Rowan Companies Management Discusses Q3 2012 Results - Earnings Call Transcript

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Rowan Companies (NYSE:RDC) Q3 2012 Earnings Call October 31, 2012 11:00 AM ET

Executives

Suzanne M. Spera - Director of Investor Relations

W. Matt Ralls - Chief Executive Officer, President, Director and Chairman of Executive Committee

Mark A. Keller - Executive Vice President of Business Development

J. Kevin Bartol - Chief Financial Officer, Executive Vice President and Treasurer

Thomas P. Burke - Chief Operating Officer

John L. Buvens - Executive Vice President of Legal

Analysts

Collin Gerry - Raymond James & Associates, Inc., Research Division

Todd P. Scholl - Clarkson Capital Markets, Research Division

Robin E. Shoemaker - Citigroup Inc, Research Division

Robert MacKenzie - FBR Capital Markets & Co., Research Division

David Wilson - Howard Weil Incorporated, Research Division

Justin Sander - RBC Capital Markets, LLC, Research Division

Ian Macpherson - Simmons & Company International, Research Division

Gregory Lewis - Crédit Suisse AG, Research Division

John R. Keller - Stephens Inc., Research Division

Operator

Greetings, and welcome Rowan Companies' Third Quarter 2012 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Suzanne Spera, Director of Investor Relations for Rowan Companies. Thank you, Suzanne, you may begin.

Suzanne M. Spera

Thank you, Diego, and good morning. Welcome to Rowan's third quarter 2012 Earnings Conference Call Joining me on the call this morning are Matt Ralls, President and Chief Executive Officer; Mark Keller, Executive Vice President, Business Development; and Kevin Bartol, Executive Vice President, Chief Financial Officer, who will have prepared comments. Also in the room to respond to questions is Chief Operating Officer Tom Burke.

Before Matt begins his remarks, I'd like to remind you that during the course of this conference call, forward-looking statements may be made within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements about the change in corporate structure, as well as statements as to the expectations, beliefs and future expected financial performance of the company that are based on current expectations and are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected by the company. Other relevant factors have been and will be disclosed in the company's filings with the SEC.

With that, I'll turn the call over to Matt.

W. Matt Ralls

Thanks, Suzanne, and good morning, everyone. I'll make some brief comments before turning the call over to Mark Keller to update you on our marketing efforts and then to Kevin Bartol for his comments on our financial results and some guidance for the balance of the year. Before I begin, I'd like to express on behalf of all of us here at Rowan, our deep concern and sympathy for all of you on the East Coast who are suffering through the aftermath of Hurricane Sandy. We have a full appreciation for all the headaches and heartaches and hard work cleaning up that follows such a powerful storm.

I also want to welcome Kevin to this call for the first time as CFO. As many of you know, Kevin has been with Rowan for 5 years doing some great work in corporate development and assumed the CFO role in August following Bill Wells' departure.

This morning, we announced results for the third quarter that were generally in line with analyst expectations for our operating revenues and expenses but which also included the earnings impact of several nonrecurring or onetime charges. Kevin will give you more detail on these charges but they primarily relate to the EXL-I tanker collision, our redomestication and related restructurings, pension expense-related to a subsidiary that's been sold and volatility around our effective tax rate.

We appreciate the confusion and perhaps frustration these unusual charges can create, but they generally either relate to charges -- to changes that strengthen our longer-term competitive position or in the case of EXL-I, an event out of our control. On a more positive note, we continue to see strong demand for available rigs in our active jack-up fleet, especially for our high-spec rigs. We currently have 9 jack-ups coming off contract over the next 3 quarters and we have multiple opportunities for most of these rigs and expect all of them to move to new contracts at higher day rates. This optimistic outlook is in spite of scheduled newbuild jack-up deliveries by competitors in the next several quarters. Rowan's high-spec fleet of relatively young jack-ups is already in a strong position competitively. And we believe that for the industry overall, accelerating attrition of the older jack-ups in the worldwide fleet will balance supply and demand.

Moving to the deepwater. We announced during the third quarter that we exercised our option at Hyundai Heavy Industries for a fourth drillship based on our confidence in the continuing strength of the demand for this very high specification class of equipment. That confidence reflected the attractive contract we signed with Repsol for the first of our 4 drillships and is reinforced by several discussions with potential clients for the other 3 rigs. We remain optimistic that we will receive further commitment in the next few months for long-term work for one or more of these 3 available units.

I should note here that the decision to build a fourth drillship means that we will need to go back to the credit markets sometime in the next year or so to fund the final shipyard payments as Kevin will discuss in his comments.

Finally, I'd like to offer a bit of perspective on the rest of 2012 and 2013. As you all know, we have been refocusing our strategy here at Rowan to concentrate on our franchise and offshore drilling. In doing so, we sold our manufacturing and land drilling operations and their related earnings and reinvested the sale proceeds into newbuild deepwater rigs that won't generate earnings on invested capital until 2014.

Moreover, that investment was made with the foreknowledge that our overhead expenses would increase in advance of that new revenue stream as we built our deepwater operations workforce and management systems. We also repositioned many of our jack-ups over the past year or so to build our presence in important international markets around the world, incurring significant expense at offrate time. Similarly, we incurred substantial expense this year to redomesticate to the U.K. to ensure that we're on even footing with our large competitors in the industry.

We believe that over time, these investments in Rowan's future will prove to have been the right decisions but, while our 2012 earnings have increased nicely over 2011 results and will do so again in 2013 compared to 2012, we won't see the true earning ability of the company reach fruition until 2014 and beyond.

In summary, we are strongly committed to the strategy we developed in 2009, very pleased with our progress in implementing that strategy and proud of our operational execution in getting new jack-ups delivered and on contact and construction under way on 4 of the most capable drillships in the industry. We appreciate your patience and support while this strategy reaches its exciting potential.

I'll now turn it over to Mark to give you more details on the markets.

Mark A. Keller

Thanks, Matt, and good morning, everyone. Before I begin my comments, I would also like to offer my thoughts and prayers to all those affected by Hurricane Sandy.

The jack-up market has continually strengthened throughout 2012. According to IHS Petrodata, there are currently 474 jack-ups worldwide. Demand is 399 rigs with total utilization of 84%, marketed utilization of 93%. We have not seen utilization numbers this high in almost 4 years. Day rate averages among our peer group are up more than $2,300 per day since our last call and Rowan day rates have improved $7,500 per day over the same period. As Matt mentioned, we expect our day rates to continue to increase as several contracts roll over in the coming months.

International tender activity remains robust. Considering submitted tenders and inquiries, bids in-house and anticipated activity, we currently see opportunities for Rowan jack-ups for approximately 30 projects, with the majority of the demand in Southeast Asia, the Middle East and the North Sea. Given that 59% of our days are already contracted for 2013, this looks highly favorable for the continued strong utilization of our jack-up fleet.

Lately, there's been some concern surrounding the industry's ability to absorb the 92 jack-ups currently under construction. In actuality, we believe there will be a struggle to replace the aging fleet. There are 317 units that are currently 25 years or older. Conservatively speaking, only 14 of those units are 40 years of age or more. However, in 10 short years, that number will increase to 273 jack-ups. The industry witnessed the attrition of nearly 120 rigs in the 15 years following the newbuild boom in the 1980s. We believe that we are on the verge of history of repeating itself as operators worldwide demand more strenuous drilling requirements and the older rigs rapidly become obsolete. Rowan is well positioned for the future with the young jack-up fleet whose average age is 16 years.

I would now like to talk to you briefly about the regions of the world where we currently operate our jack-up fleet. Rowan currently has 6 jack-ups contracted in the North Sea. They are all fully utilized and 45% of our total contract backlog is in this region. For large high-spec jack-ups, known demand far exceed supply and the significant depths that is forecasted for the foreseeable future. We anticipate the North Sea to be a target market for many of the newbuilds scheduled for delivery in the remainder of 2012 and into 2013.

We're currently in discussions to extend existing contracts in the North Sea, with our Super Gorilla class and N-Class jack-ups, we're confident in our long-term position in this predominantly high-spec region.

Now turning to the Middle East. We will have 10 active jack-ups in the area and they're all contracted. Demand in the region, driven primarily by Saudi Aramco, is forecast to increase by as many as 10 units in 2013. However, some excess capacity of commodity rigs will still exist. We currently have 6 outstanding tenders in the region.

In the U.S. Gulf of Mexico, our active fleet of 5 jack-ups is fully utilized. Despite a total jack-up utilization of 56% in the region, the market utilization is 90%, showing a significant increase in strength when cold stacked units are removed from the count. Operators in the Gulf are realizing the shortage of capable rigs and term contracts are emerging as evidenced by the Gorilla IV agreement with Walter Oil & Gas and outlook [ph].

We're also in discussions with multiple operators regarding term work versus the traditional oil-to-oil environment of the U.S. Gulf of Mexico. There are only 9 active jack-ups left in the region that are 300-foot cantilever or greater and if term work doesn't materialize, these jack-ups will continue to mobilize out of the U.S. Gulf for longer-term contracts internationally.

And finally, Southeast Asia. The EXL-I has completed repairs following the tanker incident earlier this year. The rig is currently mobilizing to Indonesia and is expected to commence operations for Hess Indonesia early next week. Jack-up demand is forecast to increase in Southeast Asia by as many as 15 to 20 rigs in 2013 as supported by our 15 outstanding tenders in the region. The more technically advanced tender requirements suggest a continued hydrating of the Southeast Asian jack-up fleet.

I would like to conclude my comments with a brief discussion of the ultra-deepwater market. An impressive number of deepwater discoveries in 2012, coupled with scarce availability in 2013 in the case of further tightening and strengthening of the ultra-deepwater sector. Approximately 30 significant discoveries have been announced so far this year, close to the total number of all of 2011. When considering rig availability, only 12 drillships rated 10,000-foot or greater are publicly available in 2013. However, our market intelligence suggests that the majority of those units are already committed and formal contracts will be announced soon. We're currently tracking active requirements for approximately 20 ultra-deepwater drillships, including several outstanding proposals. The market has shifted into 2014 contracting window, prime time for the Rowan resolute and reliance, and we will keep you updated on our progress in securing additional commitments for our ultra-deepwater fleet.

Thank you for your time this morning. I'll now turn the call over to Kevin.

J. Kevin Bartol

Thank you, Mark, and good morning, everyone. Our third quarter revenues were $354 million, up by 51% over last year due to fleet additions and higher utilization and day rates for existing rigs. Revenues were up by 1% over last quarter, primarily from higher average day rates. Our collective shipyard inspection and transit time was approximately 14% of our available rig days, including our 3 cold stacked rigs during the third quarter, which was in line with our previous guidance. We currently expect fourth quarter shipyard inspection and transit time to be approximately 8% of our available rig days, which is lower than previous estimates, primarily due to the deferral in the 2013 of the shipyard projects for 3 Tarzan rigs working for Aramco.

A new fleet status report was issued this morning with guidance on planned shipyard inspection and transit time through 2013. A copy of the report can be found on our website and in our 8-K on file with the SEC.

We've made a couple changes to the format and also intend to change the way we issue our monthly fleet status report going forward. With respect to the format, we've added our planned off rate days by quarter for the remainder of 2012 and for 2013. And we'll include known and anticipated days in future reports. Planned offrate days include forecasted shipyard, inspection and transit time but do not include either forecasted or unplanned operational downtime. For future fleet status reports, we plan to issue only a press release announcing that an updated report has been posted on our website.

Our backlog of drilling commitments is approximately $3.8 billion from $2.4 billion at this time last year. We estimate that 7% of our contract backlog will be realized as revenue during the fourth quarter of 2012; 32% will be realized in 2013; 27% in 2014 and the balance in 2015 and beyond. Excluding the 3 cold stacked rigs, we have 88% of our remaining available rig days under contract in the fourth quarter of 2012 and 66% under contract in 2013.

Our third quarter operating expenses of $188 million were in line with last quarter but above our previous guidance as a result of much higher-than-anticipated reimbursable expenses related to an accommodations contract at Norway. Reimbursable expenses are, of course, fully offset by incremental revenues. Please note that we have provided additional supplemental information for reimbursables in our earnings press release. Excluding these incremental reimbursable expenses, our operating expenses were slightly lower than our previous guidance.

Operating expenses in the third quarter were 45% above last year's level, primarily due to the impact of fleet additions, rig relocations and startups, higher reimbursables and cost associated with the ongoing geographic expansion of our drilling operations.

As reimbursables revert to a more normal level, we estimate fourth quarter 2012 operating expenses will be in the range of $190 million to $193 million, which is higher than previous estimates, primarily due to the deferral into 2013 of the shipyard projects for 3 Tarzan rigs working for Aramco. To clarify that last comment, when rigs are in the shipyard for upgrades, crew and other personnel-related costs associated with the project are capitalized rather than expensed.

Except in Trinidad, where we have recently experienced labor rate increases, we have not experienced significant inflationary pressures in our daily operating expenses and most of the cost increases we have experienced are associated with and more than offset by higher revenues. As a result, we expect our average gross margin as a percentage of revenue to slightly improve in the fourth quarter of 2012.

Our third quarter operating costs and updated fourth quarter cost guidance do not include repairs on the EXL-I due to the tanker collision. These costs are being expensed as incurred but reported separately from operating costs. Repair cost on the EXL-I through September 30 were approximately $9 million and approximately $6 million of additional costs have been incurred since September 30. As Mark mentioned, the repairs were completed in mid-October and the rig is in route to its drilling location in Indonesia. We have filed suit against the tanker owner seeking damages for repairs and loss of hire but have not accrued any recovery as of yet.

Our third quarter depreciation expense totaled $63 million, which was slightly higher than our previous guidance and up by 3% over last quarter and by 25% over last year, primarily due to fleet additions between periods. Our estimate for fourth quarter 2012 depreciation is approximately $64 million.

Our third quarter SG&A expenses totaled $26 million, which was slightly higher than our previous guidance and up by 3% over last quarter and by 14% over last year, primarily due to higher incentive compensation and professional fees associated with tax planning. Our estimate for fourth quarter 2012 SG&A is approximately $27 million.

Material charges and other operating expenses in the third quarter included approximately $2 million of transactional costs associated with our redomestication, $9 million for repairs to the EXL-I, $2 million for equity compensation charges related to the retirement of an executive officer and $5 million for charges related to settlement costs associated with accelerated benefit payments for the company's frozen manufacturing pension plan, which we continue to administer following the sale of LeTourneau.

Interest expense net of interest capitalized was approximately $14 million during the third quarter and in line with our previous guidance. We currently estimate fourth quarter net interest expense of approximately $12 million assuming current debt levels. As previously reported, we redeemed the remaining Title XI Note on July 16 for $110 million, including $10.2 million of make-whole premiums. This premium was recorded as a charge in the third quarter and included in the net interest and other income line in our financial statement.

Our expected full year effective tax rate is approximately 2%. This is higher than our previous forecast of 6% credit, primarily as a result of finalizing our 2011 U.S. federal tax return and changes in the projected mix of foreign and domestic earnings. Collectively, these items caused a $10.6 million increase in our third quarter tax expense compared to our previous forecast.

Property equipment additions totaled $277 million in the third quarter and included $180 million towards the 4 drillships, including the down payment of $167 million for the fourth drillship. The balance of the additions were for our existing fleet, including contractual modifications. At September 30, we had approximately $2.2 billion of remaining capital expenditures under our drillship newbuild program, with $49 million required in the fourth quarter of 2012, $766 million in 2013, $922 million in 2014 and $491 million in 2015. Our drillship commitments will be funded through available cash, cash flow, our revolving credit facility and additional financing. And in that regard, we are evaluating conditions in the credit markets to determine the appropriate timing of those additional financing.

We currently estimate another $175 million of capital expenditures for our jack-up fleet in the fourth quarter of 2012, including $75 million of contractual modifications, $59 million to our life enhancement and upgrade projects, $19 million for existing fleet maintenance and upgrades and $22 million for equipment spares, drill pipe and improvements to our shore bases. Our full year capital expenditures are currently estimated at $765 million, with the increase over previous guidance of $735 million resulting primarily from the down payment associated with the fourth drillship, net of the deferral into 2013 of certain amounts for the first 3 drillships and other shipyard projects for our jack-up fleet.

Although we have not completed our 2013 annual budget process, we are providing preliminary guidance, which we will update in our next earnings call. Actual results may differ significantly from this guidance due to contracting activity, which may require shipyard space and capital expenditures for rig modifications, rig relocations and other factors not currently contemplated. As shown in our fleet status report, we currently expect shipyard inspection and transit time to decline to approximately 9% of our available rig days in 2013 compared to an estimated 11% in 2012.

Our 2013 operating expenses are expected to increase approximately 5% to 7% as a result of this increased activity and some increases in labor rates, incremental costs associated with our continued geographic expansion, as well as hiring and transitioning personnel for our deepwater operations. We are currently estimating worldwide labor rate increases to be approximately 6% to 8% in 2013. As a result of increased activity in costs, we expect our average gross margins as a percentage of revenue to improve slightly in 2013.

Selling, general and administrative expenses are expected to increase approximately 10% to 15%, primarily as a result of growth and our support function for deepwater operations. Our 2013 depreciation expense is expected to increase to approximately $270 million to $275 million due to fleet additions. Based on current debt levels, our 2013 interest expense net of interest capitalized is expected to be approximately $35 million to $40 million. Our 2013 estimated tax rate is currently expected to be in the single digits. This rate could fluctuate as we finalize our 2013 budget and enter into additional drilling contracts. As you know, the tax rate is driven by our mix of domestic and foreign income and the underlying tax rates in each jurisdiction. In addition, additional tax planning as we finalize our restructuring after our 2012 redomestication to the U.K. may have an impact on the quarter-to-quarter rates.

We are currently estimating our 2013 capital expenditures to be approximately $1.2 billion to $1.3 billion, with over $750 million for the 4 drillships and the remainder for jack-up fleet contractual modification, life enhancement projects, fleet spares and fleet maintenance and upgrades. We will refine this 2013 guidance in our next earnings call after we have completed our annual budget process.

That concludes our prepared remarks. With Diego's assistance, we will now open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Collin Gerry with Raymond James.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Appreciate the new format on the guidance, a lot of great detail on 2013. One thing that kind of caught my ear was the labor rate increase. 6% to 8%, that seems a little bit higher than kind of inflation rates that we've been hearing about for the past year or so. I was wondering if there's anything specific going on there, whether it's the transition to deepwater or certain geographies that are very high, maybe just a little more color there.

Thomas P. Burke

I'd say that's mostly the transition to deepwater in our labor rates and -- but it's -- there are certain geographies where we're seeing some labor rate increases as we move rigs between areas but it's mostly the deepwater transition.

Collin Gerry - Raymond James & Associates, Inc., Research Division

So that's would speak to Matt's comments regarding kind of having to invest in advance of the drillships arriving [indiscernible] to earn revenue?

J. Kevin Bartol

Yes. Yes, that's right, Collin. I mean, in addition to having to hire some skill positions, which affect our SG&A, we also will have to start shadowing some positions as we get people ready to transition to the jack-up side to the deepwater side. So all of that was contemplated when we entered into this new line of business for us and I think it's what everybody goes through when they enter the ultra-deepwater.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Understood. That makes sense. The other one for me, Rowan has a long history in the Gulf of Mexico and we're finally seeing the Gulf of Mexico come back to life a little bit on the jack-up side. Mark, I heard your comments that in the absence of term works still looking to prefer mobilizing units out of the Gulf. I guess just strategically, you have the more volatile market given that you have mostly international assets now?. Is it worth kind of playing the spot market just for the cyclicality upside potential there? And kind of in that same line of questioning, any thoughts on the Alaska, Juneau, or Paris in terms of deactivating or being able to go back to work in the lower end of the Gulf market?

Mark A. Keller

Yes, Collin. To your first part of your question, obviously, we are playing in the spot market and elected to keep a couple of our high-spec rigs here, 3 of them actually, the EXL-III, the Joe Douglas working for McMoRan currently to see the outcome, the success hopefully there and what that would bring to the U.S. Gulf of Mexico shelf in the future. Also with the Gorilla IV here, it's a 2 million hook load rig. We're fortunate to put it on a 1-year contract, Walter Oil & Gas and [indiscernible]. So we're going to keep those here. We're in discussions with multiple operators currently, Collin, about terming up some of the rigs that are here in the U.S. Gulf given the, as I mentioned in my comments, the number of 300-foot independent-leg cantilevers are greater in the Gulf of Mexico, there are 9 of them. But realistically, some of those would not be first choice by most operators. So that market's pretty tight. So my comments around going international mostly driven that we're always looking at that market and if we're offered a significant long-term contract at high day rates, then certainly, we're going to take a look at it versus the Gulf. You still have some hurricane risk and most operators are trying to manage around that by -- when they set up their programs to have wells in shallower water during that time frame, Collin.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Okay. And then on the follow-up on the fee...

Mark A. Keller

Activation of the Alaska?

Collin Gerry - Raymond James & Associates, Inc., Research Division

Yes.

Mark A. Keller

We are tendering -- we've had a couple of opportunities to tender the Alaska into Paris. We haven't been successful, but we are tendering them and taking a look at the possibility if the right deal presented itself to activate those rigs. But currently, we haven't been successful with that.

Operator

Our next question comes from Todd Scholl with Clarkson Capital Markets.

Todd P. Scholl - Clarkson Capital Markets, Research Division

My first question was around the status of the EXL-III. I was trying to get a look at the most recent fleet status while we were on the call but it doesn't look like you've added anything for the EXL-III. Can give us a little bit of an update there? And then kind of my second question is really related to your interest in potential adding jack-ups to the fleet. It doesn't sound like you're focused on building any but we've seen a couple of sales of some newbuild rigs recently. Is this something that you'd look at like maybe if -- looking at a one-off sale from something like a prospect or standard or somebody like that?

W. Matt Ralls

Well, let me take the second part of that question first and say that yes, we continue, notwithstanding the change in Kevin's primary job responsibilities, that we continue to follow all the opportunities out there and we would definitely be interested in adding additional equipment on the jack-up side. We do stay in touch with those companies, the ones that are selling and others and look for opportunities, but it's unlikely that given our commitments currently on yet uncontracted newbuild drillships, it's unlikely that we would expand our jack-up fleet on speculation. So we would need to sort of match up contract opportunities with rigs that are being built by others. And it's a possibility that we could find opportunities to build against contracts and Mark can elaborate on that.

Mark A. Keller

Yes, we're currently tracking, Todd, several opportunities in the North Sea and U.K. and Norwegian sectors that we've been approached by operators that have asked us if we would present our newbuild against a long-term contract and we are in discussions with multiple people regarding that. We haven't gotten to the point of contract award, but there are several operators looking, in fact, given the supply depths that we're currently seeing in the U.K. sector and the Norwegian sector.

The EXL-III. I've been saying 2 weeks since January but the latest is it looks like, right now, sometime in mid-November is what they're forecasting if everything goes as planned. As you know, Todd, it changes all the time but we're hopeful that they'll be successful and we'll move forward with our other programs there. It got a lot of wells planned at which would contract several high-spec jack-ups. So we're very hopeful that it proves out as Jim Bob and his team are hoping it will.

Operator

Our next question comes from Robin Shoemaker with Citigroup.

Robin E. Shoemaker - Citigroup Inc, Research Division

I wanted to go back to the jack-up market outlook that you described. ODS shows 48 jack-ups to be delivered in 2013, of which 9 are contracted or something like that. And I just wonder if you -- I understand the point you made about the attrition, but some of the companies that have older fleets of jack-ups have been talking about a little bit better market environment for those rigs. And then, of course, we're seeing private equity jumping into the game with regard to shelf drilling. So what -- could you be a little more granular on how you see the attrition of lower end jack-ups playing out?

W. Matt Ralls

Well, Robin, I can't be terribly more granular because it's just my personal speculation on how it will work out. It's really based on what Mark talked about but the number of rigs are going to hit a historically high age bracket here over the next 10 years with over -- almost approaching 300 rigs turning 40 in the next 10 years. So we're pretty skeptical about the long-term outlook for that group of assets. And if you look back at, for example, the period into the kind of late '90s or middle '90s and there were tremendous number of retirements and conversions to other uses for rigs that were built less than 30 years prior. I mean, there were almost 100 of those, not counting the accidental losses. So what we see, and we've been talking about this for the last several years, is that operators just don't want older equipment. It's really -- I mean, they will take it if that's what available and some markets will take less capable equipment. But generally speaking, we've seen a continuous move on the part of operators to require higher specification equipment that those rigs just couldn't be upgraded for. So we think that all those new rigs you referred to will be the -- really, the fulcrum to apply the leverage to increase the rate of retirements and just general attrition from the fleet. Beyond that, can I prove it? Absolutely not. I mean, we'll just have to see how it works out but this has always been a self-regulating market in terms of jack-ups because -- in terms of rigs because you just can't afford to keep these things cruded [ph] if you can't them continuously employed and as new equipment comes in and takes away and absorbs demand, I think these older units are going to continue to be cold stacked. And the longer you're stacked, it's kind of exponential how much more expensive it is to bring them out of cold stack.

Robin E. Shoemaker - Citigroup Inc, Research Division

Yes, okay, understood. Just a related question then on these new jack-ups that are being delivered next year, many of them are kind of new entrants to the drilling business, as you know, and I just wonder whether you have seen any evidence that as we get close to delivery dates that you think of a strategy of lowering your price if you're a fairly new player, unknown to the industry to get work against a larger established competitor? Are you seeing anything like that or do you anticipate that?

W. Matt Ralls

Yes, I mean we, at the margin, we've seen one kind of startup contractor who took a lower date rate in the North Sea to get some term work there. But there's kind of a dynamic there and that most of those speculators need to get term financing. And if they get low day rates in short terms, it doesn't really facilitated that.

John L. Buvens

And in addition, several of those startups have been selling rigs to incumbent players rather than keeping them and operating them. So you're seeing that. And then you have a third that is under offer by SeaDrill. When you look at those, I don't think you're going to have, at the end of the day, 3 new robust companies out there competing for work. The rigs will probably be split up among incumbent players.

W. Matt Ralls

Yes, Robin. IOCs and NOCs around the world have gotten a lot more restrictive on allowing new people on their bit list or tender list. Saudi Aramco, Petronas, different companies. The qualifications are higher. Just having a good piece of equipment is not the only requirement to getting on their tender list. You've got to have established operating record and the HSE systems and all the management systems that go along with that. So it's a little different environment today, but we have, back to your question, we have seen a few lower tenders but -- and in a lot of cases, if there's established contractor available, he typically gets the job even at a higher day rate, Robin.

Operator

Your next question comes from Rob MacKenzie with FBR Capital Markets.

Robert MacKenzie - FBR Capital Markets & Co., Research Division

I'd start, I guess, with the J.P. Bussell. I guess your latest status report says that's still in the shipyard. Any color on the delay there, when we might expect it out?

W. Matt Ralls

It's about to enter the shipyard to do a keen inspection. It's under tow currently. But we're in negotiations with an operator currently, and we don't anticipate the rig being down very long. Just [indiscernible] the inspection and then we'll be -- well, we anticipate going on day rate.

Mark A. Keller

If this was a scheduled inspection and we took the time between contracts to do it. It's an opportune time, it causes the least downtime and least interruption, we believe. So that's why we're...

W. Matt Ralls

That's correct.

Robert MacKenzie - FBR Capital Markets & Co., Research Division

Okay. On the drillships, given the relatively -- given the timing, I guess, for delivery timing for the Resolute, the Reliance and #4, any possibility of a multi-rig package there?

W. Matt Ralls

We've had discussions with a couple of operators regarding multi-rig package, it's still ongoing. As you've heard us say at different conferences and on other calls, we still remain very optimistic. Our ships have been very well-received and sometimes the process for making this type of capital commitment with partners and everything involved takes a little longer than sometimes we would like, but it's the process. But we remain very optimistic that we should be able to secure some contracts here shortly. We're in discussions with several operators right now, Rob. And a couple of them do have multiple-rig requirements.

Robert MacKenzie - FBR Capital Markets & Co., Research Division

Okay. And that kinds of ties into my question in some ways. At your Analyst Day, you guys discussed the potential for establishing a dividend, perhaps modest. With contracts being close perhaps and with the dividend tax rate in the U.S. looking like it might revert, any thinking there on -- any change in your thinking on that?

W. Matt Ralls

Yes, Rob, not really. It's what we said at the time was that -- or what I said was that I like dividends. I'd like to see us have one. We've got support at the board level for that. But given the commitments we made on spec for the fourth drillship and -- well, for all the drillships at the time, that we'd like to see some contracts put in place before we make a final determination on that. I'd say we're favorably inclined to look at reinstating something along the lines of what we had before. But we've got to see what eventuates with these contracts before we make that final call.

Robert MacKenzie - FBR Capital Markets & Co., Research Division

Okay. And just to clarify, if I may. So you'd be willing to do that once contracts are signed, not necessarily when the ships get back to work?

W. Matt Ralls

Yes, I think so.

Operator

Your next question comes from Dave Wilson with Howard Weil.

David Wilson - Howard Weil Incorporated, Research Division

Mark, with regards to the prepared comments and the 9 jack-ups with contract expirations and expectations that those move to higher rates. Do you expect those rigs will be working in the same areas? I know you said transit time was going to be down over the next several quarters but I was just trying to gauge how much of the new contracts involve some transit time from a different region?

Mark A. Keller

I would say that there's a possibility that one could change areas, but most of them will stay in their current areas.

David Wilson - Howard Weil Incorporated, Research Division

Okay, great. And then also with regards to the updated status report on the Gorilla VI. Previously, in the fleet status report, it looked like the rig was going to get some kind of day rate for part of the shipyard time. Has that changed?

Mark A. Keller

No, it hasn't, Dave.

David Wilson - Howard Weil Incorporated, Research Division

Okay, so that stays the same.

Operator

Our next question comes from Justin Sander with RBC Capital Markets.

Justin Sander - RBC Capital Markets, LLC, Research Division

Appreciate the guidance around '13 and some of the points to think about there. I wanted to follow-up on the SG&A side of that. I'm just wondering, when you see a 10% to 15% increase in '13, that kind of set the stage for a lot of what's going on in the transformation. I'm wondering if that takes care of most everything that needs to be put into place to support the growth from the drillships online coming on? Or if we should see a similar type of a step up into '14 as well?

W. Matt Ralls

That would substantially get our functions to the level we need. We haven't started thinking about '14, however. You would expect some general inflation in that when we get 3, all 4 drillships working just to support everything. But I don't think you wouldn't anticipate to be as much of a jump.

Justin Sander - RBC Capital Markets, LLC, Research Division

Much of the heavy lifting done at that point?

W. Matt Ralls

It is, yes. That's the issues that in order to have a successful start to this deepwater program and we've got to have these skills in place by the time the first one shows up. Now there may be some kind of infilling that we're doing after that as the subsequent ships come on. But most of the -- like we say, most of the heavy lifting is done in '13.

Justin Sander - RBC Capital Markets, LLC, Research Division

Okay, got it. And I just had a follow-up question on the potentially reactivations. Just curious on some of the dynamics going on there in the tenders that are preventing the decision to reactivate it. Is it a question of day rate? Is it waiting for maybe some longer-term duration contracts to develop? Is it more of the capital cost side of the equation? Can you just flesh that out a little bit more?

W. Matt Ralls

Okay. Yes, it's really all 3. It's, obviously -- a long-term contract would make it more attractive at a high day rate to justify bringing them out of cold stacked but, Justin, it would be a combination of all 3 of those things what we're seeing, but we are tendering them actively in the U.S. Gulf of Mexico and overseas.

Justin Sander - RBC Capital Markets, LLC, Research Division

Okay. Are you able to share an estimate on the reactivation cost there?

Thomas P. Burke

It's varies from rig to rig. I wouldn't want to throw out a number.

W. Matt Ralls

And a contract requirement, got a contract requirement, they're all different, some want enhanced BOBs [ph], some don't. So it just depends. But it's a substantial number.

Operator

Our next question comes from Ian Macpherson with Simmons.

Ian Macpherson - Simmons & Company International, Research Division

Matt, you've talked in the past about wanting to get to the balance to fleet mix with deepwater. I know models will differ but mine has 4 drillships getting to 45% to 50% of your pro forma EBITDA power. Are you getting close to your target in terms of deepwater footprint? Or are we likely to see more deepwater fleet expansion ensue when you get backlog additions here?

W. Matt Ralls

Yes, Ian, that's -- we just have to wait and see. I would say that we think that something more than 4 drillships probably what it takes to get balanced when everything's operating in what we're assuming when we talk about balance is a balance fleet is kind of a balanced market being both of those asset classes. And so we think that it's more like 6 or 7 ships probably that it would take to get -- We weren't when we originally talked about this day rates were somewhat lower on the ship side than they are now. So that's -- we can get there a little bit quicker. But what we're looking at is just -- is sort of a general level of 6 to 7 ships and then growth on both sides of the -- in both asset classes, I should say. I think as we add drillships, we'll have a greater appetite then to add jack-ups and vice versa. As far as what we do with the option for the fifth drillship, I mean, that's kind of a distant concern at the moment. We want to see some contracts for these first 4 and then we'll evaluate -- we're starting to get pretty far out in terms of delivery on that option. So we'll want to look very closely on how we see things develop in the ultra-deepwater market. Right now, obviously, things are very encouraging. But we've got some time before we have to even start to make a judgment on that.

Ian Macpherson - Simmons & Company International, Research Division

Okay. So on the other side of the coin, with respect to disposals, that's always been an option in your pocket to dispose of your order jack-ups but it's never -- we haven't seen much of it come to fruition. I wonder if that is an angle that's gaining momentum or is fairly status quo right now at Rowan in terms of reducing the exposure to your few remaining older jack-ups?

W. Matt Ralls

Yes, it's just philosophically, that's something that we would like to see develop and we've talked about that in the past. But I think that we would probably look for maybe a little bit stronger market conditions before we thought about doing something there. And we'd also probably like to be closer to delivery of the drillships when we get the earnings boost from those to offset the earnings loss we would have if we sold rigs that were under contract. So we're continuing to work on it. It's very much like where we were several years ago with regard to manufacturing and land and we're not just going to sell them to get out. We don't have that same fleet renewal issue that some of our larger competitors do. We got good contract backlog, high-quality customers that are very satisfied with our equipment. And so we'll take our time and find the right opportunity.

Operator

Our next question comes from Greg Lewis with Credit Suisse.

Gregory Lewis - Crédit Suisse AG, Research Division

Matt, when we think about the jack-up fleet and the uncontracted 9 jack-ups, at this point, where we are with these rigs, should we be thinking in terms of still seeing day rate expansion or should we think more about focusing or thinking about that we're going to see more and more duration sort of expansion?

W. Matt Ralls

Yes, well, I think we always go for as much additional term as we can get but there's just not as much term in the jack-up market generally speaking as you see, obviously, on the floater side. Now on the very big jack-ups, you can't get that term because there's so much demand relative to the supply. So we always try to push term but it's not always in our control to do that. And so what we're primarily looking at is continual sort of upward pressure on day rates as those contracts roll over.

Gregory Lewis - Crédit Suisse AG, Research Division

Okay, great. And then just real quick, Kevin. Just in terms of the guidance that you gave. You gave, I think, 5% to 7% OpEx guidance. We should be thinking about 2013 OpEx just to sort of make sure that I'm thinking about this right in the $780 million to $790 million range?

J. Kevin Bartol

I haven't done that math, but just say 5% to 7% over what we projected for the full year.

Gregory Lewis - Crédit Suisse AG, Research Division

Okay, so on an absolute basis?

J. Kevin Bartol

Yes, it's on absolute basis. Preliminary, as I mentioned, these all changes if we move mobile rigs somewhere that we don't contemplate [ph] for other things that happen. So keeping that in mind that it's highly variable, yes, that's the way to look at it.

Operator

Our next question John Keller with Stephens.

John R. Keller - Stephens Inc., Research Division

Just a quick one for me on the deepwater side. I think historically or in the past, you've talked about target markets for the 3 uncontracted drillships off the Gulf of Mexico, West Africa and Brazil. Just kind of curious to get your thoughts on what's going on from an industry standpoint in Brazil. Does that change your appetite to be in that market and potentially change your appetite to move, say, into East Africa or other parts of the world?

W. Matt Ralls

Yes, let me take a first crack at that and say that it probably doesn't change our appetite with regard to Brazil. We have set our primary targets really as the Gulf of Mexico and West Africa because that's where we see most of the opportunities. We sort of look at it more by customer than we do by region. And so you really target the super majors and the markets that they are active in and the large independents in the market that they are active in. So we have looked at opportunities that would involve East Africa but most of it is in those 2 primary markets.

Mark A. Keller

We're actually -- this is Mark, John. We're actually talking to 2 IOSTs now in Brazil and as Matt said, our primary focus has been West Africa and the U.S. Gulf of Mexico, that's where the majority of the tenders lie. But we do have active tenders in Mozambique, Tanzania and different areas. So we're looking at all markets, but the indications that we've given you in the past are just where we feel like our fleet would fit the best and yield the highest day rate.

Operator

Our next question comes from Robert Jensen [ph] with Plateau Markets [ph].

Unknown Analyst

Talking about the Gorilla -- sorry, the Rowan Viking. Can you remind us when Total will have to exercise the option of that rig?

W. Matt Ralls

We're in discussions with them right now, Robert. The contract the current runs out the end of the year.

Unknown Analyst

Right. And if they were to exercise that rig, will it be working in Norway or U.K.? Or do you have any indication on that yet?

W. Matt Ralls

Right now, it's slated to stay in the U.K. sector but as you know, they have opportunities in both the Norwegian and U.K. sector but right now, from what we are talking to them about on the extension of the current term, it would be in the U.K. sector.

Unknown Analyst

Right. And given the fact that there is basically no available heavy-duty jack-ups in the market, could we expect to see a long-term contract beyond sort of the optimal period on that rig short-term?

W. Matt Ralls

I really hate to comment on that, Robert, because we are in negotiations with them right now, but we should be announcing something fairly soon.

Unknown Analyst

Okay, that's good. You talked a bit about the available rigs, the 3 sort of lower spec jack-ups and is there any potential that we could see those being sold near-term?

W. Matt Ralls

We do, Robert, continue to evaluate offers for those rigs and we have had people interested in those rigs and visit those rigs. So yes, there is a potential that one could be sold. There's also the potential that it won't be sold. But we are -- nothing's imminent, but we are talking to people.

Unknown Analyst

Okay. And just one house final housekeeping question. When you talked about the tax rates, you were not talking about the tax credit [indiscernible] expense, right?

J. Kevin Bartol

Our estimated tax rate for '12, which was a credit of 6% last quarter, we expected -- we now expect an expense of 2%. So positive tax rate rather than a negative tax rate.

Unknown Analyst

Right, I was more thinking about '13.

J. Kevin Bartol

'13, we expect a positive tax rate in the single digits.

Operator

There are no further questions at this time. I'll turn the conference back to management for closing remarks.

Suzanne M. Spera

All right. Well, that concludes our third quarter earnings conference call. We'd like to thank everyone for joining us and we wish everyone in the Northeast to be safe and to take care. You're in our thoughts and prayers. Thank you for joining us.

Operator

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.

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