Diamond Offshore Drilling Inc (DO) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Elsa, and I will be your conference coordinator for today. At this time I would like to welcome everyone to the Diamond Offshore Good morning, ladies and gentlemen. My name is Elsa, and I will be your conference coordinator for today. At this time I would like to welcome everyone to the Diamond Offshore Drillings, Inc. quarterly earnings conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to your host, Mr. Les Van Dyke. Sir, you may begin your conference. , Inc. quarterly earnings conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to your host, Mr. Les Van Dyke. Sir, you may begin your conference.

Good morning and thank you for joining us. With me on the call today are Larry Dickerson, President and Chief Operating Officer, David Williams, Executive Vice President, and Gary Krenek, Vice President and Chief Financial Officer. Before Larry begins his remarks, I should remind you that statements made during this conference call may constitute forward-looking statements, and are inherently subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. Forward-looking statements include but are not limited to discussions about future revenues and earnings, capital expenditures, industry conditions and competition, dates that drilling rigs will enter service, as well as management's plans and objectives for the future. A discussion of the risk factors that could impact these areas and the company's overall business and financial performance can be found in the company's reports filed with the Securities 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 expectation, or any changes in events, conditions, or circumstances on which any forward-looking statement is based. And with that I"ll turn the meeting over to Larry.

Good morning, and thank you for joining us. We just released this morning a record quarter for the company. This beats our previous high quarter, which was in the second quarter of 1998 when things were pretty hot in the industry. And I think if we focus for a second on the average day rates in the three primary segments we operate in, our high spec rigs were $189,000 a day, mid-water for the quarter was $104,000 a day and jack-ups were 85. In Q2 '98, that was really a -- our fleet was operating with peak day rates at that particular point in time, and those peak day rates were, for high-spec rigs, got as high as the 189 we posted in the quarter. Mid-water fleet I don't recall what the average was, but it would probably be very close to $100,000 a day, and jack-ups would have been lower than the 85 we are today. And the difference today versus '98 is that the day rates we have right now are significantly below the high forward commitments that we have.

And I'll take those three segments, for instance, the high-spec, which are working on $189,000 again average for this quarter. Within those rigs, we have future commitments on our fourth generation rigs at $400,000 a day, we have a couple of fifths that are open that haven't committed on a go-forward basis, but certainly would expect to exceed the fourth gen rates. Sot there is lots of upside. A lot of that upside is already scheduled, I think Valiant, America, Victory, Star all have day rates in the high 300s to low 400s commitments going forward.

Our mid-water fleet, which averaged 104 for the quarter, right now, we've got commitments, they really vary by capability of rig and market that they're, but in the Gulf of Mexico, we have commitments at $250,000 a day, so significant upside there. Our third generation units again, varying by where they are in the world, have commitments from 300, up to $375,000 a day. So we would expect, going forward, as shown in our fleet status report, that we will have continuing upward bias there.

Jack-ups at 85 have more room to go up, not as much as the mid-water and high-specs, and I think that reflects that jack-ups are well to well, so they're closer to where the market is. Somewhat offsetting that for the balance of '06 will be cost and utilizations. We had excellent results in the first quarter. I think we cautioned everyone that our experience is that in the first quarter costs are usually a bit muted, and they start as we get further in the year moving up. We've got labor increases that will be flowing through the subsequent quarters, and then we will go through some greater detail, and it's also disclosed on our fleet status report, on the surveys that we have moving forward.

The next topic I'd like to briefly address is preparations for hurricanes. This is a huge effort going on in this company, and indeed all drilling contractors exposed here in the U.S. Gulf of Mexico. There's been revisions of jack-up procedures, which we will easily adopt and -- to take our jack-ups in the prime condition to weather storms going forward. On floaters, as previously disclosed, our efforts are to take our Gulf of Mexico fleet, which consists of 11 moored rigs and take those rigs from 8-point to 12-point mooring systems. Our goal is to have that in place -- we're not going to be able to meet the start of the hurricane season on June 1, but have it in place by August when traditionally the very heaviest part -- the larger storms typically hit us. Those efforts are subject to lots of logistics, deliveries, and suppliers coming through, and there's so many moving pieces that we do see some risk in there, but at the moment, we're on schedule to move towards that.

Our efforts -- as I said, are moving forward. We've also identified that two of the rigs we're going to do some additional wire changeouts to strengthen their mooring conditions, and those two rigs, Victory and Concord will spend about 23 days apiece in the shipyard either in Q2 or Q3 as we deal with that. We took a rig, the Ocean Saratoga that was scheduled for shipyard in Q4, and decided we would go ahead and move that forward and do that during the hurricane season just to be able to make the installation and to take that rig out of the path.

Our estimate on CapEx for this process is in the high $60 million on a gross basis. We have various provisions in certain contracts for some cost recovery, and so the net cost to us, I think, will be in line with numbers that we've previously disclosed. For the rest of the fleet, our plan is to do the installation offshore. That is variable based upon when we get to them, what projects those rigs are working on, whether or not we can do that without taking that rig offline, so there will be a variable amount per rig, and I believe we're going to give guidance to probably estimate about a week for each of the rigs, and it will probably work out that some rigs have no downtime, and some rigs may have two weeks, and some may have five or six days, varying based upon the particulars of that -- each particular rig.

And the final subject I would like to talk about is insurance, and that's obviously directly related to hurricanes. Our insurance renewal date is May 1st, so we're actively in renewal discussions and going through the process of filling out slips and, as with any negotiation that is in process, I don't feel a lot of advantage in disclosing a lot of the details that are going on there. However, I will make this statement. In general, we've seen that premiums have increased a tremendous amount. We've seen deductibles go up, and we've seen caps on coverage. In our judgment, there is a tradeoff between either taking high premiums or larger deductibles, primarily. And at this point, our efforts are focused on accepting, within the company, higher deductibles to minimize premiums. And it's not just cost savings, but the premiums can get so high, even with an embedded, large deductible that you question how much true coverage you have. So at this point in time, we are contemplating up to $150 million deductible per incident, and just wanted everybody to be aware that that's the path we're moving down. So that generally covers my opening statements. I'm going to turn it over to Gary Krenek who will, as is our tradition, will give some updated cost guidance and downtime and other factors to look forward for subsequent quarter calculations on your part.

Okay, thanks, Larry. I'll try to be brief in my opening remarks. I want to touch on two areas. First, just a quick review of the first quarter results, looking at some of the more unusual items that occurred during the quarter and then some of the things that we expect to see in the second quarter, rest of '06, as Larry said. As the press release indicated, we earned $1.06 per share for the first quarter. The increase over the prior quarter, of course, was a result of increased revenues and the day rates that Larry talked about.

Looking at the cost side, rig operating costs were up slightly, mainly driven by a general increase in industry costs, and were pretty close to where we expected them to be. Interest expense decreased by a little over a $1 million from the prior quarter, and this was a result of interest capitalized on the Endeavor upgrade and our new-built jack-ups. Other income expense went from an expense of $3 million last quarter, and that $3 million expense was a result of a one-time charge in Q4 for an accounting change we made when we changed our functional currencies. That went to a $2 million gain in the current quarter, which resulted from just regular currency gains that we have during the quarter. And then, of course, our tax expense increased as a result of an increase in pre-tax income. The rest of our operating results were pretty close to our expectations, and if anyone would like more details, I'd be happy to provide it during the Q&A part of the call.

Looking forward into the second quarter and looking at some of the downtime. We have reported that we were going to do six surveys in 2006, and we still will perform those, and I will refer you to the rig status report for the details. Some of those did change from one quarter to a different quarter as they very often do. The two things that I would like to point out. One, the Confidence we had originally told folks that was going to occur in the first quarter. That did not. That has been pushed back to Q2, so that rig will be down 21 days in Q2. And also the Whittington, we added the Whittington. That rig was originally supposed to begin its special survey in the first part of '07. We now believe that will start sometime in mid-fourth quarter of this year.

Larry talked about some of the other expected downtime for the mooring installation. In addition to those downtimes, we expect to have about 15 days additional downtime on the Confidence for BOP repairs in Q2. And also the Baroness will have about 30 days' worth of downtime for some repairs on the top five that we've had to do. We previously reported the Spartan would be down for some late repairs, approximately 45 days in Q3. That's been moved up to Q2 and we also now believe that we will only be off contract for 21 days, rather than the previously reported 45 days. Princess and the Yatzy will also do intermediate survey work and repair work in the second quarter, taking 45 days for the Princess and some 34 days for the Yatzy. And we had previously reported those two things occurring either in Q3 or Q4. And then beyond the special surveys listed in the rig status report, we don't anticipate any additional downtime for our rigs at this point in Q3 or Q4.

Looking at expenses, the run rate on rig operating expenses, we gave daily rig operating costs by rig class last quarter, and for all practical purposes, those costs still stand. As Larry said in his opening remarks, those costs can be expected to go up slightly from here on out. The costs we gave were annual numbers and as costs continue to escalate in the industry, we expect those costs to go up from quarter to quarter, slightly. Also a remainder that the per-day costs that we did give did not include any unusual items like major MOBE amortization, special survey cost, or any kind of unusual repair items. So in addition to the normal rig -- normal per day rig operating costs, we expect in the second quarter to have about $4.6 million worth of,MOBE amortization, $3.2 attributable to the Baroness and its relocation to the Gulf of Mexico, and another 1.2 for the Spur's relocation to Tunisia. Should be noted that about 80% of this additional MOBE amortization expense will be offset by amortized MOBE revenues.

Additional costs to be considered are costs associated with the five-year surveys that are indicated in our rig status report, and also for the intermediate surveys and repairs for the Princess and the Yatzy that I just mentioned, costs as we've said before for these type of surveys should be somewhere between 1 and $2.5 million per rig. Also we'll incur some of additional cost for the repair of the Baroness top drive. G&A costs on a go-forward basis, we still expect an increase somewhere in the 10 to 12% range over what we spent in 2005. And finally, our tax rate. Tax rate for the quarter was 29.7%, and as we indicated in the last conference call, we still expect that rate for the year to end up somewhere between 28 to 31%. And with that I'll turn it over to questions.

Okay. Thank you, Gary. The focus on cost is to make sure that everyone has a good idea what's going on there. We didn't spend an equal amount in time on revenue increases, but certainly during the quarter, we've had tremendous revenue increases, which -- and day rates over and above expectations that people had. I think we disclosed the Ocean Patriot was an outstanding contract that we put in place. We also did one on the Ocean Bounty. We've had some great numbers there. So I just don't want the - the amount of time spent on cost is not reflective of truly what's going on here but I think it's important that we get into those kind of details, so .with that, we will go over back to questions.

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS] Our first question is coming from Doug Becker with Banc of America Securities. Please go ahead.

Good morning.

Good morning, Doug.

Good morning.

We've seen some very good day rates that you were alluding to in the mid-water market. Are we able to say that for the mid-water Gulf of Mexico that day rates are in the $300,000s consistently yet?

No, I don't think we're at that point. We've indicated some 200s rates --

250s, but we haven't seen anything yet in the 2,000-foot water that ranges over 3 yet.

So upper, upper 200s is still kind of where we should be expecting rates to be coming in at this point in time? ?

Well if 250 is upper for you?

Okay, mid- 200s then. And you previously mentioned that Pemex, you didn't have a whole lot of f visibility in the mid-water for the rollovers there. Has there been any more clarity with what they're planning to do on the semis that they currently have?

The closer we get to it, , the more clarity we get. We have had some conversations with Pemex about the future of all four rigs. They're still a good ways out. My expectation is that we will learn more in the next 60 days, but as it is now, we are -- we're pursuing opportunities for those rigs outside Mexico and frankly outside the U.S. Gulf as well, so -- but we don't have anything firm. And we will give Pemex a little latitude to let us know what their intentions are, but we don't have a lot of clarity yet. But I think we will in the next 60 to 90 days.

Right, I think a positive data point In the quarter, was President Fox flew out to the Ocean Worker, and it was where he made his big announcement about the large discoveries that Pemex has and the geological strata out there in deep water. So I think that's a positive thing that they've got some big projects out there, and they made the announcement from the Ocean Worker, which is the deepest capability rig they have in their fleet.

Okay, fair enough. And understand, you don't want to give specifics on insurance, but have you gotten any sense from operators that we might actually see a slowdown in activity in the Gulf of Mexico during the hurricane season?

No.

Okay. Thank you very much.

Thank you. Our next question is coming from Ian Macpherson with Simmons and Company. Please go ahead. .

Thank you and good morning. Looking at the rig status sheet, you have a footnote on there that says that wherever you have options stated on the rig status sheet, they are un-priced. Would that apply to all of the options on here, or are there some of them that do have priced options behind stated contracts?

We have some priced options in Norway.

A couple on Patriot too. We had three six-month options at 160 a day. They've exercised two and there's one remaining, one six-month [trunk] that's still priced at 160. Beyond that, on the Vanguard in Norway.

Okay. I'm looking at the fortune fleet in the Gulf of Mexico, the Quest and the Star roll off their contracts in April and October of next year, respectively, and then they have one-year options behind those, is that correct?

Well, they have an undefined option. The operator -- the way it's defined by contract is the operator has an option to extend under mutually agreed rates, terms, and conditions. So basically, they get first shot at the rig, and they've got to make that declaration fairly early in the program. Those options are not defined and they're not priced.

That's what I'm getting at. When would you expect us to be able to put a price tag on the work that those rigs will be doing in the sort of '07 to '08 time frame?

They're pretty far out in advance right now, so we're not having ongoing conversations about them yet, but certainly I would say six months or so before the termination of the current commitments, we ought to be able to define what the future would be.

Okay

I think this is reflective of our contracting philosophy, to resist priced options. Obviously there will be certain circumstances where it's just part of the deal, and you need to take it, but looking across the fleet, we just don't see a lot of advantage in priced options, because I think they only go one way, work against you in a rising market, in a falling market, and then you just renegotiate. So that's not part of our contracting philosophy.

Okay. and then looking on the jack-up side, you recently moved the Spur over to Tunisia. Are there any other international opportunities that you're looking at to reduce your gulf of Mexico exposure to the jack-up market?

Yes, but I would -- we have several mat rigs that will likely stay here and other rigs that will -- I'll let David comment on what number he thinks might go out.

We're currently pursuing international opportunities for a number of rigs. We have most of our rigs as one point or another included the mats have worked abroad, and so to the extent they're good opportunities, we'll pursue them. There are two specific rigs right now that we are pursuing specific jobs with outside U.S. waters.

Okay. Thank you.

Thank you. Our next question is coming from Waqar Syad with Petrie Parkman and Company. Please go ahead.

Yeah. Hi, gentleman. Any guidance that you can provide on surveys for 2007/2008 and maybe beyond?

On salaries?

No, on surveys, rig surveys.

We have eleven of them scheduled in '07 and 13 of 'em in '08 at this point in time. I don't have the detail on which rigs. I would be happy to give it to you offline.

Okay. That sounds fair. Now, my understanding is that the Mexican contracts, those contracts can generally be terminated over the five-day notice and on grounds of national interest. Is there any discussion going on that for your additional contracts that you may be signing that those terms could be changed?

We haven't gotten to that level of detail with Pemex yet.

Okay. And then in other -- my understanding is that in other contracts, generally the cost passed through is a standard item nowadays for long-term contracts. Is that something that you would be pursuing in Mexico?

You talking about escalations? Cost escalations?

Yes.

I don't remember offhand whether or not those contracts have some cost escalations in them or not. Some do, some don't. I don't recall exactly whether Pemex does. Let's back up to your previous question. And that is, they can cancel for national interest. That's true. But it's not -- they can't just walk away for free. There is a significant cost to them that would relate to all kind of elements of cost and market potential that's built into it. So, to my knowledge, they haven't done it. We have not had any detailed conversations with them about cancelling ours. I wish they would cancel ours, but the contracts we have now, but they can't just walk away without costs.

Right.

So there are some -- there is a severe penalty to them if they do that.

Okay.

But as far as escalations in Mexico, I'm not -- I - I don't remember offhand whether or not those contracts have it or not.

Right but those contracts are generally pretty standard contracts. They have a frame, but if they don't have those clauses as yet, but next time when you're signing three to five year kind of contracts, long-term contracts, would you be insisting in having those clauses in and would you be willing to walk away from a contract if they don't change the standard language?

That depends on the rate. It depends on the rate and the terms. If they don't want to take it, sometimes you can price it. Say we negotiate a deal at just for the sake of argument, $300,000 a day, and they won't put escalations in there, if we can get more, or maybe we build into our rate. There are ways to cover it whether you have escalations or not. If you price it right, you can cover it. So, I'll let you know in a year and a half when we get closer whether or not we can walk away or not.

And then finally on these Mexican contracts, when they expire, do you expect downtime for the rig once the contract expires and the new contract begins?

We have two of the rigs that are due for survey and some hull work, both the Yorktown when it comes up in midyear '07 and the Whittington when it comes up -- is that Whittington or Yorktown -- the Whittington comes up late this year. Actually the contract -- the terms -- the anniversary date of the contract is in October, but the contract runs into the end of the well in progress and that could be November, December, could be longer. Just depends on when they finish that well, but after that, the rig has a shipyard period scheduled. So both of those rigs go to shipyard. My expectation is probably the Worker and the Ambassador probably both would, because they've been down there so long, special survey work or other work. But at this point, we haven't identified what it would be. It's still over two years -- or two years out. But certainly the Yorktown and Whittington have some work to do.

In the case of Whittington, it 's going to be down for about 120 to 150 days. Would that be the same for other rigs as well, for others it would be more like 40, 45 days.

I think the Yorktown will be probably in that neighborhood. I think the Worker and Ambassador will be much shorter. But again, I don't -- we haven't gotten to that point yet. The Ambassador is not until December '07, the Worker is not until August '07, so those two, we haven't really gone into detail yet on what their plan is. They could have some downtime. I wouldn't expect 120 days on them at this point.

Great. Thank you very much.

Thank you. Our next question is coming from Tom Rinaldi with [SunCourt]. Please go ahead.

Good morning. Just quickly, can I confirm that you -- the amount that you said is going to cost to put moorings on all the rigs that need them?

We said that would be a gross CapEx of $65 million and that would be offset by some customer reimbursements depending upon the contracts.

Okay and in terms of insurance, do you have an upper limit per incident on your new terms?

I'd love to disclose that, but we'll address that in the queue. Because we're in the midst of placing it, I can't say what we've got. I'm just describing then what we're negotiating towards, and that doesn't make any sense to disclose that.

Okay, But you'll -- it will be ironed out by the time you put out the queue and will be in there.

We will have insurance in place by the queue and to the extent that there's a disclosure that needs to rise to that level, we'll make sure it's fully disclosed.

Okay. Great. Thanks.

Thank you, our next question is coming from Jud Bailey with Jefferies and Company. Please go ahead.

Thank you. Good morning.

Good morning.

Question on -- or maybe you could elaborate a little bit on what you're seeing in your intermediate semi markets internationally. I see you're taking the Lexington to Egypt for a three-year contract. Sounds like you're probably bidding the some of the rigs in Mexico internationally. What about the opportunity to take some more of the dom-- the intermediate semis out of the Gulf of Mexico as well?

We're seeing some of those opportunities. Our primary focus is going to be making sure the rigs in Mexico don't come back to the U.S. Gulf, but we are seeing some opportunities for the intermediate floaters that would currently be resident in the Gulf of Mexico to go to other markets, not that we're about to leave this market completely, but certainly there are a couple of opportunities we're pursuing that could take another rig or two out of here.

Could you comment maybe on what markets those are?

I'd rather not.

If you go back to the price of the product that exists today, I think that is every day is opening up new opportunities in the mid-water market around the world. and certainly the deep water equipment is fully utilized and there's lots of plans on those horizons, but there's solid prospects, obviously, in places like Egypt and I mean I think if you'd asked us a year earlier, we'd have never said gee, we're taking this rig to Egypt. So these things just open up.

Actually, I tell you, we've looked at just about every major market and we've had discussions with operators in just about every major market for rigs up to 2500 feet of water for movement from the Gulf of Mexico to one of these other major markets.

Okay.

Except the North Sea. We wouldn't take any of these rigs to the North Sea.

Okay. If I could circle in on one market in particular. Southeast Asia and Australia, you've had some pretty impressive fixtures there, as have some of your competitors. Can you maybe just talk about a little bit what you're seeing in that market and what your customers are telling you? It seems like we've seen a big surge in both the jack-ups and the floaters, and if I could just get your thoughts on that region.

We like that region. We've been in Southeast Asia and Australia for a long time. We actually in another life, we've built a couple rigs in Australia. We've been there in that area for a long time. In the mid-90s, the Southeast Asia market really didn't run with the rest of the world, and the nice thing about the period -- the cycle we're this now is Southeast Asia is running with the rest of the world, and it's a great market. There's a lot of potential, there's been good demand, good opportunities. The operators have participated in the market swings that we've seen, and it's been great. Right now, we've got a number of floaters over there. We've got a pretty good fleet over there, and I wouldn't say, we're not jumping up to move another rig over there, but we certainly would if there was the right opportunity. But Asia is a great place right now, a lot of growth and a lot of work.

Okay and just one quick follow up. Are you seeing anything out of China, and if so, talk a little bit about that?

I can't think of anything specific right now that we're working on in China that we could talk about. One of the issues we have is the availability of our rigs over there is not real good for other operators to jump in. So I think we've seen sporadic opportunities, but nothing major with a lot of term tied to it.

Great. Thank you.

Thank you. Our next question is coming from Arun Jayaram from Credit Suisse. Please go ahead.

Good morning. Nice results.

Thank you.

Good morning.

David, I was wondering if you could just give us some color on what you're seeing out of Saudi Arabia, I believe Aramco has issued a tender for five jack-ups, and I believe you may be participating in that tender, but can you give us color there?

We had one of the top drilling guys at Saudi Aramco through here a few months ago and they were basically on a good will tour to make sure all of the drillers that weren't working in Saudi Arabia were interested in working in Saudi Arabia. And since that time, we have had a regular dialogue with them and have participated in the tenders in that part of the world. What they tell us is that they intend -- that they have ramped up on their jack-up work and they intend to continue to ramp up, and not only Saudi Aramco, but a number of companies over there have continuing jack-up opportunities that would provide growth in that market. So it's a place that we have not historically been very active in recent years, but now with the rig we have at Qatar, we see other opportunities over there and certainly we'd like to see more. We think there's a -- it appears there's a huge growth opportunity in that particular part of the world.

And are these for multi-year tender opportunities that they're looking for?

They run the gamut I mean -- yes, many of them are multi-year.

Okay. And last question, the Heritage where you're, I believe are still kind of the leading edge day rate in Qatar, what are you seeing in terms of pricing in that market, which has lagged a little bit relative to other markets?

We're still seeing strength. I mean there have been -- the rates have kind of varied a little bit in the 125 to 150 range or 145 range or so, but we're still seeing strength and increasing demand. Some of the rigs over there are not real high spec, and so to compare those with some of the other leading edge rates are -- it's not quite apples and apples in every case. But it's a good place to work, you've got good experienced hands, good cost structure, good continuity of work, it's a good place to work.

That's all I got. Thanks.

Thank you.

Thank you. Our next question is coming from a Geoff Kieburtz with Citigroup. Please go ahead.

Thanks, good morning.

Good morning.

I was wondering if you could kind of share with us a little bit of the tone with your conversation with customers in regards to these contracts. As you point out in the press release, you're seeing commitments now out into the end of the decade. How are those conversations going? Or the -- do you sense the customers are becoming anxious about availability of the mid-water floaters to the same degree -- not same degree, but similar to the way they've become concerned on the deep water assets?

Well, the tone of conversations is a hell of a lot more fun now than it was two years ago.

Well, that I hope you would say.

But our customers right now, product prices solve a lot of their issues and most of the consternation that might arise out of one of these conversations goes to availability of the rig. Most of these people are more concerned about getting wells drilled than they are about the price. Not to say it's a slam dunk, just you give them a contract and they fill in the rates. It's a -- there is a lot of negotiations and some give and take, and the market dictates a lot of this. But most of the issues that they have really are going to be around availability of assets to get their work done. They have -- A lot of these people have serious work programs and a lot of big plans and they need to make sure that they have the rigs to do it. And they cannot be successful without being able to sink a bit. And so they need access to drilling rigs, and that's really what many of our conversations are centered around.

I would say -- we and the industry is getting more term in the high spec units than the second gen. We've been adding term here recently. I mean a three-year commitment in Egypt is significant. But I think there's a component of the big rigs, where if they have specific programs and just the knowledge that more will come about, whereas to date, the second gens and mid-water fleet is largely based upon specific programs with less willingness to say, oh, and I'll have more work, too. So there's certainly that possibility that that could change in that area, but we're very satisfied with the way the market has been moving.

If I could ask you to maybe venture a guess here. You've seen a five-fold increase in the dollar value of your commitment. I don't know what that translates to in terms of rig years, but it was 68 rig years committed at this point. What would you guess it might be by the end of this year?

My guess doesn't -- I don't know that it has any better crystal ball than somebody -- we're going to use up at end of this year. We will have used up 45 rig years.

Right.

So I would -- we're going to be replacing some of that as we get in there. I don't know.

You think it will be higher? Given that you're burning off 45 rig years of commitment by the end of this year?

Well, instead of making this one data point, yeah, I think you have to get into individual -- are jack-ups going to be taking more term? And if they are, that has potential to really drive the number up. Because we've got, with the two under construction, we've got 15 jack-up rig years. So I think that's your big availability for growth. And then the floaters, all they have to do is replace where they are. I think that's the scenario that has the biggest potential to make it go up. And you've got to look at the pieces.

Okay. And you're confident on that, the 15 jack-ups getting commitments out a year or more by the end of the year, high, low?

I didn't mention that opinion, I said that would be a primary driver and I'll let you make that call.

Okay. Separate topic. A lot of discussion in the industry about people. What's your experience been with retention programs and sort of the shift of people in the industry. Do you feel like that's under control at this point?

Well, obviously, that's our job to control it. We've lost some folks, and you will lose people in this kind of market. There's such demand from our customers and with new rigs coming online that there's going to be -- people have to be hired, and you can put up your retention walls, but given how much these rigs cost, somebody will breach that to some degree. So, we're also increasing training and other programs to augment just our retention programs.

Do you think your current rate of wage inflation can be held steady at this level, or do you think that's going to ramp up further?

When you look at the dynamics of the market, if the market stays strong, that's going to go hand in hand with it, continuing increases in labor. At what rate, I can't say.

Okay. Thank you.

Thank you. Our next question is coming from Darren Horowitz with Raymond James and Associates. Please go ahead. .

Good morning, gentleman.

Good morning.

I apologize if this question has already been asked. I jumped on the call a little bit late, but I was curious as to your thoughts, specifically surrounding a lot of the talk of the jack-up supply deficit on a global basis over the next few years. A lot of other offshore drilling contractors are talking about anywhere between a 20, 30 rig supply deficit over the next two years, and obviously growing beyond that. As you look at the new build jack-up count now with over 60 units scheduled for delivery over the next four years, the bulk of that's going to be coming in '07, '08. Do you have any concerns over price degradation as these units enter the market?

Well, anytime you add supply, that's probably negative. But there is a demand deficit. Our belief is that those rigs will be delivered in a workable condition much later than the stated dates that are out there. So I really think this is a late issue. That there will be very few that get delivered and start turning to the right in '06 and a increased number in '07, but that you're not going to have any potential to oversupply the market until you get further out there. So then you start asking yourself product prices and all that kind of stuff.

Sure. With that being said, when you look at the current fleet set, as I believe, the longest term jack-up contract that you have was that recently announced two-year extension on the Tower, extending it out to April '08. If you combine that with both the Shield and Scepter coming in in the first quarter of 2008, what are you hearing from operators as it relates to initial terms for contracts like that? Are they willing to book out two, three years possibly on those two new builds, extending them out to 2010, 2011, or it is shorter duration because they're concerned that far out?

Well, I mean, again I don't want to go into whatever negotiations we're in. It's just traditionally, jack-ups have been shorter than floaters. So a three-year type commitment is not normal in this business, the fact that we've transitioned and now have a two-year, I think, is a positive sign. But that has not been typically the way the business works.

I guess I'm trying to get a feel for the longevity of the cycle and the potential for an operator to actually commit for a jack-up through 2010. Would you say --

I'm not aware of any such commitments. Maybe there's one-off special need kind of things, but in general, that's not the way the market is.

But for the Shield and the Scepter, that would be the kind of contract you're looking to achieve, right? Two years in term initially.

We'd love to have some term on that but we're very comfortable with those rigs. We like the way that we built those rigs. We like the fact that we're operating them, and that they're going to be delivered with the backing of a big-time drilling contractor, and so we're comfortable in the market and will compete with them.

Those are certainly the kind of jobs we're pursuing now. The term jobs that we can actually get a chance to develop early on, but so are other people.

Sure. That's helpful. Thank you.

All right. We'll take one more question, please..

Thank you. Our last question is coming from Alan Laws with Merrill Lynch. Please go ahead.

Good morning, guys. I was wondering about, or could you give us an update on your thoughts around contracting the Monarch? Given that -- some of your cus-- your competitors recently have made some comments about how it gets more difficult to get a contract in that sort of 2009 delivery time frame. What do you guys see in that?

The Monarch is still a good ways out, but we're having a number of conversations with a number of different operators about the Monarch. We don't have anything firm yet. We don't have anything disclosed yet, but we are having conversations with a number of folks for work in a couple different markets. So, the Monarch as it sits right now, still in the Gulf of Mexico, hasn't even left to go to Singapore yet so it's still pretty early in the game for us. My expectation is that we'll get a job and we'll be proud of it.

So when you're in these discussions there, there's no -- has there been any pushback. I know it's going to be delivered in that same time frame, but is it still pretty robust as far as the terms everybody is starting with at least?

There are still opportunities out there. There are people that have rigs in place, and when you start talking about delivering a rig in '09 and looking at a three, or four-year commitment, you're talking about drilling operations in 2010 and 2011. That's a long time out for some of these guys to be looking, the way they run their businesses. So it's a challenge, but it's not, certainly not a unsurmountable.

They're definitely still coming to the table.

We're still talking, yes.

Last question I have was on the free cash flow side. How are you thinking about the free cash flow. Are you still in special dividend, sort of, camp, or are you looking at repurchases, or even maybe a more formalized leverage recap as the sort of the topic of the day?

Well, I think we made an announcement probably nine months ago during the year '05 that said that in January at the -- or shortly after the close of the year, the board would examine all the investment opportunities and make the appropriate one. And I think for our company, at least, we have an established track record that we paid out a special dividend at that point in time, which combined with our regular dividend, was just a little bit more than our net income for that year. So that our position remains the same. We'll look at that again in January. The only thing I would -- again, we asked that question to us versus somebody else, we do have a track record that backs that up.

All right. Thanks a lot, guys. I'll leave it at that.

Thanks everybody for yours interest and we'll talk to you again next quarter.

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