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Atwood Oceanics (NYSE:ATW)

Q3 2012 Earnings Call

August 02, 2012 9:00 am ET

Executives

Mark L. Mey - Chief Financial Officer, Chief Accounting Officer and Senior Vice President

Robert J. Saltiel - Chief Executive Officer, President, Director and Member of Executive Committee

Analysts

Todd P. Scholl - Clarkson Capital Markets, Research Division

David Wilson - Howard Weil Incorporated, Research Division

Ian Macpherson - Simmons & Company International, Research Division

Waqar Syed - Macquarie Research

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

John D. Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Nigel Browne - Macquarie Research

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

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

Operator

Good day. [Operator Instructions] Please note this call is being recorded. At this time, I would like to turn the call over to our moderator, Mark Mey. Go ahead, please.

Mark L. Mey

Thanks, Ty. Good Morning, and welcome to Atwood Oceanics Conference Call and Webcast to review the company's operating results for the third quarter ended June 30, 2012. The speakers today will be Rob Saltiel, President and CEO; and me, Mark Mey, Senior Vice President and CFO.

Before we begin, let me remind everyone that during the course of this conference call, we may make forward-looking statements, which are not historical facts and are based upon management's current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us. These statements involve a number of risks and uncertainties, including the risks which are described in the company's most recent Form 10-K, and the filings with the U.S. Securities and Exchange Commission.

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 if one of these risks and uncertainties were to occur, or assumptions prove incorrect. Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof.

Now, let me turn the call over to Rob for his opening remarks.

Robert J. Saltiel

Thanks, Mark, and good morning to all of you joining on this morning's call. I'll discuss Atwood's principal accomplishments in the third quarter, which was indeed a good one for us and provide an overview of the offshore drilling market and our marketing priorities.

We definitely had a strong third quarter financially and operationally, as we achieved revenue of $178.6 million and earnings of $51.7 million or $0.79 per diluted share. The revenue result was our third highest quarter ever, despite the fact that the Atwood Falcon missed 43 operating days due to completion of a shipyard project, and experienced a further 29 days at a reduced standby rate after the work was completed. Much of the credit for our good performance goes to our rig operations teams as we improve our overall fleet revenue efficiency by 100 basis points versus the second quarter to nearly 95%. It is worth noting that the Atwood Osprey achieved nearly 97% revenue efficiency, while our 3 jack-ups were at a collective 98%.

I also want to comment on the fine performance of our project teams. As we transform and expand Atwood's rig fleet, delivering new build rigs on time and on budget is critical to our success. At the same time, we must also maintain our legacy fleet to a high standard, sometimes with extensive shipyard projects to maintain our quality service and achieve higher revenue recognition on our contracts. In the third quarter, we demonstrated that our project planning and execution remains outstanding for both new build rigs and our existing fleet, and is definitely a core competency for our company.

Let me start with a discussion of our new build projects. Clearly, our most significant project achievement in the third quarter was the delivery of the Atwood Condor, our 10,000-foot water depth Dynamically Positioned Semisubmersible, a full 2 days ahead of schedule on June 28. Our project management team did a fantastic job in delivering the Condor early without compromising on the thoroughness of system commissioning or the quality of the finishing work. Excellent collaboration between our projects and operations teams, the Jurong Shipyard and our client, Hess Corporation, made this milestone possible.

Our success in delivering the Atwood Osprey in 2011 was leveraged as we replicated our crew indoctrination process for the Condor team to ensure full understanding of, and commitment to, safety and operations excellence. With each new build rig that Atwood delivers, our project team applies the lessons learned to improve our future rig deliveries.

Our first 2 new build Pacific Class 400 jack ups, the Atwood Mako and Atwood Manta, continue to trend approximately 1 month ahead of their original project schedules. Our crewing of these 2 rigs is keeping pace with the expected earlier rig deliveries, so we should go to work with each rig earlier as well.

Although not due until June 2013, the Atwood Orca is also ahead of its construction schedule.

The Atwood Advantage and Atwood Achiever drillships continue to make excellent progress in the DSME shipyard in South Korea, with no changes in schedule or budget from our previous guidance. Since our last earnings call, we have extended our 1 remaining drillship option with the DSME shipyard by 2 months until the end of September. The construction cost and delivery schedule associated with this option expansion remain unchanged. We remain hopeful that we will exercise this option and add a third drillship to our fleet.

Now, let me discuss the key projects impacting our existing fleet. As I touched on previously, the Atwood Falcon completed a major upgrade project last quarter and did so on time and under budget. The work scope was quite extensive as we rebuilt and upgraded the living quarters, painted the entire exterior of the hull and overhauled the major equipment. The Falcon looks great and is now operating for Apache in Australia under a 30-month contract that commenced in mid-May.

Mark will elaborate further, but we have successfully deferred the previously scheduled 30 days of Atwood Hunter out-of-service time scheduled for the first quarter of fiscal 2013. Our team will now complete the required regulatory work while the Hunter remains in service, resulting in no planned out-of-service time for the rest of calendar 2012. We are currently assessing a potential out-of-service period for the Hunter that may occur in late calendar year 2013 or early calendar year 2014 after the rig completes its contracted drilling program.

The Atwood Eagle's planned upgrade and maintenance work for compliance with Australian regulatory standards remains on target for November of this year. We still expect approximately 25 0 rate days for completion of this work.

And finally, the Atwood Beacon has finished drilling in Guyana and is now in Trinidad finishing up some regulatory inspections there before departing for Israel in about a week's time.

Shifting now to the markets. Since our last earnings call, we announced new contracts for the Atwood Aurora and the Vicksburg. On the Aurora, we secured 3 shorter-term extensions at rates exceeding $150,000 per day that will keep that rig busy in West Africa through August of 2013. We also signed a 1-year extension on the Vicksburg at an improved rate schedule that will see it drilling offshore Thailand through the end of calendar year 2013.

As of August 1, our revenue backlog stands at $2.1 billion.

Looking forward, the outlook for ultra-deepwater, deepwater and jack up segments continues to improve. The ultra-deepwater space, in particular, has been red-hot resulting in numerous fixtures at rates in the high 500s and low 600s, amid increasing term lengths. Operators are very focused on securing their 2013 ultra-deepwater rig requirements as the market heats up and available capacity is absorbed. These developments bode very well for our marketing of the Atwood Advantage, which is scheduled for delivery in September 2013.

Although, we don't have a contract to announce on this call, there are a number of ultra-deepwater drilling programs with a late calendar year 2013 start up that are well-suited for the Advantage's capabilities. We feel good about where the ultra-deepwater market is today and our ability to secure an attractive initial contract for the Advantage.

Shifting to the high specification jack-up space, we see rates moving up nicely there as well, as operators continue to show a preference for newer, more capable assets. We are actively marketing the Atwood Manta and remain optimistic that this rate will land a solid initial contract for commencement in the December timeframe.

For calendar year 2013, the Atwood Beacon and Atwood Orca both have availability in the first half of the year. We see a significant number of attractive prospects in Southeast Asia, Australia, the Middle East, the Med and West Africa that line up nicely with these rigs' availability windows.

I want to close my prepared comments by saying that our company has made considerable progress since we announced the building of our first 2 Pacific Class jack-ups in October of 2010. Since that time, we have delivered our first 2 ultra-deepwater semisubmersibles from the shipyard within budget and operated the first for over a year, safely and reliably. We have committed to build a further high specification jack-up, as well as our first 2 ultra-deepwater drill ships. And we have enhanced our financing sources to make this possible. Our onshore and offshore organizations have expanded in capability and size as energetic and experienced people have joined the Atwood team.

The execution of our company's growth strategy has been excellent thus far, and we owe our early success to the dedication and hard work of our people worldwide. They are the reason we are positioned for a very bright future.

On this positive note, I'll hand it back to Mark, who will do his best to maintain the momentum before we open it up for questions. Mark?

Mark L. Mey

Thanks, Rob. I will spend my time this morning by providing a little color on this quarter's operating results, explaining variance between this quarter and the previous quarter and update guidance for the fiscal fourth quarter 2012.

Our diluted earnings per share for the quarter ended June 30, 2012 with $0.79 on revenues of approximately $179 million as compared to earnings of $1.15 on revenues of $162 million for the same period in 2011. The increase in revenues is due mainly to 58 additional operating days during the most recent quarter. The increase in operating days is driven by the Atwood Osprey operating the entire quarter in 2012 as compared to 35 days in 2011.

And the Atwood Aurora operating an additional 46 days as compared to the same quarter in 2011. This was partially offset by the Atwood Falcon's 43 0 rate days, whilst in the shipyard in Singapore, operating for a steady month contract with Apache in Australia.

The reduction in earnings per share is a result of a loss of revenue and increased maintenance costs for the Falcon during its aforementioned shipyard stay.

Highlights from the third quarter includes: Average day rates increased almost $6,000 per day to $301,000 per day, revenue efficiency increased almost 1% to 95%, revenues increased $7 million or 4% due to improved revenue efficiency on the Atwood Osprey, the Atwood Falcon working additional 4 days versus the prior quarter, and a higher day rate in Australia, and the Aurora operating its current day rate of $167,000 or 49 days in Cameroon during this quarter.

Net income declined by $7.8 million or 13% due mainly to the Falcon's increased maintenance costs during its 97-day shipyard stay. Note also that the Falcon spent 29 days on standby rate waiting on environmental permits before beginning operations in Australia, a reminder of the reexhibited good revenue efficiency and tight cost control during the quarter.

Focusing on our fleet transformation and growth initiatives, capital expenditures totaled $197 million during the quarter, which consisted mainly of final payments on the Atwood Condor.

Long-term debt increased by $55 million to $655 million, partially funding the aforementioned capital expenditures incurred during the quarter. As a result of partially funding these capital expenditures, cash on hand decreased by $53 million to $79 million and we ended the quarter with a debt to cap of 26%.

Let me now provide an update to our outlook for the rest of fiscal year 2012. Firstly, as Rob mentioned earlier, the Atwood Condor was delivered on time and on budget on June 28 and began its mobilization to the U.S. Gulf of Mexico on July 2. We expect the rig to arrive and begin operations in the U.S. Gulf of Mexico in mid-October.

As previously discussed, we are currently earning and recognizing both day rates, as well as operating expenses during the mobilization period. As a reminder, mobilization day rate is 70% of our operating day rate and we estimate operating cost of approximately $125,000 per day during the mobilization period, plus reimbursable costs.

Secondly, the Atwood Mako is now anticipated to be delivered approximately to 4 weeks early and to start its contract with Salamander in early September in Thailand.

Other operating costs may run a little higher during the first few weeks as we intend to have several service personnel available to assist with any potential equipment shakedown issues.

Turning next to other service days, we expect the following projects for the remainder of calendar year 2012. We expect to incur 508 days on the Atwood Beacon in early August related to these regulatory inspections prior the rig mobilizing to Israel for its 6-month contract to Shemen Oil and Gas. We plan to report Trinidad on August 8 and anticipate a 20-day mobilization period through the Mediterranean.

The Atwood Eagle is expected to incur approximately 25 0 rate days for regulatory inspections and planned maintenance in December 2012.

During the previous earnings call, and as noted in our July fleet status report, we anticipated that the Atwood Hunter would incur 30 days out of service after the completion of its current contract with Cosmos in October 2012. We've concluded that we can perform these planned maintenance activities whilst operating. So we no longer expect that we have any out-of-service time for the remainder of this calendar year.

Note that the majority of these maintenance activities would occur during the fourth quarter. Maintenance cost for the Hunter should be $2 million to $3 million higher than as typical quarterly run rate.

To summarize, for the fiscal fourth quarter of 2012, we anticipate contract drilling cost for the 7 operating rigs as of the fiscal third quarter to remain flat quarter-on-quarter, adjusted for the Hunter's maintenance activities mentioned above and the Beacon's mobilization to Israel.

In addition, we need to factor in 3 months of mobilization costs for the Atwood Condor and 4 weeks of operating costs for the Atwood Mako.

Turning to G&A expenses. We expect the fourth quarter to approximate the third quarter at around $11.5 million to $12 million. Depreciation expense should increase from the current level upon the initiation of the Atwood Condor's mobilization on July 2 and the Atwood Mako's contracts start in September 2012. Atwood Condor's depreciation will approximate $2.5 million per month while the Atwood Mako will add an additional $500,000 per month.

We expect our tax rate for 2012 to average 14% with the fiscal fourth quarter averaging around 14.5%.

Capital expenditures year-to-date totaled $594 million. We estimate additional fourth quarter CapEx to total $190 million with the Atwood Mako's final ship log time into August, representing the vast majority of this amount. The remainder comprised of project management costs, crude costs, capital spares and maintenance costs and capitalized interest on our mainly 4 rigs under construction, plus the capitalization of our SAP software implementation.

Finally, we anticipate recognizing some interest expense in the fourth quarter as a result of delivery of the Condor and the prospective delivery of the Atwood Mako in late August. At this time, I would guide you to between $3 million to $4 million in the fiscal fourth quarter.

Regarding our capital structure, we anticipate ending the year with a long-term debt balance of around $800 million.

Recognizing the need to exercise our $350 million accordion option included in our $1.1 billion revolving credit facility, we remain fully financed for all future capital expenditures through the delivery of the Atwood Achiever in 2014.

That concludes my prepared remarks. I will now turn the call back to Ty for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Todd Scholl with Clarkson Capital.

Todd P. Scholl - Clarkson Capital Markets, Research Division

I was wondering if you guys could maybe talk a little bit about how you guys are handicapping the decision when it comes to contracting the Advantage versus your desire to go -- return to the shipyard. Obviously, as the market tightens, I think you have a little more strength in arguing day rates, but at the same time, you have the option that now expires in September. So does that make you a little more anxious in terms of getting the Advantage to work?

Robert J. Saltiel

Thanks, Todd. No, I wouldn't describe us as anxious to get the Advantage to work. We've been saying for a while that we want to make sure we get the right contract for the rig, the right combination of both term and day rate. And with what we've seen in the market recently, as I discussed in my prepared comments, the ultra-deepwater space is really heated up over the past few months. So this has really strengthened our view of where we will end up in terms of our initial contract with the Advantage. So rather than anxious, I think we're quite encouraged by the market developments and the opportunities for getting a contract for the Advantage. Clearly, the reason we have extended the option with the DSME shipyard is because we have a hope of exercising that option. We think adding a third highly-capable drillship to our fleet makes sense for Atwood and for continuation of our growth strategy, so obviously, we want to do everything we can to preserve that. At this point, we haven't made a decision about whether to exercise that option. Again, we hope that we'll be able to do that, but at the same time, we also want to work on getting our contract for the Atwood Advantage. So I hope that gives you some color on our thinking around our desire to increase our fleet size, but at the same time, our optimism about where we are with the Atwood Advantage.

Todd P. Scholl - Clarkson Capital Markets, Research Division

Sure. Yes, that's helpful. And then also, could you maybe remind us of the terms on the option that you have in terms of what is the delivery date and what is the cost for that option again?

Robert J. Saltiel

Yes. The cost for the option is similar to the cost for what we have on the Advantage and the Achiever, approximately $600 million, plus or minus, and the delivery is early 2015.

Operator

And our your next question comes from Dave Wilson with Howard Weil.

David Wilson - Howard Weil Incorporated, Research Division

Real quick, kind of following up on the option question, just on your answer from the last question. Basically, the market getting hotter, kind of -- did it change your mind about the option or did this -- say, okay, we need to give it a few more months to see if we really want to exercise this?

Robert J. Saltiel

I think really, where we are with the option is that we want to make sure that we're confident, as the management team that's exercising the option, that we've got our backlog where we want it and we have our contracts where we want them in terms of our new builds. We still have 2 jack-ups in both drillships that don't have contracts, so clearly, we're looking to build backlog and to secure some firm contracts on those rigs. The fact that we have the opportunity to extend the option with no cost to us or change in conditions made it compelling to do that at this time, but that doesn't change our desire to want to extend that option -- sorry, to exercise that option and to add a third drillship to our fleet.

David Wilson - Howard Weil Incorporated, Research Division

Great. And then another one, kind of given the strength in the market, have the discussions around the Achiever gotten more serious given the contracting activity over the past 3 months? I know the delivery is a little farther out, but just wanted to know if discussions around that one have increased.

Robert J. Saltiel

Yes. Things have definitely increased and we are seeing more programs become visible for the 2014 timeframe. I will tell you though that our focus is really on the Advantage at this point. But obviously, the strength that we're seeing for the 2013 market I think bodes well for the 2014 market as well, and our prospects for the Achiever have certainly improved as this market has strengthened.

David Wilson - Howard Weil Incorporated, Research Division

Okay. Great. And then one more, if I could sneak one in here. Any update on the Southern Cross from a marketing perspective, either going back to work or actually selling the rig?

Robert J. Saltiel

Yes. As you know, we're not actively marketing the Southern Cross. We continue to field inquiries for potential reactivation opportunities. As we said before, we want to be very particular about any decision to reactivate an idle rig given the challenges and opportunities we have on our plate with our new build program. But we certainly have seen a number of opportunities come to us. At the same time, we've had some inquiries about potentially purchasing the rig. And given that we just sold the Richmond this past quarter, we would certainly look if we got the right number to entertain those thoughts on our idle rigs. But at this point, we don't have anything to announce that's firm.

David Wilson - Howard Weil Incorporated, Research Division

Okay. So basically, status quo on that rig?

Robert J. Saltiel

Status quo, with the exception of the marketing opportunities, I think, have improved a bit as the market has strengthened. But as I say, our posturing on returning that rig to service hasn't changed.

Operator

And our your next question comes from Ian Macpherson with Simmons.

Ian Macpherson - Simmons & Company International, Research Division

It strikes me that when we've seen some of the recent ultra-deepwater contract signings, that there almost appears to be an arbitrage in the cash margin associated with different theaters of operation in terms of what the expected operating cost differentials are relative to the day rate differences. Do you agree with that? Do you think that there are markets for your drillships that are clearly more economically advantaged where you're focusing?

Robert J. Saltiel

There's no question, Ian. We certainly look to maximize our after-tax cash flow when we bid our rigs, and so you have to take into account operating cost, tax regimes and the like when you look at different geographies. Clearly, some geographies are more expensive than others and more recently, we've seen different rates of inflation in some markets than others. Just as an example, we have a heavy concentration of rigs in the Australia market, 3 floaters now working there. And we're seeing very modest inflation in that market in terms of wage rates. Whereas, if you look at Brazil or some of the other markets, you've seen much greater inflation rates. So, we certainly factor that in. And I think where you've seen recent announcements for rates in one part of the world versus another within the same contract, and you see one higher than the other, it's trying to account for these cost differences between markets.

Ian Macpherson - Simmons & Company International, Research Division

Having said that, have you identified a small list of places where you think you're likely to contract?

Robert J. Saltiel

Well, we're really looking to get the best contract for the Advantage so we haven't eliminated any theaters of operation. We are certainly focused on the Golden Triangle. I think it's fair to say that, that's where the bulk of the ultra-deepwater demand has been and will continue to be, going forward. But we're going to look at all opportunities and assess them accordingly.

Ian Macpherson - Simmons & Company International, Research Division

Okay. Is the Hunter in play for a new contract within mid-2013 rollover at this point?

Robert J. Saltiel

Yes. The Hunter is actually booked through, about September of 2013, based on estimates for the well programs that we have in finishing up our current program, and as well as for the follow-on work with Noble that was extended. We actually think that could go longer. But we're showing on our fleet status, September '13, with any kind of delays or exercise of an option, it could go further than that. So we're into late '13 for Hunter availability, but I will tell you that we've already had some inquiries on follow-on work for that rig, so we feel very good about its position in West Africa and opportunities to keep that rig fully employed into 2014.

Operator

And our next question comes from Waqar Syed with Goldman Sachs.

Waqar Syed - Macquarie Research

On the next drillship that you may consider ordering, would you go with the dual BOP or would you stick with a single BOP on the rig?

Robert J. Saltiel

Waqar, at this point, we are not committing to a second BOP in terms of our offerings. But I will tell you that we are seeing a lot of interest from clients in having a 2 BOP system. A number of our competitors have employed that. And I think, with the focus on BOP reliability and the desire for redundancy of BOP systems to perform maintenance and repair work off-line and to eliminate nonproductive time, the 2 BOP system is pretty compelling. So, we continue to be flexible in our ability to offer that and obviously, if we do that, we want to get compensated for it. So, it's definitely part of our thinking.

Waqar Syed - Macquarie Research

Now on the rigs that are under construction already, is there a way to retrofit them with the 2 BOPs or no, it's the 2 advancement [ph] designs now?

Robert J. Saltiel

So the Atwood Advantage and the Atwood Achiever are both designed to handle 2 BOP systems. So we have that capability built into the design.

Waqar Syed - Macquarie Research

Okay. But did you order 2 BOPs or not yet for those 2?

Robert J. Saltiel

We're in the process of assessing that.

Waqar Syed - Macquarie Research

Okay. And then just on inflation, you touched about on that briefly, but what are you seeing now in terms of labor cost inflation and also, material and supply?

Mark L. Mey

Waqar, this is Mark. As we've been guiding on the previous conference calls, we've seen inflation in that 4% to 5% range. We've been seeing increases in labor costs in a 3% to 5% range. And on some of the capital equipment, closer to 5%. But overall, it's still around 4% to 5%.

Operator

And our next question comes from Brian Uhlmer with Global Hunter.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

I've got a couple of real easy rig-specific questions. I just wanted to double check on this. You made a comment about the -- I'm scribbling, so was it Eagle or the Hunter, on not having to go out of service and into the yard?

Robert J. Saltiel

It was the Hunter.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

So the Hunter is going to have 0 down days. Can you dig into that a little bit more and just kind of explain what happened and what type of work you're doing that you could figure out how to not have to go into the yard and save a bunch of money there?

Robert J. Saltiel

Yes. We had a class inspection that was coming up for the rig. We had thought that as part of that inspection we might have some maintenance work that required out of service. As it turns out, we've been able to do that maintenance while we've been in service so we're getting through our class inspection without a need to idle the rig.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Okay. And now, the Eagle is expected to be out of service as well. Is there something similar that can happen with that or is that still going to be out of service?

Mark L. Mey

No, Brian. As we indicated on the prepared comments that those 25 days we're going to have to do. Due to the nature of work, we're going to have to take it out of service to perform those activities.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Okay. Great, great. That's what I thought, I just wanted to double check. And then on Falcon, can you update, what percent of the quarter do you think it will end up working in 4Q? Should we see a pre -- or beyond day rate not necessarily working? Can you give an update on that?

Mark L. Mey

Yes, the Falcon came on the shipyard in early May and started work -- started its contract with Apache in mid-May. So it's anticipated to work the entire quarter at the current $385,000 per day in Australia.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Okay. Actually I was trying to rectify versus last -- the current quarter, because that's where ...

Mark L. Mey

That's 43 0 [ph] rate days in there.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

43? Okay. Cool. Outstanding. So I can get the out cost [ph] lined up.

Operator

And our next question comes from John Lawrence with Tudor, Pickering, Holt.

John D. Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Just a follow-up on the BOP questioning, if you guys were to order a spare BOP for maybe Advantage, what would the lead time be on that, and could you get 1 by delivery date?

Robert J. Saltiel

The lead times on spare BOPs are fairly extensive. Obviously, given the fact that we've already committed to 2 new build drillships with the same manufacturer for the BOP equipment, we feel like we've got pretty good access to understanding those delivery schedules. At this point, we believe we can get BOPs -- second BOPs potentially for both rigs in time for the delivery based on their current schedule. So we're certainly within a window to be able to offer 2 BOPs on both of those rigs if we decide to do that.

John D. Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. Great. And then just question on the new build jack-ups. All those look like they're coming out ahead of schedule, does that mean anything at all from a cost-savings perspective?

Mark L. Mey

No, there's no cost savings there, John. As you know, that contract was structured with a 20-80 payment terms. So upon delivery, we paid 80%, and maybe saved a little bit in capitalized interest, but that's really de minimis.

Operator

[Operator Instructions] And our next question comes from Nigel Browne with Macquarie.

Nigel Browne - Macquarie Research

Just had -- wanted to follow-up on the cost inflation question. You guys, quoted a 4% to 5% blended. Any additional color on that? Is there any specific part of the workforce where you're seeing the main driver of that number or any particular geography?

Mark L. Mey

Nigel, let me give you a little color on that. Our labor increases in Australia are tied to our political [ph] bargaining agreement, and that's tied to the Australian CPI. So in the spring of this year, the increase that was passed through was about 3%. Currently, CPI is running at 1.9% in Australia. So if it stays around that level, you're going to see a sub-2% increase for 3 of our floating rigs down in Australia. Elsewhere, labor rate increases have been at 3% to 5% range and as it currently stands, we'll be projecting for the remainder of this year. We've just started up budgeting for fiscal 2013 and as we work through that, we may have additional guidance later. But at this stage we're going to see inflation much above 5%.

Nigel Browne - Macquarie Research

All right. Well, I guess you answered my second question, which is, looking at 2013, in terms of your maintenance CapEx, any initial thoughts on what that number would look like versus what the 2012 looks like?

Mark L. Mey

Nigel, it's going to be higher obviously, because we're going to have the Condor working, the Mako is coming out, the Mantra is coming out. So, on a per rig basis, I don't expect to see any dramatic changes. But it's all premature now for us to be able to give you a good guidance as to what the number will be for the full year.

Operator

[Operator Instructions] And our next question comes from Collin Gerry with Raymond James.

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

I just had a quick one. It seems you all have a pretty strong track record of putting up really exceptional kind of revenue efficiency numbers. And I don't know if we all calculate that on the same basis, but either way, that's out in your revenue numbers. I was just curious, how are you guys doing this? And is this something that's cultural within Atwood? Is it something that's operational? Is familiarity with the rigs? And how do you keep that momentum going, as we look to a very stout growth plan?

Robert J. Saltiel

Well, good question, Collin. I think the short answer is execution matters a lot here at Atwood Oceanics. We've put a lot of emphasis on delivering a quality, consistent drilling service, and what's very important to our clients is making sure that our rigs are reliable and available to drill their programs so they're not incurring lost time drilling their wells waiting on us to get our equipment to work. I think we've done a very good job over the years and continue to do a good job of maintaining our equipment to a high standard. The example that we've cited on this call is the investment we made in the Atwood Falcon, putting that in the shipyard for over 90 days and getting it ready for a 2.5-year program. That rig looks fantastic even though it has been operating for quite some time, and it will continue now with a high revenue recognition because it's in great shape for its follow-on program. So this is a real part of our story. I think it's a point of differentiation relative to a number of our competitors who struggle with high revenue efficiency. And I think the fact that you see that so many of our contracts are extensions by existing clients that are direct negotiated is a sign of their appreciation for what we offer in the way of differentiated drilling services. So, I'm glad that you've noticed the work that we're doing. Again, the credit goes to our rig operations teams around the world. They really bust their tails to provide the best service. And obviously, when they do that, it translates to the bottom line. So again, thanks for bringing that up.

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

Well, yes, no problem, I mean, but it shows up on the numbers. And just to dig a little deeper, I think you're right that it is turning into a differentiator, just from a numbers perspective, you versus your peers. I guess, maybe a little bit more specifically, do you think that Atwood does things differently at the rig level than some of those peers? And maybe what would some examples of that be? Is it maintenance? Is it taking care of the rigs better? Is it an answer as simple as that?

Robert J. Saltiel

I think it's a number of things. I think the culture that permeates our company is outstanding in terms of our focus on the client and focus on quality drilling services. Obviously, safety is a huge focus for us as well and we continue to perform well in that area as well. And then, of course, maintaining the rigs to a high standard is a requirement. I can't speak for the whole industry, but I could just tell you from having worked for 2 offshore drillers, we do, do things differently here, and I think that our clients notice that.

Operator

[Operator Instructions] And our next question comes from Matt Beeby with Williams Financial.

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

Rob, a quick question, some talk about the Southern Cross reactivation. Can you talk about the cost associated with getting that in working condition? And then do you expect to recoup that entire cost in the initial contract?

Robert J. Saltiel

Yes, we would estimate the cost of reactivation of Southern Cross to be $10 million to $15 million and we certainly wouldn't come out of the cold stack mode without a full recovery of that amount and then some in an initial contract. So when I say that we're particular about reactivating that rig, it's around making sure that we have a contract that sufficiently covers us for the cost and effort of reactivating that rig and then, significantly brings money to the bottom line after we fulfill the initial contract.

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

Okay. And Mark, I think I missed the OpEx guidance for next quarter. Could you go over that again?

Mark L. Mey

Yes, sure, Matt. My guidance for the rigs that we're operating as of the third quarter remains flat quarter-on-quarter, right. Because we are bringing on the Condor and so mobilizing for the majority of the quarter, you have to add the mobilization costs, which I've estimated at about $125,000 per day, plus reimbursables, and also add a month operating cost with the Mako that should start up in early September. And in addition to that, I indicated that we have about $2 million to $3 million of additional costs on the Atwood Hunter, which is associated with the maintenance work that's being done in lieu of the 0 rate days. And then finally, there's going to be some costs associated with Beacon's move from Trinidad to the Med.

Operator

And it appears we have no more questions at this time. I'll turn it back for closing remarks.

Robert J. Saltiel

Okay. We want to just to thank everybody for your interest in Atwood Oceanics. We look forward to talking again in November as we discuss our fourth quarter results and full fiscal year 2012 results. Thanks, again.

Operator

This does conclude our teleconference. You may disconnect at any time.

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