Diamond Offshore Drilling Inc (DO) 2008 Q4 法說會逐字稿

Good morning, my name is Julie Ann and I will be your conference operator today. At this time, I would like to welcome everyone to the Diamond Offshore Drilling fourth 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.

I would now like to turn the conference over to Mr. Les Van Dyke, Director of Investor Relations. Please go ahead.

Good morning. Thank you for joining us. With me on the call today are Larry Dickerson, President and Chief Executive Officer, who is on the line from Australia. And here in the office, Gary Krenek, Senior Vice President and Chief Financial Officer, and John Gabriel, Senior Vice President Contracts and Marketing. Before Larry begins his remarks, I should remind you that statements made during this conference call may constitute forward-looking statements and are inherently subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected.

Forward-looking statements include, but are not limited to, discussions about future revenues and earnings, capital expenditures, industry conditions and competition, dates 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 of 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 changes in the Company's expectations or any changes in events, conditions, or circumstances on which any forward-looking statement is based. And with that, I will turn the meeting over to Larry.

Thank you, Les. I'm here in Perth visiting a number of our offices and customers here in the region, and so far I've met with two clients based here in Australia. To comment on the results for the quarter, I think you need to look through, obviously, or consider the impacts of two things outside of the ordinary, which were the bad debt expense related to the Oilexco bankruptcy equivalent filing in the UK and that impact on our financial statements, our currency loss. But excluding those two items, our costs were in line with guidance, and we were generally pleased with the results. Let me give you a little more color on those two things.

Oilexco, as you know, had the Ocean Guardian of ours. They also had a Transocean rig. And we had been working with Oilexco for some time, dealing with their cash crunch issues. They had released some announcements that they'd obtained interim financing, and without having access to their particular financial position, we were at least impressed that we were making progress in that regard. And we had moved and were negotiating an agreement to accept half payment with a deferral of some of those items to the end. But obviously, when they had to go into administration, all that was put aside. So we recorded $32 million of pretax bad debt expense.

That represents about 90 days of day rate. About 60 days of that was what I would call work in process. You've got the 30 days for a month that you've billed, and that has 30 days until that is due ordinarily. And then you've got the month that may have not been filed -- billed to them. They filed in early January, so [essentially] we had a little bit over 60 days of work in process. And the other amount were the 50% of earlier portions that we'd agreed to defer. But all that has been recognized as bad debt expense. We still have a claim for future contract, but clearly that's all dependent upon the amount of financial assets within that company. And frankly, will be unsecured. So we will, on a go-forward basis, no longer be including that in our backlog. So our future commitments that will not be included in that are about $340 million.

The currency loss was $51 million for the quarter. That represents about $20 million of currency contracts that were unwound in the quarter. And so that's all set by an equivalent $20 million of reduced cost, primarily in the contract drilling line, so that those two netted out. And then $30 million of the loss was a mark-to-market on future positions. That mark-to-market number will change as we go forward, depending on movements of the dollar. But if it were to freeze at this particular position, then it would be offset by gains -- sorry, offset by decreased expenses, again primarily in the contract drilling line. We do not qualify or have not qualified to date for hedge accounting, so we show those two positions in this manner. But the underlying economics remain the same. So those are the two commentary on the two items in the financial statements. Gary Krenek will make some additional commentary and give you some guidance, as is our tradition, with the Year 2009 as we go forward.

The other thing that I would lake to mention is that last week, the Ocean Monarch unloaded from its heavy-lift vessel in the Gulf of Mexico, and we are loading the rig up and doing some additional commissioning and crew training and expect to be on contract sometime in March with Anadarko. And with that, that will complete our capital program for either new or upgraded rigs that were placed and delivered within this cycle. Counting the Monarch, the Ocean Endeavor, which was the first unit ordered in this cycle has already been delivered last year, and then the two new build jack-ups Shield and Scepter, that totals about $880 million. So for a little bit more than the cost of a new-build drill ship or semi late in the cycle, we were able to deliver two 10,000-foot units, which are contracted going forward, and two new construction heavy-duty jack-ups.

So I think that illustrates clearly the capital discipline that we pursue. But the fact that that program is completed means that we are now at a point in the cycle where we have no more substantial commitments. Our CapEx will just be maintenance CapEx. We've got an upgrade program on a minor scale, about $70 million going forward on the bounty in the coming year that Gary Krenek will talk about. But that primarily leaves our resources available for other uses. And among those uses are dividends, and so I will point out clearly, it's in the press release, that between regular and special dividends there was a $2 dividend declared. This was the second quarter that we've done that. And that's a substantial yield on where our stock price is today. So that completes my opening remarks, and now I'll let Gary Krenek give you some additional financial details.

Thanks, Larry. As Larry said, he's already gone over the two most significant items on the financial statement, the bad dead expense and our foreign currency loss. The only other color I'd like to add is on our rig operating expenses. They were flat to slightly down from the third quarter to the fourth quarter. That's despite the fact we added the Scepter going to work in the fourth quarter. That added about $10 million worth of cost to rig operating expense. And we had approximately $8 million to $10 million of additional costs to survey various rigs in the fourth quarter over the third quarter. Those increases were offset by, as Larry said, the strengthening of the US dollar. That offset a portion of them. And the other offset was a result of our continued cost control efforts of the Company. If anyone has any additional questions regarding the fourth quarter results, I'll be happy to answer them in the Q&A portion of the call.

As is our custom annually, we give everyone our expected cost for each of our rigs by class and location in the fourth quarter conference call so as to aid in estimating our future rig operating costs. Rather than spend the time here on this call regurgitating that information, we've included it this year on our rig status report we released this morning. And I would refer you to that document which can be found on our web site. Likewise, this rig status report includes our expected downtime by rig for 2009. That downtime includes five rigs which will be undergoing their five-year surveys this year, and an additional nine rigs will incur downtime for preparation and/or mode time related to upcoming long-term international contracts. Again, please see the rig status report for details on this expected downtime.

With respect to rig operating expenses, in addition to the normal daily operating costs that I just spoke about, we will also incur costs related to amortization of past [mobes] that we've incurred. We expect these amortized mobe costs to be approximately $32 million in 2009, with $10 million of that being incurred in the first quarter. Additionally, we'll incur costs for surveys of the Titan, Yatzy, Concord, Champion in the $5 million to $7 million range, and expect to incur $23 million to $25 million during the survey and related maintenance work for the Ocean America. All told, this will result in expected rig operating expense, excluding reimbursable expenses, of some $1.3 billion for the entire year, and between $330 million and $340 million during the first quarter. The amount of $1.3 billion for the year is an increase of approximately 10% over our 2008 rig operating expense amount.

It should be pointed out that this 10% increase is on a financial statement basis. And our 2009 numbers will include rig costs for the Ocean Monarch, the 10,000-foot upgrade Larry talked about, which was in the shipyard all of 2008 and thus incurred no operating costs last year. '09 will also include a full year of costs for the two new-build jack-ups Scepter and Shield which were delivered in '08, and thus incurred only a partial year's worth of cost in the prior year. These three rigs account for about one-half of the 10% expected year-over-year increase in costs. The remaining increase is due both to a small inflation factor we're assuming and the Company's continuing process of diversifying our rigs from the US Gulf of Mexico to higher-cost international areas. These increases in costs are somewhat offset by savings, by having a stronger US dollar in our international operations.

I would again like to take this opportunity to point out in -- when we refer to rig operating expense, we are referring to a line item in our income statement labeled Contract Drilling Cost Only, and it does not include reimbursable expenses, which is a separate line item on the P&L statement. Reimbursable expenses are driven by the amount of consumables we are asked to purchase and provide to our customers, and are offset by approximately a similar amount of reimbursable revenues.

Looking at a few other cost areas for 2009, we expect depreciation expense to be approximately $360 million for a year, and G&A expense is expected to increase in the 9% to 11% range year-over-year. Interest expense will increase in '09 as a result of us no longer capitalizing interest on our upgrade and new-build projects, as we did in 2008. That expense should be around $26 million for the year and be spread equally in each of the four quarters. Our tax rate for '09 is expected to decrease slightly to between 25% and 27%. As always, the actual rate will depend on the ultimate breakdown between US and international income and where that international income is earned.

And finally, capital expenditure guidance million for the upcoming year. We expect total capital expenditures for '09 to be approximately $470 million. That's broken by the $70 million that Larry mentioned on the Ocean Bounty, for both upgrade and maintenance and repairs on that rig. We have about $50 million slated to be spent on rigs that are -- will be required from international contract requirements. We have another $50 million for spare equipment, which is a continuation of our revenue preservation plan. And finally, the last $300 million is just general maintenance capital. And if you add all of that up, it should come to $470 million. And with that, we will turn it over for the Q&A portion.

Thank you. (Operator Instructions). Your first question is from the line of Jeff Tillery with Tudor, Pickering and Holt

Hi, good morning.

Good morning.

I wonder if you could just about the rig that was with Oilexco. I see the sublet's still on the fleet status report. How is that handled? And then do you have the ability to re-market that rig at this time?

I'll let John Gabriel make some commentary on the market, but we're in a position where we want to preserve our claims on that. However, that -- we're not going to engage in that at the expense of having the rig just stacked at the dock. Right now, it is at the dock and replacement work in the Gulf -- in the North Sea is primarily driven right now on a well-to-well basis, with the desired start time of most customers being some time outside of the severe weather window which would be starting in spring to summer.

And then, could you just talk about the general marketing environment for your [four] the 5,000-foot semis where you've got the Star kind of rolling off in May of this year? And just talk about just generally where regionally you're marking those and what is your expectation on day rates?

The only rig that we've got available, as you mentioned, is the Star, and I guess that's about May of this year. Our primary focus right now is Mexico. We have submitted a tender to PEMEX for a three-year job starting, I think, late July [notionally] of 2009. The bid is a matter of public record as is the day rate that we bid. It's been published. That's our primary opportunity right now. I think we may see some more things start to develop here in the US Gulf of Mexico, not long-term things as this juncture. But our primary focus right now is going to be trying to place the rig with PEMEX.

And my last question. Could you just discuss the opportunities in Mexico? I see that in the fleet status, the Summit mentioned as some preparation time to go down there. And then you have two other rigs that roll off contract the middle of this year down in Mexico.

We submitted tenders for the Ocean Summit against a new requirement in Mexico and against the Ocean Nugget renewal in Mexico. And we were the low bid on those tenders. They have not been awarded yet. It's probably going to take a little while for PEMEX to wade through evaluation of all those bids. They actually got 29 bids against seven requirements, and they've got a detailed evaluation process they go through. So it's going to take them a little while. That actually excludes the floater bid. It was 29 bids against seven jack-up requirements.

Okay, thank you very much.

Your next question is from the line of Dan Void with Goldman Sachs.

Thanks. I just wanted to follow up on the Guardian. It does show the sublet with Nippon. Is that a signed contract at this point, or is that something that's still being negotiated?

It is an executed assignment of the Oilexco contract that's about a 60 to 70-day job starting late Q1 to early Q2.

Okay. And can you also comment on what you're seeing in the sublet market in the North Sea? Is that something where there's a lot of competition, it will probably be -- make things a little more difficult for the Ocean Guardian to actually get a contract? Can you provide any insight on to where you think maybe the leading edge day rate is in that market for that type of rig?

There are just not a lot of data points in terms of being able to make any comment on what the existing day rate range is. There just aren't any fixtures. I can tell you that the [farm out] activity in the North Sea is increasing. And there are the two released Oilexco rigs available currently, although both are still under contract Oilexco. And we anticipate another probably three rigs rolling off existing contracts in the second half of '09. But we really don't have any clear indication of where the rate structure is. There are farm-outs, and that activity is increasing is. But if there are any subsidies associated with any of those farm-outs, I'm not aware of where they are. It's not readily apparent yet if that's even going on.

Okay. And then how about coming back to the US with the Ocean America. Looks like Mariner decided they only wanted to keep that rig for six months, not the 12 that they had the option for and -- Have you had any other conversations with them regarding would they take it longer for a lower rate, or anything substantial there?

That decision was I guess just made two or three days ago. We haven't had an opportunity to sit down with them and get a feel for what their forward plans are. They've had the rig under contract for a long period of time. And we certainly want to talk to them before we head off in a different direction. I think that decision is just a conscious decision being cautious, given where product prices are today. And we'll sit down and talk to them and try to get a feel for what their thoughts are for 2010.

Okay. And just one last question for Gary. On the cost inflation guidance, thanks for providing all the detail. It does look like the cost inflation was above what we were expecting for the US Gulf of Mexico. Can you comment on that? Was that insurance driven? And then the cost inflation, or in some cases deflation outside of the US, I assume most of that was just due to positive [FX] changes in the dollar?

Are you referring to what, the fourth quarter, Dan?

Well just the guidance that you gave, the per day OpEx guidance for 2009 relative to, I think, what the guidance was for 2008. So when you look year-over-year, it seems like the increases are quite substantial and for the US Gulf -focused rigs, and not very much at all for anything outside of the US Gulf.

I don't know. If you add everything up, it comes just 10% over the fleet.. There can be some mixture between the US Gulf and the international rigs. Remember, included in that cost -- those cost estimates are some maintenance and repair of rigs, and that's not necessarily consistent on an individual rig basis from one year to the next year. So it could be we're doing a little bit more work on of Gulf of Mexico rigs in '09 versus what we did in '08, and a little bit less on the international rigs. But the overall cost -- the general inflation that we built into our expectations is probably somewhere on the 5% to 6% range for 2009.

Okay. that's helpful. I was actually under the assumption that that per-day OpEx Ex did not include survey and maintenance. So thanks for clarifying that.

It includes normal operating. It does not include the survey costs that I detailed, the five rigs, the five to seven in the America -- approximately $25 million. So just the per-day costs do not include that. But the per-day cost does include a number of other maintenance projects that we do throughout the year.

Okay, thanks. Appreciate it, guys.

Thanks.

Your next question is from the line of Angie Sedita with Macquarie Securities.

Thank you, guys. I have a follow-up to the prior questions. On the PEMEX contracts, you said you were the low bidder on the Nugget. What's the outlook on the Columbia down in the area .

It is our understanding -- we don't have it in hand yet, but there will be a bid published in the near-term against renewal of the Columbia.

Okay. And then you said that the Summit you're bidding down into Mexico and you were low bidder there. And What is the outlook for the Spartan in the Gulf?

Spartan is idle right now obviously. And we are looking -- we've got a near-term opportunity for the rig. And hopefully, that will come to fruition here in the next week or so.

Okay. Okay. And then you discuss a little bit about this subletting. Obviously there's not a lot of interest. So you've mentioned we did not have a price point. But I assume you heard word about the subletting being at significantly discounted day rates, or are they within the contract that it has to be same day rate that the rig is working. What are you hearing on the subleting and the rates that are being offered out there?

Angie, in the discussions I've had with customers, subletting comes up quite a bit. I think there's a lot of activity, but they have not shared with us, and I'm not even sure that they fixed. At this point it's just expression among customers of either -- of subletting out or potential availability of rigs. But I don't have any rate data, and I'm not sure, John, have you picked up anything?

No. If it's going on, we haven't heard it yet.

And typically, a way an active sublet market works is not until there's actually some formal things put in bed and people start talking do you hear rumors of what rates may be. At the end of the day, I'm not sure we're going to be a reliable source of somebody to even repeat those rumors.

Okay. That's fair enough. I mean there's probably not enough demand to actually get the rate spectrum at this point anyhow. I guess the other question is, certainly a question that's often asked and I'll ask just to have it official. Are you having any customers decide what we we already know, with the [Oilexco] contract obviously, trying to renegotiate contracts, have any discussions regarding the current contracts rates, duration, or anything of the sort? duration, or anything of the sort?

I would say even in normal times, you're always having some sort of discussion on extension issues, and of course that would be the type thing that we would trade for any kind of rate relief. But beyond that, I don't think we can help you by saying here's the nature of the discussions or even pointing you in specific directions. There's clearly -- our customers are stressed by declines in the price of oil as it's impacted everybody else, so naturally you'll have some of those type of discussions.

Okay, fair enough. But you would be willing to take additional term for some rate relief.

In the past that's what we've done in declining markets.

Okay, thanks guys.

It's never been something that we just take the whole fleet and go deal with. It's typically been one or two rigs on the portfolio that's been approached that sort of solution.

Okay, special situations. All right. Great. Thank you.

Your next question is from the line of Ian Macpherson with Simmons & Company.

Good morning Larry or John. I wanted to just ask about the idle status of a few of the jack-ups and what you look at for the utilization [outlook] before you might decide to cold stack any of those? Is it in the cards contemplating that at this point or too premature for that?

The idle jack-ups that we have now, and they haven't been idle very long, all have potential prospects. We're looking at a bit of a gap. We've got the Heritage idle in the Gulf of Suez, but there is an opportunity there that we are pursuing. And the idle jack-ups here in the Gulf of Mexico, we are awaiting the outcome of the PEMEX bid with respect to the Summit. We'e waiting on a weather window to move the Ocean Crusader to its next job. And we are trying to shift some work around from one rig to another to put the Spartan back to work pretty quick. So I don't think we're at that stage yet. We still have reasonable near-term opportunities.

Okay. We haven't really seen your day rates for the Gulf of Mexico jack-ups. GAAP down a lot lower yet? Would that be in your expectations by the end of this quarter to see rates get good bit lower than the [$70s]?

I don't think a lot lower than the $70s. It's hard to tell. Typically, this time of year we're going to see a little bit more activity coming out of our customers once we get through the holidays. I think we've already seen some impact on day rates in the Gulf of Mexico. Those rates are published by the various industry source -- information sources.

Okay.

I just don't anticipate anything more significant at this stage. Hopefully the activity levels are going to pick up.

Okay. If I could just ask Larry quickly since you're in Australia meeting with customers there, what you're hearing in that part of the world with respect to ongoing demand in the mid-water market there?

Well, I think this market is more focused on longer-term prospects, and is not -- so far hasn't been as subject in other places -- to as much negative pressures. I guess that's the only way I can characterize it. Obviously, everybody's concerned about prices, and hat's I think -- the biggest impact will not be on existing programs, but on approval for any kind of new program. Certainly, I've talked to some customers who have plans, who have long-term plans, and are proceeding on with what goes on, really kind of sticking to the plans that they want to add x-number of reserves. They may be in -- for whatever reason they're in a position where they can look down and say that they think that the prices that they're going to get for this product will be higher than what it is today. And then there's other folks that have different levels of concern. So again, in all markets, I mean, there's just not any data points, and that probably reflects as much as anything that people are waiting for more information. And it's probably like mini markets even outside the oil markets. People are a little bit hesitant to make longer-term decisions not knowing whether they're making it on a short-term price postings or not. But clearly, as we have more idle equipment, and there's not a lot of idle equipment right now here in Southeast Asia, but as you have idle equipment in markets that will have, I would think, downward pressure on prices. But so far, as John indicated, they haven't GAAPed down that much or as much as some people might have expected.

Okay. Thanks a lot.

Your next question is from the line of Waqar Syed with Tristone Capital.

Larry, my question relates to acquisition opportunities. Are you looking at that, and how do you weigh acquisition opportunities versus the dividend? And can you pursue both at the same time? That's one. And then Gary, my other question relates to the five-year survey costs and upgrade costs. Are you seeing any decline in those costs in terms of moving rigs or putting new equipment, or shipyard costs and all that,. How you're seeing those costs develop versus where they were a year ago. Thank you.

Okay. This Company has a long-term history of buying rigs in down markets. And so that's a part of our strategy, and one that we will pursue. Because as I mentioned, we've completed our Cap Ex program, and we don't have spec units on order with substantial capital costs yet to come. I think that does put us in a better position than many of the other drillers out there, although I'm sure on all their conference calls, they would all indicate that they would buy rigs at the right prices. So I think that's sort of the situation. We think we're in a little bit better situation than the next guy. We think because of our low debt structure that we can pursue both. Clearly, we can't go out there and pay cash for a $5 billion or $6 billion fleet without at least looking at what that would do with the dividend. We say each quarter that the board will evaluate all alternatives and make the decision in the best interest of shareholders. But I would certainly think that at the kind of prices that we anticipate, may be available for some of this equipment that we can acquire one or two units. And I think obviously, since there's no way of knowing where the bottom is, buying them slowly over time would be the way to go. And I think we could that without having -- clearly with either tapping into our reserve cash or tapping into some borrowing capacity, that we would be able to execute on that. And so I'll let Gary answer the next question.

With regards to seeing costs come down, we he have not really seen anything come down at this point. What we have seen is the lead time on certain pieces of equipment has shortened up. But presently, things are relatively flat. As I said in the opening part of the conference call, we're expecting 5% increase, which is substantially less than what's occurred in the last several years. And we'll see whether that 5% occurs or not, or as you've implied Waqar, maybe we see some decreases. Time will tell.

Larry, just following up on the question of [acquisitions]. between the different asset classes, where would your interest be most between the deepwater or [newer fixed rigs] versus second, third-gen rigs and then floaters versus the jack-ups?

I think we would look in all areas. We're going to look at the bargains. The advantage is clearly in the bigger, deeper, newer units is that's an area that we're comfortable in. Our fleet is oriented in that direction, and adding some assets like that, I think, would be an overall net good for the Company. But we've got to look at what the returns are present there. Jack-ups, we think, are going to be -- if you just look at the shear number of new units delivered without contracts, we think that the prices may fall the most in that area. So that might be most tempting. And I think there may be some second- and third-generation bargains, but we have a substantial position already in that market, so that would be almost totally -- interest would be driven by what sort of returns we thought we would get, and ultimately, we're going to balance all that. But the returns and capital discipline is paramount in what we do.

Great. Thank you very much.

Your next question is from the line of Judd Bailey with Jeffries and Company.

Thanks. Good morning. Larry, a follow-up to the last [M&A] question. You mentioned you thought jack-up prices could fall the most. Do you think we could see a scenario where the prices would fall, say below what your new-build prices were for jack-ups a couple of years ago?

I think we may already be at that level. We paid, I guess there's some 80 jack-ups ordered. I know there were some cancellations right at the end. And our orders, as we counted them, were order number 29 and 30, and cost us right at $160 [million] apiece for the units. I think there's not a lot of units for sale right now, but I think you could beat that price today.

Okay. And then switching over to Mexico, it was mentioned earlier, there were 29 jack-ups bid for seven tenders. Do we know how many of those were incremental of the seven?

I know one of them was a renewal against the Nugget. The other four -- excuse me, the other six, it's hard to tell when's incremental and what may be replacing the mat rigs that are down there. I would suspect that a couple of them were intended to replace some of the mat rigs. And just as a guess, I'd say three or four.

Okay. And do you have any sense of how many more jack-ups or even semis PEMEX may come to tender for this year?

They put on a preliminary overview, I guess a week or two ago, with their expectations for contracting additional rigs for 2009. And I guess what we gleaned out of that was, there's probably going to be plus or minus 10 jack-up tenders and one floater tender. Again, very preliminary. But the floater tender, I believe, is against renewal of an incumbent rig. And at least one of the jack-up tenders is renewal against the Columbia, our rig, the jack-up that rolls down there, I guess in the second quarter. So to make a comment about how many are incremental, I can't do that. But again, these are just preliminary indications that we got in a general meeting down there a week or two ago.

Okay. Great. And then one last one. You sold the Ocean Tower last quarter. Can you disclose what -- how much that sold for?

We have -- go ahead, Gary.

We have a confidentiality agreement with the buyer, and so we can't disclose that. We will disclose it when that transaction is completed, which will be sometime here in the near future.

Okay., great. Thank you.

Your next question is from the line of David Smith with JPMorgan.

Hey, good morning.

Morning.

Great discussion on your M&A thinking. Thank you for that. Wanted to ask if you could characterize discussions for 2011 start dates on the deepwater fleet and maybe distinguish between [Petrogras] and everyone else.

I'm not sure exactly what you are asking me.

If there are, if there exists still, conversations for 2011 start dates on the deepwater fleet.

Okay. I think Petrogras has recently come out at least with a press release indicating they are looking at picking up additional deepwater rigs in that time frame. I think, if I remember right, it was about 11 new rigs as part of the broader plan that at one time was as large as 40. I suspect at the end of the day that there are some rigs -- new-builds that are committed to Petrogras to be delivered in -- late this year and through '10 and '11 that are distressed as well. So I think there's going to be opportunity for someone to come in and deal with the void that will exist because of that. That's the primary deepwater area. I think, though there's been conversation about PEMEX moving out into deeper water, they do have three rigs committed to come in. Exactly what the delivery dates are, but there is some conversation about those units being distressed as well. And India is probably on a secondary basis, one other part of the world where there may be some demand in the '10 to '11 time frame for deepwater units.

Thank you. I was just asking because in an environment like this, you probably get a significant pricing gap between demand and where supply was a few months ago. Just wondering if discussions are still taking place for 2011.

Yes, they are.

Thank you very much.

Your next question is from the line of Mike Urban with Deutsche Bank.

Thanks. Good morning. We've seen very few fixtures really in most markets globally. And I was just wondering -- or actually in fact in a lot of cases when rigs are rolling over, they're stacking out instead of going to a new contract. Do you think that's indicative of a significant -- an impasse or a significant bid [ask] surprise between the contractors and customers? Or is it just an outright lack of demand right now?

Well, I'm sure there are probably several explanations, but one of the primary ones I believe is simply a very cautious approach on the part of our customers. Being very much concerned where product prices are headed, and sitting back and seeing what the dynamic is as it relates to rig rates. There are tenders out there. There are not very many, but they will be used, I suspect, [to] benchmark decision-making as to whether these companies that have deferred their tenders will come back in and start the process up again.

You don't have a lot of near-term rollovers, but if you could give us a little insight into the discussions that you're having as you look out, end of this year and more so into next year, with potential extensions or renewals or new contracts. Are customers reaching out to you for that, and you're not wanting to engage it at the kind of rates being discussed. O as you said earlier, they're taking a cautious view right now and just taking a wait-and -see for now?

Our floater fleet other than the Star and the uncertainty with respect to the Guardian is basically committed, certainly committed through 2009. Our early availability is going to be in the first half of 2010. And it's just a bit premature for those conversations to be taking place right now.

Okay. That's all for me, thank you.

Your next question is from the line of Robin Shoemaker with Citigroup.

Good morning. I wanted to ask you about -- there was a comment on National Oilwell Varco's call yesterday where they indicated they thought some of the Brazilian rigs, the 12 that were contracts awarded last year, that those would actually get built with the aid of government funding, Korea, Norway, Brazil government financial institutions providing import/export type fund for those rigs. So that they actually will get built in their opinion. Is that -- it sounds -- from something you were saying earlier, that you don't really see that happening. But I do wonder if you think that is a likely outcome, or if you're hearing that kind of message?

I don't really have anything -- I haven't heard that and those aren't really things that we would follow as closely as NOV would. So sorry, can't help you there.

Okay. Well, the Petrogras tenders. Is your understanding that those would be the additional ones beyond the 12 they awarded last year? That those would be for new-build deepwater rigs?

As best as I can determine from the press release I saw, yes.

Okay. So within Diamond's kind of strategy, would a new-build against a seven- or 10-year contract be an attractive opportunity?

I suspect -- there's enough spec and new-builds there that I just don't see how you would be competitive coming in later in the cycle. Perhaps you would have some reduction. I'm sure you'd have some reduction on cost on what some of the previous commitments were. But I don't think enough to tempt somebody into that. And I think the whole Brazil thing will -- there's so many moving pieces here. Some of the initial rigs that may or may not be canceled. You've got other units that are constructed. You've got Petrogras' demonstrated historical desire to pay rates that are reflective of their longer term commitments, and are low are than might be available of other markets.And then you've got the impact of what's happening with other markets. And it's just -- I think it's impossible to say what's going on, but clearly Petrogras as a company has traditionally taken a long-term view of markets, and you've probably got more positive signals coming out of Brazil than you do anywhere else in the world right now. But how that plays out, I think it's impossible to tell.

All right. Thank you.

Your next question is from the line of Collin Gerry of Raymond James.

Hey guys. Actually, my questions have been answered. Thanks.

Okay, Les. Do we have time for another question?

Yes.

Your next question is from the line of Rob MacKenzie with F.B.R. Capital Markets.

Good morning, guys.

Good morning.

Looking forward to the next up-cycle, how do you think about potentially cutting the dividend to conserve more cash to buy and perhaps build more rigs perhaps even on spec as costs -- specifically build costs come down?

Well, we have -- we've set that dividend each quarter, and we say that we're going to look at it each quarter. So clearly, we're going to examine everything that's there. But at the same time, we recognize that this is our primary means of delivering value to shareholders, so I think we'll do what's prudent. The one thing that I can tell you that we absolutely do not know, is that is when the next cycle starts. But there will be another one.

Okay. And then follow-up to that is, your fleet is aging every year. How do you think about when and if and how you recapitalize the fleet with newer rigs, perhaps shutting more of the older rigs as time goes on?

Well, that's important to note. I don't think we've been inactive to this point. We've added two new jack-ups here. We -- the upgrades that we've done to turn rigs that were designed for less than 2,000 feet into 6,000, 8,000 and and now 10,000-foot units have been very successful. And I can tell that you they're substantially refurbished and, when you look at pictures or you hear customers talking about them, they're for all intents and purposes brand new rigs. So I'm not sure just purely looking at the construction date gets you a good picture of where the fleet is. But even if you look at some of the older rigs, no one is building or has built second-and third-generation units, and the fleet there has decreased. And obviously in down markets, those -- demand may decrease for there. But there's still plenty of pockets around the world where those rigs can drill, so we see quite a future ahead for that fleet, and we're not worried about that. But again, you ultimately come back to -- if you accept that we do need to add more new iron into this fleet, we think in down cycles is the appropriate time to look at that. I think there may be greater discounts available on sales of other people's units that they've already ordered than there would necessarily by going into the shipyard and ordering another one at some decreased prices.

Great. Thank you very much.

So we'll take one more question if we have one, Les.

Your next question is from the line of Jack Moore with Harpswell Capital.

Good morning. Thanks for taking my question. Just in light of the discussion about potentially buying rigs for the dividend, I was wondering if you could talk about where you're most comfortable with your capital structure in the long run. And what potential is for debt. And would you issue equity perhaps to do some of these transactions?

I can't give you particular parameters. I mean, we've always said that we think that having cash on the balance sheet is a good thing. We've run this Company on a very low debt basis consistently throughout the cycles. So I think looking at how we structured in the past is probably a good view going into the future. We have issued equity. If you look in the past, when we made some acquisitions such as the fleet of Arethusa, so all those things would be there, but you could -- I think everybody could know that we're going to be return-driven and that we view shareholder equity as something to be preserved. And that we'll balance all of those needs and try to make the appropriate choice.

Great. Thanks.

All right. Well I'd lake to thank everybody for joining us. Any more comments comments from Houston?

That's it.

Okay. Thank you. We'll talk to you again at the next quarterly time or at any of the investment conferences that we attend. Thank you.

Thank you all for participating in today's Diamond Offshore Drilling fourth quarter 2008 results conference call. You may now disconnect. Presenters, please remain online.