Rowan Companies PLC RDC
Q4 2009 Earnings Call Transcript
Operator: Greetings and welcome to Rowan’s Fourth Quarter 2009 Earnings Conference Call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Suzanne McLeod, Director of Investor Relations for Rowan Companies. Thank you, you may begin.
Suzanne M. McLeod - Director of IR: Thank you, Diego, and good morning everyone. Welcome to Rowan’s fourth quarter and full year 2009 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 Bill Wells, Vice President of Finance and Chief Financial Officer, who will have prepared comments.
Also in the room to respond to questions are David Russell, Executive Vice President, Drilling Operations, Kevin Bartol, Vice-President, Strategic Planning and Tom Burke, President and Chief Executive Officer of LeTourneau Technologies.
Before Matt begins his remarks, I’d like to remind you that during the course of this conference call certain forward looking statements may be made within the meaning of the Private Securities Litigation Reform Act of 1995, including statements as to the expectations, beliefs and future financial performance of the Company that are based on current expectations and are subject to certain risks, trends and uncertainties that could cause our results to differ materially from those projected by the Company.
With that, I’ll turn the call over to Matt.
W. Matt Ralls - President and CEO: Thank you, Suzanne. Good morning everyone and thanks for joining us. I’m going to make a few brief comments, and then turn it over to Mark Keller, who will discuss the rig markets and then turn it over to Bill Wells for more financial details, before opening the call for Q&A.
We reported today that our fourth quarter 2009 earnings were $61 million or $0.52 per share of clean earnings beating consensus estimates by $0.02. For the full year, we earned $367.5 million or $3.24 per share.
Rowan organization executed at a very high level in 2009, despite the sharpest downturn in worldwide drilling activity since the early 80s. We had the best safety record in the Company’s history, significantly reduced operating expenses, took delivery of our latest new build jack-up, the Ralph Coffman ahead of schedule and below budget, took advantage of idle time on several of our older rigs to make some upgrades and life enhancements.
As Mark will relate in more detail, during the last few months, we’ve seen improving activity and tendering in virtually every jack-up market, with Middle East, North Sea and Gulf of Mexico regions being the most significant for our fleet.
We continue to see good demand for higher specification jack-ups, and during the last quarter and so far in 2010, we've added some very attractive backlog on our Super Gorillas, put the Coffman to work for McMoRan, and contracted with them for the Rowan-Louisiana, as well as our first EXL, when it comes out of the shipyard.
On that note, I want to take this opportunity to congratulate McMoRan and their partners on their very exciting discovery with the Davy Jones well drilled by the Rowan-Mississippi. This well and the wells this group will be drilling to delineate and develop their ultra-deep shelf gas opportunities are excellent examples of the move we are seeing across jack-up markets toward more demanding drilling, requiring higher specification drilling equipment, which of course, plays to our strengths. We are seeing it in tenders for harsh environment wells in the North Sea, long reach horizontal drilling in Qatar, and high pressure, high temperature wells in several markets.
Industry jack-up utilization currently stands at 75%, which has been increasing, but it’s still below the level necessary in any single market to allow rig rates to move higher. However, it’s important to understand that many of those idle jack-ups are not competitive with our higher specification rigs, which compete in markets where supply and demand are in better balance, and which are all currently contracted.
Also while there are approximately 60 new built jack-ups ordered for delivery in the next 2 to 3 years, many analysts expect that about half of those will go to uncompetitive markets or not be build, which should improve the market's ability to absorb the additional competitive units.
I think an interesting analog demonstrating the ability to increase utilization in day rates of high end rigs in an otherwise over supplied market is what’s going on in the land rig market. Despite the active land rig count being nearly 1,000 rigs below where it peaked in 2008, we put several of our land rigs back to work over the past few months, and leading edge day rates have increased by over 50% for our lightning fast rigs. Clearly this is because clients are selecting more capable equipment that can drill and move faster, rather than just focusing on just price, and we believe the same basic dynamic is underway as operators look to put jack-ups back to work.
With regard to our manufacturing businesses, we’ve seen a recovery in demand in the mining segment, where we build and sell the industry's largest front loaders and have leading market share. We’ve also seen increased interest from several markets outside the U.S. for new land drilling equipment. It’s too early to point to a cyclical upturn for drilling equipment, but it certainly feels like we’ve come out of bottom in that segment of our business.
We hired Tom Burke as CEO for LeTourneau in December, and are making important progress in improving our manufacturing efficiencies and enhancing the competitive design advantages in LTI’s product line.
With that I’ll turn the call over to Mark, who will give you more detail on the drilling markets.
Mark A. Keller - EVP of Business Development: Thanks Matt, and good morning everyone. Our offshore fleet of 23 jack-ups is currently contracted with 78% utilization, with an average day rate of approximately $186,000. We’re encouraged by the increased tender activity over the past few months and LeTourneau contracts we’ve secured recently.
15 of our 23 rigs are located in international markets, 9 in the Middle East, 2 in the North Sea, 1 in West Africa, 1 in Eastern Canada, 1 in Mexico and 1 in Egypt. Our remaining eight jack-ups are located in the U.S. Gulf of Mexico. Continuing our efforts to further diversify our fleet internationally, we are establishing a marketing office in Kuala Lumpur to cover the Southeast Asia, India and Australian markets. These areas – Malaysia, and Vietnam in particular, will demand higher spec HPHT jack-ups and Rowan is preparing to take advantage of those opportunities.
As I mentioned, the recent tender activity has been strong and we’re currently seeing demand for approximately 40 jack-ups in the regions, such as the U.S. Gulf of Mexico, Eastern Canada, Central and South America, the North Sea, the Mediterranean, the Middle East, India and South East Asia.
We anticipate at least 20 additional tenders inbound over the next couple of months. We remain optimistic, while acknowledging the significant amount of contract expirations for 2010, as well as the un-contracted new builds entering new market.
According to ODS-Petrodata, there are currently 459 jack-ups worldwide, demand is 343 rigs with utilization of 75%. It appears that the bottom of the cycle is behind us as worldwide utilization has been on a slow, but steady increase from 71% in August of 2009. Fortunately for Rowan, utilization and day rates for premium jack-ups are stronger, 300-foot independent-leg cantilever and above are currently contracted at 82% utilization with high-spec rigs contracted at 93%.
We believe that industry has experienced a high grading of the fleet, as operators worldwide are demanding more stringent drilling requirements. Rowan maintains one of the youngest and most technologically advanced fleets in the world, and we are poised to greatly benefit from this market shift.
I will now address our areas of operations. Let’s begin with the U.S. Gulf of Mexico. Supply in the region is 80 jack-ups, while demand is 39 rigs, or a utilization of 49%. We have 8 jack-ups domestically, with the contracted utilization of 88%, and an average day rate of approximately $145,000.
As Matt noted, we are thrilled to be a part of McMoRan's ultra-deep gas discovery on Davy Jones and we’re pleased to announce that we have contracted 2 additional jack-ups with them bringing, the total to 4.
In addition to the Rowan-Mississippi and the Ralph Coffman already working for McMoRan, the Rowan-Louisiana will drill the Boudin prospect beginning next month for approximately 180 days in the mid-50s. Our new build EXL1 will also commence operations for McMoRan upon its delivery from the shipyard in early May 2010 in the mid-70s.
We previously reported that the EXL1 was committed in the low-160s beginning in August 2010, acknowledging the growing importance of the McMoRan relationship we have since agreed to reduced that day rate to the low-140s effective in early August as a part of a multi-well package related to the projects mentioned above. We are optimistic that the Davy Jones discovery will lead to a significant increase in deep drilling on the U.S. Gulf of Mexico shelf in the years to come.
Now turning to the North Sea, supply is 36 jack-ups, while demand is 32 rigs and contracted utilization is 89%. Rowan currently has 2 Super Gorilla class jack-ups operating in the area and the Gorilla VII will mobilize into the region upon its completion of the Cabinda Gulf contract in West Africa.
As recently announced, the Gorilla VII has contracted to Apache U.K. for approximately 18 months of work in the low-180s. The Gorilla V continues its contract with Total and we recently signed an extension with Total to keep the rig busy through May 2011. The Gorilla VI remains on location in Norway with BG until July 2010, at which point it is anticipated to mobilize back to the U.K. sector to drill an additional well for BG, U.K in the low 200s.
Even though the standard jack-up market in the North Sea remains soft, the high spec market is one of the most active in terms of tenders and we are aggressively pursuing multiple projects. Despite several highly capable units back in the region, our Super Gorillas continue to secure attractive term contracts at above average day rates.
Moving on to the Middle East, the supply in this region is 118 jack-ups, while demand is currently at 93 rigs, and contracted utilization is 79%. Rowan has 9 jack-ups in the Middle East, 5 of our units are contracted, and the remaining 4 are currently completing life enhancement modifications and upgrades in the shipyard.
As previously announced, the Rowan California has received an LOI from Wintershall for a 3-well project, beginning in May 2010, in the mid-70s, which we currently consider a leading edge day rate in the region for that class of jack-ups. Although all available jack-ups are being tendered worldwide, we are confident that we will secure additional contracts in the Middle East in the near future. Like the North Sea, the Middle East has seen a significant increase in tender activity over the last 90 days, leading multiple requirements from Saudi Aramco.
To briefly summarize the remainder of our fleet, the Gorilla III is in Eastern Canada and commenced operations with EnCana in late fourth quarter of 2009, in the mid-280s, and is expected to complete its drilling project in September 2010. The J.P. Bussell continues its contract with Shell in Egypt in the low-180s, through May 2011.
As mentioned, the Gorilla VII will conclude operations with Cabinda Gulf in West Africa during the second quarter of this year and will mobilize to the North Sea for Apache U.K. And finally, the Gorilla IV continues operations in PEMEX and is contracted through July 2011. As the industry is well aware, we have anticipated additional tenders from PEMEX for more than 6 months. All indications are that they will tender for 5 jack-ups in the first round of tenders. However, we have yet to receive a firm tender date.
And finally, I will cover our onshore division. We have a marketed fleet of 29 land rigs located in Texas, Louisiana, Oklahoma and Alaska. Currently, 79% of our fleet is contracted at an average day rate of approximately $20,000. 87% of our contracted fleet is operating in U.S. shale and gas plays, including the Haynesville and Deep Bossier. We target these areas due to the operating requirements for 2,000 horsepower high-spec rigs that can drill these challenging wells. The land rig market continues to gain momentum, and we anticipate that our marketed fleet will be 100% utilized beginning sometime in the early December.
This concludes our market overview. I’ll now turn the call over to Bill Wells.
William H. Wells - VP of Finance and CFO: Thank you, Mark, and good morning everyone. Starting with our drilling operations, our fourth quarter 2009 revenues were $255 million, down by 34% from the prior year and by 1% from last quarter, with both decreases resulting from reduced Gulf of Mexico and Middle East drilling activity between periods, partially offset by our recent startups in Egypt, Mexico and Norway.
During the fourth quarter we experienced unplanned downtime related to equipment repairs and inspections on Gorillas III, VI and VII, which collectively reduced drilling revenues by almost $20 million during the period. Our full year 2009 drilling revenues exceeded $1.2 billion, a 16% decrease from 2008, as lower average utilization more than offset the impact of net fleet additions between periods.
As of February 16, the date of our most recent fleet status update, our backlog of drilling contracts totaled approximately $1.3 billion. We expect that about 70% of that amount will be realized as revenue during the remainder of 2010, 25% will occur in 2011 and the balance in 2012 or beyond.
Our fourth quarter drilling expenses of $122 million, or 17% below the prior year, virtually unchanged from the last quarter and well below our previous guidance, despite the startup of drilling operations in Egypt and Norway and a full quarter of activity in Mexico. The year-over-year reduction was primarily in labor and related personnel costs, through optimization of crew levels on active rigs and manning reductions on idle rigs. In addition, several shipyard upgrade projects absorbed certain personnel related costs and defrayed maintenance expenses for many of our idle rigs.
Despite fleet additions and 6% more available rig days in 2009, our full year drilling expenses were 17% or more than $100 million, below 2008 levels, due largely to the factors mentioned previously.
We will add 2 full rig years to our offshore fleet in 2010 and expect to reactivate certain U.S. land rigs during the year, which will collectively result in an estimated 21% increase in operating days over 2009. Thus, we expect an activity led increase in drilling expenses in 2010 of 13%, to approximately $595 million for the year. That number assumes a nominal increase in insurance costs in 2010. It’s too early to know what coverage we’ll end up buying upon our April 1 renewal or what that coverage will cost. We will provide an update on our next quarterly call to the extent that our actual experience differs material from that estimate.
We expect that our first quarter 2010 drilling expenses will be in the range of $137 million to $140 million, with the sequential increase due to the reactivation of certain rigs, the conclusion of most rig upgrade projects, the startup of the Ralph Coffman and a full quarter of activity for Gorilla VI in Norway.
Turning to our manufacturing operations, our fourth quarter revenues totaled $231 million, including $86 million of arm's length sales to our drilling division. External revenues were $145 million, an increase of 7% over the last quarter, but down by 36% from the prior year.
Our drilling products and system segment contributed $184 million or 80% of total revenues, including sales through our drilling division. External revenues were $98 million and featured $51 million from rig projects, $18 million from power systems and components and another $13 million from drilling equipment.
Our mining, forestry and steel products revenues totaled $47 million, including $13 million from shipments of mining and forestry equipment and $9 million from steel plate.
Margins were heavily impacted by sales mix with aftermarket margins typically higher than those for original equipment. Early in 2009, our overall manufacturing margins were adversely impacted by losses realized on certain land rig projects, which had also contributed larger share of revenues. Our performance improved in the fourth quarter when land rig and kit revenues totaled $22 million and provided a high teens gross margin, as compared to $36 million and no margin in the third quarter.
We shipped 2 of our largest and most profitable mining loaders the L-2350 during the fourth quarter, bringing the total to 3 units for the full year. Our combined aftermarket parts and service revenues, which shipped the average low to mid-40s gross margins, were $31 million during the fourth quarter compared to $30 million in the third quarter and a record $126 million for the full year.
Our overall operating margin was 17% of manufacturing revenues during the fourth quarter, down from 25% in the prior year, but up from 13% last quarter, with the sequential increase due primarily to more favorable sales mix and better results on land rig projects.
At year end 2009, our manufacturing backlog totaled $675 million, which was down by about 14% during the fourth quarter. The external backlog of $413 million, included $217 million related to offshore rig projects, $71 million related to land rig projects, $67 million of mining and forestry equipment and $29 million of drilling equipment, with the remainder primarily parts and another components.
Our estimated backlog at risk totaled $15 million or less than 4% of our external backlog at December 31. We booked approximately a $118 million of new orders in the fourth quarter or 82% of external revenues during the period, with mining equipment contributing one half of the total. We currently expect to ship 21 mining loaders in 2010, up from 14 machines shipped in 2009, with the likely mix increasing our average gross margins on mining equipment from the low-20s in 2009 to the mid-20s in 2010.
Almost all of our external manufacturing backlog at year end 2009 should be realized as revenues in 2010, and we expect another record year in the aftermarket. In 2009, our manufacturing operations generated $555 million of external revenues at an average 14% operating margin. For 2010, we expect that revenues will be flat to slightly up when compared to 2009, and with a more favorable sales mix, our overall average margin should increase to the upper teens.
Carrying value of our investment in the Vicksburg, Mississippi shipyard and related inventories, totaled approximately $60 million at year end 2009. We currently have no further plans for rig construction there following the delivery of the Joe Douglas in 2011. Absent additional orders or sufficient prospects for future order, the activities at the facility would be significantly reduced at that time, in which case we would incur additional costs, such as employee severance among other charges. Closing or significantly reducing activity levels at the facility could result in cash charges ranging from $5 million to $6 million and non-cash charges ranging from $7 million to $10 million.
Our fourth quarter depreciation expense totaled approximately $45 million, which slightly exceeded our previous guidance and was up 2% from last quarter and 16% over last year, primarily due to rig fleet additions in late 2008 and 2009. For the full year, depreciation totaled $171 million, up by 21% over the last year. Our latest estimate for 2010 depreciation is in the range of $185 million to $188 million, including approximately $46 million to $47 million in the first quarter.
Our fourth quarter SG&A expenses totaled $29 million, unchanged from last year, but up by 22% over last quarter and $2 million more than our previous guidance, due primarily to incremental incentive compensation costs, higher professional fees related to tax planning and additional bad debt provisions. For the full year, SG&A totaled $103 million, down by 11% from last year due to headcount reductions in our manufacturing operations and other cost cutting initiatives.
The geographic expansion of our drilling operations is requiring more sales and administrative support, and we currently expect an increase in 2010 SG&A expenses to a range of $113 million to $115 million for the year, including approximately $27 million to $28 million for the first quarter.
Following our July debt offering, interest expense, net of interest capitalized was $4.1 million during the fourth quarter and just over $8 million for the year. Assuming no new borrowings, our 2010 interest expense should be in the range of $50 million to $51 million with about 1.5 of which should be capitalized.
As noted in our press release, our 2009 results were aided by favorable tax adjustment that followed from a recent third-party tax case. Applying the rulings in that case yielded an estimated $25 million in net tax benefit and a 5 percentage point reduction in our effective tax rate in 2009, to a level below 27%. Looking ahead, we currently expect an annual rate of approximately 30% in 2010.
Property and equipment additions totaled $183 million in the fourth quarter, which included $16 million for our second and third 240-C jack-ups, $84 million toward the 4 EXL jack-ups and $69 million for our existing fleet, including contractually required upgrades.
At year end 2009, we had approximately $500 million remaining to be spent under our new build program over the next 3 years, 2/3 of which is expected to occur in 2010. Our 2010 capital budget has been set at approximately $501 million, and includes $106 million towards the Joe Douglas, $231 million for the EXL jack-ups and $119 million for existing rigs, including contractually required upgrades, remaining $45 million includes the cost of drill pipe, needed improvements to our manufacturing facilities and shore bases, and other enhancements. We currently intend to fully fund our capital program through existing cash or operating cash flows.
That concludes our prepared remarks. With Diego’s assistance, we will now open it up for questions.
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