Diamond Offshore Drilling Inc (DO) 2007 Q4 法說會逐字稿

Good morning. My name is Henry and I will be your conference operator today. At this time, I would like to welcome everyone to Diamond Offshore Drilling fourth quarter 2007 results conference call. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to your host, Mr. Les Van Dyke. Sir, you may begin.

Morning. Thank you for joining us. With me on the call today are Larry Dickerson, President and Chief Operating Officer, Gary Krenek, Senior Vice President and Chief Financial Officer and John Gabriel, Senior Vice President, Contracts and Marketing. Before Larry begins his remarks, I should remind you that statements made during this conference call may constitute forward-looking statements and are inherently subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. Forward-looking statements include, but are not limited to, discussions about future revenues and earnings, capital expenditures, industry conditions and competition, states that drilling rigs will enter service, as well as management 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 & 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 statement is based. With that, I'll turn the meeting over to Larry.

Thank you, Les. I'm going to make some comments this morning. First, I'll talk about the year that just passed and talk a little bit about the state of the market as we go into the year 2008. I'm going to comment next on our tax charge that occurred in the quarter, and I'll get into the fourth quarter and what were the factors that were impacting the results that we had for that period of time. I'll turn it over to Gary Krenek who will give you some guidance on costs going forward into 2008. John Gabriel, our head of marketing will be here, won't make an opening statement but will respond to your questions about the markets.

First of all, as we complete 2007, we were very pleased with the $11 billion of backlog that we achieved in the Company. The latest big addition to that occurred in December when we signed several contracts in Brazil, stretching on into 2014 roughly. Although we've seen oil prices decline a bit from flirting with $100 a barrel to right around $90 a barrel, we still see a very strong market. Our customers are just as excited at this $90 level as they were when we first hit $90 on the way up. Particularly in floater markets, very, very strong interest. We're still in discussions all the time about availability of some of our rigs. We do have some rigs that will be available at the end of 2008 and those are drawing keen interest from just about every market in which we operate in. Although we're primarily a floater company, we do have enough jackups to have some important data points. And as I think everybody knows, there has been a modest recovery or stabilization of the jackup market in the U.S. gulf.

In the fourth quarter, we had very low utilization in a number of idle units, all of those rigs are now back to work. We have -- what we're not looking at situations where our rigs are working or they're coming down next week or two weeks before which was the case in the fourth quarter. We've seen that rate stabilize and in some cases, begin to move up. I think this is due to a number of factors. but the number one thing would be to look at the active number of jackup rigs that are available in the Gulf of Mexico versus where they were even a year ago. There's been a substantial reduction. And I think as we get out of hurricane season and got into the fourth quarter and are now looking at 2008 budget money, we're seeing some pretty strong interest in the Gulf of Mexico jackup market. We'll need some more data points before we can begin to say what the overall impact will be in 2008, but certainly that looks positive today. So, that looks terrific.

Talking about our construction program, the Ocean Monarch which is our fifth generation upgrade to the Ocean Victory, and a sister unit to the Ocean Endeavor which was delivered this year, is scheduled to be out and still remains on track to be available in the fourth quarter. We will not begin earning revenue until 2009 after we mobilize it from Singapore to the U.S. Gulf of Mexico. Our two jackup rigs that we have, there's been some slippage in both the Brownsville shipyard and in Singapore and we're -- and we think we're seeing this across the board in virtually all rigs in those areas. But they're still within tolerance and not at a level that's going to materially impact our budgeted costs. So, we've got both of those rigs coming on to the payroll, that are available to come on to the payroll, right at the end of May now.

The one in Singapore will mobilize out of Singapore and head down to Australia. It goes on the payroll when mobilization begins and we're still comfortable on that revised schedule. The one in Brownsville, we do not have a job for at this point in time. Although we continue to bid it in international markets. So, if we do secure a job in an international market, although it will be available in May, there will obviously be a mobilization period. But at this time, although we continue to bid that, there is an increasing likelihood that we may work in the U.S. Gulf of Mexico for at least a couple of wells. And really when you look at the number of new construction jackups, and how few of them are actually headed into the U.S. gulf, we're not displeased with that particular use of that rig.

Let me move on to the tax charge which was obviously very large in the quarter. And what happened was that during the fourth quarter, the Company made a one-time distribution of $850 million from a foreign subsidiary to its U.S. parent. And this transaction provides Diamond with unrestricted access to capital which otherwise may have been limited as to use. And there was a unique fact pattern that made this the most advantageous point in time to affect this transaction. The distribution was made at a very low incremental U.S. tax cost which was less than 7% of the amount distributed. So, accordingly, the one-time charge to tax expense of $59 million which works out to $0.42 per share was incurred in the fourth quarter.

Talking about the overall impact of the fourth quarter and I think when you adjust for that, we were still down sequentially from the quarter previously and down what maybe some of the guidance had been. This remains very much a top-line driven business, so the number one impact on us was greater than anticipated downtime in the fourth quarter. I'll go through those in particular. In order of the number of days that cost us, we had 36 days over and above the normal type of downtime that we project, on a particular big rig operating in the U.S. Gulf of Mexico and this was some equipment issues. We had a stackful and then we some other things that went wrong. We were very disappointed in this, as was our customer. We've been working very diligently to try to anticipate these type of problems and make sure that they don't carry forward in 2008, but it is the risk of the business.

And then the next biggest item, we hit 32 days of delays in acceptance testing of rigs that have relocated to international markets. This is not a particular market, but a variety of markets that we get to that market and we find either customer acceptance testing takes longer than we had projected or that there's regulatory issues in the locale where regulatory authorities delay getting to the rig and then find things that they don't believe are acceptable that we have to remedy. We go through an intense program to make sure that our rigs are ready. And in most cases, rigs are going international are down for modifications and we anticipate that in evaluating the overall job. But, this it has been beyond what we would have normally experienced. We don't think that's good for either us or the customer, but it is a fact of life. We had the 32 days delay.

And then the third big item, 23 days, so the combined total of days we're talking about here is 91 days, occurred on the Ocean Patriot. And this is probably a new issue for us. We were completing drilling in New Zealand. We drilled for a number of customers there. Had a job back in Australia. Our intention and our design was to be fully on the contract during the mobilization and during our time in New Zealand.

However, we found when we were getting ready to leave that an invasive species, an Asian green lift mussel had attached itself to the hull of the rig. This is a mussel that was brought in for food raising purposes from Asia into New Zealand. New Zealand is pleased with this particular mussel, but the governments of Victoria didn't -- the government of Victoria and assume other provinces, states in eastern Australia did not want this in place. And we had to remove this. At occurring almost at the last moment, we incurred costs to mobilize divers and blasters, and prepare for that, and that's about $5 million of our overall cost overrun for the quarter. But the bigger impact was the 23 days of missed contract time as we removed these mussels from the lower hulls. That rig is now in Australia. We completed that effort and we're doing a special survey right now, and then we will work on our existing contracts. So, that was the biggest item.

On the cost side, really, if you look at -- I think we've guided toward operating expenses being similar to what we had in Q3. And if you look at that, there was the mussel cost that we had. And then we had some additional costs on the rig that we had equipment problems on throughout the fleet of about six. That's 11 which is more than the $9 million increase of drilling expense that obviously offsets across the board going both ways. Those were the biggest single items. In the G&A area, our costs were increased due to retention programs that we had put in place. In addition to that, the number of rigs that we had in shipyards, we did 12 in the past year. And they're planned throughout the year, but of course, we don't really control that whenever wells come to an end and shipyard space is available. It turned out that we had a lot going simultaneously all in the U.S. Gulf of Mexico. So we had to hire greater than budgeted amount of outside consulting engineers to try to expedite and make sure that we could cover all of that work and not have further delays. So, that was money well spent, but that's an additional cost. So, that's pretty much what drove the results during Q4.

Gary is going to give you some guidance for overall 2008. 2008 is another year where we have a large number of rigs scheduled to be in shipyards, so we've got that exposed to us. We continue to have rigs that are scheduled to relocate to international markets. So, we're continued to be exposed to acceptance testing delays, although again we're working that very difficult. I do not believe that we are exposed to mussel issues and certainly, we will work in the future to make sure we're contractually protected for invasive species, but we have many contracts that are in place that don't particularly address that. Before I let Gary talk in detail about where 2008 will be, I think in general, I'm going to make some comments on what the overall cost trend is.

Our belief is that industry inflation will run about 10%. That's about what we've seen this year. And that's sort of at the low end of guidance that we've said that we may run this much between 10% and 15%. If you listen in to NOV conference call, I think they'll more than likely give you all of the support that you would need for a lot of the stuff that we buy and how that's increased. And then the other component is certainly labor. Cost increases in labor, and all we can do is guess on what the trend has been in 2008-2009. If, as more rigs are delivered, particularly on the floater side, there is a greater competition for personnel, then that number could be higher. But in addition to that 10% core inflation rate in the oil field, we'll see about another 9% roughly of cost that increase year-over-year.

And these are costs though that are matched by higher revenues. And then the two factors are more rigs. We'll have two new built jackups at mid-year which will add costs that we did not incur, that we've been capitalized in the shipyard in 2007. So, that will be a component. And then we'll have the Endeavor operating for a full year, where it arrived and incurred cost in 2007 for just about half year. And then the other half of the noncore inflation component, about 4% is due to rigs working international versus domestic. So, if we take a rig to Mexico, to Brazil, into the Middle East, any of these locales, our operating expenses are higher. That should be compensated for either higher day rates or as a cost that we're willing to take, because of the extended horizon that we have with terms that match that. So, that concludes my opening remarks. I'll now let Gary Krenek talk for awhile.

Thanks, Larry. Larry has already commented on some of the larger items that affected this past quarter, such as the tax transaction, our rig operating cost and G&A. So I would just like to fill in around some of the smaller items that also impacted this past quarter's financial statements. Looking at the other lines on the income statement, depreciation expense increased $6 million quarter-over-quarter. This was due to our normal year-end accounting adjustment to depreciation. It reflects our policy of taking one half year of depreciation on all fixed assets acquired during the year, and entering the number for the depreciation of the year end.

One final item on Q4 is the tax rate for the quarter, excluding the one-time tax transaction or tax rate for the quarter was 24.5%. This is lower than the prior three quarters, and also was due primarily to normal year-end true ups. Still, it resulted in a total tax rate of 27.4% for the entire year of 2007 which was within our guidance of 27% to 29%. Now, looking forward to this year 2008. We've included on our rig status report that was published this morning, to expect a number of down days by rig for 2008, along with expected daily operating costs by class of rig and by geographic location. Therefore, I'm not going to repeat the information here, but would refer you to the status report which can be found on our website. One comment though, the rig operating costs are estimates for the entire year.

As we continue to experience increasing costs in the industry as Larry talked about, we would expect the actual daily cost be slightly lower than our published numbers in the first part of the year, and slightly higher in latter part of the year, averaging out the amounts that we've listed on the rig status report. All rigs are scheduled for surveys during the year will incur their normal daily operating cost while undergoing their survey, and will also incur additional costs for moves, inspection related fees, deferred repairs, et cetera. We're expecting an additional $5 million to be incurred by the jackup Ocean Drake during its inspection period. $5 to $6 million each for the Bounty, General, Rover, Clipper, Guardian and Victory. An additional $8 to $10 million each for the Valiant, Nomad, Princess and Patriot. Finally, an additional $11 to $13 million for the Ambassador, as we'll have to move it back to the U.S. Gulf of Mexico from offshore Mexico for its survey.

The Ocean Yorktown which will be continuing its life extension work in the shipyard for the first part of this year before heading to Brazil, begins its five-year contract with [Petro Ross], will only incur its normal, second generation operating cost while in the shipyard, as much of its additional costs are being capitalized. We also expect to incur $2 to $3 million each on each of the new jackups, the Ocean Shield and Scepter, which will be expensed rather than capitalized, part of them beginning their initial contracts in mid-year. One final note regarding 2008's rig operating expense, we'll incur approximately $5 million each quarter during 2008 for amortized move expense that had previously been deferred. This expense however, will be offset by amortized move revenues which has also been deferred.

If you do the math on all of this, it should result in anticipated rig operating costs from '07 to '08, of 18% to 19% that Larry just talked about. Looking at a few other cost areas for 2008, we expect appreciation expense to run $66 to $67 million in the first two quarters of the year and then go to $69 million to $70 million in the first two quarters. The increase in the second half being attributable to our two new jackups that will be delivered mid-year. G&A expense is expected to run $15 to $16 million per quarter during 2008. And interest expense, net of capitalized interest, should be approximately $8 million for the entire year. You can assume that that $8 million will be spread equally through the four quarters of the year.

Our tax rate for 2008 is expected to be between 28% and 29%. As always, the actual rate will depend on the ultimate breakdown between U.S. and international income, and where that international income is earned. And finally, capital expenditures for the coming year. We're expecting our CapEx to be approximately $680 million in 2008, broken down as follows. Continuing work on the upgrade of the Monarch and completion of the two jackups, $180 million. Required upgrades to rigs to comply with our Brazil contracts, $130 million. CapEx spent on our 12 rigs, undergoing surveys as they do additional work while they're in the shipyard, $160 million. Additional spare equipment that we're going to buy as part of our revenue preservation plan, $50 million. And then other just general maintenance CapEx, $160 million. If you add all of that up, it should come close to the -- it should come to $680 million.

With that, I'll turn it back over to Larry. I think that covers just about everything. We did make an announcement also today on our special dividend. But, I don't know that I have anything additionally to say on that. So we will open it up now for questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question is coming from Rob MacKenzie of FBR. Please go ahead.

Good morning, guys.

Good morning.

I guess my first question is where the conference call left off. And that's to do with the special dividend. I know historically, you all have tended to pay out most of your excess cash in special dividends and didn't this quarter, I presume. Was that related somewhat to the unexpected tax payment? And could we perhaps see the special dividends rise going forward?

All I can do is, you know, we fall back on our statement which is that the board will, at each quarter, consider a special dividend and then it lists all of the factors that we'll include in there, earnings, and cash flow, and position of the Company, and I would --- the tax payment would have been one of those issues that would have computed into that. But we don't give guidance as to how the future is going to look. I think though, I would just have everybody look at the pattern that we've exhibited in the past. And I think there's probably some good clues there as to our thought process.

Ok. Great. A follow-up to that is, is this distribution of the foreign earnings, is that all you have kind of stranded overseas?

Go ahead.

At this point, yes. We brought all the foreign earnings back in. So, that's it as of December 31.

Ok. And then on the deepwater rig market, it appears that at least one of your competitors has been rather undisciplined in signing some long-term contracts and some new bills. That's a fairly low --- data rates or returns on capital that seem suboptimal. How do you see that affecting the market for existing rigs, particularly yours?

Well, I'll let John talk about the way things have been. But I mean, we've seen that where the new build market is pretty much puts a cap on what you can get for your existing fleet. It has been right around 500,000. It moves up and down a little bit from there. So, it is no surprise though. John?

Really, the only comment I would add to that is we just see this deepwater market globally as continuing in a very robust manner. And I think that the real driver to that is going to be the response to the tenders that [Petra Voss] has out for their deepwater requirements. So, we don't see any negative impact on the market at all.

Right. But I mean -- we've known for some time that --- for whatever reason and we're not participating in that little sector of the market, so we're not necessarily the best person to ask. But that the new builds, except on very rare instances, don't, for normal type equipment, don't really exceed $500,000 a day. Sometimes a little bit less, depending upon market conditions or how bad somebody really wants to get a contract.

Ok. Thanks, I'll turn it back.

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

Good morning. I guess my first question would be, I see on the updated status sheet, a pretty extensive upgrade plan for the balance sheet next year and I'm just wondering if you could elaborate on what that entails. And is that pursuant to a customer request or what's behind the work and the downtime on that rig?

Basically, what we're going to do in 2009 is to repower the rig. So, it is going to be taken -- I guess our plans right now, are to take the rig up to Singapore and to put new engine generator sets and an SCR system on it. So, that's basically what the plan is for the Bounty next year.

We will be doing a minor water depth upgrade. We do have contract prospects. But, the key driver is to just get the rig repowered. The engines are worn out. And there are pollution levels that we see from those units, are not what we want to be on a go forward basis.

Got it. Okay. I guess my other question would be on the jackup side. You have the Ocean Spur, looks like a short-term day rate in the mid 130s. And I'm just curious if that is sort of where you see rates heading for that type of rig? Or if there's something unique about that day rate? It seems a little bit lower than what we were expecting anyway.

Well, I don't think it's terribly inconsistent with a couple other short-term fixtures in the mediterranean. That market in general, there's work there, and we anticipate the rig to stay busy, consistent with the market rates in the area. I guess that's about $135,000 a day job. Those rigs in general, depending on term, are somewhere in the 130 to 150 range.

Okay. And as it relates to the new build [decentor] that isn't committed yet, do you think the market still supports multi-year contract opportunities, that call it 180 or so for that class of rig, or is that perhaps too optimistic at this stage?

Well, I think it depends on the operating theater, but I would certainly say yes the term opportunities are out there. We've got outstanding tenders for our terms, anywhere from one to three years. And depending on the area, yes, the $180,000 a day day-rate level is certainly achievable.

There's clearly a difference between the Ocean Spur class of rig which is now a 25-year-old rig with more limited capabilities than the new builds. The new build jackups are a whole different beast, in terms of capability and that's been reflected and continues to be reflected in a day rate premium over your more limited capable 300-footers.

Got it. Okay. Thank you.

Thank you. Our next question is coming from Collin Gerry of Raymond James. Please go ahead.

Good morning, guys. I wanted to follow up a little bit on the mid-water market in the Gulf of Mexico. Specifically, with the Saratoga and the Ambassador moving back there now, not a lot of capability in that region, kind of those on levels left. What's demand like for kind of a low mid-water range for those type of assets? Should we see them reprice here in the gulf?

Well, the demand for the rigs is pretty good. We're not seeing the extended term in the Gulf of Mexico as we're seeing internationally. But the demand is there, and we're looking at pricing these rigs consistent with the market for short-term work in the Gulf of Mexico.

Okay. And then I guess on the Ambassador specifically, you talked a little bit about that. But is that rig moving back to the Gulf of Mexico permanently or are you in discussions with renewing it for the Mexican --- Gulf of Mexico market?

When we finish the PEMEX contract, at this stage, we don't have any indication from PEMEX that they are talking about long-term extension. We've actually got commitments and are in discussions with respect to further commitments on the rig once it gets back in here. So, it looks like it will be in the Gulf of Mexico, up until the survey and probably for some period after the survey at least.

Okay. And that actually brings up a good point, as it relates to PEMEX. There seems to be some confusion as to how they're tendering is going to spell out here, especially on the jackup side going into 2008. With your discussions there, could you give us a little color of what you're seeing out of PEMEX as we go through to 2008 particularly on the jackup side, but also on the floater side?

Well, we attended a meeting down there back in January with all of the other contractors that are working there, and I guess those that want to work there. They put forth some formal plans, general formal plans for 2008. At this stage, there was no mention of incremental floater demand. I think it is still fluid, but there was nothing formal in the presentation they made. They did focus on jackups. And I think the primary things we got out of it, we were able to digest from the presentation was that, there may an bit of a shift on their part towards fleet mix from jackup wise, towards the deeper water independent cantilever rig. And that there is a thought process where, they will be looking at picking up additional rigs, but under some new form of tender. We have not seen that form of tender. It has been suggested that it may contain a purchase right but again, we haven't seen it. I think we'll reserve comment on where it might be headed until we see what the documents look like.

Okay. That's interesting. How do you think -- should it contain such a purchase right? How would that affect kind of bidding activity? Would that make some of the contractors a little more gun-shy about going to Mexico?

I don't think we know.

That was in the details. We hadn't seen them yet. That's about as simple as I can say it.

Okay. Fair enough. Appreciate it, guys.

Thank you. The next question is coming from Jeff Tillery of Tudor Pickering. Please go ahead.

Hi, good morning.

Good morning, Jeff.

Wanted to ask a little bit around the operating cost guidance. You've got shipyard days, '08 versus '07, coming down 35% to 40%. The base industry inflation, I understand, with an increased cost, but what is a like shipyard stay cost in '08 versus '07? It would imply that it costs quite a bit more and I'm trying to understand some of the details around that.

Well, the number of days in the shipyard does not necessarily drive the dollar cost of survey.

Sure.

We're going to spend extra money for the [moles]. Regardless of how many days we're in the shipyard, the moles are exactly the same. The daily operating costs continue while we're in the shipyard. So that will be consistent whether we're operating or in the shipyard, the costs overall are going to be the same. So, the cost on the ship -- on the surveys this year may be slightly higher, more driven from the fact that we have more international surveys to do. Most of our surveys in 2007 were domestic. And the best guidance I can give you is what we supplied which is using normal daily operating costs that we've given in the rig status report this morning, and those additional costs that I laid out earlier in the conference call.

Okay. That's helpful. Around you guys provided pretty detailed guidance on '09 shipyard days. How large is the air bar around that? Because that would imply kind of shipyard time comes down quite a bit in '09. I'm trying to understand on a utilization side, is there a big air bar around that? Are you pretty comfortable with kind of what you see today? These are the major shipyard stays.

Well, we're comfortable with these are the rigs that will be in the shipyard in '09 for doing their surveys. The number of days that is an estimate on our part. We won't know for certain a closer estimate of those days until we go through our budget at the end of this year. But what we tried to do is look at what it normally takes us to do a shipyard, in this day and age, which is longer than it had been previously due to a number of factors. Lay that out and then for a rig such as the Bounty, which we know already that we're going to be doing additional work on, laying those days out also. So, while they are estimates, we are at this point in time not expecting anything greatly in excess of what we've laid out in the rig status report.

The last question is just on CapEx as you get past these -- the rest of the new build costs. Your '08 CapEx of 680 includes 180 of new builds. Is $400 to $500 million a reasonable range to expect to go forward to post new builds and that gives you room for contract driven upgrades?

That's difficult to say because we haven't really grappled with it. We would expect, because we have fewer rigs in the shipyard, you're just not --- you don't have the time available to install stuff on the rigs. So, we would expect it to come down, but that's offset by cost continuing to go up. And we will have another year's worth of data in front of us. And if we discover a tool, or an enhancement, or an upgrade that will provide us with additional uptime, limiting downtime, any kind of redundancy protection, or anything that comes --- that will do that, certainly at the point in time, we've got shipyards. So, there's a bunch of factors going back and forth. But, the biggest single one will be a decline in shipyards. What did we have in '09? Five rigs, six rigs?

Five.

Five. And so I think -- I expect, netting out everything else that it will trend down. I just can't tell you how far down it will go.

Okay. Thank you very much.

Thank you. Our next question is coming from David Smith of J.P. Morgan. Please go ahead.

I feel terrible asking you guys jackup related questions, especially ones we've touched on. But if I could, follow up on the PEMEX issue. You mentioned they might be looking to hydrate their jackup fleet. Wondering if they gave any indication about the reasoning for that? You know, whether it is performance issues with the mats or safety concerns given the [urosmento] tragedy? Maybe a combination of things?

I don't think they really went into a lot of detail as to why. I would suspect that just simple versatility, in terms of water depth capability and indeficiencies would be the driver.

Okay.

We say in the Gulf of Mexico, it depends on the need as people move into deeper water and this is all being driven by geological things within the jackup realm. And that the mats becomes less of a tool that you need for jackups, and if you're working on the platforms or these other kind of factors that we don't always get privy to.

Okay. On your [brownstone] rebuild, the Deceptor, pardon me if you've mentioned this already, but that rig is pretty suitable for the deep shelf requirements, is that correct?

Yes.

You see much interest there for work in the Gulf? You mentioned it might work there initially.

We have seen a little bit of interest. We're in discussions, or very early stages of discussions with a couple of customers about the potential for the rig here in the Gulf. Again, I think our focus really has been international based on the term that we can -- the term that we can probably achieve in the international market versus the Gulf of Mexico market. But there has been a little bit of discussion about the rig for here in the Gulf of Mexico.

If it were for deep shelf requirements, any reason that you wouldn't get the premium kind of international rates? For that kind of specific Gulf of Mexico --- your know, deep shelf requirement?

I really don't see any reason why not.

And I hate to follow back on this, but the Ocean Spur, I think currently in the mid 130s, on your -- I'm sorry, the last announcement on that was in the 130s, down from the prior rate in the 190s. Just wondering if that's pure supply demand dynamics or if maybe there was something special about the last 190 rate?

I think it is more that the 190, it was more of an anomaly than the 135 is, not to say that that market is basically at $135,000 a day. But I think the 190 rate was more of an opportunistic situation and I think that that -- again, that class of rig is not -- the new build, 350 to 400-foot, two-million-pound, derrick-type of rig. So, we're looking at a class distinction in rates really.

That's all I had. I appreciate your time.

Thank you. Our next question is coming from Thomas Curran of Wachovia. Please go ahead. Mr. Curran, your line is live.

Sorry. All of my questions have been answered. Thank you.

Thank you. Our next question is coming from Robin Shoemaker of Bear Stearns. Please go ahead.

Thanks. I wanted to pursue a little bit on this Mobe, Demobe expenses and inspection fees, delays and acceptance testing. You're getting, I think, Mobe and Demobe fees on virtually all your contracts. But I'm sure that this -- some of these extended transitional costs, if you will, are not getting reimbursed. Can you explain exactly how that works? And whether you're in --- trying to perhaps, strengthen the terms of those expenses that you incur when moving a rig or --- from one region to another and anticipating all of the start-up costs in the new location?

Well, I think the -- there is an accounting for Mobe where the cost and the Mobe fees are deferred, and go to zero and are amortized over the life of the contract, in general. But the impact that we talk about, was if the rig doesn't go to work for 30 days, then we're losing 30 days worth of revenue that we would have otherwise expected and maybe have guided to in our previous rig status reports. So, it is the loss of revenue rather than accounting that deals with it. So far as strengthening contracts, yes. We would like to have stronger contracts. But you know, almost every contract says that there is a -- the customer has to buy off and accept the rig. And what we just found in these international markets with the customers that they, and the regulatory authorities, have been more stringent. I won't characterize whether we think it is too much or too little, but more stringent than we had expected or that we would normally see in acceptance testing in the Gulf of Mexico.

Okay. And then my follow-up question is -- and you may not want to answer this -- but you've got a consensus estimate of $11.50 a share this year. And you've given us some pretty good cost guidance and you know, it does seem that you're incurring a little bit of extra cost and somewhat delays in starting up rigs. If you would, my question is simply do you think that number is a stretch, based on what you're seeing in the guidance you've provided here on costs?

Well, I think we give pretty complete guidance with our rig status reports. And if people do the math, they can test that. I understand. But we don't get into the business of making those comments. Just tell everybody to do the math. And again, there is a lot of focus on costs and costs are important. I think costs are a relatively under control, and this remains a top-line driven business. So people need to make sure that they calculate the top line appropriately.

Okay. Thank you.

Thank you. Our next question is coming from Geoff Kieburtz of Citi. Thanks.

Just a couple of short ones. On the ceptor, what kind of rate would you need to get in the Gulf of Mexico to make it at least indifferent versus taking the rig internationally?

Well, we would like to cover our cost. And then, I think in some markets, we would like to have a premium as well to go there. But in other cases, such as the Brazil announcements, I think everybody understood that the ability to book term, we were willing to take discounts from what otherwise would be available on the short-term. So, we do an analysis and we estimate what all of the transition costs, and make sure that those are covered to the best of our ability. And I think, even though we have mentioned these two markets or a couple of markets where we've had extensive testing delays, and that's revenue we didn't anticipate that still --- that didn't imperil the economics. These are still good deals for us to take, going internationally. So, I think we have time for one final question.

Thank you. Our final question is coming from Alan Laws of Merrill Lynch. Please go ahead.

Good morning. I have more of a theoretical question, surrounding your cash return policy. You guys have been pretty tax savvy, and we're in an election year and where there have been some murmurs about removing the favorable dividend tax rate. Would a material increase in the dividend tax rate, I guess really affect your decision to use the special dividend vehicle to return in capital to shareholders?

I'm going to stick to our depreciation response -- I mean, our dividend response as to how we may calculate that and not -- I think that that's one of the factors that should be covered in the list, but I can't really comment further.

But it you --- what I'm really asking if there is a choice out there, do you --- you could of return the cash that way, repurchase stock or maybe even change your thoughts on that and go after M&A. Are you --- you know, in any way inclined to pivot on any of those given changes? Say dramatic changes?

The statement, you know, getting some hypothetical questions, but the statement is that the board will consider all of these factors in May. So, I think there is enough latitude in our statement to indicate that we will consider the appropriate factors that we believe ---

Okay. Some of your peers have talked up M&A again recently. Could you give us an update on your thinking on the M&A side? And opportunities that are in the market ? And your

You know, we don't see any change in the M&A environment. Again, there's not a lot of cost savings to be had from a change. And any combination between players that reduces the number of bidders, benefits accrue to everybody. So, we're pleased to operate in an environment, we think we can operate. We're not driven to go out and buy someone just to do a deal. We've always been driven to seek value, and the definition of value changes in the markets, based on --- So, we will continue to remain value focused.

Rather than corporate deals, I was more referring to the availability of --- call them spec rates in the market, that don't have crews or don't have an operating base. Are you interested in that?

There may be some value there. That might be something that we could move on.

Okay. All right. The last question I had was more just information question for me. How often do these invasive species, mussels issue come up?

This is the first time we've ever seen it. And I think it's indicative of more focus on the environment. I know invasive species have been issues primarily for vessels that actually come into port. We typically have been offshore. I don't know whether it was due to the fact we were coming into port to do a special survey. Or the fact that there was a recognition that the species themselves could transition from us to the supply boats. But it will be a factor. It will be a factor in countries that are more focused on this. And it will certainly be a factor in us making sure that we know this in advance, and don't have to deal with it at the last minute.

This is going into your contracts from this point forward?

Well, I mean apart from the contracts just-- if we had known three months before we were set to leave that this was an issue we were facing, we could have perhaps done the blasting while we were working. It all depends on the particular operations. And therefore, we wouldn't have missed contractual days.

Okay. All right. Thanks for the answers. Appreciate it.

Thank you, everybody. We'll join you again later in the year. We appreciate your attention.