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Edited Transcript of RDC earnings conference call or presentation 24-Feb-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Rowan Companies PLC Earnings Call

HOUSTON Feb 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Rowan Companies PLC earnings conference call or presentation Friday, February 24, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Pitre

Rowan Companies, Inc. - IR

* Tom Burke

Rowan Companies, Inc. - President & COO

* Mark Keller

Rowan Companies, Inc. - EVP, Business Development

* Stephen Butz

Rowan Companies, Inc. - EVP/CFO/Treasurer

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Conference Call Participants

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* Gregory Lewis

Credit Suisse - Analyst

* Sean Meakim

JPMorgan - Analyst

* Ian Macpherson

Simmons & Company International - Analyst

* Kurt Hallead

RBC Capital Markets - Analyst

* Eduardo Royes

Jefferies & Co. - Analyst

* Haithum Nokta

Clarkson Platou - Analyst

* Rob MacKenzie

Iberia Capital - Analyst

* Mark Brown

Seaport Global Securities - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Denise, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ronan Company's fourth-quarter 2016 earnings results conference call.

(Operator Instructions)

Thank you. Chris Pitre, Vice President of Investor Relations, you may begin your conference.

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Chris Pitre, Rowan Companies, Inc. - IR [2]

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Thank you, operator, and good morning, everyone. Welcome to Rowan's fourth-quarter 2016 earnings call, and thank you for your interest in Rowan. A copy of the Company's earnings report issued earlier this morning can be found on our website at rowan.com.

Joining me on the call this morning are, Tom Burke, President and Chief Executive Officer; Mark Keller, Executive Vice President Business Development; and Stephen Butz, Executive Vice President and Chief Financial Officer. Before to the call over to Tom, I'd like to remind you that expectations expressed during this conference call are forward-looking statements, and are subject to risks and uncertainties such as market conditions, commodity prices, offshore drilling activity levels, and other risks and uncertainties that could cause actual results to differ materially.

Please refer to our earnings release and SEC filings on our website, which more fully describe forward-looking statements and risk factors, and other events that could impact future results. Please note that information contained herein is as of the date of today's call and may be outdated at the time of any replay of this call.

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

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Tom Burke, Rowan Companies, Inc. - President & COO [3]

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Thank you, Chris. Good morning, and welcome to our fourth-quarter and full-year 2016 earnings call. We appreciate your participation today, and your continued interest and investment in Rowan.

Following my prepared comments, Mark will give you an update on the offshore drilling market, and then Stephen will walk you through our financial performance and guidance. After that, we will open the call up for questions. In the fourth quarter of 2016, we announced several key transactions that solidified our long-term growth and financial stability , even though our earnings continued to be pressured by challenging market conditions.

Our announcement of a joint venture with Saudi Aramco, our successful bond offering and [debt tender] offer, execution of our fleet strategy through continued sales of our older assets, and our outstanding operational and safety performance, made the quarter remarkable on many fronts. We accomplished these milestones while continuing to effectively reduce our costs and improve our focus on efficiency across the Company. These transactions and followed operational execution means that our visible liquidity run rate now extends comfortably into the next decade, allowing us more flexibility to invest in attractive growth opportunities.

Stephen will review our financial performance in detail, so I will only make a few comments. We reported a loss of $0.19 per share in the fourth quarter, down from $0.04 of earnings per share in the previous quarter. The results this quarter were impacted by a $33.6 million loss on our proactive early retirement of debt. Excluding this loss, our $0.08 of earnings per share this quarter beat consensus.

Our fourth-quarter EBITDA was $143 million versus consensus estimates of $132 million, mainly driven by solid cost control, and high-up revenue efficiency. During the quarter, we executed two debt capital markets transactions, though we would have preferred to extinguish debt at a discount, we are certainly pleased by the market's recognition of our solid financial position, effectively identifying us as a company that will competently move through the remainder of this down cycle, and emerge in a position of strength.

I am pleased that Rowan has led the peer group in relative [TSR] over the last three-year period, and then in 2016, we generated a positive return of 12%. Our strong operational performance in 2016 aided by our outstanding operational uptime of over 98% helped drive solid cash generation. Of course, this uptime performance would not be meaningful if it weren't accompanied by our best safety performance on record.

For our Company to have accomplished these performance measures during another year of intense focus on cost reductions is truly a well-founded source of pride to the men and women who work at Rowan. However, just as important during this downturn, is that we are highly focused on making structural changes to how we operate to ensure this outstanding performance becomes repeatable and sustained. During the fourth quarter, we sold two of our remaining older assets, the Gorilla II and Gorilla III.

This followed the sale of three other older assets in 2015. Four of the five sold rigs are now restricted to non-drilling activities. We have only two older stacked rigs left, allowing us to more fully concentrate our support on rigs that will have a meaningful contribution to our earnings when the market recovers.

We're thrilled with our recently-announced partnership with Saudi Aramco, who has been our largest customer for over 10 years, and we're delighted to further that relationship. The new company will expand its fleet over time, which will help Saudi Aramco accomplish their strategic goals, as well as provide a [exhaustive] stability and unparalleled growth to Rowan.

Truly a win-win. Stephen will provide more details in a moment on this important long-term value creation opportunity.

Now, I'd like to share a few thoughts on the market. A year ago, the view of the market was bleak, as we expected further declines in demand to both jack-up and deepwater markets. That forecast proved to be true.

We've seen operator budgets decline for three years in a row, assisted by lower rig day rates and other costs. As we have seen in cycles in the past, activities with lower capital commitments, such as unconventional land drilling and shallow water brownfield projects recover more quickly than larger capital-intensive activities, such as ultra-deepwater exploration and development . We saw some improvements in all (inaudible) this last quarter, and then OPEC's production cuts further supported crude oil prices.

This stability in oil price seems to be driving increased tendering activity for late 2017, especially for jack-ups. However, the floating market seems to be pushing off to 2018.

While becoming more comfortable with forecasting a reasonable recovery over the coming years, [more are tracked] to attrition of older assets is necessary for true recovery. We have seen further jack-up and floater scrapping and retirements recently, and expect those can continue over the next years. While a robust recovery of the drilling market may take multiple years, we are confident that the strength of our balance sheet and our operational performance will carry us through.

Finally, as with previous quarters, we continue to have a [key] focus on optimal capital allocation. With the impressive work that our finance team has done in extending our visible runway, combined with our extremely solid operational performance and a market recovering that is becoming a little clearer each day, we feel well positioned to act on any attractive opportunities that come our way.

Those opportunities may take many forms from debt retirements to the distressed asset acquisitions, but we will always view them through the same long-term shareholder value lend. Now, for a look at the markets where Rowan competes, I'll hand the call over to Mark.

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Mark Keller, Rowan Companies, Inc. - EVP, Business Development [4]

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Thanks, Tom, and good morning, everyone. As we enter 2017, we reflect on our position in the cycle and look forward, cautiously optimistic, that this year will present a turning point for the industry.

But recovery may be modest for several years. This morning, I will visit with you about the jack-up and ultra-deepwater markets, and our outlook for the year, and conclude with a few thoughts on the attrition needs that our industry must address.

We were pleased to report several jack-up contract extensions on our last fleet status update. The additional projects signed in Trinidad exhibit our customer satisfaction, and our outstanding drilling performance, and their continued commitment to have Rowan as their chosen partner and executing their drilling programs. Although we did not disclose the day rates, due to the competitive nature of the global markets, they continue to provide significant operating margin, and we were happy to add utilization to those three rig units.

In the North Sea, we currently have three jack-ups contracted, and three available. We are in discussions with multiple operators about opportunities for the Rowan Norway, the Rowan Stavanger, and the Gorilla VI. But project commencements seemed weighted toward the second half of 2017.

We're looking at P&A work, both in Norway and the UK sector, but also considering attractive opportunities outside of the region. We continue to see the most promising opportunity for increased demand in the Middle East. We're honored to be selected as the 50-50 joint-venture partner with Saudi Aramco and expect that this new company will gain significant market share within Saudi Aramco's fleet of jack-ups in the coming years.

We look forward to the commencement of the Company in the second quarter. Throughout the region, we see a focus on high specification jack-ups, and our two available units, the XL I and the XL IV, are being tendered aggressively, both in the Middle East and around the world.

Thought Gorilla IV and the XL III continue operations with Arena offshore in the US Gulf of Mexico. We see several additional opportunities in the region as operators look to develop lower costs, faster-cycle brownfield projects in the current budget environment.

To quickly touch on other areas of the world, we see increased tender activity in Southeast Asia, however, we anticipate initial needs will be met by units currently in the region. We're actively participating in contracting opportunities and West Africa, as operators look to high-grade units in that market. In Mexico, we are closely monitoring the bidding rounds, and expect multiple shallow-water blocks to be offered in 2017.

However, the commencement of these projects may not materialize until sometime in 2018. Worldwide marketing jack-up utilization is now at 68%, but we anticipate the bottoming of the trough within 2017 for jack-ups . While downward pressure on day rates may continue due to idle supply and the new builds waiting to enter the market, the combination of an increase in drilling activity, and an anticipation of continued attrition, should improve effective utilization levels worldwide, especially in niche markets.

Now, let's look at the ultra-deepwater market. Market utilization fell approximately 9% during 2016, and we expect 2017 to be another challenging year as new contract awards struggle to keep pace with contract roll-offs.

As operators seem focused on capital spending in shorter-cycle investments, several ultra-deepwater projects that we had previously anticipated commencing in 2017, now appear to be slipping into 2018. However, we're pleased with ongoing conversations with our customers about opportunities for available drill ships, and continue to believe that dual-BOP 1,250-ton units will be the first to return to work.

These rigs offer operators the technical capabilities that give them the flexibility to address their worldwide portfolios that are especially critical to the demanding drilling and regulatory requirements in the US Gulf of Mexico. Two of our four units are currently contracted in the US Gulf of Mexico, and our remaining two units are warm stacked. We believe that warm stacking is the best approach for these vessels, as our customers have made it clear that cold-stacked units will be the last in line to be contracted.

Although the crew numbers are reduced on our ships, repairs and maintenance are ongoing, and there will be minimal costs when the units return to work. 2018 appears promising for the seventh-generation ultra-deepwater market, assuming commodity prices can maintain their stability, and as many are forecasting, continue to climb steadily as the year progresses. We are actively participating in tenders for work in East and West Africa, Central and South America, and the US Gulf of Mexico.

Additionally, we are encouraged by the activity in the recently-completed bidding rounds in Mexico, and the anticipated offers in Brazil, which include the second production sharing around and the 14th bidding round of blocks under the concession [regime]. Despite this anticipated demand, recovery for the floater market, as a whole, seems to be more in the 2019 time frame.

As I alluded earlier in the call, I would like to spend a few minutes discussing attrition, both for floaters and jack-ups. On the floater side, approximately 74 units have been removed from the fleet since October of 2014. While this is a good start, given our view of demand over the coming years, we believe that an additional 100 units could be retired from the current fleet.

In tandem with strengthening commodity prices that encourage increased demand, this attrition could accelerate the industry's ability to obtain a healthy utilization target of 85% . The majority of these retirements should come from older units, those that are currently stacked, and those rolling off contract. As technology has advanced, many of these floaters have become obsolete, and contractors will struggle to maintain them and put them back to work.

Regarding jack-up attrition, only 32 units have been removed from the fleet over the same time period, but there are currently 230 jack-ups in the total fleet that are 35 years or older. 62 of which are cold stacked or out of service.

While it is significantly less expensive to stack jack-ups to floaters, which contributes to the rationale of delayed attrition, we believe that most of these older units will not re-enter the market. With approximately 100 new-builds waiting to enter the fleet, it's hard to imagine a customer choosing an aged jack-up that has been stacked for a significant amount of time over a new-build unit for a potential project, provided a suitable drilling contractor is sponsoring their market entry. Applying similar analysis for a supportable jack-up supply in the future, we believe many of the older jack-ups could be retired from the current fleet over the coming years.

Rowan has been diligent in our attrition efforts, having removed four of our older units from the market since the downturn, and we will most likely retire the Cecil program in Rowan California. Attrition is vital to accelerating the recovery of the offshore drilling market, and considering the aging fleet, this is certainly an attainable goal.

While we acknowledge the uphill battle that the industry faces in 2017, our high spec fleet of jack-ups and drill ships backfire outstanding workforce, gives us the utmost confidence in our ability to take advantage of the opportunities that the recovery will bring. This concludes my remarks this morning, and I will now turn the call over to Stephen.

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Stephen Butz, Rowan Companies, Inc. - EVP/CFO/Treasurer [5]

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Thank you, Mark, and good morning, got everyone. On the call today, I will review our fourth-quarter 2016 operating results compared to the prior quarter.

Next, I will provide some additional color around our agreement with Saudi Aramco to jointly form a new drilling company in 2017, and the implications for our financial results. Lastly, we will provide you with an update to our costs and capital spending guidance before opening the call for questions and answers.

This morning, we reported a fourth-quarter net loss of $24 million, or $0.19 per share, which includes a $33.6 million loss on the extinguishment of $464 million of debt. Excluding this item, earnings were $0.08 per share for the fourth quarter, down $0.22 from the previous quarter of non-GAAP earnings per share, due primarily to a reduction in jack-up utilization.

We generated $346 million in revenue during the fourth quarter, excluding rebillable items, an 8% decline from the previous quarter, as we incurred increased jack-up idle time, and had a couple of rigs out of service in the Middle East. We completed 2016 with less than 1.5% operational downtime, fleet-wide for the entire year. We are especially proud that we have not incurred any downtime on our drill ships for three straight quarters, and less than 1/10 of 1% downtime for the year.

Our idle days as a percentage of available days showed only a slight 2% increase from the third quarter, up to approximately 29%. Our out-of-service time for the jack-up fleet was approximately 7% of our available rig days in the fourth quarter, due primarily to repairs and inspections on the Bob Palmer and Hank Boswell, and upgrades to the J.P. Bussell, in preparation for the contribution to the new joint venture with Saudi Aramco.

Fourth-quarter operating expenses were $174 million, a reduction of $8 million from the previous quarter, attributable to lower activity on idled rigs, and continued cost control efforts. As a reminder, this excludes rebillable items, which are offset by a commensurate increase in revenue.

And line with our guidance, SG&A expenses totaled $26 billion in the fourth quarter, and $102 million for the full year. Down from 12% from 2015 levels, and 19% versus 2014. Our fourth-quarter depreciation expense remained flat with the third-quarter level at $102 million. Interest expense was $39 million in the quarter.

With respect to the income tax provision, we recognized a tax benefit in the quarter of $9.7 million as a result of a reduction in our tax asset valuation allowance, due to certain intercompany transitions . Our annual effective tax rate was still in the low-single digits, as previously guided.

Now, for a look at our cash flow and balance sheet, for the fourth quarter, capital expenditures totaled $29 million, slightly above the third-quarter level, primarily due to regularly-scheduled surveys for the Bob Palmer and Hank Boswell, and preparations for the J.P. Bussell's contribution to the joint venture with Saudi Aramco. Full-year CapEx for 2016 came in at $118 million, somewhat below our previous guidance, as some capital spend slipped into 2017.

All in all, we generated $218 million in cash in the fourth quarter, and our current cash balance today stands at $1.1 billion. With an additional $1.5 billion untapped revolver, our liquidity continues to be very strong.

In the fourth quarter, we issued $500 million of 8.5-year senior unsecured notes to yield [7.375%]. Simultaneously, we executed a tender offer focused on clearing out a substantial portion of our near-term debt maturities. Following the expiration of our tender offer, on February 8 of this year, we also exercised our early redemption offer on the remaining 2017 notes.

In total, we extinguished approximately $590 million of debt maturities that were slated to come due, between 2017 and 2022. The combined effect of these actions significantly extend our already lengthy visible runway. We believe solidifying our liquidity [well] into eventual market recovery, and affording us the flexibility to make more opportunistic capital allocation decisions.

Now, I would like to take some time to walk you through some of the economics of the new company that we are forming together with Saudi Aramco. Upon legal formation, late in the first quarter of 2017, Saudi Aramco and Rowan will each contribute $25 million in cash to capitalize the new entity. Shortly thereafter on startup, Saudi Aramco will also contribute two jack-up rigs in and related assets.

Rowan will contribute three of its jack-up rigs, the Gilbert Rowe, Bob Keller, and J.P. Bussell, our shore-based facilities and related assets. Due to the uneven value of these contributions, Saudi Aramco is expected to contribute cash to maintain a 50-50 ownership split . Day rates for these first five contributed rigs h.e been negotiated for the first three years, into 2020.

The end dates of the current contracts on the Scooter Yergain and Hank Boswell have been leveled out until they ramp up simultaneously in October, 2018. One of these rigs will also be contributed to the new company. These adjusted contracts will still provide the same backlog to Rowan between the two rigs.

As with the initial contributions, Saudi Aramco is then expected to contribute cash to maintain its ownership level. The second tranche of contributed rigs with Scooter Yeargain and Hank Boswell will receive initial contracts of three years, but day rates determined by a discounted market index. The seven contributed rigs, five initial and two in 2018, are expected to remain under contract for their remaining useful lives to meet Saudi Aramco's drilling needs, provided that the rigs continue to meet the technical and operational requirements of Saudi Aramco.

You will note that the contributed rigs from Rowan's side do not account for all (inaudible) rigs currently under contract with Saudi Aramco. From startup, the new company will manage Rowan's seven remaining jack-ups in the Kingdom, through the remainder of their contracts for a customary management fee. At the conclusion of each managed rig contract, other than the Boswell and Yeargain, which will be contributed to the rig may be leased by the new company as needed.

Looking beyond the next few years, the new company will begin ordering jack-ups to be built by a joint venture between Lamprell, a highly qualified and experienced player in rig reconstruction, and Saudi Aramco. We expect the first rig to be delivered in 2021, generally followed by two rigs per year for 10 years, and up to 20 new-build rigs in total. Each of these rigs will be placed on an initial long-term contract with Saudi Aramco.

In a similar fashion to the contributed rigs, following their initial contracts, the new-build rigs will remain under contract for their remaining useful lives at day rates determined by a discounted market index. Although we are not providing details of all the economic arrangements, the new-build rigs are expected to generate an attractive return on investment. I want to reinforce that both Saudi Aramco and Rowan expect the new-build program to be fully funded through internal JV cash generation, and external debt financing.

Given the magnitude of the backlogs, coupled with the strength of our counter-party, we expect the new company will be able to self and externally fund the growth, without additional shareholder injection . However, should th.e funds be insufficient, Saudi Aramco and Rowan intend to stand behind these orders.

Both of the parties expect that the new company will generally not hold excess levels of cash, other than what will be needed under the business plan. Any additional funds will typically be distributed to the shareholders. Therefore, given Saudi Aramco's matching contribution, and the cash generation from the new entity, we expect to see a further strengthening of Rowan's already robust liquidity over the next two years, as excess cash is distributed.

We expect to account for our investment in the JV under the equity method, and our share of the venture's income will flow through equity and unconsolidated subsidiaries on our income statement. As we're contributing our in-Kingdom shore-base operations and facility, those costs will also be absorbed by the new venture, from inception forward.

Though the intent is to create a self-sustaining business, the new company is expected to rely on Rowan for various back-office support services for the first few years. We expect the reimbursement of these services to be reported as revenue on Rowan's books.

Now, to review our guidance for 2017, updated from our preliminary numbers provided in the last quarter. On the heels of two very strong years for cash generation, the next two years will be much more challenging in terms of our financial results, with two drills ships currently idle, and one additional vessel potentially approaching the end of its contract next quarter. As Tom and Mark discussed, while we anticipate reaching a bottom in demand for jack-ups in 2017, and floaters in early 2018, we believe the industry will need to rationalize significant excess capacity before we experience a meaningful recovery in day rates.

We estimate that our full-year 2017 operating costs, excluding rebillables, will range between $625 million and $675 million, depending on the level of activity idled rigs, or other rigs rolling off contract during the year. This represents an 11% to 17% reduction from our 2016 level, primarily due to reduced activity , the new joint venture absorbing approximately $25 million of shore based costs, and incremental cost control measures.

First-quarter 2017 operating expenses are expected to approximate $170 million. This guidance excludes certain potential joint-venture costs that may be grossed up on our income statement and offset by equal revenue. We expect to incur SG&A expense of $95 million to $100 million in 2017, which represents a slight decline from the 2016 level of $102 million, with approximately $26 million in the first quarter.

We expect to record depreciation expense of $385 million to $395 million, slightly below our 2016 level. Our full-year interest expense guidance is $155 million to $160 million, slightly above our previous guidance, taking into account the impact of the recent capital market transaction.

Moving on to our income tax provision, as pretax income declines to a fairly low level, the effective tax rate starts becoming less meaningful, so this year, instead of providing you with an estimated tax rate, we will provide guidance for the estimated tax expense. We expect our income tax expense for 2017 will approximate $50 million, versus only $5 million in 2016. The significant expected difference from 2016 to 2017 is primarily driven by two non-cash factors.

Under US GAAP, certain transactions that occurred in 2016, while creating no income tax in aggregate, created a tax benefit in 2016, which will be offset by expense in 2017 and 2018. Additionally, the early adoption of a new accounting standard will result in our eliminating a deferred tax liability and taking in to retained earnings over $200 million in January of 2017, but will eliminate a roughly annual $20 million benefit over the next decade.

First-quarter tax expenses expected to range from $10 million to $15 million. But our income tax expense will likely vary significantly quarter to quarter, depending on the actual results, additional backlog additions or other transactions, as they impact our forecast and our valuation allowances on our net deferred tax assets. So, while the provision maybe remain volatile, we expect our cash taxes to remain flat in the $40 million range in 2017, excluding the impact of auditor settlements related to previous years.

Finally, we expect to incur capital expenditures of approximately $105 million to $115 million in 2017, an approximate 10% increase from previous guidance, primarily due to the deferral of certain fourth-quarter capital spend into 2017. We're proud of Rowan's performance during 2016, and the flexibility we have built for the Company to maneuver through the challenging times facing our industry. Over the course of the year, we continued to reduce costs, strengthen our balance sheet, and improved our liquidity, without any dilution to shareholders.

Our safety, environmental, and drilling performance has been excellent. Our intense focus on customer satisfaction has yielded positive results, as is exemplified by our groundbreaking partnership with the world's largest oil company and consumer jack-up drilling rates. We're cautiously optimistic that we will see a bottom in offshore drilling activity over the next year or so, and we will then begin the road back toward healthy market fundamentals.

Meanwhile, we will continue to focus on what is under our control, as we position Rowan to thrive in the eventual market recovery. We are now prepared to open the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Your first question comes from Gregory Lewis with Credit Suisse.

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Gregory Lewis, Credit Suisse - Analyst [2]

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Yes, thank you, and good morning.

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Tom Burke, Rowan Companies, Inc. - President & COO [3]

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Good morning, Greg.

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Gregory Lewis, Credit Suisse - Analyst [4]

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Feel free to chime in where comfortable. So, Stephen in your prepared remarks you mentioned the reliance in Cobalt potentially rolling off this quarter. I guess earlier this week there was some news that Cobalt was -- I guess filed initial permitting to potentially do some work in Basin Bay and in the Gulf of Mexico.

I guess any sort of update you could give us on the status of this rig how maybe we should be thinking about it? I know that there's some payments that will be coming -- I guess expected to hit Q2. Apologies, I think we felt they were hitting last quarter, so any color you could give around how you guys are thinking about that rig.

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Tom Burke, Rowan Companies, Inc. - President & COO [5]

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This is Tom. I do think -- we saw the announcement today and obviously we've been keeping very close to Cobalt. I guess let Mark give some comments on that.

We don't have much beyond what is in that press release that we can talk about. The agreement is that -- disseminate the final termination payments will occur in beginning of April, end of March, or when -- end of April -- end of March, beginning of April. And beyond something on the accounting side, Stephen.

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Stephen Butz, Rowan Companies, Inc. - EVP/CFO/Treasurer [6]

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Greg, we did receive $76 million in total, or have received $76 million in total related to sort of the early potential termination payments, and would due a total of $96 million, so that $20 million would be paid, again, end of first-quarter, as Tom mentioned. In terms of the revenue recognition for that, though, that revenue is deferred, and will be recognized from April of 2017 all the way through the end of the current -- the end of the contract, which is January of 2018. So, today the revenue we have been recognizing is just for the current quarter (inaudible) roughly 580. Does that help?

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Mark Keller, Rowan Companies, Inc. - EVP, Business Development [7]

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Greg, this is Mark. I met with them earlier this week, and they've had a lot of success, geologic success, obviously a great company to work for. They will finish the current well at North Platte for some time in the end of April, early May.

There are some discussions about a potential additional well there in North Platte, but nothing is signed or anything like that. We are in discussions with them all the time.

They are a great customer of ours, and like I said, they have been very successful. So, we are hopeful that their deepwater programs will continue.

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Gregory Lewis, Credit Suisse - Analyst [8]

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Okay, great. And then one of the things that you guys have talked about, just given liquidity, given your debt profile, it is sort of the ability to maybe take advantage of the recent weakness -- the distressed asset sales, and I guess it looks like we saw some of the first assets go for sale, I guess two Hercules Discovery rigs were sold in late 2016. Just curious in how you are thinking about the opportunity for picking up some distressed assets and just sort of as you think about the timing, are we still too early, or is there something that we could see happen over the next few quarters?

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Tom Burke, Rowan Companies, Inc. - President & COO [9]

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Greg, good question. I do think we had a lot going on last year with the debt refinancing and the formation and negotiation of Saudi Aramco JV, and so, we are looking at those assets actually pretty closely, and we think the person that bought them, the company that bought them, bought them for a good price.

And so, I feel we were chasing those, the timing just didn't work out with somebody of the things that we had going on, and we feel like it was a good price, and there is some good opportunity out there, so we look a lot of stuff. We are always really focused on strong financial return, and a good return on capital, so we probably have been -- I guess I would say we have had good discipline in the opportunities we have gone after. I have to say, Stephen and I are a little disappointed that those two assets (inaudible) [fleet], but there will be other ones, and Stephen?

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Stephen Butz, Rowan Companies, Inc. - EVP/CFO/Treasurer [10]

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Greg, in terms of it being too early, I don't think we would necessarily say that it is, even though we still have, unfortunately, a lot of downturn ahead of us, but we do think, as Tom and Mark both alluded in their comments, that we're starting to have a lot more dialogue with customers and whatnot, and we anticipate a bottoming in the next 12 months (inaudible) demand, but, no, we're looking at things all the time, (inaudible) and looking at all the opportunities. It would be hard to put a timetable on.

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Gregory Lewis, Credit Suisse - Analyst [11]

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Okay. Great. Thank you very much, good luck, and have a great weekend.

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Stephen Butz, Rowan Companies, Inc. - EVP/CFO/Treasurer [12]

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Thanks, Greg.

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Operator [13]

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Your next question comes from Sean Meakim, JPMorgan.

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Sean Meakim, JPMorgan - Analyst [14]

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Good morning.

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Tom Burke, Rowan Companies, Inc. - President & COO [15]

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Good morning, Sean.

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Sean Meakim, JPMorgan - Analyst [16]

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You guys spent all that time towards the end of the year working on your liquidity, and so now, of course, the natural progression of the conversation is to talk about how you're going to spend all that cash, right. So, I guess you've answered a question on distressed assets, but I guess looking forward further out, how would you prioritize incremental debt repurchases with those but 2022s or 2024's, would that be a higher priority, compared to say another extension to the revolver?

And I guess nearer term, just thinking about as inquiries are looking better, how do we feel about capital upgrades to maybe improve some of the portions of the fleet to try to improve your opportunities at near term.

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Tom Burke, Rowan Companies, Inc. - President & COO [17]

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I'll answer the first question and then I'll let Stephen answer the more difficult first one. As far as incremental upgrades to the fleet, I don't see there's a lot of things that we need to do to our core fleet. Some of the older assets, which were non-competitive we have sold over the last couple of years, and we've got another two assets cold stacked. There may be something that we are bidding on a contract where the customer wants something specific which we don't have on one of our rigs, but generally, that will be a smaller amount, but as far as saying we're taking our fleet and saying, we don't like this rig, we need to turn it into something else, that is much less likely to happen, because the rigs that we -- the rigs that we have in our fleet are pretty strong, and we (inaudible) of doing a major capital upgrade on any of them, unless it was specifically for a customer demand. It's pretty, I would say, pretty far down the list.

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Stephen Butz, Rowan Companies, Inc. - EVP/CFO/Treasurer [18]

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And Sean, in terms of those priorities, I wish we could share that with you, but of course you can imagine that those priorities are constantly shifting, depending on the terms of all those opportunities at any given time, and so we will certainly prioritize those internally, but it gets on the ships in real-time, and it's important for us to be flexible and we pride ourselves on being nimble, so we will continue to assess all those opportunities, and move appropriately in a way that creates the most shareholder value.

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Sean Meakim, JPMorgan - Analyst [19]

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Just one quick one more for Mark. I thought your comments about West Africa were pretty interesting. Perhaps the net rig count stays challenged, but high grading could be just some incremental opportunities for you all, and so I wondered if you could expand on that a little bit.

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Mark Keller, Rowan Companies, Inc. - EVP, Business Development [20]

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Sean, we're looking at some opportunities up the west coast of Africa. The fleet there as a whole jack-up fleet is '80s vintage, maybe '90s with some minor upgrades, so the operators are looking to high-grade that fleet, I think, over the next couple of years, and we've had several discussions with multiple operators about this process, and it's a little hard to pinpoint when it will actually start, but we are hopeful that we will see some of this stuff this year, but there's definitely an interest from the IOCs and [NOCs] to upgrade the fleet and (inaudible) [jack-up] fleet in West Africa.

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Gregory Lewis, Credit Suisse - Analyst [21]

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Great. Thanks, everyone.

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Mark Keller, Rowan Companies, Inc. - EVP, Business Development [22]

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Thanks, Sean.

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Operator [23]

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Your next question comes from Ian Macpherson with Simmons.

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Ian Macpherson, Simmons & Company International - Analyst [24]

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Thanks. Good morning.

Stephen, you provided a very helpful framework for how this joint venture is going to unfold, but we do have a lot of blanks to fill in with the numbers. Can you talk a little bit more about what the road map is for the incremental disclosure on some of these numbers going forward will be, and what level of transparency we can expect to get around the day rates, the expenditures for the new-builds, and all that good stuff?

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Stephen Butz, Rowan Companies, Inc. - EVP/CFO/Treasurer [25]

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Sure, Ian. That is a good question, and as you know, we have been very transparent over the years, and we pride ourselves on that, but of course, we have a joint-venture partner here that [we are actually cognizant of], as well.

We will continue to disclose what is required, always, but in terms of the road map, this is another thing I would say too, is much of this is going to be very visible on our financial results, because it is a pretty significant JV, and it is going to be growing over time, so it will be visible soon. We will be filing our 10-K shortly, and there will be additional disclosure with that.

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Ian Macpherson, Simmons & Company International - Analyst [26]

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Well --

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Stephen Butz, Rowan Companies, Inc. - EVP/CFO/Treasurer [27]

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Because we think those disclosures will be helpful to you in evaluating (inaudible).

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Ian Macpherson, Simmons & Company International - Analyst [28]

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That is sort of what I was anticipating. Thanks.

Mark, you talked about the deepwater project bucket, it is still present, but it is slipping a little bit, and projects start slipping from 2017 and 2018, and you said you see the recovery for floaters looking more like a 2019 event, but could we interpret that as maybe contract visibility, and even contract awards commencing over the next 12 months or so in anticipation of that unfolding, and when you say a recovery, I would imagine you're talking about more of a rebalancing of utilization by 2019. Is that a good interpretation of your comments?

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Stephen Butz, Rowan Companies, Inc. - EVP/CFO/Treasurer [29]

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Yes, that is right, Ian. We operate -- we feel like we are operating in a market with 32 ships with the dual stacked, 1,250-ton ships, and I think we are hoping that supply and demand certainly hopefully would come into balance, dependent on commodity prices by then, but before that occurs, we're going to see some tenders, and we are going to respond to tenders.

We currently have about five in-house, deepwater tenders that we're working on, and there are some others that are coming, and so we are going to be very careful how we approach those, but I think a good indicator for us, we believe, as I said earlier, we believe the jack-up market will trough in 2017. A good indicator for the deepwater market beginning to trough is when the IOCs come out for long-term contracts.

I just don't think they're going to let this pricing opportunity pass without coming out with three-to-five-year contracts, particularly, the big IOCs that have enough backlog of wells to do that. I think that's going to be your best indicator of when things would start.

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Ian Macpherson, Simmons & Company International - Analyst [30]

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Good. I appreciate that.

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Stephen Butz, Rowan Companies, Inc. - EVP/CFO/Treasurer [31]

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Thanks, Ian.

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Operator [32]

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Your next question comes from Kurt Hallead, RBC.

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Kurt Hallead, RBC Capital Markets - Analyst [33]

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Good morning. As always, appreciate the color and the additional input. I guess my question on the market dynamics more broadly, it seems now very consensus view that there is substantial enough indications of demand for the jack-up market has been hashed out. You guys reference the prospect, though, that there is still more supply than demand in that dynamic, so how much additional pricing pressure could there potentially be? And I mean that in the context do you expect to see market rates to drift down toward cash break even, or do you think that this cycle and the demand dynamics will be sufficient enough to keep rig broadly operating in a profitable territory?

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Tom Burke, Rowan Companies, Inc. - President & COO [34]

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One comment, I, Mark, will try and answer that question, which is a tough one. I would say it often depends, as we will see certain niches where we will see stronger pricing, and you saw some good fixtures, there's Noble Drill and Gas in Saudi Arabia, you've seen some good fixtures for us, even as downturn in Trinidad, with the [laternus] type rigs, which are particularly suited for that market. I think it will be -- I don't think we will see any pricing recovery for quite some time, and I do think (inaudible), management teams want to get there and maintain capabilities, so they will take opportunities at lower rates, although I think most management teams don't want to be cash negative when they look at it from a sort of a holistic CapEx shore-based support, and rig operating cost.

I feel like we'll see some more pressure. Is hard to say how much it will go down. Mark, what do you think?

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Mark Keller, Rowan Companies, Inc. - EVP, Business Development [35]

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Kurt, I agree with Tom. Every market in the world is different. The pricing is different in every one of those markets, but inside of those markets, the class of rig is what is going to drive it.

Commodity rigs in certain markets are cash cost today, or below. We have seen some of them, but the higher spec rigs in different markets, such as Trinidad, Middle East and other areas, you are seeing day rates with good margins on them, and I think a good market fixture or indicator is the two contracts that we will sign with Saudi Aramco at 159, and those are five-year term. If Saudi Aramco, I haven't dealt with them since 2004, I can tell you Saudi Aramco would not offer a five-year contract unless they felt like the bottom of the market was near or certainly was here, and they feel like they want to maintain those high spec rigs, and we're willing to take a chance on letting them get away from them.

So, I think that is a good market indicator. Our rigs are shorter term in Trinidad, but once again, good margins on them, and as we roll our rigs in the Middle East, I think you'll see some good fixtures and some of our peers as they begin -- as they renegotiate contracts within Saudi Arabia.

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Kurt Hallead, RBC Capital Markets - Analyst [36]

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Got it. Thank you.

And then the follow-up on the deepwater market, as we are getting indications of increased inquiry levels and more likely the prospect of incremental contract awards in 2018, what kind of strategic or tactical view are you guys going to take if you get a three-year or five-year contract offer, and you know that demand is going up? Are you going to want to stay at the shorter end of that, and maybe even just take a one-year deal and kind of try to catch the next uptick? Curious on how you might be approaching that dynamic.

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Tom Burke, Rowan Companies, Inc. - President & COO [37]

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It is something we deliberate over quite a lot internally, and what we think we're going to do may be different from what we are going to do. What we would like to do, but I would say that it often, it would kind of depend on that particular rig class and how many available units we have.

So, if we have one available unit, we are less likely to take a lower cost at a lower rate and a longer period. We have three of that class, we will maybe consider something like that class.

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Mark Keller, Rowan Companies, Inc. - EVP, Business Development [38]

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Yes, Kurt, I do think that you will see the IOCs, as I mentioned earlier with Ian, I do think you will see them come out, and try to term up some of the higher spec drill ships at lower day rates. There really has not been any appreciable expiration going since early 2014, so at some point, when that begins to occur, and they have these backlogs of wells, I think you will be tempted with that opportunity.

But to your question, if we see the market improving and the fact that we are dealing in a -- we believe as IOCs term up, that they will go for the 32 dual stacked 1,250-ton rigs, I do think we will be cognizant of that, certainly, and be cautious. We will try to contract the rigs short term rather than long term, once we see the market start to move, but that's what we see right now.

Like Tom said, that changes. If you have all your deepwater rigs down, then you may go take one of those jobs and then play the market with the other three or something like that, but right now, that is kind of where we are.

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Kurt Hallead, RBC Capital Markets - Analyst [39]

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And then on the Saudi JV, what's the -- you said that the discounted market index rate or something, is that a global jack-up market index that's going to be used, or is it a regional one for just the Middle East?

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Tom Burke, Rowan Companies, Inc. - President & COO [40]

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It is a global one, but it excludes certain very high-end markets, such as Norway.

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Kurt Hallead, RBC Capital Markets - Analyst [41]

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Awesome. Thank you so much. Appreciate it.

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Mark Keller, Rowan Companies, Inc. - EVP, Business Development [42]

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Thanks, Kurt.

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Operator [43]

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Eduardo Royes, Jefferies.

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Eduardo Royes, Jefferies & Co. - Analyst [44]

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Good morning. Question for you on the drill ships. Depending on what happens with Cobalt, there were lines that my work a little bit longer, but you could end up, obviously, if that one goes down, that would be your third rig that does not have a job.

How should we think about the thought process around stacking for one of those? If your sense had got us three months out, do you have to keep the thing fully crewed and hot, what is the threshold where it's more fit to bring it down in one stack and then bring it back up, or do you feel like that actually puts you at a competitive disadvantage with customers that maybe literally want every single guy that just finished the prior program on the rig, how should we think about the potential thought process for that rig considering that you probably want one pretty ready to go, kind of bullet in the gun, if you will?

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Tom Burke, Rowan Companies, Inc. - President & COO [45]

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I do think that we, given that we have seventh generation or late-sixth generation rigs, those are the only ones that we have on the floating side. Certainly, the lowest state that we would go down to would be warm stacks, because if we had some lower fifth-generation or lower sixth-generation rigs, we would certainly maybe consider taking them down lower, but warm stacked would be the lowest state of readiness we would go to. Now, most of the consumers, and we're talking about these types of programs, they don't sort of like spring them on you, like tomorrow.

There's normally a good fair amount of lead time, which is not necessarily as true of jack-ups, but with deepwater rigs, it is less likely they will say, have you got a rig? Let's go. There normally it would be six months, nine months of lead time, and so, we feel that keeping all of junior crude on the rigs, meaning keeping it hot stacked, if we don't have something which we can see moving to, Mark described it as walking the rig between contracts, then we would go down to a hot-stacked status, but it would be kind of less likely to keep it hot stacked, unless we have something clear to go to, otherwise you would take it down to warm stacked, and when we say warm stacked, we really mean warm stacked meaning it is warm

We're not expecting any additional capital to go back to work, but the understanding between operations, operation support, marketing, is that the rig can be moved anywhere at very short notice, and it is all the maintenance being done as the customers come and inspect it, or a customer audit will find a rig that is ready to go back, except it doesn't have the junior crews. So, I don't see us keeping a rig hot stacked, Eduardo, unless we had something fairly substantial but our warm stacked is truly warm, where we can -- what we're looking to do is add the junior crews back.

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Mark Keller, Rowan Companies, Inc. - EVP, Business Development [46]

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Eduardo, one thing I would add to that is our customer base has been extremely clear that if you cold stack a drill ship or a deepwater rig, ultra-deepwater rig, you will be at a significant disadvantage in securing work with them, and could be eliminated from the bid list. It is a different playing field today than it has been in past troughs, so they're really focused on that.

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Eduardo Royes, Jefferies & Co. - Analyst [47]

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Got you. Thanks. And actually, Mark, my follow-up is for you. Just if you could give a little bit of color on two pretty key markets.

We saw, obviously, the Central America, the Trinidad rigs recently get some short-term extensions. Is there -- especially as it looks like we will start to see a little bit more term in the jack-up, how should we think about the possibility for you guys to continue to run those three rigs there longer-term basis, or is there in all likelihood demand well beyond just this year for -- you think for -- to be able to run three rigs in that market or the industry in general? And then, I guess, quickly on non-Saudi Middle East, do you still think there is potentially opportunity to place one of your idle rigs to work in some non-Saudi market in the region this year?

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Mark Keller, Rowan Companies, Inc. - EVP, Business Development [48]

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Eduardo, yes. Talk about Trinidad first. Trinidad has been a great market for us.

We've been there since the 1970s, off and on, but today the projects that the rigs are drilling are very visible projects within those companies, and so right now it's very hard to speculate on how long they will keep the rigs. We have been told that there's a lot of work for them in the region, so we are very focused on that. Our operation teams have done a great job from an operations standpoint.

But right now, I think there's work beyond 2017 in Trinidad for those rigs, but without a firm commitment, it's very difficult to make that claim to you, but they are very visible projects for the operators that we are currently working for. In the Middle East, in the UAE and Qatar, we are seeing some demand there for jack-ups, the XL I and IV are certainly tendered there. We're tendering those rigs all over the world, but we are seeing some demand, both in Qatar and in the UAE, and those type of rigs are the preferred type of rig in that region.

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Eduardo Royes, Jefferies & Co. - Analyst [49]

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Thanks very much. I'll turn it over.

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Operator [50]

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Your next question comes from Haithum Nokta, Clarkson Platou.

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Haithum Nokta, Clarkson Platou - Analyst [51]

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A little bit more house cleaning on the Saudi JV kind of that you were mentioning, Stephen. The JV kind of becomes official starting in the second quarter of this year, is that correct? And then you mentioned that you're going to support the backend support that Rowan does for the foreseeable future, and that's going to booked as revenue. Can you kind of give a magnitude of that revenue?

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Stephen Butz, Rowan Companies, Inc. - EVP/CFO/Treasurer [52]

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You are right on the timing, and we can't give a magnitude on the revenue today, but again, it really won't have any net impact. These are costs that we have today that we will going forward to support the JV, so it's all --

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Haithum Nokta, Clarkson Platou - Analyst [53]

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It's being moved from one bucket to another. Okay. Sorry, go ahead.

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Stephen Butz, Rowan Companies, Inc. - EVP/CFO/Treasurer [54]

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I was just going to say we can walk through some of that detail offline, too, if that's helpful.

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Haithum Nokta, Clarkson Platou - Analyst [55]

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Okay. And at that point is also when starting in the second quarter that those rigs that are not owned by the JV at that point would be managed by the JV, correct?

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Stephen Butz, Rowan Companies, Inc. - EVP/CFO/Treasurer [56]

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That's right.

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Haithum Nokta, Clarkson Platou - Analyst [57]

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And so, I guess, kind of specifically, curious about the Bob Palmer, and obviously that one is slated to roll off later this year, and it is one of the highest spec rigs in the world and in the region, and so, can you kind of give an indication of what we should be thinking for that rig?

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Tom Burke, Rowan Companies, Inc. - President & COO [58]

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I would say that that rig is a better rig than the Noble rigs.

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Haithum Nokta, Clarkson Platou - Analyst [59]

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Okay.

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Tom Burke, Rowan Companies, Inc. - President & COO [60]

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It's a bigger rig, that's for sure.

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Haithum Nokta, Clarkson Platou - Analyst [61]

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And then, separately, Mark, you mentioned the supply pressure from the new-build that are in the shipyard still, and I guess I'm curious on the jack-up side, I am curious if you've noticed those were actually showing up and competing for work somehow, or is the fact that their operators are out of the money that they are kind of just as shadow supply for the time being?

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Mark Keller, Rowan Companies, Inc. - EVP, Business Development [62]

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I think that what we're seeing in the market is it's an established drilling contractor, certainly, they're going to bring their rigs in and put them to work, so we've seen a few of those, and they will replace older assets in regions. But in Southeast Asia, we've seen a couple of things from new-builds, that's where most of them are being constructed, so the [modes] are obviously less, but Petronas tends to be a little less strict on new entry into that market, but in other regions, we haven't really seen it.

Certainly not with Aramco, they have very stringent requirements for entry in Qatar and the UAE, and so we have not seen a lot of that, because to quote a lot of our customers, if an established drilling contractor has a rig available, which most of us do, they're going to go that direction, because of obvious concerns about downtime and start-up and things like that, safety, the major things that they should be thinking about. So, anyway, we haven't seen an abundance of that [to be candid].

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Haithum Nokta, Clarkson Platou - Analyst [63]

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Thank you. I'll turn it back.

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Operator [64]

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The next question comes from Rob MacKenzie, Iberia Capital.

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Rob MacKenzie, Iberia Capital - Analyst [65]

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Thank you, guys. Stephen, I wonder if I may clarify some of your guidance.

I think you got it OpEx for the year that excludes the JV costs, it takes the cost of the rig going into the JV out of the number, correct? And then, second, was your other guidance for SG&A, D&A, et cetera, assuming the JV is in the numbers or not?

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Stephen Butz, Rowan Companies, Inc. - EVP/CFO/Treasurer [66]

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No, this does all assume a second-quarter startup of the JV, so that is correct. And I'm sorry, what was the first part of your question, again?

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Rob MacKenzie, Iberia Capital - Analyst [67]

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That answers it. I just wanted to clarify that all the guidance excluded the second-quarter startup, okay. I guess in that context, why would some of the items like G&A or D&A come down more than you seem to be guiding at this point?

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Stephen Butz, Rowan Companies, Inc. - EVP/CFO/Treasurer [68]

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I mean, the depreciation, again, is just a bottom-up buildup of all of our assets, so it does take that into account, but the -- on the SG&A piece, let me clarify something I said related to the last question. We will still have the same back-office support cost hitting Rowan's books related to all the work we do, as well as our support for the transition services that we are providing for the JV, but then we will have that incremental revenue, and so those two items don't net, as I said, that would be incremental, we can't disclose that amount today, but it will be just sort of at cost of those services that we are providing.

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Rob MacKenzie, Iberia Capital - Analyst [69]

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Okay. And I guess on the depreciation side, 385 to 395 and you have got a quarterly run rate of 102 right now, would that imply that some of the older rigs being contributed to the joint venture are largely depreciated out?

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Stephen Butz, Rowan Companies, Inc. - EVP/CFO/Treasurer [70]

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Well, it takes into account the impairment charges that we've had over the past couple of years, so that's part of it.

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Rob MacKenzie, Iberia Capital - Analyst [71]

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Okay. Thank you. I will turn it back.

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Operator [72]

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Your last question comes from Mark Brown, Seaport Global Securities.

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Mark Brown, Seaport Global Securities - Analyst [73]

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I was just curious, why is Saudi Aramco pursuing new-builds through the joint venture as opposed to perhaps acquiring some of the available jack-ups that meet their specifications, it seemed like that capital would be much higher to build rigs from scratch.

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Tom Burke, Rowan Companies, Inc. - President & COO [74]

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Mark, this is Tom. I can't speak for Saudi Aramco, but I can just give you a couple of thoughts about what they have said publicly.

I think Saudi Aramco is very focused on -- I think Saudi Arabia is very focused on a number of items, and one is the creation of new industries, and so I think there is a big project for a shipyard.

And the shipyard is not just focused on jack-ups, it's a large capital investment, I think it's called the Maritime Initiative, and you can do a search on Google and you'll see some press releases on it, and it is going to build platforms, it is going to build ships, it's got bulk ships, tankers, it's going to build a lot of different assets, including offshore rigs, jack-up rigs. And so, I believe that one of the focuses of the JV is to have -- of our partnership with them, is to have a customer for those assets, that is one.

And I think they're also, again, I can't speak for Saudi Aramco, but I think they're also very focused on diversifying their economy away from just from hydrocarbons, I mean, they are the biggest in the world from a number of different metrics around hydrocarbons, but they're also focused on developing other parts of their economy, and so I think that is part of it. And also, they have a big focus on workforce development, and so I think those are the main reasons. Again, I cannot speak for them as I can just -- but they have put out account number of interesting information around their 2/-30 vision and their in-Kingdom total value add plan.

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Mark Brown, Seaport Global Securities - Analyst [75]

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All right. I will look for those articles.

Thank you. Appreciate that, that is all I had.

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Tom Burke, Rowan Companies, Inc. - President & COO [76]

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Thank you.

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Operator [77]

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There are no further questions queued up at this time. I would now like to turn the call back over to Chris Pitre.

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Chris Pitre, Rowan Companies, Inc. - IR [78]

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We'd like to thank everyone for your interest in Rowan and joining us on today's call. If you have any additional questions, Carrie Prati and I will be available to take your call.

We look forward to speaking with you again next quarter. Denise, thank you for coordinating the call, and good day to everyone.

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Operator [79]

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This concludes today's conference call.