Diamond Offshore Drilling Inc (DO) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Diamond Offshore Drilling second-quarter 2011 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).

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

Thank you. Good morning. With me on the call today are Larry Dickerson, President and Chief Executive Officer, Gary Krenek, Senior Vice President and Chief Financial Officer, Moe Plaisance, Vice President of Marketing, and Michael Acuff, Vice President of Marketing.

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 the 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 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'll turn the meeting over to Larry.

Thank you and good morning.

We are pleased with our results today of $1.92. Point out that concludes in it a $10 million write off related to a deferred mobilization on the Ocean Monarch that was resolved with our customer at the point in time that we signed the commitments on two of our new drillships. So that was a $10 million write off. About between $0.04 and $0.05 of earnings is included in that number.

The positives for the quarter that we would focus on was we had almost all-time low amounts of downtime within our fleet. There were only 24 days covering one rig where we had a rig in the shipyard (inaudible) Ocean Yatzy in Brazil doing some thruster work (inaudible) in the ordinary course of business there will be multiple with [minimum] days. In fact, in all likelihood, our schedule shows that there will be multiple rigs in Q3, down for planned maintenance.

On the other side, the thing that we do work to control, we had a near record low unanticipated equipment downtime of only 65 days here in this quarter. This is down from 72 in the quarter before, which I'm also pleased with. We got a nice trend going in that direction, and that obviously is something that we can control and generate more of the revenue and have more to drop to the bottom line.

Although costs were up sequentially quarter-over-quarter, I'm pleased with our efforts and where we are spending money. We did start at the beginning of the quarter an offshore rig [raise], which is reflected in there and we've also put in place a retention program for selected employees on selected rigs that are under the most demand, the highly skilled rigs covering the newer rigs. So those costs are in there. We would expect those to come forward but, again, we are pleased with that.

The other big thing is the amount of backlog that we were able to add. All that sort of came together in almost a 10-day period, so we were really excited by that. But the disclosures on the press release cover $1 billion. There were some other minor ordinary course of business adjustments that really put the number at $1.1 billion of additional backlog we are burning. In the quarter, we burned right under $900 million of revenue, which in effect is backlog being burned off, so we were able to certainly replace that. That ignores the $1.8 billion of backlog that we added to the two new drillships, and I'll come to that.

But in the details of the rigs that we added additional time on, I think most significantly was down in Brazil with our customer Petrobras. One of our new builds, the Ocean Valor, had initially signed a contract at three years with Petrobras at $450,000 a day. We included at that point in time a provision to allow them to extend that to five years in return for a $10,000 prospective decrease in the day rate. They elected to exercise that (inaudible) Ocean Valor.

We had a similar provision in the fifth-generation Ocean Baroness, a rig which we relocated down there where they extended that for an additional two years for a similar rate reduction. I think that's significant, and I think it points out the demand that Petrobras has in the near term. Of course these extensions really don't kick in for two years or so. So it covers some years that -- '13, '14, so it's not just near-term but intermediate-term. They've got lots of discoveries down there. They need these type of large rigs to develop those, so that's a net positive.

At the same time, we had an opportunity to take the Ocean Yorktown, an intermediate rig, and put it into a bid in Mexico. We really didn't have another rig in the immediate area that could fulfill that job, and because of -- it would be to Petrobras' mutual benefit to relieve them of some near-term commitments the elected. We negotiated to free up the Ocean Yorktown and move the Ocean Yorktown time to another mid-water rig, the Ocean Concord.

Also in Brazil, our big customer, OGX, booked one-year extensions on their larger rigs, the Ocean Star and the Ocean Quest. So significant developments in our biggest market. We continue to have 16 rigs operating in that market with all kind of backlog, so we are pleased with that.

Also in Mexico, we are seeing a movement off of, frankly, some low-level activity that we've seen for the past year or two. We have three -- in addition to the Ocean Yorktown arriving, we've got three jackup jobs there, a slight extension on one of the existing rigs, a longer-term extension on the Ocean Summit, and then the Ocean Titan, which has been working in the Gulf of Mexico and was, frankly, down due to permitting issues. We were able to get a 777 day job there at a little over $100,000 a day. Now, we'll have to do some modifications to Ocean Titan to get it qualified to go down in Mexico. The Summit and (inaudible) have been there for some period of time. But we think that will pay out very quickly.

Then on our fleet status report that we released, we also indicated smaller extensions which we didn't include on the press release. The Ocean Nomad extended into the North Sea, puts that rig to work through the winter. Then the Ocean Valiant continued to tackle in time in West Africa.

West Africa is certainly an exciting market for there. One of the big events on the horizon is our Ocean Confidence is moving on location for cobalt for a highly anticipated well down there. So we will be obviously giving any updates on what's happening there, but we are there participating and we certainly think there's a lot of upside in West Africa.

To go back to what's probably old news that happened earlier in the quarter where we took both of our first two drillships that we had ordered and signed a combined ten years worth of work, five years per vessel, at rates that generated $1.8 billion of backlog. And I think everybody can do the math and see that those are nice rates. That excludes mobilization. We don't know where the rigs are going. In all likelihood, that mobilization will be also rolled into the day rate contractually and certainly from an accounting standpoint that's the way that rig will work.

Then the final thing I would point out would be the continuation of our dividend policy. We, as indicated in the press release, we renewed our special dividend at the same rate that's been established now I believe four quarters, combined with our regular dividend. The two dividends combined, looking back through 2006, have paid out just a hair under $29 in value to shareholders, and again continues to reflect our belief that dividends are an important component of returning value to shareholders. I always tell investors that we meet that you can't just look at our share price compared to the competition and how that may perform, but also that you need to keep in mind, depending on how long you've held it, at least some portion, hopefully for long-term shareholders, all of the portion of that dividend just under $29 of value that you perceive.

So that concludes my opening remarks. I will now turn it over to Gary Krenek to go through a little bit more of the details of our financials.

Thanks Larry.

For the second quarter, most of the line items on the income statement came within expectations of what we expected and what we had talked about in our previous conference call. The one line item Larry already alluded to that was slightly above was our contract drilling expense. We had guided to between $360 million to $375 million is what we said in the last conference call, and we came in at $388 million. As Larry said, the biggest component of that overrun was the $10 million worth of deferred [mobe] and preparation costs on the Monarch that we took a non-cash charge for in the second quarter because of early termination of the contract on that rig.

I'll remind everybody that when we do -- when we [mobe] rigs, we defer any costs occurring when that happens and amortize it over the length of the contract. So that was a $10 million charge.

We also had some weakening of the US dollar, a slight weakening for some of our own [hitch] positions in foreign denominated expenditures. That cost of somewhere between $5 million and $7 million unexpected and then slightly higher due to some of the labor increases Larry talked about. So if you take all of those into account and adjust our actual numbers, we actually come right in the middle of the guidance that we had put out last quarter. Other than that, as I said, everything came in pretty much where we had expected.

Looking forward to the next quarter and the rest of 2011, I think the biggest thing is, again, Larry talk about it, is the downtime on our rigs that we expect in the third and the fourth quarters. Again, you can look at our rig status report that we released this morning to get the details of that, but just briefly, we have four rigs that will be undergoing a five-year survey in the third quarter. We have three rigs in the fourth quarter undergoing surveys. We have three rigs, the Yorktown, Monarch, and Titan, that we'll be [mobing] from one major area of location to another during the third and fourth quarters; they will have downtime. Finally, the Ocean Clipper will be down for a few days in the third quarter and the entire fourth quarter for some contractual upgrades that we had agreed to do with Petrobras a year and a half, two years ago when we extended the contract. We had been waiting for delivery of equipment and also for a convenient time for both us and Petrobras that we'll take that rig out of service, and that time is now coming up. If anything goes according to plan and we start when we are supposed to into the third quarter, we will be back on contract by January 1, 2012.

So this downtime for our rigs, we had very good downtime in the first half of the year. It just so happens that most of it is going to be back-end loaded in the second half of the year across [the sum] on both the revenue line and will also affect our expense lines.

Looking at contract drilling expense for the third quarter, again we'll incur our daily normal daily operating costs that we've foretold everyone earlier in the year. To that you need to add some $22 million worth of amortized mode costs that we'll record in the quarter. The four survey costs, each of those rigs will be somewhere between $4 million and $8 million each. We have two jackups and two semisubmersibles. The US dollar we're expecting to remain consistent, so you need to add another $6 million to $8 million for our normal cost of that.

Finally our major expense costs for our major projects will increase somewhere in the $7 million to $10 million range in Q3 and then following also in Q4. As we've said before, this is normal. When we do our budgets in the fall of any given year, it takes the first quarter and part of the second quarter for us to write our [AFE], order our equipment, wait on delivery. All of that stuff comes in and we actually spend the money and record it in the second half of the year. So if you add up those daily, regular daily costs and the additional items that I gave you, that should come up to a third-quarter contract drilling expense of somewhere between $395 million to $410 million.

Again, I caution everybody that's contract drilling expense only. That does not include reimbursable costs. We do not budget for reimbursable costs. If you look at that, the reimbursable costs are virtually offset dollar for dollar with reimbursable revenues. The revenue guidance that we give on our rig status report excludes any type of reimbursable revenues. So when you are looking at, trying to project our earnings in the future, you really need to net those two items out, which we do.

For the rest of the income statement line items, the guidance remains virtually the same as it had in the last quarter. G&A we expect continue to be at $17 million to $18 million per quarter; depreciation $101 million to $104 million per quarter. We'll be slightly up in the third quarter simply because they have 92 days the next quarter versus 91 days in Q2.

Interest expense remains at about $22 million per quarter. Our effective tax rate at 21% to 24%, which is the same as we have guided previously. Finally, maintenance capital remains at $320 million for this year.

Additionally, we had some $475 million of down payments we made already in the first half of the year on the three new build drillships that we did. Just for accounting purposes, that $475 million is not considered capital expenditures this year, but rather are -- is recorded in the balance sheet at a long-term deposit on our new builds. That will be flipped around when we actually take delivery of the rigs and will come out of the deposit account into our fixed assets.

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

Okay. So I think we're ready for questions. We'll let the marketing folks say their piece during the Q&A.

(Operator Instructions). Ian Macpherson, Simmons.

Thanks. Larry, on the Noble call preceding yours, they were cautioning a lot about more systemic downtime for the industry because of less tolerance for BOP anomalies, etc. Have you seen a change on your fleet with that, and do you expect it going forward?

Yes. We think that is a factor. It didn't hit us in this quarter. We are trying to take steps to minimize that. We've seen instances where we think in the past we might not have had to take some period of downtime. We've had a little downtime here going into Q3 already on BOP stacks. We -- it just hadn't to hit us to that point, yes. But certainly in our future projections and whatnot, we are building in a little bit more downtime on bigger, deeper water rigs for BOP differences. We don't have a sense yet on what changes may happen in our mid-water fleet.

Follow-up question, what would you say is the direction of the mid-water market right now? Because it seems to be that it's been sort of getting slightly better but not with a lot of -- I guess the emphasis on slightly, and we've seen some pluses and minuses and we've seen now Petrobras putting their backlog on a few rigs, under one rig with you today. So can you really call it clear direction in mid-water right now? Do you think we are doing well to hold flat or do you think we're definitely improving over the next year or what?

I'll let our marketing guys comment on that

This is Michael here. I would say you're correct; we continue to see it fairly flat to slightly improved, again back to your slightly comment. With Petrobras, we had an opportunity to add backlog on that mid-water fleet at similar margins with Pemex. It was a good opportunity and they had some short-term drilling schedule issues that was able to benefit them also. But in general, if you look around the world, I think it's still a fairly flat market, no pricing power to say. We are continuing to be somewhat positive on it. The North Sea, we are seeing work coming through the winter time. We are getting that visibility now and securing that work. But to say that we are seeing a big uptick, we're just not at this moment.

I'll turn it over for now and come back later if there is time. Thank you.

Robin Shoemaker, Citigroup.

Thank you. I just wanted to, along the same lines of kind of more downtime and unexpected, on your third-quarter estimate of the number of days, has -- is that kind of forecasted somewhat conservatively or is there a significant over/under kind of a range on that number of days that you've indicated? I guess the five-year survey could turn up a lot of new projects that perhaps weren't anticipated. That's kind of the gist of my question.

This is Gary. The number of days is our best estimate. We have a pretty good idea, since they are coming up this quickly on us, we've already had the engineers out there, looked at it. You can always run into unexpected items, no doubt, but we're fairly confident with these number of days now. Can they go over an additional ten days? Sure. We can find things. We have had times when we've got caught by weather just trying to get in and out of the shipyard. So again, it's a best guess. We are comfortable with the third and the fourth quarter. It could go over a little bit. We'll see.

What becomes very difficult is when we try to give some estimates for next year and the downtime for 2012 before we do those engineering studies. Those days can certainly shift in the future.

Right, okay. A follow-up then, I'd just appreciate your perspective on the North Sea market post the UK tax law change and the Gulf of Mexico permitting pace as you expect it going forward, and the rig -- its impact on the deepwater rig market there.

I guess the North Sea -- we haven't really seen a big move one way or the other. All [saying] that tax increase has got to be the positive spread on (inaudible) over WTI where we get interest and people that talk about wanting to drill, they don't really always share all their thoughts and processes, but I think our sense is that the oil price balances out those taxes in some instances. Beyond that, it really gets into production and dates that they had leases and things that aren't always clear to us, and they change a little bit.

Permitting in the Gulf of Mexico I think has picked up. We see more permits being issued. They primarily seemed to be issued towards the deeper end of the spectrum rather than the mid-water, but the mid-water fleet is so reduced now. You've got really our Ocean Saratoga which are coming to a survey, and you've got our Ocean Victory which will service that. That's it. Everything else is a deepwater market. So it's not taking place in a world where there's still the same number of rigs that you can measure things. Certainly, I think, when we talk to customers in those markets, they seem to be very optimistic that things are picking up. I don't know, Moe, even the (inaudible) at the government regulatory agency seems to be they're getting a little more certain.

I think it seems to be getting more upbeat that they're looking at -- it's been focused on the deepwater [to get things back into that] a couple of customers looking out toward the future and we may be having to move some rigs back but there is some -- there's some positive (multiple speakers)

The summary is the tone is improving, and there are more permits going out to Noble. We are not near where we were previous to that. Ultimately, I believe that the market has to have permits stacked up in their pocket because no one knows exactly when a well is going to end. It could be declared a no-show and they want to move off. They need to be able to move this equipment rapidly and not then go through another process. So we've got a ways to go.

Thank you.

Jud Bailey, Jefferies & Co.

Thanks, good morning. First, to follow, Gary, I apologize if I missed this, but did you give any fourth-quarter cost guidance or just third-quarter?

Just third quarter.

Directionally, should we think about that as a similar level? Is there any reason it would go down or up meaningfully from that third-quarter level?

Meaningfully, no. We'll have, as I said, we'll have rigs still in the shipyard [for survey] incurring those costs and everything else. So I'm not going to make -- give any type of guidance, but nothing meaningful up or down.

That's fair. My follow-up is on kind of some of your deepwater rigs, like the Valiant, which picked up a contract in West Africa. Can you give a little more color on what you're seeing in that market? It seems like rigs have perked up a little bit there. Are you seeing any more term contract opportunities or is it still predominantly kind of more well (technical difficulty) type stuff?

Yes, Jud, on West Africa, we're really positive on that market. We are seeing starting to extend on the term a bit. We are starting to see one and two-year terms. We're definitely seeing some six-month opportunities out there. So we believe it's a positive market and continue to see that in the next few years as we see it today. So, we're excited about the position of the Valiant. The Confidence has had a lot of inquiries also while it's over there, so in general everything is positive in West Africa at the moment.

Is timing more of an issue now for operators? Are they willing to pay a premium to get that type of rig today because there's maybe not other rigs available, they're willing to pay up to get something more immediate now? Is that what's going on?

I think we are seeing some of that, that's true, because like you say, the availability is just not -- there's not as much of a surplus as in other markets. So yes, that would be a true statement in certain situations.

I'll turn it back. Thank you.

Geoff Kieburtz, Weeden.

Thanks very much. You noted at the outset that the rapid pace at which you added backlog -- do you attach significance to that? Is that indicative of a general trend in the market, or is this just coincidence that a bunch of discussions kind of came to fruition at the same time?

In the subsequent ten-day period, we didn't (inaudible) this, so I don't think you can trend it out. But it seemed to sort of come together but there was a general theme there of people looking forward and having to grab capacity. Mexico has got issues with declining production; everybody knows about that. They've been going through a couple of years of bid processes where they've not been getting the equipment that they need. So I would say there is that common theme with down in Brazil, where huge not declined but huge anticipated upswings in available prospects to be developed. It means that Petrobras needs to secure continued rigs to go down there and this was I think a pretty good indication of that.

With Petrobras, they're looking by extending existing three-year contracts that we're not even one year into in the case of new build Valor. That really shows some advanced planning more so than I think we were seeing down in Mexico. Then OGX at the same time -- I think it's more of the same. OGX is a little bit looking, dealing with stuff a little bit closer to what's going on just because of the size of their company versus Petrobras but -- so I think all those common themes come together. But we didn't finish it saying, oh, boy, wait for the next 20 days.

I understand what you're saying. I guess my follow-up question is has this rapid pace of fixtures and extensions and so on had any noticeable effect on your conversations with other customers in other parts of the world, or is it too early to really make any judgment on that?

This is Michael here. I believe what we are seeing and the pace has been in the recent quarter or the activity in the recent quarter is people are really starting to position themselves for '12 and '13. We are seeing that, more inquiries, and it seems it's a noticeable pickup where, especially in deepwater, we are seeing everyone try to make sure they have the capacity they need come next year and looking out into '13. So I think in general the theme is that though this flurry happened here in Brazil and Mexico, there's still everyone still positioning themselves and we're seeing an increase there.

If I could shift to the downtime Larry, I think you mentioned you are quite pleased with the unplanned downtime performance in the first and second quarter. Is that the result of any specific program or initiatives that have been put in place prior to that? Is there -- do you have a sense that can be sustained kind of consistently going forward?

We have -- we didn't just flip the switch and put something in place. We've got a number of preventative maintenance programs and programs designed to concentrate, replace BOP parts when we get an opportunity, and those kind of things, all of which is designed to reduce downtime. So I would say it's incremental improvements in those programs. I'm comfortable that we've got good programs going forward. I would not doubt that we could continue to sustain this. We talked earlier on the call about the issue of increased scrutiny on BOPs and control systems around that will naturally result in a little bit more downtime there.

So the net effect is that the greater scrutiny is almost certainly going to cause more unplanned downtime?

Than you would've had without that, but we are not just sitting there taking it. We've got all kind of steps involved upping our spares. We are putting dual stacks on the new drillships that we've got out there, which should reduce that.

Thank you.

John Lawrence, Tudor Pickering.

Good morning. Just given the backlog growth we've seen and the fact that two of the three new builds are on contract, any appetite for additional new builds?

We think that continuing to add to our fleet via new builds makes a lot of sense. We had purchased new builds, as everybody knows, back in '09, Courage and valor, and we shifted into contracting with shipyards. But I can't say that we have a plan that we'll yield X number within so much time. We continue to evaluate it by (inaudible) use of cash, look at our contractual situation. We were very, very pleased with being able to put two units on long-term contract this early, and I think that certainly improves our outlook, as you indicated in there, but we're not at the point of saying (inaudible).

Then maybe along those same lines, as far as committing capital to Epoch now to have the backlog there, is there any kind of commitment there also or should it remain stacked?

The Epoch -- the Epoch, I'm sorry. The rig. We haven't made a decision on the Epoch. We've got four floaters that are idle, two of them in the Gulf of Mexico, two in the Far East. But we are looking at those and we continue to look at those on some sort of upgrade plan and return to service for those rigs. They had reached the point that there was going to be substantial amount of money put into them, and we weren't quite sure where the market was heading with everything overhanging it from the two in the Gulf of Mexico, you've got permitting problems that cover those. But those are -- that is an asset and an upside that exists within this company, as you mentioned, either the Epoch or the Bounty being upgraded and coming out because they're right next door to Singapore where you would naturally do that. And then the Voyager and New Era in the Gulf of Mexico would also be candidates.

Okay. Then the last question, on the four Brazil extension, any material CapEx associated with those?

No.

Thank you.

Chris Wicklund, Wells Fargo.

It's actually Matt Conlan here. In Brazil, the OGX extensions, you reported $20,000 to $30,000 bump to the prior disclosed rates of 2012, but the rate bumps also took place for 2012. So am I reading this right that we can sort of infer there's been a $40,000 to $50,000 day rate increase projection for the 2013 term?

Yes, I think, as you blend the rates and you see the projection, that's correct.

Okay. That's pretty encouraging.

Let's clarify -- say your question one more time. Let's clarify and make sure we are speaking of the same thing.

Sure. So the Star and the Quest not only guide at $20,000 to $30,000 day rate bumps for 2013, but also for 2012 versus what the contracts were previously stated out on previous (multiple speakers)

At the same time, we took a rig, the Lexington, working for OGX which was at a previously established market rate in the $300,000s which is difficult above market today. So we lowered that, moved some time onto the Quest and Star. So -- and that's the way accounting works. You've got to average all that down. But the economics of the deal was that we did receive this Quest [and] Star, but that we did receive an increase on the Star, but other than that, everything was revenue-neutral.

Okay. Great. That's helpful. Thanks very much on that. Just an accounting question -- on the $475 million of long-term deposit on new builds, are you able to capitalize interest against that?

No.

Okay, okay. That's it. Thank you.

Aran Jayaram, Credit Suisse.

Good morning guys. Larry, I wanted to get your color on what you're seeing out of the Pemex. Obviously, Pemex, at a time when the jackup market was less robust, was attempting to try to upgrade the capabilities of their fleet. Obviously, given the improvement in the jackup market, we haven't seen a lot of bid activity. Hence, they face a some pretty large (inaudible) in terms of demand. Do you see any opportunities -- obviously you have four stacked rigs in the Gulf of Mexico -- for them to switch tact and maybe go down market, and maybe look at mat rigs again? Obviously with the accident a few years ago, I'm not sure if that's possible, but I'm just trying to see if you could give us a sense of what Pemex may do, given the fact they're unlikely to meet their demand requirements on the jackup side.

The movement today has been from -- their initial desire was for newer rigs, and I'm, not sure they've moved that much down market. They are now seeking older 300, 350 foot rigs that will do their work and substitute for that. I don't think mat rigs for the water depth capacity, from a hook load capacity, from all the other limitations exist from there our their preferred assets. We are certainly not counting on the mats suddenly having a renaissance and going down to Mexico.

Fair enough. Switching gears, obviously you have a lot of backlog earnings in Brazil. They have a tender out that again will look at moored rigs. What is your thoughts on assessing the potential of adding more rigs into Brazil, or is there a saturation point where, just from an overall portfolio standpoint, where you wouldn't want to get much bigger, the old putting all your eggs into one basket, given your thought -- I just want to get your color on that.

We've got one rig coming out, so we would certainly, I think, have room for another one. I can't rule that out, obviously. It's a big, active market. We are a big participant there with two big customers, and we would like to -- it's a market we're comfortable with. We'd like to add rigs there. We're not going to rule it out. But you are right, (inaudible) our goal has always been to run our rigs around the world with a number of customers just so that we're diversified from any of the risks that might come to one customer or to one region (inaudible).

Okay. Thanks Larry.

Scott Burk, Canaccord.

Good morning guys. I just wanted to follow up on the backlog discussion that you've had. Is there any kind of plans for that, specifically if -- are you trying to make sure you've got funding for all your new builds or do you have additional plans, maybe order some other rigs or maybe increase the dividend? What are your thoughts there?

I think backlog is a mile post that people should be interested in, in this business. It shows how much your earnings can go forward and your -- it does have a dividend component but there is no overt signal as to what's going to happen with dividends just because we are adding to backlog.

Okay. I wanted to also follow-up on the rigs that you have stacked. Exactly how much capital would be needed to bring those back, or maybe if you could give a range for the eight rigs? (multiple speakers)

It varies. The Ocean Bounty that went down has some engine issues, so that was on the higher side. It all depends on what we want to come out of it with. We don't necessarily want to out with a 3000 foot unit. We may want to have a 5000 foot unit at which (inaudible) brings it up. Other rigs that we stacked the Ocean Spartan here in the Gulf of Mexico [do] permit issues and it just really needs a special survey, so you're going to be on the low end on something like that. Everything else is in between.

Okay. But nothing that would be prohibitive to actually bring these out within a few months if needed? I guess except maybe the Bounty?

Again, it depends on if the market says, yes, I want 2000 foot rigs and I want to pay $300,000 a day for them, then we can get those out pretty well, but I suspect many of these rigs we would like to improve them. We're going to enhance their lives, and so we'll do more than just the minimum, and then we'd like some enhanced capabilities, which also -- it's time and money.

Then one kind of question, a little more broad. Day rates seems to be stabilizing for most rig classes; especially for premium rigs, rates seem to be actually trending up a bit. But if you look at overall operating margins for the space, they're still significantly above some of the other oil services segments. Where do you see the risk of potential margin compression for the sector coming from, either from increased supply or more of a potential for increased OpEx, or how do see that trending over a multi-year period?

Yes. If supply outstrips demand, that's a fundamental of this business. We do see cost pressures, particularly on labor and on some equipment. I don't think it's gotten out of size. As you point out, rigs that are mid-water fleet working in the North Sea that we're renewing in the low to mid $200,000s, our operating costs are such that we're still enjoying a 50% to 60% margin, so it is a profitable business from that perspective. It's not necessarily that profitable if you have to go out and replace all of the fleet at new construction costs, then you would be paying for a lot of that. So you -- we think shareholders earn money by having rigs -- investing in a company that has a fleet of rigs that they previously acquired.

Okay. Thank you.

Mike Urban, Deutsche Bank.

Good morning. You had commented earlier that it might make some good sense to continue adding new builds to the fleet. Given the broader renewal of the fleet industry-wide that we're seeing, and recognizing there are some constraints there in terms of price, yard availability and so on -- but would you view this investment on your part as an ongoing item, an ongoing capital item, or just continuing to be more opportunistic and subject to what you're seeing in the market and from your own backlog standpoint?

We only invest when we think it makes sense, so we would not be in a program that says we're going to build two rigs a year for the next 20 years, because I know market conditions will change. It will be really based upon all of the alternatives that we're looking at.

And then from a capital structure standpoint, the cash flow situation looks pretty good here in the relatively near term certainly in the next, say, 12, 18 months and you have added some backlog here. But capital commitments do jump up a good bit as you get further out. Are you thinking about managing things proactively there and in terms of either building cash, taking on some debt, or is it still too early to say and you'd have to wait to see how the market will develop from a cash flow perspective?

We do plan our cash needs and we'll look at them. Right now, we are continuing to generate cash even after paying the deposits and continuing to pay our dividends, so we're in a nice cash position. Because you earn nothing on your cash, we don't really see a need for us to rush out and borrow money at this particular point in time. We will handle that.

I think we have time for one more question.

Darren Gacicia, Vertical Research.

Thank you for taking my question. Two things -- first, it seems to me that there's a lot of sort of potential demand out there for '12 and '13. You go into the second half of 2011 and you'll get a lot of the operators starting to work through their budgets. Do you think that could be a catalyst to see maybe more projects come to the front and possibly improve the near-term outlook? Because it seems like you're optimistic but sort of cautious at this point. I'm trying to see if there's a transference or a catalyst in here in the second half of the year.

We are optimistic but cautious. We are seeing operators looking at their projects. As we spoke about earlier, West Africa, we are seeing increases there. We are seeing Australasia good inquiries, good projects coming up with medium-term to long-term prospects. So we -- and we are moving the Ocean Monarch to that market, so I think we're in good shape. This business is very fickle; we all know that. We've been around a long time. Plan for some upside but always keep looking at the downside.

But do you think there is a potential catalyst as people maybe -- because in aggregate as you have more people looking at their budgets and pushing more projects, like basically pushing them forward, as everybody starts to realize that happening, that may carry a catalyst here. What do you think the probability of that happening is?

I am not going to give projections on that. But there's a natural trend in the business that rigs return to work, rigs return to work for a little bit more term. That leads to opportunities to raise rates. Then as you say, then there's a catalyst that will sometime occur and make things really explode. Among the catalysts is probably what you're saying, the sense from the operators that there is not going to be enough rigs to cover their needs certainly until some of the new builds arrive, and maybe not even then because a lot of the deepwater activity continues to generate the demand for more rigs. You've got catalyst. If Mexico's begins to take -- I know they're primarily in the jackup stage, but still that could contribute sucking rigs out of there. If Brazil moves, and the Gulf of Mexico, if the permitting situation returns, that would be huge.

The point I make again and again which is not really relevant on this call, but in this country we've got 9% unemployment. This industry has the ability to employ lots of people here in the United States without subsidy and paying among the highest blue-collar wages that are out there in the world. Our average rate in the Gulf of Mexico, back when we had a number of rigs working out there, is above $80,000 a day for a job where you have six months off. So maybe somebody will finally decide that that's some positive step that they can take. So lots of positive catalysts that could come about.

Okay. Secondarily, it seems like there's a lot of indexed options in the market and the rest. It seems like the average cost of the margin rebuild is probably going up because some (inaudible) from the shipyards have come off. Does that start to make that option less attractive and maybe as you look at free cash flow make dividends more attractive going forward?

I'm not sure I followed everything that you said. Are you talking about indexed options at shipyards to build rigs?

I'm saying the cost of new builds seems to be rising, not falling. So if you've sort of taken a countercyclical approach and getting things at a good price, I would imagine that the margin, that makes new builds less attractive and dividends more attractive. Am I thinking about that the right way?

Yes. If the direction moves that the cost of new builds goes up, then it would, you'd have a lower return than we would perhaps seek, but other market conditions change. So the cost of new builds has gone up, but it certainly hasn't skyrocketed.

Okay, thank you very much.

And it's much less than it was at the peak of the market when it was over $700 million to $800 million.

Again, Thank you for all the good questions. We had a broad range of financial market driven questions this quarter, and I hope we were able to answer them. We will talk to you next quarter and at a couple of conferences between now and then. Thank you.

Thank you, ladies and gentlemen, for joining today's conference call. You may now disconnect.