Diamond Offshore Drilling Inc (DO) 2009 Q3 法說會逐字稿

Good morning, I will be your conference operator today. At this time I would like to welcome everyone to the Diamond Offshore Drilling, Third quarter 2009 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 sir.

Good morning. Thank you for joining us. With me on the call today are Larry Dickerson President and Chief Executive Officer; John Vecchio, Executive Vice President; Gary Krenek Senior Vice President and Chief Financial Officer; and Bob Blair 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 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 changes in the Company's expectations, or any changes in events, conditions or circumstances on which any forward-looking statement is based. After we have discussed our results we will have a question and answer session during which we ask that you please limit yourself to one question and one follow up. So that we can open the floor to as many people as possible. With that I'll turn the meeting over to Larry.

Thank you Les, and welcome everybody to our third quarter 2009 conference call. I think this quarter that just ended was a period of time where Diamond Offshore was able to execute against its strategy in a tremendous manner, obviously the first thing to talk about is space of 100 days we acquired both P2 and P3 rigs at auction. As everyone knows these are modern newly constructed well designed dynamically positioned drilling rigs capable of drilling in up to 10,000 feet of water. We renamed the rigs Ocean Courage and Ocean Valor. We have since contracted the Ocean Courage and we are working on contracting the Ocean Valor. I'll return to that in a minute.

Our strategy has always been to take advantage of markets at points in time when prices are advantageous. We think the prices that you compare that we paid for these rigs in the $400 million compare very well not only to peak pricing, but to what pricing may be for an order at the shipyard today. Of course we have immediate delivery and no shipyard risk. We continued on our strategy of making sure that we're able to return parts of our earnings as a part of our strategy of maximizing shareholder value and this is done through the dividends which we declared a combined regular and special dividend of $2 a quarter again this quarter.

We also used our very strong balance sheet to go to the debt markets. In May we borrowed $500 million tenure money at five and seven-eighths and we returned right at the end of the quarter Gary Krenek will talk about how it's impacted in the balance sheet because we closed on the deal or made the offering on September 30, of $500 million 30 year note as outstanding interest rate of 5.7%.

So our strategy as we have looked at them on the acquisition of these rigs have been to acquire, to buy, borrow and then contract. We've put the Courage to bed and we're working on the Calor along those lines and this methodology does not divert cash that we're continuing to pay on dividends. And then most importantly we have to attend to our business and execute very well. We were pleased with our results in the quarter where expenses were flat quarter over quarter. They're down from where they were last year and in December the fourth quarter of 2008. And this is with actually more rigs being delivered and working during that time period, so that's a great achievement. Our G&A is also in line, we were able to manage the amount of downtime that we occurred in our fleet very well, so we were pleased with the results that we had across the fleet.

I'll make some brief comments about the market before we turn over to questions and both I and Bob Blair will be available to answer some of your more detailed questions. First let me comment on the Valor. We have interest in the rig, but I'm not going to comment specifically on any contract that we might make or what our marketing strategy is. We think that's best conducted between us and the customers. And we will continue to utilize our fleet status report and other such public mechanisms to make the announcements as to rates that we obtain for that rig. But we think if you look at the availability in the worldwide fleet and the capability of that rig I think we're in a very good position to be able to put that rig to bed.

I think in general we have seen, although we haven't, we don't have any evidence yet on our fleet status report, that there is increased interest in the US Gulf of Mexico for jack-ups. It's a minor part of our fleet, we only have two active rigs there, although the Ocean Columbia will be returning from Mexico, so we will be at three active rigs potentially in the Gulf of Mexico. But we're very pleased at the level of activity and inquiries that we have for our rigs. We also in the last quarter taken some steps to move into other markets with rigs that were previously idle.

The Ocean Guardian which was idle in the North Sea and our belief that operators will be loathe to pick up a rig in winter weather caused us to relocate the rig or will be relocating the rig to the Falkland Islands where in the southern hemisphere it will be relative summer and we will be able to drill down there. And then we just recently announced that the Ocean Star will be leaving the US Gulf of Mexico where it's been idle for sometime and a difficulty putting a moored rig to work during hurricane season has caused us to sign a one year contract with OGX which brings to four the number of rigs that we will have working for OGX down in Brazil.

So that's pretty much what's happening in the market. I think in general the high oil price has helped and has some confidence going on as people look around to what they may want to contract. Then finally the Ocean Valiant arrived for 16 days activity in the quarter in Angola, marks our return to West Africa, a market that we worked in over the years, but have been absent from for the last four or five years. Frankly we just haven't had enough equipment to move there. But again this was a rig that we have a two year contract with Totale in Angola and we're very pleased to return to that market and begin working for Totale, which we have worked for other the years, but it's again been a couple years since we had a rig working for them. So that concludes my opening remarks and status of our fleet and market. We will now take your questions.

Oh, I'm sorry, Gary Krenek will make some comment on the accounting processes that are in place on some of the transactions and also provide some guidance as to where costs are headed.

Thanks, Larry. As Larry commented our two most significant events for the quarter occurred right toward the end of the quarter. That was the acquisition of Ocean Valor and our issuance of $500 million of 30 year debt at a fixed interest rate of 5.7%. To expand on that just a bit, the acquisition of the rig did occur in the third quarter, thus is reflected in our financial statements as so. The debt issuance however while being priced and announced in September 30, do not close until October 5, and thus is considered a fourth quarter event for accounting purposes and is not included in our September 30, financial statements that we released with our press release today.

Our third quarter results are pretty clean with operating expenses coming within expectations and within the range that we gave at our last conference call. The most significant item that did vary from our prior guidance was our tax expense rate which came in slightly lower at 23.4%. Lower than the 25 to 27% range that we had previously expected. Slower range was due to us being able to recognize some foreign tax credits that we had not been able to do previously due to accounting rules. We expect this to partially affect our fourth quarter rate also and expect the Q4 rate to be in the 24 to 25% range with next year's tax rate in 2010 coming in somewhere between 24 and 26%.

Looking forward to other fourth quarter items, we again expect to incur normal daily operating cost for our rigs as outlined in the rig status report we filed earlier this morning. These normal daily operating costs will be inflated slightly as a large number of, larger expense projects that were budgeted earlier in the year are now set to be completed in the fourth quarter adding approximately $10 million to our cost in the fourth quarter. In addition, we will spend some 8 million to $10 million to complete the survey Ocean Guardian which was begun in the third quarter and to do some repair work on the jack-up Ocean Columbia.

The Ocean Courage is moving to the Gulf of Mexico as Larry said and the Valor will continue its commissioning work for the bulk of the fourth quarter thus the cost associated with these rigs will either be deferred as in the case of the Courage or capitalized in the case of the Valor in accordance with GAAP. However both rigs will experience some costs that will be expensed during the fourth quarter and we expect those combined costs to total somewhere in the $6 million range. We will also record in upcoming quarters from $7.5 million in amortized Mobe and contract put costs that have been previously deferred and we will also record approximately the same amount or slightly more of deferred mobilization revenue costs that were previously deferred.

Offsetting these costs will be a reduction in our daily operating expense of approximately $8 million as we defer operating costs incurred during Mobe and contract prep time for the Star and the Lexington related to term contracts in Brazil. We will also save another approximately $7 million in Q4 as a result of our reducing costs on the Ocean Bounty which is currently stacked in Australia. Again if you do the math this should result in expected rig operating cost excluding reimbursable cost as always of 315 million to $330 million for the fourth quarter of 2009.

Looking further down the P&L statement we are revising our guidance for DD&A and interest expense as a result of the acquisition of the Courage and our most recent debt issuance. Depreciation expense should run 89 million to $91 million in the fourth quarter and interest expense should be approximately $21 million per quarter on an ongoing basis.

Our updated capital expenditures guidance for 2009 is for us to spend some $420 million for maintenance capital, additional spare parts and required upgrades needed to comply with international contracts that we have been awarded. This guidance is relatively consistent with what we have been saying in the past quarters. In addition to this maintenance capital we expect to spend some $980 million for the acquisition of Ocean Courage, the Ocean Valor and other major upgrades that were completed earlier this year primarily the completion of Ocean Monarch.

And finally, as always I would refer you to our rig status report which can be found on our website for expected downtime for our rigs for the remainder of the year, contract duration, timing of contract rollovers and other pertinent information.

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

Operator, I believe we're ready for Q&A session.

Thank you. (Operator Instructions) Your first question is from Dan Boyd with Goldman Sachs.

Thanks, good morning guys.

Morning.

Quick question on what your outlook is in Australia. I know there are a number of LNG projects that have reached FID and that demand is out for some years but you do have a couple rigs there now, one of them currently idle. If we could look out two to five years what are your expectations for that market.

I'll let Bob Blair comment on that. I guess the rig we have idle there, the Ocean Bounty is the rig that we took off of contract and put the Ocean America on instead to provide some more capability in that market. The Bounty requires a substantial amount of shipyard work to refurbish the rig and we pretty much elected at this time to defer that decision, keep the Bounty in a cold stack mode for sometime. But Bob, any comments looking out.

Well, the two floaters that we have in the area have contracts extending to 2011 or late 2010. We have already begun discussions with the current operators about ongoing work as well as the operator that we're moving the Ocean America to Australia for. And all indications are that there continues to be interest in the drilling programs that these rigs are working on. We see it as a viable market going forward.

Okay. Your comment on the Bounty actually brings me to my next question. I think that's a good point. There are a lot of jack-ups, mid-water rigs out there that are idle currently. Can you talk about the market of some of those rigs need quite a bit of investment before they would be brought back. What level of demand or day rate do you think you would need to see to bring those rigs back. Can you talk generally about your fleet some of the rigs what type of investment they might require?

Well, it all depends on what sort of market we want to put the Bounty back into service for. But we are 50 million a $100 million in cost to refurbish that rig is our estimate without any sort of substantial upgrade. We don't think -- at one point in time we have done a Victory class upgrade since that's where the rig is, but at the moment we would much rather put our money into acquisitions similar to the Courage and Valor. It's the same thing on refurbishing the Bounty, that number, if it was at the high end $100 million I think is better spent at acquisition prices that we're seeing right now on those two rigs. So we're just deferring that. I don't know where everybody else is, but ideally the market will turn around and get good again and then you will be sitting there missing part of it, because you will be sitting in the shipyard. Ideally you should have a crystal ball and be able to predict, go into the shipyard in advance of that. And we would typically use this downtime to do that, but given that we have a substantial fleet of second and third generation rigs we don't think at the moment we need to spend more money there. We're not giving up on the unit. We will refurbish it at some point in time I think, but as I said there's a better places to put your money.

How about on the jack-ups.

On jack-up refurbishment, we have completed a rework of our jack-up fleet over the past five to six years of leg extensions and life extensions. A lot of these units have deterioration in their void spaces if they have operated in certain climates and we have attended to all that. So I don't know where everybody else is. Certainly we have seen on the Matt rigs and we have stacked our three Matt rigs, but we have seen those rigs the margins are so razor thin that they can't stand any kind of several million dollar refurbishment that they start looking at at the moment, they have got to go back in the shipyard. But that's about all the help I guess I can give you on other people's rigs.

Okay, thanks, I appreciate it. I'll turn it back over.

Your next question is from the line of Scott Burk with Oppenheimer.

Hi, good morning guys. Can you hear me.

Morning. Yes.

Okay. I just had a couple questions. First the revenue is a bit higher than what we modeled for the quarter, just wanted to see what the main driver of that was. Was it mostly bonus revenues, how did you come out in terms of bonus revenues for the quarter?

That came out about even with previous quarters. We did recognize an additional $16 million worth of de-Mobe revenue in the quarter for two of our rigs, that's revenues that we can't predict because we expect to get them at the end of contracts, but if we get a contract in the same location or same area we may not be able to collect that at that time. So we had that, but as Larry said we also had very good utilization during the quarter.

Okay.

That $16 million is the only thing unusual in the revenue numbers.

Okay. Let's see, I wanted to ask also about the Ocean Star. You're mobilizing that down to Brazil with the one year contract with OSX or, I'm sorry--?

OGX.

OGX, as you previously mentioned. Just wondering is the market in Brazil look that much more attractive than the Gulf of Mexico, did you want to mobilize the rig down there kind of permanently or is this just opportunistically for the one contract.

Well, we got a one year contract and it was better than being stacked. We think the Star would have gone back to work, but by shrinking the amount of available rigs it improves our lie, we're now down to just one fourth generation rig in the Gulf of Mexico, the Ocean Victory, which has some contract commitments going forward. But it also has some holes that we granted the operator where we would be responsible for getting customers. Rather than having to try to work two rigs it made for sense for us to take this job. There was some competition to get this job, so we bidded aggressively to win it. And it improves our overall lie here in the US Gulf of Mexico.

Okay. And actually I just wanted one follow up question on the Victory. The rate that you have there for the one well contract, low 150's, is that something you're willing to do just because it was such a short window you needed to fill or is that indicative of rates generally?

No, that was a very specific gap we had in the program that we accepted when we took the contract with ATP. So there was an operator that was able to move the program forward to accommodate him we proposed a discounted rate.

Okay.

It's not where rates are currently.

Okay. All right, thank you.

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

Hi, good morning. I didn't see it in the release and I might have missed it in the early commentary, any comments regarding the dividend this quarter?

I just said it was a continuation of our strategy of returning value to shareholders. But it's still the same. We are, we make no representation as to what it will be in the future and remind everybody that the Board sets it at each individual time. But it is clearly when you look in the rearview mirror in the amount of money that we paid out, I think we're approaching $20 now since we began this aggressive dividend rate and that represents a huge return to shareholders. And if you factor that in along with our share price, then indeed I would say our performance, our total return performance to our shareholders is certainly in the top among drilling contractors.

So your dividend isn't announced in the earnings release, but it's the same announcement for this quarter as it has been?

We put out a separate press release with that.

Sorry. Okay.

It is a combined $2.

Got it, okay. On the Ocean Star, does that contract have full Mobe, deMobe on top of the day rate that you talked about.

The rig will not be earning a rate under mobilization, but all the transportation costs is being paid for by the operator.

Okay. So you have essentially, you have a cost, you have to carry your OpEx from the rig yourself, but they pay for tow?

That's correct. Of course the mobilization period will be minimal because the rig will be under a dry transport.

Okay. Last question the Nomad, what are the prospects for that rig gaining employment or, being cold stacked next year do you think.

At this point in time we feel like there will be an active market after the winter months in the North Sea. But we don't anticipate a lot of work until the spring season.

Okay. That's all I have, thank you very much.

Your next question is from the line of Arun Jayaram with Credit Suisse.

Good morning guys.

Morning.

Larry, I just wanted to get some insight. Obviously you have purchased two rigs in terms of how you're going to accrue those, just a thought on what you're seeing in the labor markets as you attempt to crew those two units.

I think we handled that fairly well. We had when we bought the P2 there were some crews that had been employed by the previous rig owner that were made available to us and we hired quite a number of those, so I would say maybe half the people came from there. We did not have as many on the P3 that were in that category. But all the rigs that have been mobilizing out of the Gulf of Mexico enabled us to have a pretty solid base of folks to staff up and recruit to those positions.

Okay. Any sense Gary, of what the operating costs we should be using for those two units when they're working.

Well, I believe for the Courage we're reporting in the mid-120's. Of course for the Valor it will depend where it goes to work. If you assume in the Gulf of Mexico like the Courage 125 and then escalate it up or down accordingly wherever in the world it goes.

Okay. Last question guys, obviously oil prices have improved, have you seen any change in terms of inquiry levels et cetera regarding, the second and third generation older semi market and what are your thoughts in terms of the units that you come up, next year, do you think you will be able to maintain utilization on most of those units, what's your thoughts as you look out to 2010.

One, I think oil prices have helped clearly. And, it's not -- people don't adjust their activity levels on a one day spike or anything, but the sustained move up from the lows have certainly helped. I think and Bob can fill in some color here, but I think the second and third generation market is going to be highly dependent upon what applications it's in and what individual market it's in and our expectation I believe is that we will be able to work substantial numbers of units, but we will still be exposed to things like seasonal activity, down turns in the North Sea and we may have another rig or two that we come up where we say we don't want to spend the money in this particular market if it requires a lot of CapEx.

Adding to what Larry said, the word we're getting from operators is they're going through their current planning cycle if they see the oil price giving them the confidence to be able to plan their activity level. And their activity level we believe is going to be higher than in the last year. Our second and third generation fleet is in a pretty good position now just having a lot of backlog through next year and into 2011 and beyond. So we're not as exposed as many of the contractors. But we will see some seasonal problems like in the North Sea in the wintertime and hurricane season in the Gulf of Mexico.

Okay. But at this point the only rig that has been somewhat stacked has been the Bounty is that correct, no other plans at this point?

That's correct.

Okay. Last question Larry, obviously you have been successful on the deep water front, are you seeing any in terms of acquisitions, are you seeing an opportunity with the P3 rig or elsewhere in the general jack-up market?

Well, we said on the Valor which was the--.

The third rig that group had, I'm sorry.

The P3 has not been auctioned yet. So I just, we can't really comment on that until the rig comes into the market. P1 has been put to bed, the P2 is still open. And I would certainly expect the P2 to be put to bed before the P3 if and when it comes out, because I'm not sure when the final delivery date is on the P3. And then you said something on the jack-up market, I guess as I indicated our fleet status report doesn't reflect it, but there has been increased interest we found in the US Gulf of Mexico for our limited jack-up fleet there. Other than that we were new to jack-up, a boat chartered in Croatia on a six month contract.

Larry, I'm just talking about the acquisition market for jack-ups, I apologize.

Oh, I think there's too much difference right now in the bid/ask to have any of the new jack-ups trade.

Okay, I got you. That's helpful, thanks guys.

Your next question is from the line of Judson Bailey with Jefferies and Company.

Thank you, good morning. A follow-up question on the Ocean Star and Larry I apologize if you covered this in your comments, but looks like the rate is going to be 340, but you're also lowering the rate on the Quest while it's down there from 420 to 340. So I guess that effectively nets to a 260 type number. My question is when we think about the Victory which is up or going to have some availability in 2010, do we think about that as the potential market rate for that rig in the Gulf or something above 300 for next year?

Well, the Gulf of Mexico is a separate market and it's a short-term market whereas you're talking about a one year market in Brazil which is some term in today's market. So I think they're very different and you got different numbers of supplies and demands that would impact the Gulf of Mexico. So I can't really tell you where the rates would be. As Bob indicated sometimes if we wanted to take a fill-in job for a couple months that we needed we would be prepared if necessary to discount that. But I think we have had, we have certainly had some talks of shorter term jobs in the 300's.

Okay. That's helpful. And then another question on I guess on the PetroRig 3, I don't know if you can really comment on this or not, but that rig has a contract with PEMEX, our understanding is the rig is going to be late from the yard. Can you comment on the potential for PEMEX to cancel that contract if that rig is delivered late and how would that play into the thinking on making a bid on that rig?

Well, I'll make a general comment on Mexico, but I'm not going to share for obvious reasons what our thinking would be on whether or not we have already got all the rigs we need or whether or not we would bid on three. In fact the actual bid protocols haven't been released, so that could impact it greatly. But in Mexico our understanding is that that PEMEX contract has a delivery date that the P3 cannot make and that Mexico has some pretty firm bid laws that they would have to follow. And there can always be exceptions but our understanding is it would likely follow that it would be canceled and that under the public laws Mexico would have to retender.

Okay, that's helpful, thank you.

Your next question is from the line of Joe Hill with Tudor Pickering.

Good morning.

Morning.

Larry, you touched on something a little earlier I just wanted to follow up on it. What do you think it would cost you to build today the P1 and P2 fully outfitted?

Well, I mean, our bid price were 460 and 490 for the two rigs. And then our additional outfitting costs for things like crew training and then just the time it takes to get familiarity and missing spares, because the rigs generally were underspared, range about $60 million. So that puts you in all in cost of say on the Valor of 550 and 520 on the other one.

What do you think--?

I believe there's a rate out there right now for one of our competitors for a similar rig at 750. I don't know how much of the 750 includes the additional cost, but I bet it doesn't include all of it. So that effective rate probably for that rig I would guess might be 780. I would think John, from our discussions that between the equipment suppliers and the shipyard there may be a $100 million--?

In around that range.

Yes.

Okay. That's very helpful, thank you.

650 to 680 delivered three years from now.

Okay. And just a follow up, you said that you thought maybe interest was picking up in the Gulf of Mexico jack-up market, do you think that's more than just kind of the post hurricane season bounce and there's more legs to it than that?

I can't tell you. I mean we're coming off such a low base.

We are actually talking to operators now, talking about term work of six months to a years worth of work. So the enthusiasm for activity has certainly been boosted over the last two or three weeks. Maybe they're in their planning stages, they're looking at better product pricing, but there is more enthusiasm.

Okay, great. All right, that does it for me, thanks guys.

Your next question is from the line of Rob MacKenzie with FBR Capital Markets.

Morning guys. Earlier today one of the service companies made a fairly enviable statement that they thought ExxonMobil was going to increase spending on E&P by 10 to 12% next year primarily outside North America. What are you seeing from your customers in terms of their plans to increase activity going into the coming year and which regions do you think that will be most beneficial for?

I don't know. We do pick up some G2 from time to time on what total spending plans are, but I think we typically deal with individual markets and their needs. So ExxonMobil may be talking to a Gulf of Mexico guy and it's not as important for us to track total increases in their CapEx budget that you might find at one of the big integrated service providers. So I'm not sure that we have any data, Bob, do you?

Well, ExxonMobil in particular has a couple fairly major development projects they're kicking off next year, one in West Africa and one over in the Australia region. So I think some of that expenditure may be related to those projects.

That's helpful. And then, we have also seen I guess in recent days several comments coming out of the Middle East jack-up market which I guess you guys don't participate in as much, but West Africa there continues to be good news there. Do you see much incremental business coming up in West Africa that might be applicable for the mid-water or is that still just for the most part ultra deep?

Most of the stuff in West Africa is in the ultra deep water depths. The mid-water I think is still somewhat oversupplied.

And we have been in and out of West Africa with mid-water equipment and we never seem to be able to develop an ongoing market where rigs can move from job to job and keep working, we keep being exposed with so much downtime in that market. So I think for the time being we're likely to just expose our deeper water equipment to that market.

Is the hope for the mid-water equipment primarily centered on the North Sea or are there other regions we should pay more focus to in this next cycle?

Well, I mean our fleet is dispersed. We have a good number of rigs in Brazil in the mid-water. So next up cycle I don't know what's going to happen, but that's certainly a big growth area. Then Asia Pacific includes a big number of our rigs. And what we have now in the North Sea is just three rigs, one in Norway, two in UK, one going down to the Falklands which we presume will return, but there's nothing guaranteeing we would do that. It's a long way there back and we could just as easily move to a different market.

Seems like, in the down cycle going into the up cycle people historically underestimate the earnings power of the mid-water floaters in the next up cycle, underestimate how fully utilized they will be. Do you think that's a fair characterization of where you think the market is now in terms of viewing the earnings prospects for your mid-water fleet?

It reminds me of the joke, which I won't tell here, but the punch line is stand back, I don't know how big this thing can get. You're absolutely right, in the up cycle the size and demand for second and third generation equipment I think astounded everybody and we were able to get decent amounts of term. Cycles repeat themselves, but they do have enough variants in there that I would be hesitant to give you guidance that we can achieve those same rates in the next cycle. But certainly no one is building mid-water rigs any more and there is, there are lots of coast lines around the world that haven't been fully explored and we think that over time there will be lots of opportunities for these units to drill.

Thanks, I'll turn it back.

Next question is from the line of Geoff Kieburtz with Weeden.

Thanks, Larry. I understand the limitations on what you can say about the Valor contracting process, but obviously you were persuaded that it was the right thing to do to honor the original contract with Petrobras on the Courage. Why does the logic change with the Valor?

I'm going to stick by that. Petrobras is a great customer of ours and we will conduct our negotiations between us and them and reveal when we reach a deal. All I can say is we have had interest in the Valor from a number of places and customers around the world.

Was the interest any different from the interest you got for the Courage?

We were pleased to put the Courage to work here in the Gulf of Mexico for Petrobras International. It provided us an opportunity to contract the rig very quickly.

Yes.

So that we could follow our strategy of buy, borrow and contract. And be prepared to deal with the next rig down the pike. So I can't really other than that make comparisons between the Courage and the Valor.

Okay. All right. But in terms -- there's not that much difference in the time between when you bought the Courage and when you bought the Valor. Has there been a noticeable shift that you can detect in the nature or the level of demand, because the rigs are essentially the same, right?

Yes, I think I've answered that, so I'll invoke our rule on the one question, one follow up. I'm not trying to dodge the question, but there's nothing new I can add to Courage, Valor and the contract status.

It was more about the market, whether there's been a change in the market over that relatively brief time that you could characterize?

Demand is still very strong, ultra deep water has been a consistent market. And I don't see much difference.

Okay.

Other than that's the strongest part of the world right now and remains so.

Okay. And could I just ask a separate question about operating cost trends as you look into 2010 are you thinking that there is on a per rig day basis any inflation, is there deflation, how are you thinking about that right now?

I would say it's more or less flat. I mean we are still giving pay rises to our employees, but we have seen some price decreases in some of the other source items. I always tell people talk to NOV, that's probably your best lead on where pricing is. We have time for one more question. Let's take that from someone else. Thank you.

Your next question is from the line of Pierre Conner with Capital One Southcoast.

Good morning gentlemen.

Morning, Pierre.

I think most of it's been covered. I wanted to maybe get a market outlook or commentary about the floater markets in Mexico. You have got the new Arrow and the Voyager and you've got the other issue hanging out with the PMX jack-ups, but there have been some recent discoveries, what is the outlook for potential activity there?

Well, at this stage I think it's very difficult to read what's happening in Mexico. This is the time of year that they put their plans together, they will make their announcement on bids that will be coming up for delivery, rig deliveries in 2010. They will be making those announcements typically in late November, early December. As everybody knows, the bids have been expected recently have been delayed because of the trying to process and get the funding put together for the programs. So it's kind of difficult to get a read on exactly what's happening in Mexico right now. We do believe that they have had change of management. It is going to put more emphasis on getting production back up and that there will be drilling activities spurred from Mexico. Exactly where it's going to be, we're all waiting to see.

Yes, all of us. Okay. So you might expect some inquiries on floater demand towards year end?

Yes, when they make their announcements on the bids they plan on issuing for next year's rig requirements.

Great, okay, thanks gentlemen.

Thank you everybody for joining us this quarter. We look forward to talking to you next, shortly in the beginning of 2010.

Thank you all for participating in today's conference call. You may now disconnect.