Diamond Offshore Drilling Inc (DO) 2004 Q4 法說會逐字稿

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

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 & 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 and conditions or circumstances on which any forward-looking statement is based.

With that, I'll turn the meeting over to Larry.

Good morning. I'd like to start this morning by giving you a brief overview of a bit of the market. We included that in our press release, but I'll add some commentary on the numbers we had, then I'll turn it over to Gary Krenek who will give you some extended commentary on some of the dollar issues that were also in play in the fourth quarter, give you a little guidance about how we see some of these issues coming into Q1 of next year and on into the full year and give you some costs as we see them for the coming year 2005.

I think the most significant piece of news on the overall market front was included in the press release, and that is that we had a second-generation unit add $110,000 a day in the U.S. Gulf of Mexico. And although we just have 1 in that category right now, that is the rate that we're discussing on a variety of our rigs with a number of customers. There are 9 second-generation rigs in the Gulf of Mexico active. We own 4 of them right now. There's 2 that are cold-stack that could come back to work, one of which is a Diamond Offshore rig and another one is a Transocean rig.

I think the significant thing about that $110,000 rate is that is pretty much what the peak rate was during the drilling upsurge that took place starting in '95 and ran through '97 and '98. And we tended to see those kinds of rates toward the end of it with some term attached, yet we're not at the term stage, and these rates have continued to move. And, of course, the thing that is so significant about that is that a year ago, 18 months ago, people were -- the questions that we would often get would be; what is the future for these rigs? What is the future for the water depths that they operate in?

And clearly this is illustrating that there's heavy demand for those particular units. Once the supply got down by rigs moving to Mexico and in other places and the fourth-generation rigs in the deepwater and ultra-deepwater rigs being fully utilized, these rigs have really moved to the forefront and I think are demonstrating what useful tools they are. We believe that the rate in the U.S. Gulf of Mexico will continue to set the pace and impact our substantial second and third-generation fleet around the world, not only for us but for our competitors as well.

Talking about the deepwater, we have 5 of 11 units that are active today, 6 are owned by primarily Noble, Transocean and Global Santa Fe. And we have seen those leading edge rates right now in the low 150s, which is below where they had peaked back in the '95 through '98 time frame. So it's interesting again that the second-generation units are really leading the pack in terms of where those rates are, vis-a-vis where we've been in the past.

We continue to see heavy demand in that water depth. We get calls all the time from multiple companies having approved their budgets, having a number of prospects that they want to drill in deepwater and ultra-deepwater. And right now, ours and our competitor's rigs are pretty much booked well into 2005 and there's just not enough equipment, we believe, to service that. So again, we think that we're in a very strong rate environment in there.

Again, I would point out that among our fourth-generation deepwater units, of the 5 units, 3 of those are upgraded rigs with the leading edge rates at 150, this is well in excess of the rates that we used back in '95, '96 to go ahead and do these upgrades of these rigs for this type of service. It was a lower cost. You couldn't certainly upgrade these rigs at this level, and I don't think a price of 150 is going to encourage anybody to upgrade in here. And certainly, if you have units that can operate the in the second-generation market and earn those kind of day rates you're not going it take them out of service either. But again, very strong rate environment there.

Around the world, we are also continuing to post increased rates, but they are increasing in a much smaller rate environment, more of a rates moving from 80 to 90, say, in Southeast Asia for leading edge commitments. Our North Sea commitments are for some terms, so we don't really have some repricing opportunities right now, but we're obviously watching what the market is paying for equivalent capacity rigs that our competitors offer.

And then in Brazil, we also have term and we don't have our rigs rolling until Q4 this year. We've got 2 fourth-generation rigs that will be rolling at that period of time and then in Q1 of '05 we've got a couple of third-generation rigs that will be rolling. Jack-up rates are also strong, and have been evidencing these kinds of smaller scale increases in rates. But that's across an overall fleet of over 100 rigs. So that's not surprising to us.

To come back to the ultradeep, where we made an announcement yesterday, I'm going to have David Williams, our Executive Vice President, make some commentary on that.

We did announce some contracts for both Baroness and Rover, with different operators. The Rover is a contracted essentially from today we'll run it out about 3 years to estimates now early February of '08. That contract has been in the works for a while. The rig came out -- straight out of the shipyard after its upgrade to fifth-generation capability and went to work for Murphy in Malaysia, and has stayed in that theater of operations and we've been eyeing this opportunity for a while and in conjunction with Murphy we've been having discussions. So this is the culmination of some discussions that have been ongoing for a while.

The good news for us is it ties the rig up for 3 years, which strategically makes sense for us being that we'll have that rig over there tied up well beyond the delivery of the Endeavor, which is scheduled for early '05 -- early '07, excuse me. So 1 rig will be tied up long in Asia, the other rig will be moved to that theater of operations and following delivery from shipyard will be available to go worldwide. It made sense for us it take the Baroness out of that market, and we were able to get a contract in the Gulf of Mexico at an aggregated rate with mobe and day rate between $75 and $80 million. That rig is a 1-year -- that contract is a 1-year term contract.

In the Gulf of Mexico, there is -- there were a number of operators we were in discussion with. But Amarada Hess was able to move very quickly. They saw an opportunity, they had a need, and they were able to move quickly. To their credit, they got it done when others were still studying the situation. So that rig will be moving following the contract in May to the U.S. Gulf of Mexico for a 1-year term contract. So we're pleased to be able to get that out of Asia.

Our next repricing opportunity for the fifth-generation fleet will be the Confidence which rolls off its 5-year commitment with BP in January of next year. We will undertake some conversation with BP whenever they are ready. But our expectation is that the rig will price in the market at an increased rate over where it is now.

Thank you, David. Now I'm going to let Gary Krenek comment on some of the cost issues. Then following that we'll take your questions.

Thanks, Larry. I want to do 2 things. One look at Q4 cost, as Larry said, and then look at what we see going forward in 2005. Looking at Q4, if you refer to the press release and our results of operations where we break down the costs and revenues by different class of rig, I'm going to concentrate on the expenses here.

Looking at the high-spec floaters, cost there compared to the third quarter were relatively flat, increasing from 44 million lass quarter to 45 this quarter. In the third quarter, we had a $2 million charge for -- against our deductible on insurance. Damage on the Star and the America as a result of Hurricane Ivan. So there may have been some expectations to see that cost, that category come down in Q4.

In Q4 we recorded about a $1.8 million expense on anchor chain rental on the America. This was chain we lost in the storm damage. It's going to be replaced by insurance, but we're not doing to get that chain until around April 1st. Therefore, we have to rent replacement chain. So you saw that hit in Q4. You'll also see that hit in Q1 '05.

Looking at the other semisubmersible rigs, those costs increased from $62 million last quarter to about 84.5 million this quarter. The biggest thing, as we indicate in the press release, was the reactivation of the Voyager. We spent about $7.5 million in Q4 to do that. We also had an additional $1 million worth of cost on the Voyager just to operate it during the month of December.

Also in the press release, the Ocean Vanguard, we spent about 3.5 million more in Q4. 1 million of that was a deductible that we booked for damage to that rig. That rig has been in the shipyard for most of December and is in the shipyard today, and as a result of storm damage that we suffered. So we booked that 1 million.

We also -- the rig work in the U.K. sector of North Sea in Q3 and moved to the Norwegian sector in Q4, and the increased costs by moving to Norway accounted for almost $2.5 million worth of additional cost. We experienced about a $4 million increase of cost on the Ocean Patriot.

The Patriot was moving most of Q3 from Africa to Australia, and was working all of Q4 in Australia. We amortized -- we deferred the mobe cost in Q3 and are recognizing that mobe cost over the length of the contracts we have in place on that rig, which is about 9 months. So we recorded $2 million worth of mobe cost amortization in Q4. Also you had the operating cost being incurred in Q4 that you didn't in Q3, which added the other $2 million of additional cost.

During Q3, we had the Concorde in the shipyard undergoing life enhancement upgrades to its tanks. And most of those costs were capitalized. Therefore, you didn't have very many more costs on the Concorde in Q3. Q4 that rig went back to work, worked most of the month and that resulted in about an additional $2 million worth of operating cost.

The weakening of the U.S. dollar has impacted us also, primarily the U.K., Brazil, and Australia. And from -- it has caused about a $2.5 million quarter-to-quarter increase in this segment, the other semisubmersible rigs.

Finally, we had an approximately $1 million increase in cost on the Ocean Nomad. The are rig mobe from Africa to the North Sea during Q4. And it was stacked for part of that month in the North Sea waiting on our customer. I'm happy to report that rig is working today, but we used some of that stack time to get ready for the North Sea work and also to do a little bit of deferred maintenance by the fact that it was sitting stacked.

Looking at the cost on the jack-ups. We actually saw a decrease of approximately $6 million from quarter-to-quarter. Mostly due to unusual items recorded in Q3. That included a $3 million charge for the insurance deductible on the Warwick, because of Hurricane Ivan. We also recorded $3 million worth of demobe cost in Q3 on the Ocean Heritage as part of its demobe from Ecuador back to Southeast Asia.

Also during the third quarter, we reactivated the Ocean Champion. The jack-up in the Gulf of Mexico and spent about $1.5 million on that rig. These decrease in costs were partially offset by mobe cost -- amortization of mobe cost on the sovereign from its mobe from Singapore to Bangladesh in Q4.

Looking at G&A cost, G&A cost increased from 6.7 to 8.5 million from Q3 to Q4. This was entirely due to a $2.5 million credit that we recorded in Q3 as part of reimbursement for some legal fees that we received in the third quarter. Then below operating expense, as we indicated in the press release, we recorded an $11.4 million gain in other income as a result of a settlement of a lawsuit that we were involved in.

Looking forward to 2005, what I'd like to do first is give you our expected operating -- normal operating cost for our rigs in order to satisfy the full disclosure requirements that we're under. And I'll go through these rapidly. In the Gulf of Mexico, we expect our jack-ups to operate on daily cost in the low 20s. Jack-ups in Southeast Asia will operate in the mid-20s. India and Bangladesh jack-ups in the upper 20s.

Moving to our floater fleet, Gulf of Mexico mid-water semis in the upper 20s. Mexico mid-water floaters in the low 40s. U.S. Gulf of Mexico fifth-gen DP rigs in the mid-60s. Gulf of Mexico Victory fourth-gen upgrades low 30s. Gulf of Mexico has built fourth-gen floaters in the mid-30s. Deepwater Brazil dynamically positioned rigs in the mid-60s. Indonesia, fifth-generation upgrades low 60s. And Malaysia fifth-gen upgrades in the upper 50s.

Moving to the North Sea, mid-water semis in the U.K. sector of the North Sea will cost us in the low 50s. Norway in the upper 80s. Australia, New Zealand mid-water semis in the low 60s. Then when we're in Vietnam with our semis, in the upper 30s. Korea mid-40s. Back to Brazil, mid-water dynamically positioned rig, mid-50s. And conventionally moored third-gen rigs in Brazil in the mid-40s.

These are the normal operating costs. They do not include any additional costs for surveys and things like that, which I'll talk about in just a second. Comparing these costs to our 2004 normal costs, we're seeing about a 5 to 7 percent increase in these normal costs, and there are a couple of reasons. Number 1, we gave a pay raise increase in December of this past year. We hadn't given an increase for about 4 years to our crews. And it was due -- time to do that. Also this keeps us competitive in the market.

We're seeing additional -- or expect additional weakness in the U.S. dollar, which will give rise to a slight increase. We spend about 15 percent or so of our total operating expenses in currency other than the U.S. dollar. Also, just general inflation in the industry.

And finally, we're going to see an increase in both the quality and quantity of our repair and maintenance cost. One with higher day rates that we're earning from our customers, they are expecting a little bit more from us on the repair and maintenance of our equipment. But much more importantly, with these high day rates that we're earning, when we go down because of equipment failure, it's costing us a lot of money. So we will -- we think it's a very smart move to spend a little bit more on repair and maintenance in order to keep our downtime for equipment downtime at a bare minimum.

Looking in Q1 for costs in addition to the normal operating costs I just talked about, as I mentioned before, we're going to have anchor chain rental on the America of about 1.8 million in Q1. And then we also will amortize mobe expense that we incurred on the Patriot, we'll recognize about 3 million in Q1, then another $1.7 million for Heritage -- for the Heritage, the Sovereign and the Nomad mobes primarily. Now these mobe costs will be offset by mobe revenue that we were also amortizing over the same periods.

Looking at surveys in 2005, this is the low point in the 5-year cycle. Right now we expect to only have 4 of them. Although as everyone knows, that can change as we take advantage in between well time and things like that going forward. We have no survey scheduled in Q1. We have the Lexington and the Guardian in Q2. Expect to spend up to 120 days on the Lexington. We not only will do the survey, but we'll also do the same type of repairs on the tanks, life enhancement tank repairs that we did on the Concorde and the Lexington and Saratoga. The Guardian we expect to be down about 35 days.

Q3 the Princess will be surveyed for about 30 days, and in Q4 with the Spartan for about 15 days. We also expect additional downtime in the first quarter for the Warwick. It was down all of the third -- all of the fourth quarter due to Hurricane Ivan repairs. It's going to be down about 30 days in Q1, I'm happy to report that that rig is now back on the payroll. So it missed all of January, but it's back working.

Also the Vanguard damage that I talked about earlier, we're going to miss about 75 days in Q1 for that. We also will take the Saratoga into the shipyard for about 21 days to repair some columns that we had -- that were damaged in mid-2004, and we put off to an opportune time to be able to do that. The Epic will be down for about 60 days mobing from Australia to Malaysia, and also spent part of that time in the shipyard getting ready for its Malaysian job. And finally, the Alliance is going to be down for about 17 days, we need to change out some thrusters on it.

Looking in Q2 very quickly, both the Clipper and Yahtzee will be down about 21 days each in Q2. Both of those also for thruster change out and repair. The Spur will be down about 80 days in Q2 to repair some leg damage that we suffered in 2004. And finally, as it said in the press release, the Baroness will be mobing back to the Gulf of Mexico and will be down for 90 to 120 days.

Looking at CapEx on a go forward, we expect to spend about $225 million in '05, 115 million of that in maintenance capital and the other 110 on the Ocean Endeavor upgrade. Depreciation, we expect about a 3.5 to 4.5 percent increase from 2004 to 2005. This is driven mostly by the maintenance capital that we're going to spend during the year. G&A, we expect a 7 to 9 percent increase over our 2004 totals, primarily driven by audit fees and Sarbanes-Oxley fees. We think that will increase even a little bit more going into '05, then also just due to the general inflation.

Interest expenses, assuming that we keep the same debt structure in place that we have today, we will capitalize about $1.5 million of that to the Endeavor project in 2005. And finally, the expected tax rate for 2005, can expect something between a 26 to 31 percent and always this will depend on the ultimate breakdown between the U.S. and international income and also where that international income is earned.

And having said that and gotten that out of the way. I think we would like to take calls on the more exciting part, which is talking about the markets and all the good news there.

We'll have to call that section, Gary, everything you always wanted to know about Diamond Offshore's costs, but were afraid to ask.

Thank you. (Operator Instructions). Our first question is coming from Terry Darling of Goldman Sachs. Please go ahead.

Thanks. Morning, everyone.

Morning, Terry.

Morning, Terry.

Larry, I wanted to follow up on the Gulf of Mexico market first on the second-gen market, do you see additional upside for the second-gen rates or do you think that we are going to be leveling off there? Where are we on opportunities to reactivate the Liberator and other cold-stack second- gen unit you have there, I guess the New Era?

I would say the New Era is in the Gulf of Mexico and would be something that we've been continually evaluating. We want to make sure that we maintain the market and that there's adequate demand to put that rig to work. We think we're fairly close to that number. As you recall, we spent about $8 million, a little bit under $8 million to reactivate the Voyager. The New Era, I guess would cost that but there would be some additional capital for riser and what not. So there's an up-front cost. Voyager we were able to pay that off very quickly. And certainly at these rates we can pay the New Era off as well.

The Liberator is another issue, because that's a 600 foot rig in West Africa. So it's not just reactivating it, there's not much a demand for that limited scope unit there, nor really almost anywhere. Most of our second-generation rigs are working out there beyond 1,000 feet. So you're talking about an upgrade on that unit. So that one is a little bit further away before we would anticipate doing that.

So far as upside on the day rates, our step would be to continue to roll those rates. The way we see demand, we think there's opportunities for us to continue to raise rates. But, we're pleased at this level, we want to make sure our customers are happy with it. And I think we've been setting the mark here and we would continue to make that our goal to set those going forward. Perhaps you might begin to see some term demand, although we are working for -- a lot of these rigs are working for companies that had traditionally not signed term contracts in these water depths.

Okay. And then on the fourth-gen market I think we've got a couple of your competitors talking about rollovers in the June period more in the 160, 170 range. Is that is a number you would argue with at this point?

David.

Fourth-gen Gulf of Mexico.

I think we've done a pretty good job of leading the way on the fourth-gen market, and I wouldn't expect that we would do anything differently, Terry. We've got some repricing opportunities. We've got, I guess, 1 of the fourth-gens in the Gulf of Mexico is committed out into early next year. But our expectation is that we haven't been able yet with the fleet we've got to satisfy the demand. As long as the demand outstrips the supply, we're going to -- the rates are going to move up.

David, maybe you can also comment on the jack-up market for us, we've seen Global Santa Fe bringing a 320 or 350-foot rig back from Trinidad at around 70. Does that look like a clean sort of indication where the spot market is for that part of the business right now, or that's obviously higher than the indications you made in the press release. I'm just trying to connect the 2.

I think that's an indication of the market for that rig. We have 2, 350 foot rigs we put cantilevers on and we committed those rigs to 350s for some deep exploration work. We committed those rates when they were well above rigs of that class. We're now out drilling those wells. I would expect when we reprice those rigs, that they would move up and move up to where the current market or the then current market is. So again, on those -- in that market, Terry, there's still -- there is still unsatisfied demand.

Okay. And lastly, Larry, even with the upgrade of the Endeavor, the cash generation, the visibility on the business would still suggest you've got opportunities to use your cash in other ways. Can you step us through where your thought process is on that right now and where would you put the potential for the dividend to be reinstated?

Well, that would be one of the items that we would consider. Which we have a dividend in place. We did reduce it when we were not earning that dividend. And that will be something that we look at. But right now I would say for the year '05, we've got cash going into the Endeavor. We have a convertible debt security, which will -- has a put in June. And depending upon stock performance and interest rates and all that, there's a, I would say, a decent likelihood that can be put to us.

That would be a use of cash to, in effect, retire some equity, stock buybacks become less likely as our stock climbs because we always try to buy that at a bargain price. But we have bought a previously stock at these levels in the 40s it all the depends on how we perceive evaluation going on.

We are trying to see what else we can do to leverage our fleet. The good thing is that we've done so much of our upgrades at lower prices either in the previous cycle or things that we did during the down market, including buying in rigs. So those things aren't available. Our engineering guys are moving to see what else could line up after the Endeavor to provide another victory class upgrade. Because we think the economics are so compelling there, where we spend only $250 million versus new construction, 400 to 425 and a 2-year delivery date.

Clearly, when we did that, our concern was, can we go ahead and get the Baroness Rover committed so that we're not just stacking up idle deepwater equipment. And I think we've achieved that. Right now one of them, as David indicated, on a decent term at a decent rate and another one coming back into the Gulf of Mexico where everybody knows what the market is for those kind of rates, including mobe and all that. I think we're certainly touching that market. So those are exciting opportunities for us. I think that would be number one on the list, trying to find places that we could do that.

Now, obviously Voyager is an upgrade candidate, and it's the rig that's committed here in the Gulf of Mexico at these kind of rates. So there's just too much loss opportunity to look at that, but we are working on a couple of other issues that -- or opportunities that might present itself to ourselves.

That's good. Thank you very much.

Thank you. Our next question is coming from Arun Jayaram of CSFB. Please go ahead.

Good morning.

Good morning, Arun.

Guys, there's some speculation that one of your peers could be moving 2 big drill ships out of Brazil, this is on top of the Setco express. I was just wondering, there's 9 rigs in that market which are rolling off contract, including 3 of yours in the next 12 or 13 months. What kind of upward pressure does moving more capacity you think put on rates?

Upward pressure in Brazil?

Yes.

Well, I was just in Brazil 2 weeks ago, and we had some discussions on this. The Petrobus has been the largest single user of deepwater rigs, particularly DP rigs. The rigs that they utilized there are directly related to current production. Failure to maintain that production turns it into having to pay cash out to import oil at these high prices for their economy.

So everything is lined up for them to have the motivation to renew. However, on a long-term basis, Petrobus has also always offered term instead of as a partial substitute for paying the very highest rates. They pay somewhat less than the highest rates, but you earn above the bottom rates. It's always been something I think contractors are pleased to have that term in their portfolio. And it will be interesting to see how all that dynamic works out down there.

So I'm not giving you a direct answer because we haven't been through those negotiations yet. We would like to have some term, but be able to renew down there. I think Petrobus has a number of rigs that seem to be rolling right now. So they are going to be somewhat at a disadvantage, and it will be interesting to see what -- how they use their large scale market presence. We would take some term, but clearly we can't -- can't ignore opportunities that may exist elsewhere at higher rates.

Right. Larry, you're working the winter with Petrobus in the mid-50s, a comparable unit in the Gulf of Mexico is getting 120, and that rig rolls in '06. Would you anticipate that rig could get 6 figures in this type of market?

I'm not going to put out a future target on that particular rig. Certainly it's our expectation that the rate would go up. There would be some advantage to not having the mobe there. Part of the reasons that we are earning these rates in the Gulf of Mexico is that other rigs are employed around the world. If they all flowed back into the Gulf of Mexico, it would sort of balance out. But I think the Gulf of Mexico leads the way and will indicate where other rates will be moving up in other markets.

Fair enough. My last question is on the Baroness mobilization, Gary. Can you give us the mobe cost on that move?

It will be somewhere around $10 million.

Okay. And you'll amortize that over the full 365 days; is that correct?

That is correct. We will defer it while it's mobing, so you won't see any cost while it's mobing. You'll see a very bare minimum of other cost on that rig, and then we'll divide it by the 12-month contract.

Okay. Appreciate it.

Thank you. Our next question is coming from Doug Becker from Banc of America. Please go ahead.

Thanks. Following on some of the previous questions, it sounds like you're seeing demand for term contracts in areas where you haven't seen it historically. What is kind of the strategy you're taking right now to balance the exposure between the spot market and the term contracts that are certainly at attractive rates.

I don't think we're seeing terms where it hasn't been. Brazil is a market that offers term. We've got 1-year terms in the North Sea, which was a step up from the well-to-well market, but that's not a terribly long-term. David, do you have any comments on term?

We'd like to have a balance of term and spot. If everybody goes term, then spot doesn't move. You get a balance of both. One of the things we like about Baroness and the Rover deals both is we've got the best of both worlds. The Rover deal ties the rigs up essentially for 3 years from now. I don't think of any other 3-year deals that are out there floating around right now. So that's a good basis for us. And it gives us -- with the Baroness, a year is not very long in this business, so you get another repricing opportunity here. Again, I agree with Larry, we're not seeing a lot of term inquiries in the Gulf of Mexico for second-gen floaters, which as he alluded to earlier, gives you some notional idea that we're not at the top yet.

The other thing about term, I mean, part of the drivers -- the important driver on both jack-ups and second-gen floaters have been the rigs that left the U.S. Gulf of Mexico and gone down to Mexico and taken term generally 3- to 4-year term contracts and taken a lot of rigs out. So not only do contractors need a balance between term and spot, but I think the market, a healthy market requires term and spot so that the spot market is not competing against -- is not being priced on virtually every rig out there, but as a fewer number of rigs rolling. From the operator side if they take term, then they have protection in an upward market rate environment that they should get a little bit better price.

What are your thoughts on giving priced options at this point of the market?

We tend to avoid those in rising markets, because all they do is set a ceiling on what you can earn. We have and certainly from time to time operators demand an option, and our default position is usually to make that an option subject to mutually agreed rates.

Makes sense. One question on the cost side. Gary, you gave a great rundown of a lot of the moving parts there. Just wanted to get a better sense for what Diamond's percentage of labor costs are of total operating cost. It seems like the range for various contractors was something between 40 percent and 60 percent, wanted to see where you guys fell out.

We're somewhere in that 50 -- between 50 and 60 percent range.

Okay. And does that --

50, 55.

Broadly defined labor cost.

Does that vary dramatically between a jack-up and semisubmersible?

Not really. I would say the jack-up is maybe a little bit higher percentage than a semi, because a semisubmersible has more repair costs and insurance costs, et cetera. But it doesn't vary that much.

Bigger variables geographic.

Yes, that will have more of a factor on it.

Okay. Thank you very much.

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

Good morning, gentlemen. Question on the Baroness. Do you get any reimbursement for this $10 million mobilization cost?

There is an element of mobilization that is part of the mobilization fee that's in that number that we described earlier.

But essentially the accounting would be the cost and the revenue are deferred and amortized over a year's period.

$10 million is the net number after your mobilization expense?

No, that's the gross number, correct.

Okay. And the CapEx for -- any stab at the Cap-Ex for '06?

Well, we'll spend -- we spent 110 million on the Endeavor in '05, we will spend about 140 million on it in '06, and then maintenance capital, we haven't gone through the budgeting process for '06. I would expect it to climb from '05 levels. One, we'll have more rigs out there operating. The rigs we've reactivated, reactivate the New Era. With a continued sustained market we'll probably also up the kind of items that we replaced to avoid downtime.

And just finally on the tax line, what are the international jurisdictions which are higher taxes and which are the lower tax rate areas for you?

Well, what drives that primarily are areas in Southeast Asia and other places that have deemed profits. And we pay taxes based, not on net income, but on revenues. It varies from place to place in the world.

Okay. But between Australia and Southeast Asia, which area sort of --

Well, I'd like to answer your question, that's probably an off-line question, or something. It's too complicated I think to take a lot of detailed tax questions here. I appreciate your concern, but I'm not sure we can fully summarize it here.

That sounds fine. Thank you very much.

Thank you.

Thank you. Our next question is coming from Pierre Conner of Hibernia Southcoast. Please go ahead.

Good morning, everybody.

Morning.

Kevin [ph], thank you for the great detail which you addressed the cost issues. Appreciate it very much. Just some clarification want to check with you. On the G&A guidance of the 7 to 9 percent increase in '05 over '04, there were some sort of one-time things you mentioned in G&A. I wanted to check if that increase was over your final number on '04 or was more on the core number.

It's on the final number of of '04.

I apologize for rehashing the mobilization now again on the Baroness, just to be clear, what you'll do of course is just expense during the time of the mobilization of rig operating expenses somewhat in line with that guidance you had given us, albeit in an nonoperating mobe would be lower?

Actually, yes, when we're mobing, the cost that we will experience will be maybe a third of what those normal operating costs are, 25 percent to a third. So those costs will go down substantially because we will defer some of the crew cost. Either we'll have less crew on or we'll even include some of those type costs in our mobe cost.

That's helpful. Appreciate it. Okay. Great. And then, Gary, without giving away too much on sort of competitive standing, to dig a little deeper in the second-gen Gulf of Mexico market situation, could you tell us when -- which rig when the 110 that you're talking about starts?

In a well-to-well market, it's difficult to project exactly when that -- when our previously-committed wells will complete. But I mean, we're saying roughly around beginning of June that -- no, I'm sorry.

Q3.

Q3 sometime depending on the progress of the wells we're drilling now.

Sure. Right. Hope for dry holes on the other wells. They finish sooner.

That's not our business. Big discoveries.

Yes, of course. Would it be safe to say that that's then where you'd obviously be looking at -- then again, I know we're delving into where your bidding potential. Is that now where you're bidding in Q3 or at the moment? Maybe a different way to ask --

We said that there's a price level now out there at 110. And our expectation is that rigs of that caliber would roll on their next commitments around that time at or above those numbers. Now, 1 or 2 of the rigs -- actually 1 of the rigs is committed out beyond that now.

Yes.

But every repricing opportunity is an opportunity for the market to move. To the extent that there's still unsatisfied demand, the market will continue to move.

I got you. Just, again, I think the other way I was going to ask, there wasn't anything unique about that 110 that doesn't apply across the other.

No. We have similar discussions ongoing on other rigs in that neighborhood.

And this may be just kind of an easy one. Given where, obviously, rig acquisition costs are going to move in tandem with sort of longer-term rate expectations, but what -- give us a global thought on acquisition opportunities.

Well, we try to be counter cyclical. We bought third-generation units in '03 and at the end of '02 at under $70 million a piece. And frankly, one of them went sacked. We knew that was part of the risk there. And in previous peaks, those same asset classes had traded up as high as 150, 160. So it's hard to say, because I'm not aware of any trades of those caliber units. But it becomes problematical for us to pay those kind of rates for those units. I wouldn't think that they will be very many of those opportunities presented that we would take advantage of.

All right, guys. Thanks for the information. I appreciate it.

Thank you.

Thank you. Our next question is coming from Mark Urness with Merrill Lynch. Please go ahead.

Yes, good morning.

Hi, Mark.

Hey, Larry, I wanted to ask you to kind of look into your crystal ball in terms of how this cycle is going to play out versus the mid-'90s cycle. We're starting to get some term on the fourth-gen rigs and, obviously, some of the fifth-gens are termed out through '06 now. When do you think customers will get concerned about availability in the fourth-gen class and commit through '06? And then when do you see requirements for new construction?

Well, let me -- I'll answer parts of your question. I'm going to say that my crystal ball is not -- doesn't have a huge track record. If we try to pursue a counter-cyclical policy, then we think that will pay off. All I'll do is just point to some of the factors that I think need to be taken into consideration in this cycle versus last cycle. I can't exactly tell you when or the way it's going to play out.

One thing is new construction costs are much higher than they were in the '90s. And all of the drillers got sharp lessons pretty much last time on how much it really cost and what shipyards do. Lots of overruns in U.S.-based shipyards, U.S.-based shipyards went bankrupt and what not. So I think there's one diminished capacity, people will be focused on the Far East and those costs will be much higher to do new construction. So except for the jack-up area right now, we're not seeing a huge rush of construction. And I don't think that there are many opportunities for the upgrades.

Our Victory class are one area that can be done and Noble has a couple of halls that they have in inventory that could be done. So there's -- we're not at that stage yet. Once we even get to the economics and cross all those bridges to deliver new construction equipment, it's going to be 3-years-plus before there's any substantial new deliveries. So all of that having been said, lots can happen.

And the other thing that seems to be going on is there is a pyramid affect in that when operators get a discovery, somewhat further down the line there's a demand for long-term use of rigs for development drilling. And that's driving a lot of the commitments that we've got going on. You're seeing that happen in West Africa. It's taken a long time compared to the discoveries that took place in the mid-'90s until today between oil prices and economics and reserve losses for people to get busy with that. But that's happening across the board. That's what's put the Rover to work in Malaysia.

So continued exploration is building a backlog of required development to get that out of the ground. So I think demand seems to me on a go-forward basis to be very high in fourth- and fifth-generations, and we're seeing the same thing now in second-generation. We've seen it for a while, but I think posting this kind of rate will convince the market that that's there.

How it plays out and when it converts to term, what it takes to take what is a cyclical industry and have it go into a down phase, I really can't help you on that. But certainly, we're committing a lot of rates for '05, we're committing out into '06, our visibility on those 2 years looks very good for us. And beyond '07, we'll just have to see.

My other question was on the cost side maybe to Gary. Could you just quantify a little bit for us how much you expect your repair and maintenance cost increase given the increased demands of your customers? Is it 20 percent, 40 percent or can you quantify it?

No, it's not going to be 20 or 40 percent, but the biggest part of that 5 to 7 percent increase is going to be in the labor cost. I'd say the repair and maintenance maybe can go up 10 percent year-over-year, something like that.

Okay. And then just a look at '06 in terms of surveys. You mentioned '05 is sort of a trough year for surveys. Do you have an idea '06 looks like so we can try to build it into our numbers?

'06 and even going into '07 are going to be 2 of the higher years. We're looking at 9 in '06 and then 12 in '07.

Thanks.

Okay. We're going to try to wrap this up by the top of the hour, so we'll take a few more questions. We've got about 10 more minutes to do those.

Thank you. Our next question is coming from Derek Winger of Jefferies & Company. Please go ahead.

Can't you go to whoever is selling you these [expletive] things and say, listen my customer --

Mr. Winger, your line is live. Please proceed with your question. Our next question is coming from Ian MacPherson of Simmons & Company. Please go ahead.

Good morning. We've talked about sort of the day rate differentials between the Gulf of Mexico and Brazil for the floaters. Just to clarify, do all 3 of those rigs have the flexibility to move into the other worldwide markets?

In the rigs in Brazil, yes.

They do.

The alliance has worked in Norway, U.K., West Africa, U.S. Gulf of Mexico. So it's got a big track record on that. The Yahtzee's worked in Brazil for a long time, a DP rig, very specialized in some work-over operations. I think it's well suited for Brazil, but certainly it could work in some other markets. And then our third-generation, we've got the other 2 rigs there, the Clipper and the Winner would not be North Sea qualified, but other than that should work anywhere.

Okay. Thanks. And just secondly, what tax rate is applicable to the 11.5 million associated with the lawsuit settlement in Q4?

We haven't gotten that broken out right now. There were so many things that went on in the tax rate computation. All I can tell you is what we have in the press release, the fact that we had a higher tax rate that was driven by a change in -- from the estimate to actual in difference between international versus domestic. And also the fact that we are close to break-even. It causes the tax rate percentage to look unusual. In '05 as these day rates kick in and our earnings go up, some of these changes will not be near as pronounced on the actual tax rate percentage.

Sure. Okay. Thanks a lot.

Thank you. Our next question is coming from Mike Urban from Deutsche Bank. Please go ahead.

All my questions have been answered. Thank you.

Thanks, Mike. I appreciate everybody's attention on that. And I will be talking to you in the coming quarters. Meanwhile, we will have an 8-K that will be filed coming up on our day rate postings. So stay tuned. Thank you.

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