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Atwood Oceanics Inc. (NYSE:ATW)

F3Q08 (Qtr End 06/30/08) Earnings Call

August 8, 2008 11:00 am ET

Executives

Jim Holland - SVP, CFO and Secretary

John Irwin - President and CEO

Analysts

Collin Gerry - Raymond James

Waqar Syed - Tristone Capital

Judson Bailey - Jeffries

Operator

Welcome to the Atwood Oceanics third quarter results for fiscal year 2008 conference call. At this time all participants are in listen-only mode. I would now turn the call over to Mr. Jim Holland.

Jim Holland

Good morning and welcome to Atwood Oceanics conference call and webcast to review the company's operating results for quarter ended June 30, 2008. Speakers today will be John Irwin, President and CEO, and myself, Jim Holland, Senior Vice President and CFO.

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

Before John provides some comments on the company's current operations, let me comment on some events impacting the results for the quarter. Earnings per share for the June quarter was $0.93 with an effective tax rate of 11% and total drilling costs for the quarter of approximately $57 million. In our last conference call, on May 9th, I stated at that time we believe that the total drilling costs for the third quarter will be around $56 million with an effective tax rate for the quarter of approximately 10%.

During the third quarter we settled personnel tax returns for fiscal year 2005 and 2006 in a foreign jurisdiction, which resulted in an additional approximately $1 million of personnel tax expense, which negatively impacted our operating costs for the quarter. Thus, without this event, our total operating costs for the quarter would be at our guidance level of $56 million.

Our effective tax rate for the quarter was 1% higher than guidance, due to higher than expected foreign tax expenses. During the quarter we incurred no planned zero rate days. The only unplanned zero rate days during the quarter were four days on the SEAHAWK.

Our operating costs for the quarter on an individual rig basis; the average per day cost for the ATWOOD BEACON, SEAHAWK, RICHMOND, ATWOOD FALCON and ATWOOD SOUTHERN CROSS were at or below guidance. With the operating costs for the ATWOOD EAGLE, ATWOOD HUNTER and VICKBURG about a $137,000, $81,000, and $58,000 respectively, being above guidance of $120,000, $75,000 and $50,000.

Thus despite our operating costs being approximately $1 million above our guidance and our effective tax rate being 1% above guidance, our earnings for the quarter were in line with market expectations.

Following John's comments, I will provide some current guidance on operating costs and cover some other items that will impact our results for the fourth quarter of fiscal year 2008.

I will now turn the conference call over to John.

John Irwin

Thank you, Jim, and good morning, everyone. Yesterday we filed our fleet status report with contract day-rate cost information as you know. I am not going to repeat all of that, but I would like to comment on certain highlights and some other additional items. And we will be pleased to respond to any questions you have at the end of the call.

During our third fiscal quarter we achieved 100% fleet utilization and our results reflected favorable performance again this quarter in terms of planned and unplanned down time.

Our existing eight operating units continued to be leveraged deep water and international markets with key clients in some of the world's most attractive offshore areas. Our current estimated contract backlog in terms of available rig days for our eight operating units is approximately 99% for this fiscal year '08, 60% for fiscal year '09 and 20% for fiscal 2010. And our current contract backlog in terms of estimated aftertax cash flow is around $1.1 billion.

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

In planning our downtime maintenance periods our goal is to maintain our fleet with a focus on minimizing downtime and achieving longer term returns. We continue to regularly review our forward plans for inspections and maintenance, based on the latest schedules and factors involved.

In addition to planned downtime zero rate downtime may also be incurred for unplanned maintenance and repairs. And historically this has been approximately 2% in terms of zero rate downtime days.

Now, just mentioning some updates on the rigs. The ATWOOD HUNTER is currently working in Mauritania on Petronas on the balance of its two-year term contract which was assigned by Woodside. The expected completion date of the remaining contract is the end of September, 2008.

So we already announced the ATWOOD HUNTER than has contracts for work in the Mediterranean and Offshore West Africa for a combined term of four years at operating day rates from $511,000 to $545,000. All day rates are subject to adjustments pursuant to cost escalation provisions and the clients are also to provide tow vessels and pay a day rate of approximately $460,000 during all mobilization periods.

The ATWOOD SOUTHERN CROSS is now drilling the second of [three] firm wells for ENI AGIP in Italy. The expected completion date of the second ENI well is lat August 2008. Future opportunities for the SOUTHERN CROSS are currently being discussed with potential clients.

It is expected that the day rates for shorter programs starting this year will be at operating day rates in the low to mid-$300,000s with the mobilization day rate between the current location and next opportunity likely to be in the mid- to high $200,000s.

The ATWOOD EAGLE commenced its two year contract commitment with Woodside in late June, at a day rate of $405,000. This is to be followed by a commitment with Chevron in Australia at a day rate of approximately $430,000 to $450,000,000, once again subject to cost escalations until our first new semi unit being build in Singapore is ready to commence its program in Australia, which is estimated to be early 2011.

The ATWOOD EAGLE also has one remaining well to drill with BHP BILLITON sometime during calendar 2009 at a day rate of around 170,000 for up to 35 days, and for any time over those 35 days excluding weather delays, the day rate would be $465,000.

The Atwood Falcon received a one well commitment from an operator in Southeast Asia for the drilling of a well in the South China Sea at a day rate of $425,000. This one well commenced July 15, 2008, is currently expected to be completed around mid August, so middle of this month.

The rig will then return to its contracted day rate of 160,000 Sarawak Shell, Sabah Shell in the South China Sea upon completion of this one well. The Richmond's contractual commitment with Contango is being increased from two firm wells to four firm wells plus an option for a fifth well at mutual agreeable rates.

First two wells are at a day rate of 65,000, the third well is 75,000, and the fourth firm well is at a day rate of 78,000. It is currently expected the four well program, will keep the Richmond committed into second quarter fiscal year '09.

The Richmond is now in well number two of the four wells, and this is expected to be completed once again around mid August, middle of this month. Our new ultra premium jack-up, ATWOOD AURORA, now being constructed under an agreement with Keppel AmFELS at its yard in Brownsville, Texas is expected to be delivered in November 2008.

Delays arising from a hurricane, which recently passed through Brownsville, are not expected to be significant. The current expected cost of the unit including capitalized interest and transportation cost to locate the rig to its first area of operations is estimated to be in the range of $177 million to $180 million.

The ATWOOD AURORA has been bid to a number of international clients for potential work when construction is completed. At this stage our day rate expectation is in the 160,000s with a possible contract duration of around two years, and with work starting the middle of our second quarter fiscal '09, and day rates at this level would more than achieve our financial return targets.

And a contract of this duration obviously would also provide a high utilization scenario during the period new jack-up rigs are being delivered, and when it starts operation the ATWOOD AURORA will become our ninth owned mobile offshore drilling unit.

Now, some comments on our two new semi submersible’s has already reported, we were awarded a contract by Chevron, Australia to provide a newly constructed conventionally moored mobile offshore semi submersible drilling unit for a three year period with an option to extend that to six years.

The contract provides for operating day rates of approximately 470,000 for the three years and 450,000 if the option is exercised to extend the commitment to six years, and these rates are subject to adjustment pursuant to cost escalation provisions of the contract, and to provide the drilling rig for this contract, we executed contract with Jurong Shipyard for a Friede & Goldman Ex-D Millennium semisubmersible drilling unit, which is to be constructed at Jurong Shipyard in Singapore with delivery expected to occur in early 2011, calendar 2011.

Our project team has been in place since earlier this year and ordering of equipment and other activities are progressing satisfactorily. The new rig will be able to conventionally moored up to 6,000 feet of water, actually up to 8,000 with prelaid mooring and it will become our tenth company owned mobile offshore unit.

In July this year, we executed another construction contract with Jurong for second Friede & Goldman Ex-D Millennium semisubmersible, and in this case a dynamically positioned semi to be built and equipped for water depth rating of 10,000 feet. This second unit is scheduled for delivery in mid 2012, and will also be constructed at Jurong shipyard in Singapore.

The total cost of the new rig including administrative and overhead cost and capitalized interest is currently estimated to be in the range of 750 to 775 million payable in installments tied to completion of certain milestones, and this rig will become our 11th company owned mobile offshore unit.

Financing for the construction of both semisubmersibles will be provided from a combination of ongoing cash flows and debt as necessary. Company is currently evaluating the need to add additional debt to our current $300 million credit facility. Based upon our current capital commitments and backlog cash flows, we do not expect our debt to total capitalization ratio to exceed 30%.

We have an option for third rig with Jurong, which requires commitment within 180 days of the execution of this second construction contract and no determination has been made at this time, whether that would be exercised.

Our ongoing fleet major upgrade, a new construction capital program, which started in '97 has put the company in a strong position to take advantage of the current market and outlook, and the outlook for the markets we serve continues to be positive, particularly our international deep water markets.

With the likelihood of record cash flows and financial results, all of us here have a high focus on execution, and achieving our potential. Based on our strong balance sheet and continuing trend for improvement in cash flows, we will continue to evaluate the best use of our future cash flows.

Our strategy for meeting our client's needs with safe quality services, premium equipment and by leveraging our activities to attractive international markets has served us well and continues to guide our path forward. Our recent commitment for a second used semi is a natural and incremental extension of our strategy in terms of increasing our capability and our leverage to deep water depths.

We have a distinctive position in the industry, particularly in view of our size, our strategy in the niches in which we operate, and we continue to actively develop our organization, and people, and company for the longer term

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

Jim Holland

Thank you, John. Before we open the conference call to questions, let me address some items that will have an impact on our operating results for the fourth quarter of fiscal year 2008.

As John stated, the ATWOOD FALCON commenced drilling one well at a day rate of $425,000 on July 15th and is expected to complete this drilling of this one well commitment, around mid-August for a total drilling time for the well of around 30 days.

Upon the completion of this well the rig will return to work for SHELL as a day rate of 160,000 under its current contract, which now extends into August 2009. The one well hired day rate will add additional $8 million revenue to the fourth quarter results.

And John also stated the ATWOOD HUNTER is now, not expected to complete its current work at a day rate of $240,000 off shore Mauritania until the end of September 2008 with the ATWOOD SOUTHERN CROSS now expected to complete its current drilling program off shore Italy with current day rate of $406,000 by late August 2008. There is current uncertainty on this rig's ultimate impact on the fourth quarter results since we do not today have a firm commitment following completion of its current work.

As John indicated, we expect the rigs day rate following the ENI contract will decline to low to mid-300s with mobilization day rate between its current location and next opportunity likely to be in the mid-to high $200,000s.

Thus timing of the day rate changes for the ATWOOD FALCON, the ATWOOD HUNTER, and the ATWOOD SOUTHERN CROSS during the fourth quarter of fiscal year 2008 could significantly impact results for the quarter.

Currently the only potential plan zero rate days for the fourth quarter is the SEAHAWK, which could occur a three to five days zero rate due to some required maintenance. However, we can give no assurance that we will not incur unplanned zero rate days for any of our rigs.

We currently expect total drilling costs for the fourth quarter to be around $57 million and total costs for the year of $217 million, which result in an approximate 16% increase from fiscal year 2007.

On a rig by rig basis, our expected per day operating costs levels for the fourth quarter is as follows:.ATWOOD HUNTER $75,000; ATWOOD EAGLE, $130,000; ATWOOD FALCON, $75,000; ATWOOD BEACON, $55,000; SEAHAWK, $85,000; ATWOOD SOUTHERN CROSS $115,000;, VIKSBURG $50,000, RICHMOND $40,000; other costs around 10,000.

We currently expect general and administrative expenses between $7 million and $8 million for the last quarter of the fiscal year, which would result in a $29 million to $30 million for the year.

Depreciating expense is expected to be around $9 million for the quarter, will result in $35 million for the year. We currently expect our effective tax rate for the fourth quarter of fiscal year 2008 to be approximately 11%.

With three rigs now in construction, I will now comment on expected capital expenditures for the fourth quarter of fiscal year 2008. We currently have $170 million outstanding under our $300 million five-year revolving credit facility with cash on hand at the end of June totaling $200 million.

In early July we made $113 million, down payment toward the construction of our dynamically positioned semisubmersible drilling unit.

For the first nine months of fiscal year we incurred approximately $200 million in capital expenditures. We expect to incur capital expenditures in the fourth quarter of around $200 million. We expect to end fiscal year 2008 with outstanding long-term debt of around $200 million. The debt to total capitalization ratio around 20%.

We will now open the conference call to questions.

Question-and-Answer Session

Operator

Thank you Mr. Holland.. Operator Instructions) Our first question is from Collin Gerry of Raymond James.

Collin Gerry - Raymond James

Good morning, guys.

John Irwin

Good morning, Collin.

Collin Gerry - Raymond James

Just real quick, looks like you have got quite a bit of jack-up availability, as we go into 2009. Rates have been a little bit stronger, I think then most would have expected on the international front. Kind of give us your reasoning, how you're balancing term and building backlog with what you're seeing with rates? Are we still thinking kind of mid 150 range or the market seems to be closer to 170 or 180? I guess just some commentary on how you see those assets to be priced?

John Irwin

Collin, I guess speaking of one particular unit or in general, but on the AURORA, I said we're hoping to get certainly expectation a bit higher than the 150s, and hopefully in the 160s for more like two years. If such an opportunity exists, then we believe that would be beneficial at, in terms of our modeling and where our costs are as we gave those that would put use our model internal rate of return after tax in the higher than the 15% range and perhaps in the high teens, and we would like to take advantage of that if that exist.

And looking at the other rigs, of course the other rigs two jack-ups roll over next year, one in the middle of the year, and we have started discussions with clients there, and continue discussions on the BEACON with the client and also bidding it, but on those rigs, we still have expectations that they would be higher than their current rates, one is at 133.5 and the other is at 154.

But in terms of rates, we have seen the rates down in the 170s. There have been some let's say higher rates than the 170s, but for shorter term programs, and I think even if you look at the average rates down the 170s, the average durations would be tending to be shorter. There has been more impact to me on durations than perhaps rates, so certainly that's something we've balanced in making our decisions and focusing on returns.

Collin Gerry – Raymond James

Okay. That's pretty helpful. Switching gears to the CROSS, it sounded like just base, Jim on your commentary there is a possibility that there could be some slippage time in between the contract in Italy rolling off, and maybe getting another contract? Do I interpret that right?

Jim Holland

Collin, we're going to work very hard not to have any zero rate days, but we can't guarantee that would not be the case. But, we're optimistic that won't be, if we have some it won't be long, but again we're working very hard to not have that occur, and are somewhat optimistic that can happen, but I mean, no guarantees we wouldn't have a few days there, but we don't anticipate any lengthy zero rate period for the CROSS.

Collin Gerry – Raymond James

And then, I might have missed it, but could you repeat, I think you said mid-to-high 300s maybe as renewal obviously a little lower than where it is right now?

John Irwin

Yeah. No, I think what we said, Collin, was low to mid 300s for this period of time, and we're talking about the balance of this year, and of course we're seeing interest in next year and the goal right now is bridging into next year. But, moving from the current location probably to the next client, the rate for that potentially what I said was mid-to high 200s, perhaps kind of the 260 range or something like that, but as Jim said, we are pursuing discussions, and trying to move ahead, push it as quickly as we can in terms of timing.

Collin Gerry – Raymond James

Okay. I will turn it back over. Thanks a lot.

John Irwin

Thank you.

Operator

[Operator Instructions].

Our next question is from Waqar Syed of Tristone Capital.

Waqar Syed - Tristone Capital

Hi, John, Jim, given the [NP] company's that you're talking to, how many days do you think it's going to take to mobilize the Southern Cross to its new location?

John Irwin

Well that will of course depend on where it goes, but the current opportunity that would be the most likely for follow on the party that has potential interest for follow on this year or after the current work is probably, two to three weeks away, and it's not generally in that market area that it's currently in.

Waqar Syed - Tristone Capital

Okay. And then, these opportunities are more or like a couple of month opportunities, that's what you said?

John Irwin

I think the first one potentially in the 60 to 90 day bracket that type of thing, and then another one where there is discussion and, I think that's probably in that sort of range as well. Looking strictly at the opportunities for this year to bridge into next year where there are more opportunities Waqar.

Waqar Syed - Tristone Capital

Sure. And then, after this, let's say the first opportunity 60 to 90 days, there going to be another mobilization period of maybe lower day rate or how does that work out?

John Irwin

There would be a lower rate again I would believe, but it may not be longer than potentially two weeks, no longer than that first move.

Waqar Syed - Tristone Capital

Okay. Now, for the AURORA, when do you think it's going to be on a payroll and was there any issues with some of the thunderstorms and hurricanes that impacted that area with rains and flooding?

John Irwin

Certainly the hurricane went through the area and that did cause disruption too with evacuations to things continuing, the shipyard was affected during that period or the projects were affected during that period. But in terms of any delays, I said there wasn't anything significant. We still believe that we can deliver by the end of November and of course then the dry transport vessel window is really late November to the middle of December. And that potentially puts us still overseas in the second half of January and then preparing the rig for startup in February, if all went well and according to plan and vessels were on time and so on. So, I think I said during my comments, potentially the middle of our second quarter fiscal year '09 for commencement of operations if things went according to plan, if it works out the way we would hope.

Waqar Syed - Tristone Capital

Okay. And if you were to bet which market do you think this rig is going to end up in?

John Irwin

Waqar, we have been in number of international markets, and to be honest, I think I would refrain from commenting on it at this point. We are trying to give a little feeling for what our hopes, expectations are, where we stand, but I wouldn't – I guess I would refrain from commenting at this point on which market it may turn out to be.

Waqar Syed - Tristone Capital

Sure. And then the day rates for the new builds have been higher than the 160s that you mentioned. So what makes you think that it could be 160s? Is that where you're bidding right now or?

John Irwin

Based on the opportunities we look at, and of course you bid different rates depending on the lengths of time and we bid some higher rates based on shorter periods. But for -- and of course as you know it depends on which area you're working and what the costs are. The costs can vary significantly, depending on which area you're working. That could be more around the 50 – direct operating costs of $50,000 a day. They could be $70,000 a day and they could be higher in certain areas as well.

So that makes a difference, but that sort of rate we believe would be in the more favorable end of the range on direct operating costs, and would be for a contract duration that would be we believe positive and a location that would be positive and certainly exceeds our returns. I mean, we've always said we can get our returns with less than the 150s and the $160,000s we believe we can still do very well, position the rig well, and be assured of that return during that period of time

Waqar Syed - Tristone Capital

Okay. And then just one final question, the BEACON, where do you think the BEACON rate could be in '09?

John Irwin

I couldn't predict at this point. Certainly we're bidding quite a bit higher than the current rates, the [13035] and not just for competitive reasons, but I think it is a bit early to really comment what where they might be, but certainly our expectations the rig has performed extremely well. We believe it is great rig, that's got a great track record and deserves to be at a significantly higher level.

Waqar Syed - Tristone Capital

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

Jim Holland

Thank you. Waqar.

Operator

Jud Bailey of Jeffries, your line is open.

Judson Bailey - Jeffries

Thank you. Good morning.

Jim Holland

Good morning.

Judson Bailey - Jeffries

Jim, I couldn't write fast enough when you were going through the cost numbers per rig. Did you say the SOUTHERN CROSS for the quarter should average $115,000 per day.

Jim Holland

115, is what we are projecting.

Judson Bailey - Jeffries

Is there something special in that, that is inflating that and should we?

Jim Holland

A lot of maintenance is going on in that rig right now Jud , it is one of the older rigs, obviously and so just and again most all of that is going to be expense. I mean it is not a very few things you capitalize any more unless you're doing a major upgrade. So unfortunately in that rig its just maintenance coming on. And so that's –hopefully it will go down. I mean, again its going to be a quarter-by-quarter on all of these rigs depending on what's going on from a maintenance perspective and in this particular quarter, we are – the management of that rig specs change out some equipment and some maintenance, so that’s just going to be higher this quarter.

Judson Bailey - Jeffries

Okay. So. for the following quarter can we expect generally trend back down towards 100 or 105 or?

Jim Holland

I would hope that would be the case. Again, we'll have to see what goes on. Again, that's but hopefully that's the case Jud. I mean, hopefully we wouldn't be at the 115 going forward for all of '09, I don't think that would be the case.

Judson Bailey - Jeffries

And did you say for the EAGLE $130,000.

Jim Holland

130 on the EAGLE, again you got. Obviously the payroll is highest there anywhere else, and we also have some maintenance going on there as well, and we'll see there. But again it is going to be a quarter-to-quarter in most of these rigs and depending on what – you replace a major piece of equipment and all of that gets expensed.

Judson Bailey - Jeffries

So it sounds like that one would come down a little bit as well, the following quarter?

Jim Holland

We would have to wait and see on our payroll, costs going forward. We expect that to continue to go up some in all of these rigs, but we'll see. But, hopefully it might come to a little bit, but I will say it's going to be in the 120, 130 at least throughout the rest of '09, and we'll see if it comes down any or not.

Judson Bailey - Jeffries

Okay. And then, the last one was the VICKSBURG, is that 40,000 a day, I just wanted to confirm?

John Irwin

VICKSBURG is 50,000.

Judson Bailey - Jeffries

50, okay. Great, thank you.

John Irwin

Yes sir.

Operator

And, gentlemen those are all the questions we have today.

John Irwin

Okay. We appreciate your interest in Atwood. Thank you very much. Bye.

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