Diamond Offshore Drilling Inc (DO) 2007 Q3 法說會逐字稿

Good morning. My name is Jackie and I will be your conference operator today. At this time, I would like to welcome everyone to the Diamond Offshore Drilling Inc. third 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 and 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 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 reflect any change in the Company's expectations or any changes in events, conditions, or circumstances on which any forward-looking statements is based.

With that, I will turn the meeting over to Larry.

Thank you, Les. I would like to welcome everybody here to our third quarter conference call. I'm going to make some brief opening remarks. As you may have noted in our press release -- if we have any recent large-scale contracts, we typically will highlight those in our press release and the fact that we did not in this quarter indicates that we did not have any data points to share with you. However, I assure you that our activity is very strong, that we have lots of interest, that we're in discussions with a number of customers, both domestic and internationally for both renewals on certain rigs -- we have some rigs that are available here in 2008 and we're in discussions on renewing or placing those rigs with new customers. Additionally, we have several customers expressing interest on follow-up contracts where those contracts may not start for as late as a year from today, in other words, contracting on a rig that's already contracted out through a year. All of that remains very strong. I can't tell you when some of those will come together, but based upon the level of activity, it should be -- should have some of those to include in our rig status report, if not the next cycle, the cycle after that, perhaps. International jack-up bidding opportunities are also present in front of us and we continue to see opportunities there.

Our weak area, of course, and it's no surprise to anyone, is the domestic jack-up market. We have seven rigs that, on a go-forward basis, will be operating in that basin. That's down from 2004 when we had 13. So we've continued on a strategy of moving rigs out of that market. I think that's something that many of the other jack-up players in the Gulf of Mexico have done, clearly, because you've seen the supply shrink. Yet demand remains anemic, I'll say, in that particular market.

As we said today, we have one rig, the Ocean Spartan, that's been down right at three weeks. It's joined by a number of rigs in that class from our competition, so we're not hopeful that that's a -- imminently ready to go back to work. We also have three rigs in the shipyard. One is not in the seven, the Columbia, which is preparing to go down to Mexico to begin a term project down there for Pemex, part of our initiative to move rigs out of the U.S. Gulf of Mexico. We have the Crusader, a matte rig, which is doing some leg repairs right now in Galveston. And then we have the Ocean Tower, which is contracted on term with Chevron, is off contract -- or we've suspended the contract while we go into the shipyard and do our regular special survey. Then that rig should return and continue working for Chevron through its projected two-year term end date, which would be April of 2008.

So that's really where the market looks today. John Gabriel is joining me, our Senior Vice President of Marketing, to answer more detailed questions, if we have those. And then I'm going to let Gary Krenek follow on with some details of the results that we have during the quarter and give you some guidance -- reference to what we see happening in the fourth quarter, primarily in terms of rigs being in or out of the shipyard. We had, actually, less downtime in Q3 than we gave guidance for previously on our conference call, by about 44 days. However, a number of those improvements were days that are probably going to slide -- we know they're going to slide into Q4.

In general, I'll say that we have experienced slowdowns in the shipyard. Some of that is equipment that we find that requires additional maintenance to us. But very often, it's slower to get rigs through the shipyard. We had an incident of the Ocean Baroness where we hustled to get that rig -- had to get suspend the well to get it into the shipyard to do its five-year survey and we had secured a space on a drydock, so we had to make that particular drydock. We got notice that the drydock capacity had been downgraded due to its condition and that we couldn't handle the entire rig. So then we had to spend extra time unloading the chain. We got -- when we finished that operation, which added time, and we get ready to get on the drydock, and we find that it's downgraded further and can't take the weight of our rig at all. So rather than being able to drydock, then we had to put in different plan to be able to access our void spaces in the lower pontoons. And all of that took additional time. It was not as efficient as having been on the drydock. So that is just one example of some of the things we saw in the quarter. And we're probably going to give guidance with the expectation that some of those things will occur as we continue with our heavy shipyard operation of rigs that are either preparing for contracts or are dealing with special surveys.

We have relocated a couple of our rigs to Brazil. We've got the New Era has arrived in Mexico, along with the Voyager. The New Era has been accepted and is on contract presently. The Voyager is still dealing with some acceptance testing issues, which has added some time, but we continue on with relocating those rigs.

So I think that's a general overview of what's going on. Let me close out by talking about the dividend announcement that we made earlier this week upon approval. We had told people in our last conference call that we had a number of inquiries about whether or not an annual special dividend or a quarterly dividend would be the appropriate vehicle. We spent some time reviewing that, as well as reviewing tax implications of making a change. And we made that announcement here. I'm not going to stray, really, off the announcement as to what factors we're going to use in setting that. Those are much the same language that we used when we were on the annual dividend basis. Those are the factors and those are indeed the factors that the Board looks at in setting those. And we will -- the Board will look at that again in approximately 90 days, as we complete our next quarter. So that concludes my opening remarks.

I will now let Gary Krenek give you some more detailed guidance and a number explanation.

Thanks, Larry. I would like to make just a couple of comments on the third quarter results and then spend the bulk of my time trying to give some guidance, as Larry said, into what we see happening to our cost in the fourth quarter. With respect to the third quarter, I'm not going to reiterate the press release numbers, but I would like to say that the numbers were pretty clean. The only really unusual item that came up was the result of a booked to tax return adjustment for 2006 taxes, which caused us in the third quarter to record an additional $4.4 million worth of tax expense above and beyond our normal tax expense in the third quarter. This adjustment resulted in a $0.03 reduction to our Q3 earnings. So other than that, the numbers were pretty clean.

As Larry said, operating expenses did increase in the third quarter compared to the second, just as we had guided. This was the result of ten of our rigs spending time in the shipyards, either for their five-year surveys or contract preparation work. Costs were actually a little bit lower than what we guided in our last conference call. This is primarily due to the three additional rigs that Larry mentioned that were expected to spend time in the shipyard in the past quarter, but have had their work delayed either into Q4 this year or into next year. When you take these three rigs into account and make the appropriate adjustments to projected cost, our guidance for the quarter actually came within 0.5% of the actual costs that we recorded. If anyone needs any further details on the third quarter results, I'll be happy to provide them during the Q&A session.

With respect to expected cost in the fourth quarter -- we gave guidance on our last conference call detailing per-day costs for our rigs by rig type and by geographic location. I'm not going to repeat that here this morning, but if anyone needs any help or refresher with that, they're more than welcome to give us a call, either myself or Les Van Dyke will be happy to help you after this call. I will add, however, that we have two new disclosures, that is cost for our midwater rig working in Trinidad is expected to be in the low 70s and we expect costs of approximately $10,000 a day for the King, which is getting ready to start it's [bare-book] charter in Croatia.

Now in addition to the normal daily operating costs that you need to take into account, we expect an additional $13 million to $16 million in expense to complete the surveys of the Worker, the Baroness, Crusader, King, and Columbia, which began their survey work in the third quarter and will complete their work in the fourth quarter. The Quest, the Alliance, and the Tower are expected to do their surveys in their entirety in the fourth quarter. And we expect them to follow the guidance we've been giving all year, that is $3 million to $4 million for a jack-up, and $5 million to $6 million for a floater, in addition to the normal daily operating costs these rigs incur. We also have the Victory and the Yorktown that will be down in the fourth quarter that -- they'll do a portion of their surveys in the fourth quarter and then finish up in 2008. Combined, these two rigs will incur $6 million to $8 million of survey-related costs in addition to their daily operating costs. The Concord, New Era, and Voyager will spend some time in Q4 in the shipyard before beginning contracts in Brazil and Mexico later in the quarter. These three rigs will incur a combined cost of $5 million to $6 million to do this work, again in addition to their normal daily operating cost. Finally, the Vanguard will be down for its intermediate survey in Q4 and incur additional costs of some $3 million. For the details on the timing and duration of the downtime on all these rigs, I would refer you to our most current rig status report that we released earlier this morning.

In addition to these operating costs, we will amortize to expense approximately $3 million of deferred mobe costs during the quarter, $1 million of that related to the endeavor which mobe to the Gulf of Mexico earlier this year and the rest being attributable to a number of different rigs. I would remind everyone that these mobe costs are going to be offset by amortization of deferred mobe revenues. When it's all said and done, if the timing of the shipyard work actually follows our expectation, operating costs for Q4 should either be slightly above or slightly below the third quarter's actual cost. I caution everybody to remember; if shipyard timing changes, costs will be impacted and you should adjust your projections accordingly, either up or down. Any timing changes that occur will be disclosed in our rig status reports that we publish on a bi-weekly basis.

Finally, just a few housekeeping items; depreciation expense should remain consistent into Q4 compared to Q3, which was $57 million, $58 million. G&A expense, we expect, to be consistent from the third quarter to the fourth quarter. Interest expense, net of capitalized interest, should run in the $2 million to $3 million range. And our tax rate, which was just under 28% after the booked to tax adjustment recorded this quarter, should remain right around the 28% level into the fourth quarter.

With that, I'll turn it back over to Larry.

All right. I think we'll be ready to take questions at this point.

Thank you. (OPERATOR INSTRUCTIONS) Your first question is from Angie Sedita with Lehman Brothers.

Thanks. First, glad to see the quarterly special dividend -- certainly a positive. And then on the questions -- thoughts, John or Larry, on the jack-up market in the Gulf? I know you only have seven rigs left in that region. But would you expect to see continued idle time here in Q4 and potentially even going into Q1, based on what you're seeing in inquiries and in conversations?

I'll let John talk about details. One thing I'll say, Angie, was -- I guess it was last year, as the jack-up market began to deteriorate, it was enunciated the belief throughout the industry, well, next quarter, end of the year, whatever. And we gave up at some point trying to say when it was going to turn around. We are exiting hurricane season, that's an important point. We're coming into fourth quarter. There was some bid activity in the most recent lease sale on the shelf, although most of it was deep water. So there was some potential positives that are overhanging the market. Having said that, we're going to have to play it as it comes. And I'll let John talk about the details that we're seeing in the market.

Angie, I think Larry has kind of covered nit a nutshell. In the near-term, we don't see any dramatic changes. We have seen a slight increase in inquiries and I would attribute that to coming out of hurricane season and to some year end budget money that's being freed up. But it's certainly not enough to have a dramatic impact on the market. So I think that we're going to be looking at softness in this market, certainly through the fourth quarter.

Okay. That's what I had assumed. And then also, I know you -- Larry, you mentioned at the beginning about renewals, et cetera. Any color on the Ambassador, which is coming up this December in Mexico, second gen semi?

We are, I guess, in some level of discussion with Pemex as it relates to a little bit of term associated with finishing a well that will be in progress, which will notionally get us into the first quarter of next year. And what we're hopeful at this point is that the Pemex 2008 program and potential additional rig needs would be released and we would have a feel for what our opportunities with respect to continuing in Mexico might be. As an alternative, we do have interest here in the U.S. Gulf of Mexico -- again, short-term work -- but we do have interest in the rig in the event it were to come back to the Gulf of Mexico, at least in the near-term.

Okay, great. Final question, on the Scepter, I believe it's being built down here in the U.S. Any conversations you have on the rig? I know it's still early '08 before it comes out. But is it going to be somewhat of a difficult contract to sign, considering it's nothing mobilized if you go internationally?

I don't view the Scepter as being problematic. At this stage, we've got the rig bid on several opportunities and I think we just have to wait and see what the outcome of those opportunities are. Mobilizing it outside the Gulf of Mexico is going to have a level of costs associated with it. But those opportunities are generally of a longer-term nature, so it -- when you amortize those mobilization cost over that longer-term, the impact is not as significant.

When we ordered those rigs, we had the choice of -- we could take another slot out of Singapore. And we said at that time, no, we would just as soon be spread out. Certainly, the Gulf of Mexico has changed since we made that decision. It's not likely that it will work in the Gulf of Mexico, certainly not on term. We would have to work it short-term. But we've bid it into West Africa and in various places in the Atlantic and the mid. So it's probably just as close or not that much further coming out of Brownsville than it would be coming out of Singapore. And there are a big number of rigs coming out of Singapore. So I still don't think we're disadvantaged on our locations.

Okay. But you are seeing interest for one to two year contracts for that rig?

Yes. Those are the kind of things we're bidding.

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

Thank you.

Thank you. Your next question is from Dan Boyd with Goldman Sachs.

Hi, guys.

Hi, Dan.

Historically, you've done a pretty good job of maintaining discipline, upgrading and acquiring rigs in the down cycle. Assuming acquisition costs stay where they are and new build costs stay where they are, should we expect you to maintain this discipline and we wouldn't expect those uses of cash to be on the top of your radar screen?

We won't rule that out. We are very careful on how we deploy our capital. Assuming everything stays the same, there could be a possibility where we would acquire some new asset if we were comfortable that the contract would put us where we'd be. We don't think we'd get same return on capital that we have on the rest of our fleet. But I can't rule it out, although it's probably -- we haven't rushed to the shipyards in Korea to go order new equipment at these levels. But if there was the right opportunity, we could.

And would you be opposed to financing that acquisition with debt? Or would you want to -- would you prefer using cash?

Well, everything would be considered. Again, we have strong cash flows, but we've announced that our -- that clearly, dividends will play a part in that. And we have virtually no debt now, so we certainly have the capacity to add it. Again, it would depend on the particular circumstance.

Okay. And then one last one. When just looking at downtime -- and we think about the survey time for next year, you gave guidance of 50 days for semis and 30 for jack-ups. You've also mentioned on prior calls that your shipyard time is becoming cyclically longer for some of the items we mentioned today. Should we think about that 50 days as having all the risk to the upside? Or is there also some conservatism factored in there and there is some downside potential as well?

Days could run longer. I think the opportunities for us to cut those days down are very minimal. Here's the factors; the shipyards are slower in the Gulf of Mexico, there's labor issues. And we also recognize that at these type of day rates, our customers are very concerned about efficiency. So whereas in a market two or three years ago we might have had three days at some point during the well to do certain things that really you have to suspend normal drilling operations, we could get that in the contract -- all that type of stuff is now being pushed off and has to be done when we get into the shipyard. So there's just very few factors that are going to push us to get those rigs out earlier.

Okay, thanks. That's all for me.

Thank you. Your next question is from Arun Jayaram with Credit Suisse.

Good morning, guys.

Good morning.

Hey, Gary, in terms of the Q3 operating costs, could you give us a sense of how much of the Q3 costs were related to special surveys and shipyard time?

The analysts are -- the analyzing that we did was comparing Q2 to Q3 and the operating costs were up about $58 million. And when we looked at that, about $50 million of that $58 million was due to the shipyard cost. So the vast bulk of that increase were due to all the rigs -- the ten rigs we had in the shipyard.

That's helpful. Larry, over the last several quarters, you've mobilized four or five of your midwater semis out of the U.S. Gulf of Mexico to international markets. We obviously had a very strong Gulf of Mexico lease sale in the deepwater and the midwater. Are you seeing any incremental demand yet in the Gulf of Mexico midwater market? And could we possibly see you move some rigs back to the Gulf?

Well, anything's possible. I don't know that -- the lease sale hasn't immediately translated into incremental demand. We made the decision, not that there was lack of demand in the Gulf of Mexico, but that we could get term internationally at rates that were competitive with when we saw here in the U.S. Gulf of Mexico, on a short-term basis. So we did that. Most of the rigs that went overseas went overseas for a good amount of term. So they're not available to bring back. We would -- our expectations are, though, that we have a large fourth generation fleet in the Gulf of Mexico and that those rigs will pick up the perspective jobs in the midwater. We still have the Saratoga here in the midwater that we're going to work well-to-well for the time being, and then John alluded that if Mexico does not keep the Ambassador, and certainly right now we don't have any commitment beyond the short-term, that we would bring that rig potentially back and work the midwater.

That's fair. John, it sounds like you're working on some contract renewals at [Sitra]. Can you just talk about what you're seeing in terms of rates? Are you seeing flattening rates or continuing to see increases in rates on some of the renewals you're talking about?

Well, I don't want to really be specific about renewals that we're in discussions about right now. What I can say is that I believe there's still some upside in these midwater rigs with near-term availability. I don't think it's going to be as dramatic as we've seen it run up in the last -- in the last two years, but there is some upside in these rigs -- the ones that we have availability in '08 and they're rolling in late '08 and '09.

Yes. I would say it's all set by the price for new builds. And our opportunities on our existing fleet is continued rate convergence where you see these rates stack up very, very closely to that new build rate. And if the new build rate moves higher because of the additional costs that they're seeing out there or excess demand, then there's further opportunities there. But I don't think that the convergence that we've seen and the levels that we have are as high as they can go.

Okay. Last question, Larry, I want to press you a little bit on the dividend. You'd historically, last couple of years, had been paying out 80%, 90% of your net incomes through special dividends on an annual basis and now you shifted to quarterly. Can you help us put the $1.25 in context? Because you've earned a little less than $5 this year. Is this related to Q3 earnings or the earnings to date? Just help us put that $1.25 into context.

We've said that the Board uses the factors that we had in the press release. And we're going to stick with that and really just let people draw their conclusions based upon our actions, rather than give guidance or raise expectations as to what that exactly would be. So I guess I can't really help you on that.

Okay. Well, thanks a lot.

Thank you. Your next question is from Waqar Syed with Tristone Capital.

Yes. I have a question on the Ambassador. I think you mentioned that contract in Mexico mixed in into the first quarter. Would the rates be renewed if that happens? Or do you continue to work at about $55,000?

We, in an open market -- no, that $55,000 rate was first set back in 2004 and is very much off of where we see rates -- I think, without specifically saying they would have expectations, we would have expectations, they're probably going to look at what some of their longer-term renewals are and what rates are in the Gulf of Mexico. And we'll have to come to a meeting of the minds. But even if we're on the low end, it's going to be substantially higher than the $55.

Okay. So it is, in a sense, a contract renewal -- a new contract, even though it may be a short-term, one-well kind of deal in Mexico?

We did not give them option rights that were priced.

Okay. That's fair. Could you give some idea on Ocean America, that -- that sort of contract is up for renewal around mid -- or contract is up around mid 2008? What kind of options do you see for that rig and where could the rates be?

We're looking at several opportunities here in the Gulf of Mexico and conversationally, term-wise, anywhere from one to two years. We've also been approached about short-term work for the rig. Obviously, the longer-temple work has some appeal. We have also been approached by two different entities about taking the rig outside the Gulf of Mexico, anywhere from one to three years, conversationally. Again, I think the rate structure on a go-forward basis with respect to those rigs -- Larry's kind of already addressed that in that there is upside there, but there is some relative limit to that, given where the new build rigs are being priced right now.

Yes. I would -- John covered that very well. I think that the choice for us are continued work in the Gulf of Mexico, which would be term, or taking slightly longer term, perhaps, internationally. Typically, there is mobe and some capital equipment costs to go internationally on these rigs. The market will give you some recovery, but you might have to eat some of that. And so those are the kind of things that we weigh -- look at the concentration of fleet in the Gulf of Mexico versus dispersing around the world in various other markets.

The rates for the Fortune rigs have been all the way from low 400s to even touching 500s. You think high 400 is still kind of achievable for this rate?

I would like to help you, but we can't. One, I don't want to set expectations; and two, we're in negotiations with customers and we try not to do that all publicly.

Okay. Secondly, on the international jack-ups, you have some availability early in '08. What do you see prospects there for those rigs; Sovereign, Spur, Heritage?

In all three cases, we've got opportunities. We see opportunities for the Spur, both in Egypt, potentially Libya and potentially in Tunisia. The opportunities relative to the Heritage would be in the Persian Gulf and the Gulf of Suez. And there are opportunities for the Sovereign in southeast Asia. So we expect all three of those rigs to notionally remain in the geographic areas where they are currently located.

Okay. How about the rate environment? Do you see the rate environment softening there in these markets with the new builds coming in? Or do you think the rates could stay at high levels in the $140 to $160 kind of range?

I think -- each one of these areas is a little bit different. If you take the Gulf of Suez, historically, it's been a little bit under in general terms than you would see in the Mediterranean or, say, in the far east. But if you want to characterize these rates, if you're talking about new builds on a $140 to $160 range, there might be some modest discount for an existing rig, but it's a function of capability as well. We're confident that we'll be able to put these rigs to work and keep them working. And we don't see any significant deterioration in the rate structure as yet.

I was thinking about $140 to $160 for your rigs and maybe for new builds, the $180 plus kind of range. Do you think that rate (inaudible)?

I'm going to let you pick your own future rates. We don't --

Okay. And one last question for Larry. You mentioned that you still -- you remain interested in acquisitions of new assets. Do you have a preference for jack-ups versus floaters? Ar at this point, you'll take anything that becomes available?

Well, I would never say we would take anything that becomes available. We're going to look for where we see value in the acquisition chain. This is a floater company. That's what we've been for a long time. We did add jack-ups to here. I would expect that there's just many more uncontracted jack-ups versus the floater fleet being contracted. I would suspect there would be more availability on the jack-up side, but I can't tell you necessarily that we would be tempted on that bigger market, until I know which rig and what the contract prospects are for that rig.

Great. Thank you very much.

Thank you. Your next question is from Pierre Conner with Capital One Southcoast.

Good morning, everyone. Back to the Gulf of Mexico -- and I understand that it's no the biggest driver, but maybe has the most near-term data points coming into my interest -- strategy-wise. So you have seven currently. Maybe, John, can you tell us how many of those are you actively bidding outside of the Gulf? How many would you think over the next year you might move out? Can you give us some perspective on that, Larry and John?

I can tell you right now of the rigs that are here, that we probably have three or four of them currently bid outside of the Gulf right now. And I'm including the Scepter in that total. So that will probably be (inaudible).

Right, including the Scepter -- well, except for the Scepter, maybe, those would be -- opportunities would come up within the next six months or so?

Right. The matte rigs are not likely to leave the Gulf of Mexico, but the others ones would be ones that we would --

Okay. Related to that, you have the rig has been down three weeks. To what -- can you see in the context of some other companies deciding to, quote 'warm stack,' or potentially -- even now, granted submersible rig and the different capabilities -- is there become a balance point between opportunity of the people, things of that nature, other opportunities costs, where you would elect to warm stack or effectively take it off the active market list?

Sure, there is a point. I don't know that that's immediately here. When you look at the number of rigs that are stacked, the key driver is going to be the overall number of rigs that are stacked. It's unreasonable for to believe that we're going to be materially above that average and we're going to duck having to have a rig idle. As long as we believe that there is a chance to put it to work at a profitable rate in the near-term -- and we believe that we are not going to demand it and not operate it. In addition, we are likely to, with just the sheer number of opportunities overseas, to have at least a rig go overseas. That also helps bring it into balance. I think those more the near-term actions we would see than a move on our part to warm stack a rig.

That perspective helps. I appreciate it. Switching gears to -- on the yard time. I may have my math -- and maybe Gary can correct me on some of this. You had an increase of the expectation of yard time in 4Q. Of that, some 40 days plus, I think I'd calculate, as you mentioned, really slipped from 3Q to 4Q. But there's still -- maybe the number's around 100 incremental. And I was seeing if you could give me a break down of -- as you said, some of that is -- these things are taking longer because of the yard inefficiencies. Is there some of that has now cropped up during the quarter of previously unidentified yard time? Is there a breakdown of how much has been more shipyard delays?

Well, what we've released is the most current that we have right now. Part of it was shipyard delays. Part of it -- we also include in the downtime is mobe time down the Mexico for the Voyager and the New Era. We had some delays on the Voyager, particularly, waiting on weather. Approximately 100 to 120 days were just shipyards taking longer -- the Baroness took quite a bit of that up.

And I'd point out that we had some hurricane or threatened hurricane activity with the number of rigs that we had in the shipyard. And that probably cost each rig five days, at least. So not blaming it totally on the shipyard, we've had -- we've got a rig going forward, the Champion, that we're currently working on leg repairs. That was an unanticipated problem with the rig. So it's a variety of issues. And I would probably blame shipyards more. That's probably the leading cause, but there's certainly a wide variety of things.

That's the color I was looking for. The majority of this is shipyard issues, delay issues, et cetera. Trying to get a handle to identify how much should we think about, when we get an expectation for yard time for '08, how much, is quote, 'safety factors' should we put on it? That's what I was trying to get a handle on.

Well, the 30 and 50 for the jack-ups and the semi submersibles are still reasonable. We will beat the 50 on some of them, we won't on some of the others. We're in the middle of our budget process right now and we'll get a little bit better idea of what all work we need to do on those rigs during that budget process. And we'll give you some better numbers, some better guidance on the next quarterly conference call after we've completed that budget.

All right. Thanks, gentleman.

Thank you. Your next question is from Jud Bailey with Jefferies & Company.

Thank you. Good morning.

Good morning.

First, a question on the fleet status report. Can you correct me if I'm wrong here, but under the Ocean Baroness, it's showing -- under the comment section, that it says available and actively marketing. It doesn't mention the Amerada Hess contract. Is that a mistake? Or did I miss an announcement somewhere?

No, we're still working for Amerada Hess and I believe we have about a year and a half to go on that contract. I think every rig says available/actively marking at the end of that time frame -- at the end of the contract time frame. So they're checking --

It's a little bit misleading. We -- as Larry said, still under the Hess contract. Under operator, it says DODI simply because as of this morning -- or as of yesterday, when we prepared this, we were not on day rate with Hess. We expect to go on today, is our best estimate. And so --

No, it's going to be a couple more days here.

Okay. A couple more days now. That was -- so, yes, the status report is a little misleading there. But we're still with Hess.

Okay. Question on cost of reconstruction or upgrades. If you were to redo the -- or do the Monarch upgrade today, what ballpark do you think that would cost you, if you were to try to contract a yard to do that same upgrade today?

I don't have that figure, but it would certainly be up because yards are charging more, NOV's charging more for its items, a wide variety of things. We said that we'd do that for $300 million. Probably our final number at this point in time will be close to that, but on -- a little bit higher. I'd just be guessing, but -- on the order of 20% plus to do the same work.

Okay. All right. That's all I've got. Thank you.

Thank you. Your next question is from Alan Laws with Merrill Lynch.

Good morning. I have just a couple of clarification-type of questions here. The first was on the downtime. Someone asked about the assumptions you're using for shipyard times -- I think it was 50 days for the floating rigs and 30 days for the jack-ups. And you did say that this was trending higher. Should we use 2007 experience as a guide for the trend higher? I guess there's no reason why 2008 would be better, right?

That's all that you have to deal with, really, is 2007.

I see. So you started the year somewhere -- sub 1,000 and made it up to about 1,800 down days. Are we expecting the same thing for '08?

You need to look at the individual rigs that we are going to have down and we've released that -- the scheduled surveys for 2008 on that rig status report. There's some 12 rigs on there that we're going to do in '08 and two of them that we have to complete. You can't just look at pure days, you've got to compare the type of rigs and compute it from there.

Sure. But you have about 13 of those -- or 11 of the 12 are floating rigs, correct?

Yes. I believe that's correct.

Okay. If you were to look at these floating rigs versus last year's floating rigs, are these ones in any worse shape than last year's, going into their surveys?

We don't believe so. It's going to be -- we're planning those surveys -- there's been some preliminary planning going on and it will really be after the budget process is completed, early December, that we will make adjustments to the rig status report if we get any big changes from that.

Okay.

We are -- on the remaining -- we'll continue to take questions, but I feel like we really need to clear out because of the large number of other conference calls by 10:00. If I could ask the remaining questioners, if we could get you guys to roll all your questions into one blip so we can give everybody a chance to ask their questions.

All right. I'll ask one more then. I have a follow-up here again on the Gulf of Mexico. A little concerned here. I think you've given your cash costs in the Gulf of Mexico jack-ups in the mid, sort of $30,000 per day level. Given the softness in the Gulf and I guess lots of warm stack units, I think our number is 17 or so, and additional rigs -- there's lots of extra rigs coming into the overall global market, limiting relocation potential; what would keep the rates here from heading to cash break-even level over the next year if demands were to stay at these levels today? I think we're down about 40% already.

In the past, we've seen that. In this particular market, the market's been weakening and we have not seen rates decline to that level. I think that the safety valve of rigs being able to go out have been a factor at this time. I think, certainly, many matte rigs are owned by just a few players. And I think there's some more pricing discipline than we've seen before. I think in the past, they go to cash break-even. I'm not saying that they can't go to cash break-even today, but those are always a factor. I would remind everybody, of course, that we are a floater company. That within our jack-up fleet, which is one-third of our fleet, is only 10% of our earnings. And our Gulf of Mexico exposure is seven rigs on a go-forward basis. So it will be deminimis. Be glad to give you the data points, though.

All right. I appreciate the answer. Again, congratulate you on the quarterly dividend. That's an amazing move.

Thanks.

Thank you. Your next question is from Robin Shoemaker with Bear Stearns.

Thank you. Sort of on the same line of questioning, it seems like the rate level of $60,000 a day is kind of where we are, and maybe that's a line in the sand. I'm not sure -- but I'm talking about Gulf of Mexico jack-ups. So the issue is, we've seen a handful of announcements of cold stacking of some very low-end rigs in the Gulf of Mexico. In your opinion, does that help prevent us going below this threshold?

And as a secondary part -- two-part question -- but do you see the Pemex negotiations continue to be heavily influenced by this, as your rate for the Columbia -- I guess as I look at it today, looks like a very good rate compared to what you might get today, but perhaps I'm wrong on that. That market really does have a different dynamic, although some influence from the U.S. Gulf. That's my only question, but it's two parts.

All right. Well, I appreciate you rolling them all into one. I don't think there's any particular line in the sand of -- if we had more than our seven rigs, which is a small portion of our large issue, then cold stacking might be a factor. So really those questions are best directed towards the people who have large fleets in the Gulf of Mexico; ENSCO, Hercules, those companies. In fact, I'm going to get off so you can talk to ENSCO at 10:00.

So far as Mexico rates, yes, it's influenced. They see these rates, they know it, it's a different market, you've got different costs, you've got a lot of -- to bring a new rig into Mexico, you've got to spend a lot of money putting on Pemex-required equipment. So that probably accounts for some of the rate differential as well.

Thank you.

Thank you. Your next question is from David Smith with JPMorgan.

Good morning. Maybe it's too early to ask this question, but thinking out longer-term, wondering any concern you might have about the level of demand for the midwater fleet, either in absolute rigs or just the sense of operator urgency, as the 65 plus ultradeepwater rigs under construction start to join the fleet in '09 and 2010?

I would say no, frankly, because the deepwater fleet that's arriving is contracted, by and large, and no one's building more midwater fleet. When you look at the big differences internationally, there's so many new territories opening up where 2,000 to 3,000 feet of water has not been drilled over and there's some big prospects in there. So the deepwater fleet is heading off shore. We think if there continues to be the level of success, that there's not actually adequate deepwater rigs to both drill exploration and do development drilling. So it's not something that we see, as far out as we can see, that's going to give us competition in the midwater.

Okay. Thank you.

Thank you. Your next question is from Eliot Glazer with (inaudible).

Yes. Gentleman, could you give us a figure for long-term contract backlog, overall? I don't believe you provided one since the end of March, when it was about $7.4 billion going out to 2010.

As of right now -- as of current rig status report, it stands right at $8.5 billion with -- and that represents some 81 years worth of rig time.

$8.5 billion --

In 81 rig years.

Can you break that down over the period 2007, 2008, 2009 and 2010; how much of the $8.5 billion is in that four-year period?

I don't have that information here with me at this time.

Okay. Thanks a lot.

Thank you.

I think we have time for one more question.

Your final question is from Geoff Kieburtz with Citi.

Good morning. I'll try to roll my questions into one. Earlier there was a comment in regards to the midwater fleet, and I think it was said, obviously, we would prefer term. So I wanted to ask you to explain that comment in the context of -- does that suggest that you see some risk over the next couple of years that rates might come down?

Related to that, you mentioned that there would be costs that you would have to -- be bourne by the contractor if you were to move the rig. And is that a change in the market dynamic versus say a year ago?

And the third part of this question is, NOV said yesterday they thought that there would be a new jack-up ordered for every one delivered over the next 12 to 18 months. If that were in fact to be true, how do you think that would affect international jack-up rates?

Okay. Now having challenged you to roll it into one, my challenge is to remember what all pieces were.

I'll step in.

I understand. Your question on term versus spot working.

Yes. Does that suggest you have a concern about where rates might go over the next -- ?

No, but unless there's a meaningful premium for the spot market, there's just so many more advantages to term. We can do a better job when we're -- when we know what we're doing for our customer instead of --

Sure, okay.

There's safety issues. If you're not giving up that much for term, then there's certainly availability. And the -- having rigs contracted for term allows rates to move more rapidly than if this was a spot market. The boat companies are spot market and their rates move up and down very dramatically. And given our level of capital commitment, we'd rather have the longer term.

On the ability to pay for mobe, I would say the market is probably at a point in time that it pays for more mobe than it ordinarily would. However, if the mobe is a long way, then you're trying to make sure that you're on your full day rate, you've got all those costs paid for, and that you've got your modification cost that you may have to have for the new contract all paid for it. And it all depends -- to get all three of those paid for and if they're all fairly large, then, no, you may not always get that. I know we were looking at one -- taking some fourth generation capacity out of the old Mexico, about as far as you can go, given that the globe is round. And when you added up all those factors, we did not believe -- we believe that to make that relocation, we would have to eat some costs. So that's -- we haven't made a final decision on it. But there's a case where spot versus term, we may pick the more profitable opportunity.

But the key there is that that's not a change?

No. It's not a new dynamic and it's -- the element -- maybe I misunderstood the question, but I think the element was much focused on compliance costs with requirements of the customer as it was mobilization. And that's not a new dynamic either.

Okay.

Then on NOV's projection of jack-up mark, they've just got so much more data than I do. They've got salesmen in the field and they must be reporting back that they're talking to all kind of --

No, I wasn't asking you to verify that projection. I was asking, if that were to be true, how do you think that might affect the jack-up rate environment?

Look, if we continue to just build and build and build until we finally choke, then it will be like the real estate market or something. I don't think that we're at that level right now. And I think orders are going to slow down. But that's just my personal opinion.

Okay. Thanks very much.

Thank you. I would like to hand the floor back to the speakers for any additional --

Thank you. We appreciate everybody tuning in. We'll see you next time. I'll spend one -- I know we get lots of jack-up questions because that's where there's market dynamics. But I'm going to close one more time by saying, this is a floater fleet -- two-thirds of our fleet is floater and 90% of our income comes from the floater market. Thank you.

Thank you. This does conclude today's Diamond Offshore Drilling conference call. You may now disconnect.