Diamond Offshore Drilling Inc (DO) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Diamond Offshore Drilling Incorporated quarterly earnings conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. It is now my pleasure to introduce your host for today's call, Mr. Les Van Dyke. Sir, you may begin.

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 that drilling rigs will enter service, as well as management's plans and objectives for the future. A discussion of the risk factors that could impact these areas, and the Company's overall business and financial performance, can be found in the Company's reports filed with the Securities 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 changes in the Company's expectations or any changes in events, conditions or circumstances on which the forward-looking statement is based. With that, I'll turn the meeting over to Larry.

Good morning and welcome to our third quarter conference call. I'm going to talk a little bit this morning in my opening statement about the result that we had for the quarter. I'll go through a market update on new postings of rates, draw your attention to the fact that we posted this morning a rig status report, we typically do that on Monday mornings but wanted to go ahead and get one matching the disclosures that we would make today. And then with that conclusion, we'll take your questions, whether they're concerning the Houston Astros or our results, we're prepared to comment on either of them.

For the quarter as we noted in the press release, we had several negative impacts, which we thought appropriate to spell out. Chiefly, we had a four cent per share provision that we made for the deductible portion of insurance claims caused by hurricane Ivan. That was treated as one event, so we had a single deductible. We also had a $4 million-plus aggregate that we needed to penetrate. Combined, the two items, caused about a pre-tax loss of $6.5 million; and that represents damages that we sustained on three rigs, the Ocean America and Ocean Star, fourth generation semi-submersibles and then the Ocean Warwick, a jackup. The Ocean America and Star had some mooring issues. Those have been repaired and both rigs were back to drilling operations in the first week of October.

The Ocean Warwick, though, sustained fairly heavy damage to its legs and to the jacking system securing the hull to the legs, and that rig is still on-site. We -- our initial operations were to secure the rig, to make sure that it was stable, having achieved that, we then opened it up to be able to bid out some of the work that needs to be done, and our current estimate of the size of that job is about $10 million, although we have not completed everything and certainly haven't looked fully below the water, but that would be to repair the legs, and of the jack housing portion of the rigs that were cracked. We believe the rig will be down about 120 days, subsequent to our arrival in the shipyard, which should be in the next week or two, and Warwick was earning about $40,000 a day, so that's equivalent to a frequent $6 million of missed revenue. So in addition to whatever provision we've taken in, we would have about 2 cents a share, certainly, impact for Q4; and then some slight amount that I guess our current estimate would lap into Q1. Before we would be returned. But the rig is repairable and the damage was confined to those particular areas chiefly.

In addition to that, we had some downtime issues that were reported in our last quarter arising out of the Ocean Alliance coming out of the shipyard and having its new sub sea control system, some function issues. Some of those issues spilled over and then we had some other issues early in the quarter, which also aggregated to 29 days of downtime or another 2 cents a share. Since that point in time, though, we believe that we have those issues worked out and the rig has continued under contract and able to perform. But beyond that, everything is fairly small, and the only reason we mention it is that we think there's things that our investors should be aware of. We took a one cent per share provision coming out of the U.K. There was, coming out of the European Union there was some legislation adopted by the U.K. which mandated pay for certain time-off. Our initial belief and, in fact, our belief still to this day is that because of the schedules that our offshore employees work, that they covered that particular time, but should we lose that in any court or what not, we've gone ahead and made that provision to record some off-time pay for our employees on our U.K. rigs.

In addition to that, we incurred another penny bringing out the Ocean Champion. The Ocean Champion is a low specification jackup rig. It is really a great rig, but in terms of its water depth, it is a small water depth mat rig, and we brought that rig out and incurred about one cent of expense costs to reactivate that rig. The rig has worked very well since then and is moving on to its second job at a rate of $36,000 a day. That really covers the provisions that we took against our results for the quarter which all total aggregated 8 cents of negative. There was certainly some small scale positive items in there. But really to talk about positives, we need to talk about the status of our fleet and the renewals that we've been getting on that.

Again, to review for you, this market is very strong floater market that we're enjoying is approximately 13 weeks old. It began to turn the middle of July. Really, almost subsequent to last quarter's conference call, and we have had some really nice day rate renewals that have come in rounds that continue to increase. We're seeing strength in all floater classes here in the U.S. Gulf of Mexico, but for us, that's primarily the fourth generation deep water market and then the second generation mid-water market. In addition to that, the North Sea has been very strong and although we do not necessarily have postings in there, we're seeing ultra deep and deep water rates worldwide become very strong. So I'm going to go with those just briefly and I'm going to also highlight the date at which our current estimate is that rigs will roll to their new highest posted day rates, because we've been booking our first round, were to book some idle rigs back in July. As rates began to rise, we booked some wells behind that, and we're typically now booking commitments that will start in late Q1 of '05, or in some cases Q2.

But to go over the mid-water fleet, we have three rigs currently working in that market. The Concord, Lexington and Saratoga. The Concord has a commitment in the mid-70s that begins in March of next year. In the meantime, it does have several intermediate upticks that we will enjoy on our way to that date. The Lexington, its highest commitment is 60, which will begin in February, and in March, we'll take the rig in for a special survey. We had not booked a commitment subsequent to that point. The Ocean Saratoga, it will roll the earliest to the highest rate posted, which is in the mid-60s in November of this year. Because these rigs are fully booked, and the competitive fleet that we work against in the Gulf of Mexico and mid-water's also fully booked, we've decided to bring out the Ocean Voyager. We have a commitment for an initial well, we are commencing now some refurbishment work which will cost us approximately $8 million to ready the rig and our initial commitment is in the low to mid-70s, and we have several discussions going on subsequent to that point at that rate or higher. At the $8 million investment, it'll take about six months of work to pay for the refurbishment costs and we're very comfortable right now in this market that we'll be able to achieve that.

Talking about the deep water in the Gulf of Mexico, we have four rigs that really solidly work in that market, as does the Quest. So that makes a total of five and then the Ocean Confidence is a fifth generation unit. The Confidence is committed with BP until January of '06. It's working today on Das Bump, prospect for BP and so we don't really have any renewals to talk about on that. The other five rigs in our deep water fleet, fourth generation units, all have commitments at least in the 100s. The lowest of the units is the Ocean Quest which is only a 3500-foot rig, and it has a commitment that will begin in December at 100,000. We have announced on the Star that it has a commitment this morning at 140, which will begin in June. The America begins its 130 prospect in February. And all these dates are our best estimates because it is dependent upon a number of wells being completed. And then the Ocean Valiant has a 130 commitment which we expect to begin in March and the Victory has a commitment with Shell that will also begin in March at 130. And all of these rigs have at least one, and usually two, intermediate steps where rates will go from presently $60,000-ish up into the 70s, 80s, 90s, low 100s, before they roll to there. So we'll have ever-increasing day rates on a go-forward basis; but we won't fully begin to realize these rates until Q2 and I think everybody needs to recognize that.

Staying with the floaters in the North Sea, we have one-year commitments for four rigs in that market. The Vanguard is currently earning its new higher rate. It's moved over to Norway and it is working at 140. Remember Norwegian rates costs are more expensive, so on a U.K. basis that's probably in the low 100s as an equivalent rate. And then among our other three rigs, the Guardian received a one-year extension from Shell, which won't take place until late March, but that's in-- we're saying low 80s. That's the same rate for all the rigs. The Princess continues with Talisman in December in the low 80s and then the Nomad is returning from West Africa, it had previously been in the North Sea. It will enter the shipyard for some repair work. Our estimate is that it will be available to begin work for Talisman, again in the low 80s, at approximately 20 January of '05. The rest of the floater fleet worldwide pretty much continues as is with renewals, but certainly not the rapid increase that we're seeing elsewhere. I will revisit here in a minute the Rover and the Baroness.

But let me come back to the Gulf of Mexico and finish out with the jackup fleet. The jackup fleet continues with steady upward ticks, but not the kind of price increases that we've seen elsewhere. We're typically filling in a little more terms of it, so the rigs are -- have a couple wells lined up. In some cases, I guess the big news is that our 350-foot rigs, both Titan and Tower now have commitments in the mid-50s. The 300-footers are typically in the low 40s. We've got one at 39. The Warwick was working at 40 before it sustained its damage. We've got a couple of units in the high 30s and then our three mat rigs that we have in the Gulf of Mexico are all working in the mid-30s with rates beginning to move up.

And finally, just close out, we're talking about the Baroness and Rover which are our fifth generation units working in Indonesia and Malaysia, respectively. We are continuing to work for our existing customers at rates that are more fourth generation-type competitive rates. Certainly we will be looking, as the year moves forward, to renewing those rigs, either with those customers or with other people at fifth generation rates. We did do a six-month extension on the Baroness which will kick in in November and take it through March as sort of a blended rate in the 130s where we will continue to work for that particular customer and, at that time--subsequent to that time, then we would expect and be very hopeful as being able to bid a fifth generation rate, with a fifth generation work, either in that market or elsewhere. So that's a general coverage of where the market is. We'll certainly -- there's a lot of news out there and I'm sure there'll be lots of questions. I'm joined by David Williams, who runs our marketing group, and will be able to answer more detailed questions. Gary Krenek's here for some financial questions. I'll close with the final financial information and that is during the quarter, we did buy in 782,000 shares at an average cost of $23.11 a share. That was early in the quarter. And we disclosed that when we did our borrowing and filed the SEC documents at that time. So that concludes a rather lengthy, for us, opening statement; but we'll go ahead and take your questions.

Thank you, the floor is now open for questions. [Caller Instructions] And our first question today is coming from Bill Sanchez of Howard Weil. Sir, please go ahead with your question.

Yes, good morning. Larry, David, with the new fixtures you're signing here in the fourth gen semis at some pretty impressive rates, most of the fixtures here continue to be more well-to-well type contracts. I'm just curious with the dramatic surge in day rates if operators are now looking to get those rigs a little bit more longer-term contracts? And what do you expect the new contract terms to be on additional rollovers next year? Do you expect to see the term lengthening there for those type of rigs?

We are having some conversations with some operators about term. We've got-- you know, the interesting thing about this market is it turned very quickly, as Larry talked about, and there is still a good bit of unsatisfied demand out there; so as long as there are people out there who are not getting rigs, your expectation is you would continue to see some potential growth in rates. I guess the correct theory is you push it as hard as you can, you tie them up as long as you can go. So we're still pushing. But the expectation is, and there is some conversation with some folks about terms that some of these things would get committed, at least say through '05, in the not-too-distant future.

And, David, that expectation would be for the commitments to be in the Gulf of Mexico, or would that be taking the rig out of the Gulf to secure that kind of long-term contract? Or longer-term contract, I should say?

Well, what I'm referring to is specifically Gulf of Mexico work, although, you correctly point out there are some opportunities abroad and we've bid a number of these rigs for work in international waters, and are kind of trying to keep our options open for a couple rigs. If there's a good opportunity for some term work in another market, we certainly wouldn't be opposed to going after it. So we are trying to keep our options open.

Okay. My other question, Gary, is for you. Gary, could you talk a little bit about, or quantify any unusual items you may see in operating expense during the fourth quarter that we should be aware of? Certainly you all have highlighted the Voyager reactivation of $8 million, but you got the Nomad and the General mobilizing here during the quarter and it looks like a couple of international jackups. Can you talk a little bit about that?

Sure, Bill. I think a couple of things people need to remember is we had the Champion come out in the third quarter, and we had about $3 million worth of activation costs which we won't spend in the fourth, but we only worked it 45 days, and it'll work full 90 days in the fourth quarter. So at about $20,000 a day that's an additional $1million worth of expense. We said the Voyager around $8 million will get us in the fourth quarter. Also, Larry pointed out the Vanguard moving to Norway. It was working at about $40,000 a day in the U.K. sector, it's going to be at around 85 in Norway?

You're talking operating costs.

This is operating costs. And so that'll be approximately $4 million additional cost. Also the Concord was in the shipyard all of the third quarter. And most of its costs were being capitalized when we're doing life enhancement work on the tanks and some steel work. It is back to work now, so we will incur operating costs for the third quarter at about $25,000 a day in the Gulf of Mexico.

Anything on those two jackups internationally, Gary? I noticed that there is going to be mobilizations during the quarter on those units.

The Heritage moved -- most of that moving was down in the third quarter. And so that will be a very small impact. And the Sovereign, the move isn't that far, so it's not going to have -- maybe $1million total on the two rigs.

Okay. Great.

And also, remember, those -- both of those will have revenue associated with it.

To offset that. Great. Thank you very much.

Thank you. The next question is coming from Terry Darling of Goldman Sachs. Please go ahead with your question.

Thanks, a couple of follow-ups on the rig detail. First, on the Voyager, that will be 8 million and that will be -- all of that will be expensed, nothing capitalized? Is that correct?

That $8 million is all expensed, that's correct. We'll have a small amount of capital going on with it, but $8 million is expense.

Okay. And the Valiant looks like it may have a month downtime, as we move, you know, Q1, Q2, next year, is that accurate?

No.

Between contracts? No?

No, you're seeing something I'm not seeing, Terry. No, we don't have a break in the Valiant's program.

Okay. David, can you talk about the --

What we have -- actually what we have, I think what maybe you picked up on, on the rig status is there is a -- there is an option that an operator has retained that is A, not committed, and B, not priced in there, and so -- but there is not a break in the service.

Okay. And you had mentioned a Lexington special survey next year in March, I believe. Can we just go over any other special surveys throughout the broader fleet in 2005, you're expecting at this point?

Gary has the schedule that he's going to go over. But we reduced number of rigs next year.

Yeah, Terry, I don't have right now the exact rigs, but we have -- I do have a total number, we have four of them that were scheduled for '05, which is going to be a very light year; '06 and '07 is when we're going to get hit very hard with special surveys again and we have nine scheduled in '06 and 12 in '07.

Okay.

But it does not include the big rigs. In the year just past we had America, Valiant, Alliance, all down; as well as the Yatzy. So we had -- it was --function of the rigs, of course, day rates are all getting big right now so.

And can you remind us just the rough parameters how many days down and how much expense associated with those surveys to build in?

You've got the normal -- a normal survey will run you 21 to 30 days, and cost us, give or take, a couple a million dollars. But remember, often we use that time to do other work to those rigs. The Winner, for example, was out for 60, 65 days because we had some work we had to do to it. So each survey is unique into themselves. But any floater you can count a minimum of 21 days down.

Okay.

And we'll get more detail as we go through our budgeting process. We're very early in that right now. Trying to tie down exactly when we're going to do this and what other work we need to do, in estimating how long these rigs will be out.

Okay. And lastly, Larry, I think you passed over the -- some of the low end semis, in the Australia and Asia region. You've got some follow-on work in January for the Bounty, in the low 80s, the Epic and General roll at various points in the first half of next year. Is the low 80s where we ought to be thinking for the spot market? Or is that an Australia special situation? Can you just talk about that market a little bit?

I think Australia is a little bit of a special market because it's one of the highest cost markets in the world. So you're correct on the Bounty in the low 80s, the Patriot's in the upper 70s, both those rigs are committed into next year. The Epic and the General work in the general parts of Asia. And the operating -- the operating costs there are a bit lower. So say mid to upper 60s to 70s or so would be a reasonable offset to the Australia cost.

Okay. Great. Thanks very much.

You bet.

Thank you. The next question is coming from Waqar Syed of Petrie Parkman. Please go ahead with your question.

Hi. I have a couple of questions on the op cost side. If -- could you provide us with details about the $6.5 million charge that you have for repairs from hurricane Ivan. How do you distribute them between the jackups and the floaters?

Sure. I think the first thing to realize is $5 million of that cost went into operating expense, and another 1.5 million went into loss on disposal of fixed assets. And that was us writing off some anchor and chain that we lost on the Star and the America. Of the 5 million that we booked into operating expense to book that deductible, 3 million of it went into the jackup line and approximately 2 million went into the high spec semi line.

Great. Could you also provide some guidance for operating costs for next year? Do you expect any wage increases for '05?

Well, in general, our goal is to try to hold the line on costs so we can achieve as much of this day rate increase to the bottom line as possible. I would say the areas that we will be challenged on, we would expect, and this is a small number. But we would expect our insurance renewal in light of the industry's total losses in hurricane Ivan to perhaps increase that some small amount for us. Labor is one. Reactivating rigs and everything, we're not the only company to do that, will cause some shortage. And if you remember, we took the Concord came out of the shipyard, we took a jackup back in there, we've got the Voyager coming out to work. That's just our company.

And we've held the wages flat for a number of years. So I would expect to see that those numbers would go up, probably, from the beginning of the year. And rig operating costs should be more or less stable, although our goal is going to be to ensure that we get the highest amount of uptime that we can to be able to realize everything. So we haven't completed our budget but I would expect that we would spending a little bit more money than we have in years where we've been challenged just to become positive to -- because it has the payoff of making sure your rigs operate.

Let me just comment a little bit on the $8 million that we're spending on the Voyager. Some of that is due to time having been spent down, but a portion of that is replacing parts that we took off in the past two years to avoid spending cash on other rigs. And then we've got to do a special survey on the -- is included in there on the Ocean Voyager, the Voyager was down and so we skipped the survey. We talked a moment ago about special surveys and what they cost. We try to make sure that those have the least impact that they possibly can. For instance, the Vanguard as it moved--right before it moved into Norway, we moved up the special survey and did that here in the U.K. so that we don't have to take some downtime at this higher $140,000 day rate, or have the--be exposed to the additional cost that we might see in Norway or have to bring it back to the U.K. to an appropriate shipyard.

So these are some of the actions that we take to mitigate that. But we would expect for to you see costs increase somewhat next year but, by and large, it's going to be a secondary issue to the large increase in revenue.

Okay. And your insurance costs, generally, they're reviewed first of January or the middle of the year or when do you expect those to go up?

Our policy renewal's in May.

I'm sorry, what's that?

May.

May, okay. And any thoughts in upgrading of Endeavor?

That's always something that we're looking at. Very much within this company because we have a cost advantage over new construction and, even more significant, a time advantage that we can do this project in about two years time, which would be great for us. Although we're not totally constricting ourselves, we are looking at what the work prospects are for the last two upgrades, the Baroness and Rover, and proceeding on with those renewals. We look at it on a portfolio basis, so commitments there would be, for us, almost the same as a commitment on the Endeavor. But, again, as strong as this market is, we think the market could take the Endeavor without a raw impact on it and because we would be first mover and be the first company to deliver one, and deliver one at a cheaper price, I would say it's something that is very likely in our goals to be something that we're going to work towards.

And any thoughts on bringing the New Era or the Liberator out of cold stack?

If you look at the number of cold stack rigs in the Gulf of Mexico, they're controlled by Transocean and ourselves, primarily. And I can't speak for them. But I mean our interest is to provide additional supply when there is that demand. But we don't want to do it such that it negatively impacts the existing fleet. So we try to make sure that our existing fleet has some commitments going forward. And that we can bring it out and recover the costs without -- without a doubt, the Voyager, the fact that we brought that out and it cost us $8 million, I think a good indication that it's not free to bring the rigs back into service.

Now, would you say, you know, if rigs can be reactivated in the 70s and low 80s, that that puts a cap on where the areas for second gen rigs can be in the Gulf of Mexico or in Southeast Asia?

No. I don't -- there's not enough supply, I believe, to have that be a cap. Why don't we go ahead and move on and let someone else ask a question.

Okay. Thank you.

Thank you, sir. The next question is coming from Scott Gill of Simmons. Please go ahead with your question.

Yes, good morning, gentlemen.

Good morning.

If I could just kind of continue some of the questioning here on the deep water, and Larry actually take off from a comment you made towards the end about the Baroness and the Rover. Where do you see the fifth generation rates going in that market? You've got some contract exposure it looks like on the Rover in January. Where do you think those rates are kind of mid part of '05?

We've had opportunities to bid both the Baroness and Rover on opportunities around the world, different programs, different places. You know, we've seen some commitments on fifth generation style equipment in the, you know, the upper hundreds to the low 200s. I don't really want to comment exactly on where we're going but certainly there's been a benchmark set for fifth generation rigs in that range.

Do you think it's best to keep those assets in the Asia-Pacific area or are you going to look for higher rates and move them out of that market?

Well, we're in this for the money, so we're going to go wherever the best job is. We're not bashful about moving them to the gulf. We're not bashful about moving them to Africa. We've had bids outstanding on the Baroness in other parts of the world. So, you know, no, we're not married to Asia. There are opportunities for both those rigs in Asia. There are opportunities for those rigs in other markets. So we've made it clear to our customers, you know, those rigs are very well suited for deep water development. Deep well, deep drilling, drilling a complete scenario, I think they're on a lot of people's radar screens for some of those programs, and we're going to go wherever we have the best opportunity that fits our timing.

And with respect to the stacked assets, which of the three do you you think is the first to get unstacked?

I would say my guess is of the three that are stacked now, after the Voyager, the New Era would be the next up.

Okay. And what type of day rates or term are you looking for to do a major refurbishment upgrade of the Endeavor? Where do market rates in terms of contracts need to be to do that work?

You're talking for an upgrade?

Yes, an upgrade.

Well, I mean I think you can follow where the fifth generation market has been, 180 to north of 200, for -- depending upon the equipment that's there. But, you know, anything close to that-- we can make substantial money on those rigs, even at rates lower than that. Now that doesn't mean that we're going to undersell the equipment.

Right.

But, therefore, that gives us more comfort that we don't necessarily have to have a very long commitment. If we get some commitment there again on Rover or Baroness I think that would put us in that particular direction. Given that the capital costs on that are in the low 200s, 230 area, which is up from where we spent before, because the steel and equipment cost. But that's still not a -- that's not a $400 million-type commitment, which is what you're looking at for the most recently built new construction. So I think it is something very likely to happen.

Last follow-up and then I'll get off. With respect to that -- that upgrade, do you need a contract? Or is this something you would do with just market conditions being there? In other words would you do it kind of on a spec basis or are you going to do it with a secured contract?

Well, we're going to look at it on our portfolio basis because we've got two rigs in that class, Baroness, Rover. So the contracts within there would potentially count for that, or we may not necessarily have to have a contract -- we're just not going to go on a naked spec. But if we believe that our prospects for renewal, a substantial renewal on the Baroness, Rover are looking particularly strong, we might do that without the market necessarily knowing everything behind our decision.

Okay. Thank you.

Thank you. The next question is coming from Tom Rinaldi of Deutsche Bank. Please go ahead with your question.

Good morning. Most of what I had has been covered but just on the jackup expense line, I think you mentioned 3 million in activation in the cold stacked rig and then another 3 related to hurricane Ivan. The sequential increase was 10. Was there anything else unusual?

Yeah, Tom, we also had another $3 million worth of move cost, moving the Heritage from Ecuador back to Southeast Asia that we recognized in the third quarter. So there, you got $9 million. And then also, about $1million worth of operating cost on the Champion for 45 days.

Okay.

So there's the full 10.

All right. That's helpful. That's all I have.

Thank you. The next question is coming from Matthew Conlan of Weedon & Co. Please go ahead with your question.

Thank you. My questions have all been answered.

Thank you. The next question is coming from Geoff Kiebertz of Smith Barney. Please go ahead.

Thanks. Just a follow-up on the other smaller charges there. Could you just explain for a moment the provision in the U.K.? I didn't quite understand whether this is something -- I understand you're debating whether it is valid, but if it were to be enforced, is this something that's recurring?

This was -- this was a catch-up. The effective date of the legislation was last August. But there's a provision called working time directive which limits the number of hours and requires that people receive four weeks offtime. And of course, when these legislation-type things are drafted, no one ever thinks through what happens with shift work offshore. But our provision is to try to make sure that the -- that we have enough set aside that if we would lose, then we would -- in making the provision, obviously, we think there is a -- whatever the accounting qualification is, high likelihood that it's something that we could lose. On an ongoing basis, we would just book it as a part of labor costs.

And that would probably raise your costs per rig by around $2,000 a day.

For U.K. rigs only?

That is correct.

Okay.

Only rigs in the U.K..

Okay. That's what I was looking for. A larger question. You know, I think comments in regards to what's going on in terms of the day rates certainly indicate that this is -- was sudden, and somewhat unexpected. I just wondered if you could put it into some historical context, as to, you know, have you seen these kind of rapid run-up in day rates in past periods? And could you kind of compare the current environment to a prior period that is most like this?

I think it's without precedent.

Okay.

You know, for the last several conference calls, everybody talks about why hasn't there been more drilling. And it's almost as if, you know, the rubber band just got stretched and stretched and stretched and people moved. Our first thought was that maybe this was just year-end money. But quickly, we booked up through year-end and started booking into next year and we haven't seen that happen. Obviously price is an influencing issue. I think also key is that there's a lot of deep water development jobs and the deep water activity has finally come together. So that we've seen rigs-- we did used to have some competition from fifth generation units coming down, certainly in the Gulf of Mexico, and stealing fourth generation jobs at very low day rates. And that's virtually ceased. But we don't have fourth generation rigs dropping down in the mid water and everything's working in its sector.

There's very few rigs, ultimately, in the Gulf of Mexico that are floaters. So it is not like trying to turn the jackup market around. All of which has just contributed to what, frankly, is a more than doubling of rates. Because we were the -- we would bid fourth generation equipment in the Gulf of Mexico 40, $50,000 a day for second gen work. We would bid it 60 in the early part of the summer to get a fifth -- a fourth generation job, and we had excess capacity. We had rigs stacked. So if you think about it in 13 weeks, we've gone from zero or 60 now to 140.

And, I mean, is it just, you know, a perfect storm kind of thing that all of these --

I have used that word before. That seems to be, is to be as good an explanation as any.

Okay. And I think you mentioned earlier that you are having discussions about terms. So -- on many of these, so that, you know, at what point do you start to, if you will, lock in some of this -- this dramatic jump in day rates?

We took term in the North Sea, as it was offered. It's very hard to force term unless the operator's willing to give it and it'll come in the fifth generation markets, it'll come for development applications which sometimes will be fourth generation. And then it will come when the operators perceive that it's the only way to secure rigs, and that they feel comfortable that should they have a hole in their schedule, they can farm out or somehow put the rig to work. They're desperately afraid of being overcommitted. So to date, they've been willing to commit on well to well markets, and that's been good for us. I mean if we had gone term here in the Gulf of Mexico earlier, we would be underpriced to some degree and that's a risk that we're willing to take. But as large as our fleet is we would like to have some term, and we will -- as it's offered, we will bid aggressively for it.

Okay. And it may seem out of place but, you know, given how suddenly this has come on, you know, are there any, you know, cracks in the picture there that you focus on to signal whether it's going to reverse itself just as suddenly?

No, I mean we're still -- we're still riding the wave up. We're not -- you know, we're not looking for a chink in the armor yet. I mean we will -- you're asking about term and when we tie them up, we'll tie them up on term when it's available to us at the right price. What the right price is, I'm not sure yet.

Okay. Thanks very much.

Thank you. The next question is coming from Joe Agular of Johnson Rice. Please go ahead with your question, sir.

Thank you. Larry and David, I just want to make sure I'm checking my numbers correctly. In kind of the last upcycle, I showed that the Valiant reached like $189,000 day rate at one point. Is that accurate?

We made, I think, 187 on a contract that was committed in the Gulf of Mexico and raised to go overseas. I think the contract Gulf of Mexico rate was about 172 or 175.

Okay.

And we took the rig out -- the operator wanted to take-- had the right, and wanted to take the rig overseas so we took it out and the adjustment was an uplift for foreign markets, so that was the benchmark for that rig, yeah.

And kind of the Concord, Lexington, Saratoga group, I showed that they did get over 100 at some point, didn't they.

We had some second generation rigs working at, yeah, 110. We had one second generation rig that had a 15K BOP system at above that, but that was kind of the top of those, yeah. You know, to kind of put it in perspective, we did the Quest upgrade, which we were kind of the first guys to the table with the upgrades. We did the Quest upgrade for, I think, a $75,000 a day for a three-year deal and that rig is now committed at 100.

And Larry, when you made the comment that, you know, this current market is without precedent, were you referring to just how fast the rates are run up, or are you referring more to maybe the demand side.

No, how fast, the speed.

The speed. Okay. Just wanted to clarify. That thank you.

Thank you. The next question is coming from Mark Urness of Merrill Lynch. Please go ahead with your question,.

Thanks, good morning. My questions have been answered. I just want to say congratulations for the rapid turn in your business.

Thank you.

Thanks.

We will take that.

Thank you. The next question is coming from Terry Darling of Goldman Sachs. Please go ahead with your question.

Thanks, Larry, I wanted to follow-up on a point you alluded to with regards to the Endeavor upgrade. Can you perhaps just catch us up to date to where new build economics have moved to. If we were going to build a new, state of the art, dual activity fifth generation rig today, given the increase in steel costs. Perhaps you can share with us what's going on with lead times from shipyards to try to understand where that math might be right now?

Well, we've seen on our own upgrades, we did the Rover for 190, and we're in the 230 to 240 range right now. That's steel costs, that's booking costs and it's the impact of a longer schedule. Big chunk of that is just the lead time to order steel. You know, we're not actively bidding new construction. But we obviously watch it, because we need to have an appropriate advantage. We certainly don't want to do an upgrade that heads up at three quarters of new construction cost. At some point we're better off starting new.

And I guess the best thing is to look at--one of our competitors has two fifth gen, dual activity--they're DP rigs coming out of Singapore and if you add up all of the pieces, it's in my mind certainly north of 400. They placed those orders before steel really escalated and before equipment has escalated. So I would think that that number is greater than that. Certainly I've talked to the shipyard and the shipyard will give a quote, below 400 but they're not adding on all of the supervision crews; the startup costs, which are significant; capitalized interest, all -- the capitalized overhead, all the pieces. When we give a 240 piece, we give everything, that includes spares, that includes the cost to haul the rig over there, and a provision to haul it out. So we try to make sure we're quoting totals. And our belief is that the totals for a new construction rig is north of 400 and may get as high as 450 in today's market. And so we think we got a great advantage.

Okay. And just want to shift gears and follow up on the stock buyback. If I remember correctly, your philosophy there has been -- it's kind of focused on, you know, where the stock is relative to where you see the fundamentals going. Has anything changed on that philosophy? Is that still the primary driver?

That's a hard one to answer. You know, we just say we buy it from time to time. Certainly, when we buy, that's an important signal, but stocks could be well valued, but we might choose to spend our money elsewhere on the Endeavor or buying a rig, or what not, in a particular market. So you've highlighted an important facet but that's not the whole thing.

Okay. And lastly, Gary, tax rate guidance for '05?

Much easier to forecast day rates, I believe. Terry, somewhere right now -- our tax rate I will tell you for the fourth quarter, we are estimating to be 28%. And again, that's the difference between changing domestic versus international income. Best guess for '05 right now would be somewhere between 26 -- 25 to 30%.

Okay. Great. Thanks very much.

Thank you. The next question is coming from Poe Fratt of A.G. Edwards. Please go ahead with your question.

Yes. Larry, I'm not sure we're going to be rooting for the same team in the next couple of games, but -- [ Laughter ]

Great. I was waiting for a baseball question!

Next question, then.

Certainly it would be interesting if the Yankees win, too. So we'll both have a dilemma. If you could just give aus little guidance on G&A, and then also looking at your interest expense going forward, sort of where you see that shaking out for the fourth quarter, and then looking into 2005. And I'd also like to add my congratulations on how quickly the market's improved.

Okay. On interest expense, in the fourth quarter we'll be right around $10 million or just slightly below that. And that's adding our new $250 million offering that we did in August. Going into '05, it's going to depend on we have the -- our zero coupon convertible that can be put back us to in June or it is also callable. Assuming, for the time being, that that is eliminated in June, we would look at interest expense at somewhere around $30 million, with it being higher of course in the first two quarters and lower in the last two. As far as G&A expense, on a go forward basis, right now, we're looking at somewhere between 7 -- 7 to $8 million in the fourth quarter and then perhaps slightly higher going into '05.

Great. Thank you.

Thank you. The next question is coming from Steven Pineault of Imperial Capital. Please go ahead with your question.

Good morning, gentlemen and congratulations on the outlook and the turn around. Just a quick question. You mentioned that the new fifth gen rigs might cost as much as $450 million to build. What do you think someone would need as a day rate to justify building one of those?

Well, I mean -- you know, I can't always predict what somebody's going to do and you need to caution that both the shipyard and our competitors and everybody is working to try to cut those costs. I just don't think there is much you can do from that. For us to achieve the kind of rates of return that we think is appropriate for a high risk business, I don't have the math in front of me, but mid 200s, 240, 250; and probably you'd do the math, and you'd find that that gets a little bit light. I've seen some schedules from some of our competitors that indicate that those numbers get really high.

Okay. Great. Thank you very much.

Thank you. The next question is coming from Robin Shoemaker of Bear Stearns. Please go ahead with your question.

Yeah, thank you. I just wanted to ask you about Mexico. Obviously in hindsight they did a pretty smart thing to lock up some jackups and floaters in a soft market. I just wonder how your Mexico -- how you view your Mexico operations as going. Do you see that PEMEX has a full four years of work lined up for those rigs, as originally planned? And if there's -- if you could comment on their occasional talk about a deep water well that they may want to drill later this year, if one of your rigs is capable of doing that.

Well, we have the deepest rig under contract in Mexico, the Ocean Worker, which through use of cut-in wire can get in the 3,000-foot range. The talk that got a lot of play was based upon some geological survey data in much deeper water. And I can't -- it would just be pure speculation as to how they're going to reach that and what rig they might use and how they would get there. We generally have four-year contracts on our rigs. We're about a year and a half into those, so a little over two years still left to go. And as far as I know, PEMEX recently appeared--had some speakers at a conference I went to and they commented on -- that they were projecting this level of activity going forward, so that's all I have to pull in on that.

Okay. And just quickly on the Vanguard, will you be caught up in any of the strike-related activity going on in Norway when you start operations there?

No, at this time, our rig is not covered by the labor dispute.

Okay.

In fact, we're going in initially with some U.K. crews. We'll integrating in some Norwegian crews as we move forward.

Okay. Thanks.

Let me take one more question.

Thank you. The last question today is coming from Lori Woodland of Schroeders Investments. Please go ahead with your question.

This question goes back to what you touched on on the balance sheet and the possibilities of additional share repurchases. The company has built up some cash, there's over $200 million in cash. But leverage is now over 40%. Could you provide some comment as to what you might be doing with that cash, how much of a priority is debt reduction, compared to share repurchases, or possibly building or buying another rig?

Well, our actual cash balance, I guess we detail cash at $200 million, but when you include marketable securities and what not, we're a little bit under $900 million of cash. Our philosophy has always been to maintain a healthy cash balance.

I'd say it's very healthy right now.

Well, it is. And we just -- we just did a debt issuance back in August and raised $250 million. So-- and that wasn't done just for the accumulation of cash, but it was a good financing at favorable rates. We do have one of our issues will come up mid next year. It's a convertible issue of approximately 400 -- $475 million that can be put to us, or we can call it. So some of that borrowing was done in anticipation of that. So I guess you can assume that that might take place if we did the Endeavor, as I've indicated that would use some cash. At the day rates that we've got here, you can do the math and see that we'll be generating quite a bit of cash. So we will spend it as opportunities present themselves. Point out in the past, we paid one of the highest dividends in the industry, so that's certainly one of the areas that we have chosen in the past to use it to return to shareholders.

One other question. Have you met with Standard & Poor's recently? Or do you plan to meet with them any time soon?

S & P, we talk to them on a consistent basis. And they just readjusted our rating to an A minus with a stable outlook. That was done in this past July.

Okay. Thank you.

Well, I appreciate everybody's attention and the congratulations. And we will expect to be back next quarter. I would hope we'll have some good news. In the meantime we can all watch the Astros. Thank you.

Thank you for your participation. That does conclude this morning's teleconference. You may disconnect your lines at this time and have a great day. Thank you.