Diamond Offshore Drilling Inc (DO) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your Diamond Offshore Drilling Inc. quarterly earnings conference call. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to your host, Les Van Dyke. Sir, the floor is yours.

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, days that drilling rigs will enter service, as well as management plans and objectives for the future. A discussion of the risk factors that could impact these areas and the Company's overall business and financial performance can be found in the Company's reports filed with the Securities and Exchange Commission.

Given these concerns, investors and analysts should not place undue reliance on forward-looking statements. The Company expressly disclaims any obligation to release publicly any updates to any forward-looking statements to reflect any change in the Company's expectations or any changes in events, conditions or circumstances on which forward-looking statements are based.

With that I will turn the meeting over to Larry.

Thank you, Les, and welcome, everybody, to the Diamond Offshore's second-quarter conference call.

We continue in an exceptionally strong market. We're seeing high demand across all markets for drilling rigs. Floaters of all water depths experienced the most dramatic increases in rates with jack-up dayrates also continue to increase. Recently there has been a further dramatic upward move in rates for floaters. As an example of that, just this week Diamond Offshore has received a commitment on the Ocean Quest, a Gulf of Mexico semi with 3500 feet of water depth capacity. The Quest, currently working at a rate of $125,000 a day, and this is incidentally the highest rate this rig has ever received, has a recent renewal which will take affect, we believe, in October and will increase the rate to $240,000 per day for a six-month extension with our present customer. In addition, we are in advanced negotiations for some of our larger second generation Gulf of Mexico rigs at rates in excess of $170,000 a day.

To respond to this strong market we're preparing to return the Ocean New Era, our final cold stack rate, a 1500 foot second generation semi, to service in the US Gulf of Mexico. This should cost us about $12 million to activate this rig, and we expect to have the unit available in the fourth quarter of 2005. Already we have a six-month commitment to use this rig at a rate in excess of $120,000 a day.

As noted in our press release, we have accepted a commitment for the Ocean Endeavor in the US Gulf of Mexico. The Endeavor is undergoing a $255 million fifth generation upgrade for service in 8000 feet of water in Singapore. The operator has agreed to a minimum two-year term on the rig after its delivery in 2007. For a moderate period I think lasting until about end of the year the customer has an option to extend this term commitment to either three or four years. At the four-year increment we estimate the cash flows would fully pay out of the upgrade costs.

Prior to the fourth quarter of 2005 we believe that we will complete our purchase of the Garden Banks, an additional Victory-class hull. Because all of our other Victory-class rigs have already been upgraded and are working currently as is, this unit will provide us with opportunities for a variety of types of upgrades which will depend upon operators' interest, completion of engineering, and our own investment plans.

This strong market has also caused us to take a look at dividend policies. As we announced last week we are doubling our quarterly dividend to an annual rate of $0.50 a share. This restores the dividend at the level paid in 2003. In addition, we have announced the Board will consider declaring a special cash dividend in the first quarter of 2006 and may consider paying an annual special dividend in future years.

Our dividend announcement demonstrates our belief that Diamond Offshore is in a strong financial position, and most importantly that our earnings outlook is good since we believe that the current strong market could continue for some time. As a result is likely that our cash balances will grow as the current robust market conditions continue. Accordingly, in an effort to enhance shareholder value and to answer one of our most frequently asked questions, what are you going to do with your cash, management recommended and our Board agreed to put a special dividend on the agenda once year-end 2005 results are in.

I must caution you that the Board has not established a formulaic approach towards the special dividend. As was noted in our release, management and the Board will consider the Company's financial position, earnings outlook, capital spending plans, and other factors believed to be relevant. A formulaic approach would, we feel, limit the Board's flexibility and potentially retrain the Company taking advantage of opportunities that might arise. We currently believe, however, that taking into account our current cash position, anticipated cash buildup, and projected cash needs, management should be in a position to recommend to the Board a special dividend in the first quarter of 2006.

Please note that the management and Board consider it financially prudent for the Company to maintain a substantial cash position even during a period of robust cash flows.

I will now turn the opening marks over to Gary Krenek, as is our tradition, and he will comment in somewhat greater detail on our operating cost structure.

We want to look at two things here mainly. First is a review of the second-quarter results, looking at items other than those things that were covered already in the press release, as Larry said, concentrating on operating costs incurred in the quarter. And second, take a look at some of the things we expect to see during the third quarter of '05 and then going forward into the fourth quarter.

Looking at overall operating expenses, they increased from $148 million in Q1 to $162 million in Q2. This increase was due primarily to two items. Last quarter we pointed out that our major project repair expense was lower than expected in the first quarter and that these costs would be incurred over the remaining portion of the year. Those costs we had said were about $6 million below expectations. During the quarter we returned back to our budgeted amounts and saw those costs increase by about that $6 million. In addition, we have the Ocean Vanguard in Norway. Cost from that rig increased by about $5 million. This is due to two things. One, increased cost that we incurred getting that rig ready for its term contract in Norway, which I'm happy to say the rig is currently on and working, and also due to the fact that we had charged some of the expenses in the first quarter to an insurance receivable. That rig had suffered some damage in December of last year and was in the shipyard undergoing repairs during that first quarter.

Looking at some of the specific categories of rigs, we'll go through that quickly. On the high spec rigs costs increased by about $2 million from quarter-over-quarter, and this was almost entirely due to the major project repair expense increase. Other semisubmersible rigs increased from 75 million to 81 million. 5 million of this, as I said, was the Ocean Vanguard. We also spend about $1 million on the Ocean Epoch's survey costs during Q2, which was a regularly scheduled survey.

Looking at the jackups, costs went from 28 million to 33 million. 2.5 million of this increase was due to the Ocean Heritage. We did some leg repairs during the quarter. We had about $1 million of insurance deductible that we expensed and an additional $1.5 million of non-insurance covered repairs was charged for this rig. We had deferred amortization load (ph) costs for the Ocean Sovereign for its move from Bangladesh to Indonesia. This was just under $1 million. That caused the increase. That was offset by MOB (ph) revenue. Also, we had an additional $1 million or so increase in infield rig moves on our jackup fleet in the Gulf of Mexico. That also was covered by additional MOB revenues, so the net effect bottom line was nothing.

G&A expense decreased slightly from 9.5 to $9.2 million. On a go-forward rate you should be looking for approximately this 9 million number in Q3 and Q4.

Looking at the run rate on rig expenses, the daily rig operating costs that we detailed back in January in our Q4 conference call still stands. Since then we've moved the Heritage to Qatar. Daily costs there are expected to be in the low 30s. And for the rest of the rigs the same cost that we outlined back in January.

In addition to those normal operating costs for Q3, you can expect about $2.5 million worth of MOB revenue being amortized into expense. This is for several different rigs. That will be offset by about $2 million worth of MOB revenue.

The Lexington is undergoing a survey and tank renewal -- steel renewal right now, and will be out for the vast part of Q3. We expect it back in maybe the last week of Q3. Those survey costs will increase that rig's cost by about 1 to $2 million. In addition, the Guardian will be undergoing survey in Q3 for about 40 days and additional cost of about 1 million. The Baroness right now, which is our fifth-generation rig that is in Southeast Asia, is awaiting a heavy lift vessel to come back to the Gulf of Mexico. And as it's awaiting we're doing some prep work on it for its terms work in the Gulf. And we expect about $1 million additional cost for that rig. The rig will leave some time in mid-August. Up until then you can expect a normal operating cost in the upper-50s per day. Once it starts MOBing (ph) normal costs will go down to about $15,000 a day, and that rig should reach the Gulf of Mexico in the first week of November.

You can also expect in Q3 and in Q4 those additional major project expense costs that we did not occur in Q1. We're going to look 4 to $5 million above and beyond our normal cost to catch up on that. And also as Larry pointed out, the New Era we're bringing out from cold stack mode. That cost will be about 12 million, of which half will be expensed and half will be capitalized.

Looking at surveys, in Q3, as I said, the Lexington and the Guardian will be down. Q4 we're expecting the Ocean Spartan, the jackups in the Gulf of Mexico, to be down about 13 days. In '06 we have eight surveys scheduled right now -- the Confidence, the Saratoga, Whittington, Nugget, Spur, Summit, Sovereign and Heritage.

Additional downtime days beyond what I've already spoke about, we have the Spur in the shipyard right now undergoing leg repairs. That rig is expected to be out 60 to 65 days in Q3. It began that work at the very tail end of Q2 and will be completed this quarter. We will incur normal operating costs for that rig while it's in the shipyard. Also, the Ocean Yatzy is under schedule for a thruster change out. It will be down 21 days. At this point we believe that will occur in Q4.

Looking at CapEx on a go-forward basis, we're still projecting 285 to $290 million for this year. That's made up of 115 to 120 million in maintenance capital, $110 million on the Endeavor upgrade, and about $60 million for the new build jackups that we've announced.

And finally, looking at the tax rate, tax rate year-to-date is at 27%. We expect that to remain fairly constant. And for the year tax rate will be somewhere between 26 and 28%.

And with that, I will turn it over to questions.

(OPERATOR INSTRUCTIONS) Doug Becker, Banc of America.

Just curious if we could get a little more details on the Endeavor. Maybe you don't want to give the operator name, but what type of operator is it, and kind of the most likely dayrate that we would be seeing there? And is the term -- if you get the four-year term I assume you get a lower dayrate on that. If we could try and get a little more color on that.

Let me comments on the rate on that. That's a job that's going to start two years hence. We really like the ability to go ahead and grab that particular job. It was in a bid situation. We knew that we were going to be bidding against one of our competitors who also has hulls who had recently demonstrated that they would spend far more money and take a rate around 250 for a job down in Brazil. So that kind of helped set the rate. We are pleased to have it. With the eminent delivery of the Quest I think it's great to put this one to bed. That's all we can talk about that (ph).

David, do you have any further comment?

No. The operator is a large independent. And yes, it's a higher rate from the shorter term. The longer the term, the rate -- there's a little bit of discount. But as Larry said, we priced the things so if it goes four years it will essentially pay out the upgrade.

If I kind of read in-between the lines of your comments, if you were out marketing the Garden Banks today would you be expecting a higher dayrate?

Yes.

Certainly if a rig was complete and ready to go today you would see a much higher dayrate. And if we were in a situation where we were bidding in the future and the choice was either us or wait a lot more time for a new build, I think we could perhaps get a higher rate.

So in terms of when you take delivery of the Garden Banks, is it reasonable that you don't immediately go into maybe a speculative upgrade there or wait for a contract?

We haven't made a decision on that yet.

Just one last thing on the New Era. You mentioned $12 million in costs. Is that going to be reimbursed at all by the operator?

Well, through day rate. But no, that's our money.

Pierre Connor, Hibernia South Coast.

Larry, could you expand a little bit on your second generation leading edge rates? Obviously you're in a bidding situation and won't give too much detail. But what kind of timing would that begin and for what type of duration would you expect to see that kind of rate contracts?

We're in discussions with two different operators about two different rig. One of the operators is a one well situation that would fall in actually on the Lexington after the shipyard job. It's not a long well. But it is -- and it is indicative to us where the market is going. And it's north of 170.

The other program is a 90-day program for an operator that would commence some time next year -- early next year after the commitments run their course. And that rate is around 170 and it's about 90 days.

So the universe of rigs in the Gulf of Mexico that work in less than 3000 feet of water is not very big and there are a lot of opportunities. Again, this is a good example that we're just not able to meet demand.

And then an update on the Garden Banks? I know you were just discussing that with Doug, but in terms of timing, any thing there, Larry?

No, we don't take possession of that for another two months or so. And we're doing engineering studies trying to figure out what exactly makes sense to us. We're doing some preliminary marketing. We will move forward along those fronts.

Would you -- basically your thought is to a Victory-class upgrade standard as far as nothing associated with a different operation or anything on the rig. Is that correct?

We've been very successful. The Endeavor I think -- the Endeavor, as you know, can go all the way to 10,000 feet, has a huge increase in the amount of deck space. So that is an option to do that. We've been working with some that are a little bit bigger and we've been scaling back to have some at a little bit lesser size, just because rates are so strong across the board.

So still looking at all options?

Right.

Guys, those are the only two I had. Thanks.

Bill Herbert, Simmons.

A question for you with respect to the special dividend. And I know that you guys don't want to put yourself in a box for good reasons. But Larry, I was wondering if you could help me with sort of broader parameters as it relates to management of the balance sheets. You mentioned that historically you guys have wanted to keep substantial cash balances. Help us out with respect to what that means -- target debt to cap and maybe some broad CapEx guidance for next year so we can formulate our own assumptions with respect to what you may be able to pay out with respect to a cash dividend or a special dividend.

I'd like to help you, but all we've really done is put this on the schedule for the Board to look at. We think cash flow is strong enough. And the mention that we retain significant cash balances, I think you can see over time what those have ranged. I just -- I didn't -- our thought is we don't want anybody to think that we're going to take that down to 0, even with strong cash flows.

So obviously the announcement to do this special dividend understands that we've got cash flow going out for both the new build jackups and for the Endeavor. How we would handle the Garden Banks if we decided to proceed further on that is also something that would be under further discussion. So I really would just be speculating ahead of time if I gave you that help.

Well, keeping it on a conceptual plane then as opposed to speculating, when we're talking about a special dividend, do you view that as sort of meaningful return to shareholders? Or walk me through that logic. Do you want it to be -- assuming the cycle still relatively well behaved, you don't have something extraordinary arise with respect to capital spending, is it a meaningful component of expected free cash generation in '06? How should we think about that?

The fact that we made the announcement I think shows that we think it's important. I'm not going to get into the substantial significance, meaningful boxes, because I don't actually understand which is which. It's important enough for us to announce it. We think our cash flow is going to be strong enough that we can deal with that, even in the face of some of our investment opportunities that we have. And it might have been easier if we said we're going to payout X, but we're going to -- we haven't actually gone through the calculations yet.

Look, I mean I think it's meaningful too, and it's a welcome statement. And frankly it's probably the first statement with respect to an important participant in the offshore drilling sector with respect to returning cash to shareholders in a meaningful manner so we look forward to that announcement. Can give us a sense as to when -- you mentioned that the Board is meeting on this and going to opine on this late this year. When would an announcement be forthcoming?

Our target is to wait until after 2005 results are in, which obviously is January of '06. And then we've announced that we would make the payment or make the announcement. We would send out a press release as soon as we got to that. I don't know the mechanics of record dates and all that stuff. But all that would come out in the first quarter of '06.

Okay, and then the last thing I had is with respect to wage inflation. What exactly are you guys witnessing on that front? And what do you expect to see as it relates to paying what is sufficient to retain your crews?

We made a wage adjustment in December of last year for US-based hands (multiple speakers) different in some of the international places. We would -- we believe that we will need to obviously make another adjustment here in this year. I don't think the amount of wage adjustments that we're talking about at this stage could materially impact our earnings when you look at the kind of day rate increases that we're dealing with. We try to target our wage level as everyone else such that we're able to retain our people. There's a lot else that goes with that. We ran our crews through the downturn (multiple speakers) any kind of layouts, and I think we're in pretty good shape (inaudible)

And I do have one more thing. Do you have any preliminary capital spending guidance for 2006 at this juncture?

We're looking at maintenance capital somewhere in the 125 to 130 range. We will then have to complete the Endeavor. Right now we're targeting 140 million, but that could -- some could fall out of '05 and into '06. Endeavor is going to be a total of 250. And then about 115 on the jackups as we make progress payments.

So that is 385 basically; 130 plus 140 plus 115, something like that?

That's the ballpark.

Thanks very much.

Ken Sill, Credit Suisse First Boston.

Since we have David there instead of traipsing around the world I wanted to ask about contracting philosophy, particularly going 10% lower on a four-year term. I can understand that from the perspective of getting a full payout, but given the rapid increase in dayrates, the fact that you're seeing dayrates you haven't ever seen for lower spec rigs, have you guys thought of actually charging more for a term contract as things move forward?

In some cases we have thought about it. We think about all kinds of strategy when we're talking about term. In the case of the Garden Banks -- or the Endeavor, we didn't say 10% lower. There is a modest discount for term. But for us this is a term job that starts two years from now, and it was an opportunity for us to jump up and grab a job that really fit our timing very well with a customer we're very comfortable with, where the customer is very comfortable with us, that had potential to go long, and it was a good opportunity for us. So we went and got it.

We look at every opportunity strategically. If there's an opportunity to get more term or less term depending on what the operator wants to pay and what the dynamics of the market are, we look at every opportunity strategically. So we've given consideration to just about every scenario you can think of.

Looking at the second gen market, you and I both know how amazing that really is, $170,000 for a second gen rig. What kind of prospects are people doing? What's been driving the increase in demand for those rigs other than perhaps just the deepwater rigs getting pulled out to where they really belong?

What is driving it is what's driving everything else. $7 gas and $6 oil solves all kinds of problems. And this mid-range water depth of niche (ph) is one that's been ignored largely for a long time because there hasn't been a lot of infrastructure. And the more deepwater development that goes in, the more infrastructure there is that traverses this part of the Gulf. So development costs are a little easier to swallow I think in some cases. There are a number of companies out there that are trying to make a living for a change in this part of the Gulf. Like I said earlier, it's just not a big universe of rigs.

The Quest at (indiscernible) that we're talking about, the Quest is a 3500 rig. That's a huge rate for a rig that is only working -- it's working now in less than 3000 feet of water. 170 plus for these rigs that are working at 2000, 2200 is a huge rate, as you said. And it's just a function of supply and demand. There are a lot of opportunities for us and there is just not that many rigs.

And then one final question. Noble had mentioned on their call they're going to upgrade the mooring system for one of the new builds. It sounds like then Mesa is thinking about increasing the standards for hurricane mooring systems. Have you guys looked at what that might do to your fleet going forward or is it just too early to make a call on that?

We have a little bit different information, I guess, or a different interpretation of the information than the previous announcement. The MMS is concerned about the impact of category four and better hurricanes, particularly Hurricane Ivan. A lot of their concern is dealing with mud slides and pipeline issues that occurred and the production disruption. I think that's their number one goal, although they're also concerned about the impact of big rigs, big moored rigs that were directly in the path of this hurricane. If you recall, on Ivan there are four rigs that parted their moorings. It was the Transocean Nautilus, Ocean Star, Ocean America and then Noble's EVA Jim Thompson (ph) as well.

So they're undergoing a study right now; had just let some money out for consultants to come in and begin those particular studies. So we don't know where those things are going to come out to or what efforts would be required.

Certainly rigs that are out of service right now we're examining what we can do to potentially improve their mooring. In fact, that Ocean Endeavor is being constructed itself so that it can have 12-point mooring deployed. And the costs that we're seeing are nowhere near the costs that we saw quoted earlier.

Okay, thank you.

Jason Gilver (ph), Goldman Sachs.

The first question is I was wondering if you could comment on the supply of heavy lift vessel capacity available and just generally how though is it to move rigs around from marked to market these days.

There is limited numbers of vessels. There are going to be a lot of jackups coming out of Singapore in competition for those. To date -- the Baroness is waiting for a heavy lift vessel to take in back. But again, given that there's few numbers of vessels, I couldn't say that two years ago we wouldn't have the same wait because you don't know where they are at a given point in time when you desire to contract them. The day that we end up having to do a wet tow on a rig like that, I think that will obviously signal we're plum out of availability. But we're not there yet.

So what sort of leadtime do you need to get one of these vessels, do you think?

It depends on the size of the rig. If you look at a rig like the Baroness, you have a limited number of vessels that can carry it. If you are looking a jackup, there are numerous vessels muscles that can carry them. So it depends on how big the rig is you're trying to haul, where you're going, where the ship is. There's no easy way to answer that question. We have a heavy lift ship book for the Baroness and that's currently the one that we're interested in.

Okay.

I think the other big factor Jason is just the higher dayrates. Given that it does take some time to mobilize whether you go heavy lift or not, the extent that you miss that day rate, that ramps up the MOB cost that you're going to want to charge your customer, and that make it economically difficult to do a lot of relocating of rigs.

The next question is we just saw another two new build semis announced this morning. I was wondering if does the level of deepwater new building concern you at all?

I think it's still limited numbers of vessels and the time factor it takes to deliver those -- the two that were announced this morning, as I understand it, are designed for that Norwegian ultradeep market as is the Great Eastern. That's seems to be a niche that there is obviously very high dayrates that they believe that they can get longer term in that particular market and that's where (indiscernible).

Beyond that there's actually very few deepwater vessels -- I guess the two maris (ph) rigs would be two of them that are being constructed for (indiscernible) service. And again, cost and time are not something that is of immediate concern to us. And again, I think the cost and time will actually limit the number of vessels in that group that are going to be ordered.

Thanks. And then lastly, switching over to the jackup market for a second, I know it is early, but I was wondering if you could talk about where you were in discussions with operators in the two new build jackups, and also talk about where you see spot rates in the Gulf for the before the 303s and 350s right now.

On the new builds we've had some preliminary discussions with a number of people, but nothing at this point that's remarkable. There are certainly some interest in the rigs. The way they've been designed and the way they're going to be outfitted makes them very desirable for a number of people. So we're having some of those conversations, but nothing yet that's remarkable.

Gulf of Mexico, on the 300 footers we're plus or minus 70 a day bid rate and commitment range. And on the 350s we're -- the latest commitment we have on a 350 foot rig is in the mid-80s. So those markets are still moving just like the rest of the market. Still a good bit of demand there.

That's all I have got. Thank you.

Mark Urness, Merrill Lynch.

My question is kind of related to the new builds as well. You're obviously tying up some shipyard space in Singapore. That's where most of the new rigs are being built. There's at least one, the Eastern rig, that's being built in Korea. How much shipyard space do you think there is available given all the jackups that are being built to construct additional new semis?

I think you're right to focus that there are limitations there. On our own Garden Banks plan we're trying to see exactly where we might do that. Certainly Singapore is where we've got the most success and a place that we like. But just for instance the two new builds this morning that I guess are being built in Poland or somewhere in Eastern Europe for hulls and then the outfitting would take place in Norway, that gives me pause on the cost of that type of operation. But unlike the mid-'90s where there were shipyards active all over the world, many of those shipyards disappointed in terms of delivery and cost overrun. So I think most drillers are a bit prudent, and therefore that restricts the number of available slots and it's not unlimited. I think we're pretty close to what can reasonably churn out a rig in the near future.

Obviously the most readily available, at least in terms of delivery time and cost advantage, would be the Endeavor, which is now contracted -- or LOI, has an LOI, and your Garden Banks in the two Noble bingo hulls. Are there any operators that are the inquiring for new builds for US contractors? Because obviously these other ones that Marisk (ph) and others are building built on spec rather than with long-term contracts so I am wondering if any of the oil companies are talking about new builds yet.

I think take they're trying to get capacity. I haven't seen anybody say I want a new rig; built it along these design parameters.

How far away from that do you think we are given the way the market is going? Obviously people are talking about $500,000 dayrates, at least Ocean Rig is. How far away do you think we are from that in terms of -- could it be six months, a year?

I don't know. It's difficult to say. Pretty much right now with some exceptions you are going to have to wait until '07 to get a new rig out of the existing fleet? And you can -- but that's still a quicker delivery of drilling capacity for a customer in deepwater than it is to contract for a new build, which I think we're now late '08 probably before you can reasonably expect delivery. I would think you need -- we need to book up to the point that there is no other choice but to build new.

My last question relates to the jackups as well. Gulf of Mexico market is doing a pretty good job with keeping pace with some of the other international markets, but rates in the North Sea and West Africa seem to be going up a bit quicker. Have you had any bid requests to move your jackups out of the Gulf?

We've bid a number of opportunities outside the Gulf with select rigs. There's a couple of rigs that we're actually in discussion right now with some people to take out of the Gulf of Mexico. Whether or not they go, I don't know. But moving a rig out you've got to deal with MOB, you have got to deal with out of service time, you have got to deal with some international outfitting. So there's some trade-offs to those higher rates. The Gulf of Mexico rates are, as you said, running well. They have stayed short. But it still is the pool of rigs where the rest of the world is going to draw from. To the extent that you see continued rigs moving to the Middle East, which we're going to see, and rigs moves to West Africa, that just make the Gulf of Mexico all the better for those of us that are still here or those who are left behind. And of 28 rigs or so rigs that are stacked here, only I think half a dozen have worked in the last year or so. The Gulf of Mexico market is building backlog and the rates are moving quickly.

Thank you.

Jeff Kiebertz, Smith Barney.

A couple of follow-up questions. Larry, not wanting to put you in a box, but can you offer any conceptual reasons why the Board wouldn't approve the special dividend? What are the things that might be discussed or could happen over the next six months that might cause them to turn down the suggestion?

Again, I'm speculating. What the Board is trying to do is to ensure that we serve the best interests of the shareholders. Our cash flow, we believe, is going to be so strong that this is something that's obviously of prime importance and that we needed to get out there. Obviously if we felt that there were other alternatives that would equally serve that, then that would -- or provide superior returns, then we would consider those. I just don't think that when we say consider we're trying to indicate that it's not fixed, haven't been determined yet, and with all those warnings. But I couldn't see any sense in us making an announcement and then canceling it.

No, I fully understand. And I know there's a limit to how much you can reflect on the thought process of the entire Board. It's just a little bit -- it's hard for me to imagine something that could develop over the next six months that would cause the Board to turn down the proposal.

I think somebody else pointed out that this was among the first announcements of this nature. So we wanted to get out there and make that announcement. And I think probably until actually we follow through with a payment that people won't actually be able to unfortunately see what exactly is being contemplated.

I understand. Second question on the mooring system comment. Obviously Noble has said that they're going to preemptively invest in meeting regulations that have not yet been defined. So on that part it seems you agree in regards to it not being definitive. Can you help us understand why the second part, the difference in the cost of meeting the potential requirements, might be so difference between your analysis and theirs?

I don't know what thought processes was behind the number. We're not -- whether you're retrofitting a rig or you've got a rig, as they do and as we do with the Endeavor, where you are able to design scratch, all I can say is that our entire cost of the mooring system on the Endeavor is about their number that they quoted. So again, I don't know what's in their number or what's in our number. We would spend less than that for the whole thing, so the upgrade costs. And again, I don't know our capacity versus theirs, so it's difficult to say.

Okay, that's helpful though. That number approximates the total cost of a mooring system.

For us.

For you. Okay. All right. I know there's only so much you can guess about their comments. I just wondered if there were any guidance you could provide us to better understand why there might be a difference.

I guess the last question is -- well, obviously recognizing that rates are being set by a competitive process, do you understand your customers' economics sufficiently well to have any idea where their profitability would be -- where their economics would start to become marginal simply because of the dayrate on a rig?

We've been asked that, and we consider that ourselves. And we were thinking that back when, say, a certain class a rig was getting 100, are we at the limits. And then those rates moved to 120 and now they are moving to 170 for that particular class of rig. We're seeing deepwater rates -- well, let's just take the fourth generation rates in the Gulf of Mexico. We've seen a $300,000 rate here in that category and a year ago those rigs were working for 60.

I think there's too many variables, but the primary variable being the size of the reservoir. And you can do analysis all day long, but when you get the signals that people are still -- they want a rig, rigs are in sort short supply and they're willing to pay those kind of monies, that the size of the reservoir and price that they're getting today fully compensate them for that.

I figured you probably did not have a definitive number, but that's helpful. Thank you.

Mike Urban, Deutsche Bank.

My questions have been answered. Thank you.

We've got one more question?

Yes you do, sir.

Okay, let's do that.

Robin Shoemaker, Bear Stearns.

I just wanted to ask is there a scenario in which given the strong second generation rates in the Gulf of Mexico in which the Garden Banks could be reactivated just with its current capabilities?

Yes. We have looked at that. The CapEx he is much greater than the $12 million that we're spending on the New Era because the rig is set up as a production unit and lacks some of the equipment, but that is an alternative. It is a fairly small market, and we certainly don't want to flood that particular market and I think the other wait is that a larger scale upgrade is more likely to get substantial term. So those will be the things that we would weigh in making that decision.

The my other question had to do with the four rigs in Mexico which still have a fair amount of commitment in front of them. But is it too early to be offering those rigs on -- it seems like operators are looking for rigs that are a year, year and a half out start dates. Is it too early to be looking for opportunities for those rigs after they finish their work with PEMEX?

Probably, yes, it's too early. The first -- just one of those rigs expires in late '06 and the others are out into '07. We have other -- we can source other rigs within our worldwide fleet to serve needs ahead of those.

Okay, thanks.

We've got one question from Dan Pickering (ph)?

Mr. Pickering, your line is live.

Larry, two questions I guess. First one, when you look at the contract you just signed on the Endeavor and think about it from a returns perspective, roughly where are you and compare that to kind of where you think your cost of capital is here?

That return is in excess of 15%, which is what we target. When we announced that we were going to do the Endeavor back in January my recollection was that we thought if we could get the contract a contract in the 180 range that we would be under 15 -- 13, 14% in that range. And then obviously this has moved up quite a bit more, so we're certainly pleased with it.

I guess this one for Gary. You did a good job of helping us with the moving pieces on the operating cost side for the next couple of quarters. But I've got to admit I couldn't follow really all of the pluses and minuses. From a net perspective your contract drilling expenses, where do you see those as you move into Q3 net-net of all of the parts?

I haven't actually at this point added them all up. But they will undoubtedly increase somewhat if nothing more than the 6 million that we're going to spend on the Endeavor to bring it out. We had very few (multiple speakers) New Era, I'm sorry. We had very few things that were low this quarter, so we will build upon that. So it will be slightly higher overall.

How much mobilization revenue will you recognize in the third quarter relative to the second? In other words, does that number go up a little bit as well?

We have right at $2 million that we will recognize already preplanned for MOB revenue. We also have of course if we have any infield moves of jackups, we'll have that as an addition. That's going to be down somewhat from the second quarter. I believe we have about $5 million of deferred MOB revenue we booked in the second quarter.

That tells me what I wanted to know. Thank you.

Thank you everybody and we will join you again in approximately 90 days.

That does conclude today's teleconference. You may disconnect your lines at this time. Have a wonderful day.