Valaris Limited (VAL) Q2 2011 Earnings Report, Transcript and Summary

Good morning. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ensco PLC Second Quarter 2011 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to your host, Mr. Sean O'Neill, Vice President of Investor Relations. Sir, you may begin.

Thank you, operator, and welcome, everyone, to Ensco's Second Quarter 2011 Conference Call. With me today are Dan Rabun, CEO; Bill Chadwick, our Chief Operating Officer; Jay Swent, CFO; Mark Burns, Senior Vice President of our Western Hemisphere; Kevin Robert, Senior Vice President of Marketing, as well as other members of our management team. We issued our earnings release, which is available on our website at enscoplc.com. As usual, we will keep our call to one hour. Any comments we make about expectations are forward-looking statements and are subject to risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our earnings release and SEC filings on our website that define forward-looking statements and list of risk factors and other events that could impact future results and disclose important additional information regarding our acquisition of Pride International. Also, please note that the company undertakes no duty to update forward-looking statements. As a reminder, our most recent fleet status report was issued on July 22. Now let me turn the call over to Dan Rabun, Chairman and CEO.

Thanks, Sean, and good morning, everyone. Before Jay takes us through the financial results, I will discuss the Pride acquisition, second quarter highlights and the state of our markets. We have a great deal to discuss this morning, so our prepared remarks will be a little longer than they normally are for our earnings calls. Starting with the Pride acquisition. We successfully completed the transaction on May 31, and the integration process is going very well. We formed integration teams for 15 separate functional areas early this year, and they have done an excellent job ensuring a smooth transition. Our new organizational structure is in place, and most employees affected by the acquisition are in their new positions. Marketing teams are working closely with customers on outstanding bids and tenders, and we are leveraging our broader geographic reach, enhanced drilling fleet and larger customer base. Operations is actively integrating systems and procedures to ensure consistency across our organizations, especially our safety management systems, and we are capitalizing on our increased scale to take advantage of purchasing efficiencies to lower our cost with vendors. As we integrate our rig fleet and shore-based operations, especially in regions new to us like Brazil and West Africa, we are being very carefully to properly assess the current state of operations before proposing any potential changes. We know that our workforce is our greatest asset, and we expect to promote and add hundreds of new employees over the coming years as our new build rigs come out of the shipyard and go to work around the world, especially in the highest growth markets like Brazil and West Africa that have large numbers of new discoveries. Our Dallas-based employees are to be recognized and commended for their many contributions to our company over the years. Dallas has been our home for our corporate administrative office, and all those it employs are either in the process of relocating their families to Houston or moving on to new opportunities. Now let me cover some of our second quarter highlights. First, we achieved a significant milestone in Ensco's history by reaching more than 100 years of contracted backlog. This equates to more than 1.4 years per rig in the active fleet, including rigs that are cold stacked. ENSCO 8504, which we took delivery of yesterday from KFELS, was contracted with Total in Brunei during the second quarter. ENSCO 5001 are our new contracts for work extending into 2014 in Angola and South Africa. We mobilized ENSCO 105 to Southeast Asia, where the jackup rig will commence operations in Malaysia under a one-year term contract. And we have signed long-term contracts with Saudi Aramco for 5 of our jackups, 3 of which have been stacked for over a year. All of our marketed jackups in the U.S. Gulf of Mexico were contracted during the second quarter, and all of our North Sea and Mexico jackup rigs are contracted into 2012. For our deepwater segment, average day rates are projected to increase in the third and fourth quarter, since 3 of our drillships have recently commenced their original 5-year contract and ENSCO 8502 has commenced its original 2-year contract, all at full-day rates. In fact, all of our deepwater rigs contracted in the U.S. Gulf of Mexico are now earning full-day rates, and we anticipate that ENSCO 8503 will begin its original 2-year contract in the U.S. Gulf of Mexico in the fourth quarter at a day rate of $530,000 plus reimbursables of about $54,000 per day. In terms of operational excellence, ENSCO 8503, which commenced drilling operations last quarter for Telo, has performed extraordinarily well and has benefited from our experience with our first 3 8500 Series rigs. In fact, our ENSCO 8500 Series rig had virtually no downtime during the second quarter and achieved 99% utilization. This is the type of performance that we believe will allow us to maintain our #1 ranking in customer service in the offshore drilling sector. As I reflect on our strategy for the ENSCO 8500 Series rigs initiated back in 2005 and our results since then, I think it's fair to say that we've realized all of the intended benefits and more. We designed the rigs to meet the sweet spot of the market at a price tag that was considerably less than what our competitors paid for their rigs. While customers were early advocates of the concept and design, some market commentators were skeptics and didn't think our rigs would earn jobs, perform well or work in certain markets. In fact, the results show we have had excellent operating performance. Customers have had great success with our rigs, and new customers are interested in contracting our newbuild semis in additional markets around the world. As I mentioned earlier in my remarks, we took delivery of ENSCO 8504 from KFELS yesterday. The rig was on time and within budget. The remaining rigs in the 8500 Series are scheduled to be delivered on time and on budget, and the advantages of standardization across the entire 7 rig series are becoming more evident every day. The returns on capital for the rigs delivered to date have comfortably exceeded our cost to capital and the 15% after-tax threshold we set as a minimum goal in 2005 when we started this investment. Based on our current discussions with customers, we feel encouraged the 2 remaining uncontracted rigs will also exceed our investment thresholds. In summary, we feel really good about the returns and operational performance for these rigs. Now let's discuss the market. I will begin with the deepwater markets, where Ensco now has the second newest fleet in the world. All but one of our active deepwater rigs have commitments to at least the first half of 2013 and with more than a dozen prospects and bids in the market, we believe we are well positioned to match our availability of ultra-deepwater drill ship and semis that are under construction with near and midterm market demand. In Brazil, we will soon have 6 deepwater rigs operating. We expect the market for deepwater rigs in Brazil to remain strong with new discoveries being announced almost weekly. Petrobras remains the driving force behind the deepwater market growth and recently issued tenders for multiple rigs for 3- to 5-year term contracts. In the U.S. Gulf of Mexico, we are encouraged the deepwater permits are being issued and knowing a few deepwater units in this region are now available. Several operators are now discussing requirements for additional rigs commencing in late 2011 and 2012. The West African deepwater market has improved significantly during the quarter with contract awards, prequalifications, tenders and inquiries from multiple operators. Deepwater activity in Asia has seen a significant increase across Malaysia, Brunei and Indonesia, with national and independent operators participating. Floater activity in the Mediterranean and Black Sea is finally balanced. Currently, there are outstanding opportunities in Egypt and Israel and longer term, there is potential in Libya. Moving to midwater markets. Although the worldwide midwater fleet will remain challenged in 2012, Ensco's fleet of 6 rigs has a strong backlog position. All were contracted to year end, and 2 were contracted into 2013. In Brazil, we have 5 semisubmersibles that are currently -- are contracted. And while 2 are rolling off contract later this year, we anticipate that they will continue to work in the region. West Africa is a slow midwater market despite the recent demand that reactivated 3 stacked rigs. Several industry rigs are scheduled to be free next quarter, and competition will be intense for the few opportunities identified. ENSCO 5003, our only midwater rig in the region, is contracted to at least the end of the year, and we believe we have some advantages over other marketed rigs. Turning to the jackup markets. In the U.S. Gulf of Mexico, Ensco has 8 marketed jackups that had very good utilization in the second quarter. With hurricane season upon us, though, jackup utilization has began to decline after steadily rising since the beginning of the year. The market will be competitive for the remainder of the year, but the departure of several 400-foot jackups and increasing demand from PEMEX will be helpful factors. In Mexico, our 4 jackup rigs are contracted to PEMEX with terms into 2012. With PEMEX's intention to increase their jackup fleet by some 20 rigs, tender activity is increasing and we expect it to continue in the coming months. Discussions surrounding rate caps and other contractual terms are ongoing, and we believe PEMEX is reconsidering some of their limits in order to fulfill their drilling requirements. In the North Sea, all of our 8 rigs are contracted. The standard duty market has recovered, and forecasts predict an undersupply of 1 or 2 units for the remainder of the year and into 2012. A number of operators are unable to secure rig time. The heavy-duty jackup market also has been robust, and one of the industry's 3 stacked rigs was recently reactivated. We already are receiving inquiries for work in the Central North Sea for 2012 and 2013 that targets markets for our 2 newbuild jackups. The Mediterranean jackup market will remain a challenge for the foreseeable future. The market for jackups in the Middle East tightened considerably this quarter, and we expect this trend to continue throughout the year end. The primary driver has been Saudi Aramco. Since October 2010, Aramco has contracted 16 rigs and may issue 6 more tenders in the second quarter. These tenders call for all types of rigs: HPHT, high-spec gas drilling and workover. We also have seen an increase in the demand in the rest of the Middle East, fueled by relatively high commodity prices. We are participating in tenders in Abu Dhabi, Qatar, Bahrain, and there is an outstanding tender for 2 high-spec jackups for the longer-term programs in the neutral zone. In the Southeast Asian market, Ensco has all of its rigs contracted. A number of operators are locking in long-term contracts, while other operators are straining to get the programs. We are in discussions with operators for our limited number of jackups that will be coming available. To summarize, growing exploration and appraisal success, emerging deepwater basins, rising energy demand, healthy commodity prices and increased client spending all bode well for long-term growth. We believe demand for deepwater floaters will continue to grow as clients are under pressure to efficiently replace production in the midst of increasing technical complexity and rising safety standards. We expect 50% or more of the worldwide deepwater fleet will continue to be occupied by development and completion work, creating long-term opportunities. Activity is improving in the U.S. Gulf of Mexico. Petrobras continue to contract rigs due to their increasing geological successes in pre-salt. Deepwater opportunities are opening up in new areas around the world, and clients are placing a greater value on high-specification equipment. The jackup markets are picking up pace as well, with increasing utilization in most major markets. Saudi Aramco and PEMEX are adding multiple jackups to their fleet, and the North Sea is almost fully utilized. To date, newbuild jackups are being absorbed into the fleet. Most clients are focused on hiring companies with proven operational excellence, competent crews and successful safety and environmental track record. In essence, we're seeing a flight to quality by customers who favor established high performing companies such as Ensco. Scale is an important factor, and having newer assets also gives a distinct advantage. Our newbuild delivery schedule over the next 12 to 24 months not only puts us ahead of the curve in terms of meeting new customer demand, it also will perpetuate our advantage of having one of the youngest fleets in the industry. And our new drillship and jackup newbuild options that are available to the end of August give us additional flexibility to grow our company. In closing, when we announced our plan to acquire Pride, we made the following commitments to our shareholders: We will stay laser focused on operational execution, we would quickly integrate the 2 companies, we would work diligently to realize cost synergies from the transaction, we believe there would be revenue synergies from the transaction and the transaction would be accretive to our financial results. While our team has been working countless hours to get us where we are today, there remains plenty of work to do. I'm pleased to report we are on track for keeping these commitments. Now I'll turn it over to Jay.

Thanks, Dan. My comments today will cover highlights of our second quarter results and our future outlook. Regarding second quarter results, let me start with a few introductory comments. We completed the Pride acquisition on May 31, so second quarter 2011 results include just one month of Pride International operation, which distorts comparisons to prior period. We have provided information on our earnings release that we just issued yesterday after the market close that will assist you in making certain year-to-year comparisons. Therefore, my focus today will be on operational factors that influence the quarterly comparisons, not the one-month effect of the Pride acquisition on second quarter 2011 results. Please note that recording price assets and liabilities at their estimated fair values as of May 31 do not have a material impact on second quarter 2011 operating results. We'll be issuing our 10-Q shortly, which will also provide helpful information regarding our second quarter results. Starting with second quarter results versus prior year. Earnings from continuing operations were $0.59 per share, down from $0.85 a year ago. Combined severance cost and other Pride acquisition-related expenses reduced earnings per share by 14% in the second quarter. So the revenues were $564 million, a 37% increase from last year. Deepwater revenues increased to $232 million, mostly related to adding one month of Pride deepwater fleet operations. Adding ENSCO 8502 and 8503 to our fleet over the past year also increased revenues. However, ENSCO 7500 shipyard project that covered the entire second quarter of 2011 reduced revenues year-to-year as well as the average day rate in utilization. Midwater revenues were $36 million, all related to acquiring Pride's midwater fleet. Jackup segment revenues were down slightly to $289 million, mostly due to a $6,000 decline in the average day rate to $99,000. Acquiring ENSCO 109 in July of last year helped to offset this decline in the average day rate. Sequentially, average day rates increased $2,000 from the first quarter of this year. Other revenue was $7 million, all related to acquiring Pride's managed rigs operations. Second quarter contract drilling expense increased $80 million year-to-year. Deepwater segment contract drilling expense increased to $111 million, mostly related to adding one month of Pride's deepwater fleet operations. Similar to the revenue comparisons, adding ENSCO 8502 and 8503 to our fleet was partially offset by the ENSCO 7500 shipyard project. Midwater contract drilling expense was $23 million in the second quarter, all related to the Pride acquisition. Jackup segment contract drilling expense decreased 1% versus last year, mostly due to a $13 million pretax gain from the sale of ENSCO 95, offset by operating cost of ENSCO 109, which was not in the fleet last year. Other contract drilling expense was $7 million, all related to Pride's managed rig operations. Depreciation, G&A and other income and expense and our effective tax rate comparisons year-to-year are clearly spelled out in our earnings release, so I won't repeat them here. Now let's discuss third quarter outlook. Revenues are expected to increase to about $930 million, mostly due to adding a full quarter of Pride's former operations plus ENSCO 8502 moving up to full day rate, ENSCO 8504 commencing operations and more operating days for the legacy Ensco jackup. Consolidated jackup segment utilization, which includes the impact of legacy Pride rigs, some of which are cold stacked and not being marketed, is projected to be in the mid 70% range in the third quarter and improved to the low 80% range in the fourth quarter. The legacy Ensco jackup fleet utilization is projected to increase to the low 80% range in the third quarter and then rise even further to the 90% level in the fourth quarter. Moving to expenses, we anticipate third quarter 2011 contract drilling expense will increase to approximately $500 million, mostly due to adding Pride operations for a full quarter and more operating days for the Ensco legacy rigs. We expect a $10 million insurance settlement in the third quarter that will reduce contract drilling expense. Depreciation should increase to about $135 million due to a full quarter impact of Pride operations and the commencement of ENSCO 7500 and 8504. We anticipate G&A expense will decrease to approximately $41 million in the third quarter, which will include about $5 million of expense related to the Pride acquisition. Interest expense is estimated to be about $28 million net of capitalization. Now let's discuss our outlook for the full year 2011. Revenues are estimated to be approximately $3 billion. Contract drilling expense is projected to be approximately $1.5 billion, and depreciation should be about $415 million. G&A expense is forecasted to be approximately $155 million, which includes Pride acquisition costs totaling $42 million. Total Pride acquisition-related expenses, including severance cost reflected in contract drilling expense, are estimated to be about $48 million. Interest expense is projected to be approximately $93 million for the full year net of interest that will be capitalized. Estimated fourth quarter interest expense of about $41 million is an appropriate run rate to use for 2012. Our effective tax rate outlook for the second half of 2011 is 14% and approximately 16% for the full year. Excluding the impact of the gain on the sale of Ensco 95 mentioned earlier, the full year 2011 effective tax rate outlook is 14%. We continue to explore further tax efficiencies with respect to the legacy Pride rig ownership structure, and we believe that there may be opportunities for further improvement in the tax rate in 2012 to below 14%. 2011 capital spending is forecasted as follows: $630 million for the construction of our drillships 8500 Series rigs and ultra-premium jackups; $235 million for rig enhancement projects; and $150 million for sustaining projects. Now let's turn to synergies. We have already realized some synergies in 2011, and they are reflected in our cost guidance. For 2012, we expect total expense synergies to be approximately $100 million, with about half related to G&A and half related to the contract drilling expense. The incremental synergies of approximately $50 million versus our last outlook are related mostly to purchasing efficiencies as we leverage our increased scale for items ranging from equipment and supplies to insurance. Anticipated full year run rate synergies for years following 2012 will be approximately $150 million, comprised of $120 million of expense savings and $30 million of capital expenditure synergy. Our improved cost synergy outlook is augmented by our favorable outlook for revenue growth with utilization and average day rates improving in 2012 and our new build rigs, scheduled for delivery over the coming months, being put to work. Now I will turn the call back over to Sean.

Thanks, Jay. And now, operator, please open it up for questions.

[Operator Instructions] And your first question comes from Arun Jayaram. Arun Jayaram - Crédit Suisse AG: Just wondering, guys, if you could give us a little bit or perhaps elaborate a little bit about opportunities for the DS-6 rig. Dan, you mentioned there's quite a bit of tender activity going on in the ultra-deepwater. Just wondering if you could highlight where you are in terms of that rig and how the opportunities in the deepwater changed over the last 90 days or so.

Arun, this is Kevin. Opportunities in the last 90 days have increased significantly not only in terms of the number of formal tenders, but as the market has tightened, there's a lot more private discussion going on that's not visible demand. So we're actively engaged with both the DS-6, the 8505 and the 8506, in discussion with clients on multiple opportunities in all 3 of the major deepwater basins. Arun Jayaram - Crédit Suisse AG: Kevin, on -- one of your peers has called a mention that the leading edge rates are pushing into the $500,000 range perhaps from $460,000. Is that consistent with what you're seeing in the market place?

I don't think we should discuss rates right now, but the inquiry trend is definitely in a positive direction. Arun Jayaram - Crédit Suisse AG: Okay. And my follow-up question, gentlemen, as you do -- you mentioned, Dan, in terms of the Brazilian midwater, you have a couple of rigs which are coming up for renewal in the back half. Do you anticipate enough demand to that market to keep those rigs working for this year or next year?

Arun, this is Kevin again. Midwater market in Brazil has really gone through quite a transformation with the introduction of no less than 10 to 15 active midwater clients in that market besides Petrobras. So I think over time, we're going to see Petrobras take a backseat in that market. However, at this time, we've got 2 midwater rigs in the 5000, and 2 5004. They've performed very, very well for OGX and we expect that OGX's program is going to be very robust, and they'll keep those rigs.

Your next question comes from Collin Gerry. Collin Gerry - Raymond James & Associates, Inc.: The -- I want to start on the Gulf of Mexico. There's been some kind of a divergence of opinions, I guess, as we go to the earning season as to what's going on, what the latest is. Maybe give us your opinion just on permit activity, what your crystal ball kind of says, maybe 2012 can look like just from a -- strictly a regulatory perspective. I mean, are we going to get back to work I guess is my question.

Yes. Collin, this is Mark Burns. I guess why don't we start initially with the shallow-water permitting activity. We're seeing the BOEM approving shallow-water drilling permits. I think that demand for permits is keeping up with supply. We're starting to see some visibility into the future with our jackup fleet. Deepwater permitting, as you are aware, still moving somewhat slowly, although it's getting much better. The rules, the procedures, the documentation requirements are now more familiar with the operators, and they are complying fully. It's a matter of submitting your APD, your application for permit to drill documents and then following up with the BOEM, answering any technical or well-specific questions. But we feel the process will continue to improve, and we'll start to move faster in the coming months. Collin Gerry - Raymond James & Associates, Inc.: All right. That's helpful. Sounds kind of cautiously bullish. If I could switch gears, Jay, on some of your guidance, if I heard this right, a $41 million net interest on a quarterly basis is an appropriate run rate for 2012. Was that correct?

Yes. On a quarterly basis, that's correct. Collin Gerry - Raymond James & Associates, Inc.: Now I would have thought that your capitalized interest would go down as you deliver rigs, which I guess your guidance would imply that it stays relatively flat. Am I reading -- am I thinking too much about that? Or is there...

No, you're looking at it the right way. We'll be delivering -- we've delivered 8504. We'll be delivering other rigs later in the year. And as those come out, the amount of interest that you capitalize gets reduced. That's why we jump up to the $41 million rate. That's above what we recorded in the second quarter by a considerable amount and considerably more than what we will record in the third quarter as well.

Your next question comes from Mike Urban.

Maybe a little too early at this point to make a judgment on this, but given the turmoil you've been seeing in the -- at least in the capital markets and the equity markets, have you seen your customers express any concern? Or any of the kind of ongoing negotiations right now, is anyone saying, "Hey, let's take a step back and take a wait-and-see?" Or is it still full speed ahead just given how the rig markets seem to be tightening up?

So far, it's been full steam ahead. We've seen no pull back whatsoever, but obviously it's in the early stages.

Okay. Good to hear. Good to hear. And on the -- kind of the cost side, I see a lot of moving parts as you integrate Pride. And you're getting some cost savings and some synergies, which you've updated us on. What would you say the underlying rate of cost inflation is? And I'm presuming to the extent you're seeing any, it would be on the labor side.

Jay, you want to take that?

Yes. I think everybody's feeling some inflation, particularly as you go around all the world markets on the cost side -- or on the labor side, I should say. On the cost side, I think we're going to have the opportunity, with our procurement organization and the kind of purchasing leverage that we're going to have, to continue to work on cost with vendors and probably not incur a huge amount of inflation on the material side. But I think on the labor side, obviously, we have to compete in a worldwide market and we have to be competitive with what other people are doing, and our intent is to do that. I'm afraid, at this point, we probably can't give you anything that's particularly more quantitative than that.

Okay. But you are seeing some upward pressure on the wage side?

Sure.

Your next question comes from Doug Becker.

Dan, pretty impressive how you were able to avoid some of the issues that have been plaguing others in terms of BOP recertifications or just the more stringent equipment standards. How sustainable is that view as we go and really have a full quarter of the Pride fleet? And I think more generally, how is that whole issue being managed?

Doug, this is Mark Burns. As a company, as you know, we've discussed on previous calls, we've been very proactive and comprehensive in addressing industry and customer concerns surrounding our BOP and well control equipment, not only our subsea equipment but surface equipment as well. And prior to the advance of last spring, we were already undergoing an operations and maintenance review of these systems, and we're seeing the fruits of those results today. You will recall last summer that Ensco had the first subsea BOP system to obtain NTL-5 certification, something we were very pleased with. And our surface stack systems on our jackups also were among the first to be recertified. There's 2 points to make, Doug. The standardization equipment on our ENSCO 8500 Series semis, which we've discussed extensively, as well as the ENSCO DS series drillships, which we recently acquired through the Pride acquisition, this is yielding us significant benefits in training our personnel, sharing maintenance cost and ensuring reliability across these -- specifically these subsea complex BOP systems. Second point is we have a strong contractual protection for BOP and well control equipment maintenance and downtime, and this additional focus is placed on this area, both from our customers and regulatory agencies. But as a company, we feel we are very strong. We're managing this issue very well, and we feel very good about our position as it relates to this issue.

And I think in -- as it relates to the Ensco legacy fleet, no question. But as you incorporate the Pride fleet?

Well, again, if you recall, the Pride fleet that's in the U.S. Gulf of Mexico obviously are the 2 new drillships, the DS-3 and DS-5. Those units have -- are newly delivered from the shipyard. They have an NOV shape or 18 3/4 inch, 15k stacks. They are fully certified to work in the U.S. Gulf of Mexico, and we feel very good about where we're at in terms of operating in the U.S. Gulf of Mexico. Fleet wide, we're taking a look at -- or globally, we're taking a look, and we're applying the same proactiveness on our global fleet as we're applying on our U.S. Gulf of Mexico fleet.

Sounds good. Kevin, maybe just a quick update on the Petrobras 1,200-meter and 1,500-meter tenders, just the expected timing and just any thoughts there?

These are due at the end of the month. And we expect that, depending on the proposals, Petrobras could take multiple rigs. But until the bids go in, we'll see what happens.

And do you view that as incremental demand or a replacement?

It's incremental demand.

Your next question comes from Roger Read.

Real quick for you, maybe talk a little bit more about the Middle East jackup market. We saw some contracts in there from a competitor earlier today, and you've cited it as one of the better markets. Maybe a little more detail, if you would, on that sort of run through of the HPHT, the high spec and other things. And is there a reasonable amount of demand there for standard jackups as well?

Roger, this is Bill. I think the key to the recent developments are we have 3 rigs that have been stacked for over a year that have been re-contracted with Aramco. So that's a very positive and definitive development there. Aramco continues to issue additional tenders that we're evaluating and looking at, including some HPHT opportunities. So those bids have yet to be submitted or decided. So clearly, Aramco is setting the pace in the Middle East. There are other tenders out in the other jurisdictions there, Qatar and Abu Dhabi, but Aramco seems to be setting the pace for additional jackup demand in the region for all different types and specification rigs.

Okay. And then in terms of maybe the Asia Pac market as well, that's one we've heard about consistently as an HPHT market. Is that stable? Or is that on the increasing side in terms of specifications?

Roger, it's Kevin. I think we're seeing an increasing demand out there for all types of rigs, but especially the higher spec rigs.

And is that something near term or still on the medium term?

No. There's near-term discussions, medium term and even a few discussions looking at longer term. People are getting concerned. They can't get the rigs they need to execute the programs that are on top of them now and into 2012.

Your next question comes from Ian Macpherson.

Jay, a question on your guidance. The past couple of calls, you've thrown out 2012 view, $5 Ensco standalone earnings power plus since $0.10 Pride accretion. Can we stick with that and add the addition of $50 million pretax cost synergy as an enhancement to that? And secondarily, is there any improvement in, say, the jackup market for instance that might make you more optimistic on that prior view?

Yes. I think, Ian, I'll make a couple of points. First of all, we normally give 2012 guidance a little bit later in the year when we are doing our detailed budget process. We've got a really good fix on things. We're not at that stage right now. We gave guidance earlier just to make sure everybody knew how we felt about the transaction, and that was clearly going to be accretive. I think you've heard from the comments of Dan and Mark and myself that everything has gone at least as well as our expectation or better and that the market is very favorable at the moment as well. Having said that, we also have the recent events in the capital markets that we have -- the long-term applications of that are unclear. But I would say the best way I can answer your question is we feel very comfortable with the guidance we gave earlier. We feel like lots of positive things have happened since then. And the one quantitative thing I can tell you is that $50 million increase in synergies, you can absolutely add that into the prior numbers that you were using.

Great. And then on your guidance for run rate net interest expense, does that presuppose a pretty constant level of net debt relative to what you have currently?

Yes, it does. I mean if you add it all up, the second quarter was low, because we didn't have all the acquisitions in place for the whole quarter. But as you go forward from third and fourth quarter, it will be a very consistent level of what I would call cash interest, if you will. And it will probably be in the $50 million -- the high $50 million, $60 million kind of range per quarter. And at the moment, we don't anticipate any major debt reductions in the near term.

Perfect. And then if I can squeeze in one more in the markets. How does the differential between the opportunities and maybe the day rate opportunities compare for the drillships and the 8505 at this point? I mean, should we look at historical day rate differentials as being still pretty valid? Are they converging or diverging? Or any comments there?

I think you can use historical fixtures. And the good news is recently, there's been a lot of activity, so it gives you a good indication of the different classes of rigs. I will say though that as the market tightens, I would expect as rates begin to move, those differentials will squeeze a little bit. That's historically what we've seen in the market.

Your next question comes from Scott Burk.

One thing. Can you remind me of the total number of options that you have and when you need to acquire those for newbuilds?

We have 2 options for 2 more additional jackups and one more drillship, and they all expire at the end of August.

Okay. And regarding the turmoil in the capital markets that we've seen in the last week, does that impact the -- impact your thinking at all about those options? Or is that still something you're just looking at in trying to gauge customer demand?

Yes. Obviously, it has an effect on your thought process. So we're elevating our thoughts on those rigs. So...

Okay. And then one other question kind of on customer sentiment, what kind of oil price -- we've seen oil prices drop pretty dramatically. At least WTI prices have been a little more dramatic from recent highs. How low can those go before you'd expect customer sentiment to kind of change and start slowing down activity a bit?

First of all, remember, WTI doesn't affect too many offshore projects. You need to look at worldwide prices, more like Brent. Basically, every project that I see right now is economic. If we're over that $60 million to $70 million range, I think you're going to see clients reacting quickly to short-term fluctuations in the commodity markets.

Okay, very helpful. And then one other question. You've got several -- you talked about the improvement in the jackup markets, and you've got several new -- or several rigs that our cold stacked in the Gulf of Mexico and then a couple in the Mideast. Are they -- are the markets getting strong enough that we might see those come back to work over the next several months? Or what will be the timing there?

Scott, this is Bill. The rigs that we have cold stacked are some of the rigs at the lower end of the capability of our fleet. So we have to make a judgment as to just how long we want to continue to reinvest in those rigs and how much new capital we want to put into them relative to their future useful working life and their long-term marketability. So we've returned a number of cold stacked rigs to service. The remaining cold stacked rigs, I wouldn't say that we're very close to the point where we would want to return those rigs to service. It's something we always keep in mind and we're evaluating, but we're not close to that point right now.

Okay. Could you give me a range of how much it might cost to bring those rigs back into service?

It varies quite a bit over the different units.

I'd like to remind everyone, we've been very active over the last 12 months in terms of pursuing opportunities to sell some of that equipment. We sold a rig -- another rig this last quarter, so we'll continue. That's really the path we're going on with these cold stacked rigs is to move them out of the fleet at a good price.

Your next question comes from Geoff Kieburtz. Geoff Kieburtz - Weeden & Co., LP: First, Kevin, when you said $60 million, $70 million, were you referring to WTI? Or were you referring to Brent?

Referring to the realized oil price that the client gets when they sell their crude. So you'd have to actually go to each client and see how they manage their crude oil disposition to figure that out. But in general, I think if you use Brent as a standard, that's what most people internationally are using. Geoff Kieburtz - Weeden & Co., LP: Great. And Dan, I know you probably don't want to answer this, but you talked about evaluating the options. Listening to everyone's comments, it's hard to imagine you wouldn't exercise those options. Can you give us a scenario in which you would not?

Yes. What -- we're evaluating it, and we'll make a decision here in the next few weeks. Geoff Kieburtz - Weeden & Co., LP: Okay. I just -- it's hard to imagine you wouldn't, given the returns you've enjoyed on the newbuilds and the tone of the market.

Yes. We've had pretty good success, so... Geoff Kieburtz - Weeden & Co., LP: Okay. All right. What are your thoughts in regards to additional newbuilds beyond the options that you have in place right now?

We've got a lot in the pipeline right at the moment. As you know, we've got the 2 jackups and 2 drillships and a couple more 8500 Series rigs. So we've got plenty of organic growth in the pipeline. So we're evaluating those opportunities, and we'll be making some decisions as we get along. But right now, we've got plenty on our plate. Geoff Kieburtz - Weeden & Co., LP: Is it your sense that to newbuild costs are on the rise at this point?

Not significantly, no. Geoff Kieburtz - Weeden & Co., LP: Okay. And then on the newbuilds that are not yet contracted, should we generally expect that we'll be hearing about contracts about a quarter before the rig is delivered such as we did on 8504? Or would you expect anything different in those remaining 3 rigs?

We're in discussions with a lot of clients, Geoff, so it's hard to predict the exact timing. But I feel confident that as those rigs come out of the yard, they'll be under contract. Geoff Kieburtz - Weeden & Co., LP: Okay. You wouldn't expect any less than a quarter ahead, though?

Our clients move as fast as they're going to move, so it's hard to predict exactly you can announce the contract.

[Operator Instructions] Your next question comes from Matt Conlan.

You've sold a number of jackups over the last couple of years. And extensively, you've been looking to sell some more, not including the cold stacked one. Have the prices that you're seeking -- or the market prices for those older jackups, are they rising now that the jackup market has tightened up a little bit?

Yes. Matt, sales of these older jackups tend to be one-off occasions and it's determined both by the specifications of the jackup, the conditions of the jackup as well as what sort of opportunity a buyer might have to put it to work. So there's not really any pattern or any template. It's kind of a one-off situation with these older rigs.

Okay. Let's say a rig that you sold a year ago, would you be able to sell that rig for more or less today?

Well -- and again, it would depend what sort of opportunities are [indiscernible]. But I think generally, it probably hasn't changed a lot.

Okay. Great. And next question is on the operating costs for the Pride deepwater fleet, still look like they came in around $200,000. Were there a lot of start-up costs there for DP-3? And a year from now, what kind of daily operating expense should we be looking at for those deepwater drillships?

Jay, you want to take that?

Well, I think we're still working through the synergies on the expense side, on supplies and repair maintenance cost, that sort of thing. So it's probably a little premature for us to give you any real guidance there. I'd say you're a little high on the number probably as we see it going forward. And as we've said before, I think we still see some cost pressure going forward on the labor side, and we think we'll offset some of that on the expense side. Did I get at the question you're trying to ask?

Yes. So the -- I mean, you reported about $60 million of cost for the deepwater from the Pride fleet with about 300 days, which is where I got the $200,000 per day. So that, you think, is a little bit high of a run rate?

I think it's a little bit high. You're in the right ballpark, but you're just a little high, I think.

Your next question comes from John Lawrence. John Lawrence - Morgan Keegan & Company, Inc.: Just a broader question on the Pride assets. Now that you've had those for a couple of months, can you just give us an assessment of the quality of the rigs maybe relative to your original expectations?

I think they're very consistent with what we saw in diligence. John Lawrence - Morgan Keegan & Company, Inc.: Okay. And then I guess just on the ENSCO 91, any new CapEx there with the new contract?

There is. But it's all covered in the mobilization fee, so it's funded by the client to the large degree.

Your next question comes from Matt Beeby.

With respect to the Mexico jackup market, you mentioned the potential lifting of rate caps. Do you expect that to be a 2011 event or more likely 2012?

Okay. Matt, clarify your question. You mentioned rate caps in the U.S. Gulf of Mexico market, or are you talking about the PEMEX market?

PEMEX, yes.

Matt, obviously, we've had some encouraging signs from PEMEX. They do want to grow their jackup fleet. They have announced that publicly. They have not had a great deal of success in the past year with getting newer jackup units into the country. They are reassessing their plans and tenders. And what we've heard is that the rate cap issue, the age restriction issue and a couple of other contractual points which have hindered jackup tendering activity there in Mexico may be lifted. Obviously, we have not seen anything specific to that yet, but I think as a drilling contractor, that's a positive sign. So we need to wait and consider and see what the next move is there.

Okay. And with respect to the options on the newbuilds, we have heard some of your competitors extending those options. Is that a possibility for you guys?

Yes. We're going to explore all possibilities.

Your next question comes from Darren Garcia [ph].

Wanted to ask, it seems like you have a pick-up on activity on the tendering side recently. Is that a function of 2012 budget starting to kind of get thought about? And if that's the case, since that sort of usually flows in at the end of the year, do you think that that tender activity and demand kind of indications can accelerate into the end of the year?

I think there's a number of issues. Primarily, I think what we're seeing is the realization by our clients that rig supply is drying up quickly. Deepwater supply for 2011 is essentially spoken for. As you look into '12, it's based on visible demand today balanced. So it's probably going to be in short supply before long, and I think the same thing is going on in the jackup markets. So I think it's primarily the delay in tendering activity that we experienced coming off of the financial crisis in 2009. And the Macondo accident in 2010 is finally catching back up in the market.

And so given or what you've made for earlier comments with regard to kind of Brent and kind of realized pricing and the rest, it doesn't look like incremental demand is necessarily at risk. So with that, are you sort of holding back a little bit, maybe being a little more reserved in contracting in the near term hoping that rates go up?

The great thing about having a larger company is we're much better positioned to play the portfolio and try to have a portion of our fleet to make -- take advantage of a market that could be going up. So we're discussing that all the time. We think we're well positioned with our deepwater available fleet, our jackup fleet. And we're going to monitor this real close, because we certainly want to be positioned to take advantage of the market if the rates do start to move up.

And just one last quick one. I know there's been some discussion about rig reactivation. Have you -- I realize it can depend on the type of rig, et cetera. But what would you say range is in terms of timeframe if you decided today to reactivate a rig? How long would it take to bring it to the market?

Anywhere from 2 to 4 months.

Your next question comes from Arun Jayaram. Arun Jayaram - Crédit Suisse AG: Arun Jayaram with a follow-up. Jay, can you clarify your guidance? You indicated for 2011 you expected contract drilling expense to be $1.5 billion. But it appears you're also including in that number some of the non-recurring Pride-related acquisition expenses that analysts such as myself typically back out. Can you also clarify the G&A guidance where you said it would be $155 million? I think that also includes some of the non-recurring acquisition-related guidance. I was wondering if you could help us parse out the recovering from the non-recurring piece.

Yes, Arun. Let me see if I could do that for you. Well, I guess if you look at 2011, we had close to about $41 million of integration costs that got recorded in SG&A. So that would get you a little closer to $110 kind of a run rate number, I guess, for G&A, a much lower amount in contract drilling expense. That only really amounted to about -- probably something in the range of $7 million, so about $0.04 a share impact there. Arun Jayaram - Crédit Suisse AG: Okay. But you did say, I think, as part of your prepared remarks that the acquisition-related expenses and contract drilling were about $48 million for contract drilling, if I heard you correct.

I don't think I said that.

Arun, that's all in. That's the combined. If you add them...

That's the 2.

Your next question comes from Ian Macpherson.

Jay, one more housekeeping follow-up for me as well. Do you have the total remaining CapEx in your newbuilds at June 30?

I don't have it right at my fingertips. I guess if you wouldn't mind giving Sean a call, he'll be more than happy to give that to you. I just don't have it sitting right here.

No problem.

We'll be filing the Q. It will be in there as well.

Your final question comes from Grace Holsig [ph].

What were the number of shares outstanding as of the balance sheet date?

You're talking about the end of the second quarter?

Yes.

That was about 170 -- Sean, help me out -- 170 million-point-something shares. That number will change when we get to, obviously, in the third quarter. And it's -- I think it's what? 229.4 million shares?

Yes. I believe that it's 170.2 million at the end of the second quarter.

That was the average shares outstanding. Do you have your balance sheet as of June 30? You completed the deal on May 31.

Okay. Yes, I'm just getting a draft of our Q here. The 230,493,000 shares. And thank you, everybody, for your interest in our call today. We appreciate your interest in Ensco, and have a great day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.