Diamond Offshore Drilling Inc (DO) 2011 Q4 法說會逐字稿

Good morning. My name is Brandy and I will be your conference operator today. At this time, I would like to welcome everyone to the Diamond Offshore Drilling fourth 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). Thank you. I would now like to turn the call over to Darren Daugherty, Director of Investor Relations. Please go ahead.

Thank you, Brandy. Good morning, everyone. Thank you for joining us. With me on the call today are Larry Dickerson, President and Chief Executive Officer; Gary Krenek, Senior Vice President and Chief Financial Officer; 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 which are inherently subject to a variety of risks and uncertainties. Actual results achieved by the Company may differ materially from projections made in any forward-looking statements. Forward-looking statements may 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 managements plans and objectives for the future. A discussion of the risk factors that could impact these areas and the Company's overall business and financial performance can be found in the Company's 10-K and 10-Q filings with the SEC.

Given these concerns, Investors and Analysts should not place undue reliance on forward-looking statements. Forward-looking statements reflect circumstances at the time they are made and the Company expressly disclaims any obligation to update or revise any forward-looking statements. After we have discussed our results, we'll have a question and answer session. We ask that you please limit it to one question and one follow-up so that we can open the floor to as many people as possible. And now I'll turn the call over to Larry.

Thank you, Darren. Good morning and welcome to our end of the year and fourth quarter conference call. I'm going to start off by talking a little bit about the market. We do not have any banner day rates to announced today, nor have we announced any recently but that doesn't mean that there's not intense interest in a number of our rigs across a number of markets.

If we just back up for a little bit and put this in perspective on where the market is now versus where it was a year ago, we're seeing a very strong market. We're seeing that the continuation of oil prices at or above $100 for that time period is obviously having, in our judgment, an impact on our customer as they take this oil price in and become increasingly comfortable that, that is the go forward price that they can count on. We've had the North Sea firm up. A year ago we had very little forward visibility, we're concerned about working rigs through the winter and now we've got backlog in place, we're returning the Guardian from the Falkland Islands to that market for a term contract and in addition to that, Mexico has really come on very strong. We currently have four jack-ups and a semi in that market. A year ago we had two jack-ups there with less than a year of forward visibility and now we're right at 10 years of commitments spread across those five rigs, so Mexico stepping forward, taking jack-ups, bringing in floaters is certainly also a real net positive we believe.

In the Gulf of Mexico, we continued to take rigs out of that market to we're now down to one jack-up and one semi, the Ocean Victory. We've got good demand for both units. We're seeing in the jack-up front that there's a number of small players that are seeking to find oil plays among other things to put jack-ups to work and then really, with just our sole semi in the 3,000 to 6,000 foot market with very little competition we're seeing great interest in that particular unit as well.

Over in Indonesia, where we have had a presence since the early 80s, we were down to our core jack-up over there, the Ocean Sovereign has since been cold stacked and we've had the Ocean Rover working in that market for a short term period. But, since then we've committed the Ocean Monarch for a four year program so we're glad to continue in that area. And I think that also shows just that you've got lots of interest around the world in areas that people believe that they can develop lots of production that will be profitable at these type of day rates.

And then the most recent activity that we've gotten is the announcement of the construction of the Ocean Onyx. That has begun in Brownsville and we're targeting a mid '13 delivery on that unit, so the quick turnaround is certainly an advantage to us, as is the low capital cost of approximately $300 million and we've got interest in that unit already. We're not ready to comment particularly on where that market is, but I think if you watch the Ocean Victory, which is a similar rig, the Onyx will have more capability for sure, but they will serve a similar market and as you see what sort of commitments we may have on the Ocean Victory going forward, I think that would give you a good clue on where the demand might be for the Ocean Onyx certainly in the Gulf of Mexico and of course then there's interest in it in other Atlantic Basin areas that we could put the vessel to work.

Following the Ocean Onyx, we have one more opportunity to do a similar development where we could deliver new capacity to the forth generation market and we're pursuing that from an engineering standpoint at this point and don't have anything else to announce on that. And then finally, over the past year, we did commit the Ocean BlackHawk and BlackHornet to Anadarko and we have one more rig in that class to be marketed. There's a lot of rigs at that delivery point, so I wouldn't necessarily look at this moment that we're going to have a commitment for it but as we look forward to demand, we're very comfortable that virtually all of the rigs that are being constructed in that time frame will be committed. And of course the Ocean BlackRhino, we think that's the coolest name in the whole oil field and we hope that our customers will think the same thing.

So, that's sort of my commentary on the market. Gary Krenek will be talking about cost guidance, but let me comment a little bit on that. Obviously, for the quarter, we were mostly impacted by a very favorable change in our tax rate and Gary will talk about that, but from an operational standpoint, I'm pleased with our execution. We had 146 days of unanticipated equipment down time which is up from an average of about 85 a quarter for the first three quarters of the year, but well within our target operational envelope and so we're pleased with that. We had 570 days of shipyard on MOB time and of course that we try to provide guidance so that you know that, that's coming and that was up from what we had been experiencing during the year. We've got a number of surveys on a go forward basis, but we think that that's a large number and we believe that that would come down.

Our OpEx was also within guidance. I believe recently Gary had indicated to you that our total OpEx would be right at a $1.5 billion for the entire year and we came in at a $1.550 billion which we'll declare victory on that, that we were a comfortable going forward. So, really the story at Diamond offshore will be watching the market in the coming year, and the coming quarters to see what sort of commitments we have there and then we will continue to work very hard to execute to deliver on the day rates that we have, both from a down time standpoint, from an operating cost. So, with that I'm going to turn it over to Gary and let him elaborate on some of the numbers that you saw for the quarter.

Okay, thanks, Larry. I'll talk a little bit about the fourth quarter and then we'll go into some detail as to what we expect to see in the coming year in 2012. For the quarter just ended, we had net income of $188 million, or $1.36 per share. This coming on contract drilling revenues of $734 million. As Larry said, our down time for planned regulatory surveys and shipyard down time was up in the forth quarter just as we had forecasted it would be, and that impacted our revenues and of course then impacted the bottom line, but a total of five rigs in the shipyard in the fourth quarter that missed all or most of the quarter and were off day rate. We also had an additional four rigs that were MOBing to various areas in the world, and MOBing two contracts and that affected us in the fourth quarter. Again, all of these came in about at the amount of time that we had forecast and had released on our rig status reports earlier. The big thing that impacted positively the quarter was the tax rate and I want to talk about that in just a second.

Getting a little bit more specific on some of the line items in the income statement for Q4, contract drilling expenses we guided in our last conference call and said that they would come in-between $410 million to $420 million. It actually came in at $407 million, so just slightly below our guidance. As Larry said, cost control is a top priority here at Diamond Offshore and we continue to follow through on that and provide numbers, like I said, within our guidance or slightly below. G&A and interest expense came in close to what we had indicated in our last conference call. Depreciation expense was slightly below our expectations and this was due to a normal year-end adjustment. We book our depreciation through the year and have to true it up at the end of the year. We ultimately under spent our capital by about $25 million in 2011 and this gave rise to the fourth quarter adjustment that we had. It was about $6 million, so other than that, we would have come in within the guidance of the depreciation.

The big thing of course in the quarter was the tax, effective tax rate. Our effective tax rate for the year was 18.4%. We had expected it to come in at somewhere between 21% and 24% and there's a couple of reasons for the lower rate. But, first of all, in the fourth quarter, we had a reduction in our liabilities for uncertain tax positions. For your accounting and tax types that's your FIN48 accrual. We had some time sensitive issues in that accrual that turned in December, actually at the end of December and as a result, it caused us to book some credits to our tax expense, as these items expired. They were items that we could not anticipate but for GAAP reasons could not recognize until the timing actually expired on these items and therefore, it drove our tax expense for the quarter down.

We also had our normal year-end true up domestic versus foreign earnings and also where we're earning those foreign earnings at. We do report (inaudible) that every quarter in accordance with GAAP, but you're still always working with estimates and we finally in the fourth quarter get to work with actual numbers and that caused the rate to change a little bit. So, our rate actually was down a couple of percentage points lower for the year than what we had anticipated but because we had to book that accumulative adjustment in the fourth quarter, caused a Q4 tax rate to be 7.5%, and I'll talk about next years tax rate in a second.

As Larry said, we had forecasted our rig operating expense or contract drilling expenses to be approximately $1.5 billion. We did that in our fourth quarter conference call a year ago and it came in at a $1.550 billion, and so as he said we'll declare victory there and think we did a pretty good job. Looking forward to 2012, we're forecasting those same contract drilling expenses to increase by about $100 million and be somewhere in the neighborhood of a $1.650 billion. The increase are due to a couple of things. First of all, we are anticipating doing 12 special surveys this year, 11 floater rigs and one jack-up. This will also, of course, have an impact on down days in our revenues and rather than going through the detail there, I'd point you to our rig status report that we issued yesterday evening, or we also have on our Web site to see the timing of those surveys and the actual number of down days expected with all of them.

We also are seeing some increases in labor costs in the industry along with training cost as we gear up for additional rigs coming into our fleet. These two items will make up the bulk of the remaining increase in cost to '11 over '12. There is some general inflation that we're seeing in the industry; however, that will for the most part we believe, be offset by the fact that we cold stacked a couple of rigs in 2011. We incurred the cost in '11 for those rigs and we won't incur it in '12 and so that savings will, we believe, offset the general inflation. Again, contract drilling expenses from about a $1.650 billion for 2012.

Just a little bit more color on that. During the year, we expect to see normal rig operating costs as we always do, plus the survey costs for the 12 rigs that we have coming into survey. Those survey costs, we believe, will run us, in addition to the normal cost, about $5 million to $7 million additional above operating cost for each of the rigs with the exception being the Worker and the Star where we think those costs will be $8 million to $10 million above the operating normal operating cost. And conversely, the Guardian and the King we think will be somewhere in the $3 million to $5 million range worth of survey and repair type cost.

MOB and amortized mobilization cost for 2012 we believe will come in somewhere around $90 million. First quarter, we will incur about $45 million of that $90 million. The remaining Q2 through Q4 will be somewhere in the $14 million to $16 million range. Q1 will be high for two reasons. Number one, in 2011 we MOBed the Ocean Monarch from the Gulf of Mexico to Southeast Asia. The initial work on that rig when we got there was a four month job. We have since signed that up and that rig is committed for an additional four years but because of the accounting rules, we are having to amortize that MOB over just the initial four month job. The rig got to Southeast Asia in December so we recorded a little bit of that in the fourth quarter this year and we'll write the rest of that MOB off in the first quarter.

Also, we have the Guardian that is MOBing from the Falkland Islands to the North Sea, and it will do its survey in the North Sea and then go to work for a two-year commitment with Shell but again, accounting rules because we're going to a survey, requires us to expense that MOB currently rather than amortizing it over the length of the contract. So, we'll see $45 million in Q1 for that. Again, I would remind everyone that these amortized MOB costs for the most part are offset by amortized MOB revenues that we've received.

As always, I remind everyone that I've been talking about the line in our income statement contract drilling expenses only, so these numbers do not include costs incurred in the line of reimbursable expenses. We give no guidance for reimbursable expenses, nor do we give guidance for reimbursable revenues. If you look at that, they almost always net to a very immaterial amount, so that was the $1.650 billion contract drilling expenses only.

Looking at just the first quarter 2012 for contract drilling expenses, we believe Q1 will come in somewhere in the $405 million to $420 million range. This will become comprised of normal rig operating cost, Baroness survey cost. The Baroness we'll do in Q1 and then the MOB cost that I talked about earlier. Other line items in 2012, G&A we believe will be flat with the prior year. It will somewhere in the $17 million to $18 million range each quarter. Depreciation goes up slightly due to capital expenditures and will be in the $105 million to $108 million range per quarter, and interest expense, our gross interest on our debt is $22 million per quarter. We will be capitalizing a portion of that during the year. We estimate right now approximately $8 million per quarter, which will give us a net interest expense on the P&L statement of approximately $14 million.

Looking at the tax rate for 2012, we are right now estimating net tax rate to be somewhere in the 27% to 29% range, so a pretty significant increase over 2011. There are a number of reasons for that. First of all, expiration of the tax extenders bill which expired on December 31 of this past year. This law included a provision that allowed the Company to defer recognizing certain foreign earnings as US taxable income until such earnings are repatriated back to the US. With the expiration of this law, certain foreign incomes will now be taxed currently in the US, thus increasing our effective tax rate for the year. Secondly, for the past 15 years, we've recorded a tax deduction for amortization associated with our acquisition of Arethusa Drilling back in 1995. Those deductions were fully amortized last year and thus we don't have benefit of those deductions in 2012 or any time thereafter.

Third, as I said earlier, we had a fourth quarter reduction of our FIN48 accrual. This reduced our overall tax rate for 2011 and we are not able to forecast any similar reduction to 2012, so we're not going to see a credit for that we don't believe at this time in 2012. And finally, the normal mixture between domestic and foreign earnings always has an effect on our tax rate. We've put that into our model, washed it through and as a result, we take all of these things in account, we now expect a 27% to 29% tax rate. We'll of course be updating that orderly as the year progresses.

Finally, capital expenditures for the coming year, we believe we'll see maintenance capital of $330 million. Our guidance last year was $300 million. We came in at about $275 million, so we had some rollover into 2012. So, when you take that into account, maintenance capital is about flat year-over-year and then we also expect to record about $220 million of capital for our new build rigs, primarily the Onyx but we'll also see some capitalized cost for oversight of the drill ships and of course the capitalized interest on the drill ships. So in total, we expect to see $550 million of CapEx for the year. Approximately $100 million of that will be spent, we believe, in Q1. And with that, I'll turn it back over to Larry.

Okay, I think we're ready for the questions, Darren.

Operator, we would like to open it up for questions now.

(Operator Instructions). Your first question comes from the line of Ian Macphearson with Simmons & Company.

Hi, thank you. Gary just as a point of clarification. The 1.65 was inclusive of the survey costs or before survey costs?

No, that's inclusive of everything, Ian. Survey costs and the market costs.

That's what I thought, thanks. Okay, follow-up question, on the market really. Larry, really just a true or false. It sounds like the fourth generation market could be poised for improving day rates and term combined which would be quite a difference from what we have seen for the past couple of years for the 2012 fixtures. Is that true?

Like you said, it could be, so yes. To elaborate on that, I'll let Michael speak, but we're very enthusiastic about that market or we wouldn't have committed to the Onyx.

Yes, Ian, good morning. We are seeing in the Gulf of Mexico, in particular if I work through the markets, we're seeing some demand start to be realized here in the Gulf as some customers continue to work that water depth area. Of course, West Africa is strong demand over there at the moment and that's in various water depths from deep-water to ultra deep-water and then even in Southeast Asia we're seeing this water depth -- or this market where there's demand in this water depth. So, we're quite positive on this market, like Larry said, or we wouldn't have done the Onyx. We're seeing -- we think we'll have significant term with some of these assets and of course day rates increasing, so without getting specific, we're seeing a general worldwide demand in deep-water that continues and we feel like it's an opportunity for us to service that market.

Good. Thanks.

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

So, a quick question. I guess you might have gone over this a little bit, but the kind of channel checks we're doing in the industry seem to indicate a lot of uncertainty into how to kind of write the contracts in the post Macondo world. How do you kind of decipher between whose paying for down time if you have to pull a BOP, and all of the new regulatory issues. Could you maybe talk to a little bit of that? I think it's been hinted to me that a lot of it has to do with how the manufacturers recommend the maintenance cycle on the BOP, so that needs to get rewritten into the contracts as unpaid or paid down time. And how does the new contracts compare to the older legacy contracts that we're currently working off right now, long winded question but hopefully you got that.

Yes, if I could design an ideal contract it would involve, at the end of each well, whatever time it takes to do the BOP work, would be compensated down time and of course that's quite a bit different from where we are today. We've seen, over the past five or six years, just a change in operations in that it used to be that it would take more time to move from one location, set up another well, and you would have a normal two or three days built in where you could perform your maintenance on the BOP stack. And now, at these day rates, as you can imagine our customers are intensely focused on trying to reduce non-productive time. So, we actually lose ground over time in that they may be ready to go and so we don't get as much down time and we're pushing wherever we can to expand that, but that's an ongoing process. There's other issues as well on the contracts. Michael, do you have anything?

No, I think we're still working with the similar model, we had pre-Macondo. Of course, there's always pressures depending on the market of clauses changing here and there. But in general, we look for down time banks or paid times of maintaining our equipment between wells or recertifying with the customer, and we continue to do that. Again like Larry says, it evolves a bit customer to customer but in general, I wouldn't say we've seen a big shift in contracting and the way contracts are done from a historical standpoint, but it's something that continues to evolve as we go forward and regulations come out or different requirements are put before us.

Okay. That's helpful. Last question for me. You've got some cold stacked assets in the Gulf of Mexico. That market, sorry on the jack-up side. That market looks to be improving, not gang busters but it looks to be getting better. Any prospects for reactivating those rigs or rates where they need to be and maybe just a little color there?

Of the four idle jack-ups we have in the Gulf of Mexico, one is the Ocean Spartan, which is a 300-foot unit and I think that's the highest prospect. We have actually talked to various operators about that rig suitable for some programs, so that's something that could happen. The other three are mat jack-ups and although that market has strengthened, we're not really looking to re-enter that market. I think it would be much more likely that we would be able to sell those rigs to somebody else who would have the scale of operations and be sized to operate those rigs in a manner that it's just not worth the effort for us.

Got you, all right guys, thanks again.

Your next question comes from the line of Jud Bailey with Jefferies & Company.

Thanks, good morning. A couple of questions. First on surveys, you outlined all of the five year surveys for 2012. Can you give us a broad sense of what that number could be like in 2013 and I understand you don't want to give details but in general, would it be higher or lower or maybe about the same in terms of modeling 2013?

Jud, right now, we believe we'll have eight surveys in '13 and of course that's subject to adjustment, so slightly lower than what we were projecting in '12.

Okay, and then on the operating cost guidance you provided in the fleet status last night, it seems like I guess operating costs in some of the Brazil floaters are probably moving higher. As we model that through, should we also increase the rate to offset those higher costs or has that already been accounted for in the fleet status reports as you kind of bump up the rates as you get costs passed through on those contracts?

As we get the increase, yes we bump up the rates in the rig status report.

Okay, but if it's up for 2012, should we assume you're probably going to get that -- in other words has it been reflected yet in the fleet status you have already but we would probably see it if those operating costs prove to be true.

We will not change that rig status report until we actually get an increase in rates. So, it's not reflected on a go forward basis.

Okay, and then my last question was just to circle back on the Ocean Victory in the Gulf. As you noted, you do have some availability and the Gulf is picking up. Can you give a little more color as to maybe the type of opportunities? Are they still more well to well or are you seeing some longer term opportunities beyond say maybe one year for that kind of unit?

Yes, Jud, as you're aware, the supply here is somewhat limited in that market where the Victory is at, so what we're seeing from customers are longer term. They are starting to get more visibility and it's shifting from the well to well or six month type programs into more year, 18 months (Inaudible) of discussions that we're having with customers. So like I say, that again is a bright spot that we think we're well positioned for, so longer term and better rates I think in the Gulf for that rate.

Okay, and are you up for a longer term contract, are you providing any type of discount or is the market strong enough that it's pretty much the same for spot versus term at this point?

That depends on the situation, but I would say that spread has tightened quite a bit compared to what you may traditionally think of the tradeoff of term for rate.

Yes, okay. I appreciate it. Thank you.

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

Good morning guys. Just a question on the Saratoga. Is there enough work in Guyana to keep it down there or could that potentially move back to the Gulf of Mexico just given the strength we're seeing?

Yes, John. We continue to look at the Saratoga and the opportunities down there. We think there are some additional opportunities. I won't tell you that it's visible or we've got something more concrete at the moment but there's work in the Trinidad area, there's continued work down in the Guyana-Suriname type area but we'll continue to investigate those. Otherwise, we'll come back to the Gulf because we've still got customers that would like to use the Saratoga here. We'll just have to see how it develops going forward and if things come together in time, if they don't we'll bring the rig back.

What would the MOB cost be there to bring it back?

It's about 30 days to get down there and back and we typically do that, I think on the Saratoga, we've got a day rate in tugs type scenario, so from an all in number you'd have to do the calculation.

That's all I had. Thanks a lot.

Your next question comes from the line of Todd Scholl with Clarkson Capital Markets.

Good morning guys, good quarter. I had just two quick questions. One, you kind of mentioned the jack-ups in the Gulf of Mexico that are stacked and a potential divestiture of some of the older mat jack-ups. Can you kind of give us a progress update on that? We've heard that there's several interested parties. How close do you guys think you are or is that something that is still quite a ways away?

And then secondly, with the Asia Pacific market kind of heating up, we've heard that there's three or four tenders potentially out there in Vietnam with varying lengths of six or seven months, particularly for the jack-ups. With the Sovereign still stacked there, is there the possibility that could be going back to work soon? I think that still needs kind of a five year survey which I'm guessing would probably be in that $3 million to $5 million range. What length of a contract and kind of would it make sense for that to go back to work?

On the mat jack-ups, we're not really serious about that. I was just indicating of the possible futures that we probably might explore a sale ahead of putting them back to work, but it's not at the point that anybody should be booking that on those vessels. The Ocean Sovereign has not been down that long. It's facing a survey so there's that little bit of a block for the rig to come back to work but certainly in a strong market, we would be prepared to do that. But again, I don't -- although we would bring it back at a point in time at which we would seek some profitability, most of that profitability would be recovering the survey costs. So, I don't think it has a big bottom line impact if we brought that back in the year that we did it.

Okay, and can you kind of comment on the maybe the floater side of the Asia Pacific market? I believe you guys have the General that's out there that's being actively marketed and then you have a couple of other cold stacked rigs there. Are you seeing pretty good prospects for getting any of those rigs to work?

In particular on the General, we do see prospects. We're actually in discussions at the moment on a couple different opportunities with the General and we've kind of got a short gap window here that we're assuming off survey before we would have the opportunity to start a job, but we see demand for the General and believe it's short-term, the short-term period will work into longer contracts. So, we're seeing, in general, 12 months to a year is kind of the term we're talking about for contracting in Southeast Asia right now for rigs by the General.

Okay, great. Thank you.

Your next question comes from the line of David Smith with Johnson Rice.

Thanks, guys. Sorry if I missed this earlier. Got disconnected for a couple minutes. Just wanted to confirm that the total drilling cost guidance of $1.65 billion, if that did include surveys and mobilizations?

Yes, it did.

Okay, great.

That's all in.

Perfect, thank you. And a quick question about a couple of the day rates in the fleet status report. On the Ocean Confidence, was that $390,000 a day a clean rate for the asset or were there any mitigating factors that maybe caused a little discount versus the recent high 400s, mid 400s we've seen for 10,000-foot DP rigs?

Yes, David. On the Confidence one of the things I think that happens in our business sometimes is you'll make a deal and then it takes some time to work through the details of the contract in order to finalize it and that's what happened in this scenario. This rate is several months old. It was where we were working with the customer to finalize the deal, so I wouldn't take that as an indication of where we think the market is. In particular, definitely not in West Africa, so it's just something that happens in our business sometimes as a matter of process and so that's what's happened and when we finalize it and this was the next opportunity to announce it.

Makes perfect sense. It's good color and on the Rover, are the two remaining price options also at 285 a day?

The Rover has firm commitment that we recently signed at 600 days.

Are you speaking about the Endeavor?

Oh, I'm sorry, I misidentified that rig. We saw the four month extension at $285,000 a day and there's two more priced options. I just wanted to confirm if those were at 285.

Yes.

Correct.

Yes, and that was again, to make commentary on that, that was part of the agreement we reached to get the Endeavor out of the Gulf of Mexico. It was working in the Gulf of Mexico at a rate similar to that and so our big concern was to get it out, keep it working and that was a position that the market sort of forced us to take. Under normal circumstances we would not price an option that far into the future.

Great color, thank you.

Your next question comes from the line of Scott Burk with Canaccord.

Hi, good morning guys. Gary, wanted to ask you on the expense front, if all the rigs were active and you had apples-to-apples comparison, what would be your average cost inflation for 2012?

Somewhere in the mid to upper single digits probably.

Okay, thanks. That's helpful and I wanted to ask you questions about a couple of rigs. The Ocean Confidence with Murphy, what are your expectations for when that rig can move back to the Gulf of Mexico and start that $512,000 day rate? Would you expect that kind of at the end of the most recent extension through January 2013?

That's really Murphy's call on their confidence on the permitting situation and you hear some companies are very bullish on the permit section application and other companies are a little bit more cautious. Depends on where their prospects are, so can't really comment on that. We certainly -- that remains the intent for Murphy to bring that back. We should work through most of our commitments at these lower day rates some time later in the year and so we would be looking in one market or the other to be moving up towards market with that vessel.

So, the implication is -- can you remind me what your commitments are? So, you have to be committed to that day rate through the end of 2012 is all?

Roughly.

Yes, towards the end of 2012.

Okay, thank you, and then the other one I wanted to ask about was the Heritage which moved to [Warren Sack] from being actively marketed. Do you have any expectations for off hire time there and does it need yard work before you'd put it back on another contract?

No, the Heritage is recently completed its survey, so it's good to go on a go forward basis.

And so should we assume like just a month or two down time or perhaps more than that?

Well any down time we took would be if relocating it to a different market and so it would be just mobilization time.

We continue to evaluate the opportunities of the Heritage and we'll see going forward.

Okay, and then wanted to ask you kind of a broader question around the Macondo court cases. Just had a couple of rulings that seem to be favorable for the industry. Just wondered what your thoughts were in terms of the rulings there and if it strengthens or weakens the indemnity clauses that you have in drilling contracts.

I can't really speak to legal issues other than my understanding was an affirmation of the contracts that were negotiated between the operator and the contractor, and we believe very much in the contracts that when you conduct business, you set parameters that parties can take one thing or another and we were glad to see the court leave that in place. So, that's a good thing for all of business I would say, not just drilling contractors or the energy business.

Right, okay. Thanks. That's what I thought as well, thank you.

Okay. I think we have time for one more question.

Your final question comes from the line of Andreas Stubsrud with Pareto Securities.

Hello. I -- actually one of my questions were partly answered. I was wondering how we were think about the jack-ups that actually lost some -- or had negative operating income before CapEx obviously and tax, et cetera have negative operating income, the whole jack-up fleet. And how we are thinking about that in the future compared to what you just did with Ocean Voyager where you are taking it from a low end market to a high end market, it's always been a little more difficult, of course, in the jack-up market but your long term views on this type of fleet?

Yes, thanks, Andreas. We certainly had different opportunities available to us in the floater area, we've got other cold stacked rigs that we don't necessarily see a way to upgrade. The Onyx was based upon a vessel that had some inherent strength and it enabled us to deliver new capacity into the fourth gen market. And jack-ups, we went through a program several years ago where we upped water depths by adding legs and added pumps and what not and generally that fleet is at its practical capacity because beyond this you start adding power, which requires space, which requires -- takes your deck load down and it's just not the room to be able to upgrade those rigs cost effectively. So, we are continuing, we've got a stronger market, we've got rigs down in Mexico, so we are working very hard to up the contribution that they make but this remains primarily a floater Company, and that's the way we see it going forward.

Okay, thank you and just a quick follow-up. Do you think there will be a trend what you do with Voyager in the market in general or in the industry, because like you're saying, the fourth generation market looks quite good, especially in Africa and other places, and while the low end middle market looks to be more replaced by both new builds and other units. Do you think this is going to be an industry trend or do you think there's only going to be some one off like the one you're doing?

Well, each owner of a rig will make his own assessment, but certainly we've seen that if you don't have an appropriate vessel to plan your program around that you run the risk of really spending a lot of money. We sold the Ocean Liberator to another contractor who did what, in our judgment, was not a cost effective upgrade because the cost just kept spiraling out. Certainly what Diamond has done in the past has worked very well. I would say Nobel has done some good jobs with some of their vessels, but I think in general there's a limited number of appropriate vessels to be worked on a go forward basis. So, my expectation would be that there would be few units that you would see come into the market as a fourth gen type capacity.

Okay, and thank you and just the last one, are you able to inform us what the Ocean Voyager book value was before you are doing this upgrade?

It was minimal, simply because that rig was acquired as part of the Odeco acquisition in 1992, so it had been very much depreciated.

Okay, very good. Thank you.

Okay, we thank everybody for joining us. We had some good questions and we're looking forward to next quarter and hope to have some day rates to get you excited about. Thank you.

This concludes today's Diamond Offshore Drilling fourth quarter 2011 results conference call. You may now disconnect.