Diamond Offshore Drilling Inc (DO) 2005 Q1 法說會逐字稿

Good morning, welcome to the Diamond Offshore Drilling first quarter earnings conference call. (OPERATOR INSTRUCTIONS). It's my pleasure to turn the floor floor over to your host, Les Van Dyke. Sir, you may begin.

Good morning and thank you for joining us. With me on the call 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 the drilling rigs will enter service, as well as management's plans and objectives for the future. Discussion of the risk factors that could impact these areas and the Company's overall business and financial performance can be found on the Company's reports filed with the Securities and Exchange Commission.

Given these concerns, investors and analysts should not place undue reliance on forward-looking statements. The Company expressly disclaims any obligation to release publicly any updates to any forward-looking statements to reflect any change in the company's expectations or any changes in the events, conditions or circumstances on which any forward-looking statement is based. And with that, I will turn the meeting over to Larry.

Thank you very much, Les, and welcome, everybody, to our conference call. We were pleased with our results this quarter of $0.23, up substantially for $0.09 and I'm going to make an opening statement about -- a little bit about the components of that. I'll talk briefly about costs that will be followed after my remarks by Gary Krenek, our Chief Financial Officer who will give you elaborations on those costs and some data that might aid you in looking forward on how, how costs will be developed.

I'll talk a little about the utilization of our fleet, and then close by talking about the day rates. And the point I'm going to make on the day rates is that the $0.23 that we have reflected in this first quarter results reflect improving day rates over where we began last summer but are still very far away from the current market rates that we're booking on into the future that were a bit a ways a way from that yet we still were able to increase our earnings substantially for the quarter.

Generally on our costs, our costs were very much in control. They were actually down quarter-over-quarter, and we had some unusual items in the last part of fourth quarter, but they, they've been relatively flat or controlled and Gary will give you color on how that's likely to develop here. Utilization for the quarter, we had, in addition to our cold sack rigs Liberator and New Era, the Endeavor is down and will be into the future as we perform its upgrade. Its on its way currently to Singapore for that upgrade.

We had stacked downtime that was not forecast in the fourth quarter. We took 19 days on the Nomad and three days on the Heritage between jobs. We had 56 days on mobilization down time on the Epic in Australia going to Malaysia, which included a brief stop-over in a shipyard where we attended to some repair issues. We had forecast 60 days in Q4, so that's something you knew about, and then we had repair down time across four rigs, Alliance, Saratoga, Warwick and Vanguard of a approximately 147 days and we had forecast in the Q4 time period approximately 143. So all of that was in line.

Our unanticipated repair time was about 50 days. When you measure that across our active fleet, that is under 2% and that's well within -- we strive for 0 but we caution everybody that 98% normal operating time is -- is about what we're going to do as we move forward. And again, Gary will elaborate a little bit on what's scheduled to be down in '05.

Talking about day rates, as I motioned before, the day rates that are reflected in this quarter's results, although up, are quite a bit a ways away from where we're booking forward-commitments, and you can do the math on this with our rig status report that indicates our current projections on when rigs will roll and what those rates are going to roll towards. But if I take, just looking at the Gulf of Mexico and our second generation mid-water fleet, which consists of four units, as those rigs began to improve last summer, they were working generally in the 40s, and we've seen about six bumps in rates as we go forward.

First commitments were at 50, then we took commitments at 60, 70, 80, 90 and most recent, the six of those bumps have been for rates over 100,000. I think we disclosed as high as 120.

But, for the four rigs that we had in this quarter, our average day rate for those four rigs was $60,000 a day, so we were right, really just at the edge of the second stage of, of those day rate increases, quite a bit a ways away from where we would expect to be later on. As we roll forward, we will expect to see, again, looking at the rig status report, those rates rise through Q2 and Q3 but ut really, the entire fleet won't be at the rates until we get out to Q4.

There's a similar pattern in affect with our fourth generation fleet here in the Gulf of Mexico, which consisting of five units, that started at around $65,000 a day, increased generally $10,000 for each of our renewables; and of course each rig didn't go $10,000 a piece. One rig would go from our beginning point to stage 1, the next rig would go from our beginning point to stage 2 or 3 and, we've taken those rates up into the mid-150s and they're even going beyond that.

Those, those rigs also had an average rate closer to $100,000 for the quarter, but we see those further along in the development and as we enter Q2, we have a number of those rigs that are in the 120s, 130 rate, so we will be moving up a little more, more rapidly in those rigs. But, again, they still have a good backlog before they would begin to reach the current high rates that we're renewing, and I won't go through the rest of the fleet but the similar patterns hold.

I guess, the North Sea, we've three rigs in the UK sector, for this quarter we have two of those at -- working at one year contracts of, at 80 that really don't expire to the end of the year and one of the rigs, the Ocean Guardian was still working at its previous rate and doesn't actually begin the $80,000 contractual rate until Q2, and it was working for this quarter in the high 50s. So I would just caution everybody to look at the rig status report as we go forward to be able to anticipate when we would think those rigs would roll.

Our Jack up fleet with as much closer to the market and the rates on those will be moving up more quickly. To take one example from their Titan and Tower, which are 350 foot high-spec units. Those two rigs work in the quarter at average rates in the mid 50s. We've disclosed that we have future commitments on those in the 70s. We'll be moving up to those rates on at least one rig here in Q2, and another rig has commitments in the 60s that will take that on in through Q3.

So it'll be a little ways before we get there, but generally, those are much closer to the market rates than we see in the floaters. So that, I'll let Gary make some additional comments on our operating costs.

Okay, thanks, Larry. As Larry said, the two things I want to go over is one, comparing first quarter operating expenses to the fourth quarter and then a little guidance on what we see coming in the second quarter and throughout the rest of the year. Looking at rig operating expenses for Q4, we had $148 million approximately, compared to $160 million in Q4 of last year and there are two main reasons for this decline.

One, Larry indicated we have unusual items I'll talk about in a second, that are cured in Q4, unusual and non-reoccurring, and also, while we're endeavoring to control costs and believe we're doing a good job, we had about $6 million worth of major project repair expense costs that did not get spent in the first quarter for various reasons that will be incurred through the rest of the year with a bias, probably toward the second half of the year. Can you expect the $6 million to come into the rig operating expense line a little later this year.

Looking at our press release and the results for operations, the -- going by rig category, high-spec rigs was relatively flat. We decreased from $45 million last quarter to 44 this quarter. Primarily due to this delay in major repair expense projects of about $3 million, give or take. This decline was partially offset by increases in labor. We discussed in our last conference call. We gave a pay raise to our rig crew members on December first and so in the first quarter, we had a full three months worth of that pay raise in the costs.

Looking at other semi submersible rigs, that declined some $10 million from 85 million to 75 million. In the fourth quarter, we reactivated the mid-water Gulf of Mexico Semi Ocean Voyager, spent spent about $7.5 million in the fourth quarter. That rig is now working in the Gulf of Mexico all of the first quarter. So that was 7.5 million we didn't reoccur.

We also booked a $1 million deductible on the Ocean Vanguard, our semi in the north -- in the North Sea, in the Norway sector of the North Sea, that was a result of storm damage that it incurred in last December. We also had about an additional $1.5 million increase from amortized mobilization expense that we recorded in the fourth quarter and declined by 1.5 million in the first quarter. The remaining decrease in this category attributable to the major project expense partially offset by the increase in labor and Jack-ups was flat at $28 million, again, a slight decline in major expense, offset by the higher wages.

Looking at G&A expense, that increased from 8.5 million to $9.5 million in Q1. This was primarily due to increased audit fees and related Sarbanes-Oxley fees, also slightly higher labor costs. On a go-forward basis we expect this $9.5 million to be approximately the run rate, either that or slightly below that $9.5 million level. Looking at the run rate on rig expenses, the last quarter we gave a detailed per day cost for all the different classes of our rigs. Those costs still stand. There are no changes to that.

So that will be our normal operating cost. In addition to those normal operating costs, we'll record approximately $5.5 million of mob -- amortized mobe expense in Q2. 2.1 million on the Patriot, 1.5 million on the Sovereign. 700,000 on the Nomad and the remaining amount on various rigs throughout the fleet. As a note, this mobe expense will be offset by amortized mobilization revenue also, this ama -- this mobilization revenue that we will record is above and beyond the day rates that we list in our rig status report that we issue every two weeks.

Also in the second quarter, can you expect we will be doing survey on the Ocean Lexington. We'll have an additional 1 to $2 million worth of costs beyond its normal costs. and The Epic Larry talked about, it is completing a five-year survey right now, it will have an additional million dollars or so. We'll have some repair costs on the Ocean Heritage for some leg repairs where we'll incur approximately a million dollars above the normal operating costs. That along with the approximate 6 million I spoke about earlier, we'll incur a little bit of that, for the major expense, we'll incur a little bit of that in the second quarter and then even more of it in the third and fourth quarter until we make that up through the year.

Looking at expected downtime in Q2 and through the rest of '05, we have four surveys planned for the 2005. The Ocean Epic began its survey at the very tail end of Q1. It will complete the survey and spend about 15 days in the shipyard in Q2, and then spend six more days mobing from Singapore to Malaysia to begin its work. Also, the Lexington will do a survey and do some tank repair work. This work is -- will take up to 120 days. We hope to complete it quicker than that, but it will depend on what we find when we begin the work. That work will begin, we believe, sometimes in the second quarter and will stretch on into Q3 for a total of up to 120 days.

We currently have surveys on the Guardian in the third quarter and the Spartan in the fourth quarter. The Garden -- Guardian we are projecting to be out 40 days in Q3, and the Spartan, 13 days in Q4. As everyone knows, we always caution everyone that these surveys can be moved up or backwards depending on timing on wells and work that we are doing. In addition to the survey time that will be down, we have additional previously budgeted downtime for the Vanguard in the second quarter, we have approximately 30 days completing the storm damage repair and then expect to go to work the last 60 days of the month.

Also the spur will be down for 30 days in the second quarter doing some leg repairs. The Clipper is scheduled for 21 days down in Q2 for a thruster repair and change out. These are all previously anticipated and budgeted work, and finally, the Clipper -- I'm sorry, the Yahtzee our semi down in Brazil, is scheduled for a 21-day thruster change out. That could occur in Q2, potentially that could be moved back later in the year, again it's going to depend on the schedule for the rig.

Unanticipated downtime, the Ocean Nomad has -- will be down approximately 24 days for repair of it's top-drive and related equipment, so you can expect that in the second quarter. The other downtime will be mobilization downtime. The Sovereign will be down some 21 days s it moves from Bangladesh to a job in Indonesia. For costs during that mode, you can you assume approximately 1/2 of our normal operating cost. The Heritage will be down some 16 days as it moves to Qatar and then also 28 additional days down for the leg repair that I mentioned that we'll spend about an extra million dollars on top of normal operating costs.

The General also will be down some 21 days as it moves from Vietnam to Malaysia. Again, assume about a half of a normal operating cost on that rig and finally, the Baroness, as we announced earlier , will be mobing from southeast Asia to the Gulf of Mexico. We expect that rig to be down about 150 days, both waiting on the heavy-lift vessel and the actual mobe time and those days to be split and primarily in Q2 and Q3.

For the second quarter when the rig does comes down, we will be waiting on the heavy-lift vessel and doing some work. We'll have full crews so we can assume full normal operating cost of that rig at least for all of Q2. Just a couple of last housekeeping notes. Capital expenditures we're still looking at approximately $225 million , 115 million of maintenance capital, and 110 for the Endeavor upgrade.

And finally, the tax rate was 30% for the quarter. We still expect the tax rate for '05, as earlier reported, to be somewhere between 26 and 31%, and as always, this will depend on the ultimate breakdown between U.S. and international income, and also where the international incomes are. And with that, we will turn it over to questions.

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS) Our first question is coming from Aaron -- [ Indiscernible ] With Credit Suisse First Boston.

Good morning and nice results.

Thank you.

Larry, interested in your thoughts on the North Sea semi market, you have a lot of rig availability in 2006. We've seen some leading edge rates push up to about $150,000. Are you starting to get inquiries regarding '06, and what would your expectations be today as you look at those rigs of next year.

I'll let David mention that. I would say, talking about the UK sector, we're talking about the Ocean Nomad and the Ocean Princess --

Yup.

-- will be expiring right at year end. The Guardian doesn't expire until March of '06.

In March of '06 we've also go a special survey, that Gary talked about for the rigs, that'll be a little bit later. But we've seen rates in the north sea in the state of 140-plus range. Most of that's been pretty short-term stuff. There been -- hasn't been a lot of term work in the North Sea. We're having discussions about all of our North Sea rigs about go-forward work, and we are pursuing a little bit more term than what we've seen, you know, one or two wells, or some shorter term here, we're looking for, hoping to get something a year or better. And we would expect to -- to be at, at the market that you see.

Okay.

Or better.

Or better. Okay. That's helpful. Larry --

Depends on the rig a little bit. I mean, the Guardian's a little bit higher-spec rig than the others, so, but we would expect to see those rates moving up as well.

Okay. Larry, interested in your thoughts on Brazil. Obviously, the Alliance is one that comes to mind. The day rate on, you know, a similar-type capable rig in the Gulf of Mexico, move in to the 170s, 180s. Where are you at with your discussions with Petrobras?

We are in discussions with Petrobras. Our entire fleet rolls either in two rigs in Q4 and two rigs in Q1 of next month and I can't really comment on that. We, we are hopeful that we will be able to continue our long-term relationship with Petrobras and help them in their quest to maintain production. We think that that's great and the great thing about Brazil is obtaining some term is really a real possibility there. So, certainly from where the rates are today, there's lots of room to move up but I can't give you any kind of indication since we're in negotiations.

Okay. Fare enough, and Gary, last -- fair if -- enough. Gary, last question on the Guardian where you're going to do an upgrade on it, and I think it's going to cost you $5 million, that's what you've disclosed. Is that going to hit operating costs in Q3?

No, that $5 million is going to be capital expenditures.

Okay. And Gary, you talked about a laundry list of items regarding operating costs. Could you just reacquaint us what your expectations are and putting that all together for Q2 and, and the full-year.

Well, the costs that we talked about in the fourth quarter, I went through a long laundry list of expected day rate costs and those have not changed. You know, offline, we can discuss them again. I'm not going to retell them all on this phone call, but --

Okay.

-- they're the same things we talked about last quarter.

Okay, thanks.

And the same amounts.

Thank you, your next question is coming from Ian Mcpherson (ph) with Simmons and Company.

Hi, good morning.

Good morning.

Hi. I guess the Garden Banks you've exhausted the world su supply of Victory class holes. Is that correct?

I haven't thought of it as exhausted, I prefer corner the market.

Either way, so, I guess with that strategy tapped, could you talk generally about where your construction strategy may head next. Do you have to go resort to pure new construction if, if that proves to be the market's requirement or theoretically, are there other alternatives for adapting and converting existing equipment that's -- that is out there similar to the Victory program?

Well, our belief is that there's limited practical cost advantages to further upgrades in the world fleet. Nobel has a few holes and then we've got the Endeavor which is under construction, the Garden Banks, which we have agreement to purchase. We will close and take possession of that end of Q3. We're working right now on what type of design. I guess, as we've indicated, the Garden Banks has already been upgraded for production service, so there is some whole enhancements on there, and we're trying to come up with a design that uses those to the best degrees possible.

We're looking for the sweet spot between minimizing our expenditures and maximizing the earnings and return that will go on there. So we don't know yet exactly how that upgrade would be. If the market continues where it is, it would support that. But to get to your question on what we do next, we are studying a variety of options. We always try to look for something that we can bring to the table that gives us an advantage and, but if we're at new construction, along with everybody else, then then that will be a different issue for us in moving towards building new floater equipment.

Okay. Thanks a lot.

Thank you. Thank you. Your next question is coming from Jason Gilber with Goldman Sachs.

Morning, guys.

Morning, Jason.

Hey, Larry, I was wondering -- it looks like the latest contract signings were fourth gens in the goal for around the 170 to 180 range. Are we going to see things push up to the 200 level and are you going to get any push back at the levels?

This is David Williams. We get push back when we go from 50 to 55. So, yes, we'll get push back. But our latest commitments that we reported to the star at just over 170, we are currently pursuing rates for our other [inaudible] equipment above that. And as we've said before, we -- there is still unsatisfied demand. So, to the extent there's more demand than there is supply, we'll continue to see rates move.

Okay. I guess the next one will be just related to excess cash. Now, even with the two upgrades, that you've announced, it looks like you're going to have pretty substantial cash balances going into '06. Can you talk about your plans for that?

Well, one of the items that we've talked about in the past is a convertible issue that we have that can be put to us at mid-year, approximately $480 million, so that would be a potential use of those funds.

We'd previously raised 250 in straight debt with the idea that that might be one of the uses for that. Garden Banks would be another potential use of Cap Ex, but any way that we look at it, we're going to have cash flow in excess of our capital requirements. We will look at that and try to determine what's the best way to serve the interest of our shareholders. We continued to pay a dividend. In the past, we've had the highest dividend in the industry, so that would be one of the items that we might potentially look at, as well as survey what are the investment options that we have.

Okay. And then last question would be, we're hearing somewhat different answers from different sources related to the amount of global shipyard capacity available for new builds, I just wanted to get your comments on where we are with that.

We've had -- we're doing the endeavor in Singapore and we've sent someone over there to -- in advance of the rig arrival. We've got a permanent crew. One of our senior guys to try to determine the impact of the Jack-up construction on our delivery. So we think that crimps the ship yard capacity on there, but we think we will have room for ourselves and potentially for the Garden Banks because it uses different parts of the shipyard.

But, there's limited parts there. Obviously, we've seen recently Smedvig has semi that's been announced coming out of Korea, and currently, we think those are the two areas that a prudent contractor would do investments in. Which is not to, knock Nobel's pursuit of their rigs here domestically. But on a large scale, brand new construction, I don't think that the U.S. generally offers the kind of skill sets and experience something able to deliver on time and on budget that you would normally expect.

However, if all of that capacity is used up and you have high returns, people will seek out other areas so we don't think there is ever an absolute block to capacity, but there is a, I think there's a somewhat of a bottle neck, that for the time being, I mean, you haven't seen a big rush for floater construction,yet, even though rates are certainly on the leading edge getting up there towards where you might see it encouraged. So, I think we'll proceed forward on that. It depends if rates continue to escalate and then we'll find additional capacity.

All right. Great, thank you very much.

Thank you. Your next question is coming from Pierre Connor with Hibernia Southcoast.

Capital.

Thank you very much, Larry. Well said. Actually, I think this is probably a good question for Dave so I want to go to the Gulf. Second gen, Voyager-Concord, Lexington-Saratoga to the extent you can talk about your strategy there on, you know, term versus spot, and, you know, is it just what's available or is there a strategy to say well let's, let's take some short-term jobs here because we see that market moving. . With the fourth-gen's pulling a way so far away, it seems to me that there is still room for this equipment to sort of move into that vacuum area, so to spoke.

Well, I think we would already say they're moving into the vacuum. I mean, we're seeing rates for, for these rigs in 2000 feet of water, up to 120, $125,000 a day which, is a meaningful day rate for the rigs -- day rate for the rigs, we believe. For these rigs, it's a -- it's a function of what's available to you. In terms -- you know, the players that are, the operators that are drilling that market are not the majors and generally, they're not all available, they're not willing to give you a lot of term. In some cases, these guys are giving us more term/

Our strategy so far is to -- has been to keep the market moving and keep the rate rising with every new commitment and that's served us well so far. We've had very little down time with the rigs and we've been able to push the market up. We are seeing some potential term building. It's not two- to three-year term but it's six months to a year term in some cases, where we see an opportunity to tie the rig up.

But as we sit today, the fleet with the exception of the Lexington, which has got the shipyard job, we don't exactly know whether it's going to be 90 days or 120 days on reflections yet, we've been a little hesitant to go very long with it. The rest of them were all committed into late this year, early next year at ever increasing rates. So, there is still demand. there Is potential term. I don't see we're going to get two, three years but we might be able to do six moths to a year. And certainly at these rates, we would be interesting in pursuing those cast opportunities.

As you say, setting new leading edge here. So that --

Voyager makes a lot of mean, $120,000 a day.

A lot of margin. Absolutely. So I didn't know if, again, given the earlier comment where these fortunes are going, you know, did you see the potential. And I realize we're talking about, you know, contracts now out, really, the beginning of next year,likely, that there's even ability to push these further.

Um, the same principles of markets apply to the extent that there's moe demand than supply, race will continue to move and we have continued to see these rates move with every new commitment. So, I don't see yet where we're anywhere close to being able to satisfy the demand. The fact the Lexington's going to come out for 120 days is bad timing for us but it certainly going to log jam the market a little bit more and you know,there's just not that many rigs operating in a 2,000 foot range, so there's, there is more demand out there, so I don't see that we've topped these out yet. Right. That's a great perspective, I sure appreciate it. That's all I need thanks.

You're welcome. Thank you. Your next question is coming from Robert MacKenzie with Friedman, Billings Ramsey.

Mornings, guys.

Morning.

Kind of a follow-up to what Pierre was asking about, but I want to focus a little bit more on the high end, the Victory class, etc. In the context of what I've heard, the Mariannas competitors rigs at about 250 a days, where do you see them going the next few months?

I think the Mariannas can get into deepwater and is between a fourth and fifth generation capability and it's doing a substitute product where our rigs don't cross over to 6,000 feet there. Is a difference there.

We have seen the rates for our fourth generation equipment going up. You know, the Mariannas 250, as Larry described, is a 7000 foot rig, it's got bigger pumps then what we've got on our fourth generation rig. But, you know, the market is the market, and, you know, they did a great job of getting that contract and we're glad they got it. It certainly creates an opportunity for us to push harder and we continue to push, but the rates for our American value Quest Star Victory will continue to move up, as well as our renewal on the Confidence in January. All those renewable -- renewals will be honored.

Am I correction in my perception to that the spread between say that rig or that type of rig and your high-end rigs are typically 30 or 40,000 a day.?

I'm sorry, you're tacking about the delta between which rigs?

I'd say like a Mariannas-type rig and your high-end rig, it's about 30 to 40 a day, typically Delta.

In a market like this, it's hard to peg because, you know, the last rig that gets the newest contract always gets the highest rate. So, sometimes, you get inferior rigs that may leapfrog other rigs. Certainly we see that a lot in Jackets and lower-end floaters from time to time, but our, our highest announced commitments to date on our fourth generation equipment is in the 170s. We're in discussions with a number of people for other rigs at rates that are much higher than that. We're not at the 250 level yet.

Fair enough. Thanks, guys.

Uh-huh.

Thank you, your next question is coming from Mark Urness with Merrill Lynch.

Yes, good morning.

Good morning, Mark.

Good morning.

Larry, I wanted to ask you, it sounds like you're starting to talk to some of the operators about commitments that might extend too much of those six, but there's still a lot of available rig time both in the fourth gen and even in the fifth-gen to [inaudible] as in '06 and certainly a lot more in '07. There've been a few operators, maybe Shell and Chevron and Texaco that have been fairly aggressive on rate contracting. When do you think the market overall starts to senses a shortage or potential shortage in '06 and maybe even into '07 and we start to see instead of one or two year contracts, three or four?

As you pointed out, there's still an operator who needs a rig, can't have one today but with a horizon of about a year can probably get one, and you need to remove that capability to where the guy has to look two years to where you begin to get people saying I need to lock these rigs up, and that also helps lead you into the construction scenarios where it's, although construction we think's about three years, it needs to get to a point where that's probably the first available rig for the operator, and we think that's the advantage that we have with the Endeavor.

Because it's going to be -- that's the first real new capacity, uncommitted, that's going to be delivered, and we can probably, depending upon which design we go, we can probably even get the Garden Banks out before any other new construction that might start ahead of us. So, yeah, there's going to be evolution in the market, and this market has played out, it's moved more rapidly, I think, than we've seen in the past, but it's moved -- exactly the way that they always move. Term commitments that push further and further out and then begin transitioning in into longer-term from the well-to-well commitments and it plays out as you indicated.

Okay, and then my follow-up relates to the timing in the Garden Banks. Would you be willing to put that rig into the shipyard before you get a commitment on the Endeavor? If so, I know it's going to depend on what the shipyard capacity [inaudible] the bottlenecks look like, but if you were to put it on, in the shipyard before the end of the year, when would it come out?

Well, we don't take possession, again, until the end of Q3, We'd have to mobe it over and , again, depends upon what stuff we did and we don't have a bid yet from the shipyard to know what their time schedule would be. But the Endeavor was roughly 25 months. So I think we're talking about adding a couple of months to that type of schedule. On our -- looking back, we have done the Baroness and Rover on speck in weaker markets, we went ahead and committed to the Endeavor.

I would say we would consider the Garden Banks without having a contract on the Endeavor. I'm not sure if we'll be at the point of getting a contract on the Endeavor by decision time, which will be later in this year. I expect again, as we indicated, the Endeavor is the first rig out, that we will likely have opportunities to put it to work before delivery.

So, I feel strong enough on this. I mean, to some extent, our Victory grasp program has parallels with Ensco, who just consistently, year after year, has had a Jack-up under construction. I mean, we're -- this stuff is paying off for us. We're getting great day rates on them, we got minimal capital developed on it. So I can't see a real block on not going forward.

I had one last question on the Gulf of Mexico Jack-up market, Larry. The rates are now at or above 97 and '01 peak levels and the market, never in the past, has really been able to sustain rates at that level for that long.. Do you think it's different this time? I know $7 gas helps. Do you see it being sustained for a while or do you see operators backing off from ever-increasing rates?

I'll let Dave handle that.

Think you said, Mark, $7 gas helps. So, you know, there are certainly some things that make this market a little bit different and that is just that the well depletion is so fast and demand is growing. So I mean, you know, yes, it's different but, you know, markets work so, you know, I'm not going to sit here and tell you it's going to stay great forever. But it certainly has a , certainly has a great feel right now.

The interesting thing about the Gulf of Mexico Jack-up market is even at these rates, there are still 25 or so Jack-ups stacked, 24, I think, stacked and of those only seven have worked in '05. So there are a lot of rigs out there that are probably not coming back in. So you're going to see some -- I think attrition in the Jack-up fleet, world fleet over the next few years and that's certainly, you know, bodes well for the people that are out there building Jack-ups now that, you know, that things may be a little bit different.

And I think yeah, there's actually -- there's fewer Jack-ups deployed at these rates than we have seen at some of the other peak, and I think that's a reflection of a lot of rigs going to work in Mexico. We've got a rig now moving in to Qatar, which has been a big importer rig. I, I, I really believe there's demand around the world for Jack-ups, much more higher-spec Jack-ups. So I'm comfortable with -- with certainly our high-end part of the fleet.

Thanks, guys.

Thank you. Your next question is coming from Michael Urban with Deutsche BanK.

My questions have been answered, thanks.

I think we have time for one more and we'll let everyone get on to the next conference call.

Thank you, your last question is coming from Geoff Kieburtz with Smith Barney.

Thanks, I just wanted to revisit your -- the comments on the new build, I know we might be jumping the gun here a little bit, but as you think about this market being sustained for a multi-year period, what, what kind of design characteristics would you think about for a new semi-submersible? How much do you think -- semi-submersible and how much would it cost and what would the criteria need be to trigger that decision?

Well, I think -- we're going to be focused on the Endeavor and the Garden Banks which we can do for right around $250 million to get between 7,500 and 10,000-foot of water depth capability. Really big rigs that can drill really big, deep holes among the fleet. The ocean Baroness, for bringing back [inaudible] in the Gulf of Mexico. The water depth is not that deep, but the application we're using is extremely well-suited to all the capability we put on board that rig.

And so, within the fifth generation arena, if we were going to look at new construction, having commitments here and being able to deliver these moored rigs at a great cost advantage, I think that we'd probably have to look at doing some DP equipment if we went into that -- into the raw new build arena. And our expectations of new build cost are that they're much higher than some of the numbers you've seen bandied about. I think, if you just look at global Santa Fe, I don't know why -- where those rigs are going to finally come out because they haven't been accepted on to their job. There's crews on board and people failed to adequately measure, I think, the high level of soft cost. Costs that you don't pay to the shipping yard or you don't pay to equipment manufacturers.

Crewing time, training time. These rigs are so complex that the amount of time it takes to just get them working can easily be six months and that is -- that's a huge cost. But you add all that stuff in, I think the global Santa Fe rigs that they ordered and had many of the costs fixed much earlier in the cycle, are going to be north of $400 million, and that's kind of the number that we look at and that's why we think our upgrades are at 250 and our 250 includes rig training, spayers, inventory even mobilization of the hull over to that shipyard.

So, we think we got a great cost advantage. It's unfortunate for us that we don't think we'll be able to repeat that much beyond the Garden Banks. We have two other hulls, the Voyager and the Bounty. The only trouble is that, that, that those rigs are earning a nice rate in an unmodified state. So the lost opportunity cost squeezes us down.

Okay. Yeah, yes, I was asking in the more beyond the gard -- Garden Banks and what, you know, the Endeavor, what would you see to trigger you to take some action on the outright new bill -- build.

The day rates are getting close to being able to support that. I think we'd want to see a little bit more term in that particular market; before we would go ahead and go forward with that. Certainly, we'd want our Endeavor-Garden Banks committed so that our net exposure would be just the one rig.

Okay. Thank you very much.

Well, thank you very much. That concludes our conference and we'll see everybody again in 90 days.

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