Rowan Cos. Plc (RDC) Q2 2018 Results - Earnings Call Transcript

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About: Rowan Companies plc (RDC)
by: SA Transcripts

Rowan Cos. Plc (NYSE:RDC) Q2 2018 Earnings Call August 1, 2018 11:00 AM ET

Executives

Son Vann - Rowan Cos. Plc

Thomas Peter Burke - Rowan Cos. Plc

Stephen M. Butz - Rowan Cos. Plc

Analysts

Sean C. Meakim - JPMorgan Securities LLC

Ian Macpherson - Simmons & Company International

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Haithum Nokta - Clarksons Platou Securities, Inc.

Kurt Hallead - RBC Capital Markets LLC

Operator

Greetings, and welcome to Rowan Companies' Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to turn the call over to your host, Son Vann, Vice President-Corporate Development. You may begin.

Son Vann - Rowan Cos. Plc

Thank you, operator. Welcome to Rowan's second quarter 2018 earnings call. We appreciate your interest in Rowan. A copy of the company's earnings report issued earlier this morning can be found on our website at rowan.com. Joining me on today's call are Tom Burke, President and Chief Executive Officer; and Stephen Butz, Executive Vice President and Chief Financial Officer; as well as other members of the Rowan team.

Before I turn the call over to Tom, I'd like to remind you that during this call, we will make certain forward-looking statements regarding our company and business that are not historical facts. These forward-looking statements relate to the future and they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Please refer to our annual report and most recent quarterly report filed with the SEC for more information regarding our forward-looking statements, including the risks and uncertainties that could impact our future results.

Our actual results may differ materially from those contemplated by these forward-looking statements. We caution you, therefore, against relying on any of these forward-looking statements that are not a statement of historical fact, nor guarantees or assurances of future performance. Any forward-looking statement made by us during this call speaks only as of the time at which it is made. Factors or events that could cause our actual results to differ may emerge from time-to-time and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future development or otherwise, except as may be required by law.

With that, I'd like to turn the call over to Tom Burke, Rowan's President and Chief Executive Officer.

Thomas Peter Burke - Rowan Cos. Plc

Thank you, Son. Good morning, and welcome to our second quarter 2018 earnings call. We very much appreciate your participation today and your continued interest and investment in Rowan. Following my prepared remarks, Stephen will walk you through our finance performance and aspects, and then we'll open the call for questions.

I'm going to break my comment into two parts. First, I'm going to discuss the overall market; and then, I'm going to discuss Rowan's contract awards during the quarter, and mention other notable Rowan events.

As a back drop to my comments in the market, I would note that Brent crude oil prices have risen around $50 per barrel at this time last year to mid-$70 today. And prices have stayed between the low to high $70s since the beginning of the second quarter. This has created a more constructive environment for offshore drilling. Our discussions with customers and the cadence of tendering activity further supports this view.

Over the past (03:19) quarters on these calls, I've been talking about the improvement in the jack-up market, particularly in harsh environment regions. We have been more cautious in our outlook for the ultra-deepwater segment.

As you may remember, early this year, we adjusted our Deepwater marketing strategy to be more aggressive to bring our drillships out of warm-stack, as we could see more opportunities for continued work, even if we had to string together several shorter contracts. This improvement in the Deepwater market has indeed materialized, and we are seeing significantly more opportunities than a year ago. However, we believe that any pricing improvement will be tempered by what is still a large overhang in available supply, as well as contract terms remain short.

Looking at the worldwide marketed utilization for ultra-deepwater drillships rated 7,500 feet or greater, rig demand appears to have bottomed in the low 60 rigs late last year and has risen modestly to approximately 65 contracted rigs today, pushing marketed utilization up slightly from the low 70% at the end of last year to mid-70% today.

We can see scenarios where ultra-deepwater marketed utilization rates continue to hold over the next several quarters based on expected tender awards and extensions netted against existing roll offs.

In terms of regional trends for ultra-deepwater drillships, starting with the Gulf of Mexico, there are currently 20 rigs contracted in this region. Of the 20 rigs, only six have contract terms that expire by mid-2019, and some of these rigs have options that we expect will keep those rigs tied up beyond their original terms. While some projects have been pushed from 2018 to 2019, we continue to see new opportunities appear in the region, both for majors and for independents. We are also keeping a close eye on the developing deepwater opportunities in Mexico.

Central and South America is also a region, where we are tracking several opportunities. There are currently 16 ultra-deepwater drillships contracted in the region, the new tenders in Brazil have been well publicized with at least six tenders lasting a year or more for drillships commencing in 2019. South America has in the past shown the capability to add a considerable number of rigs, so we are pleased to see this level of tendering activity.

Demand in West Africa for ultra-deepwater drillships appear to be – to have rebounded from around 14 contracted rigs at September to now having 18 contracted rigs. While there is still a large surplus of capacity in this region, tendering activity is quite active. Many of these tenders are of short duration and will be highly competitive, but there is certain opportunities for contract terms of 12 months or greater. Much of its work will commence in late 2018 and 2019.

Some of the programs' technical requirements that puts seventh generation ultra-deepwater drillships, such as Rowan's four R-Class ships, in a strong position.

Moving to the jack-up market. Worldwide marketed jack-up utilization currently stands at 75%, up from around 70% a year ago. This improvement is driven by both a rise in the number of jack-ups under contracts over the past year, as well as a small reduction in the marketed rig count as rigs are cold-stacked and coming out of the drilling markets. Having said that, there are approximately 90 jack-ups in shipyards at various stages of completion not included in these numbers.

Now I'm going to provide regional commentary on the North Sea, US GOM, and Saudi Arabia as these are the most relevant regions to Rowan. The North Sea region continues to lead the jack-up market recovery, where marketed utilization is currently at 87%. Furthermore, of the 33 rigs that are contracted in the region, five were built in the 1980s and may not be completed coming out of this downturn.

As I've discussed on previous calls, five of Rowan's seven ultra-harsh jack-ups are in the North Sea region, which are our N-Class and Super Gorilla rigs. There are 19 such ultra-harsh rigs worldwide of which 17 or roughly 90% are currently contracted. These are among the largest and most capable of all jack-ups and particularly suited when working in the most challenging environmental conditions. As there is only one ultra-harsh jack-up under construction, this is one of the few asset classes where there isn't significant excess supply sitting on the sidelines.

Of our five rigs in the North Sea, only the Rowan Norway is currently available. We've been disciplined in bidding opportunity for this rig. We are tracking several opportunities for the rig, a few of which have commencement windows later this year, although a majority will likely start in 2019.

Moving on to other jack-up regions, U.S. Gulf of Mexico has seen a pickup in demand over the past 18 months. Demand growth, coupled with sharp climb in marketed supply since the downturn has pushed marketed utilization to 75%, and we're seeing a bit of improvement in pricing for this region, although only 12 rigs are contracted there today. Of course, contract terms remain short, and we are in hurricane season so this may dampen further improvements in the short-term.

Finally, Saudi Arabia remains strong. There are currently 45 jack-ups contracted, up from 42 rigs last June. We now participate in Saudi Arabia through our drilling, which we believe has been a positive change.

Switching over to our marketing and operations. There are several new contracts and rig commencements that we were able to successfully win or execute over the past quarter. As of today, 50% of Rowan's drillships are contracted. The Rowan Resolute, one of our seventh generation ultra-deepwater drillship, completed its contract with Anadarko, and after a short maintenance period successfully commenced operations with LLOG, who subsequently extended the contract to drill an additional well. LLOG has options for two additional wells, where the second option is at a slightly higher day rate.

Rowan Relentless, another of our seventh generation ultra-deepwater drillship, was awarded a one well contract by ExxonMobil. The term is around three months but comes with four one-well options. Although, the rig has been idle for almost two years, we believe that our strategy of carefully maintaining our idle drillships significantly influence this customer's decision when evaluating their contract options.

Now what is also encouraging is both the Exxon well and what is likely to be the second LLOG well are both exploratory. This downturn has taken a heavy toll on deepwater exploration activity, so it's good to see some exploration work taking place where seventh generation drillships are particularly well-suited. There are other opportunities in the U.S. Gulf of Mexico with commencement windows in the late 2018 and 2019, for which our drillships are well-positioned.

Finally, we believe we are well-positioned for soon to be announced drillship contracts, so we are eagerly awaiting the customer's decision, although (11:00) that we will be successful.

Moving on to jack-ups, all of Rowan's marketed rigs except for the Rowan Norway are now contracted or committed. The Gorilla VI commenced operations in Trinidad with Shell in May, this was quite an undertaking as we had to mobilize a rig from the UK (11:22) close cooperation with Shell to get everything completed for a challenging (11:26) move onto the platform in Trinidad.

The Rowan Viking also commenced a 100-day contract with Shell in the UK, while the Gorilla VII began its 18-month contract for Chrysaor in May. In the U.S. Gulf of Mexico, the EXL III completed its contract with McMoRan and started working with Cantlum.

In the Middle East, so far this year, ARO Drilling has secured 11 three-year contracts. This doesn't include the three-year contract for the SAR-201, a jack-up that Saudi Aramco sold to ARO Drilling late last year. Yesterday, we announced that ARO Drilling has been awarded six three-year contracts for Rowan jack-ups currently working with Saudi Aramco.

With these six new contracts, along with the five previously announced drilling contracts, all of Rowan's rigs working in Saudi Arabia will have new long-term contracts to go onto once their existing contracts conclude. Two rigs, the Hank Boswell and Scooter Yeargain will be sold to ARO Drilling in October once they finish their current contracts. The remaining nine contracts awarded this year are for rigs to be leased by ARO Drilling from Rowan including the Bob Palmer, which commenced its lease in mid-June.

We are extremely pleased with this outcome. By end of this year, ARO Drilling is expected to operate a fleet of 16 (12:50) rigs, nine of which will be leased from Rowan. Saudi Aramco is a thoughtful and supportive partner in ARO Drilling. We appreciate that due to ARO Drilling, Rowan is more complex at analyzing than it previously was, but we believe this joint venture will provide better utilization to Rowan in these tougher times and a significant growth profile over the next several years from the newbuild program.

With respect to the newbuild program, the ARO Drilling team is working hard on the newbuild engineering and equipment collection aligned closely with the shipyard and key equipment vendors. We expect ARO Drilling to order two LJ43 rigs in the fourth quarter of this year. We're working closely with the ARO Drilling and Saudi Aramco on plans for third-party financing for these newbuilds.

Regarding our liquidity and capital structure, I will (13:40) Stephen go into details on our new five-year revolver. But suffice to say, we're really pleased to secure this additional liquidity into mid-2023 enhancing our financial flexibility to navigate the challenging industry conditions.

So in conclusion, all-in-all, we had a solid quarter of contract signings and operational performance on seven important contracts worldwide. Since the beginning of the second quarter, ARO Drilling has added 33 years of backlog, including 27 years for rigs which are wholly-owned by Rowan. We also secured key contracts on two of our drillships. These contracts really speak to the quality of our Deepwater operations and assets, and I firmly believe customers will continue to favor the high end of the drillship fleet when awarding new work.

Based on the more positive industry backdrop and a pickup in tendering activity, I'm also encouraged that this will lead to a further rebound in offshore activity with pricing improvements following eventually. The focus on safe, efficient and reliable operations, as well as keeping our working rigs active and thoughtfully bringing back rigs that we have warm stacked through what we believe has been the toughest part of the downturn.

Rowan also continues to explore various measures to improve performance and cost efficiencies, both on the rigs and with our on-shore support structure. While we're still in a tough environment because of the general overcapacity in offshore rigs, I am quite encouraged by the improving industry outlook, which is supported by our recent backlog additions.

This concludes my remarks, and I'll now turn the call over to Stephen.

Stephen M. Butz - Rowan Cos. Plc

Thank you, Tom, and good morning, everyone. On the call today, I will review our second quarter 2018 results in comparison to first quarter 2018 results, as well as provide updated estimates on our cost and capital spending for the third quarter and full year 2018. I will also briefly discuss ARO Drilling's operating results.

Earlier this morning, we reported a net loss of $77 million or $0.60 per diluted share for the second quarter of 2018, compared to a net loss of $112 million or $0.89 per diluted share in the first quarter 2018.

Our adjusted EBITDA for the second quarter was $40 million, which is ahead of the consensus analyst estimate and above our first quarter EBITDA of $28 million. The EBITDA increase over the first quarter was primarily due to higher revenue on increased activity levels and the recognition of a early termination fee on the Rowan Resolute, partly offset by higher operating costs.

Second quarter 2018 revenue of $241 million includes $9 million of transition services revenue from ARO Drilling and $12 million of rebillable. Excluding transition services and rebillables, contract drilling revenue was $219 million, a $36-million increase from the first quarter level.

Jack-up revenue, excluding rebills, increased by 17% to $154 million as utilization improved to 68% from 56%, partially offset by a 5% reduction in average day rates to $131,000. Higher jack-up activity was driven by the Gorilla VII and EXL II returning to service during the second quarter, along with higher utilization on the Mississippi and the EXL III, partially offset by idle time on the Stavanger.

Deepwater revenue, excluding rebillables was $65 million, which includes a $27.8-million fee related to Anadarko's early termination of the Resolute. The termination fee also favorably impacted our average deepwater day rates. While Deepwater utilization slipped to 19% for the second quarter, we expect this to rebound in the third quarter with expected additional operating days for the Resolute and Relentless.

Direct operating costs in the second quarter were $164 million, excluding rebills, which falls within the midpoint of our previous estimate. Operating costs were above first quarter levels, mainly due to mobilization of the Bess Brants and the Earnest Dees to the Middle East from Brazil; start-up costs on the Gorilla VI; increased costs related to higher utilization on the Mississippi, which had been at a shipyard doing its special survey during the first quarter; and fuel purchases for our idle drillships.

SG&A expenses for the second quarter of $25 million were consistent with the prior estimate and similar to first quarter expenses. For the second quarter, depreciation expense totaled approximately $97 million and interest expense totaled $39 million, both in line with previous estimates and similar to first quarter levels.

We recognized a $4-million income tax benefit in the second quarter compared to $6 million in income tax expense during the first quarter, primarily due to a $10-million second quarter discrete benefit as a result of the resolution of a prior year tax contingency and a beneficial adjustment to our valuation allowance related to changes to our pension plan during the second quarter.

As we have discussed in previous calls, our quarterly income tax provision can exhibit wide fluctuations. We currently expect to incur full year 2018 income tax expense in the low to mid-teens million dollar range based on our latest expectation of activity levels and the geographic mix of our earnings. We continue to expect to incur cash tax in 2018 in the mid $30-million range. This estimate excludes any discrete items such as audit settlements or adjustments to valuation allowances on deferred tax assets.

Moving to our cash flow and balance sheet. We ended the quarter with just over $1.1 billion in cash. Cash declined by approximately $80 million during the quarter. However, capital expenditures of $42 million were higher than normal as they include spending on the EXL I, EXL IV, Bess Brants, and Earnest Dees to prepare them for their three-year contracts with Saudi Aramco.

Additionally, we had a $35-million billed in receivables, partially due to increased activity and the Anadarko termination fee. In May, we entered into a new five-year unsecured credit facility that provides for $955 million of borrowing capacity. Our existing credit facility was amended to provide $311 million of borrowing capacity, steps down over the next two years and matures in January 2021.

I'm very pleased that we were able to obtain this new facility, particularly given the challenging environment facing our industry. This adds two years of significant liquidity for the company, with close to $1 billion of borrowing capacity expected through May of 2023.

I also believe it is noteworthy that in this challenging environment, of the 12 lenders who extended our credit facility in 2016, 11 have agreed to join this new facility. I would like to once again thank our bankers for their strong support.

Turning now to our estimates for the third quarter and a update to our full year 2018 outlook. While our activity levels are expected to increase further in the third quarter, particularly in the Deepwater segment, our third quarter revenue will reflect market rates for drillships for that period that are in the low to mid $100,000 range. Revenue will also be impacted by the leasing of the Bob Palmer, where the lease rate is lower than the previous contracted day rates, although this lease revenue has no associated operating cost except for depreciation.

We continue to expect third quarter transition services revenue will approximate $9 million, and to incur similar levels of rebillables as we recorded during the second quarter. Direct operating expenses, excluding rebillables, for the third quarter are expected to range between $160 million and $170 million. This includes the startup of the Rowan Relentless.

Our full year 2018 operating expense estimate is in the range of $600 million to $620 million, which again, excludes rebillables. This range is $10 million higher than our previous estimate as it includes an expectation of additional work for both our drillships and jack-ups.

Our full year 2018, SG&A estimate is unchanged at $95 million to $100 million, with third quarter expenses expected to remain in the mid $20-million range. Depreciation expense for the third quarter is forecasted to increase slightly to approximately $100 million. Full year 2018 depreciation guidance is unchanged at $380 million to $390 million. We expect third quarter interest expense to be similar to second quarter levels and to incur full year interest expense of $157 million.

Finally, capital expenditures for the full year of 2018, excluding rig acquisition costs, are estimated to range from $190 million to $200 million. This includes capital upgrades for the previously discussed contract specific spending on the four rigs leased in the ARO Drilling, a portion of which will be reimbursed. It also includes the purchase of two managed pressure drillings, or MPD, equipment kit and the majority of expenditures to make all of our drillships MPD ready.

I would now like to take a moment to discuss the operating results for ARO Drilling, which Rowan accounts for under the equity method. In the second quarter, ARO Drilling generated net income of $3.2 million compared to a net loss of $2.6 million during the first quarter. Rowan's 50% share of this net income is reflected on our income statement.

This joint venture generated revenue of approximately $71 million, an increase from $58 million in the first quarter. Revenue growth was primarily due to a full quarter's contribution from the SAR-201, higher utilization on the SAR-202, higher management fees, and the addition of the Bob Palmer as a leased rig in mid-June.

ARO Drilling's direct operating costs increased to $36 million from $33 million in the prior quarter due largely to the lease of the Bob Palmer. SG&A totaled $6.8 million, a modest increase from first quarter levels. All in all, ARO Drilling generated adjusted EBITDA of $28.1 million for the second quarter of 2018, an improvement from $18.5 million in the first quarter.

Lastly, we are extremely pleased with the financial terms of the joint venture and believe that the investment community will have a similar opinion if they gain a better understanding of the earnings power of ARO.

While we certainly disclose what is required by the SEC, we have also continued to seek ways to provide greater detail around the JV's expected results of operations but also within the confines of our non-disclosure agreement with Saudi Aramco. We also recognize that there may be some confusion for investors as to what sell-side analysts estimates for Rowan include or exclude as it relates to ARO. Therefore, we have requested that sell-side analysts report estimates for Rowan as we expect to report under U.S. GAAP, reflecting our equity method of accounting for ARO Drilling.

We have also contacted certain data aggregators, including FactSet and Bloomberg, to help provide investors with greater clarity and transparency on analyst expectations for ARO. These data aggregators now have separate identifiers for ARO Drilling. They can accept analyst estimates for the joint venture for revenue, EBITDA, and net income.

We continue to encourage all sell-side analysts to report your estimates for 100% of ARO's results with these firms (26:55), alongside with your Rowan estimates. We hope this greater level of consistency and practice for reporting of Rowan estimates and transparency regarding ARO Drilling estimates will provide the investment community with the opportunity to accurately value Rowan's interest in ARO Drilling and ultimately, Rowan on a sum of the parts basis.

With that, we are ready to open the call to questions-and-answers. Operator?

Question-and-Answer Session

Operator

Your first question comes from Sean Meakim with JPMorgan. Please go ahead.

Sean C. Meakim - JPMorgan Securities LLC

Thanks. Hey, good morning.

Stephen M. Butz - Rowan Cos. Plc

Morning, Sean.

Thomas Peter Burke - Rowan Cos. Plc

Hey, Sean.

Sean C. Meakim - JPMorgan Securities LLC

So just to kick things off, I was hoping if we could maybe just get a little more detail into the strategies around the Reliance and the Renaissance, are we actively bidding into Gulf of Mexico on new tenders, does the Mexican side have any opportunities?

And I'm just thinking about how you think the strategy will evolve beginning with the idea now seems to be stringing along some offshore term options, keeping your flexibility for some of your most prized assets. When or – on what circumstances can we start to see that translate into some longer term work? And are there any markets that you're willing or unwilling to mow (28:34) those drillships into?

Thomas Peter Burke - Rowan Cos. Plc

Great, Sean. Hey, good morning. Good question. So on the – our drillships, what we are looking at in our market is really the seventh generation assets, so it's the high end of the benign drillship fleet. And so we took the strategy is as we stack rigs as contracts were terminated, we did take a significant amount of money out of those contracts and then we were faced with this noise, where there was some short-term work, but we couldn't see much down the road, we couldn't see a horizon where we could keep those rigs working.

So in 2016 and early 2017, we stepped away from short-term contracts and decided to basically keep the rigs stacked. But we kept them warm-stacked, and we really try to look after them. As you say, they are some of our most prized assets. As we came – as we finished 2017 and came into early 2018, we did see some opportunities for short-term work.

We don't want to get locked in for long-term and long-term sort of means two to three years, but we also wanted to put the rigs back to work. Because at a certain point, even if you look after the rigs carefully, the customers they look at the rig and if they've been stacked for more than two years, maybe three years, there's some doubt in their mind that you'd be able to bring them back. But I think, we looked after our rig, as we entered 2018, we started to see more opportunity.

And frankly customers (30:08) and so we've done a lot of visits to rigs offshore and when we had the rigs in Corpus and so as we – our strategy has been put them back to work, get them hot because those will be the rigs that the customers will want in a competitive market. Don't lose money on them, but bid aggressively to get them out of the – to get them back to hot.

We do see customers want these rigs and so we are competing at the high-end of the seventh generation market. It's a little unclear what will happen on pricing, whether customers will continue to prize the seventh generation assets or pick the sixth – more of the sixth generation assets. But for sure right now we have customers looking at all four ships. We put two back to work, and we're actively in discussions with customers on the others.

Now having said that, it is competitive and there are obviously other drillers out there but there aren't that many seventh generation assets available. As far as where we work, frankly worldwide, but with a lot of focus clearly on West Africa, South America, and the Gulf of Mexico. We do bid things – there are opportunities in India and other places in the world. But frankly, we're not quite as focused on those. We may or may not bid those, we do see opportunities in Mexico; we're bidding on some right now, and bidding on some opportunities in Brazil, Angola, Nigeria. Actually I'm not sure if we are bidding one in Nigeria right now, but we're bidding on all of those markets. And just really thinking about getting the rigs back to hot and but also not lock-in for too long. I'm not sure if (31:56).

Sean C. Meakim - JPMorgan Securities LLC

Thank you for all of that. No, that's comprehensive. Yes, absolutely. The other question, I guess, as we think about ARO, I thought it'd be helpful if we could maybe just do a bit of a recap, I guess, in terms of cash needs. Certainly a lot of investor questions around expectations for cash in, but you all seem to think that the cash position is going to be positive in terms of near-term and obviously long-term.

But maybe even thinking besides CapEx, working capital or anything else maybe just kind of a recap, Stephen, in terms of kind of expectations for cash in and out, short-term, long-term I think would be helpful to review.

Thomas Peter Burke - Rowan Cos. Plc

Yeah, so I'll let Stephen answer the difficult part of that question. But let me just sort of make a comment on ARO. So we are putting four rigs into ARO right now as leased rigs, the EXL I and the EXL IV, and those rigs have been in (32:49) for some time and we have an upgrade on those. So there is some capital going into those, but we do think they're a great (32:57) rig for Saudi Aramco longer term. And the Bess Brants and the Earnest Dees, they're going into – to be leased to ARO to work for Saudi Aramco.

Again, the upgrade on those rigs or the reactivation on those rigs is more than a normal Rowan rig would take, but we did buy those rigs sort of at a sub-$40 million value so we are having to put more money into those rigs and I think we guided to that in our CapEx.

But ultimately those rigs will go to work and hopefully stay working for Saudi Aramco for quite some time. And they're modern rigs and it's been – we finally got our hands on them. They're in the shipyard. And frankly, there are some things we're disappointed at. But another, and generally, the rigs haven't been used that much and so they are – we're very positive on actually putting those rigs back to work and we hope they have a long operation with Saudi Aramco.

Stephen?

Stephen M. Butz - Rowan Cos. Plc

Yes, Sean, just to give you a little more detail and we'll also probably stick with the high points because of course as you know there are a lot of various impacts with the transactions back and forth with ARO. But at a high level, I mean, what we've said is that our business plan that we agreed to together with Aramco at the time of formation, and we still stand by this, did not show us having to put in additional cash.

Now we did run scenarios where we would have to, but our base case expectation was that this newbuild program that it's embarking on will be funded at the JV level with their own internally generated funds and external financing that we expect the JV to secure.

Now we did receive the meaningful cash payment back last year at the time we sold some rigs into ARO, and we expect another significant payment in the fourth quarter, order of magnitude in the $100-million range that we expect to come back to Rowan in the fourth quarter of this year.

Now as far as when Rowan – and then we also will take cash out in the way of interest income on our shareholder loan to ARO and that will occur annually. As far as when we'll be able to take other distributions from ARO, that's ultimately going to be not only dependent on the performance, which is obvious, but also how much leverage the JV is able to put against the newbuilds. And we're working on that financing plan together with ARO and Aramco right now.

But suffice it to say, I mean, with eight-year contracts, with good terms, with a strong counterparty, we expect the JV to put a meaningful amount of leverage against those newbuilds.

Does that answer your question?

Sean C. Meakim - JPMorgan Securities LLC

Okay, great. Yeah, very good. Thanks for the feedback.

Thomas Peter Burke - Rowan Cos. Plc

Sure.

Operator

Your next question comes from Ian Macpherson with Simmons. Please go ahead.

Ian Macpherson - Simmons & Company International

Good morning.

Thomas Peter Burke - Rowan Cos. Plc

Good morning, Ian.

Ian Macpherson - Simmons & Company International

Tom, you all have unique Saudi visibility now, I would say, with ARO. Where do you think the Saudi jack-up recount goes over the next couple years if it's at 45 today? You see it plateauing or growing?

Thomas Peter Burke - Rowan Cos. Plc

I'd say that we get the feeling that it will grow somewhat. I think, from what we can tell, Aramco is tendering against some of their rigs that are rolling off contracts. And so, I think there'll be a sort of a general hydrating.

I think we have a good relationship with Saudi Aramco. However, they don't discuss with us other drilling contractors, right, as far as what they're intending to do. So I don't think we have any particular unique insights from that perspective.

It feels like they'll be adding rigs, but not dramatically from what I've – I would say it feels like a short – a modest ramp up. But also, some hydrating is what I think we'll probably see.

Ian Macpherson - Simmons & Company International

Got it. Okay. Thanks. And then moving around to a different region, you mentioned in your prepared remarks that the Rowan Norway has the ability to be, I guess, a little bit more selective now given that that asset class has less availability. Would you say – could we infer from that that the Rowan Norway has positive pricing power as it looks to fill up backlog for next year?

Thomas Peter Burke - Rowan Cos. Plc

Yeah. I'd say that as we look at the market down the road in 2019, it seems there – and again, we're drilling contractors. We're always cognizant of the (38:08) which the drilling contracts are all coming in the future, right?

But I do – I mean, when you look at that market in the high end of the North Sea, UK sector of the North Sea, and the Norwegian part of the North Sea, we do see a lot of people want rigs next year. And so, there are opportunities. And in the markets where that rig has been is truly targeted for, which is the high-end of the jack-up market, even perhaps competing with the low end of the (38:47).

And so our marketing strategy has been that we don't want to lock it in in a more benign environment, although it's the North Sea it's still a harsh environment, but we don't want to lock it in for long – at a lower rate. So, we've been directly (39:07) marketed on the more – the lower end jobs in the North Sea. We're basically been more aggressive on pricing. And hence it's still stacked.

But we do think it's an asset that will be needed next year and there are really (39:27) some opportunities outside of the North Sea where that rig's particular capabilities are needed, which we're looking at and we (39:39), right? So I think we would love to get it back to work and there's nothing that would make us – nothing that sort of makes us more distraught than going to Dundee and seeing it sitting there, but also we don't want to be sort of locking in at a lower rate because we are effectively down competing. So I think, there's more opportunities next year, although, it is tough to be stacking that rig.

Ian Macpherson - Simmons & Company International

Yeah. So, I guess, what – yeah, I think, what I heard you say is that the demand visibility is strong but the demand visibility for the rigs to maximize its functional and economic potential is probably not totally clear yet next year?

Thomas Peter Burke - Rowan Cos. Plc

Well, I think it is clear. That's why we've been – I would say that in the short-term, there aren't any – we've been bidding it, but we've been bidding it on probably things that it works (40:34) down competing, and we probably have been trying to keep the price a little bit higher and we've been moving, right?

Ian Macpherson - Simmons & Company International

Yeah.

Thomas Peter Burke - Rowan Cos. Plc

But next year, we do see a – a quite – quite a large amount of work for that rig and of course, it may not pan out, but we are seeing more work – more opportunities for that rig next year, that's why we've not being willing to commit it this year on something lower.

Ian Macpherson - Simmons & Company International

Understood. Thanks. Can I squeeze in one more quick one for Stephen? Would you share with us anything regarding the cost to reactivate Relentless, so we can get a sense of how that fits within the second half cost guidance and also maybe just as a barometer for future reactivations as well?

Stephen M. Butz - Rowan Cos. Plc

Yeah, sure, Ian. Just as an example, the rig is now fully crewed. It's probably just got – became fully crewed in the last few weeks, but you have to crew the rigs up fully in sufficient advance of the job starting. So that's by far and away the biggest cost.

Our cost in the third quarter on the Relentless will be plus or minus $10 million a day – $10 million higher than they were in the second quarter. And again, it's largely due to that crew – fully crewed almost an entire quarter.

(42:05)

Stephen M. Butz - Rowan Cos. Plc

I'm sorry?

Ian Macpherson - Simmons & Company International

So the manning up is the only material cost increase, there's nothing else with regards to...?

Stephen M. Butz - Rowan Cos. Plc

That's the only material cost increase. There are other things, minor inventories on the rig, rubber goods, things that expire, or certain certifications that from time-to-time when they're warm-stacked we probably might let them lapsed, and so we have to go through certain trials again. But far and away, the biggest cost is that labor.

Thomas Peter Burke - Rowan Cos. Plc

And the only CapEx that we might have is the customer needs, something particular like MPD. Or what we're seeing now in some of the really big work, the customer is – the technology has changed where the inertial navigation system needs to be upgraded and that – we haven't done that yet, but that's probably $1 million a rig, right?

So we aren't having a big CapEx spend, it's really about ramping up the people, and we don't have probably any CapEx spend frankly. Buying fuel, which once we start work we typically sell back to the customer, or sold to the customer, there isn't a CapEx reactivation on that rig (43:28).

Stephen M. Butz - Rowan Cos. Plc

That's right. Yeah, not with the strategy that we've taken so that's our expectation on the next two rigs that we would bring out of warm-stack as well, and we are seeing the benefits versus cold-stacked, one, they probably wouldn't be able to get jobs so soon because you have to work through with the industry in the warm-stack and newbuild capacity and then that CapEx would likely be very high.

Ian Macpherson - Simmons & Company International

Got it. Thanks guys. Good quarter.

Stephen M. Butz - Rowan Cos. Plc

Thank you.

Thomas Peter Burke - Rowan Cos. Plc

Thank you, Ian.

Operator

Your next question comes from Scott Gruber with Citigroup. Please go ahead.

Stephen M. Butz - Rowan Cos. Plc

Hi, Scott.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Yes good morning. Tom or Stephen, are you able to provide color on the potential proceeds from the upcoming sale of the Yeargain and Boswell?

Stephen M. Butz - Rowan Cos. Plc

Yeah. I mentioned this earlier on the call that we do expect to take cash out of the JV in the fourth quarter plus or minus $100 million. And that could still change depending on the cash flow needed at the JV or how many rig orders in the fourth quarter but that's based on expectation of placing order for two rigs as well.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Got it.

Thomas Peter Burke - Rowan Cos. Plc

And Scott, just obviously I think you probably realize this, but when we – provided that actually works obviously with the JV, as we're selling those rigs to JV, but we're kind of selling half – the way it works is effectively selling half of those rigs from a cash flow perspective, if that make sense.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Yes, yes. Got it. Sorry I missed that earlier comment. How should we think about the cadence of financing the newbuild based on the – some of the earlier remarks it sounded like two jack-ups will be ordered in 4Q. So then do you guys work to finance those two or are you looking at a bigger upfront financing package?

Stephen M. Butz - Rowan Cos. Plc

Yeah, there are different strategies that the JV could take. So it's – and again, the JV hasn't decided yet, so – but that would be – one logical approach would be you have critical mass on the financing of that level, two jack-up rigs and – but I mean perhaps you could do something bigger and against a larger number of rigs and have some benefits.

But again, then you'd be securing it much further in advance of when you needed the money so there would be some costs that you would incur there. So we'll be helping the JV to think through all those pros and cons and different strategies over the next few months.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Got it. And just to clarify the remarks made in response to Sean's question about cash coming out, it sounds like if the market is accepting a healthy leverage on the assets at reasonable terms, then cash can flow back to Rowan around the time of the financing or financings and ahead of the JV turning cash positive. Is that correct?

Stephen M. Butz - Rowan Cos. Plc

Yes, well, I mean, the JV is cash positive today, but it needs to build some cash to make these down payments. Even if it secures substantial amount of leverage there will still be some equity component that likely required by the lender or whatever the financing source is. So I think it would be probably getting ahead of ourselves if we said we'd be taking cash out in 2019 as an example. But, I think, again, we'll have to iron out the details and it will depend where the financing will ultimately land.

(47:22)

Stephen M. Butz - Rowan Cos. Plc

Go ahead.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

We don't have to necessarily wait until the JV turns cash positive above and beyond the investment in the newbuilds is the question.

Thomas Peter Burke - Rowan Cos. Plc

I think what we've said the agreement is that we would take cash out – the JV is going to have enough cash for the next 12 months basically of operations is the agreement. Now, if we have – depending on the financing, obviously, depends on the deposits. So I think this depends on the deposits, so if we have the deposit coming in sort of 13 months, we wouldn't take cash out. But I do think our plan after taking cash out in 2018 is to – is probably thinking it's going to be basically cash neutral to Rowan.

Stephen M. Butz - Rowan Cos. Plc

That's right. For the near term.

Thomas Peter Burke - Rowan Cos. Plc

Yeah.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Got you. Appreciate the color.

Thomas Peter Burke - Rowan Cos. Plc

Yeah. And again, we will – Stephen's been working hard with the ARO Drilling finance guys and also Saudi Aramco Treasury looking at different finance opportunities – financing opportunities, and we do have – as Stephen said, there is a number of different ones. Hasn't been finalized yet by any means and I think once we get a bit more color on it we will definitely update you, Scott.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Got it. Really appreciate it. Thank you.

Operator

Your next question comes from Haithum Nokta with Clarksons Platou Securities. Please go ahead.

Haithum Nokta - Clarksons Platou Securities, Inc.

Hi. Good morning.

Thomas Peter Burke - Rowan Cos. Plc

Hey, Haithum.

Haithum Nokta - Clarksons Platou Securities, Inc.

Hey. Stephen, I just wanted to confirm kind of on the last comment that the $100 million plus, minus that you expect extract in the fourth quarter, that's net of any – of the newbuild equity component that you're expecting at this time, correct?

Stephen M. Butz - Rowan Cos. Plc

That's right. Correct.

Haithum Nokta - Clarksons Platou Securities, Inc.

Okay. And, I guess, you're not able to say yet, kind of what payment terms would be expected for the two newbuilds at this point?

Stephen M. Butz - Rowan Cos. Plc

I think, what we've said I believe that term is redacted in the agreement on file. But what we've said is that what's customary around the world today is backend loaded payment terms. And so we would expect something to have similar terms. But our JV agreement – our shareholder agreement lays out that the terms will be no worse than X, for example. And so, that's sort of our expectation today. I hope that color helps, but that's really all the detail that I can go into on it today.

Haithum Nokta - Clarksons Platou Securities, Inc.

Understood. Got like a more strategic question. You have more than $1.1 billion of cash now. In Saudi Arabia, you're pretty well stacked with the JV. You've said you're less interested in adding benign jack-up exposure overall. So that leaves the harsh environment jack-ups and this high-end seventh generation drillship market. Where do you see the better opportunity to deploy capital and potentially acquire assets over the next 12 months or so? If that's on the radar.

Thomas Peter Burke - Rowan Cos. Plc

Yeah, no, it's a good question and something we spend a – we spend a lot of time on capital allocation with managements and the board. And so, I'd say, certainly, the high-end of the drillship markets, and as that is picking up, it was difficult to contemplate moving on the high end of the drillship market, when we had three rigs not working. But that's an interesting market there; although pricing is definitely at the high end of the drillship markets it is reflecting the asset quality for sure.

The harsh environment (51:48) market is obviously a market which is very attractive but we're very concerned on the terms, and we think that frankly it may be a little late for us in that market, but we certainly continue to look at it.

On the jack-up market, there's a lot – so sorry, just staying on the drillship market. On the sixth generation asset, there are some of those available. Again, not that many on the benign side. We continue to look at that. But also, the real tension there is how long will we keep the asset stacked before it goes back to work.

With the Bess Brants and the Earnest Dees, basically we wired the money, the final payment in January, and then basically knew we were going to get it on a contract – we had a contract secured for it once we owned it a couple of months later, right?

And that is – if the rig had been sitting around for about three years, it would be a very different return story. So I think with the sixth generation assets, we'll continue to look at those, but we just want to make sure we don't have them sitting around too long.

And then, on the jack-up side, yes, we're interested in the high end of the jack-up markets. There aren't many ultra-harsh rigs out – there's only 19 ultra-harsh rigs. So it's really the harsh side of the jack-up market. There are some opportunities there, both corporate, a few not many, but also on a shipyard so spending a lot of time looking at that and thinking through that. But not to say we wouldn't get more benign jack-up exposure because the harsh end of the market is a much smaller market.

Not saying we wouldn't get more benign exposure but we certainly have a preference for the harsh side of the market. Certainly on jack-ups today as I noted in my comments, Haithum, that we are – that we don't have enough – we don't have any basically spare capacity right now on jack-ups. So we definitely – apart from the Rowan Norway. So we certainly lean towards the harsh side of the jack-up market but we're not completely against modern benign jack-ups by any means.

Haithum Nokta - Clarksons Platou Securities, Inc.

Understood. And, I guess, the – my one clarification was that, or a question on the Saudi contracts that you just announced, the four – or the six new ones and the four call it extensions of the rigs that will be leased in, were those the result of a direct negotiation or I assume outside of (54:27) process. Is that correct?

Thomas Peter Burke - Rowan Cos. Plc

Those rigs, six that we announced yesterday were direct negotiation. Yeah, so there is a tender process going on in Aramco. I forget for how many rigs it is right now, but this was a direct negotiation separate to that.

Haithum Nokta - Clarksons Platou Securities, Inc.

Great. Thanks. I'll turn it back.

Thomas Peter Burke - Rowan Cos. Plc

Haithum, thank you so much.

Operator

Your last question comes from Kurt Hallead with RBC. Please go ahead.

Kurt Hallead - RBC Capital Markets LLC

Hey, good morning.

Stephen M. Butz - Rowan Cos. Plc

Morning, Kurt.

Thomas Peter Burke - Rowan Cos. Plc

Kurt, good morning.

Kurt Hallead - RBC Capital Markets LLC

Hey, guys, I wanted to spend just a couple more minutes here on that ARO joint venture and question maybe directed first to Stephen. And I know you guys are doing everything that you can that's feasible to get us some insight and ability to give you the appropriate value attribution.

Maybe, if I could ask, what do you think the equity joint venture line item contribution will be for full year 2018 for the ARO JV? So therefore, you don't have to go through day rates and operating cost and all kinds of other – the line item gyrations. What do you think the equity earnings line will be in 2018?

Stephen M. Butz - Rowan Cos. Plc

You're referring to the equity income line on the income statement?

Kurt Hallead - RBC Capital Markets LLC

That's correct. Yeah.

Stephen M. Butz - Rowan Cos. Plc

Yeah. I mean, plus or minus $15 million, right? So it's going to be very backend loaded. But as we have leased the discount rigs in, it should ramp up. And we'll have the two additional wholly-owned rigs in the fourth quarter.

Kurt Hallead - RBC Capital Markets LLC

Okay. That's awesome. That's great. And secondly, I just wanted to – I know you guys probably referenced this when you first announced the joint venture, but now that it's been up and operating and kind of get your footing here. And maybe this next question directed to Tom.

So when you guys went through the process of the joint venture and you kind of looked at the pros and cons of you commit the rigs into the joint venture, you're going to get the 50% of the economic benefit of those assets going forward. At the end of the day, when you did your calculation, did you feel extremely confident that when it was all said and done that you really wouldn't be diluting that economic benefit by putting these rigs into the joint venture?

Thomas Peter Burke - Rowan Cos. Plc

Yeah. Actually, I have to say, that was kind of the key question. Are we better without it or with it, and we – in that process, we engaged the investment bank, and we also engaged a top-tier consulting company to, sort of, help us through it to make sure that we weren't sort of falling in love with the deal to get us – to give ourselves some very – some – to basically, direct advice, not only to management, to the board, to make sure that we weren't. But did we think through this or did we just sort of fall in love with it and rush off and do it.

So I think, we did a lot of analysis on that. And I feel like the answer is, we felt that it would be – and we basically looked at the equity creation with and without it in multiple scenarios, and we felt that it's strongly much better with.

Now the 50% of the economics, right, it is a 50% of the ownership into those rigs, into those – of the JV. That is one component of it, and we have nine rigs in Saudi when we started this. We are – there is still the leased rigs, which of the 16 rigs we'll have operating by the end of this year, we'll own half of seven, but we'll own 100% of nine and – which is the leased rigs.

And those (58:35) leased rigs is – if we could take them somewhere else and do better with them, we absolutely would. We don't have to lease them in and Aramco has being very supportive and very thoughtful. We don't have to take them into the JV, we could put them somewhere else. And so, if we felt we could get better economics on those nine, we would, and Aramco understands that.

And so, yes, we have 50% of seven and – but we have 100% of the remaining nine, and although, there is a split on the EBITDA, which we haven't disclosed. So we looked at it hard and the marching orders that we had from the directors was, hey, listen, we understand this is your biggest customer, and we understand this is your – the largest jack-up market, but if it doesn't make sense, don't do it, right? And so, we looked – I didn't feel like going through the process that we were being forced into it, by any means. And so, I think there is true value creation here.

Kurt Hallead - RBC Capital Markets LLC

Okay. That's awesome, really appreciate that. Thanks.

Thomas Peter Burke - Rowan Cos. Plc

Thanks. And we hope to give you some more insight into the economics and the splits and the newbuild over the next several months.

Kurt Hallead - RBC Capital Markets LLC

Great. Thanks.

Operator

There are no further questions at this time. Son Vann, I turn the call back over to you.

Son Vann - Rowan Cos. Plc

Thank you, Stephanie, and thanks, everyone, for your interest and participation. If there's any additional questions feel free to give us a call or follow-up call. Thanks again and we'll talk to you next quarter.

Operator

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