Diamond Offshore Drilling Inc (DO) 2004 Q1 法說會逐字稿

Good morning. My name is Toshiba and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Diamond Offshore Drilling Company first quarter earnings conference call.

[OPERATOR INSTRUCTIONS]

Thank you. Mr. Van Dyke, you may begin your conference.

Thank you. Good morning, and thank you for joining us. With me on the call today are Larry Dickerson, President and Chief Operating Officer, who is joining us from Washington, DC, 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 and service as well as management 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 any 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 very much. I'm joining this conference as Les indicated, from Washington D.C. I've been serving for the past two years as a member of the US Commission on Ocean Policy and we're releasing our report today. So I wanted to join that, but I'm stepping out certainly to address this very important issue of our earnings.

For the quarter, as you know, we recorded an 8 cent loss. I think we gave some fairly good guidance that we expected to have a negative first quarter due to the large amount of shipyard time that we knew was coming scheduled, both for some completed upgrades that we had underway.

I mean some upgrades that are underway, specifically the Ocean America and then some down time related to special surveys, Winner Concord, and then we also have the Ocean Alliance in which we were updating it's sub-C system at the same time that we were doing a special survey.

And so the amount of shipyard losses that contributed toward the overall loss was about 6 cents. So we had a 2-cent loss from the quarter from normal operations. And that interrupted what had been a four-quarter sequential recovery, which is our goal to continually to build our results quarter after quarter. A lot of that occurred due to idle time that occurred within the fleet and the top four rigs that contributed to that were the Ocean Star, the Vanguard, each of them cost us about 2 cents by not working. We had the Ocean Patriot down and then the Ocean Nomad, which was off contract prior to its mobilization down to West Africa.

Looking forward, it's going to be a challenge for to us to get the Star back to work. David will comment specifically on some of the challenges we face in the Gulf of Mexico with that class of rig.

The Ocean Vanguard does have some work scheduled that will begin middle of this quarter, continue on throughout the year which we think will do very much to improve that situation, the Ocean Patriot has returned to work and the Nomad is working. So there are some positive items that are there, but certainly the idle time did increase our loss for the quarter.

Our costs, although they're nominally up, I'll have Gary Krenek explain how that transpired, rigs coming out of construction and relocating between markets primarily, but our costs were generally in line with the cost reductions that we had budgeted, so reduced amount of maintenance expenditures were recorded within the numbers that show up.

I talked about the shipyard time specifically and that impact with us. So concluding that, now, I'd like to turn to David and let him comment on the markets. But first, let's have Gary go ahead and fill everybody in on the cost reconciliation.

OK, thanks, Larry. As Larry said, we made a conscious effort to try to control our cost, and have been, we think, very successful in the past.

However, rig operating expenses increased from the fourth quarter to this quarter approximately $12 million from 123 to 135 million. And those increases - that increase is attributable to, first of all, the surveys that Larry talked about, the Alliance, the America, the Concord, the Winner and completion of jack-up Columbia. Those surveys cost us approximately $5 million more than normal operating cost.

Second of all, we moved the Heritage from Southeast Asia over to Ecuador. That cost us about $4 million. And the Nomad from the North Sea down to West Africa was another 1 million. So those mode costs were a total of 5, we remind everybody we did get reimbursed for those modes and that mode reimbursement is showing up as revenue. So that's $10 million.

The other $2 million can be attributable to the Ocean Titan. The Titan was in the shipyard in the fourth quarter of 2003 undergoing its cantilever conversion. It came out very early in January and it's just normal rig operating cost was about $2 million for the quarter. So that's the reconciliation from the 123 to 135. And with that, I'll turn it over to David to talk about markets.

All right. I'll just take a quick walk around the world and give you an idea of what's happening in our different market segments.

In the Gulf of Mexico, the floater business continues to be spotty at best. The shallow water business in which we're currently operating three rigs, the Saratoga, Lexington, Concord are all working. All that work is short term. Those rates are in and around $40,000, $45,000 a day. There is pressure on that market, just because there's not a lot of work going on. But we've been able to keep those rigs busy.

The deeper water markets, the fourth generation style up to 5,000 to 5,500 feet, again has been spotty. The Star has been down most of the first quarter.

We've had an opportunity for it recently but it appears we're going to lose this job to a drill ship, which was bid by one of our competitors in that business. We understand their rate was under $80,000 a day for a DP drill ship. That's going to impact us somewhat, although we expect that as we go forward, there's going to be a good bit of work and a number of rigs leaving the Gulf of Mexico. So our expectation is that fourth generation rigs will stay generally busy through most of the second half of the year.

The jack-up business has been very good for us in the first quarter. The 11 rigs were working. They've all stayed pretty busy with the exception of the surveys that Gary talked about. We've seen the average rate climb. The upper end of the market is in the low 40's right now. We had seen some higher end rigs, higher end for us, 350 footers hit around $50,000 a day. One operator dropped three or four of those rigs in the market, and that's - put a little downward pressure on it but utilization is good and rates are coming back up. So the average rates in that area are still good.

Mexico, we have four semis, continue to be a good market. We don't see continuing floater opportunities for new floaters. Our rigs are under contract for another three years plus each, generally. But the bids that are out in Mexico now are generally going to be turn-key style bids at least in the foreseeable future.

We are not bidding as a turn-key operator but we are discussing with the turn-key operators providing a rig on day-ward form. So we may see an opportunity for jack-up in Mexico as we go forward through the quarter.

In other parts of the world, we have two rigs in Africa. Larry talked about the Patriot was down, it currently worked the Petrobras SA under a one will contract, that contract will carry us through about middle of May. We don't currently have a commitment but we're talking with a number of operators about opportunities for it both in Africa and other markets.

The Nomad, which moved to the area in the quarter, is currently booked through about the third quarter for a number of operators and will stay busy. The North Sea, which has been a really tough market for quite some time, we continue to work both at Guardian and Princess for their operators Shell and Talisman respectively.

But as Larry talked about, we have a letter of intent for the Vanguard for two wells in the UK sector. The first well is a short well and we discounted it nominally to the market to get that rig out. The second well is a little more high speed drilling operation and that rig will be around $60,000 a day and take us for about 90 days after commencement.

Following that we expect that we'll have an opportunity in Norway. There is very high demand and a very small number of rigs that can work in Norway. We are in discussion with a number of folks about an operation there and those rigs would be generally in the 130 to 150 range for opportunities in Norway, with an increased cost element of about $75,000 to $80,000 a day, but good cash flow there.

Our business in South East Asia continues to be good. Our shallow water floater fleet Bounty, Epoch and General have all stayed busy. They all look like they're going to be busy through most of the year. Rates in Australia, still in the mid upper 70's.

The other two rigs in the upper 50's to mid 60's range in Vietnam and Australia. So that market stays pretty good. The jack-up business there, we only have one jack-up in South East Asia now with the other rig moving to Ecuador, but that market is tightening up a good bit. Both the South East Asia and Middle East jack-up markets are seeing a pretty good turn.

Our bid activity in those areas is prolific right now. And following the Heritage commitment in Ecuador and following commitments for the Sovereign in Indonesia, we expect to keep those rigs busy and our expectation today is that we'll see better opportunities for term and rate.

Out two deep-water rigs over there, convergent Rover and Baroness continue to work for their existing operators. The Baroness is currently still under contract to Unocal through about October this year. Rigs engaged in both a surface stack application and a sub sea application.

We've actually drilled wells of both types for the operator. But we're under contract, as I said, into mid-October. Expectation is the operator has continuing work, although we're not going to committed he has options.

The Rover, which has been working short term for Murphy, they've recently committed to a two-well extension plus multiple options.

So our current commitment there takes us to about the middle of August under the wells that we're currently committed for, and again, they have continuing options that would take the rig for some time. Remaining market force is South America.

We talked about the rigs that were under survey in the quarter. Both those rigs, the Winner and Alliance, are both out of the shipyard and going through commissioning, about to go back to work for Petrobras or in one case already have.

The Yatzy is currently in the shipyard and they are doing a special survey and of course to change that and, it should go to work early next month and will continue its contract with Petrobras and the Clipper remains active.

So Petrobras continues to be a very good customer for us and we are happy to be under our new contracts there. That's all I have on the market. And I guess at this point we can take questions.

I guess I would and excuse me, David.

Are you echoing there? I'm echoing on my side.

We don't hear an echo. You're fine.

OK well, I would just say I'm looking forward to the up coming quarter. We've got a number of rigs that are going back to work.

We do have some rigs that we have no commitments for, but as David pointed out, we do some shipyard time - that we are spilling over into Q2. That includes the Ocean Yatzy, which has a nice day rate down in Brazil.

We'll be losing some day rate on that one and than the finish work on the Ocean America will take us well through the second quarter before we will be able to return that.

We have a commitment before that rig when it finishes its well. So with that final close, let's take some questions.

[OPERATOR INSTRUCTIONS].

Your first question comes from Justin Cintor (ph) of Simmons.

Good morning. The Star's been a difficult asset to put back to work. Can you discuss your outlook on that rig and, in your opinion what must transpire for conditions in that high-end semi-Gulf of Mexico market to have - see some improvement?

Well, the Star has been -- you know, the rig's got a great reputation since we completed the conversion a number of years ago, the rig's done great. It's been on some very specialized and very successful projects. We have hit a slow stretch in the market. What's going to happen is we've just got to see more work in that band. If you look at the operators who have been busy in the last couple years in that band -- many of them are kind of taking break right now.

As you survey those operators, many of them have programs starting, well, in the next 30 to 60 days and continuing through the end of the year, so our expectation is the rig's going to be able to stay busy. We are bidding rigs in that class abroad and bidding them here. But what it's going to take is just a little more activity from the operators.

Yes, I guess I would add - that there is nothing particular of that rig if you survey the number of deeper water rigs that are down here and have been down in the Gulf of Mexico.

Virtually all of the participants have had some time with one rig or the other. For us, it's generally clustered on the Star though we've had some down time on the America.

David and Larry, hi, it's Bill Herbert.

Bill.

Do you want to share with us -- what's driving the demand renaissance in Norway and how many incremental rigs used.

Well I think first in Norway when we bought that rig, we knew that we were able to get a good price and do that, because there was some risk certainly for the coming year after we bought it that -- in 2003. We ran the risk of low activity.

Our thought was that we could bring it over to the UK and of course that market also didn't work out. But we could see at the time that Norway themselves were going through an environmental review before opening some new acreage in the north part of their country, and not only would that open new acreage, which would lead to demand, but we saw that during 2003 there was a cutback deciding not to commit dollars in the existing fields until they had a better feel for what was going on. That process is now complete and I think what we're seeing is these customers coming out and restarting their activities having cleared that hurdle.

Fine. How many incremental rigs do you see being demanded in that market in Norway for the balance of the year?

Bill, there are currently, I think, 11 rigs working in Norway, the Vanguard will wind up in Norwalk before the end of the year. I think estimates are you could probably see between, say, 13 and 16 operating in that market. I wouldn't say by the end of the year, because I'm not sure they can all get there in that time frame, but say by the -- by early next year, I think, you can see that many rigs working there.

You're kind of pushing the upper load of how many rigs can work in Norway. So I think if you look at the world fleet of the rigs that are class and certified, or capable to be class and certified to work in Norway, you're kind of pushing that limit.

So I think, you could see easily 13, as many as 16.

OK, that's all I have. Thanks, guys.

Thank you.

Your next question comes from Robin Shoemaker of Bear Stearns.

Good morning. I just wanted to ask, really, about the market for rigs, especially in the mid-water depth. In terms of potential sellers, buyers of rigs, and where that market stands since you bought the Patriot and Vanguard in late '02 in the mid-60 million range, has the market taken another drop from that level. With your strong financial condition, are you in a position to perhaps buy more assets, perhaps rigs that are qualified to work in Norway, as you said example? Where does the market stand in your view for mid-water depth semis?

I think the purchase and sale market, the issue with --certainly our cash position gives us the capability to the extent there's a reasonable asset that makes sense. I think there is a finite number of sellers, and in the case of both the Patriot and the Vanguard, we were sought out as really the only potential cash buyer who was in the position to do a quick cash deal -- in both cases, the seller was interested in a lot more money than we were willing to pay.

And we were willing to converge at a price we thought made a lot of sense and to the extent there are other sellers out there, certainly we have that capability. The limitation really in the second-hand market is a finite number of sellers.

And I would say that the Patriot, Vanguard are high-end rigs, third generation large haulss in the case of Vanguard equipped with lots of kit for the Norwegian market and carried in an AOC to be able to operate in that market.

So there was a lot of value there. I think some of the sales that we've seen often have been more towards the lower end. I'm not saying that we wouldn't have an interest, but the price would be so far down there that that's not likely where we would go.

Plus, we have within our own fleet three or four semi-submersibles, which are upgrade candidates and so bringing in additional rigs down at the bottom end wouldn't make a lot of sense.

OK.

I can tell you I don't know of a single rig out there right now for sale that's the quality of the Vanguard that we could buy for that price.

OK. And so then on your rig upgrade and enhancement spending plans this year, it's well down from prior years is my -- my understanding, in the 60 million range. Is that still correct?

That's correct. I mean, that -- now, we've always qualified that if there's a job that requires a capital expenditure and we're going to get a job, then that's a very flexible number. But that's closer to the base level of expenditures.

OK. Thanks a lot.

Your next question comes from Terry Darling of Goldman Sachs.

Thanks. David, I was wondering if. You might clarify a comment you made earlier about potential for deep-water rigs to leave the Gulf of Mexico in the second half of the year. Can you talk to us a bit about bid activity and how many rigs you think will leave that market by the end of the year?

Sure, Terry. Specifically, there's a ship that is --that we expect to leave - maybe two that would leave and what the term of programs is I'm not exactly sure. And then there are a couple of semis that have been slated to go to West Africa for a time.

We've been waiting on those rigs to get out of there. There are some continuing bid opportunities in West Africa, although there's also a number of rigs over there that roll off contracts and could fill some of those. But my expectation is that you could see, say, three to five deep-water rigs leave in the next year.

OK. And on the Baroness, on the rate renewal there, was that more or less in line with where you had been, or did that number change significantly?

The rate renewal on the Baroness, the extension on the Baroness was at the previous rate, and that -- you know, in Indonesia, it's a little complicated the way the operators are required to work with the government over there.

And rate increases calls all kinds of issues for everybody. So we had previously agreed to this rate extension at this price, and they have continuing options that are unpriced, which will ultimately force them to go back to the market, I think, to re-price those. But these Baroness extensions are at the same rate. The rollover extensions are at a very modest increase.

And on the Baroness, the new option pricing would occur August-September period?

Yes. I would hope that they would do it sometime in the summer to give us before the -- you know, before the rig is up. That would certainly be our preference. I think their preference, because of their ongoing spread costs, is to have a continuous string.

So, yes, would you -- I would expect to see something probably mid to late summer, maybe a little later. I can tell you those guys, I mean, they're not asleep at the switch -- Unocal. They're very bright people. And they've done this before.

So they're paying attention to the rig market right and probably doing some kind of some searching activity right now to see what rigs might be able to do this kind of program.

OK. And on the Star, do you see that rig going back to work in the near term? Do we assume that was kind of 45, 60 days in the quarter or do you see it working one-year term?

Terry, we're chasing jobs that could start as early as two, three weeks. I think certainly by, you know, June, sometime in June, I think, at the latest, I would expect the rig to be working. But -- I mean, we've been chasing jobs - we're down-manned the rig, we're doing some work on the rig that you can't do while the rig's working.

For instance, you can't paint the deck while you've got people working in it. So we've done that. We've done some work in the cellar deck; it's hard to do while the rigs on the payroll.

You can only do so much painting and burning while you're on a live well. So we've taken the opportunity and done some work that we needed to do. So it's been useful in that regard.

We like to put the rig to work, but we've also -- we've always got some job on the horizon and right now we're chasing some work that could start, if the operator can get it going, in the next three or four weeks. But it's all spotty right now.

OK. Larry, two quick questions for you. First, can you share with us any changes and thoughts on consolidation on a broader scale for the industry? Are you more optimistic? Less optimistic about that potential versus where you were 6 or 12 months ago?

And then secondly, where is your thought process on potentially scrapping some of your lower-end semis at this point?

Let me go ahead and talk about the scrap decisions. Two of our semis, Voyager and Endeavor are held for upgrades where we've been very successful. The holding cost of those is not very high. So I don't see that as an option.

The only other two low-end units, which we have, which we're not marketing presently would be the New Era and the Gulf of Mexico.

We've done some upgrades on that, on its sister rigs, General Epoch and Far East and (inaudible) the new areas very similar to the hunter. So there is even an upper scale. So, I think there's a value in holding that. I would -- holding that. I would guess that the Liberator might be the only candidate that potentially could be scrapped and that the cost of doing anything with it is high and the longer we keep it off, that becomes an issue for us. But certainly, the condition right now is such that we think there's value as a drilling rig, and so either if I just start my one, it's not a material number.

To talk about consolidation, you know, when they occur, you almost never see them. But the consistent part of all the consolidation is a large shareholder that's doing the selling. I mean, I think even with the Santa Fe merger, the Kuwaitis obviously, played some role in that, and certainly there was the history where we had done those.

And it's just very hard to see that occurring presently to facilitate the merger market, and there has not been to date a premium recognized in the equity market for a company that's gone through the merger. Until that happens, it's also hard to, therefore, get everybody motivated to go down that path.

OK. Very helpful. Thanks.

Sure.

Your next question comes from Tom Rinaldi of Deutsche Bank.

How are you doing? On the cost side, trying to get a handle going forward, can you go in a little more detail on the sequential differences that you made reference to in terms of earnings per share, sort of what was the cost, net of what customers reimbursed, and do they include any revenue impacts, and what sort of thing might we see in terms of lump-sum cost next quarter for the stuff that's, you know, flowing into the second quarter?

Well, additional cost, the $5 million worth of mode cost were things that were reimbursed to us and show up in the revenue line. Going forward in the second quarter, we have no modes planned and therefore, there will be nothing additional like that that's going to be reimbursed. You know, as we've been talking about, some of our survey costs will come down slightly because all we have are two rigs that will be undergoing surveys in the second quarter.

So that will reduce somewhat the Titan, of course, goes forward. You know, we have the potential in a go-forward basis, second, third quarter or perhaps de-moding the Heritage back from South America to Southeast Asia. That is still up in the air as to what's going to happen to that rig. But if it does, get de-mode back, you'll see the same thing occur.

OK. Well, assuming the modes are going to get reimbursed and run through that way, what's the change in survey cost going to be from Q1 to Q2?

We'll go from additional $5 million in Q1 to maybe, that will be reduced by 3 million, 2.5 million.

OK.

Q2.

And was any of that impact you discussed earlier a result of lost revenue, or were you discussing all costs?

Gary was discussing cost. I talked about a theoretical lost revenue. For instance, I said that the fact that the Star hadn't worked, you know, assuming that the Star had gotten a job at current rates in the quarter, it would have earned about 2 cents.

And so that was kind of how I was quantifying that. Certainly, you know, among the other things, the Vanguard will be returning to work here later in this quarter and so you'll have cost go up in looking at the total amount of cost we report for the quarter, and then when it moves later in the year to Norway, cost will skyrocket. That does not mean that we're not hard at work on controlling our cost and reducing the amount of maintenance CAPEX that we've got. And that always occurs when you move from market to market or you move from idle to stacked. I mean, just putting the Star back to work will cause our cost to increase.

So it's very hard for us to predict where those costs are. But our goal remains that, in the current market, we are striving to become profitable. We certainly got cash flow right now, but we want to get profitable and continue to move it up even absent a market that gives us increased day rates.

OK. And picking up on something you had just talked about, the two rigs are considering upgrading. What kind of spending are you talking about on those rigs, and what kind of rigs do you end up with when, you know, the work you're contemplating is done if you do go that route?

We did our last ones for under $200 million. We're talking at $200 million to get to a Baroness Rover fifth generation style upgrade. We're only going to do that with a - for a customer demand for a contract. Perhaps, if we had longer-term contracts on our existing tool, we might add an additional one but we certainly want contracts to come forward.

The real advantage that we have is we're delivering, we believe, and I think the market will show that, $300 million-plus upgrades for considerably less money. And we can do it much quicker.

So we believe that the market will always generate opportunities from time to time where an operator wants a particular customizable new build and because of our cost advantage and time advantage, we think we will have a really good shot at that. So that's sort of what we're holding those for.

OK. Thanks. That's all I have.

Your next question comes from Wagar Syed of Petri Parkman.

Hello, this is Wagar Syed from Petri Parkman. Could you talk about the G&A costs for the second quarter and the later quarters and also some guidance on the DDNA?

Also, if you could specify, give a better feel for time frame from Vanguard going to work in Norway and what particular project are you bidding that rig on? Thank you.

I'll take the Vanguard and let Larry address the cost. The Vanguard, as I said, is committed through an operator for a couple of wells in the U.K. sector in the North Sea. That work will take the rig probably into the fourth quarter and then we'll go to Norway. I don't want to be too specific on the name projects we're bidding the rig on.

In Norway, we're bidding it to everybody just about who's been out for bid over there. Both Headro and Statoil are familiar with the rig. They have both seen bids on the rig as have all the other major operators in Norway.

And on DDNA, you can expect that, at this point, to remain consistent for the rest of the year at about $44.50 million per quarter.

As far as G&A, G&A was a little bit higher this quarter than normal due to some outside legal costs incurred on a lawsuit in which, we are a plaintiff. On a go-forward basis, second quarter may be a little bit high again. But after that, I would expect it to get down to about $7.50 to $8 million per quarter, which is consistent with last year or maybe a -- about 4% or 5% increase over last year.

Why don't we take one more question?

Your next question comes from Pierre Connor of Hibernia South Coast.

Good morning guys. David, to follow on a little bit to your earlier question about rigs moving, besides potentially looking at supplying a jack-up rig to a turn-key operator for Mexico. Could you tell us are there any rigs which you are actively bidding you know out of current market, you know, at this time?

We - yes, we're actively bidding -- we're actively bidding the Patriot out of South Africa and West Africa and other markets. We're actively bidding fourth-generation rigs out of the Gulf of Mexico, and we have active bids on jack-ups out of the US Gulf of Mexico.

I think - and we are also consistently bidding both the Baroness and the Rover to other development programs from Southeast Asia that are a little longer lead time to pick a rig and a little more high-spec opportunities. So, I mean on any given day, we're bidding most the fleet on projects that are appropriate for those particular rigs.

OK. Thanks. And then Gary, just a quick to confirm, your comment about sort of CAPEX in a face level as long as there's opportunities to change for the year. Was that the 60 million all-inclusive CAPEX?

No, we're looking around 65 or so for our maintenance CAPEX, we will - we also have planned to spend and are currently spending about $15 million on America on it's upgrade program.

OK. Great. That would be the total then?

Correct.

Thanks, Gary. Thanks. OK, thank you.

Thank you.

I'd like to thank everybody for joining in this quarter and for the good questions that we received.

So, we will talk to you again next quarter and if not, in between.

Thank you.

Thank you. Goodbye.