Diamond Offshore Drilling Inc (DO) 2003 Q2 法說會逐字稿

Good morning, my name is Andrea and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Diamond Offshore Drilling Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remark, there will be a question and answer period. If you'd like to ask a question during this time simply press ;ACo- then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Van Dyke, you may begin your conference.

Good morning and thank you for joining us. With me on the call today are Larry Dickerson, president and Chief Operating Officer, David Williams, Executive Vice President, and Gary Krenek, vice president and Chief Financial Officer. Before Larry begins his remarks, I should remind you that statements made during 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 management's 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 Securities ; Exchange Commission.

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 expectation or changes in events, conditions or circumstances on which any forward-looking statement is based. With that, I'll turn the meeting over to Larry.

Thank you. Let me begin my opening statement by noting that our results for the quarter continue to show a loss. This is a reflection of continued weakness in the market that we began, the entire amount for some time but we highlighted specifically in Q1. I would note that we achieved about 125 more working days in the second quarter over the first quarter and that's responsible for our uptick in revenue, and particularly those days were spread out among higher specification units as the Ocean Valiant, which had a survey and was down a good amount of time in Q1, returned to work and then the Ocean Baroness worked for the full quarter.

So, those two things helped our revenues increase. Our expenses also increased although not at as high of a rate. That was reflection of we continued with what is a heavy schedule of special surveys during the year. We clustered several surveys that were overseas and are typically more expensive and then we had the new rigs going to work such as the Ocean Patriot that we all acquired. All of those were responsible for that. But still on the operating income line we had a net improvement for the quarter, although I would still caution everybody there was a good amount of idle rigs and idle time included in the quarter.

As we sit today we still have some idle equipment. We'll talk about that a little bit more. Looking on the horizon here, some positive news. The Ocean Rover, the last of our or the most recent of our significant victory class upgrades, a sister unit to the Ocean Baroness has completed and set sail from the shipyard on July 9th. The rig was on schedule, and our estimated current total expenditure for that rig is ;ACQ-189 million, which is under the ;ACQ-200 million announced budget. So again we've continued a very successful program. I was kidding our -- John Vecchio head of engineering when we had the rig arrive in January of 2002, when he did a calculation going through his engineering steps and projected that the rig would set sail on noon on July 9th of this year. I told him that I was a little disappointed because the rig sailed at 1:30, so we were an hour-and-a-half late on an 18-month schedule. Additionally, on June 2nd, we announced that we had been awarded three semi-submersible jobs in Mexico and two of those rigs are mobilizing towards Mexico or doing the modification work necessary to begin those contracts as the Ocean Ambassador, which had been idle and the Ocean Whittington, which is on its way from West Africa, just cleared Trinidad a few days ago, then the Ocean Worker will also be going down there.

The Ocean Worker is continuing to finish its commitment here in the Gulf of Mexico. I think we talked at that time about the favorable day rates that we were going to receive from those particular jobs. And then I would note in our press release we talked about a depreciation change. We had really towards the end of last year in some analysis had noted that among the other publicly traded drilling contractors if you took a ratio of depreciation expense versus gross property plant and equipment deployed, that the percentage of that gross property that was depreciated at Diamond Offshore was over 5;ACU-, close to 6;ACU- and a number of our competitors were as low as 3 to 4.5. So we engaged an outside -- a third party service to review policies and review our experience with the lives that had been in place. And based upon their recommendations we elected to make a change in estimate for the quarter, which we have reflected in these numbers. And so we've got that. We did that primarily to reflect our actual experience and to ensure that our comparability was present between us and our competitors.

That will conclude my opening statements. And I'll be glad to take questions. We're also joined by David Williams who is on the road on a marketing trip and will be able to answer some questions via telephone as well.

At this time would I'd like to remind everyone, in order to ask a question please press ;ACo- then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q;A roster.

Your first question comes from Roger Read.

Good morning, gentlemen. Couple of questions on sort of a regional basis. Brazil is getting highlighted as an area with some concerns, both governmental and just market. You've got several rigs coming up there before the end of the year, Yorktown, Yatze (ph) and Winner. Just wonder what the expectation on contract real over there is?

I will make that comment and let David handle it. Specifically, the Ocean York Town has completed its contract for Shell and is preparing to mobilize back to the Gulf of Mexico. The other rigs that we have will be out for bid renewals later this year. David, do you have any comments on that?

No, just the York Town has been down there for about seven years, was actually down there when the Erathusa (ph) deal was done, and it has come to the close of its deal. The rigs are under temporary airport so we have got to take the rig out and so it's our intention to bring it back to Gulf of Mexico. The other rigs -- we are having ongoing discussion with (inaudible) about the future of those rigs. Our expectation is that we will have to go through a bidding process but we are not uncomfortable with the future of those rigs in Brazil.

Okay, any comment on day rates?

Well, the glaring day rate is going top to be the Yatzee (ph), which is over ;ACQ-120,000 a day. And certainly a renewal of that rig is going to be somewhat lower than that but don't know how much lower yet until we see what the bid looks like and what the timing is and what the spec looks like. But I wouldn't hold out a lot of hope for another ;ACQ-120,000 day rate on the Yatzee (ph). The others aren't going -- I don't think going to be too bad.

Okay, flipping up to the North Sea, again not much contract visibility, looking into the second half of 2003, Vanguard looks like still does not have a contract. Can you give us some views on what you're doing with the rigs up there?

Well, the three rigs that are in the U.K. sector of the North Sea are all working and are looking at potential commitments that would take them into the third and fourth quarter, say late third or early fourth or beyond. Couple of rigs are under options that we think are going to be exercised so the future of the Nomad Princess and Guardian is starting to get a little more -- a little clear, as we go into the latter part of the year, although it's not all completely under firm contract, it's starting to clear up and starting to look a little better for those rigs. The Vanguard is currently stacked in Norway. We were required to take delivery of the rig in Norway. We do not have a job for it. We have a number of bid possibilities for it. We may very well take that rig and move it to the U.K. sector to preserve a little cost or a little cash. But just lower our cost. But we'll still be able to bid the rig both in the U.K. and Norway and still expect we will be able to work the rig pretty soon. You know, just - you know if the market was great we wouldn't have been able to buy that rig for that price. So you know, the stacking rig was not totally unexpected for us. We would rather work it and expect to, but right now it's idle.

Your next question comes from Bill Herbert.

Gary, good morning, this is Bill Herbert. Could you just explain to us very quickly what the change in depreciable life was for your fleet? Where were we before, from an economic life standpoint, and where are we going to with the change in accounting policy?

Yeah, Bill. We previously have signed a 15-year life for our jackups and second generation semis and a 25 year life for the third, fourth and fifth generation floaters. In addition, we had a zero salvage value. What the change is that we now assign a 25-year life to all jackups and a 30-year life to all floaters. Those lives will be effective from the date of original construction, rather than from the date of acquisition, which was our old policy. Having said that, we have an addendum to that in that we will assign no rig less than a 15-year life, so if we buy a rig that's already 20 years old, a jackup for instance, we would not assign it a five-year life but rather 15-year life. Also, we changed our salvage value policy on rigs and major upgrades from 0-5;ACU- which is more in line with industry standards, and also, more in line with what actually is -- occurs out there.

Okay, thanks very much, guys.

Your next question comes from Michael Urban.

Thanks, good morning. Had a question on the operating costs. You explained some of the increase in the costs sequentially and I guess really above where you've been running over the last several quarters. How much of that is permanent, from you know kind of greater operating days and how much of that will wind down as you wind down on the surveys I guess basically kind of looking for some guidance on the operating cost line going forward.

Well, most -- I'll let Gary handle that. But the surveys, this is a heavy survey year for us. We're going to have a total of 11 surveys when the year is done. And we're looking forward to a year next year of three. That's really based upon when the rigs were initially delivered. You're due every five years. We continue to look forward and back. And we have a particularly heavy year this year. And we expect another three in Q3, so those kind of factors will continue. I'll let Gary guide you a little bit further.

And the rest of the costs are pretty much standard. As Larry said, we had both the Patriot and the Vanguard, Patriot acquired very late in the first quarter. We will work it all in the second quarter. So, those costs are there to stay. The Vanguard which was on about the charter we got that rig back so the costs are going up there. Also North Sea utilization went the from 37-79;ACU-. That caused some of those costs to go up. The Ocean Tower was one of the jackups (inaudible) jackups that we cantilevered. That rig all cost was capitalized in Q1, is still in the shipyard which was delivered in Q2. We began incurring operating cost with that and we only had partial quarter in Q2. We'll have a full quarter going forward in Q3. In addition, go on a go-forward basis, the Rover that was just delivered as Larry said all costs were capitalized previously. That rig went to work on July the 10th. Cost in Southeast Asia are estimated around ;ACQ-50,000 a day. So we'll incur that in Q3. In addition, there are somewhat higher operating costs with the three rigs that are going down to Mexico so you can expect costs to increase due to that.

So sounds like we shouldn't be expecting a sequential increase in cost and continuing on at least through the balance of the year?

This company will move primarily based upon increases in revenue and increases in operating days. We're going to do what we can to control operating expenses. We did have a redundancy in elimination of some positions ton G;A line and some of the other cost control items but you know how this business works. It's all on that revenue.

Sure. G;A is actually where I wanted to go next. That was a little higher than I thought. Anything unusual or is that a good number going forward?

That number should come down to a little built more of what it had been in prior quarters. As Larry said we had some redundancy and some severance payments included in that line, and that was the primary reason for that going up in this quarter.

Okay. That's all for me, great. Thank you.

Your next question comes from Jeff Kiebertz (ph).

Good morning. Just to come back Larry in your comments, there was a sequential improvement in the operating income because of the mix. But you know, if we took out the depreciation change, it was really kind of flat. I just wondered, it's kind of another dimension of the cost question here. You know, are we going to see, you know, these costs rising, you know, in parallel with the revenues or are we going to be able to see some plateauing of the cost as the revenues increase here?

Well, the costs are generated based upon whether or not you have active rigs. And as we highlighted, we'd brought rigs actively into the market. And if you go into higher-cost markets you'll have that. Having said that our expectation for the balance of the year is that our rigs are pretty much going to be where they are. The York Town will be coming back from Brazil and presuming that we put it to work, which is our expectation, you would see a slight decrease in cost. So we think costs are more or less where they should stay, although they're always subject to some of these variables. And again it's going to be the variance on the revenue line. You're right, depreciation was a factor of roughly ;ACQ-5 million in the quarter, but we did have a ;ACQ-6 million improvement otherwise and that's essentially the increase, if we look at the increase in revenues quarter to quarter versus how much we gave up on the cost increases.

Right. And could you just update us on the outlook in Mexico? Are there some other opportunities that you expect to be able to take advantage of?

Our understanding is that there are several more bid rounds that will be coming out of that area, which will include second-generation rigs, which is a specialty of ours, and some jackups but disclosing what our bidding strategy is not in our interest or the shareholder interest as you would expect.

Can you give us an idea of what you think the number of bids are going to be through the remainder of the year?

David do you have a recap on that?

Well, there have just been bids submitted for four jackups, all pretty small, all of them mat rigs and there's just been a round that's just been submitted for two floaters. There should be another round for at least one more floater, another semisubmersible within the next month for delivery some time in the fourth quarter and at least one more jackup that we're sure is going to come out. There may be at least one more jackup program for about three more rigs, so the ones that are yet to be bid are the two floaters that I just described have already been bid and the four jackups already been bid. The rest are all remaining for this year. The '04 program from what we hear on a preliminary basis is supposed to be fairly active as well, but no details.

And Larry, last quarter you'd mentioned that while this is a positive, you don't see the Mexico demand being sufficient to, you dramatically tightened the supply situation in the Gulf of Mexico. Are you still of that opinion?

Did I say that? As Mexico is having an impact, I think it's clearly having an impact in the jackup area. We've seen our -- the fleet particularly the higher spec units, the 300 footers, have had some increases in bid rates. We saw, as we moved, as we announced our commitments of some second gens into Mexico, we saw a slight uptick in rates there. So there has been -- it's always difficult to see the inflection point. I guess my expectation is that you need something else in addition to Mexico to get a very significant move in rates. You would need an uptick in some other market. But Mexico's a great base to work off of and it's a net positive to this company and to this industry.

Great, thank you.

Your next question comes from Pierre Connor.

Good morning, guys. Lot of good questions already. Wanted to follow up. On the York Town Larry, would that be one that you'd be bidding or is there some consideration if you don't see something near term that you would stack it, what kind of plans do you have there, could you tell us?

Well, we're bringing it back, because we think this is the best market to either work it or if we have to stack it, minimize the stacking cost. That's a very nice rig. It's class of rig it's a sister rig to the Concord Saratoga and Lexington, which have done historically very well in the Gulf of Mexico and with some rigs going to Mexico we hope we will be able to work it within the Gulf of Mexico.

Okay, great. On back to the North Sea maybe a little further out in this question of customer mix maybe projecting into next year with some transactions occurring, did you see from your inquiries any change in your customer mix, i.e., smaller and independents, to give you some any incremental activity confidence for next year?

David, I'll let you handle that.

The North Sea is going through a change. The majors are as you pointed out much less active now than they used to be. The North Sea was controlled by the majors. We can see by who we're working for not just our inquiries that our customer mix is changing and we think yes, that is a net loss. When BP started selling some of their major long time holdings in the North Sea to independents, the independents will drill that, BP wouldn't. We understand there are some other companies that are packaging properties to sell. And that is without a doubt a net loss for that market and any market to be honest with you. We'd like to see the same thing in the Gulf of Mexico.

Sure. Do you think that is something that occurs after the winter when you get into calmer weather seasons that you could see the real impact event on what you've already seen in terms of the changeover?

Historically the North Sea is always a little more vibrant in the summer months than it is in the winter months. Nobody really wants to be at Magnus in November and December. It's just real rough. And I would expect that most of the independents would prefer, if they're going to cut their teeth, cut their teeth in the summer. So logic tells you there's going to be more work in the summertime. But you know a lot of this work that you do in the summertime really cannot tails off and carries you through. Our goal would go to every other drilling contractors to work that takes you through the winter. We are starting getting close to that. We would expect next summer to be a little more interesting than this past summer has been.

Good. Thanks for the information. I'll turn back.

Next question comes from Magnus Fyhr.

Good morning. Just had a follow-up question on the depreciation policy moving the life up on the floaters from 25 to 30 years of age. Can you talk a little bit how you treat a rig like the, you know the Century which is 30-year rig versus the Endeavor and the Victory, which has seen some recent extensive upgrades in the I guess late '90s?

Whenever we do a major upgrade, that is - we treat that the same thing as the rig being delivered and a new rig being delivered. So we would take 30 years from the date of that major upgrade. The Century, which was built in I believe 1972, under this policy, is now fully depreciated down to the 5;ACU- salvage value.

Okay. I guess the Endeavor which is 28 years of age, did you add value to that or is that fully depreciated as well?

If it's 28 years then it would have two years left of depreciation.

Under the old policy we would have been depreciating since the acquisition date, which was 1992, when we allocated what was frankly a very small amount of purchase price to that rig. And now a switch to 30 years from acquisition date. There were a number of rigs that actually had their lives shortened within the fleet. Again, we were following the guidelines of the study and the pickup was either from the salvage value or from some of the newer rigs. We did not go out and take some of these older rigs, certainly rigs that are cold-stacked and pick up lesser depreciation off those.

Okay. Well, thanks for clarifying that.

Your next question comes from Terry Darling.

Thanks. On the depreciation number one more time, Gary, can you give us some guidance for the third quarter? Should that be pretty well flat plus some incremental for the Rover essentially?

You got it Terry. So, we would expect to see around 43 million Q3 and Q4.

Okay, great. David, wondering if you could talk a little bit about the higher end semi market in the Gulf of Mexico, and the prospects to keep the America Valiant, Quest, Victory busy through the second half of the year and wondering if there is any update on the Rover post or following its contract?

Okay, if you want to start on the Rover's (inaudible) it's just started that program for Murphy and it's a multiwell program. Murphy has, as they've announced, a pretty exciting opportunity over there. They are going a little short-term at this point. They have continuing options that would take the rig out quite some time in the future, and their option dates are not yet due, Terry. So..

Okay.

It's a little early to say but -- sufficed to say they've made some announcement about that field, it is a very exciting area for them and our expectation is -- I think their expectation is that they will have continuing work for a rig. We are hopeful it will be our rig. In the Gulf of Mexico, we have had during the second quarter a little bit better luck keeping the rigs busy well to well. The deep water rigs busy well to well. That market is still essentially well-to-well market and I don't see that changing. We have two or three rigs that are coming up short. We have what we think is going to be a commitment on one of those rigs to go forward. We have a bid outstanding for another one that we think is a very good possibility for us. We have another rig that we have -- that we will probably substitute for a shallow water rig. We had a commitment on one of the lower spec rigs for ongoing work and the operator had a bid due date or a commencement date and with the storms and some other things that have come up, we won't be able to make it, so we'll probably use one of the deep water rigs to take that job. It is going to be at a lower rate but the rig will be working. And so my expectation is to shorten the story, my expectation is we are going to keep them busy. It's going to be well to well and I think there are others in that area so there may be a little pressure on rates but I think we'll be able to keep them generally busy.

I think we saw the Richardson work at 40 a day when it had to do a lower-end job. Is that the range for a higher end rig working a lower end job there?

Somewhere in the 40s yes.

David do you see generally moving rigs from current markets to other markets, you mentioned that the low end North Sea semi market is actually pretty firm, which is a bit different from some of your peers and I am wondering-

Our situation is not too bad.

Other than you know incremental bids in Mexico, do you see a potential to move any other rigs around the world?

Well, there is -- yeah, there is some potential Terry. There is, you know Mexico has been the big story in terms of movement of rigs and it's interesting uptick that all of the rigs do not come out of the U.S. Gulf of Mexico, they come from abroad. But there is some potential for higher spec rigs in other markets. The best potential is what everybody has been waiting on for quite some time and that's West Africa. It still is not to the point where these development programs are ready to come to the table today. But there are say four to six pretty good deep water development programs that we're having discussions with various operators in various countries along the coast of West Africa for rigs of the, say, the Valiant America, Star Victory class, fourth generation class and Baroness rover class. And those programs really start, they range in commencement from say late this year or early next year, throughout '04 and really into '05. So there are still a number of those programs on the horizon. We like a lot of people have been disappointed they haven't come up as fast as they should have and as fast as the operators had hoped that they would. But they're still out there and they'll still come, and the rigs are not located locally, so the rigs will have to come probably from the Gulf of Mexico.

Any other long term ultradeep water opportunities, I guess I'm thinking about the BP Atlantis work in the Gulf, is that likely to be an incremental opportunity in your term as well?

Certainly the Atlantis will be, if BP can get it to the next step. It's been, BP Atlantis program, from our perspective (inaudible) real details, for us it's been two weeks of panic, followed by three months of waiting to hear something. It's been a bid and then wait and bid and then wait, and discuss and wait. Sooner or later they're going to get off the dime and do something. I know they're in an evaluation program right now. I don't know of any other programs that are imminent on the scale of Atlantis. There are certainly other development programs that are out there but not at the term and spec requirement of Atlantis.

Okay, last question for Larry I guess, Larry you've got the rover starting up here, a number of Mexican rigs, do you expect to be profitable in the third quarter?

I hate to shy away from -- I want to shy away from guidance. But you know, it's too -- there are too many factors there as to what the renewals are. We did say that we expect expenses are at where they should be, given our expectations for rigs, changes and all of that going on. So you know, you do the math, based upon the revenues. We'll get some net revenue adds off the Rover. We'll have Mexican revenue adds. But a lot of that is not going do fully affect until Q4.

Sounds like cautious optimism. Thanks.

So if we have no more questions, then I'll thank everybody for joining us this quarter. And we will join you again in 90 days and see how optimistic or pessimistic we should have been.

Sir, you do have a question from Wes Maat.

All right.

All right, could you give us very quickly your second half tax rate items?

We have a tax question for the -

Yeah, the tax rate in the first quarter was at 21;ACU-. And that's based on both a blend of the international and domestic rate. When we closed the second quarter, we looked at that and that range, that tax rate, had decreased down to about 17;ACU-. And as a result, accounting rules say that you need to have a year to date, get back to that year to date range which caused us to have to book about a 10;ACU- tax rate here in the second quarter. On a go-forward basis our best estimate at this time is we would have a 17;ACU- rate in Q3 and Q4. I would caution everybody, however, that is dependent on the mix not only between domestic and international but then also once you get international, the mix between the different international areas. So we will continue to adjust that, as required by GAAP.

Okay. And then just a follow-up question. Could we get a sense of how as you roll our rates are going now in the Gulf of Mexico for the older second generations as well as the mid range, 2000, 2200 foot floaters?

I think we've indicated those rates have been in the 40s. They had gotten as low as the 30s, some other people may have bid a little bit different rates, and it all again depends upon the job and prospects for the rigs. But that's still in the 40s and I don't know that there's any upward movement at this point.

Okay, thank you.

Your next question comes from Andy Vietor.

Good morning. Do you have plans to scrap some of your other rigs like the Century and Prospector?

That is high on our list that we might consider doing that. We have got seven rigs cold-stacked presently. I would characterize the century and the Prospector as being two rigs that are old enough and have design limitations that scrapping would probably be an alternative. The trouble is, there's almost no net scrap revenue to be had. So there's nothing pushing us at this time to make those decisions. Other rigs that we have cold-stacked like Endeavor and Voger are up for additional victory class upgrades. We have got some of the idle really from market conditions we got jackup stacked here in the Gulf of Mexico, we have a semi idled in the Africa.

We will take one final question.

Your last question comes from Karl Choi.

Thanks. (inaudible) Larry, most of the questions have been answered. About the cap ex plans in the second half, obviously profitability has not come in this year at least according to our plan at the beginning of the year. Wondering if that has altered your cap ex plans for the year at all and if you have any preliminary guidance on next year.

Our, we do try to adjust expenses and cap ex based upon activity level. However, when you have a large number of special surveys that cluster within a year, there are certain items that which you can either upgrade or replace, and sometimes they're just worn out. Oftentimes they are. And you only get that chance to do that once in five years. So we're going forward on that. And we would not expect too much of a slackoff on the maintenance cap ex side. We've got the Titan now in the shipyard adding a scantilever package to that. (inaudible) We are very pleased with that result and the spread differential that's even present in this weak market between 350 foot units and 300 so we'll continue on that. We haven't set next year's budget but I would say that certainly as we sit down at the conclusion of Q3, and if we're looking at a market that will continue as is, we will really tighten back maintenance cap ex and as well as operating expenses. Because again, I re-emphasize this business will move based upon rig days employed, and revenues, but at the same time, we can still achieve some reductions in cost, and if we can then we'll take those.

All right. I appreciate it. Thank you very much.

This concludes today's Diamond Offshore Drilling second quarter conference call. You may now disconnect.