Diamond Offshore Drilling Inc (DO) 2005 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Diamond Offshore Drilling, Inc. quarterly earnings conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the call over to your host Les Van Dyke. Sir, you may begin your conference

Good morning. Thank you for joining us. With us on the call today are Larry Dickerson, President and Chief Operating Officer; David Williams, the 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's plans and objectives for the future.

A discussion of the risk factors that could impact these areas and the Company's overall business and financial performance can be found in the Company's reports filed with the Securities and Exchange Commission. Given these concerns investors and analyst 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 will turn the meeting over to Larry.

Thank you, Les and welcome everyone to our conference call. I am going to make some brief remarks commenting on the quarter itself a little bit on the state of the market and I will talk also about mooring issues related to hurricanes. And then following that, as is our custom, Gary Krenek will make a more detailed statement on what are some of the financial impacts included in the quarter and give some guidance on going forward on what cost rates are in Q1 and some other CapEx, those type of things.

For the quarter I think this was a very much top line driven quarter, expenses were close to being flat with the results coming from higher day rates primarily on our 10 high spec rigs the average day rate increase over Q3 was about $40,000 a day. Those average rates, though, that are in place are still well under where the bid market is and we'll get into that a little bit more in a minute. Our 19 mid-water semis realized about a $5,000 a day average day rate increase sequentially and then the jack-ups, the 13 jack-ups that we had averaged a $10,000 a day increase. All of that adds up to most of the revenue increases with the rest of it being decreases in down time that we suffered in Q3 primarily related to the hurricane. The down time that we did take in the fourth quarter, though, did include 77 days of hurricane time primarily on the Ocean Star which had 50 days of down time. All of those rigs are now back to work and we're not having any rig off due to hurricane damage.

We had 43 days of down time related to -- or non-revenue time as the Baroness mobilized back to the Gulf of Mexico from the Far East, and that rig went to work in December in the U.S. Gulf. We had 106 days of inspection down time, 36 days of that were on the Patriot, 24 on the Spartan and the rest of it was spread throughout the fleet in small increments. Then we had 68 days of other down time throughout the fleet which is under 2% of our operating time, and that's due equipment failures or various other conditions that unfortunately we do expect to occur from time to time.

Looking at the overall market, certainly bid rates are much higher than the actual realized rates that we had in Q4, but we need to focus on those bid rates. Many of the days going forward are committed, and we will continue to see rates continue to roll forward. We are essentially sold out on our floater fleet for all of 2006. We have just some small amount of time available, say 5% of the days available in the mid-water fleet. Our high spec fleet is totally sold out. That continues through '07 where we have 84% of our days already booked in '07 on the high spec fleet. The mid-water fleet has about half of its time in '07 available, and so I think that's where you will see most of the action there or perhaps some high spec time extending on into '08.

We've recently in the quarter announced that we had made extensions on both the Ocean Valiant and the Ocean Star and those two extensions were between the mid-380's and the mid-390's for the two rigs, and those extensions were on top of all -- of them that's already in place so that they extend one of those rigs through '08 and the other rig through '07. We have got about half of our jack-up time domestically available in '06, and so that will be also an area where you will see some activity, we believe, and then very little of that in '07. David will answer some questions or I will take questions later on on where rates are, again, I mentioned the Valiant and the Star, what day rates we had released on that and the mid-water area we had released a day rate in the North Sea on the Ocean Nomad in the mid-280's. We talked about a -- we released some low 200's here in the U.S. Gulf, and then subsequent to our renewals, there have been some renewals from competing fleets which were even higher than that which I think reflects also where the market has been going. Jack-up rates are high right here in the U.S. Gulf in the 20's and certainly we've heard of activity and participated in bid activity above that on a go forward basis. Internationally I think we've released -- we're taking a rig out of the U.S. Gulf and taking it to Indonesia also in the 120's. That's a little flavor of what's going on there.

Finally, to talk about mooring issues, the Company and really the industry has been working very hard to address the issues that arose really back two years ago with hurricane Ivan but were certainly emphasized this year with Katrina and Rita where moored rigs that were in the direct path of these category 4 and 5 storms broke moorings and when addressed most of them going aground. The rigs were largely undamaged except for the separated moorings. In all of our cases we did not drag anchors but had a clean break at the water line, so it is was not an issue of causing that damage but certainly we want to be secure on location. I think most of the companies have come to the conclusion that augmentation of the mooring going from an 8 point mooring in our case where we have rectangular rigs to a 12 point mooring 3 per corner will provide a substantial increase in the holding power, and that's the effort that we're engaged on, and I believe that's the effort that the other floater companies are also engaged in.

We have 11 moored rigs currently in the U.S. Gulf of mexico, and our solution will be to put out preset moorings to augment those moorings so in effect four presets for each of the rig that will be set in place. We have a scheme to attach those to the rigs without the addition of new winches, and we think there are several advantages that we see in this particular method, one will be the cost. Our estimate for the cost of the U.S. Gulf fleet is below $50 million for the entire fleet, so that will be some CapEx that we'll be spending here in the coming year. We think that we can do this installation with minimal down time in our fleet. That's certainly important in a market where you're enjoying these kind of day rates.

Our goal is to have this in place sometime mid-year, certainly before the second half of the hurricane season where you traditionally see the larger storms. We don't completely control equipment deliveries nor logistical support, it would be necessary to install these, but should all of those stay on schedule and we have no indication that they will not, then we believe that we will have our Gulf of Mexico fleet outfitted and prepared for the second half of the 2006 hurricane season. So we think that's very important, and we're continuing to work that issue. So that concludes my opening remarks, and now I will leet Gary Krenek take some time and go over some of the more detailed financials.

Thanks, Larry. As Larry said, I wanted to do two things. One is look at some of the more unusual items that occurred in the fourth quarter of 2006 and then look forward into Q1 of '06. I am sorry Q4 of '05 and look forward into Q1 of '06 and through the rest of the year. As indicated in our press release we earned $0.78 a share fully diluted for the fourth quarter and included in this amount were three things that I would like to go over.

First of all, we earned about a $6 million gain on disposition of assets. This related to insurance proceeds that we received during the quarter related back to 2004 and hurricane Ivan. Accounting rules dictated to us that until we receive that cash we couldn't record the gain on the equipment that we lost. You saw that in the quarter. Our income tax rate was lower than it has been during the year down to about 22.5%, and this is about $11 million less tax expense than what we would have recorded if we had recorded our normal 30% tax rate. The decrease was -- in the tax rate was due to a couple of things. First of all, last year we took an expense when we reserved some foreign NOLs that we were not sure that we were going to be able to use. With the turnaround in the market here we have now proof that we can use those NOL's and therefore we reversed those credits or those reserves that we took in the fourth quarter of '04. We also concluded a couple of years worth of IRS audits in the fourth quarter, and as a result of that, we were able to reverse several other reserves that we had, and then we had a slight true-up of our expected tax rate as we normally do at year end. That gave us about $11 million decrease in tax expense that we were -- is unusual for this quarter.

Going the other way we also showed approximately a $3 million loss in other income and expense below operating income, and that resulted from a one-time charge of about $3.5 million that we took as a result of is changing the functional currency that we use in our international operations where we change from the individual countries local currencies to the U.S. dollar. That he is 3.5 million that was one time charge. The rest of our operating results were fairly consistent with the prior quarter and if anybody has any questions on that, I will answer it during the Q&A section.

Looking forward into 2006, what I would like to do first is give you our expected average operating expense daily rates at which to see by class of rig as we did last year. Looking at our jack-up's first of all, in the Gulf of Mexico we expect to see operating expenses, daily operating expenses in the mid-20's, southeast Asian jack-up's in the low 30's, and mid-east jack-up's in the mid-30's. Looking at our floaters, daily operating expense for our U.S. Gulf of Mexico second generation semis will be in the mid-30's. Gulf of Mexico rigs located offshore Mexico will be in the mid-40's. Gulf of Mexico as built fourth generation rigs in the low 40's. Gulf fourth generation Victory upgrades in the mid-30's. Gulf of Mexico fifth generation DP in the mid-70's. And finally our fifth gen Victory upgrades in the upper 40's. Looking Internationally, deepwater Brazil DP units in the upper 70's and Brazil mid-water DP units in the 60's. Finally, Brazil mid-water conventionally moored unit in the low 50's. In the North Sea and the UK sector our semis will operate in daily cost in upper 50's and in Norway between 105 and $110,000 a day. Malaysian fifth generation rigs in the mid-60's, Australian, New Zealand, mid-water semis in the low 70's. And finally, southeast Asia mid-water semis in the mid 40's.

One thing to remember, these are annual expected costs. Normally what we will see is these costs will be slightly lower in the first half of the year and slightly higher than that in the second half of the year. This is due to the general inflation that we've seen occurring in our industry and also the fact that some of our major expense projects are planned in the first half of the year and much of the money is spent in the second half of the year.

In addition to these costs looking to Q1 we will also have approximately $3.2 million worth of MOBE expense that will be amortized, that relates to the Baroness relocating to the Gulf of Mexico in the fourth quarter of '05 and another 0.5 million of miscellaneous mobilization amortization. Remember that these costs will be offset by similar type revenues that we will amortize into the quarter. We also -- the only other unusual item in the first quarter we expect to see is survey costs for the conference which will run approximately 2 to $3 million above and beyond the normal cost I talked about earlier.

Speaking of surveys we have six of our five year surveys scheduled for 2006. Set in Q1, the Confidence we expect to see about 25 days of down time for that rig. Second quarter we have three rigs. The Summit will be down for about 25 days. Nugget, also 25 days and the Sovereign 18 days. Q3 the Heritage 35 days, and finally, Q4, the Saratoga 92 days. And as always, these are subject to revision depending on end of well and other operating circumstances. Looking forward in '07 and '08 are two heavy years based on the five year cycle. In '07 right now we have twelve surveys scheduled and in '08 we have 13 surveys scheduled.

Other down time we expect behind the five year surveys in '06, the Ocean Guardian in the North Sea is scheduled for -- or has just completed its HPHT upgrade. It will be down approximately 35 days in the quarter. We had previously forecasted that to occur in the fourth quarter of 2005 and it missed just a few days in December and most of that was pushed back into this quarter in '06. We also have the Spur mobilizing to Tunisia, it will be down 30 days in the first quarter. In the second quarter we have the Princess will be down for 40 days for an intermediate survey and some related repairs and the jack-up Spartan in the Gulf of Mexico in the second quarter Ocean Yahtzee in Brazil is scheduled for a mid-period survey and also Cross For Change out, it will be down approximately 27 days.

Looking at CapEx for 2006, we are forecasting approximately $535 million. This will be broken down into the Endeavor and the Monarch projects of approximately 205 million. The new build jack-up's, the Scepter and the Shield that we are building expect to spend about 15 million. The mooring upgrades that Larry talked about is expected to cost approximately 45 million. We also have about $20 million worth of equipment that is on order to replace equipment that was destroyed during hurricanes Katrina and Rita. We expect that to be delivered in '06.

Finally, just normal maintenance capital of approximately $150 million. The 150 million of normal maintenance capital is a little bit higher than what we've had previously, including in that is about $30 million of spares that we are acquiring, and with the high day rates that we are enjoying right now we're looking at revenue preservation and being able to order some of these spare equipment to preserve some of these high day rates and minimize our down time.

A couple more items, depreciation for '06 we're looking at a 5 to 6% increase over last year. G&A costs consistent with the rig costs we're looking for about a 10% increase from prior year to this year. Finally interest expense we have a gross interest expense based on our current debt structure of about $32 million gross. We expect to capitalize about 6.5 million of those dollars during '06 with it being more weighted to the second half of the year. And finally the expected tax rate, we again expect to see a tax rate of somewhere between 28 and 31%. Again, that can be dependent on where we earn our revenues and could change during the year. With that, we'll turn it over to questions.

[OPERATOR INSTRUCTIONS] Our fist question is from Jason Gilbert from Goldman Sachs.

Hey, on this move of the Spur out of the Gulf to Tunisia, you're getting 125 in Tunisia versus, spot in the mid-40's for 300 footers in the Gulf right now. Can you talk about the rationale for moving the rig out? Is that just avoiding hurricane impact or is it more than that.

Jason, the rates in the Gulf has continued to move since we took that job, but we wanted to be able to one, get some term and two, diversify our fleet. Our fleet has been heavily weighted in the Gulf of Mexico. We're very pleased with that but it has been a long-term goal to bid these rigs out of the Gulf. It is always difficult to in down markets you have got to eat a lot of your MOBE and up markets you miss some of your earning time even if you get the MOBE covered and the circumstances of this job, though, enable us to make the move without suffering on either of those two fronts. So for those reasons we're more than glad to go ahead and get a year's work at this rate.

Can we expect you to -- to see you move other rigs out of the Gulf, then?

We could move another one or two, but essentially most of our Gulf fleet we have got some add rigs that will likely stay here.

You're talking about jack-up's?

Jack-up's.

But there could certainly be some other rigs move out of the Gulf of Mexico from time to time.

But on the jack-up area we could move just one or two, but we're going to keep the bulk of our fleet here in the U.S. Gulf.

Great. Also second, recently GSF got 325 a day on the Arctic 1 in the Gulf. Is that the type of rate we should look at for the second and third gen rollovers you have coming up in the Gulf?

That's a third generation rate. I guess we don't really have a pure third in the Gulf, but there is not much other choices other than second.

Certainly there is limited opportunity, limited number of rigs in the U.S. Gulf of Mexico. So to the extent there is a good application, you're going to see rates go up whether or not we get to that level we'll have to see how it goes. But certainly there is more demand than there is rig capacity at this point.

Great. Thanks very much.

Next question is coming from Ian Macpherson from Simmons and Company.

I guess first question, you had your special dividend announcement and indicated that you will consider doing that again on a repeating basis annually. What would be the time frame we should look for on another announcement? Would it be not until a year from now or possibly sooner before we hear the next news on that front?

I think our plan is to do that at the end of the year similar to what we did so we made this announcement in January once we had year end results in. So I think that's the sort of time frame we're talking about. When we announced the first one we said first quarter just to allow for anything that might come up.

Okay. Then I guess getting back to the market, if you could maybe talk about what you're seeing in terms of customer interest on the Monarch that you're working on and just sort of generally what the customer interest level is on new builds above and beyond that?

We've had conversations with a number of operators about the Monarch and are continuing to have conversations. We don't have anything yet that we're really ready to disclose. But certainly the capability of the hull and the deliverability of it in '08 are attractive to a number of operators. So there is interest out there and our expectation is certainly that we will get a contract that's -- that we will be proud of. But we really don't have anything yet we're ready to talk about. On the new build front, there are a number of opportunities out there in the world, probably three or four ship opportunities that out there the floating around right there and I guess we along with everybody else are evaluating those opportunities.

Okay. Last question, you have the Whittington coming off its four year term contract with PEMEX in October, can you speak to what the outlook is for that rig and maybe what PEMEX' outlook may be for renewing it?

The -- all of the rigs in Mexico as you correctly state, the end of that contract term is in October of this year. All of those rigs are rolling starting then and well into '07. PEMEX does not have forward option rights, traditional option rights for those rigs. So we have the ability to go out and market those rigs in other parts of the world if we so choose. We actually are doing that for the rigs that roll in early. The Whittington actually, although the contract is up in October we have the obligation to complete any well in progress and the wells down there tend to be longer. So we don't know exactly when the rig will be available following the completion of its work in Mexico. We have some survey work and repairs to do. So the rig will actually -- our plan is to mold the rig to the U.S. Gulf of Mexico and conduct a special survey and some repairs that will take it probably through most of the first quarter of next year. But following that the rig is available and it along with some of the other rigs we're actively marketing around the world.

Great. Thank you very much.

Thank you.

Question is coming from Able Kwashbie from Petrie Parkman and Company.

Hello. We're not hearing a question on this end.

Your line is live. We'll go to our next question. Our next question is coming from Arun Jayaram from Credit Suisse.

Larry, I was wondering if you could maybe update us on the shipyard projects on the Endeavor and the Monarch, just the progress.

I think that's valid to focus on people, think of drilling contractors as operators of rigs and certainly that is our primary function but we are also constructors of rigs and that certainly in the past that's key to keeping a company on track. Of the four projects we have got in -- underway, the Endeavor is the most advanced. I was in Singapore and saw the rig ten days, two weeks ago. The rig was on dry dock, was making substantial progress and we were on schedule, and we have since come off the dry dock with that vessel, and we're about a year away from delivery, and everything still looks very good on that rig. That's even in the face of that shipyard having a lot of projects going on there, but the shipyard is sort of organized between refurbishment projects and new builds and so the refurbishment end of it certainly has the man power we need. The Monarch has not departed the U.S. Gulf yet. It is really too early to say. The Shield and the Scepter which will be delivered right at the end of '07, beginning of '08 when I was in Singapore they pointed at the piles of steel that had our chalked shipyard order number on there, but it is not early enough to really make any statements. But certainly to date everything seems to be on schedule. I would remind everybody, I think the easiest thing you can do in business is repeat what you've already done successfully once and in fact on the Monarch that will be the 7th of our Victory class upgrades. I am very confident of that and confident that the people that we have got there can do a good job on that.

Larry, on the Monarch you put out a $300 million estimate to complete the upgrade. Can you divide that between the owner furnished equipment and the shipyard piece and maybe just highlight or quantify some of the inflation you've seen, how would that compare to the Baroness and Rover upgrades that you did earlier.

Rover was right at 190. But hen we moved into the Endeavor, we went from a nominally equipped 7,000, 7500-foot rig to a 10,000 foot rig on the Endeavor Monarch, and the Endeavor came in at 250. We also expanded the deck area quite a bit on the Endeavor. The Endeavor has some other enhancements, so it is a little bit bigger rig, and I guess from going from 190 to 250 probably half that increase is inflation, and half of it is additional specs and then the difference between the Endeavor and Monarch is almost all cost increase. So from the 250 to $300 million level is where that comes about. I don't have a break out in front of me. But I think most of the cost increase comes from the equipment side more so than the shipyard.

Okay. Thanks a lot, guys.

Our next question is coming from Doug Becker from Banc of America Security.

Thanks. On the conference call one of the majors mentioned that some of its longer term contracts or potential longer term contracts either have either an opt out or a repricing feature. I was wondering if any of your term contracts had some type of feature like that or you'd consider it going forward.

We'd certainly consider repricing features but not opt out features. Our opt out features generally if an operator has a termination to write his obligation, generally in today's market is going to be to pay the number of days remaining in the contract times the rate. We don't really -- it's really not something that we consider when we talk about term, if it has a termination right we don't really believe it is a term contract. So our contracts are structured that way. Repricing some of our contracts have some repricing features depending on market. Most are -- most of our term contracts really are fixed.

Along those same lines how stringent are the cancelation provisions for cause if the rig is not meeting expectations, how stringent are those typically?

Well, they're defined differently. You have to keep in mind that nobody really wants to terminate a contract. The effort, is all put into trying to solve the problem not weasel out of a contract on either side. They're different. I don't really know how to define it. They don't typically have -- if there is equipment failure, there is a remedy. If there is a major failure, there is a remedy or a remedy period. So it is not a -- your draw worses down so three days later the operator has got a right to terminate. It is just not structured that way. We have a great deal of protection built into how our term contracts are structured.

That is what I was looking for. It is pretty difficult to get out of it?

It is very difficult, yes.

And then just one housekeeping item. The revenue came in pretty well above expectations, at least our expectations. Are there any moving parts that we're not capturing just in the fleet status that could account for that or have implications going forward? I guess there is a bonus structure down in Brazil but beyond that?

That was a pretty small portion of it. I think it was the rollover dates that we have on contract changes and then the amount of down time between this quarter and last quarter.

I would say it would be the down time. We -- just the normal equipment or repair was very good for the quarter which we're happy about also the Guardian may have been part of it. We gave guidance that the Guardian was going to be down for its upgrade in the fourth quarter, and that didn't occur or start until the last ten days or so.

That's helpful. Thanks.

Our next question is coming from Pierre Conner from Hibernia Capital.

Close enough. Just a follow-on on Doug's question on the down time, you mention about accumulating spare parts for revenue insurance if you will. Was there any impact to that in the quarter yet or is this something you're making sure you have replacement components for future quarters to ensure.

It is just having everything on the shelf and expanding in weaker markets. We accept a little more risk to save CapEx and with rates claiming, it switches the other way where you need to have some of that stuff. We have spare strings of riser for instance.

Right. But during this last quarter that was just good performance on existing equipment not -- and this is on a go forward I did to make sure you had the spare equipment?

I am not sure that that we don't take Liberty for a lot of the spares. We're also emphasizing and putting extra effort into our maintenance procedures and our preventive maintenance and so I like to think that that's having some impact but that you can't gauge that quarter to quarter. That's really something you'll see develop over the year. But certainly everyone is charged with making sure that we have as much up time as we possibly can.

Absolutely. Want to ask you a little about the jack-up market. So you do point out appropriately you have good exposure to additional recontracting on your jack-up side more so in '06 and then of course expand a little bit into if there has been any conversations on the, as you point out piles of steel on the Shield and Scepter. First I guess a little, do we -- what's your strategy on those available days, continue to remain as much exposed to the shorter term? Or are you looking to begin to layer in some more term in anticipation of marketing the two new builds, I realize they're obviously a little bit later deliveries and then what are you hearing if anything at this point around delivery of equipment out in late '07 on the two new builds?

I guess on the preference for term, especially we get asked that question a lot. But by and large we respond to what our operators want. There hasn't been a lot of term offered or sought by the customers in the U.S. Gulf of Mexico and that's the reason that we've stayed shorter term as they now come forward and ask for term, we will price that term appropriately there. Just where we are in the market I would expect to see more term opportunities on a go forward basis. I am not sure that we're balancing those rigs versus delivery of the new rigs. We think that the new rigs are going to work in new markets, and/or new applications within those markets -- monitor it as much.

That's helpful. Going back to the second, third gen and the discussion of the first point made about the difference in some of --leading Arctic 1 and appreciate there is a little difference in capability, water depth, maybe some as I appreciate in the BOP stack. Is that again the tightness of the market or maybe digging a little deeper, are there any opportunities within the current second gen fleet with a little bit of upgrade be it 15,000 pound stack or something of that nature to move those rates at all or is it going to be pretty much driven by just market demands? Can you fine tune anything on that equipment to mover it in terms of its capabilities into a little higher in.

Well, those rates are moving. The rates we are now are up dramatically over where they were a year ago. What you're seeing and where our average rates which Gary defined a little while ago were deals that we may have made six, eight months ago that certainly our bid rates now are well above these levels. There are things you can do to hulls to take a rig out of service, put a 15 case stack on it is -- it sounds good for a marketing guy to say it real fast. It is a very complex project, and just unless you happen to have a 15 case stack laying around, it takes a long time to marshal all the equipment to do it.

Certainly there are some things you can too to some hulls and we have done a lot of that. I think most of the applications, most of the time opportunities we've had for upgrades that we think are reasonable and cost effective and efficient for the benefit of the shareholders have been water depth enhancements where we've taken some rings up to 2200 feet of water that might have been built for less than that or to take it a step further even a Quest Star Victory and the head of Victory class upgrades.

We look at upgrades of the fleet every day, every real term opportunity or new project opportunity we look at really almost very often have some type of fleet upgrade or some kind of rig upgrade in it whether it's water depth or drilling performance enhancement opportunities, so certainly there are some things you can do. Some of these hulls are fairly limited. But there is something you can do. What's going to drive most of the bulk of the rate and what's driven the five rigs that we have working in the shallow water fleet in the Gulf of Mexico right now is just pure demand. And the demand is still there, and we still see opportunities for these five rigs here and some of these rigs abroad. Our expectation would be that we would continue to see strength in the growth of the rates.

Okay. Helpful. Maybe this one is for Gary, just remind us on, and I guess within the guidance you've given us on cost which is real helpful, I appreciate it. I'm assuming you're taking into account inflation or increases you would expect on insurance. Do you have a renewal coming up, remind us, and what are your expectations there on the cost?

Our renewal is May 1, and we expect it to go up. We expect to retain more exposure in all likelihood but beyond that we haven't -- we're just now starting the negotiations, so it is too early to say.

Okay.

Pierre, we do have some cost increase built into the numbers that I gave you, and again, that's one of the reasons that we'll be a little bit lower in the first half of the year and a little bit higher in the second half of the year. Because that's been annualized into those numbers.

Got it. Makes sense. Great. That's it for me. Thanks, guys.

Jud Bailey from Jefferies and Company.

A quick follow-up question on Mexico. You mentioned you were bidding some of your rigs out of the region and from our understanding you are probably going to see some more rigs leave that part of the world as well. Is this a function of PEMEX just not wanting to pay what are market rates or are they altering their plans at all? Can you maybe elaborate on what you're hearing from PEMEX?

Well, unfortunately it's a little -- we don't -- PEMEX has certainly been willing to step up and pay the rates for jack-up's. So our expectation is that when they get ready they may be ready to step up and pay the same kind of increased rates for the floaters. The problem is essentially that they really are not there yet. The market has kind of out run them. Where an operator who is looking for a rig here or some place else abroad may be looking a year in advance. PEMEX has really not given us any strong indications of what their intent is going to be. We need to try to be responsive to the opportunities as they arise and to the response and to the opportunities that we can go out and create and those opportunities are presenting themselves well in advance of the availability of those rigs so we are going to pursue them. That does not mean to say that PEMEX either does not have the demand or does not want the rigs or is not willing to pay the price. Because as I said, certainly they've been willing to pay it for the jack-ups. I don't yet know what PEMEX is going to do.

They certainly have a need. If you look at their overall strategy it appears they have a need. If their floater program is anything like their jack-up program, they have the wherewithal and the desire, unfortunately for them or not depending on what they want to do they haven't yet given an indication of what they want to do so they're not bidding the work. In Mexico everything is bid. There is nothing negotiated. It is all bid. So those -- the tender -- they're not there in the tender process yet.

Ask you about another state oil company that does look forward and that is Petrobras. Anything new from them? Can you talk about if anything they may need incrementally for later this year or '07 or '08.

Well, thank god for Petrobras. They've been good to us for a long long time. We've been there for thirty years or better. Right now our rigs are -- the Clipper is under a five-year contract. The other three rigs are under four year term contracts. You hear a lot from Petrobras. There has certainly been a lot of talk about drill ships down there, and some hotly where everybody has been waiting on the Petrobras drill ship bids to come out for two ships. Our expectation is there will be increased two more ships down there and there may be continuing opportunities.

I don't yet know what Petrobras' view is going to be of the rates they see or of the delivery of the vessels they see. But certainly they have indicated a need for at least two more DP vessels, and perhaps some other equipment, so I think we'll wait and see. Petrobras certainly is not bashful about augmenting their fleet when they need to and they stepped up early in this period and did themselves well. So we'll have to see. I think there is certainly life there that could have more demand.

If you could just remind us what's the latest on the start-up date for those two DP drill ships? Are they still looking '07 or '08? Or what are they looking for?

Well, I think they'll be looking for '08. I think they will probably take '09. We'll have to see -- it is real early in that process right now for me to be speculating what Petrobras has got in their mind.

Great. Thank you.

Darren Horowitz from Raymond James.

Good morning, guys, good quarter. I was wondering if we could for a minute circle back to the U.S. Gulf jack-up market and obviously you mentioned right there in the 120's and that was recently exemplified by the one well extension on the Spartan. But I was curious as to your view of premium rates throughout the course of '06 and obviously given the possibility of a limited amount of those new builds entering this market during this year as well as a large supply deficit there. I was also curious as to when you think we reach that inflection point when the disparity, domestically as it relates to rate closes with a lot of the international markets given that supply deficit?

I guess your question is pointing that international rates have run up above U.S. Gulf rates?

That's right.

Well, it generally costs you more to operate overseas. When you make that adjustment, they're not that far apart. As we indicated, our bid rates on jack-up's are above the 120's, so I -- we only have half the days committed so it is a much more open market. There is the opportunity to go up. We're seeing lots of demand, but at the same time because you got less locked in, it could go down. We see no evidence of that to date, and you're right to also note that the -- most of the new bills don't arrive until '07 or later, and we think there is certainly going to be lots of demand for those through '07 and '08 before you even run the risk of perhaps over delivering jack-ups.

That's helpful. My second question really relates to the domestic deep water semi segment. Obviously the Star with the one year fixture in the mid-380's as you pointed out and more recently the Valiant at 395 for similar term it looks like the Americas next at least as it relates to the calendar schedule, I was curious where leading edge bid rates are for that unit, if they've gone up through that level into the 4, 425 range and what type of term would be associated there? Maybe a year or would you keep them more spot market exposure?

The Americas been with a single operator now for a while, and we have been in discussions with that operator about the future of the rig. I would really rather not get too much into the details of where those discussions are. But you're correct to say that it's the next one on the calendar, and where the rate is now to where the latest pictures have been, there is certainly a lot of room. Our expectation is that the rig would be extended for at least a year at a rate that would be comparable where we've seen other fixtures.

And my final question is really just as it relates to looking out over the course of '07. When you see the bulk of these jack-up new builds actually enter the global market. We've heard from some of your competitors that they think a lot of that new capacity could actually come in and degrade price in some of the international regions. I was curious as to your thoughts there and also your thoughts if any of those units may actually come in to the Gulf market and offset some of the big supply deficit.

Yes. The gulf is a market for some of those rigs. One of the rigs we're building is being built here in the U.S. Gulf. But we made a decision. We believed strongly enough in this market that we put two orders in for jack-ups without contracts that are not going to be delivered until end of '07, beginning of '08, and our belief was that the market was expanding for jack-up's around the world, that there were specialized applications like deep gas drilling which is just one of the items, areas that these rigs work on and that these rigs are highly automated and are almost a new generation bringing forward the kind of equipment that operators have been used to seeing on deepwater equipment now applied in the jack-up arena, and that these things would do very well. So nothing has really changed since we made that order until today except that rates have continued to strengthen even further. There have been more rigs ordered, but the additional supply is now '08 '09, so we don't have concern at this company through certainly '07 into '08 and then when you start getting out into '09, that's so far in advance that I just can't even predict a market for you.

Sure. That's helpful. Thank you.

Our next question is coming from Jeff Horowitz from -- I am sorry the next question is coming from Geoff Kieburtz from Citigroup.

That's close enough. Good morning. A couple of questions. Just to go back on the special items, Gary, I think you gave us the 3.5 million hit in other pre-tax and the 6 million gain on the asset disposals, pre-tax. What were those numbers after tax?

Apply a 35% tax rate.

That's fine. And you gave us some good guidance on operating costs. I wondered if you could give us a sense within that, how much of that is wage inflation? Or what do you figure your wage inflation rate is in '06 over '05?

We'll have to really see as we get through the year. Certainly, I mean, Gary was giving you budgeted numbers. We've got all of our costs going up 12% across the board. I guess that's what's built into there. It wouldn't surprise me, the market could strengthen and we could be a little bit light on what wage inflation is for the year but again revenues are moving at a much faster pace than the costs ever are, so I am just not -- that is not a great concern to me at this time.

Okay. I am kind of picking up data a points from the contract drillers where wage inflation is kind of as you just described sort of the 12 to 15% but we're hearing a lot of the service companies talking about more like single digit wage inflation. Is there something that's causing that differential or is it just sort of different perspectives on the labor market?

I think we have a different labor market. You have got all of these new rigs being ordered of many of the rigs are being ordered by speculators that don't have existing labor in place. If the rigs were being ordered and they were being constructed by us our competitors all of us would have training programs and we'd fill most of those needs internally, but there is going to be demand for labor to cross companies a little bit of a musical chairs, so I think that's present that you don't -- they're certainly not new fresher pumping companies being formed to go out there and compete.

Got you.

You might quote that idea in Norway if you'd like.

About that, can you just share with us your thoughts in regards to the very significant number of rigs that are being built by speculators and whether you see that as an opportunity for Diamond to make some investments?

Well, we're always open to every opportunity. I can't ferret out individual opportunities. It's going to ba an opportunity, but it's certainly going to be a challenge just with the demand for labor.

Okay. And last question. You came out with your special dividend, you've already mentioned that that's something you plan to revisit on an annual basis. But I wondered if you could be willing to share any of your thoughts in terms of how this most recent decision was arrived at in terms of the size of the dividend?

Well, I think the -- we look at what our financial position is, what our balance sheet is currently, and what our coming years cash flows to be like, and what our CapEx and other expenditures are and then derive what the Board feels comfortable paying out. That doesn't quite give you a formula but that's exactly how it happened and how we would anticipate it would happen in the future.

Okay. Fine. Thank you.

Okay. I believe we got time for one more question.

Our last question is coming from Alan Laws from Merrill Lynch.

Just a quick follow-up to Geoff's question there. You paid the special dividend. Can you just kind of remind us what your thoughts are on future use of free cash flow that being do you see it being used as more special dividends? More directed to share repurchase? Or are you looking at buying or optioning the spec rigs that are out there for sale?

Yes. We would look at all of those. I certainly I think the fact that we paid a special dividend and announced that we would consider that again, I think should give you some indication of how we believe in that.

You'd rank that as number one if you had to rank them?

No. I think at the same time just went over that. At the same time we have an active CapEx program. We've got $600 million worth of projects, that's Endeavor, Monarch, and the two jack-ups. Well, really the Endeavor is contracted so I will say 600 million covers the Monarch, Shield, and Scepter of upgrades and new builds which are done purely on speculation which we will have contracts again for. That is much more exposure than we had on the special dividends. So I can't say one versus another. Certainly we always weigh trying to improve the shareholders position and in our view that consists of both some return of the higher profits that we're earning and strong cash flow as well as investment in the fleet.

What are your overall thoughts on sector consolidation at M&A?

I guess I am a bit of a skeptic on that. We've had a lot of consolidation in the past. But I just don't see the stars lining up currently. In the past you typically would have some large shareholder who was selling out and I really don't see much of that on the horizon. Somebody had talked about Norwegian entities and so that could be something that might provide some consolidation activities going forward.

The last thing is you mentioned a cluster of surveys on the horizon. Which rigs are due for surveys in '07 and '08?

Alan, I don't have that in front of me. We would be happy to answer that on our call to the Company to anybody that wants to know.

That sounds good. That's all I got. Thanks.

Thank you very much. Thanks everybody for tuning in, and we'll talk to you hopefully in advance of next quarter but certainly next quarter.

This concludes today's teleconference you may disconnect your lines at this time and have a wonderful day.