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Executives

James Holland - SVP, CFO and Secretary

John Irwin - President and CEO

Analysts

Arun Jayaram - Credit Suisse

Collin Gerry - Raymond James

Tom Curran - Wachovia Capital

Sonny Randhawa -Banc of America Securities

Brian Lester - The Abernathy Group

Waqar Syed - Tristone Capital

Mike Breard - Hodges Capital

Atwood Oceanics Inc. (ATW) F2Q08 (Qtr End 03/31/08) Earnings Call May 9, 2008 11:00 AM ET

Operator

Good day and welcome to today's teleconference. (Operator Instructions).

And now I would like to turn the program over to Mr. James Holland. Please go ahead, sir.

James Holland

Good morning and welcome to Atwood Oceanics' conference call and webcast to review the company's operating results for the quarter ended March 31, 2008. Speakers today will be John Irwin, President and CEO; and myself, Jim Holland, Senior Vice President and CFO.

Before we commence our financial and operational review, let me, as usual, remind everyone that during the course of this conference call we may make forward-looking statements based upon management's current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us, and therefore, involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. The words believe, estimate, impact, intent, anticipate or predict convey the uncertainties of future events or outcomes. Undue reliance should not be placed on these forward-looking statements, which are applicable only on the date hereof.

Before John provides some comments on the company's current operations, let me comment on some events that impacted results for the quarter. Earnings per share for the March quarter was $1.30 with an effective tax rate of 10% and total drilling cost for the quarter of approximately $52 million.

In our last conference call in February, I stated at that time we believe that the then First Call estimate of earnings per share for our second quarter of $1.30 was too high. There were two significant events in the quarter that resulted in our earnings being higher than anticipated. First, we initially anticipated that the Atwood Southern Cross would complete its contract offshore Turkey in March, and then incur four to five days of zero rate time prior to commencing its ENI program offshore Italy.

The rig did not complete its commitment in Turkey until April. Therefore, no zero rate days were incurred in the March quarter for this rig. However, two zero rate days could be incurred in the third quarter. Had the rig incurred four days of zero rate during the March quarter, earnings per share for the quarter would have been negatively impacted by approximately $0.05.

The second somewhat extraordinary policy event that we incurred was approximately $800,000 of currency exchange gain in Australia during the quarter due to the weak dollar, which reduced other drilling costs from about $10,000 per day to as reported $1,000 per day, and enhanced earnings per share by approximately $0.03.

During the quarter we incurred 52 zero rate days on the Richmond while completing its last enhancing upgrade of approximately $17 million, and 18 planned zero rate days on Atwood Hunter while upgrading some equipment. The only unplanned zero rate day incurred during the quarter were five days on the Atwood Eagle and three days on the Atwood Falcon.

The level of our contract drilling costs for the three months ended March 31, 2008 are approximately $50 million was as expected, with the Atwood Hunter, Atwood Eagle and Atwood Falcon being below guidance, the Atwood Beacon, Vicksburg, Seahawk and Richmond being within guidance, and with the Atwood Southern Cross the only rig significantly above operating cost guidance of $75,000 per day compared to actual cost of $95,000 per day.

General and administrative expenses for the quarter of $7.2 million were slightly above guidance of $7 million. Following John's comments, I will add some current guidance on operating costs and cover some other items that will impact operating results for the second half of fiscal year 2008.

I will now turn the conference call over to John.

John Irwin

Thank you, Jim, and good morning, everyone.

Yesterday, as you know, we filed our fleet status report with contract day rate and cost information for our eight operating units. I'm not going to repeat all of that information, but I would like to comment on certain highlights and some additional items. We will be pleased to respond to any questions at the end of the call.

During our second fiscal quarter, we once again achieved 100% fleet utilization, and our results also reflected favorable performance in terms of planned and unplanned downtime and direct operating costs. Our existing eight operating units continue to be leveraged to deepwater and international markets with key clients in some of the world's most attractive offshore areas.

Our current estimated contract backlog in terms of available rig days for our eight units is approximately 98% for the current fiscal year and 38% for fiscal '09. This backlog provides a combination of earnings visibility and future earnings upside potential, particularly with our deepwater and international leverage.

Our fleet status report reflects certain current estimates and indications of downtime periods for required regulatory inspections and planned maintenance. The commencement timing and duration of these periods depend on a number of factors and variables, including suitable windows between wells for contracts.

In planning our downtime maintenance periods, our goal is to maintain our fleet with a focus on minimizing downtime and achieving longer term returns. We continue to regularly review forward plans for its inspections and maintenance programs based on the very latest schedules and factors in both. And in addition to planned downtimes, zero rate downtime may also be incurred for unplanned maintenance and repairs. Historically, approximately 2% of zero rate downtime days has been experienced for unplanned maintenance.

Now, a few comments on certain of our rigs, starting with the Atwood Hunter, which is currently working in Mauritania for Petronas on the balance of its two-year term contract which was assigned by Woodside. The expected completion date of the remaining contract assigned to Petronas is September 2008. Ongoing opportunities of varying durations to follow the current contract are still being discussed with several clients. Market day rates have been in the 400,000 with high day rates in this range for shorter programs commencing later this year.

Now, as Jim stated, the Atwood Southern Cross completed its remaining contract commitments in Turkey, and then mobilized to Italy in April to drill two wells with ENI AGIP at a day rate of 406,000. The Atwood Southern Cross commenced operation in Italy in early May following certification by Italian authorities.

The drilling of the two firm wells is currently estimated to take around four to five months to complete. Under the terms of the contract, ENI provided a tow vessel to move the rig to its drilling site and is to pay a day rate of 365,000 during the mobilization period, as well as paying a day rate of 395,000 while the rig was being certified by Italian authorities prior to commencing work.

Future opportunities for the Atwood Southern Cross are currently being pursued. It is likely that day rates for shorter programs that start later this year will be at lower levels than the current day rate in Italy.

The Atwood Eagle is now expected to commencing one well of around 45 days to 50 days in probably around the middle of '08. The Atwood Eagle then has a two year contract commitment with Woodside at a day rate of 405,000. This is to be followed by a commitment with Chevron Australia with a day rate of approximately 430,000 to 450,000, and that is subject to cost escalations. And that is until our new semi-submersible unit being built in Singapore is ready to commence its drilling program in Australia estimated early 2011.

The Atwood Eagle also has one remaining well to drill with BHP Billiton sometime during basically calendar year 2009 at a day rate of around 170,000 for up to 35 days, and then 465,000 for any time over 35 days or over that 35 days, excluding of course weather delays.

The Richmond's contractual commitment with Contango involves a drilling of two firm wells plus one option well at a day rate of 65,000 for all three wells. The two well program should keep the Richmond committed until July, and with the option, until September. Further opportunities for the Richmond are now been discussed with clients.

The Atwood Aurora, our new ultra-premium jack-up the Atwood Aurora now been constructed under an agreement with Keppel AmFELS at its yard in Brownsville here in Texas. It is expected to be delivered in November, the cost of approximately $165 million. The Atwood Aurora is being marketed and bid to a number of international clients for potential work when construction is completed. The Atwood Aurora will become our ninth company-owned mobile offshore drilling unit when it comes in service.

Now on our new rig, and this is as previously reported, in December our wholly-owned subsidiary Atwood Oceanics' Pacific Limited was awarded a contract by Chevron Australia to provide a newly constructed mobile offshore semi-submersible for firm three year period with an option to extend to six years. Contract provides from operating day rate of approximately 470,000 for three years and approximately 450,000 if the option is exercised to extend to six years. And these day rates are subject to adjustment pursuant to cost escalation provisions of the contract.

To provide the drilling rig provided by this contract AOPL has a contract with Jurong Shipyard to construct a Friede & Goldman ExD Millennium Semisubmersible. The rig will be constructed at Jurong's shipyard in Singapore with delivery expected to occur, as we said, in early 2011. Our project team is now in place and is progressing well.

AOPL estimates the total cost of rig, including administrative and overhead cost and capitalized interest, will be in the range of $570 million to $590 million, and financing for the rig construction will be provided from a combination of ongoing cash flow, and as necessary from our $300 million credit facility.

The new rig will be able to conventionally moor up to 6,000 feet of water and will become our 10th company-owned mobile offshore drilling unit. The company has an option for a second rig with Jurong, which requires exercise by us prior to June 30, 2008. No determination has been made by the company at this point as to whether the option will be exercised. We do remain interested in further organic growth.

Our major fleet upgrade and new construction capital program which started at '97, as many of you know, has put the company in a strong position to continue to take advantage of the current market and outlook. Based on longer term expectations for energy demand, the outlook for the markets we served internationally is positive, particularly our international deepwater markets.

With our strong balance sheet and the likelihood of record cash flows and financial results, we are continuing to work on identifying and pursuing value enhancing growth opportunities, as well as evaluating the best use of future cash flow. Our efforts to secure a drilling contract to support construction of the second new semi are ongoing.

Our strategy is to meet our clients' needs with safe quality services, premium equipment and leveraging our activities to attractive international markets. This strategy has served us well in terms of enhancing shareholder value and it will continue to guide our path forward.

The company has a distinctive position in the industry, particularly given our size and our niche strategy, which does differentiate us within our peer group. And of course, these days it's very important in terms of the focus we have on development of our organization, our people and our company for the future in the longer term in mind.

So, thank you all for your time and for your interest. We'll be available to answer questions after Jim's remaining comments. I'll turn it back to Jim.

James Holland

Thank you, John. Before we open the conference call to question, let me address certain items that will have an impact on operating results for the remainder of 2008.

The Atwood Beacon is expected to incur a three zero rate days during the third or fourth quarter of fiscal year 2008 versus required inspections, with the Seahawk possibly incurring three to five zero rate days during the third or also fourth quarter of 2008 for some equipment upgrades. Both those zero rate days depends upon just completion of wells and timing.

Except for these two rigs, we currently have no planned zero rate days for the remainder of fiscal year 2008. However, we can give no assurance that we will not incur some unplanned zero rate days in any of our rigs during the remainder of fiscal year 2008.

We currently expect total drilling costs for the third quarter to be around $56 million, and for the year now to be around $213 million to $215 million, which would result in approximately 15% increase, if that was the case, in our total drilling costs for 2008 as now projected compared to what we did in 2007.

On a rig-by-rig basis, our expected per day operating cost level for the third quarter is as follows; Atwood Hunter, $75,000; Atwood Eagle, $120,000; Atwood Falcon, $80,000, and this is an increase of approximately $15,000 from the actual cost incurred in the second quarter on the Falcon due to some equipment upgrades going on the rig; Atwood Beacon $55,000, Seahawk, $85,000; Atwood Southern Cross $100,000, but this includes approximately $20,000 for rental expense relating to the ENI contract, which would be offset by $20,000 per day of additional revenue; Vicksburg, $50,000; Richmond, $40,000, and other costs around $10,000, subject to any currency exchange gain or loss.

We currently expect general and administrative expenses to be approximately $7 million to $7.6 million for each of the last two quarters of the fiscal year would resolve in total G&A expense for the year to be somewhere between $29 million and $30 million.

Depreciation expense is expected to be around $9 million per quarter for the remainder of fiscal year 2008 for a total of $35 million for the year. We currently expect our effective tax rate for the remainder of the fiscal year 2008 will be approximately 10%.

With two rigs now under construction, I will now comment on expected capital expenditures for the remainder of fiscal year 2008. We currently have $50 million outstanding in our $300 million five-year revolving credit facility that we executed in October 2007. And during the first six months of fiscal year 2008, we incurred approximately $130 million of capital expenditures and currently expect that our total capital expenditure for the second half of the fiscal year will be approximately $150 million to $180 million.

Based upon current expected cash capital commitments for fiscal year 2008, we expect to end the fiscal year with outstanding long-term debt of $50 million to $75 million and a debt to total capital ratio of less than 10%. Thus, we expect that most of the current capital commitments for fiscal year 2008 will be satisfied from internally generated funds. We currently have approximately $100 million of cash and cash equivalents.

We will now open the conference call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). We'll take our first question from Arun Jayaram from Credit Suisse. Please go ahead, your line is open.

Arun Jayaram - Credit Suisse

Good morning, guys. Great quarter.

John Irwin

Thank you, Arun.

Arun Jayaram - Credit Suisse

John, a quick question. You spent some time talking about your remaining option to potentially do another semi. Can you give us a sense of what level of discussions you are in and perhaps just give us what do you think the odds are of Atwood exercising that option, obviously, backed by a contract?

John Irwin

As we've said, we have been pursuing a contract and continue to do that, Arun. I mean it is difficult to put probability or odds on something being concluded. There is not anything today that I would say is close to being done. We will continue to pursue opportunities of an acceptable contract. And during the balance of the time we have here, and this option will also have to study our other alternatives to see what there is in that respect.

So, certainly we have an appetite to do something, and with the right contract and our people been very active in discussions. But I can't say that we're close to reporting anything and I couldn't put anything on there as to a probability of getting that done in this timeframe, Arun.

Arun Jayaram - Credit Suisse

Okay. That's good. John, there's been a lot of speculation on Petrobras. Has Atwood been involved in this tender process, and if so, are you bidding any new builds or existing rigs?

John Irwin

In terms of Petrobras and the bidding, I guess it's probably information that's been out there. But certainly, we have had interest and have been interested in bidding in that area. And whether that will lead to anything or not, I couldn't say. Certainly, there are number of parties pursuing that work and there is a lot of work down there. I mean separately we do stay in contact with that market in terms of our existing rigs, and should there be an opportunity that would fit one of them of the right duration and the right longer term positioning, then we would certainly have interest if it's better than the other alternatives.

And I know how all of that people are actively involved in that market like they do with all our other key markets around the world. Certainly, one of our strengths as a company has been ability to stand in touch with the most active and attractive markets. And certainly as we know, that is one of the markets today where there is demand and growth.

Arun Jayaram - Credit Suisse

Okay. And two other real questions. On the Southern Cross, obviously, you got a really nice contract, a little bit above 400. In Italy, you said that you would anticipate some shorter opportunities below that. Can you help us frame expectations, is it in the 350 to 375 range?

John Irwin

I wouldn't want to characterize it too closely at this point because there are some opportunities being pursued and we'll have to see what that means for late this year. But it's certainly lower. Hopefully, it's in the 300s or that's probably the most likely area for the market. As to where they have those opportunities will move, we'll have to keep working on that and haven't concluded anything yet. There are more opportunities out there for next year, Arun. Certainly, in going into calendar '09, we are seeing more opportunities and less just for this gap at the end of the year. So, we're working hard to close that gap and bridge into next year.

Arun Jayaram - Credit Suisse

Okay. So are you just saying the 300s, but you can't help us understand if it's in the upper 300s or lower 300s?

John Irwin

I couldn't at this point in time. It's a matter of us wanting to try and bridge this gap with less opportunities for the balance of the year and try to get something done and getting into next year where there are more opportunities. So certainly, we're trying to progress that with a focus on bridging the gap.

Arun Jayaram - Credit Suisse

Okay. I'll turn it over. Thanks a lot, John.

John Irwin

Thank you very much for your questions.

Operator

And we'll move next to the site of Collin Gerry from Raymond James. Please go ahead, your line is open.

Collin Gerry - Raymond James

Hi. Good morning, guys.

John Irwin

Good morning, Collin.

Collin Gerry - Raymond James

I want to follow-up a little bit on the new build question as it relates to kind of the opportunity cost of the current shipyard slot, seems to me like steel prices seem to go up everyday. What is the push in terms of locking something in on that and how do you balance that against other shipyard slots that may be available down the road? Do you see opportunity that this doesn't get filled to maybe get a shipyard slot later within the near-term of this one or just kind of walk us through that dynamic?

John Irwin

Of course, there has been a lot of commentary, Collin, about shipyard slots and the demand and the potential new announcements and limited slots available with quality shipyards. And certainly, the cost of new build rigs have been going up with steel cost and foreign exchange personnel and even just the, let's say, pricing power for quality yards. So, I guess we would certainly think that those costs, based on what we are seeing, would continue to rise, and I think that's been reported by others.

And in terms of opportunity costs, that's just something that has to be weighed in terms of alternatives as one works their way through this process. Our focus has been on supporting construction with the contract. But certainly as you move forward you always have to look at all your alternatives.

Collin Gerry - Raymond James

Okay. And then, I guess one more question, kind of more housekeeping, Jim. It looks like SG&A guidance kind of bumped up a little bit this quarter, any particular drivers or areas that we need to be aware of their?

James Holland

Not really. I mean we hope it'll be more in the $4 million to $7 million range, which is about where we came in this quarter as opposed to $7.5 million. But there is really nothing in general. It just depends how much professional fees and depending upon, if we haven't obtained it for growth so forth, and legal fees and so far like that looking very same but nothing particularly, its going to be, next two quarters could be similar to what we had here in this second quarter.

Collin Gerry - Raymond James

Okay so just general inflation?

John Irwin

Yes.

Collin Gerry - Raymond James

Okay and than last question, we never have really spent too much time talking about the Richmond. It seems like Gulf is kind of heating up, maybe the submersible markets are looking a little bit better, and any commentary as to how that market's shaping up once the Contango contract is wound up?

John Irwin

Yeah, the Richmond did obviously over a long period of time as been a unique rig in high demand and we believe has received premium rates versus the market and going forward we are seeing future opportunities and we believe that the rates hopefully will improve and certainly from our own point of view we would be striving to get higher on future contracts and hope that that market will continue to turnaround. At this point any way today we wouldn't see it going down.

Collin Gerry - Raymond James

Okay so the markets kind of status quo, does this applies to the upside. Is that a good way to characterize it?

John Irwin

I would say, certainly to the upside. We know that utilization has being improving and but even within the market itself for Richmond has unique capabilities in terms of working in shallow water and drilling deeper depths and with it's hurricane capability there a number of clients out there who have interest in a rig like that and we are hopeful that will lead to improving day rates.

Collin Gerry - Raymond James

Okay. Thanks guys, good quarter.

James Holland

Good.

Collin Gerry - Raymond James

Thank you Collin.

Operator

We'll move next to Tom Curran with Wachovia Capital. Please go a head

Tom Curran - Wachovia Capital

Good morning guys

James Holland

Good morning

John Irwin

Morning Tom

Tom Curran - Wachovia Capital

Congratulations on a third consecutive quarter repeat. I'm curios returning to the line of questioning on the option that you are on. Are you having parallel discussions with the shipyard about potentially extending the option and if so how are those going and what are the current indications?

John Irwin

Yes. It's probably not something you can -- we can say too much on, but I think we have the treat our option date as a deadline. We are working towards and we stay in close touch with the shipyard and continue to work the best way we can to try and make the most of our current position.

Tom Curran - Wachovia Capital

Okay. But it doesn't sound as if John that you don't -- you consider that out of question, it doesn't sound as if -- although you are treating as its firm that all hope is lost come the 30th if you haven't secured that contract?

John Irwin

I wouldn't want to raise expectation that we would have more time to do that. I suppose if we were in serious discussions at some point there would be more chance to getting time, but certainly within house here we treat the deadline is a serious one and we'll continue to work on that basis and whether there is more time or not I couldn't really comment or raise expectation and that would be the case today, Tom.

Tom Curran - Wachovia Capital

Okay. That's helpful. I know that you guys have lined up a heavy lift vessel for the mobilization of the Aurora. Should we expect that with whatever contract you end up securing for that rig that the mobilization fees associated with that will be reimbursed?

John Irwin

We are bidding a number of jobs or have or will be bidding a number of jobs in probably four different markets which relates to different costs and each of those markets may have a little bit of difference in their characteristics and have their bidding rates in mobilization. But of course when you do bid those jobs you look at a combination of rates and mobilization in the cash side and also how that plays out on the financial side and on a cash basis it maybe that the full cost of mobilization is not covered.

The financial treatment maybe different in terms of how that is handled during the mobilization period and that has to be combined with what sort of rates are out there. So, I might get Jim to comment a little bit just on the financial side of the handling of the mobilization, but it's possible in some of those market shares that you may not get fully covered on the cash side on the move. But that has to be balanced against the sort of rate and how you look at that over the period of time of the contract. But that's a little different than the financial which Jim will comment on.

James Holland

On the financial accounting side when we signed the contract for this unit to build this unit we expected when view was not in work -- our view was not to work the Gulf of Mexico. So we were anticipating, we are going to be put on the other side of the world effectively so we assuming that it happens if we take it on the either Southeast Asia, Middle East whatever but we will capitalize the cost of the heavy lift vessel.

I mean that's being fully capitalized as a cost of the rig to depreciate over its life and whatever reimbursement we get will not impact that. The gross cost to move the rig to initial offloading site and wherever it might go, will be capitalized, and then whatever reimbursement we get, it will be spread over as additional revenue over the term of the contract.

So, from an accounting perspective, we're not fully reimbursed. It will not be a P&L direct hit. It will come back to depreciation effectively, and then whatever reimbursement we get will be recorded as additional revenue.

Tom Curran - Wachovia Capital

I understand. That's helpful. Thanks, Jim. Two quick ones for you. First, it looks like that the Vicksburg realized average revenue per day came immensely higher than the indicated area in the fleet status reports. Could you speak to what's underlying that? And then, secondly, could you please share a little color on the nature of the FX gains, and then the potential for comparable gains to recur in the future?

James Holland

Okay. On the Vicksburg, when we have [systems locked there] it's going to be service revenue, other non-direct drilling revenue that gets picked up as other revenue and that's what affected, either get service revenue that effectively gets picked up as revenue. So that picture is a little bit overstated contract day rate of $154,000.

On the exchange gain, as a quarter-to-quarter, it's hard to call when that may occur. Well, what will happen, I mean conceivably it's going to depend up on the valuation of the dollar compared to the other foreign currencies. And clearly, the longer it stays in kind of the weak environment, you're going to be more successful to gains. Now, if the dollar starts increasing in value to the currency that will reverse.

Also depends on how much cash we have located in the various areas of the world. The only area where we have a substantial amount of cash right now is in Australia primarily. So, that did allow for a favorable result for this quarter. We are looking some tax planning down there that ultimately may result in our cash being sent back here to the US for the most part. The opportunity for loss or gain will again depend upon how much cash we have located in various areas of the world. So it's kind of hard to predict going forward what they'll do.

So right now, for modeling purposes, we're modeling with 10,000 per day other costs assuming that we're not going to have any substantial or insignificant gain or loss for the third quarter. It's normally been the case. We've normally not had a lot of foreign currency expense or gain over our history and I think this was somewhat of an unusual quarter. We did have a lot of cash that was down in Australia, and I expect that will be reduced going forward, and again, the weak dollar compared to the Australian dollar.

Tom Curran - Wachovia Capital

All right. Thanks for the details guys. I'll pass it over.

John Irwin

Thank you, Tom.

Operator

And our next question comes from Sonny Randhawa from Banc of America Securities. Please go ahead.

Sonny Randhawa -Banc of America Securities

Good morning guys.

John Irwin

Good morning.

James Holland

Good morning, Sonny.

Sonny Randhawa -Banc of America Securities

I got a quick question on just your employee situation in terms of attrition given the number of rigs coming on this year and next, how are you guys looking in terms of attrition right now?

John Irwin

Well, of course, that's one of the high things on our agenda not just because -- when I say high on our agenda of people and their growth and development and everything that surrounds that, not just because of the period we end, which certainly is a driver, but really has been an important part of our strategy over a long period of time really being in a people business. But certainly an area that we take very seriously, don't take lightly. We're doing everything we believe with a long-term view in terms of all those factors that make this a place for talented people to want to work and believe that we've got some great people and have been doing well at this point, and certainly, in terms of our organic growth, one rig at a time, we have been working for a while.

For example, on the case of the Aurora, in preparing crew by carrying these extras and then moving them to the Aurora, and those people are now reporting to the shipyard and that crew list is well progressed. And a same approach will be taken with the new rig when it's delivered. I mean the new semi-submersible where we will be preparing extra people and growing them to have them ready. So we have programs in place for carrying extra people, growing people within the organization and putting in place other programs here to further develop that and add capability to do that. And so far, I think people have done a good job, but we do know that it is a competitive market and we'll have to be vigilant and continue to work hard at it.

Sonny Randhawa -Banc of America Securities

Okay. I guess you are already crewing the Aurora, so I'm assuming that what Jim said was correct that you're not looking at the Gulf or not even the Mexican part of the Gulf. It's probably going to be going to somewhere in the Eastern Hemisphere.

John Irwin

Certainly our interest is our international markets. We're not looking at anything in the US Gulf of Mexico should there be opportunities in the Mexico -- in the Mexican Gulf of Mexico that fit us and the attributes of contracts and other characteristics were right then certainly we would look at that. But there are several markets overseas where we have bid or are bidding the rig and that and of course it doesn't include really looking at the US Gulf of Mexico for opportunities for the Aurora.

Sonny Randhawa -Banc of America Securities

Okay. In terms of the Beacon, I think you had an option that's expiring sometime at the middle of this year, how are you looking in terms of exercise of that option or what another likely area for the Beacon would be?

John Irwin

The current client has an option at mutually agreeable day rates and that would -- agreement would have to be reached by the end of July, I believe. Our understanding at this point in time is there would be interest in perhaps extension, but those discussions would have to occur and be completed prior to the end of July and completion means agreement on day rate and getting the agreement in writing. As we would do in any situation like that where rigs are going to be rolling over, we continue to look at other opportunities and bid those opportunities while telling the other clients we are bidding what the status of the rig is and certainly we are doing that, in this situation looking at other opportunities elsewhere basically in -- mainly in Southeast Asia at this stage.

Sonny Randhawa -Banc of America Securities

Okay. I am assuming that it right now you have a considerable amount of availability in 2009, I am assuming that if you are able to contract some of that out in I guess get to a level of I guess free cash flow or locked in free cash flow, what are the chances of actually exercising the shipyard option without a contract?

John Irwin

Well I think we have said before a while that our goal and first approach would be to have an acceptable contract to support exercising that option. I am sure we will look at the other alternatives in terms of during this timeframe and what might make sense and I couldn't comment on where we might stand at this point in time and looking at those alternatives but have focus right now still really first off an acceptable contract to support it.

Sonny Randhawa -Banc of America Securities

Okay, so if what was the cost escalation between the original semi-submersible and the option if they were exercised in June?

John Irwin

Well I think we gain the rates in the highest -- the total project cost and the high $500 million and look at across of the table here to get the nod, the guy, Alan's here as well and some of the other guys but I think probably looking more in the close sort of a mid-600s.

Sonny Randhawa -Banc of America Securities

Okay. I will turn it back.

Operator

And we will move next to Brian Lester with The Abernathy Group. Please go ahead.

Brian Lester - The Abernathy Group

Yes. Good morning, gentlemen.

James Holland

Morning.

John Irwin

Good morning, Brian.

Brian Lester - The Abernathy Group

Would you all be willing to compromise your terms maybe to a lower return hurdle or a shorter locked in term for the contract on this option if you are unable to secure your ideal by June.

John Irwin

First on, on the terms, certainly for the right opportunity in an area that had future potential and that would be a factor and I can't say that a shorter contract is closed today, Meaning, of less length than what we've talked about up till now. We'd look at that but I can't say that's a case today. In terms of compromising the returns, I don't know I characterize that position as terms of compromise. Certainly, we have to take into account all the different factors in terms of risk and other things and looking at the quality of an opportunity in running our cash returns and our internal rates of return and all of that and when you always put targets out there sometimes, those can vary somewhat and it would still have to make sense. So, we still wanted to be received as a good deal and the numbers aren't always exactly the same as one hard number and that's it or not, certainly there is some flexibility.

Brian Lester - The Abernathy Group

Okay and if all you can't find a contract by that time as well. Are you able to somehow monetize the option by selling it to one of your peers and if so, what you all think, you can make as a profit on that kind of transaction?

James Holland

Now the option itself and just kind of just selling an option to another party as an option, I don't believe that right exists under the contract.

Brian Lester - The Abernathy Group

All right. Thank you very much.

John Irwin

Good, thank you Brian.

Operator

(Operator Instructions). We'll move next to Waqar Syed from Tristone Capital.

Waqar Syed - Tristone Capital

Good morning gentlemen.

James Holland

Good morning.

Waqar Syed - Tristone Capital

Great quarter.

John Irwin

Good. Thank you, Waqar.

Waqar Syed - Tristone Capital

John right now you have no exposure to the North Sea market. There may be some rigs that may come to the market and would you be interested in those kind of opportunities for may be third-generation rigs?

John Irwin

Waqar as far as the North Sea and working in the North Sea it's still not a target area for us and our strategy. Of course, we want to be as international as we can in attractive markets and have the ability to move around to the best opportunities. It's not an area that is on our agenda at this point. So as to looking at other existing assets at the right time, that remains always, if I got you to think we've said reminds as a possibility.

It's -- the key focus here ion the short-term is being on new construction. But I suppose down the road if they were assets at the right price, where there was upgrade capability that the economics made sense we wouldn't eliminate that. But of course, we all know that pricing on most things these days is high and has being going up. So certainly an alternative if it made sense, Waqar.

Waqar Syed - Tristone Capital

I would say that the North Sea which everybody is kind of aware of some opportunities there for semi-submersible rigs to come to the market. Do you see -- are there any other opportunities elsewhere in the world for existing fleet to come to the market?

John Irwin

Yeah, I'm not sure.

Waqar Syed - Tristone Capital

Or on the floater side.

John Irwin

Meaning in terms of the existing rigs entering the market or in terms of existing rigs being available?

Waqar Syed - Tristone Capital

Existing rigs being on sale?

John Irwin

Well, we continue to watch those I can't say today there is anything that's strongly on our radar, our people always look at the opportunities out there and I wouldn't characterize any of them today as being strongly on our radar, but certainly continue to analyze what's out there.

Waqar Syed - Tristone Capital

Jim, on the Falcon, did you guys drill any $200,000 a day wells in the last quarter?

James Holland

No, Waqar. They're all at the 160. Right now, we don't anticipate any $200,000, as you note, but don't run there. You've guys seen the 160 that's the type of contract.

Waqar Syed - Tristone Capital

Okay. And then, John, in the Gulf of Mexico there has been some interest in the last few days about the deep shelf. If that were to happen and if you saw additional interest there for drilling, would you consider keeping the Aurora in the Gulf of Mexico?

John Irwin

I think that, of course, we will see how it plays out and we still have a number of opportunities we are looking at this point that, hopefully, would put the rig in an attractive international market. And that's always been our desire, to work internationally. We were never really seeking to work it in the Gulf of Mexico.

I wouldn't say that we wouldn't consider that alternative in some circumstances if the deal was right vis-à-vis the other alternatives that are out there. But at this point in time, we still have a number of possibilities available to us. And unless something changes in terms of the alternatives and the strength of that alternative today, I still think the other alternatives are the more attractive ones to us, Waqar, or should be.

Waqar Syed - Tristone Capital

Diamond Offshore is building the jack-up in the Brownsville yard and they recently got a contract in the $195,000 a day for that rig. Is that kind of the rate that we should be looking for Aurora as well?

John Irwin

Waqar, I can't comment on their contract and wouldn't want to do that. But maybe just commenting in the generic sense that the commitments depend on length and location and various other factors, and we certainly are interested in contracts in the right area of the longer length. Of course, we look at things of anything from one to three years, and the longer you go in this market, of course, with a longer commitment like that the rate would certainly be lower. And I think we've said consistently that having committed on this rig we have total project investment cost that we could get our returns in the 130s, 140s or in the mid 100s depending on the area and the cost, the direct operating cost. And based on this point in the market today we still believe the market range is still able to achieve that or higher. But I wouldn't want to suggest the high 100s, but of course that depends on length of the opportunity. But for us looking at, hopefully, something of good decent length and to be honest I don't think it will be that high.

Waqar Syed - Tristone Capital

Okay. That's all I have. Thank you very much.

John Irwin

Thank you, Waqar.

James Holland

Thank you, Waqar.

Operator

And it appears we have a follow-up from Brian Lester with The Abernathy Group. Please go ahead.

Brian Lester - The Abernathy Group

John, what is your best guess regarding the amount of equipment needed by Petrobras here over the next several years?

John Irwin

Well, I am probably not the one to or should say not just the one but usually try to stay away from protecting the future. That's always a tough task. But clearly, there has been reports about the market down there and big discoveries and even reports here recently during OTC about the media demand on number of floating rigs that there may be more information on here in the near future. So certainly, it looks like an attractive part of the world with a lot of demand for floating equipment.

Brian Lester - The Abernathy Group

So if we had an over or under of 10, does it seem -- again, it's a slight prediction, but just trying to be a little bit more specific, is it somewhat likely that's over 10 or under 10 more pieces of equipment, is there any way to speculate on that thoughtfully, not with certainty?

John Irwin

As far as meaning floating equipment here in the near future, no, I wouldn't want to speculate or predict or anything else. Certainly, there have been some reports in the press here in the last few days coming from certain analyst or others that would indicate numbers around that number. But I certainly couldn't quote any sources or speculate or provide any information myself that would support that. But there have been a number of other reports out there, people wondering if it is that sort of number.

Brian Lester - The Abernathy Group

Last question, and then I'll get off of this. What are the odds that Petrobras might be able to use Brazilian competitors to fulfill this demand for the sort of the deep water equipment?

John Irwin

Why, I think we know that there certainly has been a pattern for local interest down there to have been successful in providing the economics and when whatever has been needed for Petrobras and folks and certainly you would expect them to continue to have a strong position and their ability to do that, and certainly the appetite as well.

Brian Lester - The Abernathy Group

So it's likely that they would be certainly more prone to try to keep it at home than to deal with non-Brazilian entities like all of us here on the [phone]?

John Irwin

As far as them wanting to keep it at home or anything like that, I mean, I couldn't comment in that direction as far as just what's been the pattern in the past and there is a lot of interest down there. They have bid the work and have obtained contracts and certainly continue to be interested in having what it takes and the desire to do it to get future work as well and I don't think anything's changed in that respect. So, I would have thought, we, from my own personal point of view, I'm just guessing, I would have thought, there would continue to be a higher level of local participation down there.

Brian Lester - The Abernathy Group

Thank you so much guys.

John Irwin

Thank you.

Operator

Now, we move next to Mike Breard from Hodges Capital, Please go ahead.

Mike Breard - Hodges Capital

You have the Southern Cross and the Hunter both coming up at about the same time, would you make a conscious effort to get one long-term and one short-term or would you want to run the risk of two short term contracts waiting for possibly higher rates in '09?

John Irwin

Mike, I think the answer to that question is that the Hunter being a 5000 foot unit there is -- and for that type of unit there has been strong demand and there are a number of opportunities that for a rig -- for the Hunter with its availability and those vary in length, meaning from, several months four to six months up to several years. And as discussions are ongoing with the parties who have interest in the rig, number of parties and it could be one of those or it could be a combination of short plus long or it could be long and you know we have people been working deliberately and in their way through that in the right opportunity.

But there is strong demand in that area and that's really what drives the rig of that capability today. So that's the focus is strong demand and wanting to try and do the right deal basically and potential to do longer. Now the Southern Cross is a 2000 foot unit looking down the road and going into next year, we see future work alternatives, there are four rigs in that arena right now. Most of the opportunity is of shorter duration as it has been here for a while and that's not changing immediately. So the goal right now is to bridge the end of the year and try to get in to a period next year where the rates may improve but most of this works with Southern Cross' short-term. We don't see that pattern changing right away. Now with the Hunter so I said more likelihood that there could be a good longer opportunity. We're not there at that point yet but that's something that we continue to work on.

Mike Breard - Hodges Capital

Okay so it's whatever is the best deal for each individual rig, its not in terms of…?

John Irwin

No, basically it's not. Yeah I m sorry Mike I am just talking over you and I apologize but no it's not an overall strategy for both rigs. It's really what's best for each rig given what market opportunities are out there.

Mike Breard - Hodges Capital

Okay. Thank you

John Irwin

Thank you.

Operator

And gentleman it appears we have no further questions at this time

John Irwin

Okay. Thank you for your interest in Atwood. Bye.

Operator

And once again this does concludes today's teleconference. You may disconnect at any time. Thank you for your participation and have a wonderful afternoon.

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Source: Atwood Oceanics Inc. F2Q08 (Qtr End 03/31/08) Earnings Call Transcript
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