Diamond Offshore Drilling Inc (DO) 2007 Q1 法說會逐字稿

Good morning. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Diamond Offshore Drilling, Inc. first quarter 2007 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS.) Thank you.

It is now my pleasure to turn the floor over to your host, Mr. Les Van Dyke, Director Investor Relations. Sir, you may begin your conference.

Good morning. Thank you for joining us. With me on the call today are Larry Dickerson, President and Chief Operating Officer; Gary Krenek, Senior Vice President and Chief Financial Officer; and John Gabriel, Senior Vice President, Contracts and Marketing.

Before Larry begins his remarks, I should remind you that statements made during this conference call may constitute forward-looking statements and are inherently subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. Forward-looking statements include, but are not limited to, discussions about future revenues and earnings, capital expenditures, industry conditions and competition, dates the drilling rigs will enter service, as well as management's plans and objectives for the future. The 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 welcome to all who are joining us. The Press Release that we put out today in addition to our earnings we also commented upon some recently committed really this week. Actually this week and last week, commitments that we had received or had reached the point of notification that we felt comfortable releasing those. And we were glad to do that because I think that emphasizes the continued strength that we've been seeing in the floater markets. And we do -- before I comment specifically on those two commitments, I would like to say that a particular market that we're seeing a lot of strength in is the Asia-Pacific market. However, none of the discussions that we're having had reached the point that we felt comfortable going ahead and announcing those. But in that particular market, we're seeing multiple inquiries for multiple operators for a limited number of rigs. Most of the activity that we're seeing is on our second generation fleet, second and third generation fleet, the mid-water units, primarily because those are the ones that have availability in the near term that if we look at our higher speck units, most of those units are not available to be able to be rolled over until 2008 or greater.

To return to the commitments that we did announce, the two in Brazil and one in the Gulf of Mexico, I'd like to say that about six months ago, we surveyed our fleet and found that we had on the horizon six mid-water market units in the Gulf of Mexico, and that we had demand for those units coming from a variety of sources. Primarily Brazil, Mexico, and then the continuing demand in the Gulf of Mexico, although there are and continue to be other international opportunities for those rigs to bid on. And in surveying that market, we decided that each market offered something a little bit different. Gulf of Mexico offered top of the line rates, but not very much term. Mexico would generally match those rates for an intermediate amount of term, however everybody knows some of the cancellation provisions that exist in those contracts. Or we could look at Brazil where we could have extended term, but the rates would be lower than what we could get in the Gulf of Mexico. And after discussing that, we decided that the best approach would be to (inaudible) our six-rig fleet and put two in Mexico, desire to put two in Brazil and then keep two available in the Gulf of Mexico for spot market activity or to bid internationally. And that's more or less what we've achieved.

At year end, we announced the two rigs, Voyager and New Era, that are going down to Mexico for roughly two and a half-year jobs. Those rigs are still in the Gulf of Mexico and have not departed yet, but will be coming up here shortly. And then we've been in negotiations for sometime with Petrobras for two units down there with our idea that we would obviously like a rate that was closer to the Gulf of Mexico. But ultimately, we feel very comfortable with the deal that we achieved. To be able to add 10 years of forward commitment to our mid-water fleet is just an outstanding achievement, we think. Five years on each of the rigs, that takes it far into the future at rates that are above -- well above a decent rate of return and are not that great of discount, we think, given the amount of term that exists to go forward. So we're very comfortable that we've been able to execute on that.

On a go forward basis, that will leave us with just the Saratoga and the Concord among our mid-water fleet to work in the Gulf of Mexico spot market. We announced obviously in this press release that we have added six months worth of short-term commitment on one of those units at a $300,000 rate, which is where that market has been. We believe that there'll obviously be fewer rigs in that market as we look with the eminent departure of these units that are now not available, they're going to Brazil or Mexico. And of course, then there are still other opportunities that will have these rigs bidding out of this market. So it's going to be a very tight market, we think, for floaters in the Gulf of Mexico, and it's going to be a tight market for floaters internationally.

We took -- we have taken delivery of the Ocean Endeavor. Our fifth generation upgrade departed the shipyard early in this quarter. We had some standby time as we waited for the heavy lift vessel as a result of a sinking of a heavy lift vessel. Not our particular unit, but within the rearranging of all those units, caused us to have some delays on that unit. That unit is now underway and is nearing the Cape of Good Hope off of Africa. And we expect it to be in the Gulf of Mexico at the end of May, and then it'll take us about 30 days to load equipment on board the vessel before it hits contract here in the U.S. Gulf. So we, I believe, the Endeavor by a wide margin will be the first of the new capacity units that have been contracted since this uptick began. We were among the first on the Endeavor, which we did on speck. And part of the advantage is because of the Victor Class upgrade that we already have a hull in place that is very stout and can be platformed to build upon. We were able to complete the construction phase well under two years, including the delay. So that's been very successful for us.

The cost, even with the standby time allocated to it, is within budget. And that budget of $255 million, I believe we announced, is substantially below obviously what new construction rigs cost. We're continuing on now with the Monarch, which is the follow-on unit in that group, is underway in Singapore, and then our two jack-ups, one in Singapore, one in Brownsville, are proceeding within budget. We're taking some delays on those units, but it's in terms of a few weeks, weathering anything else. And I think that's just labor constraint on the shipyard's part in some of those locations.

So that's -- on the contracting side, I think we've got certainly good news to deliver. Obviously we're pleased with the results. One thing, though, that's a top line driven number, as well. We took less shipyard time than we had scheduled, just really due to contractual arrangements. And the flat cost that we achieved in the quarter is also, I think, reflects our efforts at cost control monitoring. I think we're doing a very good job on that. However, as those rigs go in the shipyard, a lot of those costs will flow and be done at the point in time that those units are in the shipyard. So some of that is timing, although we're comfortable with what we've achieved there.

So I think that provides a good overview of what's going on in the market. Jack-up market is not enjoying the kind of strength that we're seeing elsewhere, although rates are decent. We're continuing to have abilities to bid those rigs internationally. So we will -- I cease my opening comments, and we'll begin to take your specific questions on any of those subsegments or anything else you'd like to ask. Gary Krenek will make some cost commentary, which is our pattern, before we turn it over to questions.

Thanks, Larry. I'd just like to make a couple of comments first on first quarter results, and then a little guidance on the second quarter and rest of the year. Our first quarter numbers were actually quite clean. The only really unusual item is found in our interest expense line. During the quarter, we had approximately $440 million of our 1.5% convertible debt converted into some 8.9 million shares of common stock. As a result of this transaction, we wrote off approximately $9 million of prepaid debt issuance cost that we had been previously amortizing over the expected 30-year life of the debt. This $9 million, as I said, is included in the interest expense line. Other than that, the rest of the numbers are quite clean.

Looking forward, as Larry pointed out, we had several surveys that were originally scheduled for Q1 that were pushed back into the second quarter or even later in the year. And again as he said, sufficed to say, these costs -- the cost to do these surveys have been deferred until they actually take place. Other than that, the daily rig operating costs that we laid out in the last conference calls as of now still stand. I'd like to remind everyone, as we said before, those costs were an average for the year, and experience has shown us that we can expect the costs to be slightly lower in the first half of the year and conversely slightly higher in the second half of '07, but averaging out to the numbers that we gave.

Finally just a couple of housekeeping items. We expect our depreciation expense, as we previously forecasted, to increase by approximately $2 million per quarter, starting in 2Q, as a result of the Endeavor being delivered. Interest expense on a go forward basis should run in the $5 to $6 million per quarter range. And finally, our tax rate, which everyone always asks, was 27.8% this quarter, and should continue to run in the 28% to 29% range for the rest of the year. If there are any other details on the financial side of the business, I'll be happy to answer that during the Q&A. And with that, I'll turn it back over to Larry.

Who will then take questions.

Thank you. (OPERATOR INSTRUCTIONS.) We'll pause for just a moment to compile the Q&A roster. Your first question comes from Macpherson of Simmons & Company.

Hi, good morning. Congratulations on the new contracts.

Thank you, Ian.

I wanted to dig into a little bit how you view those margins on those long-term contracts with Petrobras. I know, Gary, you have previously guided the operating costs on a rig like the Yatzy being about 45% higher than your operating costs in the Gulf of Mexico. So should we think about that for the Whittington and the Yorktown, as well. And then maybe if you could also talk about the tax rate considerations for Brazil, as well, and kind of how all those issues net out.

The cost per rig on, as we said, on a conventionally moored mid-water rig is somewhere in the upper 60s. And so we would expect the average of those rigs to run something like that. The tax rate, or the tax effect in Brazil is built into the tax guidance. There's not going to be that much effect in 2007 since the Yorktown won't begin working there until in next year. Because it's only two rigs -- the tax rate in Brazil is very low. But because there's only two rigs in a fleet, it won't have that much impact on the company-wide tax rate.

Okay. Now do you get annual costs escalators for those long-term contracts with Petrobras?

We have won some cost escalators. Traditionally Petrobras did not give them. They are less effective than what we get in other markets. They're CPI based rather than typically what will have an actual labor variance. And then we'll have -- we seek to get some sort of oilfield inflator on the cost side. But in Brazil, we've got a general CPI, and it's somewhat limited. But we got as good as that market is giving right now.

Okay. Thanks, Larry. If I can get one quick follow-up. You alluded to pretty strong demand for the mid-water assets in the Asia-Pacific. Just curious if you're talking about incremental demand to really what you already have over there, or are you talking about just renewing the fleet that you have over there at attractive terms?

This is John Gabriel. I think the answer to that is both. We're looking at not only forward opportunities for the fleet that we've got there, but we're looking at incremental demand in Australia. We're looking at incremental demand in Malaysia and also in Vietnam.

Obviously, step one would be to add some backlog to our existing fleet, which has roll dates later this year and early in '08. Get that booked up before we bring new rigs into the market.

Got it. Okay. Thank you.

Your next question comes from Stacy Nieuwoudt of Pickering Energy Partners.

Good morning, guys.

Morning.

From a capitalized versus expense standpoint, should we think about expenses from the rigs that are entering the shipyard in Q2 and Q3 falling off? Or should we think about operating expenses just being more lumpy this year?

Well, interest expense, as I said, will be $5 to $6 million. You're going to have -- the big thing you're going to have drop off is the Endeavor. We're no longer capitalizing interest expense beginning on April 1st. And so interest expense will go up to that $5 to $6 million range. It'll probably be closer to 6 in the second quarter and drop off gradually as we add construction cost and a higher basis to capitalize upon.

Okay. And then on the Whittington, we saw shipyard time continue to expend. Was that time driven by in preparation for this Brazilian contract? Or was there just a lot more work required than you initially thought when the rig came back from Mexico? And how are you thinking about the Yorktown?

The Whittington, we really hadn't begun any of the Brazilian modifications at that point. And most of those will be done subsequently down in Brazil on that unit. But we did -- we have found, in general, that it takes much longer than you expect to get anything done in shipyards. But the most important driver is that we're taking our, we're working through our mid-water fleet with some life extension projects where we're replacing corroded steel and making sure that these rigs, which are now 30 years old, earning these very high day rates will have a -- I don't know if I'll be willing to commit to another 30 years of forward activity, but certainly substantially enhance life. And we did an estimate on the Whittington in terms of number of tons of steel that we thought we would replace. And by the time we got through cutting and replacing, the tonnage has grown significantly. Steel is expensive enough, but it's primarily the time that impacts us.

Okay. And do you expect the same type of time line on the Yorktown as you had on the Whittington?

I don't know that we've set guidance on that, but we're talking about roughly six months in the shipyard for that unit.

Yes, we're looking at the Yorktown to be out all of this year and then moving to its Brazil job beginning very early -- very early in the first quarter, at the beginning of the year of '08.

Okay. That's helpful, thanks, guys.

Your next question comes from Arun Jayaram of Credit Suisse.

Good morning.

Morning.

Gary, the number of shipyard days increased in the most recent fleet status by about 145 days, and some of that is regarding the Whittington. I was wondering, I think Larry, on the last conference cal, had given us full-year operating cost guidance in the $970 to $975 million range. Does the increase in shipyard time cause you to change that, the estimate or assumption any? And if so, what would be the magnitude?

Not significantly.

Okay.

Most of the -- most of the additional downtime is preparative Whittington, preparation for its Brazil work. A lot of the -- we will spend additional capital cost on that, but should not run down to the bottom line. Expense costs should not go up. A couple of the other jobs are going to be a little bit longer than expected. But we -- the guidance we gave in the first quarter on the cost for the surveys is still what we believe they'll come in at.

Okay. So that 970 to 975 is still a reasonably good number?

Yes.

Okay. Second question is regarding what you guys are bidding in terms of U.S. Gulf of Mexico jack-up fleet. Out of the Gulf, I guess we're hearing you may have an opportunity to put the Ocean King in the Mediterranean for a two-year deal. But I was just wondering, John, if you could maybe comment on your international opportunities for U.S. Gulf of Mexico jack-ups.

Well, what we're looking at right now opportunity-wise out of the Gulf is going to be probably be Mexico first. We're probably seeing an incremental demand there in the three to four unit area. There are opportunities in the Mediterranean. I would prefer not to get that specific, but we're looking at Tunisia, Egypt, and Libya. We're also looking at the Middle East, and the Middle East has got probably the largest chunk of incremental demand between Kuwait and Saudi Arabia. So our focus is basically global in terms of where we're evaluating opportunities.

Have you gotten to the point where you've booked in your carrier capacity, or is it too early?

It's too early to comment.

Okay. Last question, John, also on the Ocean Shield, which you signed I believe with ENI, it looks like they're already subletting some time on that rig. I was just wondering if you could comment on that.

Well, that contract is for an initial term of one year, and they have a conversion right to take that initial term to two years. And the time frame on that conversion right -- or the -- to exercise that conversion right is coming up here within the next, oh, I want to say four to five weeks, but I'm not exactly sure about the date. What we think is going on is that they are talking about sublets with respect to the conversion as opposed to the initial year.

Okay. That makes sense. And, Gary, I may have missed this. What is your tax rate in Brazil versus the U.S.?

Much lower.

Much lower? Okay. Is it in the teens?

It's even lower than that.

It's lower than the teens. Okay. So on an after tax margin basis, you have a lot of running room in terms of Brazil versus the U.S. Gulf of Mexico.

That's correct.

All right. Thanks a lot guys. Good quarter.

Thanks.

Your next question comes from Waqar Syed of Tristone Capital.

It's Waqar Syed from Tristone Capital. Couple of questions. First, could, Gary, could you let us know how the accounting for the mobilization for the two rigs into Brazil is going to work?

The same as all our mobilization. We defer any mobe revenue. We also defer any mobe cost that we incur while we're moving, and we amortize both that revenue and that cost over the length of the contracts.

Now, is the revenue and cost going to be pretty similar? Or is it going to be some difference between the two?

There'll be a little bit more revenue than there are costs, but it's not going to be that material over when you compare it to our overall earnings for the entire Company.

Okay. And secondly, these two rigs, semis going to Brazil, is this incremental demand? Or is this some replacement for some of the rigs that are already contracted in Brazil?

It's incremental demand.

Okay. And then just finally, anything on the DD&A side? Any guidance on DD&A and CapEx for '07-'08?

Nothing right now for '08. For '07, as I said, depreciation will go up approximately $2 million per quarter on a go forward basis. CapEx has gone up as a result of the work that we've gotten for the Whittington and the Yorktown. We expect now to spend approximately $400 million in maintenance capital to go along with the $220 million that we are going to spend on the upgrades and the new build jack-ups.

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

Your next question comes from Doug Becker of Banc of America.

Thanks. Larry, what portion of the performance bonuses have you been realizing on your rigs in Brazil historically?

It varies by rig, probably 50% on the DP units and two-thirds of the available stuff on ward units.

Okay. And these performance bonuses are structured in a similar fashion, so those are reasonable numbers to use for the two rigs that are moving down there?

You'll see when we do our -- we do some tables on backlog in our quarterly filings, and we just, we use 50% of the bonus to add into the backlog. So I think that's a good conservative number to utilize across the fleet.

Okay. You mentioned that Southeast Asia is an area where you're seeing some increased demand. Are you bidding any of your two remaining Gulf of Mexico semis to Southeast Asia?

All of our units are up for grabs to go into the best possible market. And as long as a market will pay at or above Gulf of Mexico and then provide lots of term, it seems pretty simple to us that we should pursue those kind of opportunities. And we're seeing lots of them.

And what are your customers in the U.S. Gulf saying? It would seem like if they have some drilling, that second to third generation market is getting increasingly tight.

I think you can -- they're not -- they're not pleased with rigs leaving this area. But we're pretty straightforward with everybody that our desire at this point is to add some term at these rates. And if we can get term in other markets, I think we need to go pursue those rather than hold back capacity. We'd love to have plenty of rigs to service all of our customers, but that's not the way the market is working. There are added complications of hurricanes here in the U.S. Gulf, which adds some risk to your operations. And when you balance the whole deal, I think foreign looks very attractive.

Understood. Gary, one, I guess, accounting question. If I take a look at the net income, divided by the diluted shares, it looks like the interest addback to get to your EPS number actually increased in the first quarter from the fourth quarter. I understand about the 1.5% converts, but I was just wondering if you could walk through why that interest addback would actually increase in the first quarter and if we should be expecting that in the second quarter, as well?

There's a lot of things, hopefully you're not missing it by more than a penny or so. There's so many moving parts in that EPS calculation nowadays that I believe that's beyond the scope of this conference call. We'd be happy to talk to you about that offline. But suffice to say, we've gone over that. There's a number of items in their, stock options come into play, and back to the interest as you said. The fact that the -- we converted that, the debt during the quarter at various times, as those conversions came through, could throw your calculations off some. So I'd be happy to do that offline.

Fair enough, thank you.

Your next question comes from Bill Sanchez of Howard Weil.

Morning.

Morning, Bill.

Just a follow-up, Larry, on the incremental mid-water demand here in Asia-Pac. Can you give us a sense of what the leading edge fixtures would be that that market would be commanding right now?

I hate to -- I hate to do that -- we'll -- we will give you look backs on what our most recent commitments have been. But we're -- we're just not going to -- I understand your desire, but I don't want to get in the game of we're going to hit X and we think it's going to be Y, and then have it be even a slight amount off.

Right. Was curious just because of the second gen. semis you have in that region now you've got a pretty wide breadth of rates that those rigs are currently working. I was just trying to get a feel there.

It's generally reflective of their capacity, but more importantly at the point in time that we committed them. If you look at our, I guess, John, our most recent commitment would have been the Patriot --

The Patriot extension in Australia, the 375.

Yes, at 375. So that's a fair -- that's a very high-end intermediate water depth rig. So that's a -- I think that's a good postmarker. And then looking backwards, we just don't have, we haven't done a role on, say the General or the Epoch, which is -- and those rigs aren't that much -- there's not that much difference in capacity on those units, but there's some.

Okay. Thanks on that. Larry, as it relates to the Concord, should we expect, as that rig reprices here, the rate on the Saratoga that was recently received. Is that probably a fair assumption here for that rig? Or does this continued pull of demand out maybe give you an opportunity for some further upside on that rate relative to the Saratoga?

Well, we'd like to get as high a rate as we can get. I think if you look at the rates that are present on -- you've seen the fourth generation rates stack up behind the fifth generation rates. There's a little bit of gap between fourth and the second/thirds. So it would seem to me that there's some room to move up. But again, these units are working on some projects that don't have that great of a reservoir size. So there is some limitations on what the customer will pay. So it's an interesting dynamic in there.

One last question, Larry. You mentioned about the higher revenue in the first quarter being driven somewhat by less shipyard days incurred. And that's also helping the cost side, as well. But outside the bonuses in Brazil, is there any other thing on the revenue side that maybe is not fully disclosed in the fleet status report that might be adding incrementally to higher revenue than what we're just taking off of the fleet status report in general. Because our -- your revenue estimate was up like 5%, or actuals were up 5% versus our expectation. So just trying to get a feel there if there's something we need to be looking at incrementally to the fleet status report since we're modeling here.

No, I think we've modified the fleet status report in the past year to emphasize shipyard time, and to make sure you guys have a handle on that. Then, the other -- the only other factor is just operational issues. We don't project any of our rigs to work at 100%, and what actually happens, though, is they don't all work at 98. Most of them work near 100, and then you'll have some issues and may work at 80-90. And wherever that overall average comes about can cause you a 2% or 3% variance in the quarter.

Thank you, Larry.

Your next question is from David Smith of JPMorgan.

Good morning.

Morning.

Looking back a couple of years, the mid-water U.S. gulf seemed to be -- seemed to have a lot more promise than has been realized to date just in terms of volume of activity. Was wondering about your thoughts in terms of -- are you surprised kind of how that market's evolved and the number of rigs we're working with? And I understand the dynamics in terms of better term outside, but in terms of the numbers that the rigs have left, is that really a function of the operators can't match the pricing because the reservoir's not there, or they can't get the term? Is it a function of just much stronger international markets? Or is the work not really there?

I'll let John comment on that.

Well, I think it's just a function of competing opportunities, and the competing opportunities at the end of the day internationally offer the term. And as long as the rate structure's the same, or close to the same, we'd much rather have the term. The term just doesn't exist here the way it does internationally.

I think a number of customers that might have been mid-water users in the past in the U.S. are now committed to deeper water opportunities. Just look at the customers that we're working for: Mariner, Murphy. Might have been -- Mariner didn't exist before, but those might have been bigger users of intermediate water depth. And as John indicated, the foreign opportunities are enough to command those rigs to go around the world.

You talk about the term versus rate structure, makes a lot of sense. I was wondering also in the context of the fourth gens catching up with the fifth gens, and maybe there being some room to catch up with the second and third gens. Does it make sense to leave a couple of rigs in the Gulf just to capture higher spot rates?

Yes, I think on paper it does. But you weigh the risk of how much higher are those spots going to be, versus you run some risk of having some downtime between spots if your price drives a lot of people out of the market. And then with the hurricanes in there, I think -- we're structured right now to have two rigs in the Gulf of Mexico, and we'll have to evaluate that versus international rates. And some of those international rates could be even higher than we're seeing in the Gulf of Mexico.

Okay. Makes sense. And also just looking at all the new builds coming out and the number of operators, I'm sorry, contractors with those, from your point of view, just looking at the landscape and how that would be prepared to -- you'd have significant fragmentation of the contractor market. How important is it from your point of view for the large established contractors to consolidate the new guys?

Well, not important enough to pay some premium that disadvantages our existing shareholders. There's -- we've seen that people will enter the market. And so you consolidate everybody else if the market still stays strong, there'll be new guys coming in. So I don't think you'll solve that. I think the consolidation that's taken place over the years to get to this point has yielded fewer contractors. And that's probably a good thing. I can't really tell you how it's going to go forward. Certainly on the floater backlog has been pretty much consolidated. See drill controlling most of those units. I don't think there's a huge number of floater guys. There are a huge number of jack-up guys, and we're going to have to see how that goes.

Good answers. Thank you.

Your next question comes from Jud Bailey of Jefferies & Company.

Thank you, good morning. I apologize if you covered this already, but for the your jack-up coming out of the yard without a contract, the Scepter, could you tell us about how the marketing of that rig is going? And remind us, I presume you're marketing that internationally, but would you work it in the Gulf of Mexico upon delivery if you have a long-term contract in international market?

Well, I think we're going to look at any opportunity for the Ocean Scepter. I would, again, be focussed on term as a preference to a short-term market in the Gulf of Mexico. But we're not going to limit our focus in terms of where we're going to chase opportunities for the rig.

Okay. My second question is on Mexico. You're taking one of your semis out of Mexico to put it in Brazil, and you noted why. It seems like PEMEX still needs some intermediate semisubmersibles, however, so is it fair that you would still market a couple of your U.S. Gulf of Mexico based semis into Mexico? And what is your read on what their ultimate requirements will be for floaters over the next couple of years? Both deepwater and second and third gens.

Well, what's happened with respect to the Voyager and the New Era going down to Mexico is basically replacing the ocean worker that's coming out in that slot if PEMEX is rig-stable and the New Era replaces the Yorktown. The incremental demand in Mexico, I believe, is going to be more focussed on deepwater. We are -- obviously there are tenders out now. But I don't believe that there's going to be significant incremental demand on the mid-water units. I think there may be one or two more, but I think the real focus on incremental demand in Mexico is going to be deepwater.

Great. Thank you.

Your next question comes from Pierre Conner of Capital One South.

Good morning, everyone. Larry, I just want to double check. I think what I understood about the revenue side where you got some good operating efficiency on your higher day rate equipment that that runs closer to 100% of contracted time, whereas you might typically think running at 96, 97 overall. Would you say it's kind of a mix of what you were able to keep working during the quarter that gave you a higher revenue than we might have expected?

Well, if you look at the rigs that we've guided might be in the shipyard last quarter, that included some higher speck rigs, such as the Baroness and I think the Star are the two units. So those are high earning units. So yes, that's correct, that had an impact. And then the -- we just -- we did a good job of holding our cost in check. But I guarantee you when we take the Star and the Baroness and we put it in the shipyard, we're going to do everything we possibly can to those rigs at that time so that when it gets back on the payroll, we don't have any disruption. So we would expect some of that to have been timing, but some of it is efficiency.

I see. And on the cost side, you got good guidance on your daily operating and I understanding that. What do you expect? Have the shipyard costs, other than the operational costs, sort of stabilized as well? Or is there still upward pressure there?

I would say there is still upward pressure. I don't think it's at the same rates that we saw six to nine months ago. But that's subject to change.

Okay. That's helpful. And then maybe this for John, just talking about specific rigs. I noticed on the fleet status the Ocean Titan kind of, if I understand it, moving in the rates in the low 80s. Wondering was there anything specific in that in terms of that particular well, that being extra leg length or cantilever reach? Or are we beginning to see some sentiment change in the Gulf of longer leg jack-up contracting rates?

Well, I think the rate on a rig like the Titan is going to fluctuate as to whether the rig is needed on an availability basis or on a capability basis.

Yes, okay.

If it's needed on a capability basis, the rate will respond positively. If it's an availability basis, it kind of falls back into the pack.

Sure. So you say this case is a bit of the capabilities that you're able to push the rate a little bit?

Yes.

Good. One last one back to Larry, more on a strategic perspective. And I know you all have laid out well your plans for use of cash flow. But we have seen of recent these JVs done with some speculator assets and wondered what you might say about your interest in something like that, given that you've diversified your footprint very well and may be able to market someone else's equipment in a better position? What would you say about your interest level there?

Well, all of these deals are shopped all over the place. And we respond, and we look at JV. Sometimes they look good, sometimes they don't. And I don't have the details on the deal that you're referring to. But I think on the face of it, it looked like a good deal.

Yes. Okay. Thanks, gentlemen, I'll turn it back. Appreciate it.

Thank you. We'll take one more question.

Your final question comes from Thomas Curran of Wachovia.

Morning, guys.

Morning.

First, returning to the downtime that was originally scheduled for the first quarter. Of the 312 days that were scheduled, could you tell us how many were actually incurred in the rigs that were involved?

Well, we have surveys for the Baroness, King, and Star, five-year surveys which were a total of 87 days, none of those were incurred. We had talked about the Alliance and the General, I'm looking from my list, was an additional 47 days. Those were both intermediate surveys. The Alliance, none of the 29 incurred, ten of the days that we had for the General, ten of the 18 were incurred. So 10 of only the total that we gave.

Okay. Great.

Also the Whittington and the Saratoga, we had said were going to be in the shipyard the bulk of the quarter. And both of those rigs were in the shipyard the entire quarter.

Okay. And I just want to clarify that I understood it correctly. Any additional expenses associated in the remaining three quarters, either with the rescheduling of that downtime or the additional shipyard time, let's say for the Whittington or the Yorktown, that is mostly going to be capitalized?

The bulk of the improvements that we need to do the rigs for the contracts will be capitalize. Those rigs will continue to incur their normal daily operating costs while they are in the shipyard, plus whatever amounts that we had earlier forecasted in addition to those normal costs. In the Gulf of Mexico, low 40s for a mid-water rig, whether it's working or whether it's in the shipyard.

I guess I was thinking of the guidance you had given on the last call of the estimated additional operating costs on top of daily operating expense that would be incurred for each survey for jack-ups I think it was 5 to 6 million -- or I'm sorry, 3 to 4 million, if it's floated, it was 5 to 6. And then you said it would run a little higher on the order of 12 to 13 in a couple of cases.

For the Worker, the Yorktown, and the Baroness, and that information is still good.

That all still stands?

That all still stands.

And you were referring solely to five-year special periodic surveys, or any and all surveys?

Those are the five-year surveys. We have a u-hall scheduled for the General, Vanguard, and Alliance, and the guidance we had given was approximately $2 million for each of those rigs in addition to their normal daily operating cost.

Okay. Great. And then moving on to some housekeeping items. I just want to confirm, you guys did pay off the special dividend in the first quarter, correct?

Gary itches his forehead like he forgot. But yes, that went out.

Okay. Great. So then could you please tell me, and I understand it may not be a final firm number at this point. What was your cash flow from operations in the quarter?

10-Q being filed shortly.

Okay.

Within the next week.

Could you give us a rough estimate? Let's say the contribution from the change in working capital?

We're not trying to duck that, I think -- everybody's focussed to do all the work and get ready for here and talk about earnings, talk about downtime, talk about -- it's not like we're not cash focussed, but I just don't -- I'm looking at Gary and his staff here who feel like they would rather have that disclosed in the Q, which will be filed here within the week.

Within a week.

Okay. Then the last question for me, based on the daily operating expense and tax guidance you've provided for Brazil, is it fair to say that with the shift we're going to have in a greater percentage of earnings coming from Brazil, that with regards to your effective tax rate guidance, it's now likely to be closer to 28% than 29%?

I don't think -- we've got to do some work to get that honed in. I think the best we can do is give ranges.

And even if -- the further work we do, the best we can give is a range; it's 28% to 29%.

Yes, I was just trying to figure out where you should be focusing foreseeing the impact of that lower tax rate and Brazil offset. Because obviously the daily OpEx.

It doesn't kick in till --

Until they go to work, I understand that.

-- until '08, until we do some more '08 work. We just can't give any guidance on that.

And I guess, what I left out was I was assuming if that tax rate range is good for '08 as well, all else constant, would the impact generally show up in the effective tax rate would come in closer to the low-end of the range?

I'm not going to give tax guidance for the '08 numbers. That's going to depend on all of our other rigs if we send additional rigs international, or not. It will depend on those rigs that aren't contracted, what those rates are going to be. The tax rate is always dependent upon your international versus domestic mix of total revenue. And we have not calculate -- that number is going to be somewhere between 25% and 32%.

Okay.

That's the best I can give you at this point.

That's helpful. Really just looking to confirm that the greater percentage of Brazil -- the greater percentage of earnings from Brazil on average, the lower the average tax rate is likely to be. That's all.

It will -- the moore from Brazil will drive that average down, but it depends what else we have --

And what is your overall denominator of total earnings. If we have more earnings from the Gulf of Mexico, than yes, it has a positive impact, but it may be swamped by higher rates here and higher tax jurisdiction.

That's clear. Thank you very much, guys. That was helpful.

Thank you very much. And we'll talk to everybody next quarter.

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