Executives
Son P. Vann - Vice President of Investor Relations & Planning
John T. Rynd - Chief Executive Officer, President and Executive Director
Stephen M. Butz - Chief Financial Officer and Senior Vice President
Analysts
Rhett Carter - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division
Ian Macpherson - Simmons & Company International, Research Division
David Wilson - Howard Weil Incorporated, Research Division
Todd P. Scholl - Clarkson Capital Markets, Research Division
Robert MacKenzie - FBR Capital Markets & Co., Research Division
David C. Smith - Johnson Rice & Company, L.L.C., Research Division
Judson E. Bailey - ISI Group Inc., Research Division
Gregory Lewis - Crédit Suisse AG, Research Division
Nigel Browne - Macquarie Research
Kathryn O'Connor - Deutsche Bank AG, Research Division
Matthew H. Beeby - Williams Financial Group, Inc., Research Division
Steven Karpel - Crédit Suisse AG, Research Division
Hercules Offshore (HERO) Q3 2012 Earnings Call October 25, 2012 11:00 AM ET
Operator
Good day, ladies and gentlemen, and welcome to the Q3 2012 Hercules Offshore, Inc. Earnings Conference Call. My name is Ben, and I will be operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.
I would now like to turn the call over to Mr. Son Vann, Vice President of Investor Relations. Please proceed, sir.
Son P. Vann
Thanks, Ben. Good morning, everyone, and welcome to our third quarter earnings conference call. With me today are John Rynd, Chief Executive Officer and President; Stephen Butz, Senior Vice President and Chief Financial Officer; and members of our senior management team, including Troy Carson, Chief Accounting Officer; and Greg Muirhead, Treasurer.
This morning, we issued our third quarter results and filed an 8-K with the SEC. The press release is available on our website, herculesoffshore.com.
Following our usual format, John will begin the call with some broad remarks regarding our quarterly performance and current outlook. Stephen will follow with a more detailed financial discussion and provide cost guidance. We will then open the call up for Q&A.
Before we begin, let me remind everyone that our call will contain forward-looking statements. Except for statements of historical facts, all statements that address our outlook for 2012 and beyond, activities, events or developments that we expect, estimate, project, believe or anticipate may or will occur in the future are forward-looking statements.
Forward-looking statements involve substantial risks and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such statements. You can obtain more information about these risks and other factors on our SEC filings, which you can find on our website or the SEC's website, sec.gov.
Now with that, let me turn the call over to John Rynd.
John T. Rynd
Good morning, everyone, and thanks for joining us today. This morning, we reported a third quarter 2012 adjusted net loss from continuing operations of $15.7 million or $0.10 per diluted share compared to an adjusted loss of $17 million or $0.12 per share in the third quarter 2011.
Our third quarter results contain several large nonoperating items that Stephen will walk through in detail. From my discussion, I will focus on adjusted results where we continue to see improvement in the Domestic Offshore and International Offshore segments.
Moving on to our market overview, starting with the U.S. Gulf of Mexico. Rig demand started picking up around this time last year and has showed no signs of slowing down ever since. Meanwhile, rig departures to international markets from us and our competitors have resulted in a fairly tight supply/demand environment for jackups over this period. Today, there are 34 drilling-capable jackups in the U.S. Gulf of Mexico, excluding the workover rigs, all of which are contracted.
Average contract backlog per rig between our fleet and our competitors exceeds 6 months. As our customers look to secure access to rigs in 2013, they are seeking much longer contract terms than what we have seen in the past. About a year ago, typical contract terms were in the 30- to 60-day range. In recent months many of the contracts signed have ranked between 3 to 6 months, and today we are in discussion with customers seeking contract terms as long as a year on our existing marketed rigs.
We continued to look for opportunities to move rig rates higher. Our latest fleet status report show the leading edge rate for our 200 mat-cantilever is now at $90,000 per day and we are working to move rates for the rest of the 200 mat-cantilever rigs to this level.
As rig availability in 2013 tightens, reactivations are coming more likely, especially as some of the contract negotiations that I alluded to earlier continue to develop. We have no rigs available until late first quarter 2013, and about 1/3 of our fleet is already locked up through mid-2013. We will also have 4 rigs undergoing special surveys next year, further reducing rig availability in 2013.
Any operator looking to have an active drilling program in the U.S. Gulf of Mexico shelf needs to realize that we may be short in jackups in 2013 if current market conditions persists.
We currently have over 1,400 days of backlog under negotiation and are in discussion with varied customers regarding reactivations. Given where our customers economics are along with our economics on reactivation, we believe it is increasingly likely that we will announce a reactivation of at least one jackup by year end.
Turning to the international jackup markets. Rig availability is relatively limited. Market utilization of international jackups is approaching -- is approximately 93% and several regions are at full utilization. We projected addition of 92 new build rigs over the next 3 years continues to be a source of concern for many industry observers, ourselves included.
However, bear in mind that attrition is real. A meaningful number of jackups have left the competitive fleet in recent years. Since the year 2000, the industry has delivered 139 new builds. Over the same period, the global marketed fleet has only risen by 58 rigs, suggesting that some 80 rigs have been lost, stacked, scrapped or sold out of the business during the past 12 years. Current jackup demand outside of the U.S. Gulf of Mexico is 355 rigs, surpassing the previous fleet demand of 334 rigs reached in the fourth quarter of 2008. The only international regions that are not equal to or above their previous peaks are in India and Gutter. In the current oil price environment, one has to assume that we will see low double-digit CapEx growth in 2013. So jackup demand is poised to expand next year, giving us confidence that new build capacity will be absorbed in an orderly fashion.
Now moving onto the work outlook for international rig fleet. On the Hercules 266, we recently informed Saudi Aramco that we expect the rig to be delivered from the shipyard in late January 2013 rather than December 1 as planned. While we encountered some weather-related delays on the barge from the U.S. Gulf of Mexico to the Middle East, given the contingencies that were built into the schedule, we were confident we would make up the shortfall. Unfortunately, the schedule is also hindered by a limited number of suppliers of particular equipment used to meet Aramco's specific requirements and their long lead times.
The rig also simply needed more steel, haul, piping and other structure replacement items that originally anticipated. Overall, the additional equipment and work will add approximately $9 million to our original CapEx estimate of $85 million for the rig acquisition, mobilization and upgrade.
Standing with most new Aramco contracts, we will be assessed the penalty for the delay. The penalty equates to a 50% reduction in our operating dayrate of $125,000 a day for a like number days as the delay. For example, if we are 60 days late, we will work at a dayrate of $62,500 for the first 60 days. While we are disappointed we'd unable to meet the original schedule, overall the rig acquisition will still produce a very attractive economics for years to come. As for other 2 rigs with Saudi Aramco, the Hercules 261 and 262, they're on location and everything is going on schedule for both rigs.
On the Hercules 208, we will complete our work in Indonesia in the next 2 weeks. Thereafter, we will mobilize the rig to Singapore to load up certain equipment and from there, we will head to Myanmar for a 4-month contract at a dayrate of $96,500.
On the Hercules 260, we are preparing the rig for special survey once it completes the current well for Prenco. After the survey, the rig will go back to Prenco through mid-May 2013. West Africa is a very attractive market and we are negotiating follow-up work to the rig after the current contract term.
Finally, contract negotiations for a specific opportunity continue on the Hercules 170. While we remain hopeful given the narrow window that we're able to work within for this opportunity, it has become less likely that we will come to terms with the customer in the timeframe that meets their work schedule.
Even if we are ultimately successful in contracted rig, startup probably will slip to late 2013. Turning to our liftboat business. In the U.S. Gulf of Mexico, third quarter utilization of 67% was up in the second quarter levels despite having roughly 170 days of downtime in August due to Hurricane Isaac, which impacted revenues by a little under $1 million. While Liftboat activity historically experiences a spy after hurricane passes through the Gulf, Hurricane Isaac, which is a Category 1 when it reached land really didn't cause much damage to offshore infrastructure. As a result, there wasn't much repair work following the storm that would've offset the weather-related downtime. We are certainly okay with that because usually any hurricane in this pickup in liftboat activity is at the expense of our drilling operations. Today, we have 27 or 32 vessels on charter and utilization could hold near current levels over the next few weeks. Before we hit the winter seasonal slowdown, that will extend through much of the first quarter of next year.
Early market indications suggest this year's seasonal slowdown will not be quite as severe as last year, but we will have to wait and see. Dayrates remained at above year-ago levels, benefiting from price increases that we implemented early in the year. We'll try to hold these rates as best we can while we go through the seasonal slow period.
Our International Liftboats segment was hampered during the third quarter by downtime of some of our larger vessels and higher cost associated with this downtime.
In the Middle East, as I mentioned during our last earnings call, we had an incident on our largest vessel, the Whaleshark, in June. This kept the vessel out of service throughout much of the third quarter and added approximately $1.5 million of related expenses to third quarter results. We have completed repairs on the Whaleshark and is back on charter today. The Kingfish, vessel that we moved from the Gulf of Mexico to the Middle East earlier this year, is finishing the upgrade work and preparing to commence on its first contract in the Middle East, a 50- to 60-day job at very attractive dayrate of $38,000 a day. The Kingfish should be on contract by late November. This is well ahead of what the vessel was earning in the U.S. Gulf of Mexico, around $20,000 per day, and justifies our decision to relocate it to the Middle East, where we see strong liftboat demand for many years to come.
In West Africa, while demand remains fairly strong, local competitors are making some inroads with certain customers. We are monitoring their performance but would expect continued competition created overtime.
Our third quarter results also had some weather-related delays that impacted activity levels. Overall, these factors reduced third quarter utilization of West Africa by approximately 30 days and average dayrates by over 900 compared to the second quarter. We expect our fourth quarter performance in West Africa to be impacted by many of the same drivers as the third quarter.
Finally, the Inland Barge market remains challenged. In the third quarter, we're able to maintain decent utilization on our 3 marketed barges. And thus far in October, we've been able to keep all 3 rigs working. However, visibility in this segment is very limited and we don't expect much improvement anytime soon. Pricing has been steady and at times we're able to push based rates modestly to the upper 20s. So without increasing demand for barge rigs on the horizon, it'll be tough to envision any pricing momentum going forward.
In closing business conditions in the U.S. Gulf of Mexico jackup market continued to be strong, with backlog and dayrates moving in the right directions. As these conditions have improved, so too does the likelihood of rig reactivations. Internationally, while the delay on the Hercules 266 is disappointing, the economic merits of the deal are still very compelling and I'm comfortable with the late January 2013 startup. We continue to reduce our cold stack capacity, which has generated significant cash over the years. And with a cash balance of over $270 million at the end of the third quarter, we have a lot of options available to us, but we will stay disciplined with any opportunities that may come our way.
With that overview, let me turn the call over to Stephen.
Stephen M. Butz
Thank you, John, and good morning, everyone. In keeping with our normal practice on this call, my comments will focus on sequential comparison in the quarterly results as opposed to a year-over-year comparison.
For the third quarter, we reported a loss of $0.24 per share. During the quarter, we had several nonoperational items which are highlighted in our press release. These items include an $18.4 million gain on the sale of Platform Rig 3 in Mexico, a $27.3 million gain on the Hercules 185 insurance settlement, a $35.2 million impairment charge on the Hercules 258, which we recently cold-stacked in Malaysia and a $25.5 million impairment charge on the Hercules 252, which resulted from our sale of the cold-stacked rig in early October. On an after-tax basis, these items net to a loss of $22.1 million or $0.14 per share. Excluding these items, our adjusted net loss from continuing operations with $0.10 per share. This compares to a loss of $0.12 per share in the second quarter, also excluding certain nonoperating items present in that quarter.
Moving onto our segment results. Excluding the impairment charge on the Hercules 252, Domestic Offshore generated operating income of $9 million compared to $15 million in the second quarter as a result of higher operating costs and increased shipyard time.
With respect to those operating expenses, they totaled $62.3 million, up from second quarter expenses of $55.5 million, which includes a net benefit of $2 million related to asset sale gains and the sales in used tax accrual. For comparative purposes, excluding these items, the second quarter expenses were $57.4 million. Higher labor cost contributed to the adjusted $5 million increase between quarters, reflecting the full impact of a wage increase implemented during the second quarter. We also incurred modest increases in insurance and workers' compensation expense.
Looking into the fourth quarter, we expect Domestic Offshore operating expenses to decline slightly, excluding gains and losses from asset sales. As John mentioned, we're continuing to experience positive trends in the Domestic Offshore revenue, which increased by 2.5% to $92 million on higher dayrates, somewhat offset by lower utilization, which resulted from increased shipyard time. Average dayrates increased by 4% to $63,200 during the third quarter. Based on our current backlog, we believe that our average dayrate is poised to move towards $70,000 for the fourth quarter, and towards the $80,000 range in the first quarter of 2013, providing a significant improvement in our operating results.
Utilization declined to 88% from 91% mainly due to downtime on the Hercules 263, which was in the shipyard for the entire quarter to complete its 5-year special survey. We currently expect the rig will complete its survey in early November. In addition to the 263, special surveys on the Hercules 253 and 350 will also impact fourth quarter utilization.
Our International Offshore segment reported operating income of $3.5 million, which includes $46 million of gains from the sale of Rig 3 and the insurance settlement on the Hercules 185, partly offset by the impairment charge of $35 million on the Hercules 258. The second quarter results also included several nonoperating items, including an impairment charge of $48 million on the Hercules 185 and a $10 million benefit from a payment by Angola Drilling Company.
For comparative purposes, if we exclude these items from both the second and third quarter, the segment would have narrowed its operating loss to $6.9 million in the third quarter versus a loss of $14.1 million in the second quarter.
International Offshore revenue increased to $37 million from $30 million in the second quarter, primarily due to the return to service of the Hercules 262 after completing its shipyard work in late July and due to a full quarter of operations on the Hercules 261, partially offset by the sale of Rig 3. The net impact on utilization was 65 additional operating days.
Average revenue per day rose by $3,000 largely as the result of the sale of Rig 3, which was our lowest dayrate earning rig in our international fleet.
International Offshore operating costs, excluding the gains from Rig 3 and 185, were $31.8 million compared to $28.8 million in the second quarter. Higher operating expenses mainly due to the return of the 262, partially offset by lower cost on the 185.
We expect operating cost to decline modestly in the fourth quarter and to approximate $30 million as we stacked -- as we recently stacked the Hercules 258 and no longer incur expenses related to Rig 3. These benefits are somewhat offset by a full quarter of expenses on the Hercules 262.
Our Inland segment reported an operating loss of $2.8 million compared to a loss of $3.7 million in the second quarter. Revenue declined by approximately $900,000 to $7.4 million due to lower utilization, as we had a gap between contracts on 1 of our 3 marketed barge rigs. Revenue per day, however, improved by 5% to $32,200 due to a marginal improvement in rates achieved on certain jobs. Operating cost declined to $6.7 million from $8.5 million as second quarter results were burdened by a $2.3 million accrual for sales and used tax. We expect fourth quarter operating cost to range from $7 million to $8 million excluding any gains or losses on asset sales.
Turning to our Liftboat operations. Our Domestic Liftboats segment operating income increased to $2.6 million from $600,000 in the second quarter. Average revenue per day improves slightly to $8,900 in part due to having a greater mix of revenue generated from the larger class vessels.
Utilization also increased to 67% from 64% in the second quarter despite incurring approximately 170 days of downtime due to Hurricane Isaac. Also contributing to the improved results was the decline in operating expenses to $9.9 million from $11.2 million. The second quarter results were also burdened by our sales in used tax accrual of $500,000. Lower workers' compensation expense also contributed to the reduced expenses.
We expect operating costs will be flat to modestly higher in the fourth quarter.
Results for our International Liftboats segment weakened somewhat from second quarter levels largely due to downtime on some of our highest earning vessels. This included the downtime John mentioned on the Whaleshark as it underwent repairs, as well as weather-related delays in West Africa which impeded certain work programs. As a result, operating income declined to $6.5 million from $11.9 million in the second quarter.
Our average revenue per day was 6% lower than the second quarter as we had 65 less operating days. Operating costs increased to $20.4 million compared to $17.1 million as a result of incremental cost to repair the Whaleshark in addition to higher labor costs. We expect fourth quarter operating expenses for International Liftboats will decline back to the $17 million to $19 million range as lower costs on the Whaleshark will be partially offset by the startup of cost on the Kingfish in the Middle East.
Moving onto other income statement and cash flow items. Our general and administrative expenses for the third quarter were $15.7 million. The comparison with second quarter G&A of $6.5 million is skewed by the $10 million ADC payment that we received during that period, of which $8.8 million was recorded as a reduction to G&A. We expect consolidated G&A to range from $16 million to $18 million in the fourth quarter. Depreciation and amortization expense was $40.8 million down from $42.4 million in the second quarter. The decline was primarily driven by the Hercules 185 impairment at the end of the second quarter. We expect a further decline of just under $40 million in fourth quarter based on the 2 impairments recorded during the third quarter.
Interest expense was $19.9 million, a modest decline from $20.3 million in the second quarter. The decline resulted from a lower average debt balance reflecting our purchase of $27.6 million in convertible notes in the second quarter. We expect fourth quarter interest expense to approximate $20 million.
Moving onto income taxes. Year-to-date, we reported an income tax rate benefit of approximately 14%. However, from quarter-to-quarter, our effective income tax rate has fluctuated in large part due to the significant nonoperational items that we highlighted in current and past quarters, such as impairments or gain on sale of assets.
When analyzing our adjusted results after backing out the items on the non-GAAP schedule, our adjusted rate of income tax benefit for the third quarter approximated 30%. For the fourth quarter, we expect our tax benefit to remain in the same range, again, aside from the impact of any gains or losses on asset sales.
Looking into 2013, our forecasted effective income tax rate can vary widely depending on assumptions for overall profitability, as well as the profitability by country. Given the number of jurisdictions we operate in, coupled with the fact that our operating results are approaching breakeven, small changes in our income or loss by country can have a significant change in our quarterly percentage tax rate.
In providing income tax rate guidance, there are certain assumptions on regional profitability that we need to make. While we don't provide earnings guidance, if we used the current consensus estimate of approximately $320 million in EBITDA for 2013 as a point of reference, we would expect our reported book income tax rate would range between 45% and 50%.
If you were to assume a 10% increase to consensus EBITDA next year from higher domestic performance, the tax rate would decline to the low 40% range. Going the other way, if you were to assume a 10% decrease to consensus EBITDA, all due to lower U.S. earnings, the effective tax rate could be as high as 60%. While that sounds high, you have to keep in mind that at such levels, we're very close to breakeven on pretax income, so the effective rate is not particularly meaningful. As we move further into the black, the rate becomes more meaningful and should decline.
Nonetheless, even at higher income levels next year, our effective rate could be higher than the statutory rate in the U.S. as a result of several factors. For one, while our offshore entities are expected to operate near breakeven, we'll still incur cash tax as a result of deemed profit tax regimes, meaning where our taxes on revenue in certain jurisdictions rather than income, resulting in a higher effective tax rate in those areas. Secondly in various other jurisdictions where we incur foreign tax, we're currently limited to taking deductions as opposed to credits in the U.S. as a result of IRS rules limiting in the use of credits in our particular situation.
While our reported book effective tax rate will fluctuate, our cash income taxes are expected to remain relatively low. Given our significant NOL position, we don't expect to incur cash taxes on our U.S. operations anytime soon. Without any significant additions to our international fleet, we expect our cash income taxes to remain in the $15 million range per year for the foreseeable future.
As for capital and drydocking expenditures, we spent approximately $37 million during the third quarter and $132 million year-to-date. As John discussed earlier, on the Hercules 266, we now anticipate spending approximately $54 million to complete the upgrade and contract preparation requirements to ready the rig for Aramco. This will be somewhat offset by the $25 million mobilization fee we will receive from the customer once we commence work under the contract.
Through the end of the third quarter, we've spent approximately $20 million of that revised budget. Our fourth quarter will include the majority of the remaining spending requirements on the 266, as well as spending for special surveys on 3 domestic rigs, the Hercules 253, 263 and 350, and 1 international rig, the 260. And all capital spending is expected to range between $55 million and $60 million in the fourth quarter.
With respect to our balance sheet and liquidity, at September 30, we had unrestricted cash and equivalents of $272 million. This amount includes the insurance proceeds from the Hercules 185 settlement. Today we have a little under $250 million of cash after making the semiannual interest payments on our notes and receiving sales proceeds on the Hercules 252. Our sizable cash position, along with our $75 million revolver, leave us with ample liquidity to fund our future capital expenditures, pursue growth opportunities and reduce debt.
We will also continue to rationalize our fleet where appropriate, which will eliminate various ongoing cash expenses and provide additional liquidity from the sales proceeds that can be redeployed into other strategic opportunity.
During the third quarter, we divested Platform Rig 3, our sole asset in Mexico. This sale made a lot of strategic sense because it was our only rig of that type and it was our only rig in Mexico, an area where we see limited opportunity for our existing assets. We also made headway in reducing our stacked capacity. During the quarter, we sold 2 stack units for scrap, the Hercules 101 and 29 for a little over $2 million. And as I previously mentioned the 252 in October for $8 million.
We currently have agreements in place to sell 3 additional cold-stacked rigs, the Hercules 257, 259 and 27 for almost $20 million. Upon the sale of these rigs, we will be left with 11 cold-stacked jackups in the U.S., down from 24 after the Seahawk acquisition. We still intend to retain about 6 of the cold-stacked jackups for reactivation opportunities, but the remainder may ultimately be sold.
In closing, during 2012, we've made tremendous progress on a number of fronts, including a dramatic turnaround in our largest segment, Domestic Offshore; a substantial improvement in our credit profile; continued execution of our divestiture program; and a positive conclusion to the SCPA investigation, just to name a few.
Moving into 2013, we look to continued the strong momentum in Domestic Offshore and be in a position to expand our earnings capacity in this segment, increase our international scale and continue the renewal of our fleet as we've done with our investments in Discovery Offshore in 2011 and 2012.
With that, we're now ready to open the call for questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Rhett Carter from Tudor Pickering Holt.
Rhett Carter - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division
Just related to the discovery assets, are you guys still holding kind of the same thought that any real contract discussions probably wouldn't get started until early 2013?
John T. Rynd
I think you'll see some progress as we exit this year, and I think we've been consistent really since we formed Discovery that late 2012, early first quarter '13 should -- the contract should be secured.
Rhett Carter - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division
Okay. And then just on the Domestic Liftboats, looking at the numbers you gave, 170 days of downtime, that implies about 5 days of downtime per vessel, is that kind of what you saw incidentally [ph] from the hurricane?
John T. Rynd
That's correct, Rhett.
Operator
Your next question comes from the line of Ian Macpherson from Hercules Offshore.
Ian Macpherson - Simmons & Company International, Research Division
I got 3 questions. I'll lay them all out at once. First of all, John, can you clarify or confirm the parameters that you gave last quarter with respect to lead time and CapEx for your first part of [ph] reactivation. Is that still the same as you saw 3 months ago? And then can you elaborate on the 170? As you've said, it won't be available before late '13 the earliest. Why is that? And then just a quick one, Stephen, regarding the 266. For modeling purposes, are we going to see the dayrate going to be amortized over the contract term we're taking over the first 2 months up front?
John T. Rynd
I'll start on the reactivation. Just the first 2 rigs appear to be right in that $14 million range and then the 120- to 140-day timeframe from start to finish. On the 170, the start date there is really dictated by monsoon season. Monsoon season commences plus or minus May 15 and runs through about September 15. So our push to get the operator to sign the contracts so we can start the shipyard work because we do not want to arrive post-monsoon, otherwise they can cancel the contract. So that's the start date is either going to be May or October. And I think given where -- we're still making progress with the customer. But given our window of -- from the time they say go to we get on location, we're not going to assume monsoon risk. So if we don't get something done here pretty quick and we are successful in the contract, it will be a fourth quarter start.
Stephen M. Butz
And with respect to your question on the Hercules 266, you're correct that the dayrate penalty for accounting purposes will be amortized over the term of the contracts. So that will bring our effective dayrate down slightly from the $125,000 level to about $121,000 per day that we'll report each quarter.
Operator
Your next question comes the line of Dave Wilson from Howard Weil.
David Wilson - Howard Weil Incorporated, Research Division
John, regarding the shelf drilling transaction with Transocean and those assets, I presume you guys looked at those assets. I wanted to know what about those assets who are attractive to HERO? And ultimately, why you thought you guys were unsuccessful in the bay. Was it timing, price or some other factor?
John T. Rynd
No, I think the unattractiveness of the assets were kind of multifaceted. One, just the diversity of location, and it gives us more scale where we lack significant scale and that's in the international markets. I do believe that we have over a decade left of needing the standard jackups around the world. And so that was the attractiveness of it. It was just the regions where they're working and the scale that brought us internationally. Now we were in the process. And I think the biggest driver for us as a public company that would have had the issue -- public securities to facilitate the transaction on a purchase of that scale, we needed 3 years of audited financials. Transocean was not in position to deliver that.
David Wilson - Howard Weil Incorporated, Research Division
Got it. And then I just wanted to touch on the insurance proceeds for the 185. Maybe you decide the reactivation of a rig. Do you have any -- are those proceeds specifically earmarked for anything or how would you rank those proceeds going forward?
John T. Rynd
Right now, obviously it's parked on a balance sheet as we're trying to build cash because with the opportunity sets that we see out there to expand our business, both on the Drilling side and Liftboats side, it's just we think it's pretty right now to kind of keep the cash build to give us the flexibility to move on some of these opportunities there that are going to be presented themselves over the next 6 to 18 months.
David Wilson - Howard Weil Incorporated, Research Division
Okay. And then one more if I can. In the Gulf of Mexico, have you noticed an uptick in demand for [indiscernible] work over P&A type work recently? Is that kind of tied to your comments earlier regarding that seasonality might not be as bad this time around?
John T. Rynd
A couple of things. One, the P&A work is progressing. Now relative to our percentage of our Domestic Liftboats revenue that's allocated or dedicated to the P&A, that has shrunk from about kind of 2010, 2011, we were running 20% to 25% of our Domestic Liftboats revenue was generated through P&A. I think, year-to-date were sub-10%. And that's really a factor that we have moved kind of our high-end boats for the West Africa 3 to the Middle East. So we're missing that segment of the market. But if you look like the Kingfish dayrate's $38,000 a day, we'll make that move. I'll give up some of that P&A work. Now we do have a big P&A program scheduled for the Hercules 350, when it comes out of yard, that work that it's going to work for that customer is all P&A work.
Operator
Your next question comes from the line of Todd Scholl from Clarkson Capital Markets.
Todd P. Scholl - Clarkson Capital Markets, Research Division
Just a couple of quick questions. First, you guys did kind of touch on your cash position and your excellent liquidity. I think you said you had around $250 million in cash right now. Do you guys have a figure of plan in place for that cash or, I mean, it doesn't sound like you guys could buy any more -- increase your stake of Discovery. Are you looking at potential new builds? Are you looking at doing something maybe on the purchase and sale side? Can you give us a little bit of color on that?
John T. Rynd
Yes, first of all and not to be flipped, we'd rather be looking at it than looking for it. So we've got that covered and I think then it's just growth opportunities. And as I mentioned on the previous Q&A, Discovery's out there. We like where we are with discovery, but that's always a potential. There are some opportunities to expand internationally, both on the Drilling side and the Liftboats side on the sale and purchase.
Todd P. Scholl - Clarkson Capital Markets, Research Division
Okay. And then just on the Domestic Offshore, we've seen pretty good momentum in dayrates there. Do you have confidence that, that momentum will continue? Or do you think we might be getting close to a point without plateaus? Just given the economics right now of where the commodities are at, how much confidence do you have that momentum there could continue?
John T. Rynd
Well, the momentum is definitely there. And I think if you look into 2013, as we said in our prepared remarks, the bulk of our 18 rigs are already contracted through the first quarter, significant contract coverage well into the second quarter. We're in discussions on current active rigs our fleet that people are going to lock them up for a year. So pretty soon, we're going to be sold out. So that's going to drive the momentum and the potential rate increase. And as we also, I think, as importantly, as we look into 2013, it's hard to see a significant influx of supply of jackups into the Gulf of Mexico. Your biggest threat is always PEMEX, and by and large, most of the rigs down there are getting recontracted for 600 to 1,200 days. So it's taking the risk of 2013 out of that. And then as I mentioned in the prepared remarks, we're basically fully utilized around the world outside the U.S. Gulf of Mexico. By our account, there's probably 10 rigs around the world that could go to work and not working. And those rates have all moved now in the $110,000 to $150,000 range for the commodity type 250-, 300-foot cantilevers that would be a candidate to come back to the Gulf of Mexico. So they have no incentive to come back to the U.S. Gulf. Now, there'll be a few maybe straggled back to the Gulf from various regions close to here. But it's hard to see a meaningful supply into the Gulf through 2013 that could kind of stall the momentum.
Todd P. Scholl - Clarkson Capital Markets, Research Division
Okay. And then just one last one. You kind of commented about looking at the assets that were eventually bought by shelf drilling. Have you guys looked at or would you consider looking at some of the jackups that Noble is potentially selling?
John T. Rynd
Yes, I think that if they have a desire to dispose of some of their legacy jackup fleet, yes, we would be answering having discussions with them.
Operator
The next question comes the line of Mr. Robert MacKenzie.
Robert MacKenzie - FBR Capital Markets & Co., Research Division
Question for you on the special surveys next year. I think you have a number of rigs hitting the 5-year timeframe. Can you update us on your thinking on what the cost might be per rig and some guidance on whether or not how much of that will be capitalized versus expense?
John T. Rynd
Yes. We have 5 -- 4 special surveys in U.S. Gulf of Mexico and potentially, the fifth internationally. And as we laid down fleets status, we're budgeting 90 days on average for those special surveys in the neighborhood of $5 million and most of that will be capitalized.
Robert MacKenzie - FBR Capital Markets & Co., Research Division
Okay. Can you give us some more color on what you see in terms of prospects for the Discovery jackups?
John T. Rynd
Yes, I think the prospects there are very bright and its multi-regional. As we looked at the opportunity sets that we have already been on and we know that bids are forthcoming, it really is driven by the central North Sea, the Middle East and West Africa in that order.
Operator
The next question comes from the line of Mr. David Smith, sir.
David C. Smith - Johnson Rice & Company, L.L.C., Research Division
I like the positive outlook for reactivations and I don't want to get too far ahead of things. But can you remind us, or help us think about the potential reactivation cost and timing for the cold-stacked jackups that are in queue behind the first 2?
John T. Rynd
We really haven't gone to that level yet, Dave. But if you just take a look, we started with the 200-mat cantilevers first and we have another one behind it. We're really focused on the first 2. And at this point, we're comfortable in that $14 million range, 120 to 140 days of work. If we're successful in securing contracts on the first one, we'll go to the third one and do our legwork on it. But right now, we're focused on the first 2.
David C. Smith - Johnson Rice & Company, L.L.C., Research Division
Fair enough. And I missed the mobilization expense for the Kingfish in the quarter. How much was allocated to that liftboat?
John T. Rynd
$100 million on the mobilization expense on the Kingfish.
Operator
The next question comes the line of Judd Bailey and ISI Group.
Judson E. Bailey - ISI Group Inc., Research Division
A follow-up question on kind of your cash position and as you look at opportunities for that cash, we've seen a couple of instances where small companies building -- have new builds under construction and have been unable to fund them -- [indiscernible] rigs. Are you -- I assume that would be something you'd be interested in? And are you anticipating more opportunities like that as the capital markets get a little tighter and companies have difficulty raising funding. Are you seeing more opportunities to purchase some of these new builds that are being, I guess are under construction currently?
John T. Rynd
Yes, good question because we keep very good track of that. Obviously, Discovery will have a funding need in the next 8 to 12 months, and I think we recently saw a startup just recently announced the sale of one and the option to sell another. Another [indiscernible] standard is sold, I think 3 at this point. Yes, so we're monitoring that as a way another growth vehicle for us.
Operator
The next question comes the line of Mr. Greg Lewis from Credit Suisse.
Gregory Lewis - Crédit Suisse AG, Research Division
John, I think you're referring -- are you referring to the prospect of rigs?
John T. Rynd
That's correct.
Gregory Lewis - Crédit Suisse AG, Research Division
Would that something that HERO took an active look at or not really?
John T. Rynd
We take a look at a lot of things and it could be that through Hercules or Discovery, depending what vehicle we want to go through. But we keep track of -- most of the sale and purchase, what's going on around the world.
Gregory Lewis - Crédit Suisse AG, Research Division
And I mean, just thinking. It seems like prospect is unwinding. Do you think is going to be an opportunity for additional prospector rigs hitting the market?
John T. Rynd
I think maybe in defense of my good friend Bill rose, I don't think they're unwinding. They just had a big funding gap into less than the dilution from equity. I think we elected to sell at least that one. But there may be. I mean, that's something we look at. But again not to play too much on it. I don't think he's unwinding. He's got a contract on his first one and he just got himself in position where with his payment terms of 10-90, that's a pretty steep hill to climb.
Gregory Lewis - Crédit Suisse AG, Research Division
Okay, great. And then just shifting gears a little bit it. Look like OpEx in both domestic and international rig were up. We think about that going forward. Is that something where we could see a little bit of a step down over the next couple of quarters, or should we be thinking about that is more of a fair rate to be thinking about?
John T. Rynd
I think it's fair rate. As Stephen outlined in his guidance, we're kind of flat, modestly down for the fourth quarter. But as we look into 2013, you're going to have cost increase across all of our businesses, not just ours, as labor continues to be a driver, repair and maintenance is going to get more. So I mean, everything is going to -- within a tight market, you're going to see some inflation. I think it's not in a level that's going to really skew the results, but it's just something you're going to have to pay attention to and manage.
Operator
The next question comes the line of Nigel Browne.
Nigel Browne - Macquarie Research
My question was actually answered. But just wanted to, if you could quickly touch on contracting trends in the Gulf of Mexico, particularly whether there are any opportunities out there or any leading signs that tenders or contracts could increase from 3 to 6 months over to a year plus in the future. Any thoughts on that?
John T. Rynd
Yes. Good observation. I think as we've said in our prepared remarks a year ago, we were signing kind of 30- to 60-day contracts as a norm and now we're more 90- to 180-day contracts. We currently have a good number, I would say, of potentials to execute 1 year contracts on the existing fleet.
Nigel Browne - Macquarie Research
Yes, and with that in mind, just one follow-up. Just wondering whether you're getting any indicative signs from your customers that with natural gas prices sort of finding sort of a sideways floor here, whether they're actually looking at this thing or some of those gas-directed type opportunities in the Gulf of Mexico as well?
John T. Rynd
I think they are getting -- they're pleasantly surprised with where gas is now and that if nothing else it props up positive cash flow. So that's always a good buffer. I would say dusting off may be the right term. I don't think anybody's really jumping at the bid. I think of our 18 rigs that are contracted currently, we're drilling 2 gas wells if I'm -- the last time I looked. And I think you get gas prices north of $4 in MCF. You may see some gas-directed drilling. Gas north of $5 could open up really another level of demand. It's hard to see gas getting to $5. But we've seen just over the course of the last 7 to 10 years kind of the first click is $4, you get a little activity; at $5, you ramp it up another notch.
Operator
[Operator Instructions] The next question comes from the line of Kathryn O'Connor from Deutsche Bank.
Kathryn O'Connor - Deutsche Bank AG, Research Division
I just have a question about your fleet report a couple of days back. It look like one your contracts dropped off for the Hercules 350 like a 50-day contract. Could you just give us some color on what happened there?
John T. Rynd
Yes, they had some partner issues that could not get everybody to the table in a timely fashion. And we moved -- some of that work, not necessarily that work, but they've also picked up a 200-foot mat-cantilever. But in a way, that was a positive move for us in that it accelerated the rate improvement on the Hercules 350. So it was all in all a win-win for both us and them.
Kathryn O'Connor - Deutsche Bank AG, Research Division
Because they -- it was a timing issue in terms of getting to the equipment to where it needed to go?
John T. Rynd
Yes, they just had partner issues that they couldn't get all the partners around the table and agree. So they weren't going to be able to honor that obligation. They had some work on the 200 mat-cantilever. We put them on that. But that 50 days of work, we've accelerated the rate improvement and we're going to achieve on the Hercules 350 by 50 days. So it was a win-win. There's no negative connotation at all in that situation. In fact, again, it's all good for us.
Kathryn O'Connor - Deutsche Bank AG, Research Division
Are you saying just basically the fact that you may perform an average of $105,000 up to $110,000 more quickly?
John T. Rynd
Yes. And then the market is improving, so the $110,000 should improve.
Operator
The next question comes from the line of Matt Beeby from Williams Financial.
Matthew H. Beeby - Williams Financial Group, Inc., Research Division
John, you've mentioned the leading edge for the 200 mat-cantilevers was at $90,000 a day. Now that the 30-day contract you also talked about the potential for year-long type contracts or are those discussions also for $90,000 a day or do you have to discount for a longer term?
John T. Rynd
We're going to be in the $80,000 to $90,000 range, I think, if we're successful in the 1 year deals.
Matthew H. Beeby - Williams Financial Group, Inc., Research Division
Okay. Just a quick follow-up. Is there any upside that we might see quick pop on the 250s or is a rig just a rig in the Gulf these days?
John T. Rynd
No, no. I think the 250s offer are -- the 3 250s offer our customer a very unique asset. They're very well equipped. And obviously with the 250 mat, your equivalent really day in and day out to a 300-foot independent light cantilever because you don't have light penetration, they do, so those rates are trending nicely as well.
Operator
The next question comes the line of Steven Karpel from Credit Suisse.
Steven Karpel - Crédit Suisse AG, Research Division
Can you clarify for us, I think your comment was, you thought rates in the domestic business would go to 70,000-ish in Q4 and Q1 would be 80. Just to clarify, that's compared to the 63-ish or so you did in the third quarter so that's an average rate?
Stephen M. Butz
That's right, that's just our average rate, what's kind of built into our backlog today. We're comfortable that the average rate for the fourth quarter and the first quarter will be plus or minus close to the levels that I mentioned.
Steven Karpel - Crédit Suisse AG, Research Division
Right. And then if I'm reading you right then, giving where you're saying leading-edge rates are 90, I know you signed 1 rig around that 90,000 areas. Does that mean that as we go forward for '13, A, it goes higher and B, you're seeing other fixtures potentially in that 90,000 other than just the one? You said another way, the one you saw wasn't just a fluke?
Stephen M. Butz
I mean, based on our backlog even into the second quarter and where we're signing up new contracts, we would expect it to continue to trend up, maybe not at the same clip that we're going to see from the fourth quarter to the first quarter with the 10,000 increase, but we would expect modest increases in the other quarters as we move through 2013.
Steven Karpel - Crédit Suisse AG, Research Division
In OpEx. So OpEx moved up pretty substantially sequentially. Does that continue a pretty substantial move to as dayrates move far?
Stephen M. Butz
No. Again, there was some items that not made it the very clean comparison with the second quarter, where the second quarter had some one-time items that brought second quarter expenses down. We expect our Domestic Offshore operating cost to decline just slightly in the fourth quarter. But then as John mentioned, as we look into next year in all the segments, we would expect some escalation in the cost, driven partially by labor, but also R&M and insurance.
Steven Karpel - Crédit Suisse AG, Research Division
And then lastly, if you look at 2013 to come to 2 parts [ph] on the organic basis, can you talk about what your organic capital needs? Give us some indication for '13? And then, John, If you could talk bigger picture, as you think about all these opportunities out there, do you have a preference on what you do in terms, I know the Noble rigs were mentioned and the shelf drilling rigs were mentioned as obviously the shelf no longer, but those type of rigs or liftboats and whatnot, do you have a particular preference?
Stephen M. Butz
Yes, I'll take the first part of that question. With respect to our CapEx next year, we're still going through the budget process, so we'll update as it changes. But at this point, we expect our maintenance CapEx, including the drydocking expenses on the liftboat, being in the $100 million range. Then of course, we'll have other growth CapEx beyond that, which could include reactivation opportunities or acquisitions.
John T. Rynd
Yes, on the acquisition front, I think that it's just going to be a balance. We have to stay disciplined. When we look at opportunities, especially of scale, we wanted to be accretive to our shareholder and credit enhancing. And that's kind of the -- that's our game plan and that's where we try to target any opportunities to where it's a win-win for everybody. And I think it's a balance as well of -- you have to renew the fleet. 65% of jackups around the world are 30 years old now. So you just have to keep the balance on near-term returns versus new build rigs. As we've seen both in Deepwater and jackups, new assets are not going to garner high returns that you can achieve like we did on the 266, the Ocean Columbia. You're not going to get that on a new rig, but you're also getting a rig that has 15 years of useful life versus a rig that has 35 useful life and that's the trade-offs as we go forward.
Operator
Your next question comes from the line of Mr. David Smith from Johnson Rice.
David C. Smith - Johnson Rice & Company, L.L.C., Research Division
Just thinking about labor cost inflation for the Domestic Offshore segment in '13. Figuring that the jackups plan in Gulf is relatively fixed. I would guess, there's some labor pressure from the growing Deepwater rig count in the Gulf, as well as maybe the international hiring needs for all the new builds. But maybe there's some increased labor supply from fewer folks working onshore. So I know it's early, but do you have a gut feel on whether '13 cost inflation is going to be higher than 2012?
John T. Rynd
We're going to budget that it's up, but I will tell you that near term, and that could be the rest of this year maybe to the first quarter, as we've seen the land rig count rollover, inbound request for jobs has dramatically increased from land-based rig crews. Drillers, derrickmen, roughneck, et cetera, we're getting -- I wouldn't say inundated, but we're getting a steady flow of people entering, going to work offshore. So near term, that tells you that you're going to have -- you're going to bait the upward pressure in labor. But if you look out '13, '14 and '15, this industry is short of people, and that labor issue may take a pause, but it's going to have upward pressure momentum on wages. If you just look, do the math on trying to staff the 92 jackups and 60-odd floaters, drillships and floaters that are under construction with an aging workforce, so it's -- again, will ebb and flow given the turn of the cyclical nature of some of our businesses, but I think the direction is going to be more pressure on wages.
Operator
Ladies and gentlemen, that is all the time we have for questions. I would now like to turn the call back to Son Vann for closing remarks.
Son P. Vann
Thanks a lot, Ben, and thank you, everyone, for joining us today. If you have any questions, feel free to give us a call. Replay of this conference call will be available on the website within the next few hours. And we'll see you early next year.
Operator
Thank you very much, ladies and gentlemen. That concludes your conference call for today. You may now disconnect. Thank you.
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