Diamond Offshore Drilling Inc (DO) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Diamond Offshore Drilling second quarter earnings conference call. At this time all participants are in a listen-only mode. And the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host, director of Investor Relations, Mr. Les Van Dyke. Sir, you may begin.

Thank you, for joining us. With me on the call today are Larry Dickerson, president and COO, John Gabriel, senior VP of marketing and Gary Krenek, VP and CFO. 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 revenue and earnings, capital expenditures, industry conditions and competition, the drilling rate and services as well 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 on 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 Larry.

Thank you, Les. And welcome everybody. Our 8-cent loss that we had in the second quarter really is reflective of several things. Our goal has been to return to profitability and I think underlying the two large components of the loss, the large number of rigs that we had in shipyards for upgrades and then some repair time, specifically on the Ocean Alliance, mask what has generally been a fairly strong and improving market. The market is not moving buy leaps and bounds, but I think I have characterized it previously, it's like the ground game and we are gradually improving and I will talk a little bit about that.

But first the two components of the loss. We had previously released several -- a couple weeks ago, the Ocean Alliance had a series of problems. We were coming out of the shipyard having installed a new subsea operating system and completing a special survey when right at acceptance we had some electrical issues which caused about 20 days of downtime, and then following that we had a series of unrelated problems which when all added together kept us off the payroll for 72 days. Many but not all of the problems, had they occurred on location, would not have necessarily resulted in downtime. They could have been dealt with off-line but because the Alliance was at this critical point of acceptance testing by our customer, those issues kept us off the payroll and we did additional steps to make sure that there were not other issues in place. I can't say that this is not a normal risk of the business but in my time here at Diamond Offshore, over 20 years, it's very rare for something like this to occur.

Additionally, we had a great amount of downtime that was scheduled during the year, either I think initially when we began the year we were hopeful we would be able to cluster most of our downtime in the first quarter. But it's, a lot of it did spread out into the second quarter. Let me address the components of the down time. During the quarter we had 74 days of downtime on the Ocean America, and this was scheduled where we brought the America into a shipyard in Brownsville, increased its mud storage capacity and added some upgrades such as new crane and crane handling systems to be able to handle a subsea completions to make the rig more competitive in the marketplace. So that was a decision we made, kept the rig off the payroll for 74 days. This is not an issue that we expect to occur again in the third or fourth quarter this year.

Market related downtime, we took 163 days, we had about 30 days on various jackups, which is part of the market in a well to well market, just downtime in between wells. And then the rest of the downtime clustered primarily in our deepwater Gulf of Mexico fleet. We had 65 days on the Star, 49 on the Victory and 17 on the Quest. Looking forward on the downtime, we are certainly exposed to these continuing in the market, the Star has returned to work but the Victory is down today and we currently have the Nugget has been down about 21 days. So I would expect these days to be at the same level or lower but they probably won't cluster as much in the upper spec fleets so we have less of a financial impact. We took 176 days of various repair time. I talked about 72 days on the Alliance. We had 32 days on Patriot, our rig in South Africa,the Patriot is moving Australia, and we took it into the shipyard to do modifications specifically for that work so we wouldn't expect that to continue. We did take the Ocean Concord a second gen unit in the Gulf of Mexico and that's in the shipyard and will continue in the shipyard through third quarter. We are doing some repair and some upgrade work which we are capitalizing. We really took advantage of the fact that the market did not have enough work out there currently for all of our second gen fleets, so we put the Concord in the shipyard to go ahead and deal with that. So some of that repair time will continue, certainly something along the lines of the Alliance we don't expect again.

In general something like with the Patriot is being modified for a job, we don't have that scheduled currently either. We had 103 days of inspection downtime. That was 50 days on the Vanguard, which was coming out of a cold stack and we were doing a survey. We have enough work here in the U.K. and North Sea that we wanted to get the survey out of the way, so we brought that forward rather than do that at a point in time that we are at work. In Norway, we had 18 days on the Winter and 20 in Yatzy, both those rigs down in Brazil. Virtually all of that inspection downtime is unique to the second quarter and is not scheduled to be repeated either in the third or fourth quarters. So in general, a lot of that downtime of all nature, inspection, market, repair, are not issues that we will have in third and fourth quarter.

Talking about the impact in the market, the Gulf of Mexico jackup market continues on a well to well basis. It's not going gangbusters, but we and the other participants in the market have been able to raise rates consistently. Our fleet which ranges from two, 350-foot units, the bulk of it being three, hundred foot cantilevers units and a couple mat cantilever units averaged in the quarter of $33,000 a day day rate, the highest of all the commitments that these rigs will be rolling on through the third quarter will take those rates up to 36. And that, but still it's variable based upon what the market will give us. Internationally we've got some strong commitments, the Patriot is leaving South Africa to go to Australia and New Zealand, working the Bass Strait for a number of different operators at a rate in the mid 70s. That's a nice uptick. The Vanguard had come out of stack. Our initial well was in the 30s, but we now rolled over to our second well in the U.K. at 60. And that's scheduled to complete sometime at the beginning of the fourth quarter.

Then we will take the rig to Norway and the day rate that we have in Norway is 140, but if you adjust it, deduct the higher cost we would expect in Norway, it's an equivalent U.K. rate of around 100. So that's certainly a nice uptick. Then our two international jackups, we have one in Indonesia, one in Ecuador, we are talking about commitments on those rigs that would substantially increase the day rates that we receive there.. North Sea is very strong. Brazil, we've got the inspections out of the way. So we, we are excited about the third quarter having gotten a lot of the issues out of the way with some increased utilization across the board. As we sit today, our idle rigs are Victory and Nugget, which are idle from the market perspective, and the Concord we have in the shipyard. But other than that, pretty much we've got most of our rigs working with nice prospects going on in the future. So we are very excited about the third and the fourth quarter. So that will conclude my opening remarks. Gary Krenek is here certainly to answer any of the financial questions that we have. And John Gabriel joins us also to provide additional market color if anyone has questions in that area.

Thank you, sir. The floor is now open for questions. Our first question is coming from Justin Kentor of Simmons and Company.

Good morning. I noticed that you sold most of your investments in marketable securities. Is there any particular reason for this action? Are you planning to make any kind of purchases in the near term?

No, there is nothing planned. We turn our securities over periodically, trying to get the best interest rates we possibly can. So there's nothing unusual here other than it just happened to straddle a end of a quarter. We sold a great deal of them, as you can see, on June 30th, received the cash on July 1. In '04 we didn't own them on June 30, but didn't quite have the cash yet so we had to add an additional line to the balance sheet for the receivable for the sale of those securities. There is nothing unusual about what we did other than it straddled the quarter. In the past we put that receivable of any securities transactions in with normal receivables but it certainly stuck out this quarter and made it look like we were having slow collections or whatnot so it made sense for us to go and disclose that.

Also moving to the deepwater Gulf of Mexico, it looks like you are experiencing some marginal improvement. Do you expect the other 5,500 footers to roll over to similar rates as the Star had in the upper 70s?

To the l extent that the opportunities present themselves in those water depths, absolutely.

I would say to the extent we have to work these rigs on a short-term basis in shallower waters then they are going to -- the rates are going to be reflected as a shallow water rate. I think what we are modestly optimistic about deepwater in the Gulf of Mexico, we have our Victory down and I know Ensco has there has their 7500 down although they have a commitment coming on that rig, we are seeing some improvement in bid activity. I know Shell solicited a couple of deepwater rigs. And with several of the other items that are in the talk about stage, if they come together there could be a nice demand. It would enable us to try to get some rate improvement.

Then with regard to the Victory, what's your outlook with respect to when it returns to work?

Probably within the next two to four weeks.

Okay. Then final question, looking at the mid market obviously having some trouble here. How would you characterize the bidding activity right now?

I think the mid depth semi market is fairly active in terms of bid activity. We took the Concord out and we just got the Lexington and Saratoga working. As you know we took a number of rigs down to Mexico to get them out. We have worked to shrink supply in that area. But we've had no problem having made the decision to just work two rigs to have enough demand to keep those rigs working. And our plan right now is to, if we don't get a deepwater job here we may take the Victory into that category and take a job. And then we are comfortable that when the Concord comes out of its shipyard upgrade period early in the fourth quarter, that that will not flood the market, that there will be enough work to keep that rig working. But at the end of that we have to size our fleet to the demand.

Thank you.

Our next question is coming from Rob Mackenzie, of Friedman Billings Ramsey.

Good morning, guys.

Morning.

My question for you, actually, the first one is a financial question. You've got your zero coupon convertible coming put-able to you I guess in the second quarter of '05, June of '05, yet you're not showing that despite it being way out of the money as a current liability. What are your plans for that and why didn't that show up as a current liability at this point given that it appears almost certain be put to you?

Why it's not shown as a current liability because current to GAAP it is still a long-term debt. You do not attempt to determine whether it's going to be put to you or not in order to classify it as short term or long-term. That's clearly a GAAP issue and it's going to be long-term. As far as what we planed to do, we are looking at that right now and we will determine that in the future. We've got enough cash to settle that, should we look at that way and we do look at the market from time to time to see what the alternate financial alternatives would be. But, you know, even at todays rates, there's no guarantee that it would necessarily be put to the company.

What's the status, have you reinvested your cash yet into more marketable securities?

We have reinvested some of them into marketable securities. Some of them are sitting as time deposits in banks. We turn that over as I said before, trying to optimize the interest income that we can earn on those. That's just standard practice and we are continuing to do that.

Okay. Can you give us some guidance, a little bit more in terms of numbers in upcoming surveys, in your prepared comments you indicated it should slow down a little bit, $6 million by my calculation of surveys this quarter. How can we think of modeling that going forward here?

We have zero scheduled for Q3 or Q4. And we are looking at six probably in the year 2005.

Okay. Specific question, real quick on the Champion, you are bringing that out in low to mid end mat slot. Any expectation that you might bring that in for an upgrade, put a cantilever on it?

I don't think that's even feasible on the design of that rig. I probably should have mentioned that in the opening. We are comfortable enough with the market that we believe that the Champion which was our only low end rig both the condition of the rig and the fact that there's not that much money required to get it out there, we are adding a top drive. It was one of the last rigs in our fleet that didn't have a top drive. But we've got a commitment out there at initial rates that will provide cash-flow. We don't think we are flooding the market by bringing one more rig into that category and the rig is high spec and it has a Diamond nameplate on it and that will be valuable to some of our customer base.

Could you provide us some color on that commitment?

We haven't announced who the commitment is for. But that's our only commitment that's not in the 30s.

Okay. Fair enough. My final question, when you refer to the Vanguard as having equivalent U.K. rate in the 100s, you are basically indicating the cash margin would be similar to that, correct?

Yes, that's correct. We've said, we've indicated and disclosed what the day rate is in Norway. But everybody understands because you've got an extra crew and you have higher rates and holiday pay and everything that goes with it, that increases the price.

There's no upgrade or any other costs amortizing for that 140 number?

No. The rig contains a Norwegian A.O. C., which is a certificate you have that indicates that you are in compliance with the Norwegian specs. There's very few rigs in the world that have those in hand. So we've got that already. We did some upgrades for some of the UK work to make the rig more HP HD friendly and some of those upgrades will continue to benefit us into Norway. But there's nothing specific other than we bought the rig for a decent price. We idled it for some time and spent some money to upgrade the unit and the condition of the unit. But still, overall adding both the purchase price and what we've put into the rig we've got a very attractive entry point on a very solid, very high specification third generation unit for the North Sea.

Thanks. I'll turn it back.

Thank you. Our next question is coming from Jason Gilbert of Goldman Sachs.

Good morning. A couple of my questions have been answered already. I wanted to follow up on tax rate. I guess the benefit you showed in the quarter was a little bit less than some of us have been expecting. I wanted to get some guidance on how to this about that going forward.

Actually,the tax rate for the normal operation was similar to the first quarter at 25% and that's what we expect on a go forward basis. The reason you are seeing it less than that we had about $850,000 adjustment we had to book in the second quarter. Related to us trueing up book taxes to actual tax returns filed in two foreign jurisdictions. I don't foresee that happening or shouldn't happen on a go forward basis Again we expect the tax rate to be about 25%.

Does that hold into '05 as well?

Well, that, that's as good a guess as any. The tax rate will change from quarter to quarter depending on the mix between international versus domestic revenue and then again even where internationally we earn that revenue so it's very difficult to project that forward. But I would suspect that we should have a tax rate somewhere between the 23, 24, to 30% on a go forward basis.

A second question while I've got you, can you tell us a little bit about the outlook for the Lexington and Saratoga second gens?

That's a well to well market; I guess when there's weakness in the higher spec units, fourth generation and above, that does somewhat dampen our ability to raise rates. We've gotten the rates up from the 30s into the high 40s earlier in the year and as we've had some weakness we pulled back a little bit on those. But the key is to watch what happens to the deeper water units. We get the Victory out there working in deep water, then I think that that would bode well for our ability to move rates modestly in the second gen units.

Great. Thank you.

Thank you. Our next question is coming from Arun Jayaram of Credit Suisse First Boston.

Good morning, Larry. I was wondering if you could discuss the longer term opportunities on the Sovereign and Heritage that you were speaking about in your prepared remarks. I think there's some speculation that you may move the Heritage to India for a longer term opportunity.

Well, I think we are going to definitely move the Heritage to Asia, broadly defined in, and India is one of the areas that has a good demand for jackups, gutters, an area that we bid the rig into before, and then Indonesia looks good. I can't tell you at this point which of those options we will be able to secure. We've had a nice rundown in Ecuador and our Demode payment should be sufficient to relocate ourselves plus added with the mobilization if we can get that from a new company that would pick up the rig.

The second question, Larry, is in terms of the Norway, there appears to be some impact in terms of the strike, in terms of some of the rigs down there. Do you anticipate any delays in getting the Vanguard up and running?

That's a good question. We are certainly aware of it. At this moment it's focused on one company, one drilling contractor and one operator. I can't predict how that will be resolved, whether it's resolved at that level or it spreads throughout Norway. We are working for a Norwegian subsidiary of a different European company. So I really can't tell you. We just don't have any experience with predicting Norwegian unions. I think to the extent that this labor action interferes with production in that sector that that will obviously be a factor in trying to get some outside influence to settle it.

Are you thinking about some contingencies at this point or is it too early to say?

It's too early to say and we have a contract and we intend at this point to fulfill that.

Last question for Gary.

Let me come back to it, I don't really like to is speculate but the market, a market that we feel the strongest about, positive upticks, is in the North Sea and the UK sector. We have just a lot of things that we are seeing over there. All of our rigs in that market are engaged and working. So it's not like we are putting rigs back to work but there's a lot of demand in the U.K. sector and certainly at some point the Vanguard could certainly work in the UK sector if we are not able to successfully work in Norway.

And the uptick in demand, Larry, are you seeing any of the super majors or majors increasing demand or is it more from the independents?

John, both?

Both.

Both. I guess some of the majors that I've heard about have been fairly interesting that you've got people that have been fairly inactive for some time and we see stepping up and looking, we are told or preparing to look for a rig or two rigs. And the bid process in the North Sea is much longer time frame than it is in the Gulf of Mexico, and they get with people early and start talking to folks about specifications and helping fill out all the paperwork. So you do get some leading indicators there that you don't often get here in the U.S.

Last question, Gary, there's a lot of moving pieces in terms of operating costs with the survey time this quarter. Can you just give us a range for operating costs for the back half of the year?

At least looking into the third quarter a couple of thing to keep in mind. We are going to have-- costs are going to decrease compared to the second quarter for the fact that we completed our surveys on the Vanguard, the Yatzy and the Winner, those costs won't be incurred again. You have the Concord in the yard doing the life enhancement to it's tanks and operating costs will go from the mid 20s down to six to $8,000 a day. So there will be cost savings there. You have the additional cost on the Alliance repairs which won't be incurred in the third quarter. So you will have decreases there. Those will be offset by the fact that, number one, the Patriot is on its way to Australia. As Larry said we expect the Heritage to move probably some time in the third quarter or third and fourth quarter back to Southeast Asia somewhere. So we will have to pay for that. That's probably, between of two of them, 5 to $7 million depending on what happens with the Heritage. Also once the Patriot gets to Australia operating costs go up to about 18 to $20,000 a day over what they were in South Africa. So we will have those additional costs. And also the Champion going to work. We haven't had any costs associated with that because it's been cold stack. We will now have to pay for that. You take all those things, add them all together and third quarter I would assume will be somewhere in the ballpark of what the second quarter was.

That's helpful. Thank, guys.

Thank you. Our next question is coming from Waqar Syed of Petrie Parkman.

Hello. Most of my questions have been answered but one question of D. D. A., what's your guidance for the third quarter?

It should stay consistent right at $44.5 million.

Okay. Great. Thank you very much.

Thank you. Our next question is coming from Doug Becker of Banc of America Securities.

Good morning. I was just taking a look at the contracts in the Gulf of Mexico jackup market. It looks like a lot of Diamond's rigs are at the lower end of the range. I'm' just trying to get a sense,is that a function of the rigs, is that a function of contracting strategy or kind of an aberration?

Well, we have been at different points. If you put the rigs in the proper category within the 300-foot rigs, we do look at what the commitments are at and we've been comfortable during the year where we are on the 300 footers. Our 350s are a little bit down on the lower end of the 350 range because you are talking there about competing with a number of rigs that are a little bit newer than some of ours. With our two 350s, the Titan is more high spec than the Tower. So I guess I'd have to say really it's an aberration at this particular point in time if you've done the math and you see that we are particularly low. One thing I'd point out, the indices of the 300 footers have been really skewed by the people picking up the new Rowan Scooter Jurgen only has 300 feet and it's getting a day rate of 62 but it's really a new construction ultra premium rig and needs to be outside of that category.

Okay. Switching to the semi market, how close have you taken a look at surface B. O. Ps and potentially increasing the water depth capacity of some of your second or third gen equipment?

We have experience with surface B. O. Ps, the Ocean Baroness has been working for Uni-cal in Indonesia with such a unit. The rig is nominally self-contained, a fifth generation 7,000-foot unit. We are contracted to work up to 8,000 feet using a surface stack. So that certainly shows some of the abilities. The 601 has worked for them to work in deeper waters. That certainly would be a factor to the extent that surface B. O. Ps spread out. I guess the experience that we've seen with that and the [INAUDIBLE] is that in general so far there seems to be a preferences to put these surface B. O. P. stacks on large units to bring all the other equipment that they have to bear, although, the 601 has done some work, we haven't really seen a push. And our second gen units they are working in the Gulf of Mexico, it hasn't been permitted to approve surface stack units here in the Gulf of Mexico.

In general, our goal is to try to increase the water depth of our units. That's essentially what this company is about. We talked about the Ocean Baroness, 7,000-foot unit, it was originally constructed as a 1200-foot unit. We upgraded that as a fifth generation unit. We've done the same thing with the Ocean Rover, working for Murphy over in that same part of the world. So that's something that we stay on top of quite a bit and having direct experience with surface operations gives us a good insight into that. It's certainly a coming trend on its ability to change what gets drilled and how we can deal with it. But it's really-- it's going to be the customers that drive that more than the contractors.

Do you have any sense for the timing of when you think customers will be more receptive?

The trend is certainly up on that but to date, though, it's, it doesn't progress at, according to Wall Street's timetable. So I would say we are talking the evolution of this will still be over the next three to five years before it begins to really show up where you guys would notice it enough.

Thank you very much.

Our next question is coming from Judd Bailey of Jeffries and Company.

Thank you. Most of my questions have been answered. I just have a general question on Mexico. [INAUDIBLE] has indicated their desire to start exploring more their deepwater acreage. I was wondering if you guys have had any discussion or have sense of what maybe their timetable may be and maybe the scope of their work and if Diamond would consider moving more of their floaters into that market?

I think I would rather guess Norwegian labor unions than PEMEX's plans, but PEMEX has a lot of deep water equipment, we have the deepest rig working in that market, for them the Ocean Worker which is contracted to go out 3,000 feet. We haven't quite moved out there. We would expect that would be your leading edge that we would begin to move out and drill into some deeper water there. We have had talks and presentations with them that we've got a nice Gulf of Mexico deepwater fleet that's close by and could get down there and I think that's certainly a growth opportunity for them. But my sense, though, is PEMEX is sort of in a pause and they are just implementing the vast number of rigs that they've taken into their stable so far. And that that's going to be their primary concentration for the current time. But that it would naturally lead to deeper water equipment a little bit into the future.

Sounds like for what they need near term, they wouldn't need any more rigs. Sounds like you guys could probably take care of their needs for the next few months?

I would be very surprised if they came out for a solicitation for deeper water equipment that quickly. I mean they've upped their budget significantly to take in the 10 to 11 floaters that are operating down there and a large number of jackups.

Thank you. We'll take one more question. Thank you. Our final question is coming from Azul Vee of Vinskeela.

Good morning, guys. One quick question regarding the Vanguard and what plans you guys have for this rig after January, '05. Is there any plans in Norway?

We've bid into Norway. There's options certainly in place for the existing customer, so -- if you understand the uptick in net realized income that we are taking off that rig out of Norway compared to the UK sector, our hope would be to deploy the rig in Norway. We bought it from Norway. So we think that's one of the best markets for Norway. There's a huge demand in Norway for rigs, so we are hopeful that something along these lines will work out. But at the present we don't have anything announced.

The reason I asked the question is we heard you guys had a pretty good standing on the upcoming contract ordered by North [INAUDIBLE] on the fields so--

Well, we'll take that as good news. We have discussed with every operator over there use of the rig and have bidded on several plans, but as I said we are not at the point where we are ready to announce anything.

Great. Thank you very much.

Thank you. Thank you, everybody again for joining us. I hope you will be with us again next quarter and we'll be talking about some progress.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. Thank you.