive Officer

Geoff, I am sorry but I am going to define the boundaries quickly also. We are not going to answer any further questions about this matter at this time.

Geoff Kieburtz - Citigroup

Okay. Could you perhaps elaborate somewhat on the comments regards to the mat jack-ups, the -- what are the various options that you are considering now that you are so clearly defying the boundaries around that and facilitated it, I think, a guys who phrased it, but the optionality associated with that business?

Louis A. Raspino - President and Chief Executive Officer

Sure, Geoff as I have mentioned many times in the past, those rigs are not rigs that we would buy today. They do not fit into our long-term growth strategy, that's not the case, we own those rigs today. I've always said that long-term, those rigs probably won't be part of our portfolio. How we get from now to the long-term is yet to be determined. Whether something happens in two weeks, two months, two years from now or even longer, I really can't discuss that. That's all I can tell you is that, in the meantime these rigs do provide critical mass, cash flow, return on capital, and most importantly, an excellent training ground as we try to crew our deepwater assets that are coming into our portfolio, not just the assets we have already contracted but for those that we may acquire in the future. I'm telling you that's one of the most significant challenges facing our industry today.

That being said, we understand that to get from here to long-term, some steps may needed to be taken in order to improve our optionality. We [prepared, carved out] audits on these assets were near complete and those carve out audits would position them under one operating management team to allow for smooth transition to something that might happen in the future. I mean philosophically and conceptually anything can happen here, from continuing to hold the assets for quite sometime to disposing of several of them, to moving some of them to different parts of the world, to spinning all of them to our shareholders, to appealing them to doing substantial engineering around the ownership and operation of those assets.

We believe that options are extremely valuable and we are doing everything we can now to improve the optionality, so that we can be nimble, be flexible and be capable of taking advantage of opportunities as they might come up in the future.

Geoff Kieburtz - Citigroup

Could you comment on the candidates for markets outside of the Greater Gulf of Mexico for the mat jackups?

Louis A. Raspino - President and Chief Executive Officer

I'll ask Kevin to comment.

Kevin C. Robert - Senior Vice President, Marketing & Business Development

Primarily South East Asia there is a little bit in other places, but I think South East Asia is the most logical.

Geoff Kieburtz - Citigroup

Okay. And the last question. You alluded to the marketing or at least, yeah, marketing I guess of possible new build drillships for 2011 delivery, do you have, is there relatively easy access to shipyard capacity or a 2011 delivery or when would have to have a commitment in order to deliver a drillship in that year?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

Access is not easy, but since we are building three ships already at Samsung, we have access in 2011. We are probably still a little bit early to commit a '011 delivery, but the clients are starting to talk about it. So, time wise, it's hard to predict, but it's probably a more near term conversation than most people would expect.

Geoff Kieburtz - Citigroup

Great. Thank you.

Operator

We'll take the next question from Roger Read with Natexis Bleichroeder..

Roger Read - Natexis Bleichroeder

Hey, good morning gentlemen.

Louis A. Raspino - President and Chief Executive Officer

Hey, Roger.

Roger Read - Natexis Bleichroeder

Following up with Jeff's question there, would you be likely, if you follow along on the deepwater building program to announce a rig and then announce a contract as you've done on a few of these, or do you think it be more likely to secure a contract and then build? And I'm just sort of thinking, as the cycle grows out, it probably becomes a little more critical to make sure you have that contract then it would have been, say two years ago?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

Roger, I would say both are possible. I think our preference is to have a contract to support a new build, but our view of the market is so strong that I'll tell you both are possible.

Roger Read - Natexis Bleichroeder

Okay. And would we expect, I guess the question then becomes would it be a rig similar to the ones you've been building, so you get some of those economies of scale, may be as you go through at least consistency out the yard for dependability on the delivery date, or do you think you might as the market looking for a different type of rig, I'm kind of thinking of Kevin's comments about the type of drilling and to be in some of the more technical stuff in the deepwater Gulf of Mexico?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

Our very strong preference would be to continue with basically the same design and same shipyard in order to have the economies of scale. We can't rule out other options here, because I mean the market is just a fluid fast moving market, but that would definitely be our preference.

Roger Read - Natexis Bleichroeder

That's helpful. Alright, thank you.

Operator

We take the next question from Dan Pickering with Tudor Pickering Holt.

Dan Pickering - Tudor Pickering Holt

Good morning guys.

Louis A. Raspino - President and Chief Executive Officer

Hi, Dan.

Dan Pickering - Tudor Pickering Holt

Would you mind to walk us through the change in the cost for the rig you just signed up with BP, I know it's now 725 and you're taking off the dual capability, you are adding some other things. I'm just trying to understand, if there has been any underlying cost increase there, or if it's just the changes that have made the difference in the rig cost?

Jeffrey L. Chastain - Vice President, Investor Relations & Communications

Brian.

Brian C. Voegele - Senior Vice President and Chief Financial Officer

Yes Dan, this is Brian Voegele, the cost increases here are simply as a result of modifications with the way the BP has requested. One of which is the [equities] compensated claim. These are in underlying, there are no, I would say at least today underlying cost increases. They're general inflationary increase in the rig cost. If you recall we announced, initially announced this rig would cost about $680 million and so, through the course of negotiations with BP they are asking us to put some additional equipment on the rig. I know, we're going to make some additional modifications to the speck of the rig.

Dan Pickering - Tudor Pickering Holt

And add 2000 feet riser to the rig.

Brian C. Voegele - Senior Vice President and Chief Financial Officer

And, this cost includes an additional 2000 feet of riser.

Dan Pickering - Tudor Pickering Holt

And if you, so if you pursued another new build, 680 is the number that we ought to kind of think about as the benchmark cost for that?

Jeffrey L. Chastain - Vice President, Investor Relations & Communications

I think that, given that the given that we committed this new bill last year and that's when we announced the 680, we have seen shipyard cost increase over the past year, and so we are probably looking at something more realistically and may be 740 range, 750 range for an 8000 foot drillship.

Dan Pickering - Tudor Pickering Holt

For 8000 feet?

Jeffrey L. Chastain - Vice President, Investor Relations & Communications

I will say it's for 8000 feet which would be comparable with the 680 last year that we announced.

Dan Pickering - Tudor Pickering Holt

Okay. And, I guess my view, Louis really given the way I have heard you talk about deepwater drilling, Kevin has talked about deepwater, generally I kind of think about is I should be surprised, if you didn't pursue incremental new builds in this area as opposed to not pursuing them.

Jeffrey L. Chastain - Vice President, Investor Relations & Communications

Well, I think we've made it very clear, it is our, we're strong pursuit of additional new build opportunities right now.

Dan Pickering - Tudor Pickering Holt

Okay, can you shift gears and talk about Mexico a little bit, the fleet status report showed the Alabama and the Colorado as cold-stacked in the Gulf of Mexico. Into the conference call today it sounded like, maybe potentially a little bit more optimistic than that, can you clarify the two please?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

They are going to come off contract. They are still on contract in Mexico, but the Alabama should demobilize shortly in the next couple of weeks, I believe, and then the Colorado demobilizes, I was thinking in the mid-to-early June. Don't go into cold-stack, if we don't have a contract, a term contract for these rigs.

Dan Pickering - Tudor Pickering Holt

Okay. And can you just walk us through the required timing. I mean, you'll have to have then you'll have to go into the shipyard, how long will that take and how much would it cost?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

Takes about 90 days, and I don't have the cost in front of, available from me.

Dan Pickering - Tudor Pickering Holt

Okay, thank you very much.

Operator

We will take the next question from Ian Macpherson with Simmons & Company.

Ian Macpherson - Simmons & Company

Hey, good morning.

Jeffrey L. Chastain - Vice President, Investor Relations & Communications

Good morning, Ian.

Ian Macpherson - Simmons & Company

Hey, I guess the first question on the different options for the Gulf of Mexico jackups, Louis, how much does the very volatile natural gas commodity price, environment factors you guys thinking with respect to evaluation of those assets. Do you think that the evaluation of that fleet would be highly correlated with $10 to $11 gas environment as opposed to $7 to $8 gas environment three months ago or do you have a more of a high level view on it than that?

Louis A. Raspino - President and Chief Executive Officer

Well, I think short term contract day rates are highly co-related with the short term volatility in the natural gas market. I am not sure long-term asset values fluctuate as widely. I think owners of the assets would tend to look at an entire cycle and a longer term viewable gas prices are going to be. I think the higher gas prices are currently, of course the more bullish that allows some money to field long-term. But, I don't think people significantly change their long term view of what's going to happen in the Gulf of Mexico, based on what's happening in the short-term gas market. I think the stronger the gas price, the better it is for an asset sale. Kevin, you want to say something?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

We do continually forecast rig rates, both near-term and long-term using kind of a low, mid, and high estimate. This is influenced by the commodity price like Louis said, but really the, my point is the rig count. Our higher day rate estimate assumes there are fewer rigs available in the Gulf of Mexico. So, the gas price would have certainly affect demand, but right now in this market rig count is a big driver.

Ian Macpherson - Simmons & Company

So, if you saw, does this momentum build pretty strongly through the summer and hold up well through hurricane season, would that potential business momentum make it more likely that you might hold off on the separation as opposed to pulling the trigger on a deal sooner rather than later?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

I don't know that we are going to be that sophisticated in market timing of pulling triggers. I think that we are positioning ourselves to be able to take advantage of opportunities that may or may not arise. I think, the move would be a strategic move and not a tactical timed move. So, I guess what I'd say, as we are developing opportunities for the future of these rigs, I don't think short-term market timing is going to come into the equation very, very strongly.

Ian Macpherson - Simmons & Company

Okay. I'll pass it over. Thanks, Louis.

Louis A. Raspino - President and Chief Executive Officer

Thank you.

Operator

We'll take the next question from Jud Bailey with Jefferies & Co.

Jud Bailey - Jefferies & Co.

Thank you. Good morning. Probably a question for Kevin regarding the shipyard space. From our understanding, you look at the Petrobras tenders, they have a requirements for several more deepwater rigs and our understanding is virtually all of those will probably be new builds. Kevin, if that's the case and you are talking, 5, 10 may be more new builds are coming just to, sort of Petrobras, if that happens, does that automatically push your next potential delivery for a deepwater rig on into 2012, given what's already on the order book? How do you think about that and as far as pricing your next construction project?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

Yeah, that's a factor in our thinking, but right now we are secure with the spots that we are able to utilize at Samsung. The Petrobras tenders allow for a 48 month delivery window from the time they confirm the order. So, I think most of the Petrobras work, as you said would be new builds and, I think you would see those orders stretch out from kind of mid to late 2011 to late 2012 from a number of different yards in order to satisfy their requirements.

Jud Bailey - Jefferies & Co.

Would you expect those new builds to primarily come out of Korea and Singapore or there are other yards that would potentially take on that construction?

Louis A. Raspino - President and Chief Executive Officer

Most of the contractors that submitted bids on that tender are building in either Korea or Singapore. There were a couple in China but, I think the Chinese rig deliveries are running little bit behind. So, mostly Korea and Singapore.

Jud Bailey - Jefferies & Co.

Okay, great. Thank you very much.

Operator

We'll take the next question from Walter Lovato with Passport Capital.

Walter Lovato - Passport Capital

Good morning. Thank you very much.

Louis A. Raspino - President and Chief Executive Officer

Good morning

Walter Lovato - Passport Capital

First of all congratulations on your, implementing your strategy so effectively over the last year. The question was in terms of the -- sort of mid water rig availability that you have in maiden deepwater, what are the next rig that come up for contract renewal?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

The Pride Venezuela is, have a second quarter 2009 availability and The Pride North Sea sometimes is called the Sea Explorer is a second, third quarter 2009 availability.

Walter Lovato - Passport Capital

When do you expect those to have? Are you in discussions with customers right now?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

Yes, we are. We're in active discussion now on a number of different prospects for those rigs.

Walter Lovato - Passport Capital

So, would you expect the contract to be signed within let's say within this year?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

I would expect it, yes.

Walter Lovato - Passport Capital

Okay. And, you also mentioned that there was two -- that customers are already looking, talking to you about these two rigs that you have available starting in 2011?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

That's correct.

Walter Lovato - Passport Capital

Those are deepwater rig?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

That's correct, yeah.

Walter Lovato - Passport Capital

And --

Kevin C. Robert - Senior Vice President, Marketing & Business Development

Those two rigs I mentioned were the North America and the Africa.

Walter Lovato - Passport Capital

Okay. And are those also discussions that you expect could be sort of concluded, sort of by this year?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

You know we're not in any hurry on those two rigs. They are not open for quite sometimes. So I would not -- right now, I'm not in any hurry to do anything on those rigs any time soon. The Pride South Pacific will be the higher priority.

Walter Lovato - Passport Capital

And I mean, but you said -- is there an urgency on your customers though for those two rigs?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

There can be. I think what we see in the market is a number of customers looking at work three years out and that is something that it is right now in this market where a numbers of clients are considering already what they are going to do in 2011.

Walter Lovato - Passport Capital

Okay, good. Well, just final comments I would make as a shareholder of Pride also that, I'd really encourage you to view that the Seadrill investment as an opportunity here for you and for the Pride shareholders rather than a risk or anything. But with that said, thank you very much.

Louis A. Raspino - President and Chief Executive Officer

Thank you.

Operator

We'll take the next question from Arun Jayaram with Credit Suisse.

Arun Jayaram - Credit Suisse

Hi, good morning guys. I joined the little bit late in the call; I just wondered if you could help me understand what the day rate was on the contract you announced today?

Brian C. Voegele - Senior Vice President and Chief Financial Officer

539,000.

Arun Jayaram - Credit Suisse

In that, is that the revenue per day including the mobilization or --

Brian C. Voegele - Senior Vice President and Chief Financial Officer

That's the revenue per day not counting the part of the revenue that's reimbursement of moved cost.

Arun Jayaram - Credit Suisse

Okay. Kevin, congratulations that's a very, very contract award.

Kevin C. Robert - Senior Vice President, Marketing & Business Development

Thank you.

Arun Jayaram - Credit Suisse

Second question, Kevin I know you've spent a lot of time in the Korean yards, there has been some talk about some potential issues from the unions and some threat of a strike. I was wondering if you could maybe update us on that situation.

Kevin C. Robert - Senior Vice President, Marketing & Business Development

You really probably should talk to the yards themselves, I mean each specific yard has their own agreements. The yard that we are building in, Samsung does not have any labor unions per say. They have more of a working relationship with their labor. But they are like any other company; they have labor agreements that every couple of years is reprised. And of course, a part of the cost increases we're seeing are certainly increases in the cost of labor as these yards have geared up to manage all the orders they have.

Arun Jayaram - Credit Suisse

All right. And then, in terms of that the contract would be -- when do you think you can get that rig on the payroll for post delivery conditioning?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

I think in operation, the order deliver ex-yard is middle of third quarter. So it probably is fourth quarter start up.

Arun Jayaram - Credit Suisse

All right. Thanks a lot guys.

Louis A. Raspino - President and Chief Executive Officer

Amie, let me interject here. We are nearing the top of the hour and let's take a couple of more questions and then conclude.

Operator

Okay, thank you. We'll go next to Gary Stromberg with Lehman Brothers.

Gary Stromberg - Lehman Brothers

Hi, good morning. Can you guys talk about your thoughts on the balance sheet? Do you have any targets for leverage in capacity there? And then I guess secondly, related to that question, your balance sheet, at least from our perspective looks to be investment graded quality. Your US peers are all investment grade rated. Is there any targets to achieve in investment grade ratings on your debt?

Louis A. Raspino - President and Chief Executive Officer

Brian?

Brian C. Voegele - Senior Vice President and Chief Financial Officer

Yeah, let me answer your first question in terms of target at debt levels. As we've said before, probably we target a debt to total cap of 20% t0 40%. We are entering into a period of time right now where we're under leverage and given our, the growth potential or other options we have available, we'll look at pushing that leverage back out into that 20% range. But again we are trying to -- given the fact that we're trying to transition the company and grow in deepwater, we'll probably remain in the lower end of the range to give us the fire power to do that and to take advantage of opportunities quickly as they develop. In terms of the -- your second question?

Gary Stromberg - Lehman Brothers

Yeah, I guess in terms of, do you have any targets to achieve in investment grade rating anytime or you're happy sitting in the high yields market?

Louis A. Raspino - President and Chief Executive Officer

We've obviously been focused on our credit metrics and this is something that we have a pretty constant dialogue with the rating agencies about and we are optimistic that we will get to investment grade. Frankly, when you look at our cost of capital and our cost of borrowing, our cost of capital is already one of the lowest in the industry, even taking into account those guys that have inverted. We look at our ability to achieve kind of an investment grade rating as an additional way to push that cost of capital even lower, and actually create a bit of a competitive advantage for us. And so it is something we are focused on and we are optimistic that over the next 12 to 18 months we might see some positive moves here.

Gary Stromberg - Lehman Brothers

Okay, great. Thank you very much.

Operator

The next question comes from Tom Curran with Wachovia.

Tom Curran - Wachovia

Good morning, guys.

Louis A. Raspino - President and Chief Executive Officer

Good morning.

Tom Curran - Wachovia

Louis, just a point of clarification here. When you talk about the North American jackups fleet that you are going to carve out audits on and making progress towards an eventual divestiture, will that include the independent jackups as well?

Louis A. Raspino - President and Chief Executive Officer

I believe we're including those in the carved out audits right now because we're including all of the rigs that are operating in the Gulf of Mexico, but we can easily add or subtract rigs due to the audit, that's not an issue.

Tom Curran - Wachovia

I guess I mean in terms of target for eventual divestiture?

Louis A. Raspino - President and Chief Executive Officer

I would say the independent rigs are questionable, we don't have a strategy need to divest of the independent rigs, we would have to decide where they might be working and whether we would like to keep just a couple of rigs working in an area or whether we would like to divest more rigs in an area. But that's kind of an on and off switch, we haven't really made a decision strategically about those rigs.

Tom Curran - Wachovia

Okay, that's helpful. Thank you. Kevin, following up on an earlier question about the potential opportunities in the eastern hemisphere for the mat supported jackups. You mentioned Southeast Asia, would that be Malaysia in particular or is there any worlds outside of Malaysia where there might actually be opportunities for those rigs?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

Actually there is three, four maybe even five different locations for opportunities, some in drilling and some in floating -- in mobile production business.

Tom Curran - Wachovia

I see. Could you share some of those other countries?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

As well known, China is looking for a water rigs in the Bohai Bay area, you see some possibilities in India out there, I think it's a possibility that Brunei and Indonesia might even have some things going on, but right now primarily, Malaysia, China and India.

Tom Curran - Wachovia

And were you to secure mobile production usage opportunity, would that require some capital investment in it? So, would it require permanent conversion of the rig?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

Yes.

Tom Curran - Wachovia

And how much would that run roughly?

Kevin C. Robert - Senior Vice President, Marketing & Business Development

Well, I think those kind of opportunities would be opportunities to sell one-off assets and take the rig out of the drilling business, which we wouldn't like to do because it would reduce the rig count.

Tom Curran - Wachovia

Okay, great. Thanks guys, I'll turn it back.

Louis A. Raspino - President and Chief Executive Officer

Great, Tom thanks. And we'd like to thank everyone else for participating on today's call. And I'll remind you that the date for second quarter 2008 earning's record call is August 7th at 11:00 ET. Thank you, Amie for the help on the call. Good day everyone.

Operator

Thank you. That does conclude today's conference. We thank you for your participation. And you may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts