Diamond Offshore Drilling Inc (DO) 2003 Q4 法說會逐字稿

Good morning. My name is Tamara and I will be your conference facilitator today. At this time I would like to welcome everyone to the Diamond Offshore Drilling fourth quarter year end conference call. All lines have been placed on mute to prevent 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 star then the number one on your telephone key pad. 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 us on the call today are Larry Dickerson, President and COO, David Williams, EVP and Gary Krenek, VP and CFO.

Before Larry begins his remarks, I should remind you 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 expenditure, industry conditions and competition, states that drilling rigs will enter service, as well as management plans and objectives for the future.

Discussion of the risks 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 statement is based.

With that, I will turn the meeting over to Larry.

Thank you, Les. Welcome everybody to our conference call. I'm pleased with the results from the quarter, not so much that we had a profit, although that's certainly significant but that this continues our trend of improvements. In the first quarter of the year we lost 17 cents a share and in each subsequent quarter we have gradually improved to where we are at the point of a penny a share but if you look at the pre-tax line there's a more significant improvement. And this was a result of a number of items, but it was not largely driven by recovery and day rates with the one exception of jack-up market. I'll talk about that here in a minute.

In general most of our rates remained flat or they have declined in various markets. But we've taken idle rigs and returned them to work. We have gone out and sought new opportunities, particularly, Mexico, where we relocated four semi-submersibles and the quarter that closed here has a complete quarter of three of those rigs on contract in that quarter and reflects the higher earnings that we're able to achieve in Mexico. The relocating of those rigs out of Mexico helped the utilization of the remaining rigs in the mid-water fleet that we have in the Gulf of Mexico. We've also made some other relocations. Some of those are under way.

The key thing is that on virtually on all of our relocations we've had a mobilization to be paid for. The Ocean Nomad is under way, right now, out of the North Sea going to West Africa. That's a paid mode. We have a jack-up heading from Singapore under way, right now, for Ecuador that's a paid mode. And at the end of this, we now have 13 of our 16 marketed intermediate second and third generation floaters with jobs or under a paid mode. Two are ready stacked and we have the Ocean Concord undergoing a survey. We have achieved a lot of this by having an uptick in utilization in working our rigs.

To talk a little bit about the jack-up market where we have seen improvements. We began the year and the 14 rigs that we have, I'm sorry, our 12 rigs that we are marketing actively in the Gulf of Mexico, we had an average day rate, back in January, of $23,600 a day. When we reached December for that same time period we were up about 29,000, about 29 and a half, headed towards 30. And then with subsequent renewals and day rate advancements that we've had here in January, we're certainly well over 30 and David will talk about some of those specific rates that we've been able to achieve.

One I would talk about is the Ocean Titan, which is on location right now earnings $50,000. The Ocean Titan is the completion of our jack-up upgrade program, which we announced some time ago, where we would spend $100,000,000 taking four rigs and lengthening their legs and taking the Ocean Tower and Ocean Titan, which were 350 slots, and converting them to 350 cantilever. Titan has a great drilling package and, certainly, we believe near the top of its particular category, which is just below the ultra premium new build jack-ups that are out there. We think the day rates that we have in the market as we renew those, that will reflect the quality of those rigs.

When we announced this program in 2001, we began planning and engineering and looking at that. We new day rates were fairly high and it would take a while to get kicked off. The timing couldn't be better because by the time we put the rigs in the shipyard, rates had fallen quite a bit. Now with the delivery of the Titan, it's coming back into a market that's higher. We were looking for a market that would pay for the four rig like the Titan, 10 to $15,000 a day higher than the rig would have earned in its previous configuration, and I think that if you look at the data points between our 300-foot cantilevers and 350 cantilever, then we're certainly up there.

Although we're talking about jack-ups this is a part of what we've done to a large part of our fleet with our fourth generation up grades and now fifth generation up grades, the Baroness and Rover, where we've significantly increased the earnings capacity of our fleet. We are very pleased with that.

Another significant achievement in the quarter we renewed three contracts in Brazil. We have three rigs down there, one of them, the Ocean Alliance still has some time to go but in Q4 we had renewals due on the Ocean Yatzy, the Ocean Clipper and the Ocean Winner. The Winner is a second to third generation rig, the Clipper is a deep water drill ship and the Yatzy is a high-spec dynamically positioned third generation rig.

We were able to renew the Clipper at a flat rate, so we are pleased with that. The Ocean Yatzy, we took a reduction in day rate. We had previously been working the rig at over $120,000 a day, that was a five-year contract secured in the peak market of the late '90s. So, we knew we would have a reduction but the reduction still provides us with significant cash flow and earnings. It has an incentive payment that's attached to the rig so really our results will operate in a range, but it cost us up in the high 40s to operate that rig and our day rates should range from the high 70s to the high 80s, depending upon how well we do on earning that return, earning the bonus. We're very pleased with that.

But again the point is we've necessity negotiated these renewals, which include a decrease in rates for the Yatzy, but with all the other positive things have gone on, we've been able to maintain our upward movement in day rates. That upward movement will expand on this a little bit . We'll have a glitch in it in Q1 because three of the rigs in Brazil, Yatzy, Alliance and Winner, will be down approximately 150 days for special surveys for a particular upgrade that we're installing on the Alliance and some other work we are doing on the Ocean Winner. The Ocean Winner, we do not have a contract on at the moment but we were low bidder in a public tender process and we believe that we should secure a renewal and get that contract signed for the Ocean Winner. We've got to do some work to change the configuration of the rig to work that and that contributes to the 150 days of down time of some very high revenue generating rigs in Q1.

Also, in our press release we noted there's some stock buy backs. I think this indicates we remain interested in shareholder returns. As we said before, our program is not fixed. We don't have a particular amount, or a particular price that we announced that we'll buy shares, but we do do that from time to time depending upon market conditions. And I would note that with this million shares that we brought in here in this quarter, that brings our total repurchases up to 10 million shares since we began this program back in 1998.

Our tax rate is high for the quarter. Part of that is a fact that just as you get close to break-even very small adjustments can throw you into this type position. I'll let that be answered in the Q&A by Gary Krenek our CEO.

As I close-out before we take your questions, I would like to ask David to do just a brief rundown of the globe and where we see our various markets that we're working in.

Thanks, Larry. I'll try to be brief. Larry touched on some of the highlights of the market but I'll just go through geographically and give you a flavor what's going on in some of the other elements.

The Gulf of Mexico floater business continues to be primarily well-to-well. That is the rule both with our second generation rigs up to 2200 to 2500 feet of water and the fourth generation fleet. As Larry mentioned the Concord is about to finish up a program, we will accelerate. Its a special survey that's due later this year. We'll go ahead and bring that forward now. The Star is currently idle and we are actively marketing it. The other rigs that we have both in the shallow water and deep water arenas appear to be reasonably stable with work going forward throughout most of the year. I will note that the America is due a survey at the end of the first quarter, at which time we're also going to did an upgrade on it, which will increase its liquid mud capacity and enhance its [subcetrete] handling capabilities. So it will be out part of the second quarter, but the rest of the fleet is looking generally pretty good.

The jack-up market, we are continuing to see strength across that market. Our lower end jack-ups shallow water rigs are approaching the high 20s to $30,000 a day. As Larry mentioned, the Titan, which is the latest upgrade is at 50. The 300 footers are in the mid to upper 30s. We are continuing to see some strength there. We are seeing the anomaly in the Gulf of Mexico that we always see and that's a little slow down in inquiries this time of the year but I think we are approaching the back end of that. We have good visibility on our working rigs through most of the first quarter, so I don't expect to see any real glitches there.

Our rigs in Mexico, as Larry talked about, we made a strategic decision to go to Mexico. All four of our semis are now up and running successfully in Mexico, all under three to four-year contracts and that operation is gaining momentum and going very well. Our rigs abroad, the Patriot, currently working in South Africa, is about to come to the end of its program with Forest. We are in negotiation for continuing work there and expect to have something secured here shortly.

The North Sea we've got four rigs that have been in that market for some time. Larry talked about the Nomad, which is currently under tow to West Africa for a multi-well program, that will tie it up through the end of July under the current commitments. There are some options hanging and some other opportunities but we are committed through about the end of July. The other rigs for the North Sea the Guardian and Princess are both committed through most of the year. The Guardian is with Shell and will stay with Shell through this year and into next year. The one idle rig we have in the North Sea is the Vanguard, which is a rig we purchased last year. We have multiple opportunities for it, both in the U.K. and Norway, which appears to be a growing market for that region of the world.

In southeast Asia, our two rigs in Australia, both the Epoch and the Bounty, both of those rigs are now committed through well into the third quarter or in the case of the Epoch, the fourth quarter. We have been very successful over there in strategically hitting the right jobs at the right time. The Bounty is headed to New Zealand to drill a couple wells down there and there are a number of opportunities there that would continue to keep that rig in the southern part of Australia or New Zealand. The Epoch is committed up on the North Shelf through most of the year.

The General, which is in Vietnam, continues to work in Vietnam. We have an extension in hand for some continuing work. I believe there will be a completion program to follow on. It will tie that rig up in Vietnam through, say well into the third quarter, as it looks now. Both the Baroness and Rover continue to work in that part of the world with their existing operators. The Baroness, we have an extension in hand for another 180 days with Unical That will tie that rig up into November. Unical has continuing options. It's way too early to see what they might do. Our expectation is they have a continuing program.

The Rover continues to work for Murphy. We are now committed firm through the first quarter and about midway through the second quarter if you add a demode on that, if they were to quit, that would take us really through the end of the second quarter. Our expectation is they will keep the rig busy. Although it looks like that they will keep it busy at least in the foreseeable future on a short-term basis. They have continuing options. We have outlined a number of different scenarios and I know they are trying to sort out what their forward plans are. But our expectation is they will keep the rig busy through most of this year if not all the year in that part of the world.

Larry already talked about Brazil. We are very pleased with our contract position there with the renewal of the three rigs. We're not excited about having three in shipyard at the same time, but they're all due and we've got to do what we've got to do.

The international jack-up scene, we've had the Sovereign and the Heritage, both were idle part of the last half of last year. Both have now returned to work. The Sovereign is working in Indonesia and is currently committed through mid year into about the middle of the third quarter with opportunities past that. The Heritage, as Larry talked about, is on a heavy lift ship to go to Ecuador for a multi-well program for Noble Energy. We have a paid mobilization overt. We will drill these wells and we'll have a paid demode back where we think we have good opportunities in other parts of the world for the rig. That's a quick walk through the world.

Question time.

We'll pause for just a moment to compile the Q&A roster. Your first question comes from Wagar Syed.

This is Wagar Syed from Petri Parkman. Could you provide us with some guidance on the DDNA of operating cost and the effective tax rate for '04?

I'll let Gary Krenek answer those issues.

Okay. Well, yeah, go forward with our depreciation expense first of all, you'll see that remain relatively flat from what you saw in the third and the fourth quarters. Everyone will remember we had a change in asset lives back in the second quarter, which reduced depreciation somewhat. That was then offset by the fact the delivery of the Rover and some of our jack-up upgrades, which increased depreciation. That should remain flat.

The operating costs, Larry talked about some of our cost-saving measures that have been put in place. We expect to see those remain on a go forward basis. I would remind everyone, though, that in the first quarter we have a number of items come up that will effect operating costs. We talked about the four surveys that we have, the Alliance, the Winner, the Yatzy and the Concord, all occurring in Q1. When those happen, you will see anywhere from 1million and a half to $2 million increase in cost per rig for each one of those surveys, both for the survey cost and the cost to bring them in and also some maintenance cost we defer until we can get those rigs in the ship yard.

Also, while we are being compensated for our modes, the Nomad and the Heritage to go to West Africa and Ecuador respectively, please remember you will see those mode costs come in as operating expense and the mode revenues in the revenue line. So that will cause expenses to go up. And also the Titan in the fourth quarter, as it was for the better part of the second half of '03, was in the ship yard with costs being capitalized. With that rig now being delivered we'll see costs of somewhere between 19 to $21,000 a day on that rig. So you'll see that coming into operating costs.

The tax rate on a go forward basis will depend on our mix between both domestic and international revenues and also where we earn those international revenues. So it's very difficult to pinpoint that at this point in time we expect that rate to be somewhere between 30 to 35 percent.

Now, you had some other revenues in income. Could you describe what that was?

Yeah. We had approximately $3 million in other made up of two things. The largest one, about half of that was a reimbursement of some taxes paid internationally for us by one of our customers as per contract. We paid those, and when we paid them, it was recorded as a tax expense. When the customer reimbursed us for that, it was recorded as a revenue, all in the fourth quarter. You had that, we also had a small amount of disputed items with customers from prior years that we have previously reserved for in case we were not able to collect it, and in the quarter we were successful in those disputes and were able to collect that revenue.

And you mentioned that there was some opportunities for Vanguard in Norway, could you say, you know, could you put some more color on that, you know, and give us some color on the timing of when that could happen, and what kind of data could we expect there?

The opportunities in Norway range from one well to a couple of opportunities 18 months and everything in between. There are a number of different opportunities over there. Rates in Norway, right now, are probably in the 110 to 120 range. The rates for the term work we would expect to be higher than that. It's a limited universe of rigs that can work in Norway. I think the rates have some upward room. I don't want to get too detailed in what the rate might be. I mean we haven't operated in Norway since the Alliance was there in about '96 or '97. We are interested in cracking that market. We think we have good reputation a good repour, we think we've got opportunities. Having said that we also think there's going to be some opportunities in the U.K. Keep in mind those rates in Norway, the operating costs in Norway can be, depending on who you are and how you operate, between 70, 80, $85,000 a day. The operating costs are very high.

In terms of timing it's more like a second half event?

There are some opportunities starting, mostly, well, early opportunities in the early second quarter, ranging through the second quarter.

Great. Thank you very much.

Uh-huh.

Once again, if you would like to ask a question, please press star then the number one on your telephone keypad. There are no further questions, sir.

All right. Well, thank you very much. Is there any other commentary, Gary that you think we need to get into when we're signing off?

May say a little bit the tax rate that Larry referred to is right at 75 percent for the end of the quarter, and it's due to a number of things one is a true-up between our estimated versus actual domestic versus international revenue. When we did that, we actually resulted in a net tax benefit, even though we had taxable income prior to taxes.

What offset that were a number of tax reserve adjustments, the largest of which was a reserve that we took in accordance with GAAP to reserve against some foreign tax credits that we had previously booked. We took that as a tax expense. GAAP required us to do that. We would hope in the future, and we will certainly try to do everything in our abilities to be able to utilize those tax credits. We have five years to use them, and I would hope that at some point in the future you'll see those come back through as a tax benefit, although we can't guarantee that at this point.

Thank you very much. We appreciate everybody tuning in. We'll talk to you next quarter.

Thank you for participating in today's Diamond Offshore fourth quarter year-end conference call. You may now disconnect.