Diamond Offshore Drilling Inc (DO) 2008 Q3 法說會逐字稿

Good morning. My name is Lynn and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2008 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 session. (OPERATOR INSTRUCTIONS). Thank you.

Mr. Van Dyke, Director of Investor Relation, you may begin your

Morning. Thank you for joining us. With me on the call today are Larry Dickerson, President, Chief Executive 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 the 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, base the drilling rigs will enter surface, as well as managements 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 statement is based. With that, I will turn the meeting over to Larry.

Thank you, Les. Welcome everyone to our third quarter conference call. I'm sure I will be making some opening remarks about Diamond Offshore, and the quarter. And I will be followed by Gary Krenek who will go through some of the detailed numbers behind that with emphasis, I guess on looking forward to the fourth quarter. I am sure in the overall macro environment, where people are concerned obviously about the price of oil and the price of-- not only shares but the entire oil field services complex, the entire stock market those are the big macro questions that I am sure sure we will take. I'm not sure I can specifically address those but I can talk about some of the positive things that are going on at Diamond Offshore, which might give you some viewpoint of how we view the particular market. Obviously, let me start with our dividend and I will return to that in a minute, but the increase that we made in our dividend is a continuation of what we have emphasized is our dividend strategy.

So the combined $2 a share dividend, which is a 46% increase over the combined dividends that we paid in the previous four quarters was something that we were able to make and it was based to a large degree upon where we are in the market, that we have over $11 billion worth of backlog and that we continue to see positive indications of demand for drilling rigs that we possessed. Obviously, the market is unsure and the decline in the price of oil will have some impact. But if we look, we announced in the press release a new contract at what for us is a record day rate for a deepwater unit, the Ocean Valiant, which will be heading over to Angola in West Africa for Totale, signed a minium two year commitment. This was signed this Monday. We had received an LOI several weeks before that, but we wanted to make sure that we made the announcement at the point in time that we had the complete contract in place, since there were some open issues there. But I think that shows that certainly for the majors at least, for Totale that their programs are such that, they are willing to go forward and willing to go forward with strong commitments. As we indicated in our press release, the opening day rate, which you can do the math and see that it is in excess of well in excess of $600,000 a day. The day rate can decrease if they take that commitment and go from either a 2 year commitment to a 2.5 year commitment or a 3 year commitment.

The other thing I would point out would be that we have seen continued strength in the jack-up mark. I think recently, Rowen's announced a number of commitments that went from a number of their Gorilla Rigs, which is an area we don't participate in on through some of the 300 and 350-foot units in the Gulf of Mexico, which we do participate in and we have also seen commitments that are at increasing day rates that have been signed and committed in the last four to six weeks. So again, even in the face of declining product prices and the uncertainty out there we see strength.

Certainly let me return to the one thing that people were concerned about when we, in our previous fleet status report indicated that an LOI that we previously received and had disclosed as a future commitment was not carried forward to contract status. The customer in that case indicated to us that due to cash flow disruptions from both Gustav and Ike to their facilities in the pipeline serving those facilities, their cash flow did not permit them to carry forward with that particular commitment. So we got that data out the door as soon as possible so make sure the market was aware of that. And that we have not disclosed the customer but, it was not, I repeat, was not the current contracted customer, Anadarko. The Ocean Stars will be finishing up its current drilling well some time toward the end of the year, and this will be the first available 6,000-foot unit in quite, in booking quite some time in the future that will be available for recontracting. And we've had terrific interest on this from a number of customers. So, disclose the, obviously the concern that people have about cash flow impacts in this particular market. But, again, it is the type of rig that we see lots of strength for.

So those are the, those are the general positive market comments. Let me talk a minute about some of the occurrences within the quarter. Our quarterly results were burdened by two items that certainly were not things that is we looked at when we went into the quarter. One, Hurricane Ike caused some damage to the jack-up Ocean Tower. Ocean Tower was very close in the path in the Vermilion area where Ike apparently caused three jack-ups to sink. But in our particular case, the Derrick and the Cantilever drilling package went over the side. I was on that rig yesterday afternoon, and the rig looks great except for not having a Derrick and drilling package. And it is astounding to all of us that Cranes and other parts of the rig on the surviving hall were largely unaffected, yet the Derrick went over the side. Of course we had no one on board so we don't have a precise understanding at this point, we did have some data gathering which we will be analyzing. But in any case, that caused a $6.3 million loss. We had a very low net-book value for the equipment that was still on the rig of approximately $2.6 million and then we accrued $3.7 million toward our deductible for removal of reck. Next spring, when the water settles down we expect to return to the site and lift up the damaged pieces.

The Ocean Tower itself is scheduled for repairs. We are in the midst of bidding those repairs out. So I can't tell you an exact price. Our effective deductible on that unit was right at $70 million. So that would be the maximum that we will spend. I would expect it will be well toward that number if not over that number but I can't give you any details on that at this point. The unfortunate thing is that due to all of the activity in the sector for new builds across the board, the derrick manufacturers are backlogged and we will not be able to receive a derrick for 8 or 9 months and then we will go through an installation period. So we look at that rig as being off contract for approximately a year. Surprisingly enough, the rig was not actually drilling at the time. It was engaged in some hurricane recovery operations for Chevron and so they continued to use the rig even absent its drilling package for the, a portion of September, and on into October, it is idle at the moment, and they paid us a rate of $75,000 a day for the rig in its current state. But we don't see much opportunities like that to come into the future. So we will be preparing the rig for the modifications that we will make to get it back in the service.

The final thing that we had not anticipated is our currency loss, and Gary can go through more details on that. But our currency loss for the quarter was just a hair under $30 million, $29 million. We have taken forward contracts on our key currencies for about the past three or four years and with the gradual decline in the dollar, although we are not, with hedge accounting, and therefore we recognize currency gains or losses, we typically will have been recognizing a slight gain in each quarter. For the two and a half years they had been about $30 million of gain; however, that was offset or attempted to offset each quarters pick up in the cost of our drilling expenses, which were denominated in those underlying quarters. So there was sort of a matching procedure that went on there. But what has happened with the huge improvement in the value of the dollar relative to these currencies and the currency that is we deal with are UK pounds, the peso from Mexico, Australian dollars and Brazilian pease and a little bit of Norwegian krona We had to, an affect mark-to-market all of our future hedge positions, which stretch through the middle of next year.

So the, the current quarters loss chiefly reflects all of those future losses having been mark-to-market. Theoretically, if the dollar stayed at that particular level, then we would, we would offset that in the future quarters by a decrease in our foreign currency denominated expense. But obviously at the, the currency can move one way or another and, in fact, for the first couple of weeks in October it has continued to-- the dollar has continued to strengthen. So that is, that is where that is but that's essentially we think a mark-to-market, a timing difference that would be offset by decreases in our drilling expense. Although all of that could reverse if the dollar moves in a different direction. And I have no idea which way that is going to go.

So that, that kind of covers what has happened in the quarter and how we see the market. And, again, I will come right back to the dividend, I think our, our decision to raise the dividend, I think is a very strong reflection of the strength that we see in Diamond Offshore's position. So Gary.

Thanks, Larry. As before I would like to spin a little time on the results we just reported in the third quarter and approximate then as Larry said give some guidance on what we expect to see financial in the fourth quarter. With regards to the third quarter result, Larry talked about two of the three more significant items, our casualty loss in the hurricane and the currency loss. So I am not going to really spend any time on that since he went through that. The only thing I would add is on the repairs for the Ocean Tower, as Larry said we expect to spend as much as $70 million. When we spend those moneys in 2009, those will be capital expenditures, so they will not hit P&L but will be accounted for as capital.

The other significant item that many of you may have a question about is contract drilling expenses which were $314 million for the quarter. That is higher than the $273 million that we had previously reported last quarter, but below the 335 to $340 million that we guided to in our last conference call. The increase over Q2 was due to the cost incurred by seven f o our rigs which spent part of the third quarter in shipyard undergoing planned regulatory surveys. However, because of the timing, approximately $15 million of the cost that we had anticipated and guided to did not occur in Q3, but rather will now be rolled over and spent in the fourth quarter. The remaining favorable variance comparing our previous guidance to actuals can be mainly attributed to our on going efforts to control costs.

Now looking forward with respect to contract drilling expenses in this upcoming quarter, we gave out an average annual per day cost that we expect to incur by rig class and location at the beginning of the year. I would remind everyone again that we said because these rates were the expected costs for the entire year, in arising cost environment, we expected to incur costs slightly below those rates during the first half of year and slightly above those rates in the second half in order to reach that average cost. At this point that's appear-- it appears that guidance was accurate, and that is what is occurring. So, in order to compute normal daily operating for the fourth quarter you need to use the annual rates that we gave out earlier but escalate them slightly for Q4.

Now in addition to these normal daily operating cost we expect to incur a combined total of approximately $50 million in additional survey and related costs to complete the surveys for the Ambassador, Valiant, Drake and Rover, which were done in the third quarter and also for survey costs related to the Ocean Nomad and Ocean Princess, which will be done in their entirety in Q4. This $50 million is inclusive of the amounts we had previously expected to spend in Q3 but have been rolled over into Q4. These rigs are expected to spend a combined total of 266 days off day rate, doing this survey work, in this upcoming quarter. We also expect to incur another 3 to $5 million above and beyond normal operating costs for two additional rig that is will spend time in the shipyard for non-survey work and we will also book an additional $11 million related to amortization and deferred mobilization cost. All told, this totals to approximately 335 to $340 million of contract drilling costs, which we expect to incur in the fourth quarter. Having said that, this estimation of course will change if there is a change in a rig survey time and has happened in this previous quarter.

I would like to take this opportunity to remind everyone that we file an updated rig status report on our website every two weeks. Changes in survey downtime, dates, contract rollover dates, et cetera can be found in that report. I would also like to point out that what I have been talking about with regard to contract drilling costs is the line item in our income statement that is labeled exactly that, and does not include reimbursable expenses, which is a separate line on the P&L statement. Reimbursable expenses are driven by the amounts of consumables we are asked to purchase by our customers and are offset by approximately the same amount of reimbursable revenues.

Quickly, depreciation and interest expense, which we normally discuss should remain relatively flat going into the next quarter. And we expect our tax rate at the end of the year somewhere between 29.5 to 30%. With that I will turn it back over to Larry.

Okay. So I think we are ready for questions, which we will take. Operator we are ready to begin our questions.

(OPERATOR INSTRUCTIONS). We will pause for a moment to compile the Q&A roster. Our first question comes from Dan Boyd with Goldman Sachs.

Morning, Dan.

Dan, your line is open.

Hi. Can you hear me? Hello.

Now, Dan. Thanks.

Sorry about that. You mentioned that you are seeing a lot of opportunity for the Ocean Star. Is there any reason to expect a day rate lower than what you just received on the Valiant.

I will let John address the market.

The Valiant? I suspect that there are some differentials between the international market and the Gulf of Mexico. I suspect that rate will be at least in the near-term consistent with what we are looking at on the Ocean, on the Star originally committed somewhere in that range similar to the America and the Victory, at least in the near-term.

Okay. Within the floater market, everything seems to be strong so far and actually rates have in some cases increased. Are there any regions that you would consider to be most vulnerable to oil below 65?

Well, I don't know that we have seen the impacts of oil below 65 yet. We can see that sort of as budgets come out. Certainly, I think deeper water has larger reservoirs, in general, is what the customers seem to tell us. So I think that that provides protection and I would expect that your vulnerability would come from your smaller, just trying to take advantage of smaller scale opportunities. So that takes place in a variety of some of the more mature markets of the world.

So this is the US Gulf of Mexico, North Sea potentially.

Yes, but I mean for deep water in the Gulf of Mexico, that's still largely a new area.

Okay. Over the past couple of quarters, you have also about looking for different tunes to grow the Company's deepwater fleet. Has this changed given the current market conditions or do you still think you have opportunities over the next 12 months?

Well, I would, I certainly there's going be opportunities out there on the rig construction side because you have got, as you know, there are parties involved in construction that may not be as well capitalized as you need to be in this current market. So those would provide opportunities. Whether or not we chose to acquire rigs in there would weigh upon a large number of factors but probably the price that we could obtain that rig at, would be one of the largest factors.

Today, it's pretty safe to assume, though if the market remained at current levels you would look forward to an opportunity to take one those shipyard slots that has an early delivery date day, say 2010 or even into 2011?

Well, I mean early delivery is an advantage. The market stays where it is and we can get a discount and we are fairly comfortable about our prospects getting a contract, improves the odds.

Okay. Thanks. I will turn it over.

Your next question comes from Arun Jayaram with Credit Suisse.

Larry I was wondering if you can comment, Brazil is an important market for Diamond, and obviously you have very good visible there, but there's some concerns that maybe the, a lot of the new builds they just agreed upon may not get done with their current owners owing to financing situations. I was wondering if you had a lot of conversation with Petrobras, has there been any changes from the way they're look at the market or how they're, how they're thinking about contracting existing rigs? Are there opportunities potentially for some replacements if these rigs don't get done in a timely manner?

There's probably opportunities, and we talked to Petrobras, but I don't think they sent any hard signals as to what thanks they're going to make in the situation. I mean I think you pretty well outlined the situation and facts on the ground. But what adjustments they're going to do, I don't know.

Okay. That's fair. Second question, can you give us your CapEx number for 2009 inclusive of some the $70 million.

We, not at this time, we are in the process of doing our budgets and we will be prepared to give that out at a later date. At this point, rely on what we have said earlier, and then add approximately $70 million back, but, again, that's a change as we go through our budgets

Okay. Last quick question, just on the operating costs line, given the 20% increase in the US dollar versus a lot of different foreign currencies, what kind of impact, Gary would that have on the operating cost line item on a percentage basis? The stronger dollar.

We spent probably 20%, I would guess in foreign denominated currencies. On our expenses. So, we-- the loss that we had of $29 million for the third quarter would be spread over six to nine months. Most of our foreign currency contracts go all the way into June of next year. So if the dollar had remained consistent as what it was on September 30, you can take that $29 million and spread it over a nine month period.

Okay. That's very helpful.

Just to give you a rough idea of what it is.

Okay. That's helpful, guys. Thanks a lot.

Our next question comes from Wagar Syed with Tristone Capital.

Good morning. Could you comment on the contracts? There's certainly a view on the Street about the strength of these contracts, and whether they're going to go be negotiated or cancel. In case commodity prices come under pressure, could you just give us your view on how strong these contracts are and what's the language and what are the outs for E&P companies in these contracts?

Our view is that these contracts are very strong. They have been tested, I think in the past on cancellations. We try to work with our customers and serve their needs. But, at the same time, when we chose to, we and they chose to go long on, on rigs, then I think both parties expect that they will live with that. There are, there are standard outs for nonperformance issues as with almost any contract, but in general, there are not outs in the particular contracts for the kind over market issues. Now, maybe the PEMEX contracts have some outs in there or there's some outs in law in those particular jurisdictions. But other than, other than that most of the negotiated contracts are pretty strong.

Okay. Now, let's just take a scenario like commodity prices come-- fall below $60, go down, companies find that their deepwater projects are not working, anything, would you be willing to renegotiate day rates again? Change the terms of the contracts and what's the record on that?

I would like to help you but I can't. If I comment on theoretical's, I just don't know where we would be at a particular point in time, as I indicated, we view ourselves as a prime supplier to our customers want to serve their needs but we try to maintain the interest of our shareholders clearly. . The fact we chose in these cases to go long on, on the drilling services and the rates. That would be our

Okay. And then just on the, on the special dividend, obviously everybody is pretty excited about the dividend going up. The Board has kept the dividend flat for a long time, and what are you thinking behind raising at this stage you feel much better about the backlog or you see the earnings now wrapping up quickly? What is the thinking about raising it now?

Well, I mean I think we disclosed in the announcement the factors that the Board looks at and I would just tell everybody to, to look at what our history has been of increasing dividends matched sort of with the increase in our cash flow. When we switched to quarterly dividends, we kept that same quarterly dividend if place for four quarters. And as during that-- as that, as the dividend stayed flat our earnings and cash flow continually grew. There was obviously, we are committed to using dividends and using cash to enhance shareholder value that way you would expect at some time for some increase.

Right. And then, one last question, on the Gulf of Mexico, jack-up market, are you seeing any, you signed some good contracts but are you seeing any hints from the E&P companies about changing their plans?

In is John Gabriel, no not yet. We look at our jack-ups right now in the gulf. We have seven of them here and we are committed anywhere from 60 days to six months out on each one of them. We haven't seen anybody of any significant pull back from the market yet. It is important, I think to note that we are down to about 21 independent cantilevers here in the Gulf of Mexico. And that is positive for that class of rig. And basically, there, the markets holding steady to rates being slightly up on the high-end, and we don't see any evidence of that changing right now.

Right. Thank you very much.

Your next question comes Mike Urban with Deutsche bank.

Wanted to follow up on a couple of questions from earlier. A nice bode of confidence on raising the special dividend, certainly speaks well of our view of the future. But does it make any comment or statement on your view on M&A , I know you addressed that earlier with respect to shipyards and potential acquisition of existing rigs. Should we take this to mean those are still too high and we haven't seen any pain or would you able to potentially take on some of those slots or acquisitions without having to cut the

Well, we would always look at whatever options are in front of us or what are in the best interest of the shareholders, but I would just point out the fact that we are, our debt levels are low, far below our cash levels. We have a revolver in place and the type of credit rating that even in this type market would allow us to potentially, we believe, tap the credit markets because of the amount of equity we put into a deal. I don't know that the two of them are exclusive, but if there was a deal that was big enough we are going to weigh one versus the other, but again we say again and again that dividends, via the form of special dividends are means we have chosen to enhance shareholder value and we going to stick with that philosophy.

Great. Back to the jack-up markets and most of the comments have been on the Gulf of Mexico, that's where most of your rigs are. Would you extend those to the international markets or just not enough of a sense of what's going on there given your limited exposure?

We have over half of our jack-ups international now. What we have seen to date is that there has been good pricing discipline in most of these markets. I think the real key is to look at the level of new build deliveries over the next two years versus where these rigs might be absorbed and I think the places to focus on are in the Middle East with respect to Ram, in Saudi Ramco and maybe to a lesser extent in the Mediterranean and another particular place to keep an eye on is going to be Mexico si we will see what kind of incremental demand comes out of those areas over the next few months to a year, and that will kind of tell us where the market is heading, I believe.

Great. Thank you.

Your next question comes from Thomas Curran with Wachovia Capital.

Larry, and/or Gary. I wanted to follow up on an earlier line of questioning regarding the potential for the renegotiating of contracts within the backlog. Can you tell us when was the last period where you engaged in a meaningful amount of that and then share some color on whether it was more weighted toward day rates or duration and provide some order of magnitude. Did you try to stick to decreases within a certain percentage range? Did you just mark to where the market seemed to be at that time? If you could just share some color on when was the last time that happened and how it worked.

I would say in my experience and with everyone else at the table, that there has been very few of that, maybe a customer where we significantly renegotiate a contract when the market moves down. And in one case that I recall from a long, long time ago, we traded rate relief for additional term, we took a two year commitment and went to three and cut the rate. And then some time in the late '90s, I recall where we, the issue was that the rig, that the customer was contracted for didn't exactly match their revised drilling program. So we enabled that customer to swap rigs. And we measured rates and commitments and all of that of stuff so that at the end of the day we believe we were preserving our economic interest, but we served them. So the two points, one there has never been in our history, wholesale renegotiations, and they have always been for a trade where it is just not us giving relief but rearranging our contract commitment. And I think that pattern has held true also for our competition.

Okay. Thank you. That's helpful. Next question, as you look out across your fleet of floaters outside of the Gulf of Mexico, of those that are going to be rolling over earliest, are there any where you have seen a decrease in the level of visibility you would expect at this point or where a lack of visibility is in any way a source of concern right now?

I think the short answer is no. Basically our fleet in southeast Asia is committed into 2010 in the North Sea is committed into 2010. Both of our floaters in Mexico are committed that far out. In fact the only rig, the only floater in our worldwide feet that has any time prior to 2010 is the Ocean Star. We have not seen anything significant at this stage that would tell us that the markets are going to do anything but at least hold where they are and possibly improve. There are still deficits In terms of rigs versus programs. Again, there's really no evidence to support anything like that.

Okay. And then lastly, a longer-term question here, as you look out across the countries that are poised to open up offshore acreage for the first time, such as Iceland, which of those are you guys most excited about in terms of potential 2010, 2011 incremental demand?

I think, I think we are always away from some of these frontier places like Iceland to actually awarded leases where oil companies begin contracting for us. We are most excited I think about southeast Asia, more countries that may have explored in the past that are ramping up production. We took a jack-up down to Argentina, the Ocean Scepter, which is th first offshore to return there in some time and we had President Kirchner come out and she came on the board the rig. It was a big deal for the country. Those are the kind of things I see in 2010 and 2011. I think we are are a long ways away from East Coast of the US and Iceland and Faulkland and those kind of places.

So still primarily southeast Asia and Latin America it sounds like?

Right.

Okay. Great. Thank for the color, guys. I will turn it back.

Your next question comes from Ian Macpherson with Simmons & Company.

Hi, good morning. Maybe just a quick follow up for John on the prospects for the Ocean Star, I guess if the rates still look closer to what you have booked recently in the Gulf of Mexico opposed to the more recent vintage contract for the Valiant, what are your more long-term plans for that rig? Are you thinking about taking it out of the Gulf of Mexico if there appears to be a geographic disparity between the day rates?

Well a lot of at that geographic disparity between day rates is absorbed in cost differentials as well, but I guess in a perfect world my preference would be to keep in Star in the Gulf of Mexico given the in particular the robust nature of the mooring system on that rig. That does not preclude us from looking at opportunities outside the Gulf of Mexico. We are actually looking at things for a rig of that class in West Africa, South America, two places in West Africa actually. They would involve potential term commitments of two to three years. So they are mobile offshore drilling units and I think we will take them where the opportunity is, if it is again my preference from a marketing standpoint I had rather keep it here.

Okay. And then just to confirm you think you have the opportunity to roll it off on in Anadarko to its next contract in December fairly seamlessly.

I think so. And I we have got some flexibility with respect to some other issues. I think it will be fairly seemless.

Our next question comes Jud Bailey with Mr. Jefferies & Company.

Thank you. Good morning. Follow up on the contract question earlier. Is it fair to say then outside of your contracts with PEMEX are no other early cancellation provisions for our long-term contracts?

Where they do exist, there is a full pay out in the contract.

Okay. My second question is regarding PEMEX we saw them withdraw a tender for four jack-ups and a deepwater rig here recently , do you have any color incite as to what PEMEX's plans may be for '09 and the reason for the tender being

It is our understanding right now that that tender is going to reemerged before the end of year. It was technical issue within their tendering process that cause it to be withdrawn. As best as we can tell, there will be, we think there will be two tenders coming out with PEMEX before the end of the year that will involve one deepwater floater and half a dozen jack-ups, one of which I believe is against an incumbent. I don't know how many of the others might be against incumbent mat rigs that they may be choosing to shift out of their fleet. But we still see Mexico as being active before the end of the year from the tendering side.

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

Our next question is from David Smith with JPMorgan.

Good morning.

Morning.

If we look at the credit situation, that is challenging some of the new entrance, as well as the recent accidents with some of the younger contracts, are you seeing any change in the Human Resources Department if crews are more skeptical about leaving the established drillers?

I am not sure what you are referring to on the accidents, but-- .

We had a fire just recently as well as a rig that mig be out for a little while because of damage incurred during jacking up.

We have had some folks leave us and then seek to come back because of they just like the stability we provide. I can't, and we work that issue, and emphasize that, that there's reasons to stay here. I haven't heard any specific about, gee, I'm afraid for my life over there, but I -- they know we are committed to safety. They know we are committed to retaining our crews. They know that because of our large scale fleet, we offer lots of promotional opportunities and then we state with competitive pay package. So we are very comfortable with our position.

And also, can I ask what you are hearing with regard to the credit situation affecting some of the start up companies and their ability to finance progress payments on the new builds?

Well, I think the same thing that, that you've hear. I mean I won't list the particular companies but it is widely known, the ones that have debt that is correct is not appearing and they have got progress payments coming up. So there are some folks out there, and I don't necessarily know the ones that we don know about yet. But, clearly, I mean it is a constrained credit environment, and we know that there are, there was a business model in this market where you put minimum money down and to finance the whole rig construction scheme. So we think there may be some opportunities that come from that.

Thank you for your time.

Let me take one more question, and we will let everybody get on to the next conference call.

Your next question comes from Michael Drickamer with Morgan Keegan & Co., Inc.

Hey, good morning, guys. I guess quickly then if we look at 2009, I understand you haven't gone through your budgets yet so you are not given guidance yet but do you think it is reasonable to assume with lower steel prices, perhaps not as much pressure on labor costs that the increase in '09 operating costs would be less you seen over the past couple of years?

There's a conference call going on right now with NOV, and you need to get a report from there. Seriously, I think in General we probably are not anticipating that, that inflation kicks it up another notch, but there is still rigs that is have to be manned. So labor is half the cost. That's a big part of it, and although steel prices have come down, that is primarily impacts the construction of rigs. It is more the service and the process steel, and to date, we are not seeing those prices are, are coming down or anything.

The only thing I would add is that the first quarter conference call we had predicted that our cost would increase 18 to 19% for this year, and that included additional work they were going to do, adding additional rigs into the fleet, the new jack-ups et cetera, it wasn't all just inflation. And with our year-to-date costs through the third quarter plus our projections in the fourth quarter, that increase is going to come out right at 19.5%. So we were very, very close to the prediction we made in the first quarter.

Okay. Well, let's emphasize it is not 19% core inflation, that includes new rigs coming into the fleet, jack-ups, et cetera, the underlying core inflation is probably--

somewhere around 10 to 12% .

10 to 12.

Okay. Following up on the strengthening dollar one more, what kind of impact do you think the strength on the dollar could have on your capital spending for 2009?

Well, it just depends on where we are spending it, but a lot of our expenses are dollar based, our labor is US dollar based, even if we have UK and Australia Foreign National working outside the home countries we pay them in dollars. A strong dollar helps the margin but I don't think it is material.

Okay. Thank you guys.

I appreciate everybody listening in and we were pleased with your dividend and we are glad to share our reasoning behind that and our view of the markets with you. We will join you again at year end which will be some time in early February. Thank you very much.

This concludes today's conference. You may now disconnect.