Diamond Offshore Drilling Inc (DO) 2012 Q2 法說會逐字稿

Good morning. My name is Maria, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Diamond Offshore second-quarter 2012 earnings 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 to begin. Please go ahead.

Thank you, Operator. 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, Senior 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 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 of 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 factors, 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 will have a question-and-answer session. We ask that you please limit it to one question and a 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. Welcome, again, to everyone for joining us. We were very pleased, obviously, with the results that we reported for the quarter and I will start by making some comments on the operating results and some of our future day rates. I'll be followed by Michael Acuff, who will elaborate more on markets around the world in an opening statement, and then Gary Krenek, who is our CFO, will make some further commentary on the numbers that are in this quarter and how those may impact us on a go-forward basis.

First, on the operations, removing the items related to the sale of the jack-ups, we still substantially performed above our budget and the average of the Street consensus. One thing I'd like to comment on there -- we've got lots of initiatives ongoing that have been in place for a long time, and some of those that really bore fruit in this quarter, particularly efforts to reduce unplanned down time. We came in at 60 days of unplanned down time, in other words, things that result from equipment breaking or being taken offline where the rig has to suspend operations during the quarter. The past two quarters, on a budgetary basis, we have experienced in the 140-day range, and that's what we set as our budget for the year. We have previously performed better than that. We did 110 days, I think, end of last year, and we were in the 60s if you go back several years. But, we're very pleased with that, and that's a reflection of our preventive maintenance program and the amount of spares that we have so that if equipment fails, we're able to very rapidly get that replaced. I'll just give you an example. This happened here right at the beginning of July; it wasn't in the quarter, but it's typical.

On one of our rigs during a routine maintenance inspection, one of our employees noted that some [shivs] on the (inaudible) compensator on a big rig appeared to have a crack, and I've seen photographs of what he looked at and, given the condition with grease and sea spray and all kind of things on it, it was really a tremendous catch. The rig was able to obviously get on top of this instead of having a catastrophic failure that could have had not only been down for a longer period of time but could have had the potential for injuries. We were able to get planned what we were going to do. Our initial plan was it make take four days, but due to the competency of our crews and great planning, they were able to execute this change out in 55 hours. So, those are the kind of efforts that are going on all the time out there, and if you think about the difference between 140 days of down time and 60 days of down time, that 80 days of savings -- if our average rate were at $300,000 -- that's $24 million in a quarter or about $0.12 to $0.13 that we would save as a result of that. We're not always going to be able to achieve that, but we certainly are working hard to do that.

Additionally, our operating expenses were within or below budget across the board. Again, more planning, making sure that we've got everything maintained in great shape, gives you the opportunity to deliver those kind of numbers. Moving beyond that and looking at the contracts that we announced, obviously the Ocean Onyx, we were very pleased. We've worked for some time with Apache and are a great customer. We enjoy working for them. The Onyx will be working in the Gulf of Mexico. The work being done on that rig in Brownsville so it will be delivered, and we will not have a long mode with off-time to get it to another market, so we're pleased with that. Again, this reflects our faith in the deepwater market, and particularly in a [bored] solution which is not always the solution, but there are a number of places where this plays out very well.

Recently, we had announced the Ocean Victory, a little bit lesser capacity we had to get signed a job at $420 million so this is a nice follow-on at these rates. I'll remind everybody that our cost of delivering this kind of capacity on the Ocean Onyx is $300 million versus our new builds, and we're pursuing those projects as well nearer to the $650 million rate, and new builds we've seen some higher day rates recently obviously than $490 million. But, if you consider you're spending half the capital to deliver that, and our operating costs are greatly reduced on the Ocean Onyx because of the more simplistic design yet it's still able to deliver the capability that's out there -- this demand of our customers. There's very little competition in this space to be able to deliver rigs of this nature. In fact, we only have one more Victory class rig in our fleet, the Ocean Bounty. That's located -- cold-stacked in Singapore -- and we're in the process of completing final engineering so that we may proceed further with a similar project on that particular rig.

Next, we announced three big contracts in the North Sea, and I think Mike will be covering a lot of the deepwater market, but I would just say that this is reflective of the North Sea as a very strong market today. I don't know -- it wasn't too much long ago that the North Sea was generally condemned and the majors are moving out of there. It doesn't have a real future yet. We see this again and again in provinces that become re-energized based upon, not only market conditions, but new technologies that come out that enable our customers to make use of quicker ways to bring product on stream. There's a Brent premium right now. Has been for some time, and that makes the North Sea work very well. It's very close to infrastructure. The drilling is not at great depths. You do have weather issues, but beyond that, it's a great area to drill in, and it has been a province of the Independence.

We -- in fact, Dana Petroleum is our customer on the Ocean Nomad. Our Ocean Princess is working right now and continues to work for EnQuest, but we've seen Shell come forward. Shell is very active and already had the Ocean Guardian on a two-year contract, and yet, as they look down the road, elected to add a third year on that contract at $350 million. Then, the Vanguard which is in Norway with Statoil, we got a 20-month extension as we noted at a nice increase. All of that means that there's continued opportunities for our customers to explore and bring on production in mid-waters in the North Sea -- both Norway and the UK. It's a market where there's not a lot of new capacity, or any new capacity, being brought on, and it's a market where there's barriers to bringing rigs in. So, it's very strong there, and I'll let Michael make any further comments on the North Sea and also how that impacts worldwide.

Last thing I'll talk about here is sale of jack-ups. We sold the Ocean Sovereign here in the quarter, and on top of the other jack-ups that we've sold, we continue to remove some of the older, lesser capacity jack-ups from our fleet. I would say we have -- our focus is on ultra-deep, deep, and mid-water units, and we continue to market those rigs around the world. We have a core of high capacity jack-ups that are in Mexico, and we would plan to continue that, but the rest of our rigs which are right now scattered around the world -- jack-ups one and two in different markets, we have been actively moving to sell those. The market is such that we're able to bid those right now. So again, a very pleasing quarter for us. Michael, do you want to expand on the market?

Sure. Thank you, Larry. Looking at the markets, starting with Ultra-Deepwater segment, the ultra-deepwater market remains robust. We've got seed demand continuing to materialize in the Gulf of Mexico, West Africa, and East Africa. Again, we're very positive on the ultra-deepwater market with significant data points being developed every day. (dropped audio)

Operator?

Yes, sir, I'm here.

We're being told we're getting calls in that no one is hearing us.

Yes, you're in there now, sir.

We're in now?

Yes, sir.

Okay, I'm going to just start over briefly. I don't know where we were cut off, and I apologize, but I've been told that for some time we were off broadcast.

You only had one line that we've heard.

So, I'm being told that my statement was heard, and we'll start over with the marketing report from Michael Acuff.

All right, take two. (laughter) Okay, no, looking at the markets, we'll start with the Ultra-Deepwater segment. The ultra-deepwater market remains robust, and we continue to see demand materialize in the Gulf of Mexico, West Africa, and East Africa. We expect several new contract announcements here in the near term in the next few months, possibly occupying up to 10 rigs in this segment. With this, we believe now that 2013 is close to being sold out and expect demand to continue to materialize into 2014 looking at the availability of rigs in that time frame. An example of this, there are multiple tenders out right now, outstanding, that could take an additional five rigs off the market in 2014, and we continue to see these come on as we go forward and expect more in the near future. With respect to pricing, the recent announcements by some of our competitors clearly show that the market is now in the high 500s for three- to five-year term work, and we don't expect this to change as we go throughout the remainder of this year.

Looking at the Deepwater segment, it continues to be strong with the Gulf of Mexico and Africa, West Africa leading the demand. The recent central US Gulf of Mexico lease sale highlights the increased activity that we think is coming into the ultra-deepwater and deepwater market in the Gulf of Mexico where sales generated approximately $1.7 billion in winning bids. It's a bright future, we believe, for the Gulf. Day rates continue to increase with leading edge rates in the high 400s to low 500s as seen with the recent fixtures, including the Onyx. And finally, we don't see any new supply coming into this segment other than what we've added recently with the Onyx and potentially the other rig Larry mentioned. We continue to see this to be a tight market going forward and look positively on it.

Turning to the mid-water, this market is operating really as two distinct segments at the moment. You've got the very strong UK and Norwegian North Sea market that Larry mentioned, and then you've got a steady to slightly increasing market in the remaining international segment -- geographic regions. As you can see from the extensions that we recently announced yesterday, we're taking rigs now into 2015, and the resulting day rates are continuing to increase. The UK North Sea and Norway is leading the charge, and we don't see a real visible end to this demand as we have customers continue to request rig time going forward. In essence, 2013 in the North Sea is sold out now, and like I said, we continue to have discussions. So, we'll see how those develop and what capacity is available for them.

Looking at the Gulf of Mexico and other international locations in the mid-water market, it continues to be a steady and slightly increasing market. We produced -- we continue to see additional demand coming online, typically in the six- to nine-month range with a bit of pricing power as we go forward, but a very steady market at the moment. One of the things we wanted to address in this call was to look at our mid-water fleet and how we see it going through the regions going forward. Of course, I discussed the North Sea where we have four units, or 25% of our fleet, in this very strong market. We have five additional units with Petrobras and Pemex, and they continue to utilize those with contracts out into late 2014 and 2015.

Of course, there's been some news recently with OGX out of Brazil. I will speak to our three mid-water units currently under contract -- The Ambassador, it's contracted until September of 2012; the Ocean Lexington, which is currently contracted until February 2013; and the Ocean Quest under contract until the end of 2013. Based on our conversations with OGX, we are currently discussing follow-on work for the Ambassador with other customers, assuming the rig will be released in September of this year. We also believe that they will release the Lexington at the end of the contract in February 2013 and are already working on a follow-on term contract in direct continuation of that. We are encouraged by both of these discussions, and we'll continue to update you as things develop. Finally, the Quest has approximately 18 months left on its contract, and we're comfortable with the rig's position with OGX there.

Turning to the Gulf of Mexico, the Saratoga recently finished its contract with Nexen, and it's currently hot-stacked awaiting its next contract. We believe the next contract will commence towards the end of the summer and should provide a steady stream of term work into 2013. In Asia, we announced new contracts on both the Patriot and General that should keep them utilized into the first quarter of 2013, and are already seeing other operators line up to secure rig time behind these contracts. So, with these rigs utilized -- or anticipating contracts, as I've mentioned -- that really only leaves the Ocean Whittington, which is currently undergoing evaluation to estimate the requirements for that rig to return to work.

So, in summary, of our 16 mid-water units in our fleet, 4 are exposed to a very strong North Sea market and have significant term contracts, 5 are on long-term contracts with NOCs, and the remaining 6 are finding steady six- to nine-month jobs with continued exposure to the increased pricing in the market as it improves. Again, that only leaves the Whittington. You can see why we're pretty comfortable with our mid-water portfolio position and the cash flow stream that it produces. With that summary of my market, Gary?

Okay, thanks, Michael. As always, I'll make a few comments on this past quarter, and then we'll turn to what to expect in Q3 and Q4 and the remainder of this year. Looking at our results for the second quarter, we reported after-tax net income of $201 million, or $1.45 a share. That's up slightly from our Q1 report of $185 million after-tax income, or $1.33 per share. We did that despite contract-drilling revenues decreasing from Q1 of $755 million to $726 million in Q2. The decrease in revenues was driven by the fact that we had five rigs down for special surveys in Q2 just as we had forecasted in our last conference call and had reflected on our rig status report. This was versus only one down in the first quarter. This reduction in revenue was mitigated by the very good, unplanned down time that Larry talked about in his opening statement, and that had helped offset the down time for the special surveys that we had.

As pointed out in the press release, we have two significant items outside of revenues that affected our earnings. Again, we had five jack-ups that we reported sold during the quarter -- the Sovereign; the Heritage; and three of our mat jack-ups. This -- the sale of these jack-ups resulted in about $50.5 million worth of gain, or $0.36 per share after tax. The book gains recorded on two of these rigs, the Sovereign and the Heritage, which was the vast majority of the total gain of $50 million, had no current tax expense associated with them, a result of them being owned by non-US subsidiaries in which profits are indefinitely reinvested and thus not subject to current US taxes. In other words, we had a zero tax rate on the gains on these rigs.

Which brings us to our second significant item in our income statement, our Q2 tax rate of 18.4%. The 18.4% was driven by a couple of items. One, just normal geography changes in our estimated earnings in the year between domestic, international as we always had. Also, the treatment, from a tax standpoint, for capitalized interest that we recorded on the Ocean BlackLion which we announced in the second quarter. These two had small effects on our tax rate, dropping it slightly; but, primarily, the factoring in of the additional $50 million of gain on the Sovereign and the Heritage with a zero tax rate was the main reason that the tax rate was driven down as far as it was. These three items will also affect the ongoing tax rate for the remainder of the year and I'll talk about that in a second.

Looking at some of the specific line items on our income statement in Q2, contract drilling expense -- we had guidance of $415 million to $430 million, and we actually came in at $405 million. Several reasons for this. One, we thought we were going to begin a survey on the Whittington in Q2. We did not begin that work. Rather, we're still assessing the condition of that rig as Michael talked about, and we also benefited from strengthening of the US dollar. These two items would have brought us up close to the low end of our guidance, maybe just slightly below it. The rest of the favorable variance on our contract drilling expense due, as Larry said, to our concentrating on cost control out there on the rigs and also the reduced unplanned down time. Less unplanned down time means less broken equipment, less repairs, and that benefited us not only on the revenue side but here on the cost side.

Looking at a few of the other line items, G&A was $18.7 million which was within our guidance. Depreciation was just slightly below what we guided to, and that was driven by the sale of the Sovereign and the impact of suspending depreciation on that rig. Interest was lower. We had guided $15 million, and actually came in at $12.7 million. This again is attributable to capitalized interest on the Ocean BlackLion deposit, and finally, of course, the tax rate was substantially lower. Other than gain on sale of assets on the income statement, there was nothing else really on the income statement of note.

Looking forward to the third quarter, one of the main drivers again will be down time due to rig surveys. As we've been saying for some time now both 2012 and 2013 are going to be heavy survey years for us. So, this should come as no surprise what we've reported in the rig status report. Into the third quarter, we're anticipating that six rigs will be down for survey. Three of them will begin and end their surveys in the quarter. Three others were actually participating in surveys as the quarter -- Q2 ended, and will complete their surveys in the third quarter. In addition, the Ocean Summit, our jack-up down in Mexico, will be down for about 60 days doing some planned repairs and also some modifications required by our Pemex contract. We have a couple other rigs with scheduled down time and, again, I refer you to the rig status report for details on exactly what rig and what timing those will occur. This down time, of course, will affect both revenues and cost in Q3.

Getting down to some of the specifics, contract drilling expense -- we will again incur normal daily operating costs by rig type and region that we gave out earlier in the year. In addition, the six rigs in the shipyard for survey -- each survey will run somewhere between $3 million and $10 million of additional cost and will add about $25 million to $30 million to our total cost. We will also incur an additional about $12 million of amortized mode cost. And again, these amortized mode costs will be offset almost dollar for dollar by amortized mode revenues.

If you add all of that up, we expect contract drilling expense for the third quarter to be somewhere between $410 million to $425 million. Again, I remind everybody that this $410 million to $425 million is for contract drilling expenses only. Reimbursable costs are not included in the amount I just gave you. If you look at those two together, you need to add another $10 million to $15 million worth of reimbursable costs which will be offset also almost dollar for dollar by reimbursable revenues.

The other line items, G&A remains the same; guidance as before, $17 million to $19 million a quarter. Depreciation, slightly lower guidance, down to $99 million to $101 million per quarter, both for Q3 and Q4. And, interest expense we now believe of the $22 million worth of gross interest expense, we'll capitalize about $10 million in Q3 and Q4, which will leave us a net of about $11 million worth of expense. This again is increased -- or the expense is decreased because of the BlackLion.

The effective tax rate, we believe, will now, for Q3 and Q4, be somewhere between 22% and 25%. This reduction from prior guidance is a result of accounting rules which has you spread the zero tax rate that was recorded on the sale of the jack-ups, not just in the quarter that it occurred, but you spread that over -- equally over all four quarters in the year. So again, 22% to 25% going forward. And finally, capital expenditures, we now believe maintenance capital will be somewhere in the $320 million range, and our new builds, because of the Black Lion and the Onyx, will be somewhere around $400 million for the year ended 2012, which gives us a total of $720 million.

One other item I'd like to mention before turning it back to Larry, for those who may have missed it, during the quarter, our credit rating was upgraded by Moody's to A3. This rating brings us in line with our Standard & Poor's rating of A minus which we have had for some time now. With this upgrade, Diamond Offshore is now the only contract driller with an A3 or an A minus rating in our industry, a reflection of the solid balance sheet and strong financial profile. With that, hand it back to Larry.

So, we're ready for questions.

Operator, we'll open it up for questions now.

(Operator Instructions) Our first question comes from the line of Robin Shoemaker with Citigroup.

Yes, good morning. I wanted to ask about your comment on the mid-water market -- very strong in the North Sea, and kind of steady elsewhere. What does that imply then for the Ambassador and Lexington, which you expect to have available now later this year? I didn't quite -- you said you're looking at various market opportunities for those types of rigs, but is there a need to upgrade significantly if they work outside of Brazil?

No, I think the North Sea has some unique attributes, which is it has been moving for -- that market has been moving for some time. I think the rest of the world is at an earlier stage. They're still by-and-large pricing off the Brent model, so you've got a nice income stream, and there's so many different markets. So, you don't always -- there is the infrastructure, but we're certainly seeing a lot of interest around the world. I think Michael was just cautioning that, at this stage, we can anticipate increasing day rates, but the market is just not set up as strong as the North Sea. Want to make sure everybody was aware of that.

And Robin, to your point on the Ambassador and the Lexington, we don't see a requirement to upgrade the rigs for the jobs that we're discussing at the moment. We see the rigs as is, as being a marketable asset with interest from several customers.

Okay, good. Where I'm on the topic of Brazil, how do you see the demand for rigs over the next year? Clearly, you've got a couple of ultra-deepwater rigs yet to be -- for '14 availability. Is that a market you're looking at for those rigs, or is it largely elsewhere?

Well, we've had a huge position down in Brazil and would expect to continue that, and we enjoy servicing both those customers there. But all things being equal, for diversification reasons, we would prefer to have those rigs, I believe, work in other markets just to spread things around the world. When we bought Valor and Courage in 2009, we put both of those into Brazil, so I think we have got some high-end assets there. We would like to see those rigs work elsewhere.

Understood. Okay, thank you.

Your next question comes from the line of Ian Macpherson of Simmons.

Thanks. Larry, you mentioned that you're completing your engineering study on the Bounty, but certainly the contract that you got for the Onyx makes that project look like a no-brainer, assuming there's nothing fatally wrong with the [hull]. Correct me if I'm wrong there. And what do you think your turnaround time would be for getting that rig delivered, if you were able to move as quickly as you would like to?

I think we would likely be doing that work in Singapore where they're much more active. When we were able to get the Onyx into Brownsville, there wasn't a lot of competition. I think we've got a great schedule there at 18 months, so we would be between 18 months and two years, I suspect, to deliver out of Singapore.

Okay, and do you think that you could be kicking this off by the fourth quarter of this year?

We're pretty advanced on engineering, and so, it would be really coming down now to contract terms that we would be able to develop between various shipyards. But, I would say -- certainly the thing is, I can't tell you there's a bunch of hurdles left to go. But, we're not ready to say we're pulling the trigger on it.

Okay. You've had some good success with your jack-up sales. Are you still looking to prune the fleet with jack-ups or mid-water rigs? Or do you think that you're more or less finished with that aspect of fleet renewal for the time being?

Well, we said on the sales front that our core jack-ups are all located in Mexico. Conceivably, we could bring the King into Mexico, but the other rigs that we've got there -- we would continue to look to sell those and really try on a go-forward basis be looking at operating a worldwide semi fleet and operating four to five jack-ups in Mexico. They could certainly move somewhere else, but for right now, that's the way we would see our fleet. Going forward -- and we could conceivably sell -- we've got a couple cold-stacked semis, and some of those could be sold.

Okay. Michael, did you comment on the near-term outlook for the Saratoga, and when that rig might get a contract either this Summer or this Autumn potentially?

Yes -- no, I did. What we're looking at, Ian, is probably late Summer, early Autumn. Of course, hurricane season in the Gulf has a little bit of an effect, but we're in discussions now, and we think that will materialize fairly soon. And we'll keep you updated on that.

Great, thank you.

Your next question comes from the line of Kurt Hallead of RBC Capital Markets.

Hi, good morning.

Good morning, Kurt.

How's everybody?

Good.

Excellent. I just had -- wanted to follow-up on, Larry and Gary, you guys mentioned this focus on unplanned -- bringing down the unplanned down time. Obviously, you've done a great job at that, so, kudos on that front. I'm just trying to get a better understanding though. You've referenced something about planning for -- I think you said 140 days per year, and now you've ran less than that last year -- 110.

140 days was the quarterly amount of down time that we ran for the past two quarters. When we sat down and did our budget, we projected that we would run 140 days per quarter of unplanned down time.

Okay, great. That clarifies that. Appreciate that.

The second question I have for you on the OGX rate. That looks like they're going to become available to the marketplace. Do you expect that you're going to need to do any work on those rigs in transition -- as you transition them, it sounds like out of Brazil into other markets. How should we be thinking about that transition period?

In general, we shouldn't have to do major work. The contract -- the discussions we're having on the Lexington wouldn't require anything significant. When we look at the Ambassador, it depends on where that rig goes to. If it goes to an international standard market, we wouldn't expect any major out-of-service or upgrade time. If it goes to, say, Mexico, you have to do some work that prepares the rig for that particular market in the contract requirements. In general, we're not expecting major out-of-service time on it for upgrades, but again, it's a bit customer- and market-dependent on where it ends up.

One factor I'd point out is that Brazil is our highest cost market, except for Norway. Even if day rates were even flat to relocate to Mexico, which we did recently with the Yorktown, we picked up a significant amount of savings on the cost line that gave us a net of -- certainly an improved margin on the same day rates.

Okay, great. Thanks for that. The last just follow-up I would have for you is that you get -- Diamond is in a situation where you try to maintain the balance between maintaining the dividend yield that a lot of investors have become accustomed to expect, and at the same time, trying to renew your fleet. Can you just give us an update on how you're looking at that balancing act as we head out into 2013?

Well, they're clearly both important to us, and to-date we've got five major projects underway. The four new drillships and the Onyx. If we added the Bounty to the mix, then that would be six major projects. I think the ratings upgrade that Moody gave us was based in part on our very low leverage level. So, we think that if we need to, we can leverage to maintain our fleet reinvestment, and that the cash flows that are reflective on the contracts that we announced today, which were in the range of $800 million of future cash flow. Of course, that doesn't kick in for a while, but all that show that there's adequate cash flows to continue dividends at this current level although we set them at each quarter.

Okay, great. Thanks, appreciate it.

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

Hi, good morning. Just to follow-up on the prior question, could you remind us how much of your cash balance or marketable securities is held in US cash versus foreign cash? And just if you see in the foreseeable future a repatriating event in order to sustain the dividend?

Our domestic cash balance is fine. We've run projections, and we don't see a problem with that for several years, at a very minimum. Remember, much of the new-build program is being done as part of our international portion of our business, and therefore, that's where earnings that are coming from the international part are going to. So, that's not an issue for us.

Okay, just wanted to clarify on that, thanks. And then, my other somewhat nitpicky question -- you mentioned that currency exposure drove a little bit of the variance in the OpEx versus what your guidance was. I was wondering if you could give us a little bit more color in terms of maybe the magnitude? And also, how that -- how currency flows through to the cost line? Specifically, where currencies may be affected?

I'm sorry, what currencies would be affected?

Right, was it the US versus the Brazilian real? Or was it more the UK rigs that saw a cost or currency fluctuation?

It was across-the-board. The amount came to $4 million or $5 million. It was not a significant amount, but you couple that with other things in order to get to where our guidance was, and it was across-the-board. It was not isolated to one currency.

Okay, perfect. Thanks for the clarity.

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

Good morning. With '12 and '13 being heavy survey years, is there any risk that some of those rigs don't go back to work after the surveys? Or does that look fairly positive for most of those?

We generally would not do a survey unless we were very confident that the rig would go back to work.

Got it, okay. That's all I have, thank you.

Your next question comes from the line of Darren Gacicia of Guggenheim.

Good morning. Thanks for taking my question. Kind of a follow-up on Kurt's query. If you look at it, and you look at what the new-build program, timing can be a little bit fluctuating between when it hits. But you have some financing needs, and you have to balance that against the dividend. My question as it goes, especially as I talk to clients and hear some pushback on the name is -- what is the level, especially given your comments around the credit rating -- you're willing to take leverage? And are we willing to sit there and build leverage at the same time as raising dividends? Is that something that's a no-no? Is that a non-starter, or is that something that if earnings grow, dividend should grow? And just in the near term, we're willing to raise debt levels as a percentage of capital?

Well, we're not going to -- we can't give guidance on what our future dividends would be. But I guess, I would state that dividends are very important to us. If you understand the capital structure and the investment -- who our investors are, you can really understand it that we [post] strongly in dividends. In the last cycle, we raised dividends fairly aggressively, but we did not have the new-build and fleet-renewal programs going on that we do now. Obviously, that year, everybody is correct to see that as a factor. As you noted, it is a balancing act, but other than that, I can't give you future guidance. The yield that's present right now on an annual run rate with our special dividend is very, very attractive.

Certainly. Maybe to ask in a slightly different way then to get parameters, is there a base cash level that you'd like to maintain? Just more specifically with regard to debt ratios and your credit rating, is there a parameter which you'd worry about debt levels go above, and you'd worry about that rating?

Obviously, debt gets out of hand, and you'd worry about the ratings. But, as Gary noted, we do projections on our fleet renewal, and make some assumptions on what we want to do with that cash. And within [pounds] of how we read the market, we don't see anything that would imperil our new-build program, imperil our credit rating, or imperil payment of dividends.

Got it. In terms of credit rating, because I think there's varying opinions across your peers. Is there -- how much positive impact do you think you get out of having a higher rating versus a lower rating, in terms of interest costs or expenses?

I think there would be some impact. I think it is fairly small, but over the life of a bond, it's several million dollars.

For an example, on a 10-year bond, we have been told by the banks that a higher credit rating is worth anywhere from 10 to 20 basis points. So, $500 million bond, 10 years, that's up to $10 million over the life of the bond.

Wow, okay. If I could just ask one more. In terms of mid-water in the Gulf of Mexico, you've obviously covered on the call where some of the strengths have been in markets. I don't know if we've really mentioned the Gulf. Given the probably latent development work there, and probably some plug-in abandonment work, especially in the mid-water, is there -- what are we seeing there?

As we stated earlier with the Saratoga, we see demand coming. You're correct. There is significant amount of P&A work that needs to be done that fits well with the Saratoga in the Gulf, and we think this is -- out into the future there's several operators that have these programs that they need to do. So, that's definitely a source of demand going forward for us in the Gulf, as you don't see as much exploration and development work, but P&A work is, I think, is going to be pretty strong going forward.

Okay, thanks a lot.

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

Actually, it's Trey filling in for Todd today. Good morning, gentlemen. Beautiful quarter.

Good morning.

Thank you.

Looking at the mid-water floater environment, and the opportunity to probably move those rigs, is it more likely that you would want to get those both in the same region? Or does that factor into it at this point?

Really it doesn't factor into it. You may have a little bit of savings from a shore-based standpoint, but not significant enough that it changes your strategy of how you market the rig. I wouldn't say that that plays very much of a role in our decision-making.

And when you talked about the Gulf of Mexico being probably better from a marginal standpoint, correct? That applies to the mid-water, too?

I think I know what you're saying, but like I said, P&A is a significant part of where we see the mid-water and the Gulf going forward. There is still some exploration work that happens, just not term-in basis -- really based on the term programs. We still see plenty of work for the Saratoga. It's not going to be a three- or four-year-type term environment. It's nine months, six months, a year, those types of jobs.

Okay, got you. Thanks a lot.

Let's take one more question.

Your next question comes from the line of Eric [Halvedson] of [Clareto].

Yes, hello. You mentioned a possible sale of two of your other cold-stacked mid-water rigs. Who would be the buyers for those? Are there any buyers, and what kind of jobs are they looking at, do you think, at the moment?

Well, I think you're reading it right. The question was -- would we sell anything else beyond jack-ups? And I said, well, our cold-stacked semis would be something we would consider. But I don't -- so, beyond that I don't have any comments on specific buyers, or what they would be looking at a rig to use -- what type of application they'd be looking to use.

Did that answer your question, Eric?

I believe his line disconnected, sir.

Okay, well, thank you very much. We'll talk to everybody at the next conference and/or investor conferences that may take place between now and then. Thank you very much.

Thank you. This concludes today's Diamond Offshore second-quarter 2012 earnings call. You may now disconnect.