Diamond Offshore Drilling Inc (DO) 2003 Q3 法說會逐字稿

Good morning. My name is Ursula and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Diamond Offshore Drilling Third Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press "*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. 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 of drilling rigs ONS 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 and 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 expectations or any changes in events, conditions or circumstances on which any forward-looking statements are based. With that, I will turn the meeting over to Larry.

Good morning. I think the results that we released this morning reflect that there are some improving trends at Diamond Offshore and that in a rough market, we have been able to improve the operating in new markets and cost reductions our financial results. Although we still had a loss for the quarter of 9 cents, it has improved quarter-over-quarter all throughout the year from our initial quarter where we lost 17 cents, and I would note that within that individual quarter, we also saw improving trends so that the month of September was an improvement over the previous two months. We've got included in there two months of operations, almost two complete months of operations in Mexico with our three semi-submersibles that began work down there in August. They will be joined shortly by the Ocean York town which set sail yesterday from Galveston and is expect today arrive in Mexico on the 25th. This has been helpful to us.

Additionally, our Gulf of Mexico jack-up fleet has enjoyed improving day rides throughout the year, and our average -- fleet average rate for our Gulf of Mexico rigs is now $27,000 a day, and that reflects a wide variety of rigs. We have a couple of our 300-foot cantilevers that have penetrated above $30,000 a day. We've got one of our 350-foot rigs out there working, although the rate is below current market, and that will be joined in January by the Ocean Titan, when we expect to deliver it from the ship yard to provide two 350-foot heavy duty rigs, they well (inaudible) and about that time, so we're hopeful that that will improve what's going on.

Additionally, I would note below the line, we had some losses in our marketable security sales, and if you compare that to a year ago where we had significant amount of gains, that also contributed to the year-over-year performance, but again the trend from quarter to quarter has been very positive. We do have weak markets that are out there, specifically the North Sea, where we have two of our four rigs working currently, and then in the Gulf of Mexico, deep water fourth generation style rigs have had some weakness.

We currently have the Ocean victory idle in that group and the Ocean Quest, although we have the Quest committed and ready to go back to work. We've set for ourselves some aggressive goals in reducing operating expense, reducing overhead expense and reducing maintenance CAPEX that we've got planned for the fleet.

Many of these things will not fully be impacted until the beginning of next year as we roll out those reductions, but they've already shown up (inaudible). If you look at the amount of contract drilling expense we had, it was up quarter-over-quarter, but that reflected a number of rigs going back to work including rigs going to work in Mexico, where the operating expenses were higher than they were when those rigs were in a stack condition, so hidden within those numbers are a great amount of number of cost reductions that we are putting in place.

So in general, Diamond Offshore is aggressively trying to seek out new markets and to seek to control expenses so that we can maximize our bottom line and return to profitability as soon as possible in this market, although of course we're all waiting for an improving market that we are hopeful will follow with improved product prices that are out there. But that alone is not all that we're waiting on. We did note in our earnings release that we did reduce the amount of dividend. That's an amount that we're comfortable paying out at these cash flow levels and these earnings levels. The dividend had remained unchanged from the point in time where we first set this high dividend in the peak years in the late 1990's, I think 1998 was when we had it at that rate. And we ran it for a number of years, and we believe that the current rate will be a more appropriate level.

So with that, I will conclude my opening statement and prepare to take your questions.

At this time, I would like to remind everyone, in order to ask a question, please press "*1" on your telephone keypad. We'll pause for just a moment to compile the Q and A roster. Your first question comes from Ken Sill of CSFB.

Good morning, Ken.

Good morning, Larry. You know, you guys are doing a pretty good job on the cost control side. I guess looking at the fleet, one of the surprises is the fact that the Sovereign and the Heritage are still idle. I was wondering if you could give us an update on what the prospects are for those two rigs in the near term?

I'll let David tell you about what the prospects are.

Ken, we've had a number of bit exercises, a number of opportunities that have slipped away. As of today, we have letters of intent for both rigs to commence -- one would commence within the next 60 days, the other one would be a little bit longer than that. In both cases, the commitments would take the rigs through substantially - at least the first half of next year and beyond. I'd really rather not say anything more than that because they are letters of intent and not firm commitments, but both look to be in reasonably good condition at this point.

And, you know, as far as day rates for jack-ups in Asia, are those still kind of holding in the mid 50's to 60's?

We're seeing commitments below that. There have been some bids where people have been a little bit more aggressive. There have been some commitments in the Middle East in those ranges and some in Asia, but we've seen some slippage from bid to bid.

And then one more question on the rigs that you guys are basically retiring, the Century and the prospectus, is there going to be any impact on depreciation with those rigs, and is there a scrap or salvage value on them?

We've written them down in the quarter to our expected realizable scrap value, which is nominal, and there wasn't that much depreciation resident or net book value in the rigs. I think our write down was a million and a half.

It was a million and a half dollar write down which you see on the income statement in the financial statements and the depreciation was minuscule.

OK. Thank you.

Your next question comes from Mike Urban of Deutsche Banc.

Thanks. Good morning. I wanted to go into the dividend, kind of a little more, wondering if you could talk about the basis for the magnitude of the economy. I mean, is that indicative of what you needed to do to get the cash neutral type of earnings based on your outlook for the foreseeable future or was there some other methodology there in terms of the magnitude?

Well, our -- you know, we've got adequate cash reserves, I believe, over $600 million, and we certainly could have sustained payment at this level, but certainly as we had slipped into losses this year, at each quarter, we would look at the dividend and discuss whether or not to reduce it or to sustain it at that particular level. I believe that there is some linkage between the two, and we thought this was an appropriate adjustment to make.

OK. And what are the CAPEX needs for next year? You talk about reducing maintenance CAPEX. What is that kind of number and what is, you know, growth or investment CAPEX otherwise?

Well, we've completed at the moment our upgrade program on both the Rover and Baroness and our jack-ups will be complete through year-end. There might be some spillover of the Ocean Titan, and we don't have any schedule for next year. Our maintenance CAPEX has run about $100 million a year for two or three years, and we are very hopeful to reduce that substantially until we complete the budget, I'm hesitant to say what that is, but it will be in the $50 to $60 million range, I would expect, for the maintenance CAPEX.

Any other CAPEX that will certainly be opportunistic and job-related should we secure any more bids in Mexico, that would require some CAPEX to ready those rigs for there, but if that's related to a job, we would want to do that. So you're looking at a nice cash savings out of there, and part of it is just the cycle where we are in the fleet. We've cycled a number of our rigs through the shipyards on special surveys, so we're complete with a lot of the maintenance. It's not so much that we have to defer things, but that we've caught up and that we will enjoy a couple years, we hope, of reduced maintenance CAPEX.

OK. Great. And last question was on the operating expense side. You can clearly see the reductions there. One in particular came in much lower than we thought was on the jack-up expense, I was wondering if that had to do with -- more so with idle time on the rigs, especially in Indonesia, and if you could comment on the prospects for those rigs as well?

Well, on the cost side, a little bit had to do with the fact that the sovereign was in the shipyard undergoing its survey in Q2, and we had less cost in Q3, but that's only a small portion of it. More of it is as Larry had talked about, the general decrease in cost and the cost controls that were -- we're instituting.

Certainly the sobern (ph) and Heritage and not working in Southeast Asia, we parked them by the dock and reduced cost. Part of the way you reduce cost in this kind of market is you're very aggressive on reducing costs when a rig goes eye idle, and we're trying to make that adjustment. But in general, in the Gulf of Mexico, we set targets that each rig needs to strive for profitability. We've been able to at least generate positive cash before depreciation on all jack-ups as day rates have gone up, but the second half is to make sure that we're on top of those costs.

OK. Great. Thank you.

Your next question comes from Bill Herbert of Simmons.

Good morning. Larry, I'm still a little bit puzzled by the dividend cut here. We have ample cash balances. We are reducing maintenance CAPEX by as much as 50%, we're reducing operating expenses. Is this a statement with respect to we are envisioning business conditions to remain stagnant for the foreseeable future? If not even more challenged than they are today? Or are there un stated CAPEX growth opportunities which are on the radar screen but you're not talking about?

Well, I guess if I'm not talking about them, I'm not talking about them. I wouldn't read anything extra in that. We're comfortable with our cash balances. We could have continued to fund that. We've got positive trends going on. I can't -- I don't have the secret on what the future market is going to hold. We've made the decision that we're going to operate the company as if these business conditions will persist for another two or three quarters. And we'll adjust it if we have something else coming up, but we're going to have to review that dividend every quarter, and we do that every quarter as a regular course of business. I think the fact that we'd set a dividend rate back in 1998 when we were earning $383 million that year, that was an aggressive pay out. We didn't rush to cut it. We kept it all the way going through the middle of 2003, and then our reduction of 50% sounds like a lot, we're paying $35 million out now when our earnings aren't at that level, and we think that they're both at that level. Most growing companies don't pay a dividend.

Right, but that's been sort of a distinguishing characteristic between Diamond and other drillers, and the fact is that you had a liquid balance sheet and it's a relatively liquid enterprise to start with, and as you say, we're in the trough here. You talked about improving trends. You're addressing those with respect to reducing maintenance CAPEX aggressively. That's welcome. You are reducing operating expenses, yet we're cutting the dividend by 50% as well.

Well, we still pay the most dividends of all the drillers. Liquidity and having a sol solid cash balance is part of the company's history and operating philosophy, and making sure that we serve our shareholders is part of that too. We'll look at it at each quarter, and I can't tell you when it might be raised. Obviously we need some more income before we would contemplate that.

OK. Good. Second question here is outlook for the Gulf of Mexico on the high-end semi front here. Rates are sort of languishing here at relatively humble levels, and give us a sense as to what the visibility is for that market and whether you expect to set a tread water here at relatively challenging levels or we're seeing improving conditions or, in fact, eroding conditions. What's the outlook here?

Yes.

All of the above, you huh?

Yes. The market right now, we've done a pretty good job of keeping the fourth generation rigs busy most of the year. We jumped to a little low spot here. We've got a commitment on the Quest, but it's not confirmed, nothing to write home about, but it is work. There are a number of opportunities that have arisen that look like they'll start before the end of the year.

OK.

And there are a number of projects that look like they are going to materialize that would carry us into the first quarter and second quarter of next year, so, you know, the market has kind of rocked along at a real close equilibrium. We're a little below the line right now, but there are a number of opportunities and we're not afraid of the market. I would look for rates to move - I wouldn't look for rates to move dramatically, but I would look for steady work.

OK. Super. And then the last question is the North Sea semi submersible market here, obviously not in the greatest of shape here, and got a couple of idle rigs. Again, walk us through what your expectations are for the next six months in that market.

Well, I mean that you know that market just stinks out loud. It's terrible. That whole region is going through a major transition from being controlled almost exclusively by the majors to a move by a number of aggressive independents and that exercise is going to take some time. The two rigs we have busy, our expectation is we'll be able to keep them busy. The two rigs we have eye tell, we have opportunities for both. We believe that Norway is going to see some improvement in the, say, second quarter and well -- as it moves through the year, more improvement, so we think the opportunity for the Vanguard and Norway are pretty good. We think the opportunities for the Nomad in the U.K. are good, but probably not until time sometime in the second quarter. So, both of those rigs currently are idle hinder garden (ph). They are warm stacked, very low manning, but a level of manning that we think is appropriate given the fact that we want to continue working them. Both rigs are in excellent condition, and it's our expectation that both rigs will work next year.

OK, but the safe assumption is that they're going to stay idle through the first quarter?

That's a safe assumption, yes.

OK. Thanks a lot, guys.

Your next question comes from Terry Darling of Goldman Sachs.

Hello. Good morning everyone. David. Wondering if you could continue on your discussion of the deep-water market to include West Africa. Where do we stand on some of the bid activity for the high end units that people were talking about, and as well as Brazil and southeast Asia, maybe in that context, speak specifically to the Rover, Yatzy and Clipper outlook.

OK. Let's start in Brazil. We have four rigs in Brazil. Our current expectation is that all four rigs will remain in Brazil. We actually have some survey work on three of the four. The whit Inc. ton, alliance and Yatzy all within the next -- I'm sorry, winter. Thank you, Larry. They all have some survey work to do in the next six months, and those will hit at various times. - (ph) brass is, as everybody knows, going through some political changes and some philosophical changes in the way they do business, but our view is that all four of those rigs have a future in Brazil. Exactly what the term and what the rates that are available to us on extensions for future awards will be, I don't know. I can tell you that the Yatzy is a rig that hit the peak of the market on a five-year term, and that rolls late this year. We believe the rig will stay busy in Brazil. I don't know yet what the rate is going to be, but it's not going to be $125,000 a day.

Where would you put the spot market? Have there been any other rollovers that we can look to?

There have been some short-term fixtures of some shallow water ships, say, 4-, 5,000-foot ships. There's really nothing like the Yatzy down there that's rolled. The Yatzy is kind of a unique tool. There's really nothing like it that rolls and the Clipper, on the other hand, is outfitted for about 8,000 feet of water, so it is above some of those rigs in terms of capability. So, I mean, you know, our expectation is to go in and have a tough negotiation. I don't know exactly where we're going to land, but we don't intend to leave a lot on the table, but I can't tell you where we're going to land yet. The Winner is going to be a bid exercise, and there are a number of rigs that will bid against, but again, our view is that there is work for most of the rigs that are going to be bid on this tender, so our view is that the Winner will stay busy down there as well. West Africa, there have been a number of rigs moving in that direction in the last year. There are a pretty large number of continuing opportunities, some dynamically positioned opportunities and some more opportunities all up down the coast. There are probably, I would say 6 to 10 ongoing discussions or bids that would have rig requirements in the next 18 months to two years.

One actually is a little bit longer than that before it starts, so there's a lot of activity. It has not materialized as fast as you or we would like to see it materialize, but I think that the pace of discussions is getting a little more frantic, and notionally, I would expect these things to be on track to start as most of the operators now envision them. So I don't see a lot more slippage, and there are a lot of opportunities, and we are aggressively pursuing a number of those.

With respect to the Rover and the Baroness, as you know, the Baroness has worked for UNOCAL in Indonesia. That project is going very well, we think. UNOCAL has rights and it's too early to say exactly what their declaration of their option will be, although we have every reason to believe that they're happy with the rig and comfortable with the operation, and we would expect and hope that they would continue to operate the rig in that area. Having said that, we bid the rid to other places and other people.

The Rover is working for Murphy in Malaysia. It is a short-term project in that it's originally about a six-month program with continuing options. They and their partner have been slow to - at least slow in our mind -- to identify exactly what their development scenarios are, but they have a very aggressive drilling program, it appears, and we hope that we'll be able to keep the Rover busy in Malaysia. If not, again, we are bidding it in other places. We've actually had it inspected by another operator within the last, oh, 30 days or so for a program that would take it to another market. So on any given day, we've got about 90 to 100 days of visibility on the rig, and we expect that we're going to be able to keep the rig busy.

Follow-up on West Africa, David. In India, we've seen some of the expected bids slip as well. Does it look like some of those bids will come forward in the first quarter of 2004 or do you think it's going to get pushed out beyond that at this point?

Most of what I see in West Africa is -- it's a mixed bag. There is some first quarter work. The lion's share of it is mid second to early third, mid year.

OK. And then on the Gulf of Mexico, are we still anticipating the BP Atlantis project to be awarded before the end of the year, and if so, are you optimistic on that?

We're out of that.

OK.

And exactly what they do, you'd have to check with BP.

OK. Let me shift gears back to the Gulf jack-up market. Other competitors commented that the recent upward pressure on day rates has probably steadied out here, leveled out here of late. Is that the way you would characterize the market as well, and -

We did say that it seems to have plateau at this point. When a bid goes out, there's still too many -- not enough backlog and there's too many rigs that bid to be able to keep us with upward pressure on day rates.

OK. And lastly, you had alluded to some additional opportunities in Mexico. Could you elaborate a little bit there on timing and are you speaking about the deep water or the shallow water or both?

Well, I can only speak to what I know about. There was a tender that was published today, I believe, for three jack-ups in Mexico. There is a lot of conversation in Mexico about work for later this year and next year, but until it actually, you know, gets something more than just conversation, it's kind of hard to comment on. Our expectation is we would continue to see more opportunities beyond the three jack-ups that were published to date, but, I mean - that you know taking on quite a large load and they have quite a large number of rigs to manage, so I can't -- I don't know how many more floater opportunities you'll see down there. We know about these three jack-up bids that are published to date, I think there's one 250 without drilling crews, one 250 with drilling crews -- my Spanish is not very good, but my guys are looking at it.

Terry, when I mentioned Mexico, certainly those opportunities are things that we'll pursue. It has gotten more competitive there, but I mainly mentioned it in relation to allowing us some room on our CAPEX that should we get one or anyone gets one, that that company needs to spend some money to meet the Mexican specs for the rig that would increase the CAPEX.

Larry, let me try to slide one more here. You know, as it relates to the dividend cut, one would surmise based on your response to questions there that a buyback also remains on the back burner, but can you just set the record straight there for us as well?

Well, our policy on the buybacks is to state that we may from time to time consider it, but we don't ever actually have a formal program or predict when we would do that. I would probably just

OK. Thanks.

Your next question comes from Jeneth Reego of Falcrum.

Hi. It's Wes Maat. In terms of the Gulf market, say the old second gens all the way up to the mid water depth, 2,500 feet, where do you see the market right now?

Well, we have with the access rig in Mexico, we have three rigs currently competing in that range, the Saratoga, Lexington and Concord. All three are working in the 40's. All three have some limited backlog, but our expectation is that those rigs will stay busy. That market is fairly broadly fragmented. We have got a couple of rigs, Rome's got a rig, Novel's got a couple of rigs, so it's kind of a mixed bag. There's no one company that really has a big grasp on it, so rates have not moved dramatically. Our utilization for the three rigs we've got here have been pretty good. And we expect it to stay pretty good, but again, I wouldn't look for rates at least in the near term to take any large jump. I would expect to be able to keep the rigs busy in the 40's range.

In terms of the fourth generation market, say 5,000-foot type of rigs. It looks like the rates start in the mid 50's. Is that a fair range where the market may be right now?

For a rig working in its market, I think that's not a bad assessment. We and others have taken those rigs and worked them in lesser water depth ranges to the extent that we've had overflow from the 2,000-foot range, demand that we couldn't meet. We've worked our rigs in that range and worked them in the 40's. And would prefer to do that over stack the rig. But for a rig working in its element, 3,000-foot or better, yes, 3 to 5, that's not a bad range to start with.

We have seen rates for us and others that are in excess of that, depending on the unique job requirements, that you can see rigs certainly in the 70's.

OK. In terms of the outlook for the first half of next year, you obviously described it as a very competitive market. You're continuing to get what looks to be very good day rates for the semis up to 2,500 feet. It could be on the weaker end for the deeper water ones. Is there enough work out there in the first half of next year that you might see some expansion at the upper end in terms of rates?

Possibly. I mean, there is a good bit of work out there. It's possible. There are a number of rigs also that are competing in that market, and there are some rolling off of the contract, so it's going to continue to be competitive, but there is a good bit of work, and our customers are sitting on some cash, so make sure that you listen in on their goals and ask them that question because all the signs are there.

With the catalyst to get them going on that, is it trying to spend this year's budget, having a new 2004 budget?

It's different for everybody you ask. Some like prospects, some have too many over capital projects on the table, some are constrained because they're still married to some of these long-term, high dollar a rig day rates that they're drilling too many $80 million wells and can't afford to drill $20 million wells, so it's a mixed bag.

Thank you, gentlemen.

Your next question comes from Francisco Garcia of J.P. Morgan.

Good morning, guys. You answered all our questions on the dividend cut. Could you provide us with a little bit of guidance just on G&A, D&A and interest expense for next year?

Depreciation expense should be relatively flat with what you saw and Q3 which was $43 million and may go up slightly in 2004, but all of our upgrades and rig acquisitions are out and already built into that number. G&A as Larry said, we're not only trying to cut costs back on our rigs but we're trying to you cut it on overhead also, and as you saw, we brought our G&A down a little bit in the third quarter. You can expect that to run somewhat flat on a go-forward basis, and interest expense will be up slightly, and that's due to the fact that we were capitalizing interest on the Rover as we were building it. Now that's complete. We're expensing all our interest expense, and in 2004, that should be somewhere in the $23 to 25 million range.

Your next question comes from Pierre Conner of Hibernia south coast.

Good morning, guys. Most of our questions have been answered. I guess just a housekeeping item. Any guidance on tax rate go forward?

I think we'd rather project where day rates go.

Depends on the mix of revenues, I'm sure.

At these earnings where we're around break-even, the tax rate can swing dramatically. Right now I would expect that tax rate to be somewhere in the 18% to 24% rate for 2004. Here in 2003, we should end somewhere in the 15% to 17% rate.

OK. Great. Like I said, I think we got the rest of it already. I'll turn it back. Thank you.

Your next question comes from Matt Conlin (ph) of Weidan and Company.

All of my questions on the dividend cut were already answered. Thank you.

Your next question comes from Judson Bailey of Jeffries & Company.

Thank you. Most of my questions have been answered already, but I do have a quick question on your revenues for the third quarter for your high spec floaters. Day rates were up by about a thousand dollars and utilization was slightly down. Revenues were up by about $7 million. Is there something else in there that I may not have taken into account in my model?

The biggest reason revenues are up there is the Rover working. The Rover being delivered from the shipyard on July 10th.

OK

And prior to that, we did not include the Rover because it was under major upgrade in our utilization numbers, so it's not like you had a non-working rig that began working increased utilization, but rather you had a rig that was not a factor at all to a working rig which would have caused the utilization to go up slightly because of it.

Where we had the Quest was in that grouping of rigs and it works on the low end of day rates so that may impact your average day rate.

OK. Great.

You almost have to look at each rig on a rig-by-rig basis to figure that out.

OK. Thank you.

There are no further questions at this time.

Well, thank you very much for joining us. I'm glad we were able to answer all your questions on the dividend. Thank you.

Thank you for participating in the Diamond Offshore Drilling third quarter earnings release conference call. This concludes today's call. You may now disconnect.