Diamond Offshore Drilling Inc (DO) 2007 Q2 法說會逐字稿

At this time I would like to welcome everyone to the Diamond Offshore Drilling second-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, Les Van Dyke, Director of 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 Bob Blair, Vice President of 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, 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 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 reflects 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. Welcome, everybody, to our second-quarter results. I think the results for the quarter, very pleased with those. I think they will reflect excellent execution throughout Diamond Offshore. Decent operations, good cost control. We have been predicting through the year that our costs would average lower in the first half of the year and higher in the second half of the year. That's still the trend we see. Gary Krenek will address that subsequently but we're very pleased with Q2.

I would like to talk about the -- some new contracts that are either included in this press release or recently announced via our rig status reports. First the Ocean Rover now has a two-year extension in Malaysia. Which I think everyone has been anticipating for some time. That now takes the rig well into the future drilling for Murphy Oil. We continue to work at our present rate and some escalations on to about January, 2009, where the new contract rate kicks in.

Previously we talked about the -- in that same general area the second and third generation rigs, Patriot and Epoch, which signed combined contracts with two customers for 4.5 years worth of work. We've stated that those rates are in ranges from the mid-300s to the high 300s, covering both those rigs. I think one interesting thing about that is the work is contracted well into the future, but we had one customer on the Epoch contract for that rig for 18 months roughly worth of work that begins well into 2009. So they were willing to make a commitment on this class of rig well into the future. We continue to see intermediate rigs, intermediate water depth rigs, enjoy a very strong demand. To some degree I believe they may be a substitute product for the lack of availability of deeper water units. Not that one rig can always drill for the other one, but we see customers directing their exploration funds to water depths that are covered by these rigs. Particularly in international markets, there's a lot of new areas to be explored.

Additionally we've talked about the Ocean King. One of our jack-ups is being mobilized to Croatia. We're following a shipyard job in Croatia. We will begin a two-year bare boat charter at a rate just over $100,000 a day. As I'm sure you're aware, our own costs will be limited to a very small portion of that day rate, just the minimal staff that we'll keep on board to look after the condition of the rig. And some insurance costs. So a Gulf of Mexico equivalent of that rate would be at least in the 130's if not a little bit higher. So that's a solid opportunity for us. It also takes a rig out of the Gulf which we and many of our competitors have said is part of our long-term strategy to relocate to higher day rates, to relocate to term, to avoid hurricane risk, and then ultimately to believe what presently is the only weak market that we're seeing in the world.

Additionally, at the first part of July, the Ocean Endeavor spudded a well in the Gulf of Mexico. The Ocean Endeavor is the latest delivered Victory class upgrade, it's a 10,000-foot capable unit. The Endeavor represents, we believe, the first delivery of new deepwater capacity ordered in this particular cycle. I believe we announced the order of that rig in January of '05, we didn't actually mobilize to Singapore until July of '05. Here it is two years later, July of '07. We've already taken delivery. I think that again shows the advantage of this particular upgrade.

Our capital costs, again, were well below new construction costs. So it's been a solid performance for us. In fact, the two-year timeframe between when it arrived in Singapore and when it got spudded here included a delay, it was unplanned, where the heavy lift vessel was delayed in picking us up. Right at 21 months, we think had we not incurred that delay would have been the timeframe in getting this rig here in the U.S. Gulf of Mexico.

Want to talk a little bit about the balance of the year. Gary Krenek, as is our custom will go over some detailed guidance on costs and various other issues as we go forward. In the quarter just ended we incurred about 340 days of down time, primarily shipyard-related down time. As we've been saying, this year, 2007, is a year that's particularly heavy on requirements for our rigs to go into shipyards.

In addition to normal five-year survey demands on our fleet to get into shipyards, we've had a number of rigs receive awards to go overseas which require some contract modifications which includes a shipyard period. In some cases we'll move forward a survey to get that done here before we send it overseas. And then in addition to that, we do have some ongoing life extension projects on our fleet which continue to occur. All in all, we see for the balance of the year -- remember, we were at 340 days in Q2. We see almost 1,160 days in Q3 and Q4. More in Q3 than Q4, but some of that will -- it's difficult to exactly say when that starts. And let me talk about that increase in number of days.

The biggest single item, about 275 days, is a good type of down time. And that's related to contract awards that we've received. The King in going to Croatia, we've moved forward its particular survey. Would have occurred here in the US, we're going to do that now in Croatia in Q3. And so that's one of the components of that. The Ocean Concord which received a five year commitment in Brazil, we're going to move forward some work on that rig and do that down time. In addition to that you will have mobilization time on that rig, getting ready. So in other words, we're taking down time today for future revenue that will extend five years into the future.

And the third item included in that -- we don't have this job yet but the Ocean Columbia, another one of our jack-ups, is the low bidder by the public record in Mexico. We haven't been awarded that job yet, but we've gone ahead and assumed that we would take that rig down to do contract modifications to get it ready for Mexico and move forward in survey so that that would all be out of the way. If we do receive that job, then we will be down to a total of seven active jack-ups here in the U.S. Gulf of Mexico which is down from a high of 13. So again, we've been executing that strategy very well.

Other days, we have about 110 days of timing differences that had -- had been earlier predicted to be shipyard time that we would do in Q1, Q2 that's mobing into this particular period of time. The Ocean Wittington is going to work in Brazil, and we're finding that we're taking additional days than we had initially expected for acceptance testing, getting the rigs through the port and through Petrobras acceptance So we've gone ahead and estimated about 35 days toward that rig over and above our estimate and the other rigs that we have going into various markets, Concord into that market, and then some of the rigs going into Mexico.

Last, I'd like to talk about a particular rig, the Ocean Baroness, another of our Victory class upgrades. That rig had been scheduled for about 50 days of shipyard time in this quarter. We're now seeing that will run about 86 days. And let me talk about that.

On the ordinary way of doing special surveys is we try to work at the end of a well so that during mooring operations at the end of the well as we get full anchors and get ready to mobe to the next location we suspend operations after anchors are pulled, go into the shipyard, do the work, and return to that particular site. Because we are going to do some install and upgrade on that rig for the customer at the shipyard time, we were not able to schedule this at the start of our -- this particular well. We thought we would be done at the end of the well, but we ran out of time and had to suspend operations in the middle of that well. The customer issued a press release on that, as well.

But the net effect is that we have to stop and pull anchors in the middle of the well after securing the well. And that time and those costs are on us. We have to pay for the anchor running operations on this end. And then when we return, at a higher spot rate than boats charge on a longer term basis, additionally as we were mobilizing into the Gulf of Mexico we were trying to meet a window to get on a dry dock. We were informed that the dry dock had been -- lowered its capacity rating so that they did not believe we could fit on there. So we've had to come up with an alternative plan to put the rig in a place where we can do the work without a dry dock and the expense of that is time.

So time and money. We're seeing about $13 million additional cost of the mooring, the alternate job that we're dealing with. That's probably a worst case basis. That's sort of what we're seeing in this market where shipyard space is tight. Wells are lasting longer than we would have anticipated. On a go forward basis we are certainly going to try to make sure that we can, if need be even move surveys up rather than get caught in this particular situation again.

So that covers everything I want to talk about. The continued strength of the market, results that we had here. Talk a little bit about how we saw shipyard days falling for the next two quarters. I'm going to let Gary Krenek talk again about some of the cost guidance and more details on the time. And then we have Bob Blair, Head of our Marketing group here to help answer all of us answer your questions. Gary?

Thanks, Larry. I'd like to make just a couple of comments on our second-quarter results, nd then spend the bulk of my time trying to give some guidance as Larry said, to what we see happening to our operating costs on a go forward basis.

With respect to the second quarter, I'm not going to reiterate the press release numbers but suffice to say that we again set an all-time quarterly high for revenues, net income, and earnings per share for Diamond Offshore. What I would like to do is to highlight a couple of the cost areas that changed from quarter over quarter.

First, looking at rig operating expenses, they increased by approximately $10 million from Q1 to Q2 as a result of the following items. First of all, the Ocean General and Ocean Star went into the shipyard for some surveys, and we spent about $4 million additional costs during the quarter on those two rigs. The Endeavor incurred one month daily operating costs or about $2.5 million as Larry said as a result of it arriving in the Gulf of Mexico for its fourth gear contract with Devon on June 1. Endeavor's costs previous to that had been deferred as mode costs which will be amortized and expensed over the four-year contract period.

The Ocean's King preparation for its mobe to Croatia as Larry talked about, a weaker U.S. dollar, and higher insurance premiums as a result of us increasing our insurance coverage with our new policy year that began May 1, combined to add another $4.5 million or so of quarter over quarter costs. We also saw an increase of approximately $5 million as a result of timing of major expense projects and just general industry inflation. These increases were offset by a net $6 million decrease in costs resulting from anchor-handling boat costs incurred in Q1, but not in Q2 as a result of charters ending in the last quarter and also some accounting accrual adjustment made in Q2.

With respect to other cost areas, depreciation expense increased to $58 million as we previously guided with the Endeavor coming on line in Q2. And interest expense decreased due to the writing off of some $9 million prepaid debt issuance costs in Q1 as a result of the conversion of the bulk of our 1.5% convertible debt last quarter. If anyone needs any further details on any of our second-quarter results, I'd be happy to provide them during the Q&A session.

With respect to costs on a go forward basis, during our January conference call, we gave an average daily operating cost for our rigs by rig type and geographic location. We also said that those amounts were an average for the year and due to inflation in the industry, they would be somewhat lower in the first half of the year and somewhat higher in the second half. This is what is now actually occurring, and everyone should keep in mind -- keep that in mind when they're modeling our Q3 costs. For example, we said the daily Gulf of Mexico jack-up costs would average in the low 30's for the year. And as predicted through the first two quarters, they've actually come in a little bit below that.

Now in order to reach that low 30s rate for the year that we originally projected on a go forward basis, daily operating costs would be in the mid-30's for our Gulf of Mexico jack-ups. The same convention should be used for all our rigs when modeling their normal operating costs i.e. mid-50's will become the high 50's. High 70's will become the low 80's, et cetera, et cetera. If anyone needs to be reminded what those original cost projections were that we gave in our January conference call, please give Les Van Dyke a direct call later and he'll be happy to help you.

In addition to normal operating costs, as Larry said, we have a number of rigs that due to surveys, modes, et cetera, will incur costs above and beyond their normal operating costs during the third quarter. And I'd like to just quickly go through those to give you an idea of what those costs will be. We've got special surveys with the Clipper and Crusader that will be begun and ended in Q3. And as we had previously guided costs for most of our surveys for jack-ups will run us $3 million to $4 million each. Floaters $5 million to $6 million each in addition to their normal operating costs. This will hold true for the Clipper, which is our drill ship, and Crusader, one of our jack-ups other during the third quarter. The Ocean Star began its survey in Q2 but will end it in Q3. And as a result we'll see approximately $3 million to $4 million excess costs on the Star in the third quarter.

The Ocean Quest and the Ocean Alliance both will begin their surveys in the third quarter and they will carry on into Q4. For the third quarter we expect costs for those two rigs to be in the $3 million to $4 million range each. The Ocean Columbia is scheduled to come into the shipyard and spend six days in Q3. So the very end of the quarter beginning its survey, we're expecting maybe $1 million or so extra cost on the Columbia. As Larry said the Ocean King is on its way to Croatia under a bare boat charter. Daily cost for that rig you can assume will be somewhere in the $5,000-a-day range. During the third quarter, while we perform our special survey, we expect to see approximately $3 million to $4 million extra cost on that rig.

The Ocean Yorktown will be entering the shipyard in the third quarter to do both its survey and its life extension. That rig will, as you see from our rig status report, will be down going into 2008. We had previously guided approximately $12 million to $13 million extra cost on this rig beyond its normal cost. That cost is still good guidance. However, in the third quarter, we expect to see the bulk of that come through or about half of it, $5 million to $6 million. Primarily due to the cost associated with mobing that rig from Mexico back to the U.S. Gulf of Mexico.

The worker will also go into the shipyard in the third quarter to begin its survey, which will stretch in the fourth quarter. Those costs also previously had been guided to $12 million to $13 million. We still stand behind those numbers. We expect to see $7 million to $8 million of that come through in the third quarter. The rest of it in the fourth quarter. And finally as Larry went into some detail on the Baroness, previous guidance was also $12 million to $13 million for that rig. We now expect to see those costs somewhere between $24 million to $27 million. All of it or at least the bulk of it coming through in Q3.

Finally we'll expense approximately $2 million worth of mobe costs during the quarter. $1 million of that related to the Endeavor with the rest being attributable to a number of different rigs. Remind everyone that these mobe costs will, however, be offset by the fact that we will amortize deferred revenue from our mobes at the same time.

And finally, just a few housekeeping items. As I said before, depreciation expense should remain consistent over the last two quarters at about $58 million per quarter. G&A expense which has been approximately $12 million in both Q1 and Q2 should continue at that rate or just slightly higher on a go-forward basis. Interest expense, net of capitalized interest, should run in the $3 million to $4 million range in both Q3 and Q4. And finally, our tax rate, which was 28.5% this past quarter, should continue to run in the 28 to 29% range which we had been talking about all year. And with that I'll turn it back over to Larry.

Okay. I think we're ready for some questions.

Thank you. (OPERATOR INSTRUCTIONS) Your first question is coming from Arun Jayaram. Please go ahead.

Good morning, guys.

Good morning.

Larry, your friends at Scorpion have announced a couple of pretty nice contract for some 116-C new builds in Brazil and Mexico. Just wondering if you could comment on how your marketing efforts are going on the Shield and Scepter and what you're seeing in terms of -- as you get the contracts under the new builds.

Well, we have, as you know, we have a contract on the Shield at a very, very nice rate for a year in Australia. The scepter, we haven't announced anything. Bob, do you have any comments? I know we bidded on some jobs.

We have a unit bid out in several areas. We participated in the Brazil bid and the Mexico bid. And we have it bid into areas in West Africa and the Middle East. There appears to be a lot of demand for that type of jack-up of the 2008 timeframe.

Just can you give us kind of what the bid rates have been?

Well, I think you can see what Scorpion won those jobs at. So if we bid and we didn't get it, then we were a little bit higher than they were.

Okay. Okay. That's fair.

And we're comfortable with the prospects. But you understand, I just don't want to tell you what we're going to bid next.

Fair enough. Gary, on the tax rate, you are shifting some assets, thinking about next year and the year after from the Gulf of Mexico to lower tax rate regimes like Brazil. Can you give us a preliminary stab of tax rate guidance for 2008?

The best I can tell you, it will be marginally, we expect it to be marginally lower. But if it's 27% to 29% this year, maybe 1% lower. We have so many rigs already that are contracted in areas we already know where they're going to be that it just -- it's not going to change it that much.

Okay. And last question. I'm a bean counter so I'm going to ask you this because there's a new line item on your balance sheet which is the effect of the FIN 48 adoption. Did that have any P&L impact this quarter?

It had approximately -- it added $2 million to our tax expense. So the rest of it went through as -- some $30 million went through the equity section as required by cap, and then $2 million to $2.5 million worth of expense went through. That related to the full six months of the year. So that's a very small percentage. We don't see it changing very much on a go-forward basis.

Thanks a lot, guys.

Thank you. Your next question is coming from Dan Boyd. Please go ahead.

Good morning, guys.

Good morning.

Can you just update us on your strategy in Mexico on the deepwater side, and what role you expect to play in that market going forward?

Well, up until this recent series of awards, we have the deepest water unit in Mexico. The Ocean Worker that President Fox went on board last May, I think, is their holiday where they celebrate the petroleum industry. We -- we would like to be a part of that market. But at the moment, it's been lack of availability of suitable equipment more than anything else.

Okay. That's helpful. Thanks.

Thank you. Your next question is coming from Ian Macpherson. Please go ahead.

Good morning. Can you see what you bid the Columbia at for PEMEX?

I think that's public record, Bob, right.

It is public record. The operating rate was in the mid-120's.

Okay. And then switching over just kind of sticking on the, kind of the rig prospect side, we've seen a recent leg up in leading edge pricing for fourth generation semis. Would you say that the recent fixtures we've seen there are fairly reflective of where you're bidding the Ocean America for mid-'08 contract rollover?

Well, I don't -- we are not actively bidding the America at this moment. We have bid it on occasion for some jobs that are scheduled to start out there. But--.

The existing operator has option rights that are due in October. And we are -- he's -- he's awaiting -- that operator's awaiting results of the upcoming acreage releases that he's bidding on before he wants to begin extension discussions.

Okay. How -- how long would those options carry his occupancy on the rig?

We've talked about multi-year extensions.

And those are unpriced as of yet?

They're unpriced.

Okay. All right. That's all I have for now. Thanks.

Thank you. Your next question is coming from Pierre Conner. Please go ahead.

Good morning. I think that's me. Am I on?

You are. Pierre.

Good. Thank you, guys. Good morning. Larry, the jack-up count to the Gulf of Mexico down to 7, moving them out -- or whoever wants to answer. How many of those are you actively participating in international bids? The entire fleet, or couple of them? Could you just -- and not commitment to move out to any particular number, but just looking for how many of those are actively being marketed outside.

Well, I guess the best way to look at it is there are three mat rigs. And there are sometimes mat opportunities but by and large I'm going to ignore those. So that leaves us with us four rigs, two are 350's, one is a 300 unit. Or did I miss one?

You didn't miss one.

Yes -- I'm adding up to six. All right? There are seven rigs. Take a look. They're in the 300 range.

Well, you got two 300's, the Spartan and the Summit.

Yes, I'm sorry. The -- all the independent cantilevers could go to various international locations. The Spartan is a sister -- has three sister rigs that are in international locations. So that one's probably the most likely to go to the other locations.

Okay. All right. Now that's helpful on that one. On the sort of run rate against the -- the contracted time that's not in the yard, I wanted to get a feel for your up time against your contract. I know that very -- down times over a certain amount, maybe you don't get paid for the day. But typically you've guided us to be looking at something in the 95% range. 98%. How did you all fare in the quarter, and how did that look sequentially? Were you able to get a higher up time against the contracts? Again, excluding yard time?

Yes, we did. We did better on average, on the entire fleet. What we've said in the past is 95% for dynamically positioned rigs. 97% for conventionally moored semis, and 98% for jack-ups. And we beat that. I think we had something like 75 days combined of miscellaneous small equipment repair time down. So we did very well. I would stay with that same guidance because what we've seen is always 9 out of 10 rigs will always beat that guidance, but we occasionally will have one that will go down to 80% for whatever reason. So those averages I think over time are still good.

And also the Endeavor, the new equipment coming on, we always feel that during the first well we're exposed to issues despite all of our testing that have to be worked through. We've been dealing with some of those issues, most of it not resulting in down time. But that's always a possibility. The -- I guess the best thing about that is the day rate on the Endeavor, which was placed quite a while ago is actually fairly low within our fleet of Gulf of Mexico rigs. So the impact would not be that great.

That was actually the follow-up to that question. About where you see that going forward. Then the last one, actually is for Gary. You ran through a lot of numbers. On the total expenses. I wonder if you could give us a quick total of expenses that are associated with yard work for 3Q and how did that compare to the total expenses that are in your 2Q number?

Significantly more, of course. So that we had maybe $5 million or so associated with just two rigs in Q2. I don't have a grand total in front of me here of all those numbers I read off. But you have all the details.

I can run through and add it up, but it compares to the $5 million in the Q2?

Yes.

All right, gentlemen, I'll turn it back. Thank you.

Thank you. Your next question is coming from Mike Drickamer. Please go ahead.

Good morning, guys.

Good morning.

Larry, if we can speak strategically here for a minute, there's been a lot of talk about consolidation here in the industry. What are your thoughts on getting bigger? Did the offshore drillers need more scale to continue to compete especially as your competitors are getting larger?

Well, if you asked me that question a week ago, I would have said I was not a believer that there would be a lot of mergers, so that's -- I don't feel like I got a good predictive effort on that. Certainly everybody's relooking at it in light of the announced transaction. But there's so many particulars around each company as to whether or not they're likely to do something and what sort of combination. I don't think we need, certainly in this market -- there's such demand on the floating side for equipment that you take really a small competitor like Atwood does very well. Everyone else does -- does well. I think the fewer participants we've seen that in the past leads to a more orderly bidding process. But ultimately the market does rule.

Okay. So you don't necessarily believe that bigger is better?

Well, we're going to test that out here with one big participant. And I would just need to see how they trade, whether or not there is -- to me it's all going to be whether or not size yields a higher multiple due to the liquidity and due to all those other factors. To me that's the only tangible advantage. Most of the costs in this business exists per rig. There's not that much cost savings you can achieve when you combine two companies. And we have some experience with that. That's our view.

Great. Thanks a lot. That's my question.

Thank you. Your next question is coming from Robin Shoemaker. Please go ahead.

Yes, thanks. Appreciate your comments on the merger this week. That was really my principal question. Since you've already addressed that, let me just ask you -- there's a lot of controversy or differences of opinion on how many rigs PEMEX needs. Jack-ups I'm speaking of now. And then what's the status of the Ocean Ambassador or on the floating rig side in Mexico in terms of its future options I guess I'd say?

I think what is known about PEMEX's jack-up requirements for the remainder of 2007, there's the outstanding bid package, bids that hadn't been ordered for three new -- jack-ups that would be new to the -- that market area. We know there's going to be a further one rig jack-up package. Tender document coming out probably within next month. And there's some discussion about an additional three jack-up package. Again, these all being incremental rigs to the existing fleet there. Their 2008 requirements have not been announced. Typically that's done in a public session late in the year after they do their planning.

I know we met with PEMEX I'd say nine months ago down in Mexico City where they went through their multi-year plan which was a significant capital investment, and the bulk of that was offshore in developing new fields. I don't know how that translates into specific rigs and where we are on booking rigs up to that point. But we believe that there's going to be sustained investment in that market, and we think there's great opportunities. And we think there's going to be an expansion from here. I'm not -- I don't think we're willing to say it's X rigs at this point, though.

On your question about the Ocean Ambassador, the PEMEX does have plans to issue further tenders for semi submersibles for delivery early in 2008, of which the Ambassador fits the technical requirements.

Oh, okay. So one of them would be a rig of this size or this water depth capability.

The initial discussions we've had with PEMEX indicated it would be. The actual bid package has not been issued.

Yes. Okay. And I assume you've got other options for that rig, as well. Or would that be the principal one?

That's the primary option for the rig. There is also a -- certainly with the departure of that type of rig from the U.S. Gulf of Mexico, there is interest in the rig back here.

Yes. Okay. Thank you.

Thank you. Your next question is coming from Scott Greiper. Please go ahead.

Yes, good morning, gentlemen. I wanted to circle back to the Gulf of Mexico. You know, you guys are moving a lot of rigs out of the region. Are you not getting the rate, or is it the term that you're not getting? Is it a combination of both? And either way, do you believe that domestic operators, why do you believe that domestic operators aren't offering as attractive terms as the international operators?

I think typically in the U.S. Gulf for these type of rigs we're pretty much working in a short-term market. We do get a rate premium, in some cases we get higher rates than we've seen in Brazil, for instance. But we're willing to trade some of that for some term. And in other markets, again, we're talking about floaters at the moment, just as in jack-ups we do see higher rates than U.S. Gulf. So a combination of higher rates, longer term. And then we're visiting any of the hurricane worries and uncertainties around that make it a pretty clear decision to go ahead and move those out. As we shrink the available supply in the Gulf of Mexico, we think that does further strengthen that market, as well.

Do you believe it's more of a secular shift in spending in the deepwater in the Gulf of Mexico, though? Out of the second and third gen mid-water area?

Yes, I think that to some degree we're seeing a lot of companies that would have been active in those markets, and the same thing is true in the jack-up market. Companies that would have been active there are now active internationally in deeper waters. And some of it is deeper waters in the U.S. Gulf that the returns, the projected returns are higher in that area. But there's enough demand that we can put rigs in other markets, and we're not afraid of keeping a couple rigs here and working them in the spot market. We think we'll do all right on rates and all that. But it's -- it's just -- when we get an opportunity, we price into there what -- how we view the various opportunities and bid. And so far we've been winning jobs to go overseas.

Okay. Great. That's it. I'll turn it back.

Thank you. Your next question is coming from Alan Laws. Please go ahead.

Good morning.

Good morning.

You talked about shipyard time in some detail here this morning. The trend here in the maintenance down time seems to be kind of rising or ballooning at the same time when opportunity costs for this time has gotten much larger. Can you talk maybe a little more generally about the state of the fleet in terms of its operational readiness and maybe break down what you think were up to say 1,700 days in '07 are good days or ones for future investment or ones that are bad are just maintenance.

Well, I think I indicated we've got 275 days baked in for jobs and mobes to relocate to other markets. So I guess those are good. The rest of it is the fleet just has a requirement, a statutory requirement issued by the Classification Society. So it's not necessarily statutory to be between four and five years return to the shipyard. And out of our 46-rig fleet, that's not evenly distributed. It falls heavily in a two-year period. Between '07 and '08. We're aware that the lost opportunity costs of that are significant. We spend a lot of time trying to address what we can do to minimize the shipyard time. But at the same time, we've got competing issues where I would say three or four years ago, we could do some of this work offline while we were still drilling.

Today at the rates the operators are paying, there's much less opportunity to do things on site because they want to maintain productivity at these high day rates. They've got all the bunk space full of third-party service hands to make sure that the rig is kept operable. And that they're -- they're so focused on efficiency, which I don't blame them at these high day rates that we end up finding that when we get into the shipyard, we've got a lot of deferred issues that we need to address. So what ideally might have been a 30-day job pretty quickly can grow to a 40 to 50-day job to address these particular items. So we see that, and we've had a light participation in the shipyard for the first two quarters. So we're going to be seeing that here for quarters three and four, and probably into '08 we'll see some shipyard time. When we get to '09, we expect in the ordinary course of business for that to mitigate itself quite a bit down.

Right. So when you get in the mim, we've seen a number of these go from 50 to 90 days. Are there any surprises that you're finding once they get into the shipyard?

I don't know that we've had too many that grow from 50 to 90 that we didn't have that as a plan. Now, I can say right now that the shipyard capacity in the U.S. is absolutely stressed. And so we feel like we're exposed to shortages of labor. If a hurricane comes through or even threatens to come through, you've got to secure the rig and down man it and all that kind of stuff. So there is additional risk. But I think we've got a fairly good handle -- yes. We're announcing now that some of these rigs take more time such as the Baroness but that was an issue of us not being able to complete a well, and that is not something that we necessarily control.

Also bear in mind when we listed all of the down days in our rig status report, that includes days that we were not going to be reporting revenue such as mobilization time. We have 45 days towed from the Gulf of Mexico to Brazil. We're getting paid for those, but we're getting a lump sum and accounting rules require us not to record that revenue during the mobe period but rather amortize it over the length of the contract. So you may be seeing some of that, and we have let's say we've been awarded a number of contracts, Mexico, Brazil, during the year, so you've seen those days increase because of that.

Sure. Yes. We're aware of that. We just wondered -- it seems to be the last few quarters, the absolute number of days seems to be growing rather rapidly. So just wanted to confirm that. I understand, though. Thank you, that's a good answer. On the cash return side, you've been, basically a leader here in the cash returns. No question as to what your preferred vehicle is. Our question is really why not make this distribution on a quarterly basis. Is there some reason why it's annual or unpaid in the first quarter. Is there any special mystery to that?

Well, we've selected special dividend as the vehicle because we don't want to be in a position of reducing a regular dividend. We do want to make sure, though, that people see the yield that this company is yielding and so we want to make sure that we're recognized. But at the moment, special dividend is what we've elected to put it in place.

All right. We only mention it because investors seem to be capitalizing material yield on a sort of preferred basis, squeezing down the yields to kind of all-time lows. Whether you look at the S&P 500 or whether you look at variable dividend situations and other takers or maybe even the MLPs. Since you're already paying it, more structure might lead to more equity value upside than you're presently getting, which is -- we throw that in.

No, I -- I understand that. We've heard that from several -- several people. And all I can say is we are focused always on returning shareholder value. And so we wanted to use the best possible vehicle to do that.

Just a little follow-up just for my clarification. So you may in the future look at making it more structured or are you just going to stick with once a year?

We're going to focus on what we can best do to serve the community but again, and we'll look at ongoing payments. But, I can't just -- I can't say right now that we're going to do anything different than what we're doing at the moment.

Okay.

We will look at it, and we hear what you're saying.

All right. Thank you. I'll turn it back.

Thank you. Your next question is coming from Jud Bailey. Please go ahead.

Thank you. Good morning. Question on a couple of different semi submersible markets. You've signed quite a few impressive contracts in Southeast Asia and Australia. Could you maybe comment a little more on the incremental demand you see there, and your outlook. And as a follow-up, could you comment a little bit on what you're seeing in the Mediterranean. You have one rig there currently but could be some opportunity for growth. So if you could comment on both those markets, please.

You focused on two very strong markets. I think the Asia Pacific market is a terrific market for us. And we're very pleased with that. We actually have two rigs in the Mediterranean. I'll let Bob comment on how he sees that market and in general.

Well, the Mediterranean appears to be a big future market for floaters. There's been new areas such as Libya that has created strong, incremental demand for floaters. We see a number of rig requirements there in the near future.

Could you quantify that and maybe take a guess at what the timing could be on the need for those rigs.

The -- initially the indications that at least four rigs will be required for that area, four incremental rigs will be required for that area. Probably starting sometime late 2007 or early 2008. And then phasing in.

Okay. And just to clarify, were you speaking just of Libya or the entire region, the Mediterranean region?

That was initially for Libya only.

Okay. Great. Thank you.

And I said two rigs. We have the Spur present and the Lexington semi. And with the King going to Croatia, it will grow to three. And probably timing is going to be influenced by availability. We can't really generally deliver rigs until mid-2008 on the floater side.

And just to -- to follow-up on that, you have one rig, the Saratoga I guess in the Gulf. Would that fit the needs -- as far as from a spec perspective, what they're looking for in the Mediterranean?

It does meet some of the technical requirements of the work in the Med, yes.

Okay. Thank you.

Thank you. Your next question is coming from David Smith. Please go ahead.

Good morning.

Good morning.

Just getting back to the transition GSF merger, in that context wondering if in your view we might see the opportunities to consolidate the speculative asset base, maybe become more attractive given that removal of two potentially significant consolidators.

Well, I think Sea Drill has already consolidated most of the highly desirable floaters. There are still a number of other floaters that are being constructed by one or two rig companies, but they're generally either being built in a less-than-optimum shipyard, or they may have some differences. So I -- there may be some opportunities there. I don't know that -- essentially you're saying Transocean rig are going to be -- and GSF are going to be focused on their own issues and wouldn't participate in buying out those other players.

Maybe have less firepower to do so, right?

Yes. I don't think the landscape changes for that reason.

Okay. With the focus on floaters, it sounds like and maybe with the availability you have on your own jack-up fleet, not too interested in the speculative jack-ups.

I -- I wouldn't rule that out. We always have interest in a good bargain. But I don't -- I don't think you're going to see the bargains out there for a while. You would -- it would be reflected in lower day rates before you have people induced to sell at bargain rates.

You wouldn't maybe be interested in defining that kind of bargain range on these new builds? What your view of that as a bargain might be?

I don't know, but it -- but you would not be pleased with the decrease in jack-up rates.

I understand. I appreciate that. Thank you.

Thank you. Your next question is coming from Geoff Kieburtz. Please go ahead.

Thanks. Good morning. Just a clarification on one question. In the discussion earlier about the special dividend, when you use that term, do you equate special dividend with annual?

At the moment, we have paid for two years now, we've paid an annual special dividend combined with a regular dividend represents 85% plus of our earnings per share for those particular years. And that is the mode that we're still in. We're not announcing any change. But we do want to make sure that people focus on the yield that's present in the stock. That is our strategy of returning cash to the shareholder. And so we will look at whatever other opportunities might improve that.

Got you. And going back to an earlier comment Larry made in regards to assessing the value of consolidation through analyzing the multiple differential, I just wonder in that -- since the transaction that was announced at the beginning of the week is actually two, it's a consolidation and a leverage recap.

Right.

How would you approach, distinguishing between a -- if a multiple differential exists -- existed, the -- which one of those two pieces is the driver?

I guess -- I guess I couldn't. It's ultimately going to be judgment in there. But over time, they're going to pay down that debt.

Sure.

Fairly rapidly. So I would guess you would see that multiple as they begin to exit at some -- at some point.

Right. But just finally, it sounded in your answer, though, that on a, I guess fundamental basis you're at least agnostic in regards to whether there is value to consolidation at least as long as the current market conditions persist?

We believe that we can easily compete with a company of any size. So we're not concerned on the market level. And we're not opposed to it. But again the ultimate value to -- they've done a clever transaction. I think it's -- the stock market's responded well to it. So we'll just need to see how it ultimately plays out.

Very good. Thank you.

Let me take one more question.

Thank you. Your last question is coming from [Stephen Abernathy]. Please go ahead.

Gentlemen, real quick housekeeping. And I'll make this short and get back with Les for the rest if we run too long. Can you help me with the next two years of CapEx in two or three categories real quickly. And that is the pure -- just the pure upkeep, sort of the refurbishment to change is the second category. The refurbishment to change the vessels to an increased day rate sort of category. Then third, which is the new equipment. Can you guys help me with that for the next two years or so.

Well, for this year right now, we have approximately $625 million worth of CapEx is what we're projecting. $220 million of that will be either upgrade of the Monarch or completion of the Endeavor. And also our two jack-up new builds. The other 405 million is broken down between just normal maintenance capital or contract requirements to be able to work rigs on contracts that we've gotten. Of that 405, probably 100 million is related to new contracts.

On a go-forward basis, we haven't done our budgets, but the upgrade, complete the Monarch upgrade, in '08, complete the jack-up new builds will depend on how much we actually spend this year and when shipyard payments become due and those kind of things. But we're -- we probably will spend somewhere in the $100 million to $150 million range there. Our normal maintenance capital will run somewhere probably in the $250 million to $300 million range, and then what extra capital we will have to spend on new contracts that we get in 2008 will depend on the contracts we get.

What about the new builds? Any more money coming due in the next two years?

We will be completing the new jack-ups in the early part of '08 and then the Monarch runs through 8 '08. I think, Gary, you said 150 million?

100 to 50 depending on how much we actually spend this year.

That's for which year?

'08.

'08.

Got you. So sorry.

We have no new builds in '09. And can't help you really beyond in '09.

Okay. And the last thing, let -- Larry, we talked a little bit when you were in New York last about sort of personnel costs. Is there any -- is there any light at the end of the tunnel on this sort of reducing margins or so. Or any more guidance?

Well, with the delivery of all the new rigs, we would expect to have continued pressure on labor rates. We've been pleased to raise pay for our jack-up and semi crews that work very hard. I would say -- I mean, it's -- that in general we have been pleasantly surprised that our turnover has been offshore fairly reduced. And I think part of that is the fact that we're paying -- we're ensuring that we're paying adequate premiums and adequate retention values offshore to keep our guys. The light at the end of the tunnel, I think it will continue to increase. Again, I think revenues continue to increase, and we do have cost protections in place on a number of our contracts. To offset that.

Thanks, gentlemen.

Thank you. We will talk to everybody again sometime in October. Thank you very much.

Thank you. This concludes today's Diamond Offshore Drilling second-quarter 2007 results conference call. You may now disconnect.