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Rowan Companies (NYSE:RDC)

Q2 2012 Earnings Call

August 02, 2012 11:00 am ET

Executives

Suzanne M. Spera - Director of Investor Relations

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

Mark A. Keller - Executive Vice President of Business Development

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

Analysts

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

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

David Wilson - Howard Weil Incorporated, Research Division

Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division

Ian Macpherson - Simmons & Company International, Research Division

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Andrea Sharkey - Gabelli & Company, Inc.

Anders Bergland - RS Platou Markets AS, Research Division

Robin E. Shoemaker - Citigroup Inc, Research Division

Operator

Greetings, and welcome to the Rowan Companies' Second Quarter 2012 Earnings Results Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Suzanne Spera, Director of Investor Relations for Rowan Companies. Thank you, Suzanne. You may begin.

Suzanne M. Spera

Thank you, Robin, and good morning. Welcome to Rowan's Second Quarter 2012 Earnings Conference Call.

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

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

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

W. Matt Ralls

Thanks, Suzanne, and good morning, everyone. I'll be brief this morning before turning the call over to Mark Keller to update you on our marketing efforts and then to Bill Wells for his comments on our financial results and some guidance for the balance of the year.

This morning, we announced results for the second quarter that were slightly ahead of consensus, excluding some onetime charges and gains. More importantly, we released a fleet status report on Tuesday reflecting a very attractive 3-year contract for the first of our 3 ultra-deepwater drillships under construction in Korea. Mark will provide contract details in his comments, but it's worth noting that this commitment increases our total contract backlog to $4 billion, a new high watermark for Rowan.

We are encouraged, though not surprised, by the interest we're getting in these very high-specification rigs from operators and remain optimistic about our ability to obtain attractive commitments for the other 2 drillships in the coming months. We also received an extension from Hyundai Heavy Industries for our option to build a fourth drillship. We now have until early September to exercise that option at a price substantially similar to what we are paying for the third rig. In the meantime, we continue to see good demand in upward pricing pressure in the high-spec jack-up markets around the world.

I'll now turn it over to Mark to give you more details on these developments.

Mark A. Keller

Thanks, Matt, and good morning, everyone. After months of anticipation, we are proud to announce the commitment of our first ultra-deepwater drillship, the Rowan Renaissance. We received the binding letter of intent from Repsol for a 3-year global term commencing in the first quarter of 2014.

Immediately after delivery in South Korea in late 2013, the drillship is expected to mobilize to West Africa for the first year of its commitment at an effective day rate of up to $624,000 per day. Repsol currently plans to move the Renaissance to the U.S. Gulf of Mexico for the remaining 2 years, at which point, the effective day rate will be $614,000 per day. We look forward to our partnership with Repsol for this important milestone in Rowan's history.

We continue to see significant strength in the ultra-deepwater drillship market, albeit 2 of the 84 drillships currently in service were contracted at 98% utilization worldwide. Through our internal analysis of expected newbuild units, we anticipate that all 68 drillships will be committed upon delivery based on those already contracted and identified demand.

We believe the market is ready to absorb additional ultra-deepwater units. We are currently tracking active requirements for 23 ultra-deepwater drillships, including several outstanding proposals. While we continue to monitor projects in the frontier regions of the world, the focus of recent tender activity has been the U.S. Gulf of Mexico and West Africa. We will keep you updated on our progress in securing additional commitments for ultra-deepwater fleet.

Turning to the jack-up market. According to IHS Petrodata, there are currently 473 jack-ups worldwide. Demand is currently 391 rigs with total utilization at 83% and marketed utilization at 93%. We have not seen utilization numbers this high since February 2009. And day rate averages among our peer group are up almost $4,000 per day over last quarter, and tender activity remains strong. Considering submitted tenders in Far East, Bizen House and anticipated projects, we currently see international jack-up demand for 35 units, driven primarily by Southeast Asia, the Middle East and the North Sea markets.

I would now like to talk to you briefly about the regions in the world we currently operate our jack-ups. Since our last call, the EXL-IV has commenced operations for Carigali Hess in Malaysia on a 31-month contract. The EXL-I is currently en route to Singapore where it will undergo repairs following the tanker incident in the U.S. Gulf of Mexico earlier this year.

After approximately 3 months in the shipyard and transit time, the rig is expected to commence a minimum 270-day commitment with Hess Indonesia in December of this year. The operators indicated that it plans to keep the EXL-I past its primary term. These 2 rigs joined the J.P. Bussell on a drill of 2, both currently operating for Petronas in Vietnam and Malaysia, respectively. As the South East Asian market continues to bifurcate and demand higher-spec equipment, we anticipate additional opportunities for Rowan to enter the region.

Now looking at the Middle East. We have 11 jack-ups in the area with none of those units contracted to Saudi Aramco. Demand in the region is the highest it has been since 2008. And in fact, the IHS Petrodata calculates that the Middle East is currently leading the world in terms of jack-up contract backlog. Saudi Aramco is the driving force behind the demand, but an increase in activity in Iran and the UAE were also contributing to the absorption of excess capacity. We currently have 7 outstanding tenders in the region.

In the U.S. Gulf of Mexico, our marketed fleet of 5 jack-ups is fully utilized. Despite our total jack-up utilization of 58% in the region, the marketed utilization is 92%, showing a significant increase in strength when cold stack units are removed from the count.

We are beginning to see some pricing leverage for 350-foot cantilever jack-ups due to limited availability of rigs in this class. As previously reported, the Ralph Coffman is scheduled to mobilize to Egypt this month for a 2-year contract with BG. We are tendering additional units to international markets where a longer-term contracts and higher day rates are more prevalent. Two of our units have ongoing operations with McMoRan, and we continue to await the results of Davy Jones well test.

In concluding with the North Sea, based on known demand, we currently predict a supply deficit for high-spec jack-ups of 6 to 8 units in the region. We anticipate the North Sea to be a target for many of the newbuilds scheduled for delivery in the remainder of 2012 and into 2013. Additionally, the shortage of available high-spec jack-ups has prompted several inquiries from operators about building additional Norwegian class harsh environment units. Rowan currently has 6 jack-ups contracted in the area. They're all fully utilized and fully 6% of our total contract backlog is in the North Sea.

Since our last call, BG exercised its priced option on the Gorilla VI for 250 days at $220,000 per day. We are pleased to continue our long-standing relationship with BG.

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

William H. Wells

Thank you, Mark, and good morning, everyone. Our second quarter revenues were $351 million, up by 57% over last year, primarily from the impact of fleet additions between periods and higher utilization in day rates for existing rigs. Revenues were up by 5% over last quarter, primarily from higher utilization.

Our collective shipyard and transit time was approximately 11% of our available rig days during the second quarter, matching the first quarter level in our previous guidance. We currently expect higher levels at 14% and 20%, respectively, during the last few quarters of the year, with the increases from previous estimates primarily associated with repairs of the EXL-I following the collision with a tanker in early May, an additional shipyard time for the Cecil Provine. As a result, despite expected higher average day rates following the startup of operations in Norway and Egypt, our third and fourth quarter 2012 drilling revenues will be slightly below the second quarter level.

Consistent with our last week's status update, our fourth quarter estimate for shipyard time assumes the entire period for each of the 3 Tarzan rigs working in Saudi Arabia where a customer required a well-controlled equipment upgrades. The specific timing of these upgrades will be dictated by Aramco's drilling plans and could be at least partly deferred into 2013. Assuming no change to the current schedule, we expect shipyard and transit times to decline to approximately 8% of our available rig days in 2013 compared to 14% in 2012.

Our backlog of drilling commitments is just over $4 billion, up from $2.6 billion at this time last year. We estimate that 13% of our contract backlog will be realized as revenue during the remainder of 2012; 30% will incur -- occur in 2013; 24% will occur in 2014; and the balance in 2015 and beyond. Excluding the 3 cold stack rigs, we have 70% of our remaining available rig days in 2012 under contract and 67% of those in 2013.

Our second quarter operating expenses of $188 million were 3% above last quarter and above our previous guidance as a result of much higher-than-anticipated reimbursable expenses, which were fully offset by incremental revenues. An increase in personnel cost between quarters, primarily due to higher activity levels, and an average 3% targeted wage increase effective April 1, was substantially offset by reduced repair and maintenance costs. Operating expenses in the second quarter were 80% above last year's level, primarily due to the impact of fleet additions, rig relocations and startups and costs associated with the ongoing geographic expansion of our drilling operations.

Assuming reimbursables will revert to a more normal level, we estimate third quarter 2012 operating expenses will be in the range of $184 million to $185 million, which is slightly higher than previous estimates due primarily to incremental personnel costs. We expect a reduction in fourth quarter operating expenses to around $170 million, primarily as a result of the increased shipyard time.

Our full year 2012 estimate of operating expenses is now approximately $725 million or 2% above our previous guidance, primarily as a result of expected higher activity levels in Norway and labor cost in Trinidad. Except in Trinidad, we are not experiencing significant inflationary pressures in our daily operating expenses, and most of the cost increases we have experienced are associated with and more than offset by higher revenues. As a result, we expect further improvement in our average gross margin as a percentage of revenues to almost 50% in the fourth quarter of 2012.

Our updated cost guidance does not include approximately $29 million of incremental repairs on EXL-I, which will be expensed as incurred though reported separately from operating costs, pending any recovery. Costs incurred through June 30 were not significant. We have filed suit seeking damages primarily for repairs due to the loss of use of the rig. The tanker owners are seeking to limit damages to the post-accident value of the tanker, which is estimated to be less than our expected repair cost. We have put our insurers on those for the potential claim for physical damage to the rig, though any such claim is subject to a $25 million deductible. We believe our position is legally and factually strong, but we cannot predict the ultimate outcome at this time.

Our second quarter depreciation expense totaled $61 million, which was in line with our previous guidance and up by 4% over last quarter by 50% over last year, primarily due to rig fleet additions between periods. Our latest estimate for 2012 depreciation continues to be in the range of $244 million and $245 million for the year, including approximately $62 million in the third quarter.

Our second quarter SG&A expenses totaled $25 million, which is in line with our previous guidance and up by 9% over last quarter and by 16% over last year, primarily due to higher incentive compensation, travel costs and professional fees associated with tax planning. Our latest estimate for 2012 SG&A expense continues to be in the range of $96 million to $97 million for the year, including approximately $24 million in the third quarter.

Material charges and other operating expenses in the second quarter include approximately $8 million of transactional costs associated with the redomestication. Such costs exceeded our original estimates due largely to expenses of converting from ADR to the Class A Share structure, which kept Rowan in the S&P 500 index.

Interest expense, net of interest capitalized, was approximately $13 million during the second quarter, higher than our previous guidance following the $500 million of 4.875% senior notes issued in mid-May. Assuming no further borrowings, we estimate second half 2012 gross interest costs of approximately $44 million, of which, we expect $17 million to be capitalized. For the third quarter, net interest expense should be approximately $14 million.

As previously reported, we redeemed 3 of the 4 MarAd Title XI Notes during the second quarter through payments totaling $141 million, including $11.8 million of make-whole premiums recognized as the loss on the redemption. We redeemed the remaining Title XI Notes on July 16, which required payments of $110 million, including $10.5 million of make-whole premiums to be recognized as a loss in the third quarter.

Our expected full year effective tax rate is a credit of approximately 6%, better than our previous forecast as a result of reduced U.S. income, which continues to benefit from the reversal of taxes previously provided on certain outbound rigs.

Our after-tax loss from discontinued manufacturing and land drilling operations totaled $1.5 million in the second quarter and resulted primarily from pension settlement costs associated with accelerated benefit payments.

Property and equipment additions totaled $148 million in the second quarter, includes $72 million towards the 3 drillships and the balance towards the fleet including contractual modifications.

At June 30, we had approximately $1.7 billion of remaining capital expenditures under our drillship newbuild program with $113 million required in 2012 and the remainder in 2013 and 2014. We expect such commitments will continue to be funded through available cash, cash flow and our $500 million revolving credit facility.

We currently estimate as much as another $359 million of capital expenditures in 2012, including $176 million of contractual modifications, $112 million toward managed life enhancement upgrade projects, $29 million for existing fleet maintenance and upgrades and $42 million for equipment spares, drill pipe and improvements to our shore bases.

Our full year capital expenditures are currently estimated at $735 million with the increase over our previous guidance resulting primarily from acceleration of certain equipment deliveries on the drillship newbuilds and increased shipyard time for existing rigs.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Joe Hill with Tudor, Pickering, Holt.

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

Guys, obviously, the contracts with McMoRan pretty much roll off here in August. Davy Jones has been delayed. I think we all know that. What's kind of the Plan B for the EXL-III and Douglas if that doesn't work out?

W. Matt Ralls

The EXL-III, Energy 21 is going to keep the EXL-III until the well test on Davy Jones 2, which is anticipated right now. I mean, you need to get the final start from McMoRan, obviously, but we're being told first quarter of '13. Energy 21 plans on keeping the rig till that point. As far as the Joe Douglas, we have some other contracts for those -- for the Joe Douglas here in the U.S. Gulf of Mexico that will either walk the rig to McMoRan, McMoRan's commencement, or an international contract, whichever occurs first.

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

Okay. And then, Matt, you've extended your drillship option. You got your first contract. And I'm just wondering whether or not it would take one or both of the other 2 drillships before -- being signed before you consider exercising your option.

W. Matt Ralls

Yes. Not necessarily, Joe. We still view the ultra-deepwater drillship market very favorably. We like the direction it's going and the demand that we're seeing especially, as I said in my comments, for these very highly capable ships. But we've got more time to make that decision. So sometime in the next month or so, we'll probably come to a conclusion one way or the other about which way we're going to go. We're quite positive, as I said, on the drillship market.

Operator

Our next question comes from the line of Collin Gary with Raymond James.

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

Congratulations on the big drillship contract. I remember not too long ago we were under the impression that you might have to take a discount for it in entering the deepwater market, but that doesn't seem to be the case at all. And kind of as we think about the offshore community, obviously, there's a lot of people, your peers, yourself hydrating their fleets. That includes adding new assets and in some cases, divestible assets. The divestiture opportunity, is that something that you are considering? I'm thinking of some of the slot rigs that you have in the Gulf or maybe some of the other legacy assets. It's not a necessity, but is that something that's considered?

Mark A. Keller

Collin, as you know, we have 2 slot rigs that are stacked in the U.S. Gulf. And we also have one 116-C jack-up stacked in the Middle East. We are entertaining offers for those 3 stacked rigs. beyond that, we're very happy with the fleet. Everything is working, and we see future demand for all the other rigs.

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

So it's really the idle capacity that's on the table now, nothing beyond that?

Mark A. Keller

Yes.

W. Matt Ralls

Well, nothing beyond that now. I mean, we continually assess the competitive position for some of our older rigs. And over time, we'll probably try to take capital out of that into the business to redeploy in the higher-end jack-ups. But as of right now, everything is, as Kevin said, working at good day rates on some attractive terms. So right now, we're just continuing the status quo there.

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

Right. And then a follow-up for me, is the first drillship contract within West Africa? And 2 questions that relate to that. Number one, are there contracting opportunities in West Africa versus sort of Gulf of Mexico or Brazil more appetizing? Or is this just a one-off where the customer wants it and it's not really worth reading into too much of a regionality there? And then also, does that increase the likelihood of one in the contract subsequent drillships into West Africa as well? Or is it wide open that you could go to Gulf of Mexico or Brazil or wherever?

Mark A. Keller

Collin, this is Mark. Right now, most of the tender activity that we're seeing in demand that our clients are communicating to us currently is certainly coming out of West Africa and the U.S. Gulf of Mexico. And that's driving a lot of that. There are some tenders in the front-tier regions, Mozambique, Tanzania, areas like that. For Rowan, I think we've communicated before, Matt has, and that if we were going to rank the regions just for on a revenue basis for us, we think that our concentration certainly would be in Africa or the Gulf of Mexico. And then probably third, if we rank them, Brazil. But that's not to say that we wouldn't want to work for Petrobras by any means. But to your question, we would probably rank those regions first.

W. Matt Ralls

Just to be clear there, Collin, I mean, the currently anticipated work location is West Africa for the -- probably the first year or so of the contract.

Mark A. Keller

300 days to a year, and then the balance of the contract, Collin, would be in the U.S. Gulf of Mexico.

Operator

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

David Wilson - Howard Weil Incorporated, Research Division

Mark, kind of following on your comments regarding the resolute, have conversations around that rig increased over the past 3 months or so? I know it's still quite aways until it gets delivered, but just trying to gauge the interest for 2014.

Mark A. Keller

We're actually in discussions with operators on both our remaining ships, the Resolute and the Reliance. We've had discussions with multiple operators regarding those ships.

David Wilson - Howard Weil Incorporated, Research Division

Okay. But you haven't noticed an increase, more operators coming to you in the last couple of months on those?

Mark A. Keller

We have. As you see, the capacity continued to erode for deliverability in '13. Obviously, it's moving into '14 now. And there's a heightened sense of awareness that the higher-spec equipment with little stacks and the redundancies that our ships possess that the operators would prefer to have that in their fleet versus a lesser quality ship or less capable ship.

David Wilson - Howard Weil Incorporated, Research Division

Sure, sure. And then another one, kind of switching gears. Mark, for you, you mentioned the 7 tenders outstanding in the Middle East. Is that -- is there a number of rigs associated with that?

Mark A. Keller

With Maersk, Maersk is out for 5 rigs in Qatar. Most of them are single-rig tenders. We do have -- there's some other tenders that have that beyond the 7 in the region. Dave, if you look at Saudi Aramco, some of those that have expired. We're not sure where those are, but there's 4 or 5 of those tenders that are still being reviewed and whatever. But we have 7 active ones that -- and those are in the UAE and Qatar.

David Wilson - Howard Weil Incorporated, Research Division

Okay. And I'm going to, sorry, just try to squeeze in one more here real quick. Any update on the plans to the idle equipment, mainly the conventional and slot rigs?

Mark A. Keller

We've been in discussions with some people. As Kevin said earlier, we've looked to sell some of that equipment. But we also have had some discussions with some of the slot rigs because they have skid-off capabilities and talking to some operators in South East Asia, but nothing has materialized there. And we've tendered the Rowan Paris into different areas. But we haven't -- not a word or anything, obviously. We're in serious discussions about it, Dave.

Operator

Our next question comes from the line of Scott Gruber with Bernstein.

Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division

There's been discussion about potential multi-rig packages for deepwater units, particularly in the Gulf, for some time now. We recently saw one of your peers just secure one from, I believe, BP. Are there other multi-rig packages available? And if so, how are the delivery dates on the resolute line up with those programs?

W. Matt Ralls

Scott, that's always a possibility. However, we get tenders or inquiries a lot where there's a potential for a multiple rig situation. We do respond to them. It will be very difficult to forecast if there's any of that ahead of us. I do think there's a possibility, but whether it materializes or not, I don't know. But we have definitely had some discussions with more than one operator that have multi-rig requirements.

Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division

And have you seen an increase or decrease in the number of multi-rig packages on the table over the last few months?

Mark A. Keller

I think the discussions have intensified somewhat as I've seen some of the recent contract awards. But as you saw -- you saw the SeaDrill release from BP. But like I said, there are few tenders out there that have multi-rig requirements in different areas of the world. So we're obviously pursuing those very vigorously. But today, we haven't certainly been awarded one. So that is a possibility.

Operator

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

Ian Macpherson - Simmons & Company International, Research Division

A couple of questions. First, on the Gulf of Mexico jack-up market. Mark, I know that, obviously, McMoRan's plants will have some bearing on this. But generally speaking, do you see further upside doing the EXL in the Gulf of Mexico? Because I think what I heard Hercules communicated was, yes, they do, possibly at a decelerating cliff, and they do expect rates to continue to go higher in the Gulf. What's your view there?

Mark A. Keller

Ian, I would agree with that. Particularly with our fleet, just given the fact that now, the availability of 300-foot plus independent live rigs in the U.S. Gulf is continuing to dwindle as contractors look for term work in international markets. But today, you're down to 11 of those rigs. And so we've seen some ability -- we've had some ability to increase our day rates on our rigs, and the U.S. Gulf is -- you've seen in our fleet status. I do think you'll see some of more of that for the high-spec equipment. Obviously, if McMoRan is successful, then that would change on the shelf pretty rapidly.

Ian Macpherson - Simmons & Company International, Research Division

Yes. Okay. And then just a quick follow-up, Bill, I just wanted to seek clarification on what you said for tax rate. I guess you said you're now expecting a credit of 5% for the full year, which is consistent with what you've had for the first half last year. Is that what you said?

William H. Wells

That's correct, Ian.

Ian Macpherson - Simmons & Company International, Research Division

Can you talk about 2013 yet?

William H. Wells

No, I really can't really do that yet. I mean, as we've seen in '12 and prior years, it's a pretty fluid situation. It's heavily influenced by activity levels and where we're working. And so as we get into our budgeting process and start to provide guidance on costs and so on, we will update guidance for taxes, but not at this time.

Ian Macpherson - Simmons & Company International, Research Division

Okay. And with regard to all of the redomestication expenses, did everything fall into Q2?

William H. Wells

I think most of it did or there could be a little bit of a carryover. What we're showing separately there is what we consider to be the onetime costs. Obviously, there's additional ongoing cost that's baked into our SG&A guidance.

W. Matt Ralls

As Bill mentioned in his comments also, there is one more make-whole on the last MarAd that will hit the third quarter.

William H. Wells

That's true.

Operator

Our next question comes from the line of Kurt Hallead with RBC Capital Markets.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Just had a couple of quick follow-ups here. First, as you guys are embarking on your -- going at your new ultra-deepwater ships, can you give us a general sense on how you guys have been able to, say, weave in some new contract language that would protect you from some of the downside risk or downtime risk that the industry has experienced over the last couple of years? And then in that same context, what are you finding with respect to the discussions you're having with your oil company customers? How receptive are they to addressing some of these issues?

Mark A. Keller

Kurt, I can tell you from the discussions that are currently underway with Repsol, we have taken a position in the indemnity provisions of the contract no different than we would do in a jack-up contract. We felt like we have -- we have an internal procedure and internal guidance that's a corporate guidance for liabilities that we assume under contracts. And we have heard of that, and we feel very strong that we're going to get that in this contract. So far, it's there. Repsol has been very receptive and very fair in this negotiation.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

I guess, I always forgot to say I understand the indemnity provisions are pretty standard and ironclad. I'm talking more about the downtime risks associated with some equipment issues, equipment maintenance and so on and so forth. And that's what really post-Macondo heard the drilling industry, was the downtime. And any kind of fluid will glued to 2 weeks of downtime, and these contractual provisions typically only had about 2 days of covered downtime. So that's the kind of language that I was referencing. So I was just trying to get a sense as to how much stronger the contract language is now that you guys get the start fresh.

Mark A. Keller

Well, the contract -- our first contract is obviously not fully negotiated. But I can tell you that as of last night, we felt like we had a very strong downtime provision. the contractor is very fair. And Repsol -- both Repsol and Rowan are happy with it.

W. Matt Ralls

Yes. And Kurt, it's worth saying that, I mean, part of the -- a big part of the specification that we built into this rig was to make sure that we minimize for the client the downtime regardless of whether who's paying for it. They still have ongoing costs and schedule issues, so that's the whole point of having 2 BOPs on the rig that -- to minimize a lot of the most common causes for that downtime.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Got it. Okay. And secondly, you guys indicated other as of offshore drillers an increase in demand, shortage of rigs, particularly in the ultra-deepwater market, increasing demand for jack-ups. So I'm just trying to get an idea from you guys. What are you seeing from an oil company standpoint on sense of urgency? How can you characterize that relative to maybe kind of 3 or 6 months ago? And how would you characterize it relative to the runup into the last peak in 2008?

Mark A. Keller

I think that from ultra-deepwater standpoint, as I mentioned earlier, Kurt, I think you're clearly seeing an increase in activity. That market is bifurcating in a very rapid pace and operators to match point. Operators are looking for rigs that have dual stacks and have the redundant systems built in to keep the rigs operating because their spread costs now are north of $1 million a day, and they're very focused on that. And so they're looking towards established drilling contractors that can provide them with that equipment. So I think we're seeing as capacity continues to be absorbed into the market for those types of rigs, I do think we're seeing a heightened sense of awareness by our customer bases to try to contact those rigs. On the jack-up side, I think it depends on the different markets. As I mentioned in my remarks, in the North Sea, we're seeing a definite shortage of Norwegian class harsh environment type rigs like the Super Gorillas or the N-Class, those type of rigs. Probably today, we're seeing probably 68 customers that are looking for that type of rig, which is going to bode well for our peers that have rigs -- newbuilds under construction that can meet some of that capacity -- some of that demand. But as far as the other markets, Saudi Arabia, the Middle -- I mean, the Middle East, South East Asia are clearly seeing the market continue to high grade. And I think the higher-spec equipment is going to be in higher demand. It continues to be in Southeast Asia as Petronas high grades their fleet. And certainly, Saudi Aramco has significantly increased the specs on their tenders and their scheduled G requirements of their tenders. So to answer your question, I don't think the jack-up market is as intense as an ultra-deepwater market today, but it's certainly improving. As I said, we're seeing increase in day rate from our peers of about $4,000 a day over the last quarter, which is good. I do think their rates are moving upward. Whether there is a rapid a pace as pre-2008, I don't think so, yes. But it certainly got a positive trend.

Operator

Our next question comes from the line of Andrea Sharkey with Gabelli & Company.

Andrea Sharkey - Gabelli & Company, Inc.

I was curious -- you've been talking about how the North Sea market is tightening for the harsh environment jack-ups. Could you talk to us about how your appetite for maybe building new N-Class or Super Gorilla jack-ups to meet some of that demand?

W. Matt Ralls

Sure, I'd be happy to. As I mentioned, we currently see a supply deficit -- a potential supply deficit for those type of rigs. We are in discussions with multiple operators now about building a rig against the contract. Out in the future, they see as demand increases, as the wells become more and more challenging in Norway and even in the U.K. sector operators, their tender requirements becoming more and more stringent. And they are looking for different systems and operating capability on those rigs. And so we have, over the last several months, seen an increase in discussions with our customer base in the North Sea wanting to have discussions with regarding newbuild equipment against the contract.

Andrea Sharkey - Gabelli & Company, Inc.

Okay. And do you have an idea yet how much that would cost in terms of CapEx and how quickly you could have a rig like that delivered?

Mark A. Keller

It would certainly depend on the rig, whether it would be a CJ70 or in N-Class or a 240C or a JU3000 because they vary in costs. But I'll let...

W. Matt Ralls

Yes. The Super Gorilla in class CJ70, you're looking in a range of $500 million to $600-plus million, and I'm looking at 2.5 years. And as Mark mentioned, these rigs, given that they're in a limited market, really, at those CapEx levels, Norway is currently the only market with the day rate that will return that investment. Given how thin the market is, you wouldn't perceive that until you have a drilling contract. So you wouldn't build them on the spec.

Andrea Sharkey - Gabelli & Company, Inc.

Sure. That make sense. And then last question for me is, I know it's early days to start thinking about it, but looking out to 2013 operating costs, do you have a sense just directionally whether you think they're going to go up or down just based on the moving pieces maybe lower? It should be our time but some inflation and higher utilization. Do you have any guidance you can give us on that?

W. Matt Ralls

Yes, Andrea. The only thing we can tell you is that we have -- we try to stay current with the market on wage rates. And we have seen that there is likely to be a need for somewhere in the mid-single digit, maybe 6% to 8% in terms of wage increases next year. But that's about all we can say at this time.

Operator

[Operator Instructions] Our next question comes from the line of Anders Bergland with Platou Markets.

Anders Bergland - RS Platou Markets AS, Research Division

A couple of questions on the Renaissance contract. I don't know if you can clarify this. Is the day rate that you indicated, does that include the mobilization fee? Or is that the core day rate?

William H. Wells

It includes the total revenue that we'll receive. I'd rather not break it down, because we're in a highly competitive situation right now with our other 2 ships, and I'd rather not give you a total breakdown of what the rate is.

W. Matt Ralls

But it is footnoted in the fleet status report that it includes all of the revenue. And it's probably the -- it's not how you break it down. The fact is that it's -- that's what will average per day over that contract spread is the right way to think about it anyway.

Anders Bergland - RS Platou Markets AS, Research Division

Furthermore on that contract, have you -- I got cut off the conference call a couple of times. It's a bad line. But have you stated anything in which country it's going through other than West Africa?

W. Matt Ralls

Repsol would prefer us, at the present time, just staying at the first 300 days to a year we'll be in West Africa. And we want to certainly respect that request. And then, the balance of the contract would be in the U.S. Gulf of Mexico.

Anders Bergland - RS Platou Markets AS, Research Division

Okay, okay. And on the demand on the harsh environment jack-ups, there's a category JV tender out, is that something of interest for you? Or you'd rather own these assets to yourself if you want to pursue some growth in that region?

W. Matt Ralls

I think, Anders, we would always be looking at contracts like that. And we have to be involved in that tender, and we're evaluating it.

Anders Bergland - RS Platou Markets AS, Research Division

Okay. Do you know anything about the timeline of that project? Or can you give us some advance?

Mark A. Keller

Nothing in front of us right now to speak to. I mean, it's ongoing.

Operator

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

Robin E. Shoemaker - Citigroup Inc, Research Division

Matt, I wanted to -- just revisit a slide you gave us in your analyst presentation, which showed a kind of a matrix of $600,000 a day. The earnings contribution from each rig would be something like, call it, $0.85, $0.90 a share to earnings. And so we now have one of these contracts actually on hand. I believe -- and actually, your figure shows $0.80 a share in 2014. So I know that those calculations were based kind of on the Gulf of Mexico work environment. And so has anything -- I mean, this is very recent compilation you made, but has anything changed or anything we should think about that would make that EPS accretion less than what you calculated here?

William H. Wells

Robin, this is Bill. Let me address that. That was based on the Gulf of Mexico contract, and I think we're estimating around $168 million or so for OpEx. Obviously, West Africa is a little higher-cost environment. We'll probably going to be in the $180 million to $200 million range on daily OpEx. And then the other thing that's different is the tax rate. We would expect to be able to achieve, say, a 4% rate operating in the Gulf of Mexico. But depending on where we operate in West Africa, we're probably looking at a 10% to 12% rate.

Robin E. Shoemaker - Citigroup Inc, Research Division

Okay. And just for clarification on these expected earnings contributions, were you putting any financing cost onto that calculation? Or was that kind of unlevered kind of return?

William H. Wells

It was unlevered.

Operator

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

Suzanne M. Spera

Thank you, Robin. So that concludes our second quarter financial earnings call. We appreciate your time. And if you have any additional questions, please call Investor Relations. Thank you.

Operator

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

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