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Rowan Companies, Inc. (NYSE:RDC)

Q2 FY08 Earnings Call

August 5, 2008, 09:30 AM ET

Executives

William Provine - VP of IR

Daniel F. McNease - Chairman, President and CEO

William H. Wells - VP, Finance and CFO

Analysts

Arun Jayaram - Credit Suisse

David Smith - JPMorgan

Ian Macpherson - Simmons & Company

Thomas Curran - Wachovia Capital Markets

Operator

Good day everyone and welcome to this Rowan Companies Incorporated Second Quarter 2008 Earnings Results Conference Call. Just as a reminder, today's call is being recorded. And now this time for opening remarks and introductions, I'd like to turn the call over to Mr. Bill Provine, Vice President of Investor Relations. Please go ahead, sir.

William Provine - Vice President of Investor Relations

Thank you Stephanie and good morning everyone. Welcome to Rowan's second quarter 2008 earnings results conference call. Joining me on this call this morning are Danny McNease, Chairman and Chief Executive Officer and Bill Wells, our Chief Financial Officer.

Before Danny begins his remarks, I'd like to remind you that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements as to the expectations, beliefs and future financial performance of the company that are based current expectations and are subject to certain risks, trends and uncertainties that may cause results to differ materially from those projected by the company. With that I'll turn the call over Danny McNease.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Thank you Bill. Good morning everyone and thanks for joining us today. I'll begin by highlighting our second quarter financial results and discussing our developments since our last call. I'll then turn it over to Bill Wells, our CFO to discuss our financial performance in more details and update any guidance.

And before taking your questions, I will conclude with overview of the worldwide markets where we currently operate followed by review of our manufacturing division's performance for the quarter.

In the second quarter, we recorded consolidated revenues of $587 million, and a net income of $120.6 million or earnings per share of $1.06 per share. These earnings were 22% higher than the first quarter 2008. Our results were driven by our continued excellence and operating performance along with strong international day rates combined with improved contributions from our manufacturing business.

As you know we are in a process of moniterizing [ph] our wholly owned manufacturing division LTI. We believe the timing is right for such a transaction given LTI's record performance in 2007 and 2008, and the increased demand for manufactured products and services within the oil and gas drilling industry. Over the last several months we've been working on evaluating other viable options, focusing on what would be the best opportunity for our shareholders, customers, and employees. A number of parties in the industry have expressed great interest in a potential transaction and we are actively engaged with these multiple groups and considering several alternatives. We remain committed to completing this transaction by year-end 2008.

Moving on to our offshore business, with natural gas prices remaining strong, we expect to see continued improvements in demand and day rates in the Gulf of Mexico, jack-up market, and intend to maintain a portion of our fleet and areas to take advantage of the upward trend. Day rates at two of our rigs in the Gulf of Mexico have increased recently by more than $10,000 a day. They were all asked to receive a contract extension from July to October 2008 for two additional wells at the day rate in the mid one tenths, up from its prior day rates in the low 100s. Also the [indiscernible] of Rowan received a contract extension until September of 2008 in the low 100s up from its prior day rate in the mid 80s.

In the first quarter we also moved our Gorilla III back to the U.S. Gulf of Mexico from Trinidad. The Gorilla III is completing a well-to-well contract to the day rate in the low 120s and we're currently in the process of negotiating an extension for the rig and increased day rate. Starting mid 2009, we plan to mobilize growth rate from the Gulf of Mexico to Eastern Canada for a six-month contract with EnCana in the high 290s.

We have positioned Rowan as a unique player in the offshore rig markets specializing in the high special case and jack-up-rigs ideally suited to meet the increasing demanding drilling conditions of drilling deep, high temperature, high pressure wells in the Gulf of Mexico, and the harsh weather environments around the world. Our fleet of high-specification jack-ups also have more storage capacity, more backload [ph] capacity, and more extended reached capability than other jack-ups, which makes them ideal for meeting the future of drilling, as drilling goes deeper and deeper.

Our Gorilla IV is making progress on the Blackbeard well, an ultra-deep floor test working for McMoRan. At a drilling depth below 32,550 feet, the Rowan Gorilla IV is drilling one of the deepest wells offshore at the U.S. Gulf of Mexico and is going deeper. McMoRan has well permitted drill to 35,000 feet, if this well is successful, it could drive an increase in demand for larger premium rigs, a scenario that bodes well for Rowan and the future of Gulf of Mexico. We also have work in the ultra-deep shelf of the Gulf of Mexico, our Super Gorilla class jack-up with Bob Palmer growing on BP's Eldorado prospect.

Regarding our nine new build rigs under construction, we have two scheduled for delivery this year, one to fall in 2009, and then three in each 2010 and 2011. One of the first two new builds scheduled for delivery this year, the 240-C class Rowan Mississippi just arrived in [indiscernible] yesterday and is preparing for leg up. The addition of these nine new rigs over the next three years should expand our fleet by 40%. We believe that global jack-up market looks strong as new builds take later [ph], jack-ups continue to be absorbed in the market without significant down pressure on contract rates or durations.

Considering the number of new builds slated for delivery over the next few years in this project that exist in just about every other predominant drilling market around the world. We believe the interest of premium, jack-up equipment for deep gas or extended rigs drilling appears to exceed the available supply coming on line over the next year. The two new builds we have scheduled for delivery this year are actively being bid for the long term opportunities in West Africa, The Mid, the North Sea and the Middle East where we see strong demand for high spec jack-ups and a number of active tenders. I will touch on this in more detail later in call during my discussion of our markets and current drilling operations.

Giving the number of new builds coming online around the world, a major industry challenge is how to man the new equipment. Labor costs are expected to continue to rise as more crews are needed to operate these rigs. In the Middle East, we're working to meet this labor challenge and to lower our cost by training third country nationals and local labor to replace our experienced American experienced [ph] crews can then be reassigned the work throughout on our new builds. At Rowan, we continuously train our personnel and provide opportunities for them to move up through the company. We believe we have the most qualified personnel in the industry, the experienced loyalty and longevity of our crews are something we're very proud of.

It has also been our position to spend what is needed on maintenance in order to avoid unplanned down time on our rigs. As we noted in our last weeks status update published on July 22nd. Over the next quarter we have scheduled down time for two of our high-spec jack-up rigs. Rowan middle town on contract was Saudi Aramco in the Middle East entered the shipyard in late July for performance upgrade and is expected to return to service in late August. Also the Gorilla V on contract with Totel [ph] in North Sea is scheduled to enter the shipyard in Dundee Scotland in mid August for 30 to 35 days, while it undergoes inspections and installation of a new LTI top rep.

We expect that our land division during the second quarter we were pleased to secure new longer term contracts with six over land rates including two with a three year term. We're seeing these longer term opportunities more frequently and believe they signal operator confidence in the strength of the land drilling market.

The delivery of Rig 84 at the end of May, 2008, we now operate a fleet of 30 land rigs in U.S. market that range in horsepower from 1500 to 3000. We have three more land rigs currently on construction and planned for delivery before the end of this year and are in the process of negotiating a long term contracts reach.

As you are well aware, the hurricane season can affect the energy sector dramatically. The sudden event of tropical storm Edouard that formed off the coast of Louisiana over the weekend has forced many drillers to suspend operations; to evacuate their crews. In preparation of the advancing storm, we have evacuated workers from the Rowan anchorage located at about 35 miles in from Dallas [ph]. We continue to receive our day rate during evacuation periods.

Today we are much more comfortable and more prepared for drilling through the hurricane season. We use a five step program and our effort to ensure the safety of crews in rigs. First we utilize increasingly sophisticated data so that we can determine the condition of the seabed. Second, we utilize increasingly sophisticated met ocean depth so that we can gauge current and historical weather patterns. Third, this season we have increased [indiscernible] with a distance between the surface of the water and the bottom of rigs hole. Last year we had a minimum air-gap of 50 feet, this year its 62 feet. Fourth, we pre-oiled [ph] our rig in a way that maximize leg penetration, thereby making the rig more able withstand the wind and wave conditions of a hurricane. And finally, we paid considerable attention to whether our jack-up's are located in the Gulf of Mexico during the peak of hurricane season, to see if we can work in any shallow water where the force of the wind and waves will be less from a hurricanes than in deeper water.

The jack-up rigs we have operating for our customers in the Gulf of Mexico are now operating in shallow water than what they are rated. With that I would like to turn it over, turn the call over to Bill Wells who will discuss our financial performance for the second quarter in more detail. Bill?

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

Thank you Danny and good morning everyone. Our second quarter of 2008 drilling revenues were $367 million, an increase of 4% over the prior year and 8% over last quarter and above our previous guidance.

This sequential improvement resulted from the start up or relocated or upgraded offshore rigs while the year-over-year growth is primarily due to the increase in our overall average offshore day rates between periods. Land rig fleet additions over the past 12 months and higher rebuild expenses also have contributed to both revenue increases.

Looking ahead, we have modifications underway on the Rowan-Middletown, and an upgrades scheduled for the Gorilla V, which we expect will collectively reduce our rig operating days by about 65 to 75 and a revenue by more than $10 million during the third quarter. Barring further rig downtime, we expect the total third quarter drilling revenues will be in the range of $350 million to $355 million.

Our second quarter drilling expenses were $163 million, an increase of 13% over the prior year and 4% over the last quarter. Both increases were primarily attributable to higher maintenance, compensation and rebuild cost between periods. We currently estimate that our third quarter drilling expenses will comparable to the second quarter amount and then our full year 2008 drillings expenses will be within 10% over the 2007 amount.

Our second quarter manufacturing revenues totaled $320 million, including a $101 million of arm's length sales to our drilling division. External revenues were $220 million, an increase of 43% from the prior year and 51% from last quarter and at the upper end of our previous guidance. Our second quarter drilling products and systems revenues totaled $259 million including sales to our drilling division. External revenues were $158 million and featured $65 million from land rigs and component packages $38 million from six offshore rig ship projects and another $31 million from drilling equipment.

Our second quarter mining, forestry and steel products revenues were $62 million, including $22 million from shipments of mining and forestry equipment, $17 million from steel plate and $17 million from after-market parts. Our average margin on operating cost improved to 18% of revenues from the second quarter up from 15% in the prior year and 13% last quarter. Similarly our manufacturing operating income improved to 11% of revenues in the current quarter up from 8% in the prior year and 3% last quarter.

Our quarter-end manufacturing backlog totaled over of $1.2 billion and included $357 million of external orders and $878 million related to our own jack-up new build programs. In the past few weeks, we have announced another $164 million of orders for land rigs and related equipment packages, thus we are confident that our full year goal of more than $900 million external revenues will be achieved.

Our second quarter depreciation expense totaled $33 million up by 1% from last quarter, and 16% over the last year, primarily due to rig fleet additions. Our second quarter SG&A expenses totaled $31 million, up by 12% over last quarter and by 34% over the last year primarily due to increased manufacturing and selling cost. Our CapEx totaled $163 million for the second quarter, most of which related to construction of our fourth Tarzan Class rigs at J.P. Bussell, our first two 240-C class jack-up, the Rowan Mississippi and the Ralph Coffman, and four new Super 116Es. On July 7, 2008 we reacquired 116 C class jack-ups of Rowan for a $119 million in cash.

Currently, estimate that our remaining 2008 CapEx; will be in the range of $210 million to $225 million, will be financed through our operating cash flows.

With that I will turn it back over to Danny.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Thanks Bill. I will now provide an overview of the worldwide markets where we currently have drilling operations followed by discussion of our manufacturing division LTI.

Rowans offshore fleet of 21 jack-ups is currently contracted to 100% utilization and had an average day rate to a $161,600 for the second quarter worldwide. Approximately, 70% of our jack-up rigs are contracted until the end... of end of or beyond 2008. 12 of our 21 rigs are contracted to international markets, Nine in the Middle East, two in the North Sea and one in West Africa. Remaining nine rigs, four of which are conventional jack-ups are located in the U.S. Gulf of Mexico. We are presently considering active jack-up tenders in South America, India, the Middle East, the Med, West Africa and the North Sea. Now from a broader perspective, the drilling markets worldwide continue to be strong and we remain optimistic about our future prospects.

According to OD special [ph] data there are 427 jack-ups worldwide, demand is currently 396 rigs with utilization of 93%. We believe that our current forecast five debts 36 to 47 jack-ups exist worldwide [indiscernible] 2008 through 2009, despite the arrival of 12 new bill so far in 2008 and another 21 scheduled for delivery for the end of the year, jack-up supply deficit continue to drive demand in almost every major operating area worldwide, primarily due to the high specification operating requirements for the composed induction and relative lack of regional availability.

Today about 75% of our jack-up net book values and 80% of our drilling revenue backlogs are located outside the U.S. In the coming year we plan to continue our long-term strategy of diversifying our fleet across international markets. As I mentioned earlier, we expect to contract our two new bills 240-C Rowan Mississippi, Tarzan Class J.P. Bussell in the Middle East North Sea or West African market. Average of the domestic rig kit projects proved successful these rigs maybe market in U.S., Gulf of Mexico since they are niche market technology.

I'll now provide some insight on our current drilling operation areas including the Gulf of Mexico, the Middle East, North Sea and West Africa. Let me begin with the Gulf of Mexico. This jack-up market remains promptly in a well to well environment compared to the long-term contracts available internationally. This trend is forecast to continue through 2008 and into 2009.

Supply in the region is 80 jack-ups, while demand is 64 rigs with a contract utilization of 80%. All of our nine jack-ups in U.S. Gulf of Mexico are currently contracted and average new rate in the region is approximately $129,000 per day. We expect to second some jack-up rigs leave the U.S. Gulf of Mexico to international markets to yield higher day rates and longer term contracts.

The Middle East continues to be the most active jack-up market in the world and the supply in the region is a 104 jack-ups while demand is currently at 97 in rigs and contracted utilization is 93%. We believe the supply deficit of 25 to 30 jack-ups currently exist. Saudi Aramco is now tendering for five jack-ups program beginning on second quarter 2009. Additional tenders are projected from DubaiPetroleum, RAK Petroleum, Precit [ph], NDC, Opsi [ph], Topel [ph], ONGC, Gutter [ph], Dolphin and KOC.

To meet this demand, approximately 15 rigs are scheduled to migrate into the Middle East in 2008, 2009. Rowan's strong position in the Middle East its now firmly strongly established. We have nine jack-ups operating in the region at average day rate of 156,000 per day. We believe the Middle East markets is one the keys to our future growing division and we are well positioned for growth as our current relationship with Saudi Aramco, and Merck demonstrate.

For the North Sea supply demand is 32 jack-ups and contract to utilization is a 100%. The jack-up market remains strong in the region due to scarce rig availability. Demand is expected in increase in all sectors in 2009. Today Rowan has two jack-ups operating North Sea at average day rate of $220,000. We're currently in discussions with various operators for long-term contracts using our Gorilla class jack-ups and the new 240-C class jack-ups. Finally, turning to West Africa, the supply in the region is 27 jack-ups while demand is just 25 and contract utilization is 93%. The region is forecast to see a two to three rig deficit over 2008 and 2009 due to tender from Cabinda Gulf and Exxon Mobil. Additional tenders projected from [indiscernible] could increase this deficit.

Our Gorilla VII relocated offshore to Angola began operations for Cabinda Gulf in the late April of this year. In addition to our current areas of operation, we're constantly looking at opportunities around the world to further diversify our fleet. We currently have 35 tenders, either in-house or in bound for long term contracts in international markets, and we are reviewing all of them as we continue to implement our diversification strategy worldwide.

With respect to our onshore operations, our fleet of 30 land rigs located in U.S. is currently contracted to 100% utilization and had a average day rate of 22,600 for the second quarter. Approximately, one half of our land rigs are contracted through the end of or beyond 2008. However, with the recent increase in demand, multiyear contracts are once again been executed.

As I mentioned earlier, we delivered one new land rig during the second quarter and have three additional rigs under construction. We expect delivery of the next land rig in the third quarter of '08 followed by remaining two in the fourth quarter of this year.

Now turning to our manufacturing division, LTI. We began reporting LTI's financial results on a standalone basis beginning January 1sup>st/sup>, 2008 and already shows the business earning power in the improved transparency. We're pleased with another record for LTI. Our manufacturing divisions year-to-date, externally [indiscernible] $364.8 million, and operating income of $27.8 million or in line with our aggressive business plan. After achieving financial results with dramatic year-over-year improvements for several consecutive years, we expect LTI to achieve another year of record breaking results.

As we've mentioned before, these results can be significantly impacted by the timing of our shipments. So, it would be less variable to the model LTI on a annual basis rather than sequentially from quarter-to-quarter.

Looking forward for the reminder of year, we remain optimistic that we'll meet or exceed our 2008 operating plan for LTI. We project the external revenues will excess $900 million versus a record $712 million in 2007 and total revenues will exceed $1.3 billion. LTI's growth through external sales have contributed significantly to the success over the past few years. During the second quarter LTI's backlogs external orders increased to $357 million up $9 million from year-end 2007. Total backlog including orders from Rowan division was approximately $1.2 billion at June 30, 2008.

Our delivery commitments for these orders are extend in 2011. We expect this growth trend to continue for an increasing proportion of LTI revenue to generate from external sales. I would also like to add since June 30, LTI has signed additional new external orders in excess of $240 million. These orders were recorded across all our market segments. Part of LTI success is also attributed to its global... growing global product lines in international markets. This is evidenced by more established mining products and offshore products divisions, which operate on six continents.

Today our drilling systems is also conducting business worldwide with operations in the Middle East, Singapore, South America, Russia with further expansions to follow. We're pleased with the cost diverted developments of our drilling systems, which were reported in an external backlog of $200 million at June 30th, 2008. Year-to-date quotation activity at the end of the second quarter for drilling systems alone was $84 billion, further demonstrates that the drilling market is turning more and more to LTI as a reliable competitive source for high performance, products and services.

Going forward we expect this relatively new, but important market segment of LTI to enjoy continuous growth and development. At June 30th 2008, offshore products reported backlog of $82 million for external offshore products such as jack-up rigs, rig kits, and related components and parts including the $73 million related to rig kit projects and process. Third rig quotations offer deliveries in the first half of 2009, it means that the final delivery of the completed jack-ups associated with these kits would be in 2010. LTI also reported a backlog of $75 million for mining parts for steel products at June 30th 2008. After market parts sales comprised of significant portion of revenues for this group, mining products is embarking upon a major source, so source on alliance [ph] substantial increases backlog.

That concludes our prepared comments, thanks for supporting Rowan Companies. We are now available to answer any of your questions.

Question And Answer

Operator

[Operator Instructions]. We'll take our first question from, Arun Jayaram with Credit Suisse.

Arun Jayaram - Credit Suisse

Good morning guys.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Good morning.

Arun Jayaram - Credit Suisse

Danny, I was wondering if you could elaborate on the process you are undergoing at some monetize return, and just maybe comment on some of the interest you are seeing in parties and potential outcomes?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Well I mean I can't really go into details but we are... as everyone knows, we are up for bids right now, and from all different type of companies all around the world, and that process has taken longer due to amount of tenders that we've had. So, we are going through that process, letting people look in our data rooms and to make the second rounds of bids, but there is a lot of interest about the organization and the company.

Arun Jayaram - Credit Suisse

Okay. I don't want to put the cart before horse here, but lets just assume for agreement sake that you could get 1.2 billion to 1.5 billion for Laterno, can you help us understand what the potential tax implications would be if you received amount in that... at that level?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Well Arun, we're looking at alternatives that would be a tax efficient, if you will. But it's going to be a challenge to pull that off. Let's just say that our tax basis in LTI less than that range you suggested, so there would be a tax cost unless we are able to find an alternative.

Arun Jayaram - Credit Suisse

Okay, my understanding is that tax basis is about $400 million to $500 million. Is that accurate?

Daniel F. McNease - Chairman, President and Chief Executive Officer

I think that's fair, yeah.

Arun Jayaram - Credit Suisse

Okay. Final questions on the land rig side, you talked about maybe 6 new commitments. Can you help us understand, what the pricing level look like, I think you did 22/6 in terms of an average there in the quarter?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Yeah, the pricing level is anywhere from 25,000 to 27,000 for a new two and three year contracts.

Arun Jayaram - Credit Suisse

Okay that's helpful thanks Dannie.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions]. And we are going next for Robert Schumacher [ph] with Citi.

Unidentified Analyst

Yes. Good morning. Danny I wanted to ask about as you think about the

the Bussell and the Mississippi, you mentioned the Middle East market or perhaps for a period of time the Gulf of Mexico, can you indicate what the range of rates and term would be in either of those markets and the availability of vessels, heavy lift vessels for moving the rigs?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Yes. I mean if you look at, that has a lot to do with term and the contract, some of the terms are for one year, some of them are as high as five years for the bids, as we have we have in house right now for those two rigs, the range that we are bidding depends on the type of job it is, but for example, for the Tarzan or the Bussell, you are looking at ranges from 170 to 195 depending on the project, the 240-C, the Mississippi, you are looking at ranges 195 to 245 depending on the link and the type of project we are dealing with. As far as availability of heavy haulers, most of these projects are scheduled for the first half of next year and they are heavy haulers available to move into those locations.

Unidentified Analyst

Okay. And if they work for a period of time in the Gulf of Mexico, what kind of term and rate do you think they would get there?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Well right know if you look at the Gorilla IV it's working at 195 per day and that would be comparable rate that we've been looking at for the tight wells that they would be drilling here in.

Unidentified Analyst

Okay. Just one other question, Bill mentioned the 13% year-over-year cost increase in drilling 10% '08 over '07. Is that, if we look forward to '09 perhaps better, really but is that the level of cost escalation you see or would you see something higher?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Well we're hoping that that's... what's driving a lot of that of course is commodity cost and we're seeing some those come down such as steel and other products. So, if you look year-over-year it will at least be 10% and most of that's been driven by demand on labors we talked about in our presentation and we'll just have to wait and see how that works out. All these people, all these new rigs coming to the market place, the demand for how these people [ph] continue to growth.

Unidentified Analyst

Okay, thank you.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Thank you.

Operator

We'll take our next question from David Smith with J.P. Morgan.

David Smith - JPMorgan

Hi, good morning.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Good morning.

David Smith - JPMorgan

I appreciate you breaking out the internal assumptions from the Rowan backlog, the LTI backlog, and well I was wondering is that it looks like the assumed margin on the internal revenues was about 3% higher than the actual on the external and wondering what we should think about the for the mark-up on the internal when LTI is a separate entity?

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

It will all be about the same David. I mean those contracts that you're seeing come through are arms length negotiations and so it ought to be comparable with that going forward.

David Smith - JPMorgan

So, would we rate up to the internal the business, the CapEx going forward for the 240s and Super 116s by about 20%?

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

I don't know if it works out to be 20% that sounds a little.

David Smith - JPMorgan

Excluding that was with Kepple [ph]?

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

Yeah, you got a mix of items there, obviously the kit has a higher margin on it. The whole is a fairly small margin. Both of those are done through the Longview Vicksburg operation. A lot of the OFE we get from our operation here in Houston and that's got a little bit lower margin on it as a package, and then we get some equipments from the outside, obviously that doesn't have a mark upon it. So 20% probably sounds a little high maybe in that 18% range.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Yes 17 to 18 range would be safe.

David Smith - JPMorgan

Okay, appreciate it. Second question is, if I look at your niche assets. One region where supply seems extremely tight would be Norway and you've got the Super Gorilla moving in there. Wondering what you see for opportunities for the three other Super Gorillas in that country?

Daniel F. McNease - Chairman, President and Chief Executive Officer

They are going to be opportunities with the new incentive package that the Norwegian government put in place. The only disadvantage to Norway of course is the high cost of operating expense there and we evaluate that on a bid-by-bid basis. We've got a big in-house right for accommodations unit there in Norway that we'll evaluate, but if you could work out of West Africa, there is tax advantages there plus cost of operations is less.

David Smith - JPMorgan

Could you just follow on Norway. Could you maybe touch on the cost to obtain the AOC for one of the Super Gorillas or is that going to vary significantly between the third and the fourth?

Daniel F. McNease - Chairman, President and Chief Executive Officer

The cost is between $10 million and $15 million is what we've seen on the rig is going in.

David Smith - JPMorgan

Great. Muchappreciate it.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Okay.

Operator

[Operator Instructions]. We will go next to Ian Macpherson with Simmons & Company.

Ian Macpherson - Simmons & Company

Hi good morning.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Good morning.

Ian Macpherson - Simmons & Company

Danny it sounds like the outlook for worldwide jack-up deficits is maybe more centralized in the Middle East than before. I don't knows if that's a fair interpretation of your remarks? And do you see an opportunity for day rates to do better than flat and maybe accelerate in 2009 in light of this demand what you're seeing there?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Well of course, it has a lot to do with the demand that we see currently is about 20 to 25 rig deficit in the Middle East, and as I said that will call for 15 additional rigs to come in the area. Right now what we're seeing in 2008 is the day rates to remain flat. But of course in fact if people continue to move in and do deals, say in Gutter and places like that where the demand goes up, and you could see an increase in price in 2009, no doubt about it. But you've also got the Pacific Rim area, it's got potential growth in. We think that's going to absorb additional equipment in Pacific Rim area and also in Mexico, is coming out for some additional rounds of tenders which will help sort some of the new builds. And of course another key areas West Africa, this depends on the stability of the political situation there such as the Nigeria and the other places. I mean the dough here is [ph] in the demand, so its just a matter of political risks associated with all that.

Ian Macpherson - Simmons & Company

Okay. The day rate ranges that you cited for the Bussell and the Mississippi, is that all for what you're bidding for multiyear engagements though, correct?

Daniel F. McNease - Chairman, President and Chief Executive Officer

That's correct, yes.

Ian Macpherson - Simmons & Company

Okay. If I could just ask a follow-up on the land rig side. You've been adding couple of rigs now and then to your fleet, opportunistically. Where are you with roof on capacity for building rigs given surging demand from the likes of Chesapeake and other external customers. Are you interested in continuing to build-up your internal fleet and what's your ability to do so over the next year, irrespective of the ownership structure?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Yeah, we've looked at, we're currently locating some three year deals where we would build some additional rigs, but right now it's just in early stages of the bidding process and negotiation but as far as capacity goes LTI has the capacity to, if we want to add four rigs next year, we could easily do that to our fleet to no problem.

Ian Macpherson - Simmons & Company

Okay, what would be the lead time if you ordered another one today, would it be six to nine months or?

Daniel F. McNease - Chairman, President and Chief Executive Officer

We could deliver one a quarter next year.

Ian Macpherson - Simmons & Company

Okay. Alright thanks Danny.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions]. We'll go next to Tom Curran with Wachovia

Thomas Curran - Wachovia Capital Markets

Good morning guys.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Good morning

Thomas Curran - Wachovia Capital Markets

Danny as you look across the array of alternatives that are currently on the table for monetization, how would you break that down rough percentage wise between a full blown sale of Laterno in its entirety, versus some sort of strategic merger combination and then on the sales side, what percentage, the current interested parties are private equity players?

Daniel F. McNease - Chairman, President and Chief Executive Officer

At this point I don't want to get into that. I mean we have a lot of opportunities on the table right now and we are just... we are going to wait and see how that sorts out here in the next 30, 45 days and as soon as we figure that out, we'll let you know. But I don't want to say how many private equity firms or how many manufacturing companies like that I don't think it wouldn't be fair to the people that are working through the process.

Thomas Curran - Wachovia Capital Markets

Okay. And then as you look at how the earnings mix at Laterno is evolving, as we exit '08 what percentage roughly on average, in terms of a run rate Laterno's top line would you expect to be getting generated by short cycle orders. Orders that ordinarily wouldn't make it into the backlog where, if you guys had ordered in the beginning of the quarter you would expect to turn it around before the end?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Well, right now if you look at, I'd say over 90% are long-term items such as complete rigs things like that, the parts business if you look at the drilling product side and the mining side, probably makes up less than 10%. And if you look at the lease time on some of the items as you need to manufacture these different products, you could say that it's probably in '09, it's probably going to be 90% long-term and 10% short-term.

Thomas Curran - Wachovia Capital Markets

Okay, and within that long-term portion, what are your expectations regarding the future jack-up rig orders?

Daniel F. McNease - Chairman, President and Chief Executive Officer

Wellwe are still surprised, and we are still getting a lot of requesting and all those request, I'd say most of those request are coming from NOCs around the world that are concerned about rig availability in the future and the top riggers they need. So, we think that's a good indication for the strength of the market going forward. And its just NOCs around the world that were actually quoting for and were quoting for deliveries in 2010 through 2012 for these fleet.

Thomas Curran - Wachovia Capital Markets

Could you share a little bit more color on who these NOCs are and the range of needs for each?

Daniel F. McNease - Chairman, President and Chief Executive Officer

My competition is will run over and start out to bid me.

Thomas Curran - Wachovia Capital Markets

Alright, thanks guys. I'll turn it back.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Thank you.

Operator

We'll take a follow from Ian Macpherson, with Simmons & Company.

Ian Macpherson - Simmons & Company

Hi. Danny or Bill, I just wanted to clarify the guidance on Laterno, this you still in excess of 900 million, external revenues. The margin guidance last quarter was at 15% to 20% on the gross margin level?

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

Right, that's correct.

Ian Macpherson - Simmons & Company

Okay. And the G&A expenses is running at a higher run rate so far in the first half this year, is that representative going out in the back half '08?

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

It should be, yeah.

Ian Macpherson - Simmons & Company

Okay, great. Thanks Bill.

Operator

And it appears there are no further phone questions. I'll turn the conference back to our speakers.

Daniel F. McNease - Chairman, President and Chief Executive Officer

Well, thank you very much everyone for listening to our second quarter earnings conference call and please join us again in about three months for the third quarter. That will conclude today's call and see you next quarter. Bye.

Operator

Once again that will conclude our teleconference. Thank you all for your participation and have great day.

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Source: Rowan Cos., Inc. Q2 2008 Earnings Call Transcript

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