Hercules Offshore Management Discusses Q2 2012 Results - Earnings Call Transcript

Executives

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

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

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

Analysts

David Wilson - Howard Weil Incorporated, Research Division

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

Haithum Nokta - Clarkson Capital Markets, Research Division

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

Ian Macpherson - Simmons & Company International, Research Division

Nigel Browne - Macquarie Research

Matthew H. Beeby - Williams Financial Group, Inc., Research Division

Michael W. Urban - Deutsche Bank AG, Research Division

Kathryn O'Connor - Deutsche Bank AG, Research Division

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

Hercules Offshore (HERO) Q2 2012 Earnings Call July 27, 2012 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Hercules Offshore, Inc. Earnings Conference Call. My name is Stephanie, and I'll be your coordinator today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Son Vann, Vice President of Investor Relations and Planning. Please proceed.

Son P. Vann

Thank you very much, Stephanie. Good morning, and welcome, everyone, to our second quarter 2012 earnings conference call. With me today are John Rynd, Chief Executive Officer and President; Stephen Butz, Senior Vice President and Chief Financial Officer; as well as the senior management team, including Troy Carson, Chief Accounting Officer.

This morning, we issued our second quarter results and filed an 8-K with the SEC. The press release is available on our website, herculesoffshore.com.

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

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

With that, it's my pleasure to turn the call over to John.

John T. Rynd

Good morning, everyone, and thanks for joining us today. This morning, we reported a second quarter 2012 adjusted net loss from continuing operations of $18.2 million or $0.12 per diluted share. This excludes a noncash impairment charge of $47.5 million on Hercules 185 and approximately $9.2 million of expenses related to our recent debt refinancing, the subsequent retirement of our term loan and the repurchase of a portion of our convertible notes. On an after-tax basis, these items totaled $0.23 per diluted share, which were just the results of our reported GAAP net loss from continuing operations of $0.35 per diluted share. In comparison, we reported a loss from continuing operations of $14.3 million or $0.11 per diluted share for the second quarter of 2011.

While the latest quarter contains a number of non-operating items that can make a review of our results challenging, a closer review of revenue and EBITDA show improvement in every segment compared to the first quarter 2012 levels.

Our domestic jackup business posted its fifth consecutive quarter of revenue growth, driven by higher dayrates in near full utilization. While crude prices have moderated since our last earnings call, let me be clear in saying that based on discussions with our customers, we have not sensed any pullback in drilling programs. In fact, our latest fleet status report issued last week provides confirmation of the continued strength in activity levels, as our domestic backlog grew by 20 days per jackup rig from the prior month and as that is an all-time high of approximately 6 months per rig of average backlog. Most of our marketed fleet is contracted through the end of this year, with over 1/4 of our rigs contracted well into 2013.

Recent contracts also carried longer terms. We are signing more fixtures that have 120 to 200-plus days of backlog per contract. This compares to the 30- to 90-day-term contracts that were more typical in past cycles. And we are in discussions right now with several operators seeking 4- to 6-month rig commitments.

Pricing continues to meet -- to move higher, albeit at a more gradual pace than we saw in late 2011, early 2012. Leading edge dayrates for our 200 mat-cantilever rigs have moved up by about $5,000 per day since our last earnings call to the mid-$70,000 range. Our 250 mat-cantilever rigs have risen to the high 80s. And the Hercules 300 and 350 have recently seen rate increases by $5,000 to $7,000 a day.

As we have said on many occasions, our ability to move rates and add backlog is a function of our customers' well economics. Our customers have shown an ability to make economics -- make the economics in the Gulf of Mexico shelf work even in this choppy environment.

Also keep in mind that while oil prices have declined over the past 4 months, Louisiana light sweet crude didn't fall much below $90 and quickly rebounded to over $100 per barrel, which is where we're at today. And natural gas prices have increased to over $3 per MCF, with a forward rate showing continued improvement.

Availability of jackup rigs in the Gulf of Mexico remains extremely tight. Of the 39 marketed rigs in the region, 37 are under contract. The only rigs not under contract are the small workover rigs. Excluding these workover rigs, the 36 drilling-capable rigs have essentially been fully contracted since November 2011, and most are currently on contract through late 2012. We own half of these 36 rigs.

Rig reactivations are still on negotiating table, and we continue to have this discussion with customers. Given where our backlog and leading edge rates are, the economics to reactivate are compelling. But we remain disciplined with our investment decisions, and we'll not embark on any speculative reactivation program that can disrupt the positive environment in the U.S. Gulf of Mexico.

There are a lot of positives within our Domestic Offshore segment, but we do have some challenges, principally on costs and shipyard time. On the cost side, we recently passed on a wage increase that averaged 7% across our Offshore employee base. We feel that these recent labor increases will keep us competitive with the market through the rest of this year. Future labor rates will depend on a number of factors including overall industry activity, the general economy, but offshore drilling is strong right now, and demand for people is constant. Interest costs are also rising, due in large part, to the underwriters recalibrating their risk portfolios in light of various industry incidents that have occurred over the past couple of years and the resulting claims in litigation. Our recent policy renewals, about 9% higher than prior year premium, with part of this increase due to our election to maintain higher coverage levels.

We are expensing greater-than-anticipated shipyard downtime while undergoing our 5-year surveys. This is partially due to work scope created on these rigs while at the yard. We have also had issue with certain shipyards in terms of yard availability, labor boat availability and competency. The impact has been more longer periods in the yard than the overall cost impact. We are working through these issues, but they will likely continue to be a challenge.

These costs creeps are baked into our cost guidance, which Stephen will review later on the call. While we're doing what we can to contain costs, we are also seeking pricing adjustments through our customers to account for this rising labor costs. I believe a good portion of these adjustments will be picked up by our customers as many of our customers understand the importance of a safe and efficient crews.

Turning to the international jackup markets. Rig availability remains tight. Market utilization of international jackups is approximately 92%, despite new build capacity coming to the market over the past year. Of the 18 new build jackups that have been in the market since the beginning of 2011, all but 1 are contracted. There are currently 93 new builds in the order book to be delivered over the next 3 years. But we believe that roughly 1/3 of this capacity is either owner-operated or captive markets, i.e. Russia, China or Iran, or ultra-aspect rigs that are targeting a new market segment for jackups.

There are also 25 cold-stacked jackups in international locations. Over the past few months, a handful of stacked jackups have changed hands. Most of the recently sold stacked rigs will be converted to a combinations or mobile production units, with a small number to be reactivated for drilling programs. We don't expect much of the remaining cold-stacked capacity return in the drilling capacity anytime soon, but we are monitoring the situation closely.

Looking at our international rig fleet. On Hercules 185, as I previously mentioned, we impaired the book value to rig based on our expectation that it is unseasonable to repair the leg damage and return the rig to service. It is our belief that the legs need to be completely replaced before the rig can go back to work. But the economics to do so wouldn't justify the spending. We are currently in discussions with our insurance underwriters on recovery amounts, both for the recent leg damage and the original claim by September involving the spud can. We have already collected $7.5 million related to the spud can claim in the second quarter.

The Hercules 266 arrived in charge in early July, and the extensive work to get the rig ready for Aramco is well underway. Everything thus far is on schedule, and we expect to get the rig out of shipyard and on contract in December.

A week ago, the Hercules 260 finished its shipyard stay and acceptance testing with Aramco and is back on full dayrate. It joined to sit the rig, Hercules 261, which went back on contract in late April. Both rigs are contracted with Aramco through late 2014.

The Hercules 208 is working in Indonesia at $100,000 per day through the end of September. There is a 45-day option at the same price, and we are marketing the rigs to other interested parties about keeping the rig on a long-term basis in the region.

We received 180-day extension on the Hercules 260, which will keep the rig working through March 2013 with the same customer and includes an upward rate adjustment to $90,000 per day starting in mid-September.

The Platform Rig 3, we expect to embark on an infill rig move sometime late this year, although we have not received notice from PEMEX on the exact timing of the move. We anticipate the move will take about 2 months or so to complete. It will be off dayrate during this time, but we will receive a $3 million lump sum payment for the move.

And we are continuing to actively market the Hercules 170 and 258 but do not have anything to report today.

A review of our Inland Barge segment shows a substantial improvement in utilization from the slow start that we had at the beginning of the year. Although we haven't been able to build much backlog with this business, we have been able to find work for 3 active barges, achieving basically full utilization during the second quarter. All 3 rigs are working today.

Pricing is also starting to move higher. Our latest contract on Hercules 17 carries a base rate in the high 20s compared to base dayrates that are in the low- to mid-20s at the beginning of the year.

Turning to our Liftboat business. In the U.S. Gulf of Mexico, we are in the seasonal upturn for activity. Second quarter utilization rose to over 64%, up from 43% in the first quarter. Today, we have 21 of 32 vessels on charter and expect utilization to be in this range, plus or minus, due to the summer and fall months. Pricing improved during the second quarter, as we are successful in implementing some rate increases earlier in the year and benefited from a few high-dayrate jobs on our larger vessels during the quarter.

In West Africa, we continue to be pleasantly surprised by the strong demand, which has kept utilization and pricing firm in the region. Some of the new capacity brought in over the past year or so by our competitors have also had operational issues that have limited their availability. But overall, demand has been good. And as a result, we recently reactivated the 105-plus vessel in late June.

In the Middle East, strong demand in the region kept both liftboats working throughout most of the second quarter. However, in late June, we had an incident on our largest vessel, the Whale Shark. Fortunately, no major injuries, but the vessel will be out of service for about 2 months. The Kingfish arrived in the shipyard early this month and will undergo upgrade work. We are very encouraged about the prospects for the Kingfish, based on our discussion with regional operators, and we're hopeful we'll have the vessel under contract in the fourth quarter once out of the shipyard.

On the asset sales front, we sold Hercules 2501 during the second quarter to a foreign buyer for $7 million for alternate use. This is one of the cold-stacked Seahawk rigs we acquired last April. We've now sold 8 of the 13 cold-stacked rigs we picked up in the Seahawk acquisition, in addition to the loose equipment, for total gross proceeds of $39 million. We sold the Hercules 29, one of our cold-stacked barge rigs for $900,000 this week, and has signed an agreement to sell the Hercules 27, another of our stacked barge rigs, for $5 million for use in West Africa and the Hercules 101, a retired jackup rig, for scrap value of around $1 million. And we are in discussion with various parties for other assets.

Before handing the call over to Stephen, let me close out by reiterating that our business outlook remains positive. Gulf of Mexico drilling activity shows strong resilience even during the past few months, where the crude prices seemed like it was in a free fall. Crude prices have rebounded in recent weeks. As we look ahead, our domestic customers continue to express a very healthy level of interest into our current rigs into 2013. We're also very encouraged by the latest central Gulf lease sale. We saw the highest number of shallow-water blocks receiving bids since 2006. This bodes well for future rig demand. Performance in our international drilling operations should improve in the second half of 2012, as we have completed the majority of our heavy shipyard project. And 2013 results will have the addition of the Hercules 266. Lastly, fundamentals within our Liftboat business, particularly international, remains solid.

With that overview, let me turn the call over to Stephen.

Stephen M. Butz

Thank you, John. I'll follow our typical format with a review of our second quarter 2012 results in comparison to the first quarter of 2012 and provide some forward-looking commentary along the way.

For the second quarter, we reported a loss of $0.35 per share. This includes several non-operating items outlined in the press release. But to summarize those again, we had a pretax impairment charge of $47.5 million to the Hercules 185, a charge of $6.4 million for debt issuance costs related to our April refinancing, and $2.7 million related to the termination of our prior term loan, and purchase of approximately $27.6 million of our outstanding convertible notes. On an after-tax basis, these items amount to $36.8 million or $0.23 per share. Excluding these items, our adjusted net loss from continuing operations was $0.12 per share compared to a loss of $0.28 per share in the first quarter of 2012.

Moving onto the results by segment. Domestic Offshore generated operating income of $15.1 million compared to $1.8 million in the first quarter. The strong improvement was mainly driven by higher dayrates, which improved by 8.5% sequentially, to average 60,700 during the second quarter. We expect to realize further rate improvement through the remainder in the year given our current backlog, which has been contracted at higher dayrates as compared to first half levels. Utilization, at 90%, was relatively flat with the first quarter activity, as we were essentially at full utilization for all available rigs during the quarter, with downtime limited to rigs undergoing their 5-year surveys.

We had 3 rigs undergoing surveys at various points during the second quarter: the Hercules 212, 263 and 265. Two of these 3 rigs are back on contract, while the 263 is expected to remain in the yard through September. We also currently expect to bring in the Hercules 253 and 350 sometime during the second half of 2012 to complete their 5-year surveys.

Segment operating expenses were $55.5 million compared to $59.9 million in the first quarter. Second quarter expenses include the benefit of $4.2 million in net gains, mainly from the sale of the Hercules 2501. However, this is partially offset by a $2.3 million accrual for sales in used tax.

As John mentioned, we recently implemented a wage increase for our Offshore personnel. Given higher labor and burden, coupled with the increase in insurance rates during our most recent renewal, we expect operating costs for Domestic Offshore to increase modestly during the second half to average in the low-$60 million range per quarter.

Our International Offshore segment narrowed its operating loss to $4.1 million versus a loss of $20.8 million in the first quarter, after excluding the impairment charge. Second quarter results included the benefit of a $10 million payment from Angola Drilling Company, which we announced on our last earnings call. As a reminder, we're still owed $54.4 million from ADC after this latest payment. Segment results also benefited from higher utilization, as many of the rigs that were out of service during most of the first quarter went back on contract in the second quarter. With that said, we still incurred downtime on the Hercules 262, which was out for the entire second quarter for contract preparation work, and the 261 didn't go back on contract until late April. So we should benefit from even higher utilization during the third quarter.

Average revenue per day rose to $91,400 from $73,100. The rate improvement was due to the return of the Hercules 208 and 261 to our working fleet, as they're amongst our highest-earning international rigs.

International Offshore operating costs increased by $4.6 million to $28.8 million. Higher segment operating costs were primarily the result of incremental expenses incurred on the Hercules 185, including inspection costs and expenses related to securing the rig once it arrived in Angola. We also incurred higher costs on the Hercules 208 and 261 as they return to service. This was partially offset by the affirmative costs on the 262 while on the shipyard and the 258, which we warm-stacked earlier this year. We expect to incur some additional costs to stack the Hercules 185 in the third quarter and see higher costs on the 262 as it returns to service. As a result, International Offshore operating expenses are expected to increase back to the low-$30 million range for the third quarter.

Turning to our Inland segment. Inland reported an operating loss of $3.7 million compared to a loss of $4.6 million in the first quarter. Revenue increased by 89% to $8.2 million, as operating days nearly doubled, partially offset by a modest decline in our average revenue per day due to fewer rebillable items.

Operating costs rose to $8.5 million from $5.7 million. Most of this increase can be attributed to a $2.3 million accrual for sales and use tax. Operating costs are expected to decline back to the $6 million to $8 million range per quarter for the remainder of the year, prior to any gains or losses on asset sales.

Our Domestic Liftboats segment generated an operating income of $600,000 compared to a loss of $2.3 million in the first quarter. Typical of this time of year, we experienced a rebound in activity levels, as evidenced by a 41% increase in operating days. In addition to the normal seasonal upturn, we also benefited from a 10% improvement in dayrates, which averaged to 8,600 per vessel.

Operating expenses were $11.2 million compared to $8.5 million in the first quarter. First quarter expenses included the benefit of a $1.8 million gain from insurance payment. The remainder of this cost increase during the second quarter was largely due to incremental labor and catering costs stemming from higher activity levels and an accrual for sales and use tax. We expect the operating costs in the third quarter to be relatively flat.

We're pleased with the strong results in our International Liftboats segment this quarter. It generated operating income of $11.9 million compared to $8.6 million in the first quarter, led by improvements in both dayrates and utilization. Dayrates averaged nearly 25,000, an increase of 1,500, as utilization rose to 76%, up from 66% in the first quarter.

Operating costs increased to $17.1 million compared to $13.1 million in the first quarter, as first quarter expenses benefited from a $1.6 million insurance gain. The cost increase also resulted from the mobilization-related expenses for the Kingfish of approximately $1 million and higher workers' compensation expense. We expect third quarter operating expenses for International Liftboats to range from $16 million to $18 million, which is similar to second quarter levels, with incremental costs expected on the Whale Shark.

Moving onto the other income statement cash flow items. Consolidated general and administrative expense for the second quarter was $6.5 million. As previously discussed, this includes the benefit of the $10 million ADC payment, of which $8.8 million reduced the G&A expense. Excluding the ADC impact, consolidated G&A would be $15.3 million, down from $17.7 million during the first quarter. We expect consolidated G&A in the second half to range from $16 million to $18 million per quarter. Second quarter depreciation and amortization expense was $42.4 million, down slightly from $43 million in the first quarter. We expect third quarter G&A expenses to decline to the low-$40 million range.

Second quarter interest expense was $20.3 million, a modest increase from $19.7 million in the first quarter. During the second quarter, we purchased $27.6 million of our [Audio Gap] notes, leaving us with a notional balance of approximately $68 million. We expect third quarter interest expense to be at or slightly below second quarter levels, given our marginally lower debt balance.

Moving onto income taxes. Including the impairment and debt issuance and retirement-related expenses outlined in our press release, year-to-date, we've reported an income tax rate benefit of 20%. Looking forward, we expect to maintain a similar rate for the remainder of the year. When analyzing our adjusted results after backing out items on the non-GAAP schedule, our adjusted rate of income tax expense for the second quarter approximated 50%. However, measuring on a year-to-date basis, our adjusted results yielded a 5% tax rate benefit. This came in below our guidance of a rate benefit in the high-teens, primarily as a result of a change in the jurisdictional mix of earnings, namely, a shift in contribution from certain offshore entities to non-offshore entities. As we obtained no benefit from tax losses generated in these offshore entities, our overall tax benefit declined. But again, looking into the back half of 2012, based on our forecast by jurisdiction, we expect our tax rate benefit to approximate 20%. We operate in a number of jurisdictions, and recently, a number of these have been operating at or near breakeven. It's important to point out, when this is the case, small changes in our income can have a significant change in our quarterly percentage tax rate.

As for capital and drydocking expenditures, we spent approximately $35 million during the second quarter. Year-to-date, capital spending and drydocking has totaled $95 million. Of this amount, $48 million is related to the acquisition and transportation of the Hercules 266 to the Middle East; $20 million was spent on the Hercules 261 and 262 for their contract-specific upgrade requirements for Aramco. We received a lump sum payment from Aramco on the 261 in the second quarter and should receive a similar payment for the 262 of approximately $7 million to $8 million within the next few months. During the second half of 2012, we expect to spend between $100 million and $110 million. Approximately $37 million will be for the project on the 266, which we will receive a $25 million lump sum payment after rig acceptance. The remainder will largely be spent on the 5-year special surveys scheduled for Domestic Offshore, the NTL move for Platform Rig 3, upgrade work for the Kingfish, and maintenance CapEx and drydocking of our liftboats.

With respect to our balance sheet and liquidity, at June 30, we had unrestricted cash and equivalents and marketable securities of $205 million. Total book value of our debt was $863 million, which includes the April issuance of $500 million in notes, the repayment of our term loan and the purchase of a little over 1/4 of our then-outstanding convertible notes. The balance of the convertible notes is classified under short-term debt based on our expectation that they will be put back to us in May of 2013. With over $200 million of cash and marketable securities on hand, in addition to our $75 million revolver, which is currently undrawn, we have ample liquidity to retire the convertible notes and fund future capital expenditures.

In closing, our operations will likely consume some cash during the second half of 2012 due to the heavy capital spending program over this period. We expect this dynamic to change early in 2013. International Offshore performance should improve dramatically next year, as we see a much lower shipyard downtime, and the Hercules 266 should be in service. While the Domestic Offshore segment is still somewhat exposed to the spot market, we have already contracted a number of rigs through mid-2013. Assuming a continuation of leading edge rigs across our domestic jackup fleet through 2013 and no material changes to our Liftboats business, we would expect to generate excess cash flow next year.

Naturally, us of this free cash flow will depend on available investment opportunities. However, we would continue to target high-return growth opportunities as we did with the Seahawk asset acquisition and the recent acquisition of the Ocean Columbia. Beyond growth opportunities, we also have the ability to prepay debt. Aside from the convertible notes, we have early redemption options starting with our 10 1/2% notes in late 2013. And all of our notes have prepayment options prior to their respective maturities.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Dave Wilson with Howard Weil.

David Wilson - Howard Weil Incorporated, Research Division

In the last several fleets updates, you guys have shown successfully higher dayrates being signed. You talked about that in your prepared remarks. But from here, do you see the opportunity to push rates further? Or did the crude volatility during the quarter kind of put a pause there from an operator standpoint?

John T. Rynd

No. I think we still have the ability to push rates, but like we said, I think albeit at a much lower scale that we were able to achieve over the last 6 to 8 months. I think the one impact that this volatility in crude has had is the ability to really secure a reactivation. With that uncertainty, I think people are a little reticent of trying to get over their skis. But same math, the fundamentals of the 18 marketed jackups, as I mentioned, is solid, very, very solid.

David Wilson - Howard Weil Incorporated, Research Division

Got it. And along those lines, it seems like a relatively healthy level of contracting activity through hurricane season. It just -- which seems kind of at odds with some things that we've heard in the past -- sorry, history. How does the season, in terms of contracting compared to prior seasons, not considering the impact of the moratorium? Is it better or worse? I mean, it seems like it's better, but -- and should we think about this as a basis, when we are out of the hurricane season, that there's going to be another kind of, I will say, wave of contracting? Or do you think this is kind of the new kind of just norm at this level?

John T. Rynd

I think, Dave, what you've got is we only have one rig that is not contracted through hurricane season, but it's got multiple opportunities, so we're not concerned about it. I think the real driver here is that the economics for drilling on the shelf are very robust. Rig market is very tight, so people are less likely to take hurricane season off and get out of a rig queue. So they will drill through hurricane season so as not to get -- not have access to a rig. So I think as you look forward, and we can go back even post-Katrina and Rita, when the fundamentals were strong, we are going to -- we drilled through the hurricane season, fundamentals are weak, we had an impact.

David Wilson - Howard Weil Incorporated, Research Division

Great. And one more, if I can. In the past, we've kind of danced around the liftboats from an M&A perspective. Can you remind me where you stand, more likely a buyer or seller, what the current appetite is in the market? Just an update on that regarding -- especially considering your fairly robust international exposures all through the quarter-end. Domestic results, that appear to be a little better than some of your peers.

John T. Rynd

Yes, nothing is really for sale, albeit, as we -- and I don't mean to be flip, but everything is for sale at the right price. But on the international front, we think that's a growth region for the next 3 to 5 years, as you see more infrastructure being put in place in the shallow water. And also you've got an aging infrastructure across all the shallow-water regions in the world. So our international outlook is very optimistic. Domestically, the right acquisition came along at the right price, we would grow the fleet. If an offer came across the battle that was very attractive, we have to -- have a fiduciary responsibility to evaluate that offer.

David Wilson - Howard Weil Incorporated, Research Division

Sure. Now along those lines, John, you're looking to move more boats out of the domestic market into international the next few years then?

John T. Rynd

Yes. We will always -- always looking kind of move West to East, both with the jackups and the liftboats. I will say we've had very, very positive results in West Africa. And one thing we are contemplating as we are looking to move asset internationally, if we were -- if we saw weakness in West Africa, that may have been where we moved an asset out of West Africa to the Middle East or to Asia. But given the -- how solid the business is, that's really not an option right now.

Operator

Your next question comes from the line of Collin Gerry with Raymond James.

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

So you brought up an interesting point in terms of the capital that's coming to the Gulf of Mexico on the shallow water side. My sense is that a lot of it is coming on the private side, as well as public side. But you're obviously a lot more tuned and plugged into that. Could you maybe just talk about what the environment is like for your customers from a private equity perspective? Is there still money coming in to drill on the shelf? And usually, what's kind of the gestation time between when the capital is committed and how long it takes to start drilling and kind of get activity going?

John T. Rynd

Well, from our account, there's been 5 new coasts, private-equity backed that have entered in the Gulf in the last 6 to 12 months. We currently, of those 5, already have rigs committed to 2 levels. So to your question on the gestation period, it was quick. And some of those new coasts were also active in acquiring leases in this recent lease sale. So those guys are allocating capital, and they want to put it to work and get a return.

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

Okay, that's very interesting. And is that all new drilling, or is it going in and doing workover on existing wells, or is this -- I get a sense it's mostly drilling new wells.

John T. Rynd

Mostly new wells.

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

Very interesting. Okay. And then the other kind of point that's in more paramount this quarter than maybe in the past is the people side of things. I mean, you mentioned the wage increases and so forth, and I've gotten a sense from you guys that people's not as easy as you would think given the unemployment numbers. But talk to me about as we look at the growth opportunities going forward or how concerned should we be about getting people. Is it -- how tight is the market compared to prior cycles?

John T. Rynd

I think it's as tight as it has been even in previous cycles and I think for a couple of reasons. There's really 3 in my mind. One is now we've had a little pullback in the land business, but that was sucking a lot of people. Also, with the service intensity on these new wells in the resource plays, the headcount across from the drillers and the service providers on the land location, they're in all-time highs relative to previous cycles. Secondly, we're now building cars in the Southeast part of the United States. That was never a draw on labor, and those are the kind of - that's the labor pool we historically have drawn from in that region of the U.S. And then thirdly, there's 93 jackups under construction. There's, I don't know, I don't track the floater business as well, but 45 to 50 new drillships and floaters, semis under contract. And now this -- the industry in total, both from our customers and all the service providers, have a significant challenge in front of us to attract and retain talent.

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

And then what -- I mean, what's your strategy in that environment? Should we expect wage increases to be the norm every quarter? Are you locking people in for mostly -- with your contracts or something?

John T. Rynd

Right now, we feel comfortable that the recent 7% increase on average that we gave across the Offshore workforce should suffice this year. And I'll tell you, a little comfort we get is just -- from the dropping of land rig count is that their need for people is abating. But again, we could be wrong. But I think right now, if you go back, we gave about a 15% pay raise about 14 months ago. So I mean, that's almost a 25% increase in 1.5 years. So I think that we feel comparable right now that this should get us through this year.

Operator

The next question comes from the line of Todd Scholl with Clarkson Capital.

Haithum Nokta - Clarkson Capital Markets, Research Division

This is Haithum Nokta, filling in with -- for Todd Scholl. I have a question following on the liftboats. Can you compare the economics of mobilizing a liftboat from the Gulf of Mexico to West Africa and the Middle East versus buying assets in those markets?

John T. Rynd

Yes I think it's almost 2 different stories, actually. You can grow, obviously, organically, which we prefer to do. Let's take just an example on the economics of the Kingfish. The Kingfish, year-to-date, prior to making decision to move the vessel to the Middle East, had 35% utilization rate. And its average rate, on those 35% utilized days, was about $16,000 a day. So we were able to spend $1 million to mobilize the vessel to the Middle East. We'll spend plus-or-minus $5 million during a rig update to international specs. The average dayrate in the region for our liftboats there is $38,000 a day. Operating cost is probably $4,000 a day on that vessel in the U.S. Gulf of Mexico. It will be $9,000 a day in the Middle East, very robust economics. Now if -- to buy a liftboat in the region, if there was one for sale, there is one that's available, and they're asking almost $60 million for the vessel, and it competes with our vessels there. So the economics is just pale in comparison as far as moving the vessel.

Stephen M. Butz

And if I can just add on, one thing that we've tried to do in the past is to move the vessels opportunistically when we can just add a liftboat on to a heavy lift vessel that we have moving a rig over, and we've been able to minimize that mobilization expense. And we've done that, I think, virtually in every case on the liftboats we've moved. In the absence of that, if you were just to contract a heavy lift to move a liftboat, coupled with the opportunity costs that have been working during that time in the U.S., it's a bit harder to make the economics work. So our move -- future moves will probably likely continue to be opportunistic.

Haithum Nokta - Clarkson Capital Markets, Research Division

Okay. Yes, that makes sense. And I guess, also, similar to that, how attractive are kind of the ask prices for jackups internationally? Is there anything out there that's similar to the 266 deals that you got there?

John T. Rynd

Nothing exactly similar because we have already done it. But yes, they're there. There are some units that are available that we're keeping tabs on. And it's always -- we've been asked what are the opportunity such that if you make that acquisition to kind of de-risk acquisition, as we did with the 266. If we can lock up a multiyear contract that either pays us all the capital back or significant portion of our capital, then we'll do it.

Operator

Your next question comes from the line of Rhett Carter with Tudor, Pickering and Holt.

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

It kind of feels like we're seeing an uptick in demand for P&A-related work in the Gulf of Mexico. Are you seeing signs of this and really taking any specific action to position for it? And has that increased, I guess, the number of potential acquires kicking tires on the Domestic Liftboat business?

John T. Rynd

Rhett, we're not experiencing that uptick year-to-date. I think year-to-date, on the Liftboats, our revenue generated from P&A is sub-10% of revenue. And last year, it was about 19% to 22%. I won't be far off. The demand is there, but we're just not seeing it really take place in the market, i.e. the permitting process and things is not -- has really been kind of a surprise so far year-to-date. We know there's a ton of work to be done over the next 3 years. We haven't seen it. Now positioning yourself, really what you've -- to position yourself on the Liftboats side, really what you're looking for is your crane capacity is the biggest component to make you most competitive because the liftboats are limited by Coast Guard regulations. They cannot work in over 180 feet of water. So really, it's not water depth, it's a crane capacity-driven demand. Longer term, you're going to see continued demand for P&A because it's been regulated that they have to get it done. Just it's been interesting year-to-date, we haven't seen the activity level like we did last year.

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

Okay. And just on the discovery rigs, just want an update on how potential contract discussions were going and where you're seeing the most interests.

John T. Rynd

Yes, the discovery rigs are on time and on budget, taking great shape. We have offered the unit around the world to a couple of operators. Just the specifications of the unit have been very well received. Again, we're about a year out from the first delivery -- about 11 months actually from the first delivery. I think we're going to be -- 6 months from now, we will really get serious as we get closer to delivery. The 2 primary markets that the units are being the most well received are the North Sea, non-Norway, and the Middle East.

Operator

Your next question comes from the line of Ian Macpherson with Simmons.

Ian Macpherson - Simmons & Company International, Research Division

John, I wanted to ask a couple questions on international jackups. With regard to the one -- I guess, the 208 and the 260, which I think are probably the next 2 you have that are working in that roll-off contracts. How do you think leading edge dayrates today compare to where those are contracted [indiscernible]?

John T. Rynd

Yes. I'll start with the 208. We're at $100,000 a day, and there's probably, max, 10% to 20% upside from there. That will depend on timing and location and customer, et cetera. But the peak dayrate we achieved on the 208 was $110,000, so we're almost back in previous peaks. Not that, that would not allow us to go above that previous peak, but just showing how fast the rigs move internationally. On the 260, it's contracted into the first quarter of '13 at $90,000 a day starting in September of this year. Leading edge rates, I think, on those -- that class of asset is probably in the $115,000 to probably $135,000 range. What we saw recently on Noble's announcement that they got a 82 SD-C contracted in West Africa at $142,000 a day, so the rates are moving.

Ian Macpherson - Simmons & Company International, Research Division

Yes, exactly. The other question in that part of the fleet, what do you think the handicapping should be in terms of over the next 6 months in your 2 warm-stacked rigs go both under contract or stay stacked then it become more cold-stacked or maybe 50-50 between those 2 outcomes.

John T. Rynd

On the 170 and 258, the 170, for the third year in a row, we've been in detailed discussions with operators to put the rig to work. Obviously, in the years past, we were unsuccessful for various reasons, most of them, we would not accept the liabilities they want us to assume under the drilling contract. But on the 170, it's a 50-50 right now, where we've got a good dialogue going with the customer that we've worked for before and knows us well, so keep our fingers crossed on that. The 258, given that it's a slot rig, has not quite the breadth of opportunities as a cantilever rig does, obviously. And also on the 258, we'll do a special survey, and that's going to be probably, minimum, $10 million. And so if we get a 90-day job at $80,000 or $90,000 or $100,000 a day, we're still risking some capital. So it's a little bit of a chicken and the egg with the 258.

Ian Macpherson - Simmons & Company International, Research Division

Okay. Domestic reactivations, I assume you're probably -- the earliest, 6 months from greenlight today?

John T. Rynd

Yes. I think if you look, like we said in the prepared remarks, the dayrated term dictate that it's very compelling to do an upgrade, but we're not going to do an all-spec. And I think, as I said earlier to one of the questions, I think this kind of a little bit of unnerving drop in oil prices. We recovered a fair amount, but that kind of took some of the -- the luster off that. And I believe, really, the next leg up in demand because we've been running 37 jackups as an industry in the Gulf since November. The demand is fairly flat, and I think the next leg up in demand, you're going to have to see some improvement in natural gas prices to really knock the lid off this thing. But if you look at backlog, you know where ours is, it's about 6 months. Rowan's is about 180 days a rig as well. In scope, our rough math is about 200 days a rig right now. So you're getting, not just our fleet, but the entire Gulf of Mexico fleet contracted well into 2013. And if you see incremental demand that come, they're going to have to look to the reactivation.

Operator

Your next question comes from the line of Nigel Browne with Macquarie.

Nigel Browne - Macquarie Research

Just had 2 questions on the costs side of things, on operational costs, as well as capital costs. On the OpEx side, you guys mentioned that there was a 77% increase in salaries in the Gulf. Is that correct?

Stephen M. Butz

Yes. And actually, it wasn't just the Gulf, also it's our international. Then we had some pay increases in Liftboats.

Nigel Browne - Macquarie Research

So pay increases across the board. What is the main driver of the pay increases? Is it just blended overall, or are there particular segments of the workforce where you're targeting that increase to attract personnel?

Stephen M. Butz

Yes, that's the blended rate. Certain positions were higher, and certain positions were lower. And essentially, the positions that were in short of supply, typically, the more skill positions. Some of the higher positions, where you have a bigger base to begin with, that's where we saw the greater increases and greater wage pressure than, say, for example, the entry level positions.

Nigel Browne - Macquarie Research

And how should we look at 2013, given that there was already an increase this year? Do we also look at 2013 as maybe smaller increase or you're planning to -- do you think that, that will be enough to retain your talent base right now?

Stephen M. Butz

Well, I think at this point, we would say we'd still expect further increases in this oil price environment and with capital spending for our customers continuing to grow at a double-digit pace, and they tend in an inflationary environment. However, as John mentioned, we've got about a 25% increase over the last 2 years, partly due to catch up of 3 or 4 years, where we actually had reductions in pay. But -- so I would expect the rate of increase to certainly moderate from where it's been.

Nigel Browne - Macquarie Research

Okay. And one last question before I surrender the line. How do we look at the CapEx spend for the rest of the year and your first stab at 2013?

Stephen M. Butz

Yes, well, for the rest of the year, it should be in the $110 million to $110 million range, which is much, much higher than it would be on a go-forward basis due to the 266, which we're upgrading for Saudi. We're -- when it goes under contract, we'll receive $25 million payment from Saudi. That will probably be in next year's results, that payment, but the CapEx will be incurred this year. Looking forward to next year, we haven't finished our capital budget yet and will in the fall. So perhaps on the next call, we'll be able to hone it in a little better. But our maintenance capital spending has been running last -- in the last 2 years, we certainly cut it back significantly anywhere from the $50 million to $80 million range. Whereas if you go back to 2007, we had a higher rig count, but it was in the $120 million range. So to sum it all up, I think going forward into a more robust environment, we would expect it to increase from that $50 million to $80 million, but certainly, not back to the $120 million level, just on a maintenance perspective. So -- and then it could increase further with attractive growth opportunities such as reactivations or acquisitions.

Nigel Browne - Macquarie Research

So any ballpark range all in, or you're just not prepared to say right now?

Stephen M. Butz

Again, I hate to throw the numbers since we're not done, but probably, just to give you a broader range, between $80 million and $100 million at this point. But that's with -- in the absence of any growth spending. That's for maintenance, maintenance capital spending and drydocking.

Operator

Your next question comes from the line of Matt Beeby with Williams Financial.

Matthew H. Beeby - Williams Financial Group, Inc., Research Division

John, can you talk about -- we continue to hear a lot of jackup demand conversations from Mexico. Can you give any insight what the market might look like, given the fact that the Gulf of Mexico jackup rates are probably on par with what we're seeing there now? And the Gulf was probably going to be one of the markets who's going to supply Mexico. Can you give any update on timing and what's your expectations are from the industry standpoint in the Gulf of Mexico?

John T. Rynd

Right now, there's currently no tenders pending from PEMEX. They've got roughly 40 jackups under -- or 41 jackups under contract, but only 30 are working. So they got 11 that are contracted and have to be delivered. Our latest intelligence, looks like they're going to come out at some point, with 18 bids, and that's -- it appears right now that, that's going to be 10 incremental rigs and 8 renewals. And what they've been doing is, as you've noticed, they've been just trying negotiating extensions with the fleet that's currently in Mexico. Right now, their reference dayrates, what they call old equipment, kind of pre-1990 equipment, were 350 IC, like our 350, which is currently $105,000 and going to $110,000. It's $112,000 a day. And for the 300-footers, it's kind of $80,000 to $90,000. And the 82 SD-Cs looks like it's about $80,000 to $85,000. The newer equipment, the highest dayrate is $135,000. So if you look at that and you're either -- you own a relatively new jackup or you own an old jackup, the economics, given what's going on in the Gulf of Mexico and elsewhere in the world, don't look very good relative to where you're sitting. If you are going to take -- let's take the 350 as an example. We're going to go down to Mexico for a 2- to 3-year contract at $112,000 a day, well, we'd be out of service, have lost opportunity costs of 120 to 150 days. We would spend easily $15 million of incremental CapEx to meet their specifications, you won't do it. So I think that's -- and they have struggled so far to attract the numbers of jackups they require because the economics don't justify people leaving a region to undertake that.

Matthew H. Beeby - Williams Financial Group, Inc., Research Division

Okay, that's really good color. A couple of just rig-specific items. The 120 and the 173, can you maybe talk about expectations, maybe extending those again through 6- or 12-months terms with Chevron? And any discount that you might have to make to current leading edge rates?

John T. Rynd

Yes, I think we're confident that Chevron's going to return those 2 rigs for all of 2013. They've kept both those rigs for over 12 years. So we'll come down to a price discussion. Obviously, we're at a very low end of the range, currently, where our dayrates are for Chevron in those 2 units. So we'll see -- hopefully, see an increase with Chevron. And I think that will -- that discussion is ongoing. And then, I think, depending on how that rate discussion comes out, do we do a 6-month -- plus 6 months, or if we're comfortable, we'll lock it up for the full year.

Operator

Your next question comes from the line of Mike Urban with Deutsche Bank.

Michael W. Urban - Deutsche Bank AG, Research Division

My questions have been answered.

Operator

Your next question comes from the line of Kathryn O'Connor with Deutsche Bank.