Diamond Offshore Drilling Inc (DO) 2002 Q4 法說會逐字稿

Good morning. My name is Shawn (ph) and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Diamond Offshore fourth quarter earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad.

If you would like to withdraw your question, press the pound key. Thank you. Ms. Steffes. You may begin your conference.

Good morning and thank you for joining us. Today we have Larry Dickerson, President and Chief Operating Officer; David Williams, Executive Vice President; and Gary Krenek, Vice President and Chief Financial Officer.

I'll begin with the safe harbor statement followed by an opening statement from Larry Dickerson. Statements made during the scope of this conference call may constitute forward-looking statements and are inherently subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected.

Forward-looking statements include but are not limited to discussions about future revenues and earnings, capital expenditures, industry conditions and competition, dates that drilling rigs will enter service as well as managements plans and objectives for the future. A discussion of the risk factors that could impact these areas and the company's overall business and financial performance can be found in the company's reports filed with the SEC.

Given these concerns, investors and analysts should not place undue reliance on forward-looking statements. The company expressly disclaims any obligation to release publicly any updates to any forward-looking statements to reflect any change in the company's expectations or any change and events, conditions or circumstances in which any forward-looking statement is based which speak as of the date of the rigs status report.

I would now like to introduce Larry Dickerson.

Thank you for joining us. The financial results that we had for the quarter, I think are close to a break-even mode and reflect some of the weakness that's out there in some of our markets.

And certainly we'll address those in questions as to actions we've taken to cut costs, to idle rigs, what the market prospects are. But I'd like to concentrate in my opening statement on the actions that Diamond Offshore has strategically taken and will strategically take in idle markets to take advantage of the investment climate.

First of all, during the quarter we announced the acquisition of two third generation rigs. The Omega, which is presently located in South Africa, and the West Vanguard which has been renamed the Ocean Vanguard, which we purchased from Smedvig (ph) in Norway.

We're very pleased with both acquisitions. The Vanguard has closed and we now own the rig, although we have bareboat chartered it back to Smedvig (ph) for completion of a contract that they had underway. We're receiving a nominal day rate bareboat charter during that timeframe an that contract could last through extensions on through early summer.

The Omega, the -- we also have a commitment for that, we haven't taken possession of the rig. The rig is in for a survey in a shipyard in South Africa, and following the completion of that survey and some upgrade work to that rig, installation of a third mud pump, among other items, we will take possession and have that rig go to work. The two rigs were purchased for a combined price of $133 million, $65 million for one, 68.5 for the other.

These prices, are we think, very favorable compared to what acquisition prices have been for third generation units, and in our mind, really represent a great opportunity of the company. We also, at the beginning of the quarter, purchased a few shares in the market. Those were announced at the time when we had our third-quarter conference call. There hasn't been any new purchases since then. But really, the purchase of those two third-generation rigs, in our minds, are almost the equivalent of repurchasing shares. When you look at the asset prices themselves, they are as low as the share prices are presently. And so we think that was a great opportunity.

And because we've been able to take these rigs and secure work committees (ph) for them, they actually have a superior effect on our earnings per share than a repurchase of shares. Also, we continue on our rig upgrade program. The Ocean Rover continues on budget for delivery mid this year, coming out of shipyard in Singapore and follows on the heels of the Ocean Baroness. The Baroness worked right until the end of the year for Murphy in Malaysia. The rig is now in Singapore doing some adjustment work, and we have an LOI to commit the Ocean Baroness, and that rig should go back to work sometime in late February, early March.

The Rover, we have lots of interest in that, and that has been a very successful continuation of our Victory-class upgrade as we deliver fifth-generation units for prices that are considerably below new construction costs. And then not to overlook, we've also continued on with our Jack-up upgrade program. We have four rigs that are having leg extensions done to them, two in Indonesia, two in Brownsville, Texas. And then we have two other rigs that are 350 foot slots that we're turning into 350-foot cantilevers. We're about midway through those programs. I guess the upside is with the weak Jack-up prices is they are lost opportunity cost to get those rigs in the market is pretty slight, and the rigs are going to come out, we believe, and have excellent earnings opportunities in the years to come.

So that concludes my opening statement of what kind of activities we've been engaged in, and we'll be prepared to take your questions on these and other subjects.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one, on your telephone keypad. Your first question comes from Bill Herbert of Simmons & Company.

Good morning, guys.

Good morning.

Good morning.

Larry or Gary, there was the fairly prominent other income, other operating income category input with respect to the fourth quarter earnings. What was that, please?

If you look, Bill, you'll also notice the tax rate is fairly high at 54 percent, and these things are intertwined. What this is, it's a result of a settlement of a prior-year tax dispute that we settled in the fourth quarter. Back in 1997, we had a rig working in the international arena that our customer asked us to take to another country. We did that. We signed a contract addendum that the customer agreed to reimburse us for any incremental cost incurred, including taxes. That contract ended in 1998. Subsequent to that, we were assessed some - a tax amount that's been in dispute ever since then. During the fourth quarter, the customer contacted us and told us to go ahead and settle that dispute. We did that for about $6 million.

The key here - two things. Number one, the $6 million that we paid to the foreign tax in jurisdiction was reimbursed by the customer. It was a zero net income effect to the company. It was also a zero cash flow effect to the company. However, GAAP required us to record that as contract drilling revenue coming in also as tax expense. So you see those two numbers on the income statement - answers your question and then also why the tax rate is so high. And effectively, that gave 100 percent tax rate for that item.

So you're saying that the $6 million tax settlement had zero impact to the bottom line.

That is correct.

OK. And then, I guess that leaves that basic question. You had $3 million of additional other income. Was that the gain on investments or what? I say it because, I mean, if you look - the total operating income contribution from other income was about 9.1 million bucks.

Well, it's that - it's approximately six million of the other revenue and then if you look in other contract drilling expenses, you'll see a credit of a little over $3 million.

Yes.

That's - that gave you the nine. The credit is the result of about a $2-and-a-half billion adjustment that we made to the books. Back when we bought Arafusa (ph) back in 1996, we assumed all the Jones (ph) Act liability claims that Arafusa (ph) had at that point in time, which is the equivalent of worker comp for an offshore rig hand. We set up a accrual as part of the purchase entry and we've been running those claims out. This year we finally concluded paying off all of those claims and found out that we had over-accrued back in 1996 by about $2-and-a-half million. We took that into income in the fourth quarter.

OK. And do you tax effect that at the normal rate?

Yes.

OK. Great. Roger (ph) has some questions here. Go ahead, Rog (ph) .

Yes. Just kind of looking broadly at the market, specifically looking at the rig status sheet yesterday, the America and the Victory in the Gulf of Mexico and the Winner in Brazil, rates were a little lower than what we would have anticipated (ph) . And I was just wondering if you could give us some clarity on kind of what you see in those markets, more in the Gulf of Mexico than in Brazil, I would assume.

You're talking about the America, the Victory in the Gulf of Mexico and the - which rig in Brazil - the Winner?

And the Winner in Brazil.

Yes. Right.

I mean, just - the rate on the Winner tended to be a little lower than we thought and I just wondered what do you see in the Gulf of Mexico, given that both the ...

Well, the Gulf of Mexico is going to continue for that class of rig. The fourth generation moored (ph) fleet up fixed (ph) 500 feet of water - is - there is a good bit of work. It is - it is generally well to well. Our expectation is we're going to be able to keep these rigs busy. We don't expect that we're going to be able, at least in the first half of the year, to be able to build a lot of backlog, though we think that - we think the rates - we think the market will be - will be fully utilized, but without backlogging us, you're not - you're not going to see a lot of growth in rates.

You know, we're not all that disappointed at this point, given the fragmentation of the Gulf of Mexico market of rates in the 70s to 80. You know, even 65 to 80 for this class rig in the Gulf of Mexico on a well-to-well basis is reasonably strong given the rest of the fragmentation in the market. But we don't see a lot of backlog, though, until the last half of the year.

OK.

OK.

Any particular areas of strength out there?

I would - we're pleased with that deep water that you're talking about. The fact that we're able to roll those rigs and it's - for the past couple of years it - if there's a rig idle or there's two or three ready to roll, then those rates will drop down to the 60s, but they do strengthen and you get some play in there. And they're certainly, they're positive cash flow numbers, they're not what we've certainly enjoyed in stronger markets. But I think that's the best market that we've got going.

And with respect to, I guess, Brazil, a commentary on that market. The sort of roll over on the Warwick was a little lower than what we were contemplating. What's the state of play down there?

Well, I would argue that, I mean the winter was probably priced pretty well above the market for that ridge, previously. You know, the roll rates in the 60s and essentially we were played off against some other people that were willing to do it for less. The Warwick's a third generation rig with a stretch buoy system.

We believe that Brazil's going to continue to be a strong market. It's a - it's still at pretty consistently profiles a term market, so it's one that we like. We see more opportunities for more configurations semis down there in the months ahead. So, there is some pressure, always, you know, there's the world market slack, Petra Brush (ph) latched to apply pressure to the extent they can, but we think that's still going to a reasonably strong market on the Gulf War basis.

OK.

At least for us.

A final question, you mentioned in the last conference call potential in West Africa. Do you see anything there?

Well, as Larry pointed out, the Omega, which is the rig that we're in the process of concluding the shipyard protocol on now for the special survey and the upgrade, will go to work in South Africa when we're finished and we expect that we'll be able to keep it busy with Whittington, which is our rig that, 15 hundred foot semi that's been working Brazil for a number of years. We took it to West Africa last year, worked it about the first year of the year. Has not been as successful as we would like to see, although we have about three or four very strong conversations ongoing right now for work that we would have hoped we start in the first quarter and we really think that once we get the rig up and going in the first quarter, it's a seasonal thing, we think once we start the rig it will - it will continue work through the year.

The Liberator, we've cold stacked. It's currently idle in South Africa. We could start it up although we don't anticipate it until we get good backlog on the other two. And we have a number inquiries and conversations ongoing about some deep-water equipment in West Africa.

So we're still optimistic. You know, this time of year is not a real active time for our customers. But we would expect that West Africa will start soaking up more equipment.

Thank you.

Yes.

Your next question comes from Doug Becker (ph) with Bank of America.

Good morning. I was hoping to get an update on the capital spending plans for 2003. You obviously have a pretty robust upgrade backlog, are there any other plans beyond the ones you've already talked about?

The ones that we have, and I'll Gary fill in the figures just to review for everybody, is the wind down of the Rover. And we're about half finished. And then we've got our jack-up program. We've delivered Spartan and Spur here in the Gulf of Mexico and one of the rigs in Indonesia is imminent to be finished. And then we're in process on one of the cham link (ph) upgrades and the other one hasn't begun yet. So we're about half through that program.

We're half through program actual work with money spent we're a little bit over half because we've preordered equipment for some of these rigs. We've got about 30 to $35 million left to spend in '03 to complete the jack-ups and right around a $100 million to finish the rover-up (ph) .

In addition to that, we will have maintenance capital this year. We're budgeting right around the $110 million mark.

OK. And nothing else on the backburner that depending on market conditions, you might consider upgrading?

Well, we have the Endeavor and the Voyager are two unscheduled Victory class upgrades. And I would - Endeavor would be scheduled to be next, I think. We're not ready to make that commitment, but given that we'll have one out of the shipyard mid-year that would be something I would look for.

OK. Switching gears a little bit. Pemex is looking for some lower end semi's. I wanted to get your thoughts on your interest in those bids and just kind of the impact for the Gulf of Mexico market.

Well, mid-water semi's in the Gulf of Mexico is our market and so we would certainly like to be able to take some of those rigs and put them on long-term contract. We have worked in Mexico previously. There are some contractual issues that we need to get resolved to our satisfaction.

That there have been some drilling contractors that take those contractual conditions and are not as concerned about the liability issues as we and some other drilling contractors have shied away from that. So, I can't really tell you which way we're going to come out on that. Whether we take some of these long term contracts or someone else does, just putting to work the number of rigs that their talking about down there in Mexico we think will have a very positive impact on the mid-water market.

And we haven't really talked about that market today, but at the moment in the Gulf of Mexico, outside of our cold-stacked rigs, we only have one rig idle today, the Ocean Saratoga, and the other rigs that we're working in that market are still able to work. We're rolling them on a short-term basis, but we're rolling them at day rates that are solidly cash flow positive and have been much better for us than jack-ups are in the market.

And what's the latest you're hearing on the bids from Pemex in terms of quantity and timing?

We - there actually meetings ongoing as we speak in Mexico with - between Pemex and the interested parties who have indicated interest in bidding. The timing is always a little suspect, as Larry talked about. We have contractual concerns. The subject of the meetings as we understand it, is going to be to address the concerns that we have and some of the major drillers have and so the timing will be determined by the positive or negative indications that Pemex gets from these meetings. I suspect.

Our early indications were that we'd be seeing bids in the first quarter.

OK. Thank you very much.

Your next question comes from Terry Darling with Goldman Sachs.

Good morning. It's Terry Darling here. Gentlemen, wanted to follow up, I guess, on the Gulf flow and semi market excluding the Mexico effect. And, I guess, maybe narrow in on the Saratoga and the prospects for that unit first off.

Terry, the, you know, as you know the Gulf of Mexico semi market is well to well almost exclusively. We actually have a little backlog on two or three of these rigs. The Saratoga is one that just came up short as they do sometime in a well-to-well market.

We have many prospects for it. A number of different people we're talking to about trying to get a prospect up and ready and saucer and blowed ready starts. My expectation is we won't be down long, but long is relative when you're stacked.

It's just, you know, there are a lot of prospects out there. We're not going to be - it won't be that long. I don't believe.

OK, and is the -- would you put the spot market, David, still around that 40,000 range, plus or minus?

Plus or minus, yes. We've actually pushed above that in cases, and under the right circumstances, if we can talk somebody into starting early, we might get a little more aggressive. It just depends on what works for us and the operator at the time.

OK, and in terms of thinking a little bit longer term on that market, second half of 2003, do you have any sense that the market may, and just the Gulf shallow and semi market may pick up at that point, or is the visibility still very limited there?

Well, the visibility's short, but we are seeing a lot of prospects that have been on the -- you know, kind of on the shelf for a long time start to at least develop signs of maturity, which tells us that there may be some prospects for some backlog-building in this part of the market. You know, we're only trying to work four or five rigs here in the shallow water/semi business in the Gulf of Mexico, and there are a number of other contradicts that are working one or two or three rigs, and so it's not a huge market. It doesn't take a lot of work in order to build some strength there.

So, my expectation is that as we continue to see these prospects mature that you'll see some backlog and a little more strength there. Strength may be, again, relative. I mean, I would expect to see rates firming and a little bit term (ph) and some growth. I wouldn't expect to see them double.

OK, and I guess shifting out to the Baroness, you mentioned the LOI, I think the previous rate on that unit was in the 120 range. Is it fair to say we've got a rollover somewhere in that neighborhood, or have things softened up from there?

They've softened up a bit, but not as much as you might think. The rate is north of 100.

OK. Shifting to the North Sea semi market, I think you've had a little more success than some in keeping your units busy over there, although the visibility, in terms of contract durations, isn't all that long. I wonder if you can update us on the prospects for keeping those units busy deeper into 2003?

Terry, I appreciate you noticing that we've done OK over there. We actually have commitments for all of our rigs over there. The Nomad is currently working for Agit (ph) and we'll stay busy with them for a while. The Guardian and Princess are both in the shipyard undergoing special survey in one case and some upgrades and projects on the other. Both of those rigs have letters of intent that will tie them up well into the summer. The rates are not spectacular, but they're above cash and they'll generate some cash flow once we get them up and running. And as Larry talked about, the Vanguard is under ferry (ph) boat charter, and Snudwig (ph) has committed now for a well with some options. And if the options are fully developed, then that would go into the early summer.

So we've got to get through the first quarter over the next couple of months, really, and then we'll be in pretty good shape in the North Sea.

That's good news. And on the rates there, at 35 to 45 range, still about where we are on the ...

That's a reasonable expectation for the market at large, yes.

OK, great. Larry, wanted to come back to your comments about your efforts to cut costs in your opening remarks and just see if you can expand on that a little bit. And maybe, Gary, in that context, educate us as to number of special surveys and timing of those for 2003?

Gary, why don't you talk to the special surveys?

We have two rigs currently in the shipyard right now, Terry, the Valiant and the Guardian. Valiant will be down probably about 45 days, Guardian a little over 30, doing those surveys. We also have the Winner and the Warwick scheduled for the first quarter. Subsequent to that, we have another five-rig scheduled for '02. In the second quarter, the Drake and the Bounty are scheduled to be down, and then in the fourth quarter, the Alliance, the Ambassador, and the Nomad. Again, this will depend on work schedules on these rigs. This could slide back or forth a little bit. Also, we have the potential to slide some from '04 forward if we believe the market dictates that, if we have some idle time.

And so, I guess, on the base case, it sounds - maybe you can total up number of days ...

That was not - nine surveys in '02 is what we, at this time, expect to have.

At an average of 30 to 45 days.

Yes.

OK.

Yes. Minimum of 30, 45 - some of them a little bit longer if we have some repair work that we need to them.

OK.

The Winner looks like it's going to be down about 60 days ...

OK.

... is one of those.

Terry, there's nothing special that we're doing on cost other than the normal type things. I mean, we've deferred salary increases for our offshore fleet. We've coast back (ph) rigs. We go through with a very fine-toothed comb the maintenance cap ex and the expenditures that we have out there. One thing I'd - you know, we know what our competition earns in day rates. That's widely available. We know what they - what their net is.

And so, we're able - you can sit there and then try to reconstruct what our competition spends on cost and we've done that exercise. And one of our competition is involved in a major cost-cutting effort. I can tell you that our costs are so far below where they're coming from that it's not like we're behind the eight ball on cost. I think we've always run a tight organization. Now, it's a - it's an expensive business to be in, so there's always opportunities and you've got to look at that. If a rig goes idle, you need to do something to reduce those costs, if you can.

And do your comments - I guess, refresh us and where the insurance premiums are headed for you guys. Have you already absorbed that increase that some others are going to see here in 2003 or is that still the comment? If so, can you quantify that for us?

We - our insurance rolled on the first of December and our cost will go up in two areas. One, the amount of premium increase that we took during the year is already - was not really reflected in the - in the - in Q4. But it will, on a go-forward basis will be about - I think the total amount of cost was eight to $10 million on premium increase. And then the second amount of increase that we will have is that our deductible has gone up quite a bit. So items which will - I won't say the routine, but they happen. Lots of mooring (ph) lines, things like that, that would have been covered by insurance, will now be a S&R type item that we will have on a go-forward basis.

And that's eight to 10 million on an annual basis, presumably?

Yes.

Actually, Terry, it's a little bit less than that. It's about $7 million on an annual basis.

OK. And you maybe saw a million-and-a-half or something in the month or in that range?

Well, I mean, we - our internal budget estimate is that it'll probably cost us another $5 million next year for routine losses. Now, that won't ever show up, but I can tell you, internally, that our incentives will be based upon beating that number. We have a - we emphasize safety, like all drilling contractors do, but it's not only safety on people, it's safety on equipment and making sure because that comes out of our own pocket. We're going to work on that. That's - we're certainly not going to eliminate it to zero.

So that's the five million on top of the seven you're saying.

That's correct.

OK. And then, in - just in percentage terms, the deductible increase, ballpark for us. Or how much has that gone up on you?

Well, I mean, our deductible before was virtually nothing.

OK. Last question for you, Larry. Very wide range on your consensus estimates for the first quarter. Do you care to take a stab at narrowing that at all for us?

I'm sorry I can't do that. You'll have to crank that through. Obviously you know where the day rates are. We're close to, I think, at the margin right now at break even we get some cash flow here, but when you factor in idle rigs and other costs that are in there, we make a little bit of money. And it's the ultimate projection on how this company, how this industry does is how you feel that the whole market is going to move that's the big item.

Fair enough. Thanks very much.

Your next question comes from Dimbe Tao (ph) with JP Morgan.

Morning. It's actually Michael Lemont (ph) . A couple of quick balance sheet and cash flow questions for you, first, as you look at the balance between acquisition and opportunity - acquisition, opportunities, and share repurchases, you know, clearly, Larry, as you commented, the acquisitions from an aggretion (ph) standpoint look very good. Are there other opportunities out there in the open market that you all are currently looking at? And sort of second to that, is there a trade-off, direct trade-off, between putting capital to work for acquisitions versus share repurchases? I guess another way of asking that question is, is the share repurchase program automated or is it really more price specific?

We don't have an announced program and we don't really tell you how we're going to do that. Obviously there's certain prices in certain markets where we find it attractive to make sure repurchases - and if you look historically, we've retired a significant percentage of our shares and we're far ahead of any other drilling contractor in the number of shares and dollar amounts expended on share repurchase. So that's something that we do.

We look all the time at rigs being brought in and there is - you've got to look one versus another. I don't know that they're direct substitutes, but obviously they're both on our radar screen at the moment. And if we find additional rigs with the high capability that we saw in the Omega (ph) and the Vanguard (ph) , then at these prices I would say that that's probably that we tend to go. But, you know, share prices have drifted down and also become attractive as well.

OK. And then just a follow-up question to the cap ex comments on '03. As I look into '04 you're free cash flow position is looking pretty good just based on maintenance levels of cap ex. With, you know, a negative net debt very high, cash flow yield, obviously, acquisitions, and share repurchases being current uses, could we see you all potentially step out and buy a fleet of rigs? Have you given much thought to what, you know what the uses of free cash flow would look like going into next year?

Well, we like to buy shares or rigs, whatever is cheaper. And obviously Gary made reference in the early part of the statements that the new acquisition back in 1996 and the Odogo (ph) acquisition, 1992. So we've done that in the past.

It's difficult, I would probably say, in today's market with the low share prices to be able to tender your shares to purchase a fleet, although we certainly wouldn't be stopped from that. It certainly depends on the market. I think in all likelihood, it's - the opportunities that we're probably going to see are going to be individual rigs.

OK. Very good, thanks.

Your next question comes from Robin Shoemaker with Bear Sterns.

Yes. Good morning. You've commented on a number of markets but you didn't say too much about the Gulf of Mexico jack-up market and if you have any visibility beyond the current well-to-well cash break even type of market conditions.

I would characterize the Gulf of Mexico jack-up market as confused. It's, you know, at $5.00 gas you would expect that people would be drilling like crazy and it's just not happening.

We are seeing some, again, some prospects develop but there are more rigs down in the Gulf of Mexico than there should be. It continues to be well-to-well and I think that a foreseeable future it's going to be well-to-well. There are a few cases, and we've got some as well, some term contracts on jack-ups that are indexed so that you don't really get a lot of benefit of the term in terms of price and rate above the market.

But you - the rate floats with the market. So there's a little bit more visibility there in terms of being able to predict at least a minimal level of cash flow. But, you know, until the operators have confidence in the product price, you're going to see a short-term well-to-well market. My view is that these types of product prices, particularly a regional commodity like gas, you know, at the end of the day market's working.

You have to assume, you have to believe, that $5.00 gas is going to create drilling opportunities.

OK. And any comment on Indonesia jack-up market?

Not - the international jack-up market remains fairly strong. Indonesia we have our two rigs that have worked over there for Maxis (ph) and now Repsol (ph) for a long period of time. We are currently - actually, recently worked both rigs under the same contract with those while we swapped the rigs out to go from one shipyard and replace the other one.

That part of the world, from a jack-up standpoint, is a pretty decent market. We expect that we'll be able to keep one or two rigs busy either in Indonesia or other parts of Asia. Although we're not currently committed to do that. When the second jack-up comes out of the yard over there or when it gets close to coming out of the yard, we'll be more actively pursuing different opportunities.

We like Indonesia. We've been there for a long time but that's not the only place we can work those rigs.

OK. Then my last question is, I've heard various numbers on how many rigs Pemex - or semi's Pemex is looking for. What's your understanding of that and what are the actual water depth ranges they're looking for?

The best - well, the most favorable view I've seen is up to seven rigs. Most of those were up to a 1,000 feet of water, 1,200 feet of water. There was one that went up to about 3,000 feet of water.

My expectation is that they will not be able to do seven rigs. I just - I think that's very aggressive for Pemex. Although, you know, they surprise people from time to time. I'll have a better view of what we expect when our marketing guys get back from the meetings they're in now. You know, if they take three, I think that's great.

If they take seven, it's tremendous. I don't expect they'll take seven.

OK. Thanks a lot.

Your next question comes from Ken Sill with CSFB.

Good morning. This is Aaron. I just had a couple of questions. First, you sounded pretty optimistic about the Rover. Which market do you - are you seeing the most interest for that rig?

To date, the bulk of the interest that we've seen coming out of the shipyard has been in the Southeast Asia area.

OK. On the Baroness, on the LOI, can you give us a little color on perhaps the contract, how long -- the length of the contract?

I'd rather not say too much about it. I probably said too much already, but the initial contract term expectation is in the neighborhood of a year.

Is it in Malaysia, perhaps?

It's in Southeast Asia.

Larger to redbox (ph) .

OK, and lastly, anything on -- I know India has had a lot of bidding activity, et cetera. Just any potential for you guys in India?

We bid two 300-foot cantilevers in there in the last round of bids. My understanding is, all of those bids were rejected and ONGC will probably re-tender shortly. You know, India's one of those places that when you're in, you tend to stay, and when you're not in, it's kind of hard to crack that box. We certainly have a -- we have operating history there. We have a good reputation. We have an ongoing valla (ph) with ONGC. We have some issues with their contract, like we do in Mexico, and to the extent that other people will sign it, it makes our position a little untenable. But we haven't given up.

You know, for us, it's like Mexico. Whether we're there or whether we're not, as long as they take rigs out of the rest of the market, that's good for all of us even if we don't go. So we're bidding. It's not our primary focus.

OK, thanks a lot, guys.

Your next question comes from Pierre Conner with Hibernia Southcoast.

Good morning guys. A little bit of follow on Southeast Asia. Maybe one of the markets that seems to exhibit a little more strength than others. You've already talked about India, Indonesia, what about deep water Australia? Are you hearing any -- is there any visibility to increased activity there?

I think it depends on the success of the program that's ongoing now. There were three operators who got together and contracted a ship to go in there and do some work. I have not heard public results of the first well over there, but Australia has not historically been a deep water market. I think it depends solely on the results. I think it'll take a while before that information is out there. There is the -- you know, there I the odd well here and there that gives us some view to the future, that there's certainly interest in deep water in Australia, but not a lot of activity yet.

OK, great. And then maybe you all's perspective on a longer term Gulf of Mexico issue. You may be aware that recently a judge struck down Imamesa's (ph) royalty relief, ruling to have it apply on a lease basis, on a field basis. And so I wondered if had heard of that, if you heard anything from your customers relative to this generating some incremental step-out type wells on additional leases in deep water.

We haven't heard a thing. I think our customers quit depending on the government a long time ago.

They make their own decisions. Well good. OK, well thanks for the information. OK.

Your next question comes from Joe Agular (ph) with Gunsman Wright (ph) .

Good morning, is the Victory on its primary well, or is it on the option well part of the contract?

The Victory is on its primary well as we speak today.

OK, did you mention -- are you expecting that option to be exercised on that, or what's the outlook for that particular?

We don't yet know whether the option's going to be exercised. If it is not, we think we have another operator in the queue.

OK, and I guess the Valiant also -- do you have any prospects for that rig?

We have about four prospects for that rig. We've actually had two people inspect it within the last few days. The Valiant - we had some repairs we wanted to do and we had a special survey to do it. It just made a lot of sense for us go ahead and get that rig in. We should be ready to go to work sometime in mid-February and my expectation is that by then we'll have a commitment.

Would you expect rates for the Victory, Valiant to be sort of in the class of the Star and America?

Generally speaking, yes. I mean, that market is a pretty wide range, depending on water depth, whether you're in the, you know, the just over 3,500 feet or just under 5,500 feet and what the term is. So the range, you know, the range in that market really is from the 60s to the 80s, so it's, you know, certainly within there is where I would hope we'd land. And hopefully towards the top. But it's - we don't have anything confirmed yet.

OK. And on the Baroness, did you mention, Larry, the length of contract that you're looking at for that rig?

Yes. David (ph) said that it was just over a year.

Just over a year. OK. Thank you. And one final question. The depreciation with the inclusion of the two new rig - depreciation guidance for full year 2003, please.

We'll be going up. We've been at 45 million for the last couple of quarters. We'll increase to 47 to 48 in the first quarter to account for the Omega (ph) and the Van Guard (ph) . And then, in the third quarter, when the Rover (ph) comes on-line, we'll go up another - about $2 million. All three of those rigs have 25-year lives.

Great. Thank ...

[Inaudible] lives.

Thank you very much.

Your next question comes from Jeff Kibertz (ph) of Salomon Smith Barney.

Thanks. Just a couple of clarifications. In terms of the tax rate in '03, what's - what are you expecting?

We're looking at somewhere in the upper 20 percent range. It's going to depend on the mix between domestic versus international revenue.

OK.

Exactly where that falls out.

And on the insurance question, just to - I think I got it right, but you're looking at '03 relative to '02 - about seven million a year in higher premiums. And you're guestimating about five million a year in higher out-of-pocket costs.

Yes. This is on the insurance on the whole fleet.

Right. Right.

That does not talk about liability.

Right. And you mentioned, in talking about the, you know, the other income effects in the fourth quarter. I didn't quite follow the reference back to the Arafusa (ph) and it sounded like, maybe, on over-accrual. Could you just run through that one more time? I wasn't quite sure whether it was some unusual impact on net income.

It was a reversal on over-accrual. When we acquired Arafusa (ph) in '96, we assumed all of their Jones (ph) Act liabilities that they had incurred to that date and we had to run those out, pay those - pay those claims out. We ultimately have now finished paying those out this year. We have no additional liability to the best of our knowledge. We were left with some $2-and-a-half million worth of accrual on the books. So we reversed that out in the fourth quarter.

And that hit where on the income statement?

It's part of contract drilling expense. If you look at the page where - the result of operations - it's in contract drilling expense other line as part of that credit.

OK. And that did flow through the pretax income.

Yes, it did.

Great. Thanks very much.

Your next question comes from John Dowd (ph) of Sanford Bernstein (ph) .

Good morning. I was hoping you could clarify your comments on the North Sea a little bit. I thought I heard that you said that market was strengthening a little bit. Was - is that a seasonal improvement or is there something behind that?

I think it's two things. Yes, it's seasonal. The North Sea is typically - the summer drilling season is the high season and the winter season, obviously, is the - is the worst part of the time.. Of course by year - I think what was saw is the North Sea didn't get as bad during the winter period this year as we had expected, and so our uplift for the summer is going to just start from a little higher ebb.

So, the activity is a little bit better than what we'd anticipated. Nice, it's still not great, but it's just going to start from a little higher position.

There are no further questions at this time.

Well thank you very much. We'll talk to you next quarter.

This concludes today's conference. You may now disconnect.