Diamond Offshore Drilling Inc (DO) 2012 Q3 法說會逐字稿

Good morning. My name is Christie and I will be your conference operator today. At this time, I would like to welcome everyone to the Diamond Offshore Drilling Inc. third-quarter earnings 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, sir.

Thank you, Christie. Good morning, everyone, and thank you for joining us. With me on the call today are Larry Dickerson, President and Chief Executive Officer; John Vecchio, Executive Vice President; Gary Krenek, Senior Vice President and Chief Financial Officer; and 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, days 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 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'll have a question-and-answer session. And now I'll turn the call over to Larry.

Thank you very much, and welcome to our third-quarter conference call. I've got four points I'd like to talk about in my opening remarks and then we'll turn it over to Michael Acuff to expand on the market, and then Gary Krenek will walk you through the numbers in a little bit more detail. First and most significant I think is the forward-commitments that we announced in this press release and a recent filing of a rig status report, but primarily in the this press release. First I'd like to comment on the Ocean America and Ocean Valiant, which were fourth-generation rigs. Ocean America we signed up in Australia, 18-month commitment with Chevron at $475,000. I think that reflects a little bit of -- that's one of the lower rates that we have and it's a little higher cost area. It's still a solid, profitable rate that we'll do very well on, but it reflects in the Pacific maybe the weakest of the markets that we operate in. Or I'd rather say, least strong, because it's still -- it is a nice market. Over in Africa, where the Valiant extended a short term for Hess and moved its rate from the $300,000s up to $515,000 is, I think, reflective of a decent market. And that's a continuation of the $490,000 rate that we booked on our new capacity rig, the Ocean Onyx in the Gulf of Mexico. And it's important to remember that these fourth-generation rigs are moored and they have substantially less operating cost crews, marine crews and maintenance expenditures than you'll find on your fifth- and sixth-generation rigs.

So the margins that we're likely to earn on the Valiant in West Africa at this point will be very, very close to what sixth generation rigs will be earning. On higher spec rigs, the Ocean Endeavor, we announced an 18-month commitment at a -- we'll call it $521,000, which is $505,000 plus half of a 6.6% bonus. Which is what for budget and SEC purposes we say that we typically earn. We never earn 100% across our fleet but we do typically 50% or better on those. So that's a solid rate, coming up from a post-Macondo rate that we've been working on in the high $200,000s in Egypt, and this work will be in a location outside the Mediterranean. Additionally, the Ocean Lexington will be released by OGX for Brazil. That's been talked about for some period of time. And we secured a greater-than 12-month commitment for the rig in Trinidad with a consortium of companies at $300,000 a day. So that's about a $50,000 uptick from the price we're working in, in Brazil, and we're anticipating a very substantial reduction in cost. Brazil being our highest cost location that we work in. And Trinidad won't be as cheap as the Gulf of Mexico but should be substantially cheaper, so that will be a nice, profitable job for us. And then in addition to that, just some other -- Patriot in the Pacific and Saratoga, I believe we announced just recently, in the Gulf of Mexico. And that's really one of the few mid-water rigs working in the Gulf of Mexico, so that's doing very well.

On the performance for the quarter, we're very pleased with our operating expense. We continued quarter after quarter to just stay very tight within our budget. And this is in spite of the fact that conditions do change on us and there are a lot of cost-inflation pressures. But the people that look after our fleet just continue to do a very, very good job. This was offset somewhat by a little bit of impact from the revenues, as our unanticipated equipment down time reached 159 days in the quarter. If you look back last quarter, we made an all-time record of only 60 days across the fleet, but the three preceding quarters were in the 140s to as low as 110s. So we're up from where we were there. And the down time was concentrated on two fifth-generation rigs, which helped part really, because you had some high day-rates that we lost time on. But the rest of the fleet did very, very well and performed well under what our expectations are. And so it wasn't as big of an impact as we would have otherwise had. And having the risk of down time on rigs due to equipment failures or maintenance or even the higher standards that the whole industry looks towards in a post-Macondo world are continuing risks as we go forward. But we're comfortable on a rolling-quarter basis that we will be able to perform within tolerance and not have that. But again, the outstanding performance on the operating expense got us to where we need to be.

Last two comments are on the financial areas. One, as previously noted, we did put in place a bank facility at $750 million. We have no plans to immediately draw that down, and of course that's for general corporate purposes. But if you look out as our drill ships are delivered, we've got 70% payments due for those. We've got $1.5 billion of cash on the balance sheet. So that will be the primary source of financing that. But we felt that this was something that it was prudent for us to have. The rates that we got on that were outstanding. We are the only A-rated by both Moody's and Standard & Poor's drilling contractor in the space, and I think that was reflected in the rates that we obtained. And then the final financial thing that I would note is, we again declared a regular and special dividend at the same rates that have been in effect for some period of time. And this brings our cumulative payment since we began our dividend program a number of years ago, at $34 a share. And so that's a -- that added to the share price is for our long-term shareholders -- reflects the value that we've returned and puts us certainly in the top tier of offshore drilling companies' combined share performance and dividends. So that's my summary of how I saw the quarter, and I'll let Michael talk a little bit more about where the markets are.

Thank you, Larry. Good morning, everyone, and thanks for attending the call. The offshore drilling market remains robust as we continue to see steady- to increasing-activity as a result of the strong commodity pricing in the world market today. Today I'll discuss each of the market segments, but in general we are pleased with the state of the business and believe that it should remain strong going forward into 2013. Looking at the market segments, the ultra-deepwater and deepwater markets continue to show strength worldwide, with the concentration of incremental demand continuing to reside in Australia, West Africa, East Africa and the Gulf of Mexico. Several new fixtures with strong day rates have been announced over the past three months, and we believe this momentum in the market will continue for the foreseeable future. As stated in our earnings announcement, we recently signed the Ocean Endeavor to a worldwide contract with a unnamed operator for 18 months at $505,000 per day. Plus a potential 6.6% bonus, up from the current operating rate of $285,000 per day. Additionally, we contracted the Ocean America with Chevron, as Larry said, for 18 months in Australia at a dayrate of $475,000 per day, versus the current dayrate of $405,000. And then finally, the Ocean Valiant was extended for another two wells at $515,000 to continue its work for Hess offshore Equatorial Guinea.

We're quite pleased with all three of these fixtures and our current deepwater and ultra-deepwater portfolio going forward into 2013 and 2014. We believe we are well-positioned with our two uncontracted new-build drill ships, the Ocean BlackRhino and the Ocean BlackLion. Along with our new deepwater semisubmersible the Ocean Apex, all of which are due to be delivered in 2014. With respect to ultra-deepwater pricing, recent fixtures in the market continue to demonstrate that rates for three-year deals are hovering around the $600,000 per-day mark, with West Africa fixtures typically higher by another $20,000 to $30,000 a day. For contracts with longer term, up to five years potentially, rates have been settling in the high $500,000s, where I would expect them to remain for the near future. Turning to deepwater, we continue to see pricing momentum that has now taken us over the $500,000 per-day mark for work under a year, with longer-term contracts in the high $400,000s.

We believe this will continue, with steady deepwater demand materializing for 2014. For example, Australia continues to move forward with their exploration programs and LNG-related development projects. West Africa exploration efforts are currently strong in countries such as Angola, Cameroon, Congo, Equatorial Guinea and Ghana, while significant demand for development projects is being seen in Angola, Ghana and Nigeria, to name a few. In the US Gulf of Mexico, we have seen a resurgence in activity in the deepwater and ultra-deepwater arenas over the past year, and are now approaching pre-Macondo activity levels, with expectations of continued demand taking us up to possibly 40 rigs in 2013. In the mid-water segment of our business, as we stated on our last call, the market continues to operate as two distinct segments -- the very strong North Sea region and the other international and US Gulf of Mexico markets that remain steady. In the North Sea, the operators continue to seek rig availability, which is at a premium, and are currently planning for slots in late 2013 and 2014. For example, we are receiving significant interest in the Ocean Princess, which ends its current contract in August 2013, subject to its options, of course, with operators looking at an average of two years of term commitment.

Additionally, we have had discussions with several operators on relocating additional existing capacity to the region, with the potential for a term contract. In the US Gulf of Mexico and other international locations outside the North Sea, the market continues to be steady to slightly increasing, and has produced additional demand with some pricing power. Our announcement yesterday on the Ocean Lexington and its contract with the group of BG Centrica and Nico is a positive data point for this segment, with an increase in rate and a term commitment from the group of operators. Our other mid-water rigs, the Saratoga, Patriot and General, continue to build short-term backlog while remaining steady from a day-rate perspective. The Ocean Ambassador, which just left Brazil to return to the US Gulf of Mexico, is a rig we are focusing on as we are discussing opportunities with operators with the intent to secure a contract in the next few months. So in summary, we are very pleased with the direction of the market and the future strength of the offshore drilling business. And with that, I'll turn it over to Gary.

Thanks, Michael. For the quarter, Diamond Offshore recorded a bottom line net income of $178 million or $1.28 per share on contract drilling revenues of $714 million. This is down from our second-quarter results when we reported $201 million after-tax income, or $1.45 per share. The primary reason though for that decrease was, in the second quarter, if you recall, we sold five of our jack-up rigs and reported a gain of about $50 million, or after-tax EPS of $0.36 a share. So if you take that out of the mix, we actually increased our earnings quarter-over-quarter. As Larry said, one of the reasons for that increase in earnings was our lower-anticipated rig operating cost. So looking back at the guidance that we gave last quarter, I had told everyone that we expected operating cost to be somewhere between $410 million to $425 million, and we actually came in at $357 million, substantial feat. Part of that beat of the cost is a result of some timing issues. We had anticipated the Ocean Worker would undergo a survey in the fourth quarter and that has been pushed back in its entirety to the third -- I'm sorry, we thought it was going to be in the third quarter, we pushed it back in its entirety to the fourth quarter. Also, the Ocean Victory was supposed to perform most of its survey in Q3, and it's moved most of it back to Q4. We began the very first part of it in Q3. If you look at those two things, we believe, about $15 million worth of costs were pushed from Q3 into Q4.

In addition to that, we had about $10 million of favorable currency issues out there. We -- in our cost estimates for the quarter, we anticipated the US dollar being what we were at when we budgeted for the year, and the dollar has been stronger than that. So that gave us about a $10 million favorable variance. So those two in total, both timing and US dollars, by $25 million. The remaining portion, though, of the beat comes from just general cost controls. We had about $7 million worth of estimate-to-actual adjustments during the quarter. These are items that we had anticipated cost in prior quarters and booked expenses and they actually came in lower than what we anticipated. And therefore, we turned those accruals around in Q3 as we became comfortable of what the actual costs were. So that $7 million doesn't necessarily relate to Q3, but does relate to prior quarters, where costs came in even little bit lower than the good numbers that we reported then.

We had a number of surveys in Q3. Those surveys came in about $8 million below our expectations. Again, just watching the dollars. We had about a $5 million adjustment on our reserve for our Jones Act claims. This is not something that we estimate ourselves, but rather go to an outside third party actuaries and have them estimate our reserves for us. And he we do that on a quarterly basis and so this quarter came back with a $5 million credit. This is a reflection, I think, of two things. Number one, our incident rate is -- for safety -- is the best that it's ever been, and so that's reflected in this credit. And not only is the incident rate down, but the severity of the incidents we are having is down. And so that has benefited the cost to us. In addition to that, we had about $15 million more of what I would just term general cost savings and cost control spread throughout the fleet, much of it in our supply and maintenance expense. Again, as Larry pointed out, the guys out on the rigs that are in charge of this, just doing a very good job and we're very happy with that.

Looking at some of the other lines on the income statement, our G&A costs were a little bit lower than expected. Part of this was due to about a $2.5 million accounting adjustment that we had during the quarter. Interest expense was down by $2 million below what our expectations were. We benefited here from a favorable resolution to a tax audit that we had reserved for in our FIN 48 accrual. This has been going on for a number of years. It relates to one of our international subsidiaries, and we had a favorable resolution. We were able to turn that reserve around. It only affected the tax line by about $1 million, $1.5 million, so kind of got lost in the rounding on taxes. But we had also recorded $2.5 million worth of interest on that accrual. And since we were successful in defending ourselves there, we were able to turn that around and that came out of our interest expense line. Depreciation of $99 million was within our guidance, and our tax rate of 24.1% was within the guidance that I gave, which was 22% to 25%. So a little bit toward the top end of it, but still within the range that we expected.

Looking forward to the third quarter -- as always, planned down time will affect both our earnings and our cost. For the quarter, we're anticipating that the Ocean Worker will be down about 65 days for its five-year survey. We will complete the Victory survey that was begun by 15 down days in Q3. It will have an additional 45 down days in the fourth quarter. And we expect to begin the Quest about December 1st, which will result in 31 down days. So you total that up, that's about 140 days on those three rigs for survey. In addition, the Ocean Saratoga is currently on a standby rate with BP for accounting reasons. We are not recognizing any of those revenues that we've earned for the first 45 days of the quarter. Rather, what we will do is defer those earnings and amortize them over the remaining portion of the contract. So essentially, you'll have 45 days from an accounting standpoint of zero revenue coming in, even though we are actually able to bill that on an ongoing basis. The Ambassador is, as Michael said, is preparing to move back to the Gulf of Mexico. We believe it will be about down 60 days before it gets here and totally completes its move. And as always, I'd refer you to the Rig Status Report for details on these down times and the exact dates and further information on it.

Getting down to specifics on cost that we expect in the fourth quarter. Again, as always, our normal daily operating expense on our rigs that we gave some guidance out early on the year will occur. The cost of the surveys I talked about. We're estimating about $17 million. The Worker is a larger survey -- more days, and we've got some stuff we want to do with that rig -- will be about 10 just for that rig. So we'll have $17 million there. Amortized [MOBE], approximately $13 million is what we're expecting for the quarter. Again, this will be offset by MOBE revenues pretty much dollar for dollar. The Ambassador's move back to the Gulf, we'll expense that currently, probably $6 million. This time we are factoring in the strength of the US dollar, so we're taking that into account and assuming that the dollar will stay strong. So we've reduced our expectations for that. And then finally, during the fourth quarter, historically, we've always seen our major project expense number go up as we complete projects that we budgeted at the beginning of the year. And said, historically, that's always been the highest in the fourth quarter. So we've tried to build that into our numbers.

You take all of that into account and we believe that contract drilling expense for the fourth quarter will be between $390 million to $410 million. As always, I would note, this is contract drilling expenses only. Reimbursable cost will be in addition to the amount that I just gave you. A few other lines. G&A, we believe that will return back to the $17 million to $18 million which we've historically recorded over the past six or seven quarters. Depreciation, same guidance as last quarter, $99 million to $101 million. And interest expense, we believe, will return to its normal cost, which is the $22 million. Which is what our outstanding debt brings us, less $10 million worth of capitalized interest, or a net of $11 million. The effective tax rate -- we'll increase it just slightly over last time -- we believe will be somewhere between the 23% to 26% range. And finally, capital expense, we are increasing our expected capital from $720 million to $800 million. And that's to reflect the Ocean Apex rig that we announced earlier in the quarter. And that $800 million will be broken down between maintenance capital of $320 million and our new-build rigs, we expect to spend about $480 million. With that I'll turn it back to Larry.

Thank you. We will do the questions here.

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

Thank you.

(Operator Instructions)

Robin Shoemaker of Citigroup.

Wanted to ask about the mid-water market and it seems -- correct me if I'm wrong, but it seems to be very strong in the North Sea. Perhaps getting a little stronger elsewhere, but not as much. But as you look at your mid-water fleet, do you have candidates for the North Sea and is it a -- is it something where either strategically or just in view of the long-term strength of that market, you would want to have greater exposure there?

Yes. You're right, the North Sea has been a particularly strong market. If you go back about 10 years, the presumption would have been in the North Sea that it is a highly regulated, highly expensive place to do business. And with the rest of the world trying to adopt regulations, and in the midst of putting those regulations in place and not really sure where those regulations are, the UK's, in our opinion, very efficient, highly mature regulations are actually a bonus, and we enjoy working in that location. The drilling is very easy for our customers, not really deep. There is the weather issues. But it's a great market and then you're right next to where Brent price is, and that premium and everything makes it really, really good. There are not that many rigs that are capable of working in the North Sea. In addition to the safety case, there's standards that have to be met. And we believe that we may possess a few rigs in our fleet -- not many -- in the mid-water segment that could be relocated to that market. And there's certainly more demand up there than there are number of rigs. So all that would lead you to believe that that is one of the options that we're considering. But we haven't made a determination yet.

Okay. I guess it would involve some investment, considerable investment to make them North Sea-qualified.

Yes. You got to look at each rig is different as to what it could meet. Some rigs are at a juncture where you really couldn't meet the standard. And then there's other rigs that you could, but it's ridiculous to spend that amount of money, and other rigs are working in markets where they earn a decent amount of cash. So it's not a very big number of rigs that can go in there. And I'm speaking for the industry and not just for Diamond Offshore.

On a similar topic, just when you look at your exposure in Brazil and the mid-water kind of segment or conventional deepwater, it looks like you've done extremely well avoiding some of the problems that some of your competitors have there. But Brazil's regulatory environment, et cetera, is getting -- it seems to be universally believed to be getting much more complicated and difficult. And so you don't have a lot of assets coming up for renewal there. But would you like to kind of balance things out, have maybe less exposure to Brazil, or do the assets you have there really belong there in terms of the type of rig they are and the capability?

There are certainly rigs that belong there. I mean, we are looking for a solution to the Brazilian problems, the continuing escalation of cost and the uncertain regulatory environment and conflicting regulations, taxes, import taxes. All of those things make it difficult to work in there and so under normal circumstances we might be looking at taking some rigs out of there. But we have two good customers down there and I'm just not going to, in this forum, say we're leaving them. But we have fiscal responsibilities and when it comes time for renewal and all that, well in advance of that we will be sitting down and talking about how the two of us solve the problems that are present in Brazil currently.

Right. Okay, thanks, Larry.

Greg Lewis of Credit Suisse.

Thank you and good morning. So first, could you provide an update on the Ocean Confidence? I know that rig was -- is now up and running with Murphy. When that contract with Murphy rolls off, do you sort of have an indication that Cobalt will still be wanting to take the rig back, given what happened leading up to the release of the rig?

I'll let Michael discuss the contractual situation and then we'll come back and address the mechanical problems.

Yes, Greg. The plan for that rig at the current moment, discussing it with Murphy and Cobalt, it will finish the well in Congo with Murphy here in roughly 60 to 90 days. And then we will move back into Angola and carry out the drill stem test that we left, that was still outstanding on the well. And then drill an additional two wells in Angola, is the plan at the moment. And then of course we have a well with Murphy following that. But we're looking to move back to Cobalt and continue the program for them.

Okay. The problem that we had was a computer system that controls the DP system, and it was compounded by the manufacturer is no longer really in the drilling business and they had some concerns about potential liability in a post-Macondo world. And so we had difficulty even fixing what we needed to get fixed. That was the situation in our judgment that led to Cobalt, at least from us, deciding to suspend operations, and we took seven, eight days I believe of down time. So there wasn't a huge amount of down time that resulted on the confidence. And because we had a backup commitment from Murphy in the initial top hole section, we were confident that the DP system was robust enough as long as we -- up until the point that we had to run the stack, that everybody was comfortable on that. And that gave us a little bit more time. And with some assistance from the vendor and others, we have since solved the programming problem and we are confident that we can proceed ahead with Murphy, finish that job. And then we do have these other commitments, as Michael described, with both Cobalt and Murphy, and the precise order that we line them up in may still be up in the air. But he outlined where it looks currently.

Okay, great. And then just shifting gears over to the Ocean Ambassador, now that rig is moving back to the US Gulf. If you could sort of handicap it, whether that rig goes to work maybe in the US Gulf or maybe Mexico. Do you think Mexico is a viable option for that rig at this point? Are you seeing any sort of interest in that rig from maybe Pemex?

I think the Ambassador would be an ideal rig to work in Mexico. It's worked there before. We would like it to continue. But the Mexican contracting process that Pemex works under is slow and so I can't necessarily say when we would go to work. We would be hopeful in the meantime that we would get one or two short jobs to be able to work that in the Gulf of Mexico because, again, there's just a real paucity of mid-water fleet availability in the Gulf of Mexico.

Okay, great. And then just one final question. You kind of -- you touched on it earlier. When we think about the potential for upgrades and you mentioned the rigs that are working, is it safe to say that rigs that are actively working -- probably doesn't make sense to maybe upgrade some of those rigs for the North Sea? And the way we should be thinking about it is that it's the idle or stacked rigs that could potentially be candidates for upgrades or conversions?

No, because the algebra equation is not only what are you forfeiting to work, but a rig that may have worked in the UK before the marginal add-on CapEx to get it up to North Sea standards would be reduced. And the North Sea is strong enough that we would measure the incremental dayrate and the certainty, because we could probably get some term behind that. And we could well go in the direction of taking the rigs out of service and believe that that's the better alternative than put a lot of money into an idle rig.

Okay, great, thanks for the time. Appreciate the color.

Rhett Carter of Tudor, Pickering, Holt.

Good morning, guys. Just thinking about Mexico, kind of following up on the earlier question about it. With the recent election potentially opening up the deepwater market, are you seeing more opportunities emerge there? And kind of how do you think about the potential timing of that? Is it still too early?

Yes, Rhett, this is Michael. You know, it appears that they're starting to have some success there in the deepwater area after the build-up for a while now in that. But I wouldn't say that there's going to be a huge demand develop in the near-term or the next year. There may be opportunities as they expand their programs, but I think they're going to have -- probably have to have some more exploration success before they start expanding their fleet. But it's something we're definitely watching closely and in conversations with them about. But I wouldn't expect just a wave of rigs to start flowing into Mexico.

I would say that we view our ongoing jack-up presence in the Gulf of Mexico -- and we do have one floater down there in Mexican waters -- as maintaining a base of operations so that we can easily bolt on deepwater activity down there, should they need to bid out and we've got availability.

Yes, and to clarify my comment, I could see adding one to two rigs in there. But you have to kind of temper your expectations a bit.

Okay. And then just on the Ocean Apex, I'm assuming deepwater kind of starting to kick the tires around that. What do you see as really some ideal markets for that rig?

Well, of course, the Apex is, as we've told you, it has a very large deck area. Of course, 2 million-pound hook load capacity with significant liquid storage and bulk storage. So ideally, a remote -- a more remote type location is perfect for that rig. So I have expectations that West Africa is going to be a potential market for that rig, strong market. Of course, with the 2 million-pound hook load, the Gulf of Mexico is always an option, as you drill the deep wells here. And you can't rule out Australia. That market's in balance at the moment but could probably use an additional rig or two. And then as other exploration programs develop, we can see where it goes. But that's kind of the focus area, I believe, that would maximize the capabilities of the rig.

And its moored capability does work well in Australia, so that you can move easily between water depths.

That's it from me. Thank you, guys.

Collin Gerry of Raymond James.

Hey, good morning, guys. I've got two quick ones, kind of bigger picture. We're hearing a lot, with the strength in the Gulf of Mexico, there's a lot of capital on the operator side coming back in, both private and public. And the exodus of mid- to deep-depths, everything outside of the ultra-deep side over the last few years, there's just a scarcity of rigs in that mid- and deep-category. Do you see any -- are you fielding calls from Gulf of Mexico guys wanting those rigs to come back? Do you see opportunities there? This is operator conversations with us that I'm just trying to understand if that maybe goes somewhere.

Well, when we -- we targeted the Onyx specifically, because nobody was adding 4,000- to 6,000-foot capability. And indeed we got a job in the Gulf of Mexico and we had interest from more than one guy. And I think Michael would tell you that we get calls about and hopes for mid-water. But I don't see -- to date we haven't seen any big mid-water programs. It's one or two wells. And then you have the issues with hurricanes because you're closer to infrastructure. So we think there might be space for a rig or two, but I don't -- probably in mid-water, I wouldn't think Gulf of Mexico is a big draw for those units.

Okay. So it sounds like more noise than actual substance there.

Well if you heard it from our customers, I'm not going to characterize it as noise.

Okay, I'll tell them to call you instead of talking to me. (laughter) The other one was -- also hearing a little bit of noise regarding regulations in Brazil with BOP standards. Do you -- are you hearing anything about maybe requirements for a four-rim stack or, coming out of Petrobras, anything regarding kind of BOP regulations coming through in Brazil?

Well, four rims is the minimum, so what we're looking at is five. I don't know if they settled on that yet. You have -- A&p is still relatively new. I would probably characterize that they've got lots of issues that they're working on to ensure safety of Brazilian waters. And I think they're -- my guess would be that they're waiting to see BOP regulations come out of other areas. Because here it is the US, and we're over two years past the event and we don't have any regulations here.

That's it from me. Thanks for the color.

Ian MacPherson of Simmons.

Thanks. Larry, you highlighted in your earnings release your balance sheet optionality, particularly relative to the peer group?

Right.

And I wonder if you've got one or two, or even one or two or three capital projects to address North Sea demand next year, Q4 next year, and you have the opportunity to order one or two more drill ships? Could you envision this scenario with the right backlog support of doing all of the above next year, in terms of more mid water CapEx and ordering one or two more new builds on the ultra-deepwater side?

Yes, I think I could see that happening. I don't -- I guess I don't know what I can tell you. I think everybody there is -- sort of most of the established players are waiting for contracts on some of their '14 deliveries. That would be Rollin, us, Mobile, some of the other guys. So you need to have that fall, I would think, before you start seeing additional orders coming out industry-wide. And then there's some various one-off opportunities to build other type of new equipment and then, yes, pretty much said that we are focused on seeing what we could do to provide new capacity into the North Sea.

Okay. How far advanced are you with your studying on the Whittington and its prospects for a reactivation at this point?

Well, I mean, our overall North Sea studies, which would include the Whittington, is not necessarily focused on that. You know, I would say that we're getting fairly close to understanding what the prospects are. So by the end of the year, first quarter, we could be making a decision.

Okay. And then if I can just squeeze in one more question. Michael, you characterized the mid-water as still improving in the North Sea and still steady in the rest of the world, but the Lexington contract in Trinidad, I would say, looks a little bit better than steady. It seems like you've probably got a decent cash margin improvement there as you move away from Brazilian OpEx. Could you quantify that? And also comment on that sort of dayrate and cash margin as relates sort of to the -- what we should expect for benign environment mid-water Leading Edge rates?

Yes, Ian. I think that probably is the Lexington fixtures around the Leading Edge rate for an international mid-water rig. Of course, as Larry said, we believe we'll have some gains from an operating cost standpoint moving that rig into the Trinidad market. It just depends on the rig capability. You've got thousand-foot mid-water rigs and you've got 3,500-foot mid-water rigs. So that capability then trickles into the pricing advantages and opportunities. But I think the upper-end of the mid-water is in the high-twos, and more your standard 1,500-foot type mid-water rigs are in the mid-twos. It was a great contract for us. We're very excited about it. The ability to get that type of term in the mid-water segment is just not everywhere we look. It's more of short-term, as you see with the Patriot, the General. You get 90 days, still getting 120-day jobs. So until we start seeing that term build up, I think you'll continue to see the rates where they are, and that's the reason I made my steady comment, versus increasing. But where it's possible, obviously we'll take advantage of the pricing power and opportunities with the rigs we have to put them into good markets with better margin environments. So we're quite excited about the Lexington.

That's great, thanks. Again, how much do we think the OpEx differential is moving from Brazil to Trinidad, once you get normalized?

Operating in Brazil for mid-water rigs, somewhere in the low 120s. Trinidad --

Probably 70 to 80. Yes, so you could get a 40K addition there, potentially.

Very good, thank you.

Todd Scholl of Clarkson Capital Markets.

Good morning, guys. All my questions have been answered, thanks.

Dave Wilson of Howard Weil.

Good morning, gentlemen, thanks for taking my questions. We've made it pretty far in the call and I can't believe it hasn't been asked yet. What have you guys thought about what [Ceseral] has done with dropping some rigs into an MLP? Have you guys evaluated that from Diamond's standpoint? Where do you stand on that?

We haven't seriously looked at it. There's nothing that just jumps out at me and says that that's appropriate for our Company. Ceseral is pretty on the leading edge on doing all kind of things, but we like the simplicity of 100% ownership of our vessels. We would certainly, if there was a material improvement in the valuation, then we would have to grab hold of it. But at the moment, it's not something that's on our screen.

Also, Ceseral has a lot of rigs that they still are -- have under construction and need to pay for. And so they have need for cash.

Got it. Thanks for that. And then just real quickly, Gary, regarding the new-builds, the Hornet and the Hawk, any early indications of where those rigs could end up? And if they do end up in the Gulf of Mexico, do we need to be thinking about adjusting our longer-term tax rate assumptions?

It's hard enough to predict what the tax rate is going to be next year. Who's going to win the election? Let's start off with that. So I wouldn't -- no, no predictions for long-term tax rates at this point.

Okay, great.

My hope, though, would be that we would target an international market. There's a lot of advantages to the Gulf of Mexico, but we just don't want to have all of this class of vessel sitting in one market.

Okay, thanks, guys, I'll turn the call back over.

Justin Sander of RBC Capital Markets.

Good morning. Just had one on the cost side to follow up from some of Gary's comments earlier. And Gary, you kind of you laid out the survey cost in the third quarter coming in a bit below expectations and gave us some good outlook as far as what to expect in the fourth quarter, as far as number of days in survey and cost. I'm just wondering if you can, one -- can we expect looking out into '13 with all these other surveys coming online, should we expect a similar type of cost per day relationship there? And then secondly, can you just help us understand a bit more what's going on that allowed this survey cost to come in $8 million below expectations in the quarter? Thanks.

Not a lot of color I can give you going forward into next year. We're in the process of doing our budget. And part of doing that is our maintenance and our engineering groups going out and doing their own surveys of the rigs, trying to estimate how much of that work we need to do in addition to this, the normal survey cost. And so we're in -- doing that process right now. For the time being, yes, you can assume something similar in '13 as opposed to '12. We're going to do about the same number of surveys. So certainly we'll have a better guess for you and better estimates in our next quarterly conference call. And then the second question of reducing cost in this quarter. Nothing that I can put my finger on. Part of it is just being a little bit more efficient, not being in the shipyard quite as long. If we can save two or three days, that can save a lot of money for us. Also, when we do some of our estimates, we're trying to estimate how much it costs to move in and out. And it's very easy to miss those estimates by a $0.5 million to $0.75 million. Again, I wish I could tell you it's A, B and C equal $8 million. But when I looked at it and tried to come up with those things, it's just kind of across the board a lot of little things.

Got it, I understand, okay. That's all I had, thanks.

Doug Becker of Bank of America.

Thanks. Gary, just wanted to drill down a little bit more on the surveys. The Victory survey has already started, correct?

That's correct. I believe we were down 15, 18 days in Q3.

Okay. And has the Worker, has that survey started?

Has not begun yet.

Okay. And --

But we expect, within the next up couple of weeks it should. We believe we will get the full 65 days in and complete the thing just before the end of the year.

Okay. Just trying to gauge the potential of that maybe getting pushed to the first quarter.

At this point, we really don't believe -- we certainly are not planning on that. We're staging all the equipment and everything. I can't promise you. Things do occur at the last second. But as of right now, we're getting pretty close to it, and it looks like within the next two to three weeks we certainly will be bringing it in. And keep watching the Rig Status Report. Should that change, of course, we will let you know.

Understood. Obviously, Diamond's older fleet gets mentioned a lot. Operating costs have really done an outstanding job on that front. What's the thinking about maintenance CapE two, three years down the road? Has there been any change in terms of what it takes to maintain the fleet?

You've got -- a bigger issue is just cost inflation for supplies. I think that is the number one item. As rigs get older, they do require more maintenance CapEx. But we are taking our fleet and evaluating it and constantly looking at -- is it worth spending X to keep this rig going? And that's kind of led to the Epoch coming down, a couple of rigs which are now down and available as our new capacity candidates. The Onyx and the Apex were in that category. So that kind of offsets it. So it's not something that I see as a huge issue for us. And we are bringing in new rigs into the fleet and those will require less maintenance. But on the other hand, the money that we're spending on -- we've got Courage and Valor, fairly you new rigs. But they go into Brazil, where you have to pay such high duties on anything you bring into them, and we've still been working on those. I would say those run higher maintenance CapEx than we see on some of our older rigs.

Is there any rule of thumb you would point to as we think about maintenance CapEx on the older rigs? Or it just varies too much rig by rig?

Yes, there is too much variability. I can't give you a rule of thumb. Whatever our maintenance CapEx is this year, I would expect it to escalate a little bit next year.

We're at, this year, $320 million. I would expect next year -- again, we're in the process of doing the budget -- to come in somewhere close to that, because we're going to do about the same number of surveys. And when we do a large number of surveys, the maintenance capital does tend to go up because we have the rigs in and that's when we can spend the money on it. In 2014 and '15, the number of surveys go down. So that versus inflation, and the rig's a little bit lower, I would estimate somewhere around $300 million on a go-forward basis.

Thanks. And one last quick one. Larry, any thoughts on the dividend strategy? If the dividend tax cuts do expire toward the end of the year, does that change your thought process regarding the dividend strategy?

We pretty much just do our dividends in a special dividend. And the Board will look at all things in setting those dividends, that dividend strategy. But the best thing is to look back about what we've done in the past, which is generally maintain a dividend. We recognize that that's a very important component. But on tax changes, as far as I know, there's no tax changes that impact us, where we get -- just tax changes on the recipients. So I can't imagine that that would impact us. If you look forward, you know that we've got CapEx to continue to upgrade our fleet and bring in new rigs, but at the same time, enough funds to continue to pay a dividend. And I'm not sure that there's any slack in there to adjust for, even if we wanted to, changes on taxes to the recipients.

Makes sense. Thank you very much.

Let's take one more question.

Chris Wicklund of Wells Fargo Securities.

Hey, guys. This is actually Matt Conlan. I was going to ask about the dividend as well. But I wanted to ask you about the Whittington. You've been evaluating that rig now for almost a year. Should we expect the rig to ever get reactivated again?

Well, certainly there is a possibility that we don't reactivate that rig. That was a North Sea potential candidate. But it is a very, very expensive one, and right now we're looking at other candidates for the North Sea. But we haven't given up on that rig. It depends on what the markets are, and we'll look at what can happen for the rig. But the valuation process is also dependent upon condition and where the market is. And there's just not generally a big market for that rig.

Okay. So even if you were to do some sort of a massive reinvestment in it, it doesn't sound likely that it's going to be a contributor in 2013.

I do not think so.

Okay, great. Thank you very much.

Alright. I appreciate everybody joining us. We will talk to you again next quarter. Thank you.

Thank you. This does conclude today's conference call. You may now disconnect.