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Noble Corp. (NYSE:NE)

Q2 FY08 Earnings Call

July 24, 2008, 02:00 PM ET

Executives

Lee Ahlstrom - VP of IR & Planning

Thomas L. Mitchell - Sr. VP and CFO

Kurt Hoffman - VP of Worldwide Marketing

David W. Williams - Chairman of the Board, CEO and President

Analysts

Dan Pickering - Tudor, Pickering, Holt

Robin Shoemaker - Citigroup

Kurt Hallead - Royal Bank of Canada

Arun Jayaram - Credit Suisse

Jeff Spittel - Natixis Bleichroeder

David Smith - JPMorgan

Daniel Boyd - Goldman Sachs

Pierre Conner - Capita One South

Alan Laws - Merrill Lynch

Judd Bailey - Jefferies & Co.

Rob MacKenzie - FBR

Geoff Kieburtz - Weeden & Co.

Presentation

Operator

Welcome to the Noble Corporation's second quarter 2008 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded Thursday, July 24, 2008.

I would like to turn the conference over to Mr. Lee Ahlstrom, Vice President of Investor Relations & Planning. Please go ahead, sir.

Lee Ahlstrom - Vice President of Investor Relations & Planning

Thank you, Ashley. Good afternoon, everyone. Before we begin our prepared remarks, I would like to remind everyone that any statements we make today about our plans, expectations, estimates, predictions or similar expressions for the future are forward-looking statements and are subject to risks and uncertainties.

Our filings with the U.S. Securities and Exchange Commission which are posted on our website discuss the risks and uncertainties in our business and industry and the various factors that could keep outcomes of any forward-looking statements from being realized. Our actual results could differ materially from our expectations. We have included detailed balance sheets and income and cash flow statements along with our earnings news release that was posted last night.

Also when we open up for questions, I will ask each of you to stick to one question with one follow-up. I am sure you all understand we have a large number of folks who would like an opportunity to have a question answered and we want to be fair to everyone.

With that, I will turn the call over to David Williams, our Chairman, President and Chief Executive Officer.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Thank you, Lee. Good afternoon and welcome to our second quarter call. We appreciate you being here with us today. I'm going to make a few opening remarks and then Tom Mitchell, our CFO, will discuss the quarterly results and combine that with some guidance. And then Kurt Hoffman, our VP of Worldwide Marketing will run through the markets. We will try to keep our remarks brief today so we have some more time for Q&A at the end.

I'd like to begin today by stating that global drilling markets both for jackup and deepwater units continues to be very strong. In a quarter marked by significant volatility in commodities prices, we continue to see good opportunities at retail prices for both deepwater rigs and jackups. As a result, our contract backlog has once again grown quarter-on-quarter. We continue to be somewhat surprised that despite the strength of our earnings and the backlogs we're enjoying, the stocks in our sector reacted with the same volatility as commodities and the sector earnings multiples continue to be very low.

In fact, if anything has changed about our view of the market, it's in our overall confidence in the longevity of the cycle has increased. It appears that new build speculative jackups continue to be absorbed into the market without significant downward pressure on rates or terms. We now have more clarity in Mexico and in West Africa than we did in first quarter and the U.S. Gulf of Mexico jackup market appears to have turned the quarter on another cycle.

In deepwater, even with Petrobras' well-known desire to add supply in Brazil and the resulting contracting activity, worldwide demand is still ahead of supply. In fact, we continue to see strength in the sector in the form of record deepwater fixtures. This bodes very well for the two deepwater rigs we have with availability before January 2010. The Noble Clyde Boudreaux, a 10,000 foot more semi with availability next June and the Noble Paul Romano, a fourth-generation EVA with availability from January 1st, 2010.

Furthermore, we're continuing to examine our options to expand our deepwater fleet through acquisitions and new buildings and we've engaged in a number of discussions on this front. The economics of current new build pricing continues to be challenging, but as I said our view of the cycle is improved and we believe there may be opportunities to add deepwater assets with some acceptable returns. We don't have anything to announce yet, but we're work on the problem.

Let me update you on our current new build program. On or about September 1st, the Noble Hans Deul, the second of our three 2008 jackups is scheduled to depart Dalian on a heavy lift vessel. It's mobilizing the North Sea with a work for shale [ph] and we are obviously excited to reach the end of this project. That leaves only one remaining new build jackup under construction, Noble Scott Marks and we're continuing to expect delivery of that rig in mid-2009.

The semisubmersible Noble Dave Beard is still scheduled for completion at the end of the year, but recently we've been informed by the shipyard that due to the upcoming Olympic Games in Beijing, power generation throughout China will be rationed in an attempt to improve air quality for the athletes and the visitors. We don't know exactly what this means for us, but it looks like we could lose a couple days a week of full shipyard activity until the games are over.

Having said that, over our time in China we've heard other stories from time to time that have caused alarm, but those fears didn't necessarily materialize. So, we'll just have to wait and see how this plays out.

In Singapore, we believe we're also seeing some potential challenges for the Danny Adkins and the Noble Jim Day. As it stands today, we are sticking with the dates we have in the fleet status. However, we are seeing some signs of some potential labor shortages and we're having sporadic issues with some equipment deliveries.

Again, we're not revising any of the schedules today, but as always, we wanted to make you aware of our concerns as soon as we have them. We'll continue to update on the progress of all of our new builds through our regular fleet status reports.

Now, let me touch briefly on a few more items, beginning with safety and turnover. Our recordable rate through the second quarter improved 3% over our first quarter performance, and I'm thankful to our employees who are continuing to work hard at making Noble the safest contractor in the business. However, we won't rest on this front and safety will always be a focus area for everyone at Noble.

We're also continuing to do well in the area of turnover. Fleet-wide, our turnover rate through second quarter is still under 5%, and we're on track to beat last year's annual performance. Among our top senior operating employees, we're a little bit higher than last year on an annualized basis, but our numbers are still excellent. All in all, we feel we're in very good shape with respect to meeting our fleet-wide needs and positioning ourselves for future growth.

Finally, let me address topic that I know is on many of your minds, dividends. On our last call, we told you that we would evaluate the return of cash to shareholders on a regular basis in the absence of other more strategic investment opportunities. And our philosophy hasn't changed. However, last quarter, the Board considered the declaration of a special dividend along with some other issues at a special Board meeting prior to our earnings call and the regularly scheduled quarterly Board meeting.

Since the Board agreed in our early special meeting that paying the special dividend last quarter was appropriate, we advised the world essentially immediately, plus we're able to discuss it on the last call. This quarter, and in the future, the Board will consider any dividends in the normal course of business at its regularly scheduled meetings that generally fall a week after our earnings call. Therefore, this topic will be on the agenda next week at our regular Board meeting.

Now, obviously I can't tell you where we'll land in future Board discussions, and I need to remind everyone that dividends would be discussed and evaluated based on all factors deemed relevant by the company's Board of Directors. I just want to clarify that going forward, this will become the more regular schedule.

And with that, I'll turn it over to Tom to make some comments on the financials.

Thomas L. Mitchell - Senior Vice President and Chief Financial Officer

Thank you, David, and good afternoon to everyone. Last evening, Noble reported earnings of $376 million or $1.40 per diluted share for the second quarter. This earnings included an after-tax gain of $0.11 per share on the sale of the North Sea labor contract drilling services business, and that sale was announced in January and closed on April 8th. I'll provide you some guidance as to what that means in our labor contract drilling segment in a few minutes here.

Revenues in the core contract drilling services segment were $783 million. That's up $126 million or about 19% from the second quarter of last year, but they are down $15 million or just under 2% from our first quarter results. Let me give you a little color on that.

Six of our rigs in the U.S. Gulf, West Africa, the Middle East and the North Sea rolled to higher day rates during the quarter, moving from an average day rate of 172,000 per day on March 31 to just about 300,000 a day on June 30. However, as you already know, our three jackups in Mexico were renewed at lower rates during the quarter. All in, net revenues increased about $29 million as a result of day rate changes.

However, during the quarter, we experienced factors that more than offset the increase in day rate rollovers, leading to lower overall second quarter drilling revenues. Specifically, the Noble Max Smith entered the shipyard for upgrades and modifications associated with starting its three-year contract with PEMEX, giving us 56 fewer revenue days in the second quarter compared to the first.

We also experienced higher-than-anticipated downtime on several of our floaters, including the Boudreaux, the Homer Ferrington and the Noble Paul Wolff. And of course, the downtime on the Paul Wolff had an additional impact on the bonus there in Brazil. We also had higher-than-expected yard time on the Noble Roy Butler and our idle time, including that on the Noble Carl Norberg and the Don Walker in West Africa.

As expected, our contract drilling services costs increased quarter-on-quarter. For the second quarter, costs were up about $20 million to $256 million, driven by an increase in repair and maintenance spending, salary increases in the U.K., Brazil and Gulf of Mexico, and costs associated with downtime on the Clyde Boudreaux, including costs related to the retrieval of the BOP stack.

As you're aware, we dropped the BOP stack on the Boudreaux in mid while pulling the stack. We located the stack on the seabed quickly and have since recovered it. We had built up a number of downtime credits through our routine operations. And as a result, we didn't go off day rate until June 26. So, the revenue impact from the lost day rate on the quarter was minimal.

We incurred additional costs as part of the recovery operation, but these costs are anticipated to be below our $10 million insurance deductible threshold. The Boudreaux does have lots of higher insurance, but that doesn't kick in until we've been on zero rate for 45 days. And at this point, we anticipate being back to work before we would be able to submit a loss of higher claim.

Daily drilling costs during the quarter were about 54,700. That's up 13% over first quarter costs of 38,400. The per day costs were driven higher by the factors that I mentioned as well as our lower utilization of 90.4% versus 93.9% that we experienced in the first quarter. In general, our cost outlook continues to be where it was in the guidance that we gave last quarter at $1.1 billion, plus or minus $50 million, with the remaining costs split pretty much evenly over the third and fourth quarters.

As I mentioned earlier, we closed the sale of our North Sea platform business in early April. In June, we finalized an agreement to return the Noble Kolskaya [inaudible] owners. So both the North Sea platform business and the Kolskaya business have been reported in the labor contract drilling services line. Neither contributed to revenues in the second quarter, although there were about a million dollars of costs associated with the Kolskaya.

Going forward, the only thing remaining in labor contract drilling will be our platform operations at Hibernia in Canada, and we expect that the revenues and expenses will be in line with or slightly below what we reported for this quarter.

A few more points on the income statement. Reimbursable revenues and expenses were down significantly quarter-on-quarter. And that's due to the sale of the North Sea platform business. As you know, this item represents purchases made on behalf of customers and it can vary significantly. We don't make any attempt to provide guidance on that number.

DD&A was up $5 million over the first quarter. We are adjusting our full year estimates to a range of $345 million to $355 million on DD&A so you can factor that into your models through the rest of the year.

Selling, general, administrative expenses were down quarter-on-quarter as we experienced lower costs associated with the special investigation in Nigeria. As we noted in our release, we had about a penny per share of cost after-tax associated with that investigation. And finally, the tax rate of 18.5% is where we expect to be for the remainder of the year.

Turning to capital, we spent $291 million this quarter. We continue to expect the pace of spending to pick up in the back half of the year and maintain our guidance of around $1.4 billion for the full year. We ended the quarter with $320 million in cash after paying the $0.75 special dividend, giving us a debt-to-total cap ratio of 13.1% and a net debt-to-total cap ratio of 7.8%. We did not repurchase any shares this quarter.

That concludes the financial remarks and I'll now pass it on to Kurt who will discuss the markets.

Kurt Hoffman - Vice President of Worldwide Marketing

Thanks, Tom. As of June 30th, Noble's fleet contract and backlog position remains very strong. Overall and excluding the three submersible units, we have 91% of our available days booked for 2008, 71% for 2009, and 33% for 2010. For the jackup fleet in particular, those numbers for 2008 through 2010 are 88%, 62% and 14% respectively, showing good visibility in the jackup market despite forthcoming capacity addition.

Our total contract backlog potential as of June 30th stood at $12.1 billion, and that includes earning the maximum bonus potential on our rigs in Brazil. The jackup fleet contributes roughly $2.9 billion of the total backlog or about 24% with the remainder attributable to our 16 deepwater assets. And that $2.9 billion does not include the additional backlog recently achieved on the Noble Tom Jobe. This was a solid quarter for us in terms of locking up contracts on some large jackups.

During our last call, we cautioned that certain jackup markets, such as Mexico and West Africa could experience some choppiness. We believe that this would have more to do with the local Geo political environment than it would actual demand and we believe we're starting to see that play out. Particularly in West Africa, where we recently announced two new contracts on the Noble Percy Johns and the Noble Ed Noble and our letter of intent on the Noble Tommy Craighead. All three of these are at strong market rates, above 170,000 per day, all with good term.

We had some good news on the permitting front in Nigeria and have been able to secure temporary import permits for all the rigs that needed them, including the Noble Carl Norberg which had been waiting on a permit to go back to work. We have two rigs in the region, the Noble Don Walker and the Noble Roy Butler which currently have availability and we're aware of additional tenders being prepared for up to three or four jackups with multi-year terms and will be in competition for those opportunities.

All in all, we're feeling like things are starting to move ahead in West Africa. In Mexico, PEMEX published three additional tenders during the quarter. By now, many of you are aware that Noble was a successful bidder on the renewal of the 1217 day total Noble Tom Jobe contract. We bid a 155,000 per day on this 250-foot jackup and that's above its current rate of a 150,000 per day.

As a reminder, this contract is similar to the three others we recently signed and that it reprices quarterly after the first six months based on an index. Successful conclusion of the Noble Tom Jobe contract means that our rigs in Mexico are contracted through substantially all of 2009, with the next renewals not due until December of that year.

As you are aware, yesterday bids were due on one incremental 250-foot jackup and one incremental 350-foot jackup unit and we submitted a bid on the Noble Carl Norberg for the 250-foot Jobe. We're currently waiting to see the outcome of these bids.

In summary, we're pleased that PEMEX has been moving forward to contract much needed incremental rigs and we're hopeful that rumors of more incremental rig requirements come to fruition before the end of the year. Activity in the Arabian Gulf market continues to increase and we signed a number of positive new contracts during the quarter. Of the 15 rigs we have in the region, only two, the Noble George McLeod and the Noble Dick Favor have any time available this year. And we're currently engaged in bidding each of these rigs.

Recently, the Saudis tender for five jackups for three years each and we plan on participating in those bidding opportunities. Competition in the region has been brisk, but disciplined, and we see rates holding in the $150,000 to $170,000 per day range.

A few final thoughts on the jackup markets. The North Sea continues to hold firm as expected. We're fully contracted through 2008 and during this quarter signed commitments on five of our seven jackups that extend well into 2009. Additionally, Cirrus Energy recently exercised its options for two priced wells for a total of about 120 days at a day rate of $220,000. That was on the Noble Lynda Bossler.

This means that in the North Sea, our earliest availability is the Noble Piet van Ede in July of 2009. We see no weakening in this market as U.K. gas prices remain very strong. Also, rates in the shallow-water Gulf of Mexico have been bolstered during the quarter by increases in natural gas pricing. Of course, as you know, our direct exposure here is limited to our two operating submersibles, but we believe we benefit globally as higher prices in the U.S. not only strengthen local demand, but they also have a positive impact in index contracts in Mexico.

Turning now to the deepwater markets, we have no new contracts to report. However, it's clear to us from the activity we've observed during the quarter that this market will remain robust for the foreseeable future. Marathon's choice to exercise its option to extend the contract on the Noble Jim Day from two years to four years is clear evidence of the market strength.

As mentioned earlier, the Noble Clyde Boudreaux is one of the first 10,000-foot rigs available since it comes off contract in June 2009, and we're currently in discussions with our customer and others to see what the future will hold for that rig.

And that concludes my remarks.

Lee Ahlstrom - Vice President of Investor Relations & Planning

Thanks, Kurt. Ashley, at this time, we'll open it up to the queue for the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions]

We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Dan Pickering with Tudor, Pickering, Holt.

Dan Pickering - Tudor, Pickering, Holt

Good morning.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Good morning, Dan.

Dan Pickering - Tudor, Pickering, Holt

David, I was hoping that you could elaborate a little bit more in terms of the issues or potential issues in the yard. You were kind enough to tell us you're concerned and watching it closely. What kind of equipment looks like it's late? What could the Chinese delays -- or how does that translate to delivery date delays potentially? Just kind of tell us a little bit more, if you could.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

On the Hans Deul, it won't have any impact at all. I mean Hans Deul is effectively complete. We're doing commissioning right now. So, the heavy lift ship is due. So, in China, that won't be an issue at all. On the Scott Marks, likewise, there is enough time there that if we get some -- basically what we're looking at is the yard probably going on -- on the go slow during the Olympics.

So, I mean the impact is not going to be material. It shouldn't be very large. It's just we just like to get it out as soon as we know about it. I don't really expect a whole lot of issues in China. But it's been talked about, so we just thought we would pass it on to you guys.

In Singapore, it's just -- there is a lot of pressure on labor in that market in all the yards. They're just -- they're running flat out, and there is good bit of poaching of local labor going on over there. And so, it's just we're seeing labor shortages. We're hearing stories from not only our yard, but other yards. So, it's going to be on the radar screen for everybody else. So, it's just kind of silly for us to ignore it. So, we're just telling you about it.

On equipment deliveries, there is nothing yet that's going to impact the schedule. There is nothing that's in the critical path, but there are some pieces that are a little later than scheduled, manufacturers jostle schedules and stuff. So, we're just telling you, Dan, when we know, we're getting the information out. It's symptomatic. It's not yet a problem, but it's symptomatic of what's going on in the industry.

Dan Pickering - Tudor, Pickering, Holt

Do you have any penalties from the customer if a rig were to slip? Does that cost you money on top of just the opportunity cost of not working?

David W. Williams - Chairman of the Board, Chief Executive Officer and President

I would give anything if these guys would terminate these contracts for whatever reason, but I don't see it happening.

Dan Pickering - Tudor, Pickering, Holt

Okay. And my second question is a somewhat related follow-up. You mentioned the Boudreaux availability in summer of next year. I guess the two-part question. One is, with the delays of dropping the stack, could that potentially push you later? In other words, do you have to give the customer the extra days?

And the second question would be what's your philosophy around the timing or length of a contract beyond? You want to keep a couple rigs in the spot market or would you be willing to go long, your remaining capacity?

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Well, let me take the first piece of it first. No, we don't owe any days. And I'd like to just -- we talked about dropping the stack. We've already got -- that event occurred. It occurred as a result of a failure in the system, not because of something anybody on the rig did. And so, part of our exercise has been to investigate exactly what happened to make sure it doesn't happen again.

But we've already got the stack back. Had we not had dolly, we'd have been ready to rerun it this week. So, as soon as we get back to the rig, it's one of the rigs that's in the way south. So, it's one of the rigs we did evacuate. So, as soon as I get back on, we'd be ready to rerun the stack again, but we don't owe them the days on that

Regarding our philosophy on renewal of the [inaudible] or any rig, Dan, we can price anything. Certainly, we'd like to have some terms if it's your worth it, but we're certainly not afraid of the short-term market. But it's a short-term commitment. It's going to be a big rate. So, you like to have some rigs rolling. You've always got some rolling but we could price anything, anything… I can't see us doing anything less than a year, 18 months. But we've talked to some people about three or four, five year deals as well. So anything… we can price anything. I think the shorter the term, the bigger the number.

Dan Pickering - Tudor, Pickering, Holt

Helpful. Thank you.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Yes, sir.

Operator

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

Robin Shoemaker - Citigroup

Thank you. I was wondering if you could talk a little bit more about Mexico and how the contracts there would be… certainly the Gulf… the index is strictly tied to Gulf of Mexico jackup rates or are you getting more of a globe index in those contracts?

Kurt Hoffman - Vice President of Worldwide Marketing

Robin, this is Kurt. That's a good question. It's pretty much the high end of a global region for like type equipment. I think it's indexed off seven different geographical areas in the world, including the Gulf of Mexico.

Robin Shoemaker - Citigroup

Okay. So the rebound in the Gulf of Mexico would help a little but it's really a global index.

Kurt Hoffman - Vice President of Worldwide Marketing

That's correct. An average of the high end of the global index.

Robin Shoemaker - Citigroup

Right. Okay. And in terms of Brazil, are you in any way… you have rig availability for that market, obviously they've ordered a lot of rigs for the 2012 time frame and what do you expect to be the demand between now and then?

Kurt Hoffman - Vice President of Worldwide Marketing

We expect the demand to remain strong. I mean, there's lots of talk and noise out in the market that Petrobras is still actively pursuing new deepwater ships and semis and we certainly talk to them as well. As you know, our fleet is pretty much booked up, got exposure out into 2016, I believe. But that market will remain strong, we believe, and we're glad we're a part of it.

Robin Shoemaker - Citigroup

Right. Are you familiar with… how familiar are you with the contractors that have entered into these long-term contracts with Petrobras for rigs to be delivered three years out? And is there any role for you in these… in those… that new generation of rigs that's coming to Brazil?

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Some of contractors we know some, I'd say we know of all, generally the ones that are established, there's some new players to the business in there. But unless they f alter and somehow those rigs come into the market, no there's probably not a role for us or other contractors in between those contract signees and Petrobras, I don't expect. As Kurt said, we've got our six rigs down there committed out well into the future. We've had conversations about some of the rigs that are not in that market, taking them down there. But as far as the other people that have signed these other documents to take rigs down there, they're kind of on their own, as far as we can tell.

Robin Shoemaker - Citigroup

Okay. All right. Thank you.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Thanks, Robin. And congratulations on your new role there at Citi.

Robin Shoemaker - Citigroup

Thank you.

Operator

Your next question comes from the line of Kurt Hallead with Royal Bank of Canada.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Hi, Kurt.

Kurt Hallead - Royal Bank of Canada

Hey, good morning or good afternoon I guess is what time it is.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Good afternoon.

Kurt Hallead - Royal Bank of Canada

Hey, just you reference here the jackup markets kind of being stable and rate ranges I guess you were talking about in general between 150 to 170 outside of Mexico and the North Sea. What do you thing it takes here to get some upward momentum in those price ranges? Clearly, with all the rigs coming in, it hasn't been a detriment to pricing incrementally from the last three months or so. What's going to get us going the other way?

David W. Williams - Chairman of the Board, Chief Executive Officer and President

We're pretty happy with these prices.

Kurt Hallead - Royal Bank of Canada

I know you're happy with them. You would probably be happier with higher price.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

We would. Markets work and this market is no different. You know, if you see enough activity in jackups so that when people start to get ready to go drill the prospects, they can't get a rig that drives rates. You know, are we seeing it to that extent across all geographic regions? No. We saw some nice pops in the rates that Kurt and his guys did in West Africa recently to get some of those up north of 180 is a good pop in that market. I'm not at all disappointed in the Tom Jobe on a Behr load charter [ph] basis in Mexico at 155. Our rates in the North Sea as you said are good. So I mean those rates are all going the right way. If you're looking for exponential growth, you are going to have to see a lot of tightening in the market.

Kurt Hallead - Royal Bank of Canada

In terms of growing your asset base, I know you're going to be opportunistic along there as well. Given all the demand on the deepwater, are we getting any closer in your mind to seeing some another one or two deepwater rigs for Noble?

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Are we getting any closer? That's a characterization I'm just not going to make. We have had an ongoing dialogue with a lot of people over time. We still have some dialogues going on. Those things, when they hit, they hit in a hurry. And so, I guess all I would say about that is our capital program as it is, you know, we got out early in the cycle with seven rigs. Our capital program has run its course. It's time for us to do something else. And we're looking hard at it.

Kurt Hallead - Royal Bank of Canada

Okay. And then let me wrap with this, just and I'll finish it up. Just on the equipment side, you referenced some delays or whatever. Is this -- where in the critical path is this equipment and how quickly could it get resolved?

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Well, none of it's in the critical path yet. That's what I was trying to say on an earlier question. None of this stuff is really in a critical path yet. It's all kit that goes on other pieces or pieces of equipment that go on the rig someplace. It's just symptomatic of what I think the industry might see. We haven't had anybody yet say we're not going to deliver X, Y, Z piece of equipment. That's critical for some other activity on the rig yet.

So, I'm just trying to point out that there are some symptomatic issues in the industry that I think it's naïve to believe that all these rigs under construction are going to be on time, and we're seeing symptomatic issues around that question.

Kurt Hallead - Royal Bank of Canada

Great. I appreciate it. Thank you.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Yes, sir.

Operator

Our next question comes from the line of Arun Jayaram with Credit Suisse.

Arun Jayaram - Credit Suisse

Good afternoon.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Hello, Arun. How are you?

Arun Jayaram - Credit Suisse

I'm doing well. Kurt, I want to see if you could elaborate -- you built some pretty good backlog on the jackup side. Probably the only area of near term uncertainty is in West Africa where you've got the Norberg coming off contract in the middle of August, the Butler in the shipyard and the Walker as well. Can you give us the near-term prognosis on when you expect to get those rigs back on the payroll?

Kurt Hoffman - Vice President of Worldwide Marketing

You bet, Arun. As we've said before, geopolitically, Nigeria is a tough place to be right now. There is all kinds of opportunities that we're looking at. However, it's taken a little bit longer than we had hoped to bring them together. We're still in the Exxon Mobil tender, which is going to be for the four jackups that currently have under contract and then two incremental is what their plans are now. And then there is also opportunities in West Africa, but outside of Nigeria that we're looking at. So could it stay slow here for a little bit? It could, but it's not because there aren't just any opportunities. There are opportunities. They're just taking longer to put together.

Arun Jayaram - Credit Suisse

Okay. But the permit issues have been largely resolved. Is that still going to be kind of temporary or has that situation been resolved?

Kurt Hoffman - Vice President of Worldwide Marketing

Well, I mean we're getting our temporary imports and our permanent importation permits when we need them. Nigeria is Nigeria and it's going to continue to be interesting as we go forward. But we're getting our permits when we need them.

Arun Jayaram - Credit Suisse

Thank you very much, guys.

Kurt Hoffman - Vice President of Worldwide Marketing

Yeah.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Thanks, Arun.

Operator

Your next question comes from the line of Jeff Spittel with Natixis Bleichroeder.

Jeff Spittel - Natixis Bleichroeder

Good morning, guys. First question was in the international jackup market. Certainly there are a lot of new build rigs coming out toward the end of this year and '09. In discussions with your customers, are you starting to get the sense that there is still some unwillingness on their part to lock up some of those rigs with new crews and are you really kind of still competing against the established installed base in the jackup market or are you starting to see some more competition from the new builds?

Kurt Hoffman - Vice President of Worldwide Marketing

This is Kurt. We're certainly seeing competition from the new builds. And they're going to bring these rigs out, and they're going to have to put them to work. And they're looking at the new opportunities as we are. A new build was bid into -- not a brand new build, but a build within this construction cycle was bid into the PEMEX tenders yesterday. So, we're certainly going to see it.

To one of your earlier points, there are some customers out there that are reluctant to take on a new build with new crews. They would rather stay with more established rigs that have certainly an operating history. We see that as well. But these new builds are going to come out and they're going to have to find jobs. So, we'll be competing with them and we're ready to do that.

Jeff Spittel - Natixis Bleichroeder

Okay. And I guess, do you think the takeaway from that would be that there is a discount in terms of day rate for the less experienced or non-experienced crews on the new builds versus, say, a Noble rig?

Kurt Hoffman - Vice President of Worldwide Marketing

I don't know the answer to that. Are you saying that they may -- the new build might market the rig at a discount?

Jeff Spittel - Natixis Bleichroeder

Correct.

Kurt Hoffman - Vice President of Worldwide Marketing

They may. We haven't seen a lot of that. Actually, we've seen quite a bit of discipline with some of the new build contracts. So, I think they're going to compete at what they think the market rate is.

Jeff Spittel - Natixis Bleichroeder

Okay. And then unrelated follow-up, in the deepwater market as it relates to new builds, with some of the issues that you're talking about in the general tightness in the shipyard, are you starting to get to the point where maybe looking at an acquisition of a new build rig is becoming increasingly attractive versus going out and building it on your own?

Kurt Hoffman - Vice President of Worldwide Marketing

Well, we've looked at a lot of existing new build opportunities. We think they are attractive at the price that we'd be willing to pay. They are not necessarily attracting -- they are attractive at what they're willing to sell them at. So, the bid asked on those opportunities is still pretty large. So, you know, I won't say one is better than the other. We're kissing lot of frogs. We're looking at a lot of opportunities. You know, we don't have… I don't know that we have a necessary preference one way or the other, unless we were having an immediate need for a rig sooner. So we're looking at everything.

Jeff Spittel - Natixis Bleichroeder

Okay. That's what I was getting at. Sounds like the bid out spread hasn't really narrowed as of yet.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Not really.

Jeff Spittel - Natixis Bleichroeder

For now put those plans on hold.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Not really, you're correct.

Jeff Spittel - Natixis Bleichroeder

Thanks Jeff.

Operator

Your next question comes from the line of David Smith with JP Morgan.

David Smith - JPMorgan

Good morning.

Lee Ahlstrom - Vice President of Investor Relations & Planning

Good morning, Dave.

David Smith - JPMorgan

Looking at the second half of '08, there doesn't seem to be a lot of free cash flow if you hit your CapEx guidance. And I was wondering what your thinking is on a cumulating debt to fund a special dividend.

Thomas L. Mitchell - Senior Vice President and Chief Financial Officer

We will look at all options that are being -- this is Tom. We will look at all options that are out there. We're not opposed to taking on a little bit of debt, but our free cash flow has held up on the first half with the way that the capital program has played out. You are correct, it does catch up a little bit in the second half but there is still some flexibility there. We wouldn't necessarily let some leverage hold us back from dealing with the dividend.

David Smith - JPMorgan

Okay. Speaking of building deepwater rigs, what kind of deliverability would you be looking at realistically if you were to go in for a new drill ship pursuing?

David W. Williams - Chairman of the Board, Chief Executive Officer and President

I think if you walk into the yard today they're quoting 2012.

David Smith - JPMorgan

Would that be early 2012 or 2012.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

I think if they are probably saying early 2012, we probably want that later than that. I think there is probably a couple of slots out there in the early part of '012, when you're looking that far out. I'm not sure whether early or late makes a big difference. I think 2012 is what we're looking at. We are not thinking probably at the early part.

David Smith - JPMorgan

I was thinking about that in the context of customer demand to give contract against new builds given 2012 plus or minus, maybe.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

There are certainly people that are willing to talk about it.

David Smith - JPMorgan

Great. Thank you.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Thank you.

Operator

Your next question comes from the line of Dan Boyd with Goldman Sachs.

Daniel Boyd - Goldman Sachs

Hi, good afternoon, guys.

Lee Ahlstrom - Vice President of Investor Relations & Planning

Hey, Dan.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Hey, Dan.

Daniel Boyd - Goldman Sachs

Just looking at PEMEX, can you try to put some numbers around some of the incremental demand you see down there for jackups, and then just also comment on how reliable as you put it as rumors are?

Kurt Hoffman - Vice President of Worldwide Marketing

Dan, this is Kurt. It's certainly all noise until they actually publish the tender. But we feel that the noise we've heard in the past has been fairly accurate. In terms of incremental jackup demand, what we're hearing right now is four or additional rigs, probably 250-foot, 300-foot rigs, something to that. Don't have any idea what the term would be. But we've heard that if they do come out with incremental rigs, the tenders could be published fairly soon.

As far as deepwater rigs, I think there's not a whole lot of rumor. Every now and then it pops up that PEMEX would like to have another deepwater rig in addition to the Noble Max Smith that recently got on location in Mexico. I think in deepwater terms that will depend on their geologic success in their deepwater drilling campaign.

Daniel Boyd - Goldman Sachs

Very thoughtful [ph]. I have an unrelated follow-up. When you look historically, the strategy has been to not build cash and buyback shares. You now switched to a special dividend as a more appropriate I guess a more preferred way of returning cash to shareholders. And as David mentioned previously, you're not really building cash until maybe even late 2008, early 2009, but you're willing to take on some debt to potentially fund the special dividend. So should we look at that as a more aggressive strategy of returning cash to shareholders and potentially something you would like to continue for the foreseeable future as long as you have strong free cash flow?

David W. Williams - Chairman of the Board, Chief Executive Officer and President

I wouldn't read too much into it. You're right, we said we're not going to build cash. I think that's kind of the driver behind what we're doing. We still have a buyback program that's available to us, and we may from time to time give it a workout. But I wouldn't read too much into it.

Daniel Boyd - Goldman Sachs

Okay. Thanks.

Operator

Your next question comes from the line of Pierre Connor with Capital One South.

Pierre Conner - Capita One South

Good afternoon gentlemen.

Lee Ahlstrom - Vice President of Investor Relations & Planning

Hi Pierre.

Pierre Conner - Capita One South

This is probably for Kurt, and this just maybe more a clarification for me to make sure I understand. The contracts for PEMEX that you mentioned were indexed to the international market rates, that's on the rig that you just bid or is that also from the prior three that were -- the renewals, the Fredericks and the [inaudible]. Do they also indexed to international rates and --

David W. Williams - Chairman of the Board, Chief Executive Officer and President

That's correct, Pierre. They are. It's the current bid and then also the last three. You're exactly right. They are international including the US, Gulf of Mexico.

Pierre Conner - Capita One South

Okay. So the terms didn't change between them. My question, I know those don't have a …they have a six month fixed on the start of the last three, but have you looked at what that index would be for them today?

David W. Williams - Chairman of the Board, Chief Executive Officer and President

We have, actually. And if you look at… I don't have the exact number in front of me, but if you look at when we bid the last three for 250-foot and 300-foot jackups and when we bid this last one last week, the index for that class of rigs, for the seven geographical areas they look at throughout the world has increased.

Pierre Conner - Capita One South

Okay. Your bid is the top of where those indexes would have moved to.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

The successful bid on the Tom Jobe at 155 was moderately above the international average.

Pierre Conner - Capita One South

Okay, thanks. My unrelated follow-up is around the Paul Romano and of course either Dave or Kurt, this recent news on the south Pacific, is that near the levels that we could be thinking about for that rig if it were a very… a one year or six month type contract?

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Yeah, I mean, it depends on what the term is. I mean, you know, that was a nice fixture on a short-term job. I mean, I would like to see a little bit more term than that. But we would go… I'm going to tell you we'll go as big as we can.

Pierre Conner - Capita One South

Okay.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

We're not… we've gotten over being embarrassed about day rates. We'll go as big as we can.

Pierre Conner - Capita One South

All right. Thanks, gentlemen.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

You bet.

Kurt Hoffman - Vice President of Worldwide Marketing

Thanks Pierre.

Operator

Your next question comes from the line of Alan Laws with Merrill Lynch.

Alan Laws - Merrill Lynch

Good afternoon.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Mr. Laws, how are you?

Alan Laws - Merrill Lynch

First question is on consolidation. You talked about it a bit in your prepared remarks that was kind of interesting. You talked about it, you sort of sounded like it could be assets, could be corporate. Just wanted to know from your perspective, since you seem to be kicking a lot of tires, what call the Esprit decorps out there is around getting a deal done?

David W. Williams - Chairman of the Board, Chief Executive Officer and President

You know, it's… you hear a lot of rumors. You know, I think everybody's been obviously watching the C drill pride saga. You hear a lot of rumors. I'm not going to comment too deeply beyond that. You know, I think people are in the mood to do it. I think there are some opportunities out there, some reasonable targets. I guess going into this year I would have thought we would have seen a little bit more activity by now. But I guess with the volatility of the stocks it's hard to get your arms around valuations of different companies on different days.

Alan Laws - Merrill Lynch

Okay. Would there be any factors that you see out there that would make a deal more likely or do you think there's things that each party or a party needs that makes it more likely? Obviously, you're talking about you thought it would be… that there would be something done already kind of thing. What was in that, that sort of thinking?

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Well, just going in with the global Santa Fe/Transocean deal last year. There was a lot of excitement around zero premium deals and a lot of discussion around that that was going to open the flood gates and I think there are probably a number of discussions to be had. You know, I don't think most of us in this business, and I can tell you that at Noble, we don't feel compelled to get bigger just because we want to get bigger.

For us, what's going to make a difference to us is how do we add value and what are the strategic benefits to our shareholders of doing a deal. You know, there's nobody out there that you want to just euthanize now, as in years in the past there might have been some of those. But right now, you know, it's a pretty good bunch of contractors, they're all smart people, they all have their own set of circumstances. And so I think you've got to look at strategic nuances that make it more meaningful.

Alan Laws - Merrill Lynch

Okay. I like that characterization, Dave.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Open your headline, Alan, thanks. I have been doing this… I've been at this for a long time. There have been a few of them out there, I thought in the past they should have been euthanized. Luckily by now they have been.

Alan Laws - Merrill Lynch

Unrelated follow-up to [inaudible] little ruled one questions is, I can't follow up to Arun's question on West Africa. From time to time, we see these kind of ebbs and flows of slowdowns there that don't really seem to be based on fundamentals. This time it was permits. I guess that's what it was. Can you characterize really what has led to the slowdown there and whether you think that's coming back or what the risks there are that it would come back?

David W. Williams - Chairman of the Board, Chief Executive Officer and President

You know, you're right, it has ebbed and flowed over time. Sometimes the ebb's much worse than what we're in right now. There's 100 plus oil and gas works that helps a lot of markets. So we think that the rigs, the outer rigs in Nigeria will go back to work and it won't be a prolonged downturn. With that, we're looking at other opportunities outside of the Nigeria. Not that we would give up on Nigeria. But there's demands for these types of equipment. If we can put the right deal together we'll take one out. We are awkward about doing that either.

But there's opportunities. I think the majors, the big companies are a bit of a slowdown right now with some of the unrest that we all read and see on the news. There's certainly some of the smaller, some indigenous companies that we know that have a lot of drilling plans that can actually get things done much quicker with their partner, the government, than some of the majors. So there's opportunities there. The market is not dead by any means and we feel that these rigs will go back to work soon, if not in Nigeria, somewhere else.

Alan Laws - Merrill Lynch

Okay, great. Thanks for the answers today.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Thanks Alan.

Operator

Your next question comes from the line of Judd Bailey with Jefferies & Co.

Judd Bailey - Jefferies & Co.

Thanks, good afternoon.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Hi, Judd.

Judd Bailey - Jefferies & Co.

Question on new build pricing. We've seen quite a bit of cost escalation in the last 60 days or so with all the Petrobras commitments. David, any estimate on if you wanted to build a rig similar to the Jim Day, what that would cost you, all in, for delivery in 2012?

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Well, I mean, Judd, as you know the Jim Day is a drilling package on a hull that was built eight years ago. But I don't think that our pricing to replicate the Jim Day would be any different than what you hear from anybody else, in the sevens or so, depending on exactly how you kit it up and what you're building. There's a little bit of difference between ships and semisubmersibles and how you put it together. Our numbers aren't going to be any different than anybody else's numbers.

Judd Bailey - Jefferies & Co.

Okay. A follow-up is also unrelated. PEMEX has commitments to contract three deepwater rigs upon delivery in 2010. All those contracts are with more marginal players. One of the rigs in particular, from everything we hear, is going to be extremely late. Do you happen to know what kind of cancellation provision would be in those contracts. I believe their contracts are fairly standardized. And do you have any idea if PEMEX is already looking to potentially replace one of the rigs that could be extremely late?

David W. Williams - Chairman of the Board, Chief Executive Officer and President

I don't have any knowledge. Kurt, do you?

Kurt Hoffman - Vice President of Worldwide Marketing

No, I don't.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

We don't have any… we did not sign that contract, you know, as you recall, we bid that program and we were unsuccessful in the tender process but we were the only one that had a rig that was available in 2008 to drill. So our deal was a direct assignment, a direct negotiation and we don't have the same contract they've got. So I don't know what kind of penalties they may have and I don't know what PEMEX fallback position might be in the event of an extremely late delivery. I couldn't tell you.

Judd Bailey - Jefferies & Co.

Okay. Thought I would ask. Thank you.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Thank you.

Operator

Your next question comes from the line of Rob MacKenzie with FBR.

Rob MacKenzie - FBR

Thank you, guys. Actually, my questions have been answered.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Thank you, Rob.

Operator

Your next question comes from the line of Geoff Kieburtz with Weeden & Co.

Geoff Kieburtz - Weeden & Co.

Just wanted to follow up on the comment about the new build being bid into Mexico. Where was that rig built?

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Let's see. There were three of them. One was built at T side. The hull was built in China. Where were the other two built?

Kurt Hoffman - Vice President of Worldwide Marketing

It was built in Russia and towed to T side.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

And the third one is the Mexican drilling contractor, I'm not sure where he's building it. I don't know.

Geoff Kieburtz - Weeden & Co.

All right. Is it at all concerning that we're seeing new builds being marketed into the Western hemisphere already?

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Those were done a good while ago. I mean, I think there are a lot of new builds being marketed in this part of the world over here. So no, it's not surprising at all.

Kurt Hoffman - Vice President of Worldwide Marketing

Those three rigs were contracted back last summer, beginning of last summer. Because we signed the Max Smith in July. We announced the Max Smith last July.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

The tender was in May.

Geoff Kieburtz - Weeden & Co.

Okay. I thought you said that there was a new build bid into Mexico yesterday.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Okay. I'm sorry. We're talking about a jackup that… I'm sorry. We missed your question. Yes, there was… one of the contractors who operates new build jackups had bid one of their rigs into Mexico under the tender yesterday. And other than the Mexican contractors, I think that's the first time we've seen one of the new builds bid down there. We had heard that scorpion might from time to time but to my knowledge they haven't. So I think sooner or later they're going to come there. PEMEX has demonstrated that they're going to be a real player. Many contractors have kind of avoided Mexico. We have got a long history there. We like it. So it doesn't surprise me. We hate to see a shark in our swimming pool but it's… it doesn't surprise me they're bidding over here. It's good work.

Geoff Kieburtz - Weeden & Co.

Okay. All right. And the other question was on the M&A topic, are the discussion that's you've heard about, if I could phrase it that way, still being done at zero premium?

David W. Williams - Chairman of the Board, Chief Executive Officer and President

I don't know what I've heard about any discussions that I could comment on. I mean, you know, we hear the same rumors you guys hear. And I'm not privy to those discussions so I don't have a clue what they're… I was trying to characterize the notion that after the global Santa Fe transaction, the global Santa Fe/Transocean transaction there was a lot of excitement and thought that might drive more M&A activity and I kind of felt like you might see more activity as well. But as far as the details of what might be going on now, I haven't got a clue.

Geoff Kieburtz - Weeden & Co.

Thank you.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

You bet.

Operator

[Operator Instructions]. Our next question is a follow-up from the line of Kurt Hallead with Royal Bank of Canada.

Kurt Hallead - Royal Bank of Canada

Yeah, just on the Mexico tenders and what's been transpiring in the Gulf of Mexico. Can you comment on how incrementally competitive the bidding process has been? Have the bid rates kind of firmed up? Can you talk about the competitive factors down there right now?

Kurt Hoffman - Vice President of Worldwide Marketing

Kurt, is this specific to Mexico?

Kurt Hallead - Royal Bank of Canada

Yeah.

Kurt Hoffman - Vice President of Worldwide Marketing

Yeah, well, it was… this was last round, it was on the 250 that we just bid yesterday, it was us and Ensco and that was it. I think the award will come down to how PEMEX analyzes mobe and demobe because both companies day rates were very competitive. But we haven't seen on the 350-foot incremental job that was also two contractors that bid on that. And again, their rates were… they were good rates, good, solid rates on those jobs.

I think it will come down to the mobe and demobe as well. But we haven't seen a lot of new competition coming into the Mexican markets. But to David's point, I think it's going to be possible that they do come in. They're offering good terms and if you believe that they've got the demand to drill these wells and these types of wells and these types of well and the cancellation provision in the contract won't happen which we haven't seen it happen to us, then you're going to see other contractors come in there I think.

Kurt Hallead - Royal Bank of Canada

Okay. Thanks.

Kurt Hoffman - Vice President of Worldwide Marketing

Thank you.

Operator

And there are no further questions at this time. Sir, do you have any closing remarks?

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Thanks very much, Ashley. And thank you all for joining us on the call today. We appreciate you being shareholders and your interest in Noble. We'll look forward to speaking to you again either at conferences on the road or at the next earnings conference call which will be in October. Thanks very much.

Kurt Hoffman - Vice President of Worldwide Marketing

Thank you.

David W. Williams - Chairman of the Board, Chief Executive Officer and President

Thanks.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Noble Corp. Q2 2008 Earnings Call Transcript
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