Diamond Offshore Drilling Inc (DO) 2005 Q3 法說會逐字稿

Good morning, my name is Denise and I will be your conference facilitator today. At this time I would like to welcome everyone to the Diamond Offshore Drilling's quarterly earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a questions and answer period. If you would like to ask a question during that time, please press star then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. And it's now my pleasure to turn the floor over to your host, Mr. Les Van Dyke, Director of Investor Relations. Sir, you may begin your conference.

Thank you. Good morning. Thank you for joining us. With me on the call today are Larry Dickerson, President and Chief Operating Officer, David Williams, Executive Vice President, and Gary Krenek, Vice President and Chief Financial Officer. Before Larry begins his remarks, I should remind you that statements made during this conference call may constitute forward-looking statements and are inherently subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. Forward-looking statements include, but are not limited to, discussions about future revenues and earnings, capital expenditures, industry conditions and competition, dates that drilling rigs will enter service, as well as management's plans and objectives for the future.

A discussion of the risk factors that could impact these areas and the Company's overall business and financial performance can be found on the Company's reports filed with the Securities and Exchange Commission. Given these concerns, investors and analysts should not place undue reliance on forward-looking statements. The Company expressly disclaims any obligation to release publicly any updates to any forward-looking statements to reflect any change in the Company's expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based. With that, I'll turn the meeting over to Larry.

Thank you very much, Les. I'm going to begin with come opening remarks. I'm going to address results of our operations, what the current status of the market is. I'll talk about the hurricane issues and related to the hurricane, mooring plans with regard to our floating drilling rigs here in the US Gulf of Mexico. To begin with, I'll just run through a brief reconciliation for everybody. Because of the hurricane results in there it's a little bit hard to figure out what kind of numbers that you may be looking at. But we posted results of $0.60 a share. Included in that was $0.17 of hurricane gain on the loss of a rig, net of the deductible. So if you back that out, our non-hurricane results were $0.43 excluding that particular gain. However, those results were lowered by $0.02 for additional costs incurred in the third quarter for hurricane expenses not covered by insurance. And then we lost $0.04 of revenue due to downtime during the quarter, that wasn't booked. So to give you a non-hurricane adjusted -- if the hurricane did not occur then we would have earned right at $0.49 for the quarter.

We have very strong markets today, particularly, I think, it's relevant to focus attention on jackups. We have -- in our fleet we have 11 jackups operating post the loss of the Ocean Warwick in the US Gulf of Mexico. We've got two international and we have two under construction, one here in the US Gulf and one in Singapore. The net -- two hurricanes, of Katrina and Rita, severely damaged or destroyed, I'll let each of the contractors who lost rigs make that determination, nine major jackups. We lost the Ocean Warwick in the first, Katrina. I believe at that same time, Roland lost a rig and there was a Hercules rig damaged. And then there was six major jackups that were torn from their legs in the follow-up hurricane. For us, we've declared the Ocean Warwick a complete loss.

Losing nine rigs out of a very limited supply of jackups, also added to that rigs that are otherwise somewhat damaged and rigs that are being moved out of the US Gulf of Mexico has had a severe reduction in supply at a point in time when there was significant demand. Immediately following the hurricane there was sort of a pause as companies dealt with more pressing issues before they went out for bids. And then there was some sorting out and confusion in the market to see exactly where numbers would land. We can certainly report today that we, in your bid rates and where we're beginning to make some commitments, we're seeing significant increases in rates across the board. 300-foot units, which is the bulk of our US Gulf fleet, pre-hurricane were probably 70s and 80s, and those rates today are 105 on up to in the high 120s. So a significant move there. At the same time our mat units, and we have three in the Gulf of Mexico, we're now talking in the 80s, which again is a significant move.

We have got two 350 units, we just haven't had a chance -- those units are committed to beginning of '06 and we haven't really had a committment yet to talk about those. But I think it's clear that those rates have also significantly moved and moved above the 300-foot units. So, very. very strong jackup market due,again, to the reduction in supply and great demand in that area. In our floating drilling rigs in the US Gulf, our second gen units we had been making announcements at 175, we're now looking forward to rates right at $200,000 a day for these units. Fourth generation rigs, rates are -- probably have remained close to where they have been for maybe the last quarter to five or six months, between -- in the 320s on up to 350, in that range. But what we're really seeing there is significant demand for additional term, where we're bidding and very close to making commitments for two and three-year term from where we stand today. So I think that's significant and what we would expect in this market.

Fifth generation units, also, we're seeing significant demand for term in those particular units. So, again, very strong markets internationally but the US Gulf of Mexico is where we have had most of the repricing opportunities. The hurricane, we'll talk about what that impact was to our Company and lead into some of the mooring issues there. But I think everybody needs to remember that there was no injuries to any of our personnel and any personnel that I'm aware of in the industry that are -- this industry knows very well how to deal with hurricanes. We begin our evacuations well in advance and we evacuate in such a manner and secure the wells that in addition to no personnel injuries, there is no well board pollution that has flowed from any of the jackups or semis in operation in the US Gulf. We can also pleased to report that all of our employees, and we had many employees that lived in the impacted areas, suffered any sort of serious injuries.

Although we did have approximately 30 employees who homes were totally destroyed in the hurricane and we, as well as many other people in the industry, have made appropriate efforts to assist these employees in their recoveries. Our people were just great following the fact that we had many, many people that couldn't get on the road, other employees moved around and got out there and manned existing rigs. And we were shuffling people around, but we were always able to have a crew out on our rigs and continue operations. And so I thank all of our employees that went through that particular effort. On talking about the floaters, the big issue was moorings that parted. Virtually all rigs that were in the past of both Katrina or Rita or close by on the bad side of the hurricane, suffered some degree of mooring partings. Damages that we had on our particular rig, I'll give you the amount of downtime on those rigs and the status. I'm pleased to report that with the exception of one rig, which we expect to be back at work middle of November, all of the other rigs are now back to work.

The Quest did not part moorings, it was sitting on bottom, but suffered some cracks and took 40 days, 30 days in Q3 and 10 days in this quarter, and was back at work on 11, October. Saratoga suffered about 18 days of downtime, primarily in the fourth quarter and is now back at work. Concord broke moorings but held on its particular location, had some days of downtime. The Star is the more significant one that, again, we're projecting now middle of November to get that rig back to work. In addition to those rigs, we did have the Voyager, which broke moorings and that rig is on it's way back to location. Then we were preparing the New Era into being passed, have that come out. We took some delays, obviously, where all the damage to the shipyard and in that area, although the rig generally was in pretty good shape. We had the Lexington down in Brownsville, that was in the shipyard that suffered some delays, but it is now out, primarily because we were evacuating personnel and securing things, so we had to do that.

Additionally, the Ocean Baroness, a fifth generation rig of ours, was just arriving here in Q4 into the Gulf of Mexico when hurricane Wilma was coming in. So we took some delays on that rig that were probably 7 to 10 days while we waited for the storm to come through and the seas to die down before we began unloading operations. Moorings has been an issue and an area of concern for this Company, the industry and the government regulators. Since Ivan last year caused a number of rigs to part moorings, we have formed under MMS Encouragement and Direction, a industry study group that was working on those particular issues to explore what could be done to enhance mooring capabilities and to look at what sort of mooring standards that we needed to design these rigs to. Since Katrina and Rita, this has become even more important and it's getting more pressure from the government. But even apart from that, we have been working internally to see what we can do.

We want to meet government standards, but we think that it's obviously prudent and we're concerned about our own rig's safety and making sure that these rigs stay on location and continue to operate for our customers. So we have been working on that in those particular studies. Right now we have in the US Gulf, we have got six high-speck floaters, and that includes the Baroness which just arrived, that are moored. And then we have five second generation rigs, so we have got 11 rigs here in the Gulf, a very large number, and our efforts right now have been -- are still too early to say where we're going to end up, but it appears most of our effort is focused on a 12-point mooring enhancement which we think would significantly increase the holding capacity of the rigs. We're focused within those 12-point moorings on methods that would allow us to rapidly deploy these improvements and try not to be caught up in bottlenecks on new equipment delivery and will give us lower cost than some of the numbers that we have seen out there. And so we're working on that right now.

I would point out that I think our efforts are enhanced by the fact that we have got lots of data now on the behavior of our rigs in the storm. We were among the first companies to put data gathering locations devices on the rig, which we had in place in Ivan. So we have got that particular data. We have enhanced the data gathering even through Katrina. So we have got lots of data and our engineers are using that data to great effect. So this will be sometime, I would suppose, before we can rollout more details on that but that's something that we're working on. Efforts that might be put in place on jackup rigs to increase their strength and holdings so that we don't suffer the loss of those particular units is something that is still too early for us to be able to comment on. So, in general, strong markets, hurricanes caused a big impact, but I think the industry did very well. And we have efforts right now to make sure that for future hurricanes we will have increased holding capacity and won't suffer the amount of downtime and damages.

So with that I'm going to turn it over to Gary Krenek, our Chief Financial Officer, who, as is our custom, will be going through what some of the cost impacts are going forward into the fourth quarter and were included in the third quarter.

Thanks, Larry. I'll be quick this morning, spending most of my time commenting on things that everyone should expect to see in the fourth quarter. But first, just a couple of comments on the third quarter operating expenses. Operating expenses decreased from 162.5 million to 160.5 million from Q2 to Q3. And this decrease is primarily due to two things. One, a reduction in amortized MOB cost of about $3 million, just a natural progression of those things being amortized out. And also in Q2 we had approximately $5 million worth of cumulative repair cost on the Vanguard and the Heritage, semisubmersible and a jackup, that were not incurred in Q3. This $8 million worth of decreased cost was offset by approximately $4 million of cost to reactivate the New Era, as Larry spoke about, and also another $2.5 million of increased cost due to the hurricanes, 1.5 million of actually moneys incurred and another $1 million worth of insurance deductibles that were recorded to the operating expense line.

Just as a note, the remaining $1.5 million of hurricane cost that we referenced in our press release is included in the gain or loss on disposal of equipment line on the income statement. Looking forward to the run rate on our operating costs, we have given the daily rig operating cost by rig class in the past and for the fourth quarter we anticipate approximately a 2% increase due to increase in both labor cost and equipment cost. In addition to these normal costs, you can expect to see about $3.5 million worth of amortized MOB expense in the quarter, most of that being related to Ocean Baroness as a result of its relocation to the Gulf. Just as a note also there, we'll see about half of that amount recouped through mobilization revenue in the quarter. We'll also incur about $1 million worth of cost for a special survey on the Guardian that was previously anticipated to take place in Q3, will now take place in Q4.

We also have about $1 million worth of inspection costs on various jackups in the Gulf of Mexico that we'll see in Q4. As Larry said, the New Era will actually come out in Q4 and so we're expecting about another $2 million worth of cost on that rig to complete its remobilization into the fleet. We also will incur about $2 million worth of rental cost for mooring equipment that we're requiring as a result of the hurricanes on a couple of our moored semisubmersibles. And finally, our major project expense cost normally is the highest in the fourth quarter, it's lowest in the first quarter and so we're still catching up. And we expect to see a $3 to $5 million increase in that in Q4. Looking at downtimes. At the Guardian we'll be off contract for about 50 days in Q4 doing its survey and an equipment upgrade.

We also have the Ocean Spartan, a jackup in the Gulf of Mexico, which will be down about 14 days for a special survey. And finally, the Lexington is completed its survey the first part of Q4 and will be down about 14 days. In addition to these special survey times, we have inspection time for the jackups, Titan and Tower, 14 and 21 days down in Q4. And two of our semisubmersibles, the Patriot and Nomad, Patriot down 10 to 14 days and the Nomad we're expecting to be down about 12 days in Q4. Just a quick recap on hurricane repair. Downtime in Q4, Larry talked about the Quest 10 days. We're expecting Saratoga 20 days and the Star approximately 45. Finally, the Baroness, its relocation to the Gulf of Mexico, we expect to go back on to contract mid-November of this -- this quarter. And finally, the New Era should go on to contract mid-December. And finally the tax rate was approximately 29% for the first nine months of this year and we expect that to remain consistent in the fourth quarter, somewhere between that 28% to 30% range. And with that I will turn it over to questions.

Thank you. At this time I I would like to remind everyone, if you would like to ask a question, press star, one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question is coming from Doug Becker of Banc of America.

Thanks, good morning. Gary gave a lot of detail on fourth quarter operating costs. Wonder if you could take a stab at what we should be expecting in 2006?

Gary.

We are in the process of doing our budgets right now and what you can see -- I believe you can expect is a slight increase over the normal operating costs that we have given on our rig class by the 7%, reflecting both equipment and increases in wages that will be necessary.

So 5% to 7% off the numbers you have given us in the past?

That's correct.

Okay. You gave some overview of -- of where day rates were. Just wondering if we could get a little more specifics on the Ocean Epoch, given that the Gulf of Mexico does come off contract in early 2006.

The Ocean Epoch is working in Malaysia right now. Right now it's working for Murphy in Malaysia, it's under contract till about -- almost the end of the first quarter. We are not yet in discussions, detailed discussions. We have got bids outstanding, but we don't have anything confirmed for it. But we're seeing rates rise in Asia, just like we are in the Gulf of Mexico. So we would expect that rate to increase on it's renewal, but we don't have any thing to report yet.

Similar rates to what we're seeing in the Gulf of Mexico?

I wouldn't say that they are quite as dramatic, but they are, in the grand scheme of things, large.

Lastly conversations to upgrade the Garden Bank? Any progress or update on that?

No update but that's clearly something that we're pushing. And we have with the Garden Banks the ability to deliver fairly quickly in this particular marketplace and I think that's an advantage that appeals to many people. Also, anybody who has used Baroness or Rover or that class of rig is certainly familiar with our capabilities, so I think the market looks promising.

And how do you define quickly in terms of delivery?

Well, I think -- I mean we're talking from the moment that we began cutting steel, which because slots are full and all of that kind of stuff, wouldn't be til late in '06, that we're under two years from the date that we begin that.

Okay. Thank you very much.

Thank you. Our next question is coming from Ian Macpherson of Simmons.

Good morning. Larry, I was interested to get your perspective. You mentioned sort of the changing supply and demand dynamics for jackups in the Gulf of Mexico and does that impact the way you think about reinvesting capital into your business. Having lost one jackup but maybe having an opportunity to pickup some market share, if you were to -- like to build more of those and how you weigh that against the other capital budgeting decisions you have with respect to the Garden Banks and special dividend.

I would say it affirms our decision that we made probably six months ago to begin construction of two new jackups, the Ocean Scepter in Brownsville and the Ocean Shield in Singapore. Yes, we would certainly look at building some more, but really the delivery schedules right now on jackups, where we would fall, are pretty far out there. So I think -- what makes this business run is the fact that it does take a while to deliver new capacity, so you are in best shape if you make calls before the market turns and I think I can look forward in this particular area that we made the right call.

Finally, on the Garden Banks, did you say that you were waiting until late '06 to get shipyard slot?

That's about -- you know, we would -- we need to take the rig over to Singapore, so that takes a while to get there. And then just with availability of shipyard space puts us in -- past mid-2006 before we could begin. So I mean, conservatively we're talking out there at the end of Q3.

And in the vicinity of the 250 million that you have for the Endeavor or would that budget be increasing in today's environment?

It would be increasing in today's environment. Where we're pricing those numbers are going to be higher than that due to the equipment cost, due to the higher charges from the shipyard, all of that kind of stuff. I think the numbers should come in under 300, which would still put you, for our shareholders, a significant improvement on returns versus new construction, which for that class of rig is probably right at $500 million.

Thank you.

Sure.

Thank you. Our next question is coming from Arun Jayaram from CSFB.

Good morning, gentlemen, nice quarter. David, I was wondering if you could comment on the Gulf of Mexico jackup market, where you are bidding your 300-foot independent leg units, call it Q1 of '06?

Q1 of '06. Well, we don't currently have anything that's committed out that far, so what we're bidding for is direct continuation of our existing commitments. And our bid ranges right now are in the low 100s to say the 125, 130 range depending on term. And that's about as close, really, as we can get. For short-term commitments, we're seeing rates in that range. We are seeing some people that are coming up and interested in a year commitment or so, which is something we haven't seen very much of in the last, oh, 18 months. There has been some, but now we're starting to see some more of it. So we are seeing opportunities for higher rates and more term, which is something we like, we like to do a little bit more term, but, as Larry pointed out, the market has been impacted dramatically. There is only about 75 or so jackups working the Gulf of Mexico now. So the operating community is now starting to recognize that if they want to keep active, they are going to have to recognize the supply side that we're now facing in this market.

Okay. That's helpful. Question for you, Larry. If the drilling moratorium in the eastern Gulf is listed, that sale area 181 or so, what do you think this could do to rig demand? And what types of rigs, call it mid-water or deep water, could this impact in terms of demand? And would you change your strategy if you were to see a big area of drilling open up over the next couple of years?

Well, we're seeing demand so strong across the world that if we opened additional, significant additional parts of the US, I'm saying 181 would be nice, but that's not a huge area, then that would just have demand, I think, increase even further. So I think there would be more pressure for new delivery, because there's not enough capacity to service the existing markets. But the new deliveries are still out there some period of time.

181, I think in general, because it's structured more than 100 miles from the Florida shores and more than 100 miles, now that they have eliminated the chimney portion of it, from Alabama, is primarily deep water. And I know I talked to customers previously in a different marketplace. But two years ago, we're really looking for 181 for people that didn't necessarily have big deep water plays. I said, here's a new opportunity for us to grab some deep water plays. So that may have changed in this particular market environment. But I think if you did see an opening, you would see a lot of new smaller people that maybe are not out there or out there in a limited extent expanding their deep water efforts. And again, I would also look for new areas that opened up to be primarily deeper water, because it seems like that is part of the tradeoff to keep them away from the shore, 100 miles or so, so that you end up without a lot of jackup shelf area.

That's helpful. And one question for Gary. Gary, can you just give us a preliminary CapEx number for 2006.

Preliminary number, we're looking somewhere 385, 390 million range, which would be maintenance capital of in the order of 130 to 140 and the remainder of that cost going to the complete the upgrade of the Endeavor and progress payments on the jackups.

And I would add that there is the possibility of, in addition to those numbers and not included in those numbers, would be mooring augmentation that we would add to our fleet.

Okay. Thanks a lot, gentlemen.

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

Good morning, guys.

Good morning.

Maybe it's too early, but I was wondering if you were in discussions yet regarding any deep water contract rollovers in Mexico and specifically was just wondering what your read on PenMex is at this point with respect to rig demand and willingness to pay globally competitive rates.

David what is your -- ?

Yes, Mexico -- PenMex so far has been pretty quiet about the future of the floaters down there. We have been in discussions with them about what their forward plans are. They certainly have, it appears, need and desire to keep going. Whether or not they have the willingness to pay the kind of market rates we're seeing, it's a little early to say. Our first roll for floaters is late '06. And so -- as the next year progresses, PenMex will, I think, be a little more forthcoming with what their plans are. But as we sit today, no, we don't really have a lot of information about what their future is.

Next question, I think at this point we have 15 firm new build deep water rigs or so and a number of options. At what point does that number start to concern you at all?

I think there's adequate demand for those number of rigs. They are really coming in at the top-end where there's limited availability of rigs. I don't know where the number is. Obviously, we would prefer fewer rather than a lot more, but with a lot of deep water exploration, we have seen that that increases the demand for development drilling. So I just don't -- I don't really have a good feel for where that is. I think, so far, shipyard capacity has been the restricting item. When you look at the -- some of those deliveries are out there in '09, '10. That's a pretty long way. I think -- also if you look at the construction experience that everybody had for orders initiated between '95 and '98, there were significant time delays across the fleet. Now I -- I hope everybody has worked really hard to try to cure those problems. But that is also a risk, so that we're looking at a phenomena, again, out there '09, '10 and then if there's significant new orders past that point, I think those are still pretty far out there.

Okay. Last question. Larry, you mentioned that fourth gens are roughly in the same spot, day rate range, as they have been for the past quarter, but you are seeing more demand for increased term. I'm just wondering why wouldn't you push rates in the instances or just keep more rigs available for spot exposure. I'm just sort of wondering about how you think about the balancing term versus day rate in these discussions, because more recently it seems that we have begun to see operators pay up a bit more above spot for term.

Yes, we do charge for some term, but frankly at these rates we are comfortable making some commitments for some portion of our fleet and not -- what helps drive the market is having fewer rigs to compete on the spot market.

Okay. Thank you very much.

Thank you. Our next question is coming from Geoff Kiebertz of Citigroup.

Good morning. Gary, I just wanted to come back to your detail on the OpEx. When you roll-up all of the numbers, I'm afraid I might be double counting something. What were you thinking about in terms of fourth quarter OpEx.

I'm not going to give a projection there, but take the normal daily operating costs plus all the different -- different parts and pieces that I have put forth in the first part, and that's -- we're going to come in somewhere around those numbers. This business, you can't come into the penny, as everybody knows.

Yes.

But that's about the best guidance we can give your right now.

Okay. But we could be looking at a 10% sequential increase here?

I I don't know it's going to be quite that much. Part of that -- remember, also, part of that is amortization of [MOEB] expense which will be offset by additionally [MOEB] revenues.

Okay, fair enough. I know you didn't want to talk about it in quantified terms, but as you are looking at these mooring costs, can you give us any sense of -- I think that Noble has put out a number on the order of 15 million a rig. Are you looking at something substantially less than that.

That's our goal.

Okay. And how long do you think it will take you to resolve whether that's going to be a workable solution?

Well, you don't know until you do the work, but we recognize that we would be advantaged and the industry would be advantaged if we could get this deployed. Again, depending upon some delivers that we don't totally control. But if we could get this deployed across our fleet in advance of next year's hurricane season would be a great win for us and for the industry, and that's what we're concentrating on.

Okay. All right. In terms of insurance, when do you guys renew your insurance policy and what are you hearing in terms of the likely increase in the premiums?

Our renewal is in this second quarter, and, I -- we just had Wilma, so I think we need to -- we're better served to get some perspective and get all of this stuff quantified and let the underwriters sort it out. They'll be repricing some of their reinsurance right at year-end, all those factors will start coming together. So I don't believe we'll have really good data on where pricing will be until the beginning of the first quarter. Our expectations, though, are that we'll be looking at a significant increase in rates. Our deductible was at the low-end of where we see deductibles within our industry and we would therefore expect that our deductible will go up.

Okay. And is something like 100% increase in premiums in your thinking right now?

I think you would have to consider that given the magnitude of the losses. But I don't have any information to say that it's -- it's that, lower or higher.

Right. And today insurance accounts for about what percent of your operating expenditures?

It's about 2%, isn't it Gary.

A little bit less than that.

It's a fairly low number.

Okay. Okay. Great. And on a more strategic level, you have -- a lot of speculative building of both jackups and floaters out there, could you kind of share with us what -- what your thinking is in regards to how those assets, as they come into the fleet, might change the -- the competitive landscape and kind of what posture you might take in regards to those assets?

Bearing in mind that we're participating in that, because we have got two of the jackups under construction ourselves and we have, from time to time -- consistently we have done victory-class upgrades initially on spec and then we get a contract before we're delivered on that.

Yes, I guess I was thinking more of the building that was going on by -- by organizations that don't have an operating capability.

Well, having invested all that amount of money, they'll find a way to operate the rigs. They can't just let that stop them. You don't put $5 to $600 million on an asset and then let a smaller scale problem shut you down. So they'll deal with it. If demand holds where it is today, at these levels, I think those will easily be accomplished and taken in. If you look at jackups, there really hasn't been significant numbers of new jackups constructed for several years. And the amount of deep-water floaters that were constructed in the '95, '98 time frame, that we initiated those orders, was not really all that great given the amount of acreage that's out there. I think both of those, both the jackups and the floaters, are going to serve new markets and expand existing markets that are in high demand. So I'm not worried at this point. It is a cyclical business, so if demand tapers off and you have got more supply, then that could cause pricing pressure. So I think it really all goes back to your view on product prices and demand from our operators.

Okay. Great. Thanks very much.

Thank you. Our next question is coming from Pierre Connor of Hibernia South Coast.

Good morning, everybody.

Good morning.

Gary, just a housekeeping first. Wanted to clarify the downtime on the Voyager anticipated? I didn't quite pick the number out. Is there going back to location but not yet back on day rate?

That rig actually is still on day rate.

Oh still. Okay. So then the only other was the Quest 10 and The Star 45, or did I miss one more?

Star is down 45 days, is the only one that hasn't returned back to work and we're going to miss 10 on the Quest and 20 on the Saratoga.

That was the one. Okay. Gary have you added at all in terms of what the fourth quarter hurricane number is on a total basis between -- and I guess all we have left now that you have taken your deductibles, is strictly the downtime and therefore, i.e. lost revenue, is that fair? And have you added that up?

We have not added that up, but what I will say on the cost side, said we will have about $2 million worth of rental cost for mooring equipment.

You gave us that. Okay. So that would be -- . Okay, fair. Larry, on -- or maybe for David too, the -- as you work through this mooring design issue and obviously don't have-- or desire to maybe implement all of that at one time, is there potential for some operational constraints next season whereby either self-imposed or externally there would be water depth limitations on the fleet? Do you see anything like that?

Just totally speculating, but I don't think that the broken moorings was related to water depth. We have seen some of our second gen units break lose in shallow waters, so I don't think there's a correlation on that end of it. It's too early to say what is going on as I re-emphasize we're moving as rapidly as we can to have a fix for our fleet before the start of the next hurricane season.

Right. On the contracting strategy side and the term and the spot exposure and it seems like that the operators are obviously concerned about just flat out availability, obviously, willing to pay up for term. In your strategy would you consider obligating availability for -- with variable, i.e. hybrid contracting strategy? Do you have some of that now and would you consider some of that -- either both of jackups or, I suppose, primarily on the jackup side?

Do you mean indexing rates according to what the market does?

Yes.

We have got some of that and we've done some of that. If everybody indexes the whole fleet the market doesn't move. So we don't mind indexing certain rigs under certain circumstances as long as there's a big enough universe of rigs to benchmark against. One of the concerns that we have got in that strategy is that the supply and the market has been diminished dramatically. There's 75 or so jackups were in the Gulf of Mexico. We have got a big piece of that business. Our 11 jackups is a big piece of the Gulf of Mexico business. If you look at the universal rigs, you worry about the different class of rigs, what you're being benchmarked against, and how it works. We have historically done some limited indexing. In a market like this it is not our preferred strategy. But we build in some protection if the market takes a big run and we index often in a market like this.

Okay. Fair. And Larry, maybe a little bit on -- or further on Jeff's question. With these potentially, even though ostensively they've indicated they would be operators of this equipment being build, both jackups and floaters, and maybe not. And then I'll even give away your strategic positioning here. Do you see that given the dramatic changes in strength of rates and there were early talk of selling some of that before it came out. What is your perspective on the ability of those speculators to actually sell some of this to existing operators?

Well, I think they would -- they have got price targets in mind that they'd like to realize. I think they are pricing off the stock market, though, and so they are looking at real premium prices. And I do not believe in general that the big US drilling contractors are going to buy equipment at those type of prices.

Okay. Great. Okay, guys, thank you very much for the information. I appreciate it.

Hope you guys are doing okay in Baton Rouge.

Yes. Thanks.

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

Great quarter, gentlemen. Couple of things. Have you figured out the rigs that will be down for five-year service next year?

Right now we have eight scheduled, and those would include the Confidence, Saratoga, Whittington, Nugget, Spur, Summit, Sovereign and Heritage.

And how long will they be down on average?

You can assume on average 21 days for a jackup, and 35 to 40 for a semisubmersibles. That is an average.

Okay. And how much will it cost extra for those service?

Jackup $1 million and a semisubmersibles 2 million on average.

2 million. Okay. Great. Any guidance on the G&A side for next year?

Like I said we're still in the process of doing our budgets, I would imagine with inflationary pressures on this industry, 5% to 7% increase over this year's cost.

Yes, and the other thing that I would point out, I'm not sure it impacts G&A that much, but with day rates where they are, if we can see where the expenditures for people or equipment or procedures increase our ability to maintain rigs and reduce the exposure to downtime, then we're likely to do that. So you could see some of that driving cost, but again, we recognize we have to keep costs under control, but they are a ever diminishing proportion of our revenue stream. So it's really whether we hold our G&A to a 4% increase or a 6% increase, there's really not that much impact on our bottom-line.

Now the rental cost that you mentioned, $2 million for next quarter, is that going to be recurring into first quarter and the subsequent quarters as well or not?

It should not be. Or at least at this point we don't expect it to go beyond the fourth quarter.

Okay. And on the Voyager, I see that you still be receiving day rate despite the rig not working. Is that because of insurance or is that some kind of contract that you have?

All of these contracts have some support from the operator and they very from contract to contract. This one is a little bit different and just suffice it to say that we made arrangements to be paid.

Okay. Great. And finally, just by my estimates shows that you are going to have significant free cash flow next year and in '07. Any early thoughts in how you are going to use that free cash flow?

We have laid out our capital plans I think fairly significantly and we made an announcement at the last earnings release that the board was planning on considering a special dividend sometime in Q1.

Right. Thank you very much.

Thank you.

Thank you. Our next questions is coming from Jud Bailey of Jefferies & Company.

Thank you, good morning. I was hoping to get a little color on two of the regions that you operate in. First, could you maybe expand on what you are seeing in the southeast Asia floater market? Demand seems to be increasing in a couple of different pockets there. And secondly, could you talk little bit about what is going on in Brazil? If you are talking to Petrobras, our understanding is they are still looking for additional deep water units for the next few years and still not willing to pay market rate and maybe looking at new construction. Could you maybe talk a little bit if you talked to them about doing some work in that regard?

Okay. In Brazil, you are right. They do have additional demand, they believe and have been in the market looking for opportunities. And you are also right, they don't like paying the $350 or $400, $500,000 a day for day rate. They have had some discussions about potential new assets that could include new construction. I think we, along with everybody else that's been in Brazil, have had those conversations with them. Everything done in Brazil is public tender. So Petrobras moves whenever they want to. So certainly that's an opportunity there for the industry and by virtue of the fact that we have been in Brazil for a very, very long time and have a very good relationship and good work history, we would certainly have a shot at that if and when it comes up.

In Asia we operate a range of rigs from 5th generation to 3rd generation rigs in both in Australia and in the other greater areas of all Austral/Asia, and we are seeing some significant pressure on the rates there. The supply is certainly -- we're under supplied in that market, like we are in other markets. That market has been fairly short-term contracting philosophy in the past and continues to be, although we're seeing rates move faster and people being talk -- or people talking about more term,. So you're right. It's a big area and there is significant pressure on rates. And we are certainly, as a major participant over there, participating in that rate rise and pushing rates every chance we get on every class of rig that rolls.

I wanted to follow-up on Petrobras. It's probably fairly early in this regard, but do you get the sense that they would require, if it is new construction, would they require that be done in a Brazil yard or would they be flexible on that?

I think Petrobras will be very flexible on that. I think at the end of the day, Petrobras, those guys are pretty astute folks. They are interested in what all operators are going to be interested in, and that's going to be delivering the appropriate capacity as quickly and as efficiently as they can. And so they may leave that up to -- and they may give some consideration or some additional consideration to a Brazilian construction program. But at the end of the day, I think they will evaluate all opportunities fairly based on what the presentation of those opportunities might be.

Great, thank you.

Thank you. Our next question is coming from Robin Shoemaker of Bear Stearns.

Okay. Thanks. Most of my questions have been asked. But I just did want to ask on the Ocean Victory, in which you show a new contract commencing November of '06, I believe, would that rate with Murphy be -- is that the kind of leading edge rate for that category of rig today? Or did those conversations kind of start a little earlier in the year?

I believe we announced that that's in the low 200s, and that that commitment was made -- guessing David, what four or five months ago?

Yes. That deal was made a good time ago and discussions have been ongoing for a while. So I would not consider that to be leading edge rate. It was a leading edge rate when we made it, when we did the deal, but certainly rates for that class of rig on renewals will be north of 300.

I'm sorry I meant -- didn't you show a rate in your current [recess] report of 320, mid-320s beginning November '06,ending November '08.

Yes, that would be in the mid, say, 310s to 335, 340 for that rig. In that range is going to be where the fourth generation renewals would be on renews, yes.

As of today. Okay. Just one other question on the Ocean Endeavor contract, you indicated a range of two to four years and there's the decision, I guess has not yet been made by the operator as to what will be the term of that contract. Is that correct?

That is correct.

Okay. That's all I have. Thank you.

Thank you. Our next question is coming from Darren Horowitz of Raymond James.

Good morning, guys. I'll just ask a quick question. Circling back to the jackup new builds. Over and above what you have already announced with both the Shield and the Scepter, I know that there is an option out there for a third jackup. At this point what would it take to go ahead and announce the construction of that third unit? Would it be a contract in hand? Or are there other constraints such as shipyard availability or -- just a little clarity there.

Well, our option was on price and not on slots, so the delivery is probably further out there than would likely generate us a contract. I think we're in great position with the two rigs. When you look at all of the rigs under construction, most of them are not, as was noted earlier, by main stream building contractors. So we think we have got an advantage there. But that advantage is only worth so much compared to actual delivery. So at this point in time I think the two rigs that we constructed are our present bet in that particular sector.

Just a quick follow-up question. As it relates to the aggregate cost for both the Shield and the Scepter, is around 300 million still appropriate? Was that a fixed cost when that was initially signed?

Well, yes, there were different components of it. And there's a time -- if we have late delivery or that kind of stuff, then portions of those costs go up. So it's not a fixed all end cost deliver at this rate. But we priced most of the things and we're very comfortable with the shipyard's ability to perform and deliver on that particular schedule. But again, if they are 60 days late, then you have got more interest and crew cost standing by and all of that kind of stuff, so there's some variability in that price. But we will be very close to 150, I believe.

That's very helpful. Thank you very much.

Okay. I think we have one more question.

Thank you. Our next question is coming from Asfelt Teuby from Inskulks Securities.

Hi. [INAUDIBLE] from Oslo, Norway. Most of my question has been answered already, but you were talking about all of the new business entering the market now from 2008 and 2009, and with all the options we know in the market we are talking 20 - 25 units, primarily most of them are down by Norwegian and equity money. How do you see the developments when these rigs are being delivered to the market? Could you expect day rates for leading edge fifth-six generation rates to continue further or will they stabilize at this price? And also regarding contract lengths on new contracts, what do you expect?

I would expect that the existing fleet capacity would be contracted up through when you have the new delivers. And that's taking place as we speak right now. And then at that point the operators -- our customers will move to consideration of the new delivery. And I believe that there would need to be -- to cross that bridge with the operators, the Norwegians will have to have more concrete operating plans announced than they have today. I don't believe that's something that they won't cross and then it will -- it will be just within that market what the bid and the ask are between the people constructing the rigs and the operators that -- that demand those. If we go forward on the Garden Banks without a contract, then we would be a slight participation in that market, although, again, because of our delivery schedule we think it's fairly likely that we could get a contract, maybe not before we initiate construction but certainly before delivery.

Do you believe in the Norwegian players saying that the units are ready for delivery now in 2008. They are already in a very, very soon position to fix these assets at a very good day rate on the three to five years contract,. And they will most likely be fixed during the next three to six months.

I think there's certainly an element of truth on that because we're moving towards pricing up the existing fleet. So I'm sure that they are in discussions. They know what they are doing and they are working hard on that.

Did you mention earlier, just my last question here, did you mention that you think that the valuation expectation from Norwegian players are too high on the premium and the stock market are too high that we could expect some of the U.S. players try to consolidate the new bids now.

Yes, I do believe their price expectations are -- are too high.

Thanks a lot.

Thank you very much. And we'll talk to everybody next quarter or in the interim. Thank you.

Thank you. This does conclude today's Diamond Offshore Drilling conference call. You may now disconnect your lines and have a wonderful day.