Diamond Offshore Drilling Inc (DO) 2010 Q3 法說會逐字稿

Good morning. My name is Wes and I will be your conference operator today. At this time I would like to welcome everyone to the Diamond Offshore Drilling third quarter 2010 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'll now turn the conference over to Mr. Les Van Dyke, Director, Investor Relations.

Good morning. Thank you for joining us. Larry Dickerson, our President and Chief Executive Officer, was called to Washington, D.C. at the last minute, along with other industry representatives and won't be joining us today. However, with me on the call are Lyndol Dew, Senior Vice President, Worldwide Operations, Gary Krenek, Senior Vice President and Chief Financial Officer, and Bill Long, Senior Vice President and General Counsel.

Before we begin our 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 change 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 will turn the meeting over to Lyndol.

Thank you, Les, and good morning, everyone. On behalf of Larry, I will address four topics prior to turning the call over to Gary. The first of which is the moratorium in the US Gulf of Mexico and its continuing impact on Diamond Offshore. As I'm sure you all are aware, the moratorium has been lifted. While we consider this a positive step in the right direction, it is just one step toward resumption of normal exploration and production drilling in the Gulf.

Drilling cannot commence until our customers obtain permits. It's all about the permits. If we look to shallow water permitting, where there was no moratorium as a guide, we believe the permitting process will be slow for the foreseeable future, especially for new deepwater oil wells.

Since early June, there have been only 15 new well permits issued for water depths less than 500 feet, according to the BOEM website. The BOEM needs a clear road map and additional resources to process and approve the permits. We hope the US government makes this a top priority, and that approved permits will begin to appear sooner rather than later.

To update you as to the status of our remaining rigs in the Gulf, all three of our marketed floaters have had their BOPs independently certified in accordance with NTL5, and that certification has been accepted by the BOEM. Our two marketed jack-ups are presently in compliance and are working. Additionally, we are presently evaluating the impact of the interim final rules that were published in the Federal Register on October 14.

As reflected in our rig status report, we have had several rig relocations since our last conference call. The Ocean Confidence mobilized across the Atlantic to Congo for Murphy and commenced operations in mid-September. the Ocean Baroness completed Petrobras acceptance in early September and commenced its three-year contract in Brazil. The Ocean Endeavor arrived in Egypt on October 18, and is completing formalities prior to moving on to its first location. And the Ocean Scepter is presently in Brazil, awaiting contract commencement during the first week of December for OTX.

In general, our traditional market remains stable and looks good, with the exception of the US Gulf of Mexico. This should come as no surprise with oil prices above $80.00 per barrel. We see that high end jack-ups and floaters have a small amount of pricing power, and market bright spots include West Africa and the Mediterranean. With the exception of the Ocean Sovereign, all of our rigs with contract end dates before the middle of next year have good prospects for continuing work.

And finally, a short comment on the dividends. The dividends remain an important part of our philosophy of returning value to shareholders. As stated in our press release, the Board has decided to declare a $0.125 regular and $0.75 special dividend, which is the same as last quarter. The Board will continue implementing our policy of evaluating the use of cash on a quarterly basis. With that, I now turn the call over to Gary to elaborate on the numbers.

Thanks Lyndol, and good morning to everyone on the call. Earlier today, we reported net income for the third quarter of $198 million, or $1.43 per share, on contract drilling revenues of $749 million. Included in these results was a $32 million gain on the sale of the jack-up Ocean Shield that we had previously announced but closed and recorded early in this current quarter.

Overall, our earnings are down slightly from the previous quarter when we reported an EPS of $1.61. This reduction was driven mainly by decreased revenues related to items that we highlighted in our earnings release.

Looking now at some of the other specific line items on our Q3 income statement, contract drilling expenses came in at $349 million, which is below our guidance of $380 million to $390 million that we gave in our last conference call. Approximately $12 million to $14 million of this variance are timing differences attributable to two things, first, the Ocean Spur and Ocean Winter survey related costs, which were not incurred in Q3, but will now stretch into the fourth quarter, and second, the delayed start up of the Valor and Baroness contracts in Brazil, as we defer recognition of operating costs as per our policy in GAAP longer than what we had originally participated.

Costs were also some $9 million lower, due to cost savings related to the cold stacking of the New Era and the Voyager in the Gulf of Mexico during Q3. The remaining $12 million to $15 million favorable variance is a result of our continuing efforts to control costs on an ongoing basis. Our tax rate for Q3 came in at 33.5%, which was above our previous guidance of 29% to 31%. During the quarter, we booked tax adjustments of some $6 million related to provision adjustments and to the fine tuning of our FIN 48 tax accrual. Without these adjustments, our tax rate would have come in at a little over 31%, only slightly higher than our previous guidance.

The remaining line items in our income statement for the third quarter are relatively straightforward and are within our previous guidance for the quarter, or comparable with prior quarter results. If anyone has further questions concerning our third quarter results, I'll be happy to answer them in the Q&A portion of the call.

Looking forward to the fourth quarter, we again expect to incur normal daily contract drilling expenses for our working rigs as outlined earlier this year. With respect to recently cold-stacked rigs, you can assume costs of $5,000 per day for cold-stack floaters, and $2,000 per day for cold stack jack-ups. These normal daily operating costs will be inflated slightly, as a number of large expense projects that were budgeted earlier in the year are now set to be completed in the fourth quarter, adding approximately $5 million to $10 million to our costs.

In addition, we'll spend some $4 million to $6 million and complete the surveys of the Spur and the Winner, which were begun in the third quarter. We will also record in the upcoming quarter some $32 million in amortized mobe and contract prep costs that had previously been deferred, and we'll also record approximately the same amount of deferred mobilization revenue.

Adding that all up, this should result in expected contract drilling costs, excluding reimbursable costs of some $380 million to $390 million for the fourth quarter of 2010. Now this is some $30 million to $40 million more than our third quarter contract drilling expenses, but remember, during Q3, we deferred costs due to mobing and/or acceptance testing for the Confidence, Baroness, Endeavor, Valor, and Scepter, which will all be operating all or most of Q4.

Looking further down the P&L statement, DD&A, G&A, and interest spent should all be relatively consistent quarter over quarter going into Q4, and with respect to our tax rate, we expect to see a rate of somewhere around 31% or 32% for the upcoming quarter. Our updated capital expenditure guidance is now for us to spend some $430 million for the full year 2010 for maintenance CapEx, additional spare parts, and required upgrades needed to comply with international contracts that we've been awarded. In addition to this maintenance capital amount, we expect to incur an additional $65 million to complete the commissioning and outfitting of the Courage and the Valor, two new-build rigs we acquired in the previous year. All told, this comes up to total CapEx for 2010 of some $495 million.

And finally, as always, I would refer you to our Rig Status Report, which can be found on our website for expected down time for our rigs for the remainder of the year, for contract durations, timing of contract rollovers, and other pertinent information. And with that, we will open the Q&A portion of our call. Operator, we're ready to take questions.

(Operator Instructions) And our first question comes from Ian Macpherson of Simmons.

Hi, good morning. I really just wanted to ask Lyndol or Gary if you wanted to comment on what you're seeing in terms of budding strength and recovery in the deep water market, and how you are assessing opportunities to acquire or build, as I know that's been flagged in recent quarters as a priority, where we stand with that and what are the options and the agenda for building the deep water fleet?

Well, looking at the deep water market, there seems to have been a little bit more strength here recently in the last couple of months. We're certainly seeing opportunities throughout the world, as Lyndol said, particularly West Africa, the Med, particularly West Africa, e a number of potential opportunities out there, and so that's looking good.

With respect to adding to the fleet, we are always looking for opportunities to add to our fleet. This Company was built through acquisitions in the past and we will continue to monitor anything that comes up. There is a couple of potential opportunities, I'm sure everybody knows about Sea Dragon rigs that are out there [by Lloyd's], they've expressed public opinions of trying to divest themselves of those rigs, a couple of the Greek ship builders that have potential rigs that can be acquired.

We'll continue to evaluate everything that comes down the pike as we always have, and along with potential new builds, we're monitoring the cost of new builds from the ship yards. As everyone knows, when we've added to the fleet in the past, we've done it economically, and we'll continue to try to do so in the future.

Is there a clear cut advantage between acquiring or building new at the shipyard at this stage based on - - ?

Well, there certainly is an advantage in acquiring in that these rigs are already either almost totally built or partially built, so early delivery would be the advantage on acquiring a rig. The question is how much are you going to have to pay for that rig? And we continue to monitor that, and we'll evaluate both of them as those opportunities come up.

And, Gary, should we be watching Diamond to continue to prune the low end of the fleet as you have with some older jack-ups and also with the Shield that you decided to part ways with (inaudible) is that still part of the strategy going forward?

Well, we certainly would like to upgrade our fleet by adding new equipment to it. We of course will evaluate our older equipment and decide what to do. The sale of the Shield, we weren't necessarily looking to sell that rig, but had an offer we felt we couldn't refuse, and we continuously evaluate our fleet on an ongoing basis.

All right. I'll turn it over. Thanks, Gary.

All right, thanks.

Your next question comes from Dan Boyd of Goldman Sachs.

Hi, good morning.

Hi, Dan.

You mentioned that all of the rigs rolling off contract, it sounds like over the next six, 12 months seem to have good prospects to stay working. We've seen a lot of bifurcation in the market, where the altered deep water rigs have surprised to the upside.

What are seeing for the lower specification rigs? Are the rates you're talking about kind of consistent with what we've seen over the past three months, or are the better assets starting to pull rates up, or is the bifurcation going to cause rates to maybe weaken?

I think the rates are fairly consistent over the past three months. Mid-water rates are in the low to mid-200s. Our most recent fixture was the Ocean General out in Southeast Asia at 240, and so we're pretty much steady as she goes at this point.

Okay. Can you give us just an early flavor for what surveys look like in 2011 and 2012? I know they kind of - - every three or four years I think you go through a cycle of having to go through the bigger survey and down time. Can you maybe compare 2011 and 2012 to what we saw in 2009 and 2010?

2011, right now we're looking at eight different rigs undergoing surveys, and we're in the process of doing our budget and evaluating how long we think those rigs are going to be out. 2012 is going to be a heavy year. I don't have the figures in front of me, but because it's a five-year cycle, both 2012 and 2013, we will have an increased number of rigs that we're going to have to survey.

And of those rigs, it sounds like next year is actually a pretty light year even relative to this year, then?

Well, we had about the same number this year. I think we did seven or eight this year. 2011 will be about the same as 2010, 2012 and 2013 will be our heavy years.

Okay. Thanks.

Okay.

Your next question comes from Collin Gerry of Raymond James.

I wanted to follow-up on the upgrading the fleet comment you had made. Does that include potential upgrades, like shipyard upgrades, to current rigs, and how does that fall into the new build versus acquire assets line of questioning from earlier?

We have some potential rigs that we could upgrade to some point, but our major upgrade program of upgrading the Victory Class rigs is pretty much over. We've upgraded the rigs that we could upgrade and we have only two more Victory Class rigs left. The rest of our rigs, any type of major upgrade really does not make economic sense. Those Victory Class rigs lent themselves very well to being upgraded.

The rest of the fleet does not necessarily do that. You can always upgrade any rig, it just depends on how much money you're willing to spend, and some of the other type rigs, it's actually more economical to go ahead and start from scratch and build a new rig rather than try to upgrade something like the General or the Epoch or something like that.

Right. So going forward, just really a handful of opportunities, but by and large not much upgrade opportunity?

That's correct.

Okay. Makes sense. Switching gears real quick, on the Valor, we've seen the delivery pushed to the right a few times. Maybe just give us a sense of what's happening there?

Right now we are in the last phases of Petrobras' inspection and we expect that to happen relatively quickly. As you may or may not be aware, Petrobras has very detailed requirements for the inspection process, so we are departing our location and heading toward the actual location where we'll do our DP trials and then start from there.

Right. Okay. I guess relative to, say, six months ago, what has changed in that delivery time table in terms of the inspection? Were there just back and forth [that] just normal occurrences you didn't see prior to that, or are there any specific items that you could maybe mention that kind of delayed that delivery?

Probably the biggest issue that's caused an impact has been dat cylinder repairs, those are direct actioning tensioners, and we had some unanticipated damage that required repair and that took a couple of months to get that done before we could recommence the actual Petrobras inspection. So that was the event.

Okay. That's it for me. Thanks.

Your next question comes from John Lawrence of Tudor, Pickering, Holt.

Hi guys, good morning.

Good morning.

Could you talk about the strength of the North Sea in 2011 with a couple of rigs rolling?

We characterize the North Sea as in balance right now. We have the Nomad that is scheduled to come off contract here in the next month or two, and we're talking to customers right now. We hope to have something in place that will take us through the winter months, and then once we get into the spring, we see strength there to certainly be able to continue to work our rigs.

Okay. And then just anything you could say on the Monarch litigation?

John, not much. We can't comment on all the specifics of the pending litigation, but we can reiterate what's in our Rig Status Report, which essentially is our customer has taken a position that the moratorium constitutes an event, a force majeure event, under the contract that gives them a right to terminate the contract. They have terminated the contract - - or given us notification of termination, and then filed an action in Houston seeking a declaratory judgment finding that they have a right or that their interpretation of the contract is correct.

And Diamond's view is obviously to the contrary. We don't believe the events constitute a force majeure event, and therefore don't give them a right to terminate the contract. So we're going to vigorously pursue that position.

Okay. Great. Thanks. That's it for me.

Your next question comes from Dave Wilson of Howard Weil. Mr. Wilson, your line is open.

Sorry. I was on mute. Good morning, Gary. This is with regards to the tax rate longer term, and I know you guys get this question a lot, but I think this is a - - you got it when you had a lot more rigs in the Gulf of Mexico, but now that - - what are your thoughts on the possibility of a a re-domestication or some kind of inversion, something that will lower your tax rate permanently going forward now that you have lot of the rigs out of the Gulf of Mexico?

Well, we have a very good tax department that continuously looks at ways to reduce our tax rate. To specifically answer your question, for an ongoing basis, the true answer is I don't know, because we don't know what the tax laws are going to be in future years. What I can tell you, though, is that we do actively pursue and have done things in the past to be able to lower our rate, and we will continuously do that.

What that rate is going to be next year, I'm not sure right now. There is some tax legislation that we thought was going to be passed during this year that would have lowered our rates from four or five percentage points, tax laws that expired at the end of 2009 were supposed to be renewed in 2010, and Congress never got around to doing it. I'm told that they're still potentially going to renew some of those tax laws.

So I know, Dave, I didn't really answer your question other than to say we have to wait and see, but I can guarantee you we will monitor everything and do whatever we can to bring that tax rate down.

Okay Gary. Maybe another way to ask it is, and it sounds like that's an ongoing thing that you've always done that, but moving rigs out of the Gulf of Mexico hasn't changed kind of that approach or made it easier or anything like that?

Not necessarily. With rigs out of the Gulf, there are some things we can potentially do. We have our rigs both in the domestic and foreign structure; however, rigs that are working in international markets are not necessarily in the foreign structure. In order to move them into that foreign structure, to benefit from lower tax rates, often causes an up-front tax expense that makes it prohibitive.

Got it. I understand. Thanks for the time, Gary.

Okay, Dave.

Your next question comes from Scott Gruber of Sanford Bernstein.

Good morning, gentlemen.

Good morning.

You have five semis of varying capability working in Southeast Asia and Australia. There's potentially a lot of LNG connected gas drilling in the region, yet at the same time there's a fair amount of [speculative] deep water capacity being [constructed] in the broader region as well. And as we've seen the jack-up market, the [speculative] capacity is rolled out without contracts, it's essentially been dumped into the regional market to the detriment of utilization across the regional fleet, is there a risk of that occurring in the semi market as these [speculative] deep water rigs roll out?

I guess one of the barriers to entry, especially into Australia, is the safety case requirement. So it's not something that they can just immediately just dump the rig out of the shipyard and run it to Australia and make it work, and the rigs that are there, the legacy rigs there already have safety cases, so that gives them some time to continue working. But we view the Southeast Asia market as being reasonably stable, and we're comfortable there are rigs there that can continue doing a good job for our customers.

Okay. Thanks my only question. Thank you.

Your next question comes from Arun Jayaram of Credit Suisse.

Good morning. Can you hear me?

Yes. Go ahead.

Okay. I just wanted a couple of clarifications on your Gulf of Mexico fleet. Firstly, Gary, on the Ocean Victory where you restart with ATP, I believe, in early November, does that work have a permit or can you just describe that program?

That is a continuation of the work that we had done previously. They also have some P&A work, as I understand, that we may be able to do for them. Exactly where they stand in that permit process, I am not sure, other than the last I heard is that they still expect us to go to work for them in that first week of November.

Okay. But it sounds like they have a permit to perform those activities?

They either have their permit or they feel comfortable they are going to be able to get that permit by that first week of November is my understanding.

Okay. And just second question on the Monarch, do you have the ability to market this rig to other customers, given the situation on the contract on that rig?

Yes. And we are currently marketing that both in the US Gulf and internationally.

Okay. And can you just comment on what you're seeing on the demand front for a rig of those specifications?

We have a couple of customers right now that are interested in the rig, and we're in discussions with them.

Okay. And would you gauge that more international demand or Gulf of Mexico?

Yes.

Okay. All right. Thanks a lot, guys.

All right.

Your next question comes from Robin Shoemaker of Citigroup.

Thanks, good morning. Could you comment on how you see the jack-up market in Mexico, both short-term for your contracts that are expiring, and the prospects for longer term contracts in Mexico, and rigs that you have that are not currently there that might be available, depending on how they come out with regard to the age restrictions?

Okay. I think we can characterize certainly the Mexico market as being active. We are aware of at least four current bid opportunities that are out there. We anticipate two more, all of which have the age requirements on the jack-ups, but we've been hearing that on a go-forward basis, they may relax some of that requirement, making some of our units available to go in there and compete for those.

We also anticipate a bid to come out shortly for a thousand foot floater, which we have some units that could fulfill that requirement, and and we're hearing about a market inquiry for the [Lacosh] development. So we really foresee Mexico as an active place, a place where we want to be, and we want to stay there.

Right. So the floater requirement is for a start date in 2011?

Correct. We understand a May of 2011 start date.

Okay. That's all for me. Thank you.

Your next question comes from Scott Burk of Oppenheimer.

Hi, good morning.

Good morning.

I wanted to ask a couple of questions about the some comments you had in the release, specifically you talked about anticipating most of your rigs being employed during the majority of the fourth quarter. Would that extend to a couple of the rigs that you have currently stacked, maybe the Voyager, the New Era, or the Bounty, could those potentially be going back to work if the fourth quarter, or are you just saying the rigs rolling off contract will continue to work?

Most likely those rigs will not return to work, the ones that you mentioned, in the fourth quarter. The ones that we indicated in the press release were the ones that we're molding and acceptance testing in the shipyard for surveys.

Okay.

Those [that] will be going back to work, either have already gone to work at the end of the third quarter or the beginning of the fourth quarter will be going to work shortly.

Okay. Very good. And then I had a question about the Confidence in the Endeavor, the two rigs that you had moved out of the Gulf of Mexico earlier this year, both of them got an extra month on their contract, and is there any implication that that makes it more likely that they will stay in those international areas, or do you expect that they'll eventually make their way back to the Gulf of Mexico?

Well, for the Confidence, it certainly will come back to the Gulf of Mexico, because we still have term work with Murphy here in the US Gulf, and when the situation clarifies in the Gulf and Murphy can get their permits, that rig will certainly be coming back to the Gulf to complete that contract. In the meantime, it's working internationally. We have additional customers interested in that rig in West Africa that we're talking to, and we'll work that rig over there until it has to come back.

As far as the Endeavor, it's clear to do whatever, so it most likely will stay international since it's already over there rather than moving back, but it is certainly free to be marketed anywhere in the world.

Okay. That's it for me. Thanks.

Your next question comes from Geoff Kieburtz of Weeden.

Thanks very much. Coming back to the Monarch for a moment, just to clarify, you are recognizing revenue on that rig currently, correct?

We are not.

You are not.

We are billing. We believe that, as Bill said earlier, that we are owed that money and we are invoicing it; however, accounting rules have dictated that we reserve that revenue and so technically speaking, we book the revenue, turn right around and reserve it. The net effect is you see no revenue in our income statement.

Good. I wanted that clarification. And the other one, I understand your caution in regards to how quickly the floater market in the Gulf of Mexico might rebound, but as you see it today, what quarter would you say it's most likely that we'll see a rig go back to work in a drilling mode in over 500 feet of water?

How long is a piece of string?

Okay.

The government is - - as Lyndol said, it's all about the permits- -

Sure.

- - and exactly when is the government going to begin permitting these wells so that we can go to work? We will work in the Gulf of Mexico again. The country needs the energy, it will happen. The timing is open to speculation at this point.

If you want to try to rephrase a little bit, do you think there's any chance a rig would be active by the end of this year?

By the end of this year?

Yes.

Not real encouraged by the end of this year. We just haven't seen anything come up so far. I'm certainly not ruling it out.

Sure.

I'm much more optimistic that we will see something next year.

Okay. All right. Great. Thank you.

Your next question comes from Doug Becker of Banc of America, Merrill Lynch.

Thanks. Lyndol, wanted to follow-up on your comment on the Ocean Sovereign. You specifically singled it out as not having good prospects for continuing work. Is that likely to be mobilized to a different market, or what's the thought process there?

Well, right now our customers, our present customers tell us that they have no further work for it, and our customers that we contacted in the area don't have a term program for it, so we're evaluating what's the best use of the unit to either mobilize it or to stack it or reduce costs or whatever, but right now we don't have a clear path for the Sovereign for work and that's the reason I singled it out.

But the potential for it being stacked, would be low probability?

Right now we don't know. We're still talking to people.

Okay. And if you can look into your crystal ball, I realize there's still lots of uncertainty here, but how many deep water rigs, floating rigs, do you think will be in the Gulf of Mexico when we reach this new normal? How many additional rigs do you think will actually leave the Gulf, just trying to get a sense for how you think the intermediate term market looks outside of the permitting issues that are certainly the focus in the short-term?

Well, I think it depends when the permitting process comes up. These rigs are not going to sit idle in the Gulf forever, and they've sat there this long or the majority of them. We've taken two out and a couple others have left.

So it tells me the oil companies think that the permitting process is going to work itself out sooner than later. So, there's certainly, because of no drilling for the past six months, there's pent up demand, oil companies running behind schedule, the lease explorations are running, the clock is ticking on them, so we have the potential for there to be an increase in demand in the Gulf of Mexico should everything work itself out.

Okay. And then just a quick thought question. We're seeing some of the other contractors indicate interest, or at least operators are indicating interest in some smaller drill ships, maybe a little more nimble. What's Diamond's view of those types of assets and something that would be considered down the road?

Well, we certainly consider everything and we've heard that, we've looked at it. We won't rule anything out. We'll continue to look at it.

There's not a lot of cost savings to build these smaller ships, the same equipment is on these rigs. You're saving a little bit of money on steel, and you build a big one, it can do everything that the small one can do. The small one not necessarily can do everything the big one can do. So I guess our preference would be to a larger one, but again, I wouldn't rule anything out.

Okay. Thank you very much.

Your next question comes from Andreas Stubsrud of Pareto.

Yes, hello. I'm wondering about the cost and time it takes to get the semi back in drilling mode from a stacked position, such as the Ocean Bounty which has been stacked since August 2009?

Okay. Right now, going from a stacked mode to an operation mode depends on the amount of surveys that have to be done and how much actual repairs. If the special survey has to be done, then you're looking at a minimum of 45 days to 60 days to reactivate that particular unit.

If the surveys are current and all we have to do is fire up the equipment and exercise it and put it back in operation, it can be certainly done in less than a month, because we do take particular care when we stack the rigs to make sure that the equipment is preserved and ready to go back to work on a fairly quick notice. But it really depends on where it stands in its survey cycle and what has to be done from a regulatory perspective.

The only thing that I would add to that, it also depends on how long it's been sitting there cold stacked. Our semis have not been cold stacked for very long periods, so I agree with everything Lyndol said, but the longer they sit there, then the more time is needed to bring it back into a working mode.

Exactly, and that's why I'm asking it because there are some rigs that will be probably stacked for a longer period here, as some of the older ones may be, so such as the Ocean Bounty, which is in Malaysia, I think that came from Australia. So could you answer on the cost side, would that be $10, $20 or more to get it into position without a special survey?

Well, the Bounty does have a special survey required, so it is going to require a significant amount of capital to bring it back to service, and then of course, when you look at that unit, what do you want it to be in the future? When you're in there for the special survey, do you want to take the opportunity to upgrade it and give it more capability? All those questions have to be answered, and it's really market driven and what do the customers want.

Okay. Very good. Thank you.

Your next question comes from [Mike Ralish] of Adage Capital

Hi, thanks for taking a question from a shareholder. I have two questions. I was wondering if you could address the accounting for the Monarch? I think you talked about that you were booking revenue. Can you talk about the expense side? Do you also defer the expense on that?

No. We book that as incurred.

Okay. And then secondly, there's been a lot of speculation on the demand from Brazil for deep water units. I was wondering if you could just comment on if you feel comfortable having more than 15 units in that market? Thank you.

We recognize the number of rigs we have down there and we'd like to spread around. However, having said that, both Petrobras and OGX are very good customers of ours down there, and as long as there's demand for rigs from those customers, particularly if we can get term work from them, we are more than happy to continue to work for them. There's other companies down there that may require rigs in the future, and if so, we would work for them down in Brazil.

Okay, thanks.

Your next question comes from Matt Beeby of Global Hunter Securities.

Hi, guys.

Good morning.

I had a question about the US Gulf shallow water market. Earlier this year you all had as many as four jack-ups working, and now there's two. I'm just curious if there's a timing as to when you might be able to bring some of those rigs back from cold stack, and if there's demand there that you might see some more of those rigs working?

Well, again, it's the permits, and that has caused us to stack some of our rigs. The cold stacked rigs, the mat slots, that's a very commodity market, and the odds of bringing them out at any time in the near future are pretty slim. With natural gas prices where they're at, that's also a detriment to working jack-ups in the Gulf of Mexico, so time will tell.

We need two things. We need higher gas prices and we need the permitting process solved, to be able to put any more rigs back to work.

Okay. So is it maybe more likely that you see some of the mat rigs as a divesture opportunity longer term?

Those mat rigs are such a small percentage of our fleet and have the potential earning power of less than 1% of the total overall fleet, so it's not something that we dwell on a lot. There is a number of mat slots out there, and again, as our rigs sit cold stacked along with others, the odds of them coming back to work any time in the near future are pretty slim. I think we have time for one more question.

And our final question comes from Judson Bailey of Jefferies.

Thanks, good morning. A follow-up on Brazil. There's been, as it's been noted here, a lot of talk about them coming to market with some requirements using existing capacity. Based on your conversations with them, has there been any talk about them also changing the specification requirements? In other words, maybe contemplating using some moored units as opposed to DP units or higher spec units.

Well, there's both DP and moored, a number of our moored units are working down there. And they just recently took the Baroness. We mowed the Baroness out of the Gulf of Mexico down there which is a moored unit. So they're looking at both.

Okay. And then my follow-up, a little different direction. My understanding is Statoil is looking at potentially awarding some contracts to support new construction. Do you guys have any interest in participating in new build rigs that would be going to a place like Norway?

Again, we look at all opportunities, and it boils down to the economics. If we believe that it's economically viable, certainly we will look at it and potentially participate. If we don't think that we can make money, then we'll pass on it. So just a common sense answer there.

Okay. Great. Thank you.

Okay, Jud. Thank you for everyone that joined us, and we look forward to talking to you again in the next quarter.

And ladies and gentlemen, that concludes the Diamond Offshore Drilling third quarter 2010 results conference call. We appreciate your time. You may now disconnect.