Aug 5, 2009
Executives
Greg Panagos - VP of IR Bob Long - Chief Executive Officer Greg Cauthen - Chief Financial Officer Terry Bonno - VP of Marketing Steven Newman - Chief Operating Officer
Analysts
Arun Jayaram - Credit Suisse Jim Crandell - Barclays Roger Read - Natixis Bleichroeder Brian Uhlmer - Pritchard Capital Collin Gerry - Raymond James Leon Cooperman - Omega Advisers Lukas Daul - Enskilda Mike Urban - Deutsche Bank Jud Bailey - Jefferies & Company
Operator
Good day and welcome everyone to the second quarter 2009 results conference call for Transocean. At this time for opening remarks and introductions, I would like to turn the program over to Mr.
Greg Panagos, Vice President of Investor Relations and Communications. Please go ahead, sir.
Greg Panagos
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The quarterly toolkit also has six additional financial tables for your convenience covering revenue efficiency, deferred costs, deferred revenue, other revenue, operating and maintenance costs by rig type and contract intangible revenue.
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The quarterly toolkit also has six additional financial tables for your convenience covering revenue efficiency, deferred costs, deferred revenue, other revenue, operating and maintenance costs by rig type and contract intangible revenue.
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The quarterly toolkit also has six additional financial tables for your convenience covering revenue efficiency, deferred costs, deferred revenue, other revenue, operating and maintenance costs by rig type and contract intangible revenue.
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The quarterly toolkit also has six additional financial tables for your convenience covering revenue efficiency, deferred costs, deferred revenue, other revenue, operating and maintenance costs by rig type and contract intangible revenue.
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Before I turn the call over to Bob, I would like to point out that, during the course of this conference call, participants may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts, including future financial performance, operating results and the prospects for the contract drilling business.
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Should one or more of these risks and uncertainties materialize or underlying assumptions prove incorrect, actual results may vary materially from those indicated. Also, please note that we may use various numerical measures on the call today that are or may be considered non-GAAP financial measures under Regulation G.
As I indicated earlier, you will find the required supplemental financial disclosures for these measures, including the most directly comparable GAAP measure and associated reconciliation on our website at www.deepwater.com under Investor Relations, Quarterly Toolkit and Non-GAAP Financial Measures and Reconciliations. Finally, in order to give more people an opportunity to ask questions, please limit your questions to one initial question and one follow-up.
Thank you. That concludes the preliminary details.
Now I will turn the call over to Bob.
Bob Long
Thanks, Greg. Good morning, everyone and thank you for joining us on the call.
As you saw from our press release, we reported earnings of $2.79 per share after adjusting for asset impairments, discrete tax items and several other items, which Greg Cauthen will cover in his report. We continue to experience difficult market conditions, particularly in the jackup business where demand has declined and supply just keeps increasing.
We currently have 18 jackups idle or stacked, plus one that is just about to come off contract and will stack making it 19. That is up from nine at our last call and three at our year-end call.
As I think I mentioned last time, we expect to see more stacked before the year is out resulting in as many as 25 or 26 jackups stacked by year-end and maybe a bit more. As rigs roll off contract without follow-on prospects, we are approached continuously to cold stack them as efficiently as possible to get costs down quickly.
In the midwater market and conventional deepwater markets, we have seen a slowdown in bid activity. We had four midwater floaters stacked at the end of the quarter and a fifth has just come down as moving to a stacking location.
We have another three midwater rigs coming available shortly and could see some of those stack also. I will let Terry Bonno give you some thoughts on the prospects for these rigs and on the two deepwater rigs we have coming available in 2009; Sedco 709 and the Rather.
We have concluded a sales agreement with the purchase of the Arctic II and IV. Those are the two midwater rigs in the North Sea, which we are required to divest as part of the merger.
The sale is subject to the OFT approval and once we have this; we hope to close the transaction in the third quarter. The good news is the continuing strength of the ultra-deepwater market.
We remain very optimistic about both the near-term and long-term outlook for this market. You saw our announcement of the contract with Petrobras for the Cajun Express, an 8500 foot capable rig, at over $500,000 per day starting early next year for three years.
We have eight other ultra-deepwater rigs coming available between now and the first quarter of 2012 and we are already in discussions with customers on opportunities for most of these rigs. Our deepwater newbuild program continues to go extremely well.
We have taken delivery of the KG1, a clear leader, and the Petrobras 10000, all of which are now earning day rate. We have also taken delivery of the Development Driller III, which is in route to the Gulf of Mexico from Singapore and the Discoverer Americas in Korea.
All of our projects are close to on time and all are on or under budget. At this point, I will turn it over to Greg for some detail on the numbers.
Greg Cauthen
Thanks, Bob and good morning to everyone. In the second quarter of 2009, we had net income of $806 million, or $2.49 per diluted share.
This compares to net income of $942 million, or $2.93 per diluted share in the first quarter of 2009. Second quarter net income was adversely impacted on a net basis by certain items totaling $96 million, or $0.30 per share.
After adjusting for these items, second quarter net income was $902 million or $2.79 per share as compared to the first quarter net income adjusted for similar items of $1,206 million or $3.75 per share. Our second quarter adjusted earnings per share of $2.79 was below the street due to a variety of revenue and cost factors.
During the quarter, we had an unusual number of major operational incidents, mostly with respect to deepwater rigs, which resulted in a $30 million increase in lost revenue. We also made a decision during the quarter to swap the Legend for the Sedco 703, which resulted in another $22 million of lost revenue in the quarter, but better positions us for future work with the Legend.
Although we also missed the [discrete] estimate of cost, this was related to timing of shipyard and maintenance activities in the quarter with our current estimate of full-year cost actually below our previous average guidance. Discrete items adversely affecting second quarter net income included $58 million for the impairment of the Arctic II and Arctic IV, $15 million of discrete tax items, $23 million for impairment of intangible assets related to drilling management services, net losses primarily related to retirement of debt and the divestitures of certain joint venture interests and finally the GSF merger related severance costs.
First quarter 2009 net income was adversely impacted by similar items, totaling $264 million, or $0.82 per share. Compared to the first quarter of 2009, contract drilling revenues for the second quarter were down $209 million.
Second quarter revenues were negatively impacted by $88 million due to an increase in planned out of service time for shipyard projects, $141 million due to the stacking of rigs and $30 million due to lower revenue efficiency caused by major operational incidents; all partially offset by the planned commitment of higher day rate contracts and various other items. Revenue efficiency for our fleet dropped to approximately 93% versus 94.4% in the first quarter, reflecting disappointing performance in our deepwater fleet.
Contract drilling intangible revenue in the second quarter decreased to $75 million from $104 million in the first quarter. You can find a schedule detailing contract drilling intangible revenues by quarter on our website.
Total revenues were $2,882 million through the second quarter compared to $3,118 million for the first quarter due to the previously discussed increased stacking of rigs, out of service times for shipyards and unplanned downtime. Contract drilling revenues for the remainder of 2009 are expected to benefit from the commencement of higher day rate contracts as shown on chart one, as well as the commencement of operations of five of our ultra-deepwater newbuilds planned to begin operations in the third and fourth quarter and to upgrade to Sedco 706, which commenced operations in the second quarter.
These expected increases in contract drilling revenues for the remainder of 2009 are expected to be offset by a decrease in rates on some jackups and midwater floaters as they roll to new contracts in 2009, an increase in net out of service days from shipyards and mobilizations as shown on chart two and an increase in stacking time on additional jackups and midwater floaters. For the remainder of 2009, we expect out of service times for stacked rigs to increase significantly in our jackup and midwater fleets as Terry will discuss in our marketing comments.
In our fleet status reports, we distinguish between stacked rigs, which represent rigs that we have started or completed the process of removing most of the crew and reducing other costs and are generally not available (inaudible) back to work quickly. In idle rigs, which are without a contract and although costs may have been temporarily reduced, the rigs can quickly return to work.
We currently have 15 jackups, four midwater floaters and one barge rig that are stacked and three jackups and one midwater floater that are idle and we expect to see more rigs stacked or idled by the end of the year. Contract drilling intangible revenues are expected to decline to $281 million in 2009 from $690 million in 2008 and to decline further to $98 million in 2010.
The anticipated decline in non-cash contract intangible revenue has no impact on our future cash flow. We expect our other revenues for 2009 to range between $700 million and $750 million with approximately $375 million related to the non-drilling operation, approximately $200 million related to integrated services and approximately $150 million related to recharge revenue.
Due to the low margin nature of this business, we expect any changes in noncontract drilling revenues to be largely offset by a change in the related costs. Operating and maintenance expenses in the second quarter were $1,277 million versus $1,171 million in the first quarter as shown on chart three.
The quarter-to-quarter increase in operating maintenance costs was primarily attributable to $87 million of expected increases in shipyard and maintenance costs, as well as $20 million in increased costs related to our newbuild rigs that are about to commence operation, partially offset by reduced operating costs from stacked rigs.
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We expect operating and maintenance costs in the third quarter to be slightly higher than the second quarter due to increased shipyard activity with fourth quarter costs falling lower due to expected decreases in shipyard activity and reduced operating costs from stacking of rigs, partially offset by additional costs as we begin operations at five of our newbuild rigs. General and administrative expenses were $53 million in the second quarter compared to $56 million in the first quarter.
This decrease was primarily attributable to reduced severance costs related to the GSF merger. We expect general administrative expenses for the full year 2009 to be between $205 million and $215 million.
Depreciation expense was $360 million in the second quarter compared to $355 million in the first quarter. The increase is primarily due to the completion of the Sedco 706 upgrade in the second quarter and placing the rig into service.
We continue to expect depreciation expense to be roughly $1.5 billion in 2009 with the increase over 2008 primarily related to the expected commencement of operations at five of our newbuilds in the Sedco 706 upgrade. Capital expenditures in the second quarter of 2009 were $947 million versus $708 million in the first quarter with the change primarily related to the timing of shipyard payments on newbuilds and upgrades.
We expect capital expenditures for the full year 2009 to be roughly $3.8 billion. Of this total, approximately $3.1 billion relates primarily to construction costs, including mobilizations of our 10 newbuild rigs, of which $750 million is the non-cash capital commitment related to the Petrobras capital lease.
The remaining $700 million primarily relates to contractually required upgrades and sustaining capital expenditures. For 2010, we expect to incur an additional $930 million in newbuild related capital expenditures.
Interest expense net of amounts capitalized and interest income decreased to $114 million in the second quarter versus $136 million in the first quarter. The decrease was primarily related to decreases in outstanding debt and an increase in capitalized interest.
We expect our 2009 interest expense net of amounts capitalized and interest income to be roughly $485 million for the full year of 2009. This is net of an estimated $190 million of expected capitalized interest.
Our interest expense guidance is $35 million lower than previous guidance primarily due to delays in the Petrobras capital lease, increased estimated capitalized interest and improved working capital. This estimate assumes short-term interest rates remain at current levels, continued repayment of debt, no share repurchases and no additional newbuild commitments.
For the second quarter and first half of 2009, our annual effective tax rate was 15.7% and 15.4% respectively versus 15.2% in the first quarter. We expect our annual effective tax rate for the second half of 2009 to be between 15% and 16%.
The increase in the range of our estimate is due to the impact of reduced net income from stacking rigs previously expected to operate in relatively low tax jurisdictions. Finally, I would like to briefly comment on our liquidity position.
At June 30, 2009, we had $900 million of cash. In addition, we have a $2 billion revolving credit facility with more than three years remaining and a $1.08 billion, 364 day commercial paper backstop facility that was put in place in November of 2008.
Today, we have almost $152 million of our revolver supporting letters of credit and we have approximately $300 million in commercial paper outstanding. Consequently, we have almost $2,600 million of unused committed bank capacity.
We also generated almost $1.6 billion of operating cash flow in the second quarter of 2009 and we expect this quarterly operating cash flow to continue at meaningful levels for the remainder of 2009. We continue to generate significant cash flow supported by our $33.7 billion of revenue backlog as shown on chart four.
Our backlog has a very high credit quality with almost 60% attributable to A rated customers and about 95% attributable to customers with investment grade or better ratings. Since the credit crisis began, we have lost only about $600 million of our backlogs due to customer credit related issues and we continue to believe we have only a small percentage of our remaining backlog with customers who may be in similar credit situations.
This backlog represents roughly $17 billion of free cash flow backlog versus almost $12.6 billion of face value of our debt. As you can see on chart five, the expected timing of the free cash flow from our backlog matches well with our debt maturity.
Our revenue and free cash flow backlog have declined since the last call with current market conditions slowing the pace of new rig contract signings. However, our level of debt has also continued to fall as we used our free cash flow to repay outstanding debt as we continue to have more than $4 billion excess of free cash flow backlog over gross debt.
We are carefully monitoring this relationship as we continue to target a level of total debt that is approximately $5 billion less than our free cash flow backlog. Given current economic conditions, it is unclear when or whether we will actually meet our target during 2009.
In May, our shareholders approved a roughly $3 billion share repurchase program that is subject to Board approval before execution. Our Board is monitoring our liquidity and market conditions and will consider when or whether we should begin using some of our free cash flows for share repurchases or whether we should continue to repay debt with the decision based on a variety of factors, including the relationship between our contractual backlog and debt, our ongoing capital requirement, cash flow generation, general market conditions, regulatory and tax considerations, the price of our shares and other factors.
From our past practice, we will not provide at this time any advanced disclosure regarding the anticipated timing or size of any future share repurchases, but we will report any repurchases that have occurred in our subsequent earnings calls and periodic SEC reports. With that, I will turn it over to Terry.
Terry Bonno
Thanks, Greg and good morning to everyone. I will move straight to the various markets and we will begin with a discussion on the deepwater market.
We continue to be optimistic on the deepwater opportunity in the near and long-term with Petrobras leading the charge as they continue to contract deepwater units to meet their immediate demand. The Cajun Express contract for three years convertible to five years strengthens our position and relationship with Petrobras in Brazil and it is further evidence of the long-term strength of the deepwater market.
We expect to see more contracts for existing rigs executed in Brazil over the next several months.
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Unfortunately, we have experienced a gap in demand for capable units in 5,000 foot water depth. As the majority of the current deepwater tenders have requirements greater than 5,000 feet.
We had two deepwater units available in 2009, specifically the Rather and the Sedco 709, and follow-on work is not obvious for either unit. While the Rather does have several potential opportunities in the North Sea, none are firm, and delays in commencement of these programs could result in some idle time.
We do believe that the Sedco 709 will have future opportunities in West Africa and Brazil, but at the moment, the near-term opportunities in those areas are all in deeper waters. We are also encouraged by drilling and tendering activity in frontier and emerging provinces such as Israel, Mexico, Indonesia, Black Sea and Libya, and believe incremental demand will result from these activities over the long-term.
Now turning to the harsh environment market. We are working to complete our Arctic design drillship, and finalize shipyard pricing in order to continue to progress our discussions with our customers in this technically demanding environment.
We continue to be encouraged with the discoveries in the UK and Norwegian North Sea since our last call. Additionally, the outlook in Eastern Canada remains strong for our continuing operations in midwater, and we see a renewal of deepwater interest with the latest deepwater licensing in offshore Nova Scotia.
Moving on to the midwater floater market. We see the remainder of 2009 soft in this market except in Norway, Eastern Canada and Brazil with seven units already stacked and 12 more becoming available before 2010 in the worldwide fleet.
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Unfortunately, we have experienced a gap in demand for capable units in 5,000 foot water depth. As the majority of the current deepwater tenders have requirements greater than 5,000 feet.
We had two deepwater units available in 2009, specifically the Rather and the Sedco 709, and follow-on work is not obvious for either unit. While the Rather does have several potential opportunities in the North Sea, none are firm, and delays in commencement of these programs could result in some idle time.
We do believe that the Sedco 709 will have future opportunities in West Africa and Brazil, but at the moment, the near-term opportunities in those areas are all in deeper waters. We are also encouraged by drilling and tendering activity in frontier and emerging provinces such as Israel, Mexico, Indonesia, Black Sea and Libya, and believe incremental demand will result from these activities over the long-term.
Now turning to the harsh environment market. We are working to complete our Arctic design drillship, and finalize shipyard pricing in order to continue to progress our discussions with our customers in this technically demanding environment.
We continue to be encouraged with the discoveries in the UK and Norwegian North Sea since our last call. Additionally, the outlook in Eastern Canada remains strong for our continuing operations in midwater, and we see a renewal of deepwater interest with the latest deepwater licensing in offshore Nova Scotia.
Moving on to the midwater floater market. We see the remainder of 2009 soft in this market except in Norway, Eastern Canada and Brazil with seven units already stacked and 12 more becoming available before 2010 in the worldwide fleet.
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Unfortunately, we have experienced a gap in demand for capable units in 5,000 foot water depth. As the majority of the current deepwater tenders have requirements greater than 5,000 feet.
We had two deepwater units available in 2009, specifically the Rather and the Sedco 709, and follow-on work is not obvious for either unit. While the Rather does have several potential opportunities in the North Sea, none are firm, and delays in commencement of these programs could result in some idle time.
We do believe that the Sedco 709 will have future opportunities in West Africa and Brazil, but at the moment, the near-term opportunities in those areas are all in deeper waters. We are also encouraged by drilling and tendering activity in frontier and emerging provinces such as Israel, Mexico, Indonesia, Black Sea and Libya, and believe incremental demand will result from these activities over the long-term.
Now turning to the harsh environment market. We are working to complete our Arctic design drillship, and finalize shipyard pricing in order to continue to progress our discussions with our customers in this technically demanding environment.
We continue to be encouraged with the discoveries in the UK and Norwegian North Sea since our last call. Additionally, the outlook in Eastern Canada remains strong for our continuing operations in midwater, and we see a renewal of deepwater interest with the latest deepwater licensing in offshore Nova Scotia.
Moving on to the midwater floater market. We see the remainder of 2009 soft in this market except in Norway, Eastern Canada and Brazil with seven units already stacked and 12 more becoming available before 2010 in the worldwide fleet.
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Unfortunately, we have experienced a gap in demand for capable units in 5,000 foot water depth. As the majority of the current deepwater tenders have requirements greater than 5,000 feet.
We had two deepwater units available in 2009, specifically the Rather and the Sedco 709, and follow-on work is not obvious for either unit. While the Rather does have several potential opportunities in the North Sea, none are firm, and delays in commencement of these programs could result in some idle time.
We do believe that the Sedco 709 will have future opportunities in West Africa and Brazil, but at the moment, the near-term opportunities in those areas are all in deeper waters. We are also encouraged by drilling and tendering activity in frontier and emerging provinces such as Israel, Mexico, Indonesia, Black Sea and Libya, and believe incremental demand will result from these activities over the long-term.
Now turning to the harsh environment market. We are working to complete our Arctic design drillship, and finalize shipyard pricing in order to continue to progress our discussions with our customers in this technically demanding environment.
We continue to be encouraged with the discoveries in the UK and Norwegian North Sea since our last call. Additionally, the outlook in Eastern Canada remains strong for our continuing operations in midwater, and we see a renewal of deepwater interest with the latest deepwater licensing in offshore Nova Scotia.
Moving on to the midwater floater market. We see the remainder of 2009 soft in this market except in Norway, Eastern Canada and Brazil with seven units already stacked and 12 more becoming available before 2010 in the worldwide fleet.
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Moving to the jackup market, we have some good news in this very difficult market. We have executed a long-term contract in the Trident 20 since our last earnings call as detailed in our fleet status report.
We are also in discussions with a few clients on extensions for 2009. However, with 14 jackups rolling off contract before the end of 2009, as Bob stated, we expect to stack around eight more units.
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The best opportunities going forward will be Pemex, ONGC, Saudi Aramco and also in Nigeria. Nigeria alone has 11 open tenders representing 25 rig years that are overdue to be awarded.
However, we expect that this will take some additional time to get to the finish line. The potential Pemex jackup tenders if and when they happen will require as many as six incremental 300 foot rigs for Mexico.
With an overhang of supply, any tender like this will be highly competitive. We expect the overall jackup market to remain challenged in the near term, especially with the influx of 15 uncontracted newbuilds in 2009, and 25 more in 2010.
That concludes my discussion on the market, so I will turn it back to you, Bob.
Bob Long
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Operator
(Operator Instructions). Our first question this morning will come from Arun Jayaram with Credit Suisse.
Arun Jayaram - Credit Suisse
I was wondering if you could comment a little bit, at least in this quarter, about the deepwater revenue efficiency. The utilization, I guess, for all three segments was below my expectations.
I was wondering if you can comment if there is any quarter specific items that led to the lower than expected utilization?
Bob Long
I will let Steven handle that question.
Steven Newman
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Arun Jayaram - Credit Suisse
Steven, could any of the BOP issues impact Q3?
Steven Newman
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Arun Jayaram - Credit Suisse
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Terry Bonno
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Operator
Our next question will come from Jim Crandell with Barclays.
Jim Crandell - Barclays
My first question is about Brazil. Can you give me your opinion on whether the first round of the dozen rigs or so in Brazil, the rigs that have not yet gotten financing, do you think they will eventually be built.
Then, what are you looking for in the second round coming from Brazil in terms of timing, and in terms of restrictions relative to maybe local content?
Bob Long
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Terry Bonno
Sure, Bob. Hi, Jim.
What we hear out of Brazil is, out of the next tranche of tenders one will be coming from engineering, and we believe that that is going to be around seven units, and those are going to be placed directly with a shipyard from Petrobras and they will be Petrobras owned units.
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Jim Crandell - Barclays
Do you think this will be decided and the bid request will go out before year end?
Terry Bonno
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Jim Crandell - Barclays
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Bob Long
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Operator
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Roger Read - Natixis Bleichroeder
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Bob Long
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Roger Read - Natixis Bleichroeder
Bob Long
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So, if the oil prices stabilize at $70, $75, $80 or more, my guess is, most of what people were drilling for in the midwater a year ago when demand was high, is likely to come back. We also need to get a little bit of confidence in the capital markets, because so many of the players in the midwater business are independents who need to have access to capital in order to drill once the prospects become economic.
I could see that if the oil prices stabilize and stay up next year, the demand ought to start going back towards where it was and with no increase in supply. In fact, if we end up stacking as an industry a number of these midwater rigs and have significant cost to bring them out, we might effectively have reduced supply.
So, I am fairly optimistic on a longer term outlook for the midwater market.
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Operator
Brian Uhlmer with Pritchard Capital. Your line is open.
Brian Uhlmer - Pritchard Capital
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Terry Bonno
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Brian Uhlmer - Pritchard Capital
Have they changed the tendering documents to request qualifications for experienced bidders or have you seen a change in that in the last few tenders?
Terry Bonno
No.
Brian Uhlmer - Pritchard Capital
No? Okay.
Could you give an update on, at some point you were working on an Arctic vessel. Do you have any update on that?
Steven Newman
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Operator
Our next question comes from Collin Gerry with Raymond James.
Collin Gerry - Raymond James
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Bob Long
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Collin Gerry - Raymond James
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Terry Bonno
I would say that we have certainly seen more interest. There is more traffic from the demand side.
I think Bob articulated quite well the supply side and the issue space there, and the onslaught of the newbuilds that are coming onto the market . We have seen many more bids.
We have seen quite frankly in the UK and in Southeast Asia. So, we do see some good opportunities.
ONGC is coming out certainly some long-term tenders. We know Pemex is coming out with some long-term tenders .
It is just basically a wait and see.
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Collin Gerry - Raymond James
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Terry Bonno
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Bob Long
I think the question is not so much specifically aimed at high spec markets like the North Sea, but whether or not some of the newbuild higher spec rigs will displace the older rigs simply because of technical capabilities.
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Operator
We go now to Leon Cooperman with Omega Advisers.
Leon Cooperman - Omega Advisers
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Bob Long
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Leon Cooperman - Omega Advisers
Bob Long
Yes, we will.
Leon Cooperman - Omega Advisers
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Bob Long
Operator
[Nathan Barnes] with Edward Jones.
Unidentified Analyst
Bob Long
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Unidentified Analyst
More on the ultra-deepwater. Is the competition that you are seeing there increasing or are you pretty confident going forward that you are so far ahead of everyone else in technology that you are not going to see a whole lot of increased competition in the near term?
Bob Long
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Operator
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Unidentified Analyst
My first question is related to the deepwater category. The deepwater category, where you have the low utilization, was that a reflection of the old fleet?
Steven Newman
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Unidentified Analyst
Terry Bonno
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Unidentified Analyst
And those four, do they have to be built with the local content down in Brazil?
Terry Bonno
They have to be built in Brazil, but the tender obviously has not come out, and we do not know the specifics of the local content percentages or requirements.
Unidentified Analyst
Greg Cauthen
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Unidentified Analyst
So a little bit less than $200 million each?
Greg Cauthen
For both rigs.
Unidentified Analyst
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Bob Long
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Unidentified Analyst
Bob Long
That is exactly right. If you think that there is any possibility that rates could move back towards $350,000 or $400,000, you cash flow $100 million to $150 million a year off of a midwater floater.
That would easily pay for the upgrade and you would presumably, in that kind of a market, be able to get more than a one year contract. So, there is just too much potential option value there.
Greg Panagos
We need to move on to the next caller please.
Operator
Our next question comes from Lukas Daul with Enskilda.
Lukas Daul - Enskilda
I noticed that this is the first time where you are sort of seeing some softness in the deepwater market and you, of course, are limited to the segment of 5000 feet water depth. But given that there are 20 ultra-deepwater floaters becoming available in 2011, and if Petrobras gets enough with the seven by the end of this year.
Do you think it is just a matter of time and six months from now, you would be seeing the same softness in the ultra-deepwater segment as well ? Or are the other guys big enough or are their requirements big enough to fill in the demand?
Terry Bonno
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Operator
We take our next question from Mike Urban with Deutsche Bank.
Mike Urban - Deutsche Bank
I was wondering if you could follow up on your comment on frontier markets and when we might expect to see some meaningful incremental demand out of some of those markets given the timing on that and what the potential might be there in terms of rig demand?
Bob Long
The question is about the frontier markets, some of the emerging deepwater provinces perhaps. I will let Terry comment on that.
Terry Bonno
We are very hopeful and certainly our clients are also very interested in the Black Sea. We have several clients that are going to be motoring rigs up there shortly.
In fact, one of our clients with the Deepwater Champion will be taking that rig to the Black Sea. So we have a lot of optimism that that certainly is going to be an interesting emerging market.
Also we have seen, with the recent discovery off of Israel with Noble Energy, that is going to be a big development and there is a current open tender for that and we hope that that decision is made shortly and that certainly turned into a deepwater province. We also know there is a lot of deepwater drilling going on right now offshore Indonesia and our clients are hopeful there.
We have one of our rigs that is headed that way on the GSF Explorer as soon as it completes with BP in Angola. So there is a lot of opportunity.
There is some current drilling going on that we are hopeful for good results and then within the next couple of years, other markets we believe will be opening up.
Greg Panagos
We have time for one more question.
Operator
Our final question will come from Jud Bailey with Jefferies & Company.
Jud Bailey - Jefferies & Company
I wanted to circle back on some of the commentary on midwater versus jackup and clarify, understanding there is different supply dynamics for each segment. Terry, at this point in time, is it fair to say that you have seen a bit more of a pickup in demand so far for the jackups relative to what you are seeing on the midwater side?
Terry Bonno
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Jud Bailey - Jefferies & Company
Then my last question is for Greg. You took another write-down for the Arctic II and IV and you say you are going to have the sale in hand here shortly.
Are you going to have to write down some of the other midwater rigs going forward as that rig gets sold to kind of mark to market or how is that going to work as far as where your midwater rigs are on your books currently?
Greg Cauthen
Operator
That will conclude our question-and-answer session. I would like to turn the program back to our speakers for any additional or closing comments.
Bob Long
Operator
Thank you, everyone, for your participation. You may now disconnect.