Diamond Offshore Drilling Inc (DO) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Diamond Offshore fourth-quarter 2012 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

I would now like to turn the call over to Darren Dougherty, Director of Investor Relations. Please go ahead.

Thank you, Maria. 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. Following our prepared remarks this morning, we will have a question-and-answer session.

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 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. And now I will turn the call over to Larry.

Thank you, Darren. And welcome, everyone, to our end of the year conference call and fourth-quarter that just closed out. Looking back at 2012, we were very pleased with our results. I think the Company did an excellent job of managing costs. And we're managing costs, of course, in an environment where there is severe cost pressures coming out of Brazil, coming out of the need to staff up for new rigs, labor expenses, and operating in a number of countries that might be challenging, such as Egypt, and of course I mentioned Brazil. So that makes it all the more of an achievement. Our downtime outside of required surveys and shipyard visits due to things that happen on rigs, and there is always going to be some of that, was well within our parameters of what we budgeted. So we're also very pleased with that.

Additionally, it doesn't necessarily show up directly in the results that we post. But our safety achievement set record highs, our total recordable incident rate fell by 25% from the year prior. And we like to say that there are -- it's not that there is safety in that [there are] operations, but there is only safe operations. And we have found, and I believe the industry is finding, that as you become safer and preplan your jobs to avoid accidents, you are actually becoming more efficient. That the pre-planning itself has impacts that go forward. And I think this ultimately shows up in your cost control and your downtime management.

I would like to also talk here for a second about the Patriot. We have been spending time going through our fleet, trying to see where we can judiciously add money to increase capacity and provide new markets for some of our existing fleet. We have an aggressive new-build program, as do many of our competitors. But there is really nothing being done right now to refresh the market in water depths ranging from 3,000 to 5,000 and 6,000 feet.

We announced earlier this year the Ocean Apex, which is underway right now in Singapore. And then previous to that, we announced a similar rig, the Ocean Onyx. Both of these are 6,000-foot rigs that are serving in the deepwater market. And the Onyx has already got a contract in the Gulf of Mexico with Apache at a very, very attractive day rate. The returns in cash flow that we will have on that rig, we believe, will exceed or meet the cash flow coming off the new build drillships, and with quite a bit lower capital costs as well.

So in doing that, one of the strongest markets that we see going forward right now is the North Sea, and we did an extensive survey to see what we could do with a rig that would enter that market. We looked quite a bit at the Ocean Whittington. But we're not happy with the amount of capital required to get the rig into a state that it could operate up to our standards, as well as meet UK specifications and enter that market.

And we zeroed in on the Ocean Patriot, a mid '80s third-generation rig that we bought in 2004 at an attractive price and was working in the Pacific theatre in the mid $200,000s. Decided that we could significantly increase the amount of money that we earned by making an investment in that, and marketed that rig into the North Sea. And we were able to obtain a contract for three years at just over $400,000 a day with Shell. We will spend approximately six months with the rig in the shipyard later this year once it completes its work programs that we previously committed to in the Pacific theatre. And we will mobilize that to the UK sector and then begin our three-year contract on that.

So again, that is one of the things that we think we bring to the table, is extensive experience with taking some assets that may have been originally constructed for one market, repositioning them, putting some additional performance standards into that rig and being able to enter a new market. I'm not sure -- we are certainly looking to see what other opportunities remain in our fleet. But we think we might be coming almost to the end of those opportunities that jump out at us right now, on that.

Let me talk about down days for things like the Patriot and for other downtime going into the next year. Our projections are right at 1,400 days for next year for downtime related to special surveys. We have got 12 rigs going under survey next year, some mobilization time. And then two major work projects that we've got for contracts. One of those is the Ocean Patriot, which I mentioned. Most of the advantage of that will accrue in 2014 and later years, and we will pay a price in having some time off of contract this year. But we came to the conclusion that economically, that made a lot of sense, and we were ready to trade that.

In addition to that, we have the Ocean Endeavor, when it completes its work in Egypt, has a contract, a significant contract with an oil company that we haven't been able to disclose yet. But we will need about six months time to do some contract prep on that. We will receive, under that contract, approximately $37 million to compensate us for the work that we will do and the lost day rate that we will have during that period of time. However, accounting rules require that both the cost of the upgrade and the revenue that we receive are deferred over the life of the active contract. So that was another thing that contributed.

But if you pulled out both the Patriot and the Endeavour from the 1,400 days that we have for surveys, some repairs, custom time and a couple of smaller mobes, then that would take you down about 340 of those days. So right at 1,100 to 1,000 days of downtime. For the year that just ended, we incurred approximately 1,200 days, so excluding those two rigs, the amount of downtime that we've got next year is about flat with this year. We haven't done an actual calculation in detail yet for 2014, but the surveys drop from 12 to 5. We will have completed the Endeavour and Patriot modifications. So we should be able to return to a much lower number of down days in 2014.

In addition to that, I think I need to talk for just a second -- let me go over our construction review. I mentioned the rigs that we've got under construction. The four drillships continue on schedule and on budget in Korea. The BlackHawk will be the first of those vessels that will be out, and into the US market into the end of the year. Between mobe and contract prep time, it will take about that long before it's ready to work. But everything else continues to move along.

The Ocean Onyx and Ocean Apex that I mentioned are doing very well. The Onyx incurred more steel repairs than we had anticipated, so our $300 million budget is probably over by $10 million to $15 million at this point. And potentially 30 days to 45 days late from when we initially projected that we would have the rig ready. Nonetheless, the rig will earn a much higher day rate than we had anticipated when we did the project. And there really is no alternative to bringing it into the Brownsville shipyard here in the Gulf of Mexico. So we don't have a lot of mobilization. And I still think that is going to be an excellent item. So all the rigs, with that one minor exception, continue on where they need to be.

Additionally, we have announced that we have four rigs that we will reclass as held for resale, which will result in a write-down of $62 million. That's the Ocean Whittington, which is responsible for most of the write-down; the Ocean Epoch located near Singapore; the Ocean New Era in the Gulf of Mexico; and then a jack-up, the Ocean Spartan. Our goal is to recognize that some of these rigs are at the end of their lives, and they're not rigs that we would like to continue to invest in. We think there may be opportunities for other people to invest into them, or there may be opportunities to put them to work in a non-drilling mark. But nonetheless, we will push aggressively to move those rigs by the end of the year, and felt we needed to take that write-down.

You can never be dismissive of write-downs. However, this is not a write-down where we overpaid for an asset. These are really capitol expenditures that we've put into the rig to keep the rigs into condition. If I take the Whittington, for example, we put approximately $100 million into it before we took it down to Brazil. We earned almost twice that amount during the period of time, but we depreciated the $100 million over 10 years. So we still had 50% of it on our books that is a component of the write-down. And with that, I am going to turn it over to Michael Acuff, who will go through our marketing prospects in a little bit of greater detail. And then he will turn it over to Gary Krenek, who will review our financial results and give you guidance, as we normally do for the coming year. Michael?

Thank you, Larry. Good morning, everyone. As we head into 2013, the offshore drilling market remains strong. The steady increase in activity continues in most markets, and the visibility for 2014 and beyond is starting to become clearer. Strong and stable commodity prices and our customers' growing exploration and development budgets remain the basis for this continued expansion within the industry. And we see no near-term signals of this growth slowing. Of note, an industry survey recently reported an increase for worldwide annual E&P investments spend of about 7% for 2013, compared to 2012. And we see this capital spending trend continuing and translating into additional deepwater demand long-term for the offshore drilling business.

Looking at the floating segments, the Ultra-deepwater market continues to show a steady strength worldwide, incremental demand primarily being seen in West Africa and the US Gulf of Mexico. Though there has not been a significant amount of new fixtures over the past few months, we still see a strong demand scenario shaping up for programs starting in 2014. And we expect to see several new fixtures as this first quarter progresses. With respect to Diamond's Ultra-deepwater availability, we are beginning to see interest in the Ocean BlackRhino materialize as customers begin their initial planning for programs starting in the second half of 2014. But it is still a little early in the rig contracting process for this timeframe.

Turning to the deepwater, we continue to see strong demand in this segment, also with several long-term programs on the horizon, beginning in 2014 and beyond. The primary areas driving this market continue to be West Africa, the US Gulf, and Australia. Currently we are in discussions with operators from West Africa regarding the Ocean Valiant, which is our next available deepwater rig for both exploration and development programs. And having similar conversations with our customers in the Gulf of Mexico regarding the availability on the Ocean Victory. That rig will be available in late 2013. One point to note -- in the Gulf of Mexico, we are continuing to see a resurge in exploration and development activity in both the deepwater and Ultra-deepwater segments. And they've now passed pre-Macondo activity levels, which is a very encouraging marker for the industry.

Turning to the mid-water segment, the very strong North Sea market continues to charge forward, as evidenced by our announced three-year deal with Shell at above a $400,000 day rate on the Ocean Patriot. We have previously discussed the detailed dynamics of this market. But in general, we continue to see interest for availability into '14 and '15 from both majors and independents, coupled with a limited supply of rigs that can be brought into the area, due to the UK certification requirements. This gives us a lot of confidence going forward as we begin discussions on the Ocean Princess, which is our next available UK rig, which will come due in November of '13.

In Southeast Asia, the mid-water market continues to be steady. However, over the past few months, we have started seeing an additional demand materialize, and are in several discussions with operators that should allow us to significantly increase our backlog on the Ocean General into early 2014. And ultimately should translate into better day rates as the market continues to tighten. In particular, exploration programs in Vietnam and Indonesia are expanding. Though the work is typically two to three wells, or 120 to 180 days in length, we have seen several operators solidify drilling plans for the second half of 2013 and into the first half of 2014.

This increased demand, combined with the strategic exit of the Ocean Patriot from the area into the UK, is creating quite a bit of interest in the Ocean General's availability. And is making us more optimistic for that market as we go forward. In the US Gulf of Mexico mid-water market, we're seeing similar interest to the General as with the Saratoga -- the Ocean Saratoga -- where we're currently in discussions to contract the rig until late 2013. As with the Southeast Asia market, these programs are short-term in nature, but are starting to stack up and give us further availability in pricing power.

The one exception to this has been the Ocean Ambassador. That is our 1,100-foot semisubmersible currently warm-stacked in the Gulf. We continue to focus our marketing efforts on Mexico for this rig, and are anticipating Pemex will be issuing their tender for term work in the near future. In the meantime, we will continue to seek out short-term opportunities for the Ambassador in the Gulf and at shallower water depths. With that, I will turn it over to Gary.

Thanks, Michael. As Larry said, I will, as in the past, make a few comments on what happened this past quarter, and what we expect to see in the next quarter and for 2013 as a whole. For the fourth quarter 2012, we had net income of $156 million, or $1.12 per share on contract drilling revenues of $741 million. Looking at some of the details, the biggest item of note, unusual on our income statement, was the impairment write-down of $62 million that Larry talked about. We also reclassified those four rigs that he listed as assets held for resale. The $62 million impairment after tax had an affect of some $0.29 a share reduction in our earnings.

Looking at revenue, downtime for rig repairs, as Larry said, came in a little bit better than what we expected, which was a help to our revenue line. We had about 3.6% downtime for equipment repairs in the fourth quarter. This compares to an average of about 4%. So a little bit better than normal. This is better than the third quarter when we had a little bit better than 5%. But not as good as Q2, when we came in at under 2.5%. So a little bit better than normal, helping that top line.

Looking at our contract drilling expenses, those came in at some $378 million for the quarter. We had guided to $390 million to $410 million. So we came in under that. Some $9 million of those savings were due to timing. The Ocean Worker was supposed to do its survey in the fourth quarter of 2012. We only began that. We are doing the bulk of the work in 2013. And the Ocean Quest was supposed to begin its survey at the end of the fourth quarter. That got pushed totally into this year. So we saved about $9 million there.

We also had a $4 million adjustment on our Jones Act accrual. Larry talked about our safety record. Our best year ever in safety, both in terms of an incident rate and in severity. Very proud of that. We'll continue, as Larry said, to try to improve on it even more. But that did roll into affecting our bottom line somewhat, where we saved some $4 million and were able to reduce our accrual. If you take those two items into consideration, we actually came in within guidance. It was in toward the bottom-end of the range. Again, a reflection of the cost controls that we put in place, and we've done a very good job at doing. While at the same time, continuing to maintain our rigs at an adequate level.

Looking at some of the other line items on the income statement. Depreciation came in below guidance at $93 million. We had guided to about $100 million. Every fourth quarter we have a true-up adjustment. Sometimes it's higher, sometimes lower, favorable, unfavorable. This year it actually came in a little bit below where we expected. So that was normal. G&A slightly below our guidance, but within what I believe are normal fluctuations. And interest expense a bit below normal. We had a little bit reversal of interest expense related to some tax issues that expired at the end of the fourth quarter.

Finally, looking at fourth quarter, our tax rate came in at 15.9%. A big portion of that reduced rate is a result of that impairment write-down. The impairment write-down -- all of the rigs that were written down were in our domestic structure. Therefore, we booked that write-down at a 35% tax rate. So when you take the benefit of that write-down at 35%, it drove our tax rate down substantially. Without the impairment write-down, our tax rate would have been just slightly above 21%. The guidance that we had was 23% to 26%. The difference between that and the 21% is just our normal true-up geography differences of where we earn our pretax income, based on foreign tax rates at the different places that we earn it.

Now looking forward into 2013 and some of the highlights that will affect our financial performance. Larry talked about the down days. A high number of surveys again in 2013, where we have 12 rigs, which will affect both the number of down days and our costs, compared to 9 that we did 2012. As Larry pointed out, 2014 gets better, where we expect only five surveys to occur in 2014. I would point to you the rig status report for the details on those rigs, exactly how many days per rig, and the timing of those.

Looking at contract drilling expenses for 2013, we believe we will see an increase somewhere in the mid single-digits. And we are projecting contract drilling expenses for 2013 to be somewhere between $1.6 billion to $1.7 billion. That's up a little bit over the $1.537 billion that we occurred in 2012. The largest portion of that increase will be due to surveys. So the increase is coming in slightly over $100 million. Of that, $75 million will be related to the surveys going up from 9 to 12, and the amounts that we have to spend in those surveys.

We also have seen some increases in wages, and additional hands that we are hiring in order to get prepared for the drillships that are being delivered. Training costs are up slightly for the same reason. And add that to general inflation, somewhat offset for some of the jack-ups that we sold during 2012. You come down to a net result of $1.6 billion to $1.7 billion. As I said, mid single-digits, 5% to 7% increase.

Just a little bit more color on that. In addition to rig operating costs, those survey costs -- we are expecting most of our rigs to incur between $4 million and $10 million of survey costs during the year. The exceptions will be the Ocean America, Alliance and Quest, where those will come in somewhere between $13 million to $16 million, is our projections. And then the Ocean Valiant is a little over $20 million. We have a little bit more work to do on that rig than we do the rest of the rigs.

We will also incur amortized mobe and contract preparation cost expense of the year of about $40 million. That will be broken down into $14 million in the first quarter, approximately $10 million in the second and third quarters, and finally, about $6 million in the fourth quarter. Those costs -- most of it, if not all -- will be offset by amortized revenues, deferred revenues that we received that Larry talked about the accounting treatment in his talk. As always, I remind everyone that I have been talking about the line of contract drilling expenses on our income statement only. These numbers that I have just given you do not include cost incurred in the line reimbursable expenses.

Looking at just the first quarter 2013, we estimate that contract drilling expenses are going to be somewhere between $390 million to $410 million. That will consistent of our normal operating cost, survey costs associated with the Patriot, Rover, Worker and Quest. We have also mobed the jack-up Ocean King back to the US Gulf of Mexico. It actually arrived earlier this week, or last week. And that cost us about $6 million, so that will be included in our Q1 costs. And finally, amortized mobe costs I talked about earlier, some $14 million. Take all of that together and we're expecting $390 million to $410 million in the first quarter.

Some of the other line items in our income statement for 2013. We believe G&A will be, again, $17 million to $18 million per quarter. That is consistent with the guidance I gave all of last year that we came in slightly below. We see a little bit of cost increase in G&A, not much. To the point to where we believe we will now hit that $17 million to $18 million each quarter. Depreciation comes down slightly. The first three quarters we are expecting to incur depreciation expense of $94 million to $96 million. And then in the fourth quarter, as we start delivering rigs, we believe it will be somewhere between $100 million to $102 million. I will update that as the year goes on and we get a little bit more comfortable with exactly when we begin depreciating rigs.

Interest expense. Our gross interest that we pay is some $88 million or so -- $86 million to $88 million per year, or $22 million per quarter. Once you take capitalized interest into account, we believe in the first two quarters of the year we will have a net interest expense of $6 million to $7 million. Net interest expense should go down in the third quarter to about $2 million, and then rising to $10 million in the fourth quarter as we start delivering rigs. Again, I am fairly comfortable with the Q1 and Q2 of $6 million to $7 million. We will update the third and fourth quarters again as we get to those points.

We are looking at an effective tax rate for the year or 27% to 30%. The increase from our 2012 tax rate is based on a couple of things. First of all, in 2012 we booked about $80 million worth of gain on sale of rigs at a zero tax rate. These were rigs that were held in our foreign structure and therefore, for book purposes, we had a zero tax rate on that. And also the $62 million impairment tax benefit we booked at 35%. That along with some of the geography changes, with the Onyx going to work in the Gulf of Mexico and additional work in the Gulf, we will see that cause the rate to go up a little bit. It's a net result of 27% to 30% rate.

Now that will be booked in the second, third and fourth quarter. In the first quarter, we believe we will have a tax rate somewhere in the 11% to 13% rate. And that is due to tax legislation that was passed in early January 2013. It was legislation that was applicable to 2012 for the entire year, January to December of 2012, that we received benefits that we had not previously anticipated, or were able to book for accounting purposes. Because it was booked after the 31st, we are taking that entire benefit in the first quarter in accordance with generally accepted accounting principles. So 11% to 13% in the in the first quarter, 27% to 30% tax rate in the last three quarters. And as always, we'll update that as the quarters go on.

And finally, our capital expense guidance. We believe we will have maintenance capital of approximately $325 million for the year, another $120 million on the Patriot. And then our new builds, primarily the BlackHawk and the BlackHornet, where we are paying 70% to the shipyard upon delivery, we will incur an additional $1.3 billion worth of capital, for a total capital expenditure of the year of some $1.75 billion. And with that, I will turn it back to Larry.

Okay. Let's take some questions.

Operator, at this time, we will open it up to questions.

Thank you.

(Operator Instructions) Byron Pope of Tudor Pickering, Holt & Company.

You mentioned at the outset of the call the severe cost pressures in Brazil. I was just hoping you could provide some context in terms of how you think about the market dynamics in that area of the world, particularly as it relates to your fleet in the context of 2013.

Let me just characterize the types of costs that we see. Customs rates continue to be an issue for us. There's delays in getting in and out of customs, they've got strikes going on down there. So that yields costs and frustration. Skilled labor, Brazilian labor -- we've got some targets that we need to meet on certain rigs of percentage of those crews that are Brazilian. Those same targets impact our competitors. There is demand for people in the production world. Infrastructure going in, not only for the oil and gas industry, but for the coming Olympics and World Cup, all compete for the same type of individual. So that continues to go up.

Environmental regulations are evolving in Brazil. You've got the A&P coming up with safety and performance standards. All which can result in additional capital being required to the rigs, or things that on a year-over-year basis were not present. So those are the type of things that are present down there. And I think all of the drillers that I have talked to and listened to in various forms and all that, mention these type of factors and what that does to their financial results in Brazil.

And then just a follow-up question. You mentioned that maybe getting to the end of the road in terms of your floaters that might be upgrade candidates. How do you think about the fleet composition going forward? I mean obviously you've got the new-build drillships coming, but in the context of having reclassified your cold-stacked rigs held for sale, how should we think about Diamond continuing to grow the overall fleet, or the fleet composition changing over time?

Well, among the rigs that have -- the second- and third-generation rigs that are in good shape and are capable of meeting customer needs, certainly rigs in 3,000-feet of water, North Sea rigs, rigs where we have enlarged the capacity in one sense or another, including quarters. Those rigs continue to find demand and there is just nothing new coming for them. I think Michael, in his discussion, helped highlight the deepwater units. But where we have a significant presence in water depths right around 5,000 feet of water, we see very strong demand in that area. We've got low capital cost in those rigs and actually, the operating costs for crews and repairs and whatnot are significantly below what we spend on our fifth- and sixth-generation rigs. So all of those things, we see a future.

We are committed on a long-term basis to continue to enhance the fleet. And we would not see -- and that enhancement so far has taken the role of the -- the two new rigs we bought in the 2009 timeframe, then the four drillships that we are constructing, Onyx and Apex, where we will be delivering deepwater capacity really with some greater deck space, deck load and quarters than is currently in that market. All of those will continue to enhance. The Patriot is another one where we take the rig and make sure that it has a secure future. But we would see and we continue to look at other building opportunities. And we're trying to look not only within just adding drillship 5 and 6, but other things that might serve a particular niche market where we think that, in affect, we are diversifying where we're putting capital into the business.

Okay, thanks, guys, I will turn it over. Appreciate it.

Ian MacPherson of Simmons.

Thank you. Michael, is there anything holding back a rig like the Princess from garnering, you know, two-year extensions at the $400,000 rates that we have seen become more prevalent for that class?

Yes, Ian. We are currently having discussions with a couple of customers in those ranges and timeframes. You know, each customer has a different time horizon on their program. But that's where we see the market today, and I wouldn't think we would be significantly off of that mark.

Okay, good. Gary, you mentioned a $37 million reimbursement, I believe, for the Endeavor. And you had said that that compensates a mobe but is as well a day rate loss. Would you be willing to share what type of gross margin we should think about on that revenue component?

Well, I guess the answer is I don't have that particular margin. It is designed to cover the cost of modifications that we're doing and provide us with some margin during that period of time. But that all gets pushed forward. I think what we will do is, perhaps next quarter or so, we will make some disclosure on what the accounting impact will be on the Endeavor's contract, and what kind of margins it will look at having.

Okay, well, we will stay tuned on that, thanks. And then just lastly, are there any immediate plans for disposing of the rigs that you have reclassified here?

We don't have a signed thing in front of us. The Spartan is a 300-foot jack-up and probably has the highest demand of the three. There's not a lot of purchasers right at the moment of the semisubmersibles. But what -- we have certainly had a number of people look at those, at the semis. So we would -- when we say that -- when we put them held for re-sell, it's our intention to move them this year. We would expect to find somebody.

Okay, great, thank you.

Collin Gerry of Raymond James.

Great detail on the guidance. We certainly appreciate that. One of the questions I had, as relates to that -- and I think I heard this right -- was that of the $100 million increase in costs year-over-year, roughly $75 million of that was due to more survey time? And that we have 12 surveys this year versus 9 the prior year. Does that imply $25 million per survey? Or am I just doing some funky math?

I think that is a little bit too simplistic. You've got to look at all 12 surveys versus all nine surveys and where we spent the money. Because, you know, we can spend anywhere from $4 million to $20 million on a survey cost. It just -- as you mix all of those things up, it comes out about $75 million more this year, on the total.

We've got a number of deepwater assets that are also coming in, America and Valiant. Really good fourth-generation rigs, but those rigs were delivered in 1987, if I recall. So, I mean, you're looking at some age. And so those would tend to require more money than if, in a comparable period, we did a newer rig. An upgraded.

Also remember, part of the survey cost is moving those rigs into the shipyard and back out. So a big determination is exactly where they are at in relation to the shipyard we have to take them to, and that can drive the cost.

Yes, I think that is a good point. The Confidence and the Valiant, which are in West Africa, need a certain type of facility that is not really available in West Africa. So our current plans are to bring them to the Canaries.

Okay, well that is certainly helpful color. So I guess normalized, there's so many moving parts. But the range you mentioned, $10 million to $25 million, is that how we should think about surveys kind of going forward? And the [contom] thinking of it is that if we are going from 12 to five in 2014, that's obviously a good thing. And so we're -- I guess I am trying to think how do we put some context around how good that is?

Yes, well, the range I gave was from $4 million to a little over $20 million. Until we get closer to those, it's hard to say.

Right.

Right.

Assume $10 million each.

Okay.

That is just a great big ballpark figure.

That is very helpful. My follow-up, or unrelated follow-up is on Brazil. And you talked about the cost and some of the issues that go on there. It seems to me, just from a marketing perspective, that they are digging their heels in the sand a little bit on new-builds locally built. However, at the same time, they are missing some production guidance in Brazil. It just seems like there is a lot of moving parts down there, somewhat negative. Maybe you could just update us on your thoughts in terms of how many rigs they will need, what the timing is at, what does their marketing program look like for the next couple of years? You all have a lot of rigs. I'm just wondering what your thoughts are on how this looks over the next couple of years.

Yes, I will let Michael comment on that. I would just caution you that, although we work for Petrobras -- they are a great customer of ours, and we have a number of rigs for them, ranging from deepwater units, the 10,000-feet Courage and Valor, all the way to some shallow water semis, I don't think by any means we have enough of a perspective to be able to project what they're going to do.

Yes. And to add to Larry's comments, I would say that I think we're in a period right now, as we have discussions with Petrobras, that they are evaluating a lot of their production, a lot of their opportunities for development. And looking at their whole portfolio. In particular, they have had a changeover in management team. So with that, they have gone back and -- took a step back and slowed down a bit on their progression to do a review of all these projects. I think as we go later into this year, and definitely into '14, you are going to see more and more activity as they start deciding where they're heading forward, the progression they're going to make. I believe they're very intent on delivering and continuing the new-build program locally. It's just a matter of questioning the timing and when that develops.

But we continually have discussions with them. I see most -- the majority of the rigs they currently have continuing to work. There is potential perspective down the road that they may change the course and their strategy as far as the portfolio goes. But we don't see a big change at the moment. And I think you're right in that they're going to methodically evaluate, continue on the path they are, and then make their choices on where they invest their money. Of course, pre-salt is a huge play for them. And so we see that opportunity and the rigs that work around that area as having a strong demand going forward with Petrobas.

Thank a bunch. I will turn it back.

Todd Scholl of Clarkson Capital Markets.

Just a couple of questions. On the assets held for sale, it doesn't sound like that there is going to be -- you guys will put any restriction on who you're selling to. So you are not concerned about putting the rigs back in the market and having somebody else buy them and operate them for drilling. Is that right?

You know, the market is too thin for us to be able to go in there and start restricting who we going to sell and whatnot. In the best of worlds, we would like to see these rigs exit drilling and not remain competitive. But we believe that in the second- and third-generation market, there is just so few rigs, that that is not as important as it once was. The key criteria is having assets that are adaptable to the evolving demands in that water depth where people want more quarters and they want more mud capacity, they want more of a lot of things. And whether or not the new buyers choose to equip the rigs for that or they want to work it in a secondary market or something is -- at the end of the day, I don't think it impacts us that much.

Okay. And you guys also mentioned that you think that the opportunity to kind of upgrade and move rigs between markets in your fleet was kind of getting close to its end. Do you think that there is maybe opportunities to do that out there with kind of one-off assets that you might be interested in purchasing or looking at? Is that something you have considered? Or is that kind of something that is off the table?

No, that would be something we would consider, but I don't see that as a major needle-mover for us. I don't think there is a huge number of assets like that for us to acquire. I think most stuff that is for sale has limited capacity. And I -- look, we would love to be able to continue to make this investment, to put the Victory-class rigs, which made the basis of nine of our significant repositioning of assets, are done within our fleet. And then many of the other rigs have high day rates currently in the existing market. I mean, theoretically, we take the Ocean America and Ocean Valiant and spend some money on it and get a really -- upgrade that rig. But the rigs themselves have a nice day rate. So just, economically, it doesn't make sense.

Okay, great. And just one last one, if I can. As you guys move forward with your marketing efforts on the BlackRhino and BlackLion, can you guys maybe talk a little bit about what kind of emphasis you will put on the contracts, and maybe finding a more equitable split between subsea downtime, between you and the potential contractor?

Yes. No, one thing I want to clarify, and I think we talked about this before. We haven't seen a major shift in the contracts from the past. But we're always looking at that. And in an up market, that is some of the areas you really focus on and try to shift that to your side of the table. But we believe, you know, for the most part, our contracts we have on the current two rigs we have contracted within Anadarko and also the other ultra-deepwater rigs we have and deepwater rigs. They are -- it's fairly equitable from a downtime perspective. So we are always looking to move that, shift that to our side of the table. But I don't think there's huge gains there because we didn't lose much. Those clauses have stayed fairly standard from past experience.

Okay, great, thank you.

Waqar Syed of Goldman Sachs.

First, on the rig -- the Ocean King moving to the Gulf of Mexico. Do you plan to keep it on the US Gulf side? Or do you want to move it to the Mexican side?

We're looking at all different opportunities right now, both in the Gulf and in Mexico. In the near-term, we're focusing our efforts on bringing the rig to work in the US Gulf. But as Pemex comes out with tenders, as they do here and we expect them to do over the next year, we'll look at them and see if it makes sense to move it to Mexico. But right now we are really focusing our efforts in the Gulf. There's a strong market there and we believe opportunities for the King to go to work fairly soon.

Okay. And secondly, I have a question on the recognition of DD&A and operating costs for the BlackHawk. Do you still recognizing those costs when the rig actually starts to on the day rates which is some time in the fourth quarter? Or when it starts getting into commissioning and acceptance testing?

We've got to complete our commissioning before we begin recognizing costs. Up until that point in time, we will capitalize it. And we're still studying the accounting rules and exactly what we are we going to do in Singapore -- or Korean waters, versus what we're going to do in the US Gulf. If we are going to be able to complete the commissioning there or we have to complete the commissioning in the US Gulf. So that is to be determined. Accounting rules are pretty specific and can be difficult to apply. So we will let you know as that time comes closer.

Okay. And just one general question about the 2.5-year survey, special surveys versus, you know -- typically we see 5- to 10-year surveys. How are these different? And is this just more a North Sea kind of phenomena? Or do you see that happening in other places, too?

It's mostly North Sea. And actually the 2.5 versus 5 is, at least from a cost standpoint, is virtually identical.

This is the UK responding to the fact that most of the rigs operating there are in excess of 30 years old. And this is their response, that they want to see more frequent, more extensive surveys on a 2.5-year basis. And that is just one of the costs that's present in that market. But we think you are more than compensated by the day rates.

Sure. And so, should we be assuming every 2, 2.5 years about a same kind of downtime on the rigs in North Sea? 40, 45 days?

Yes.

Okay. All right. That's all I have, thank you very much.

Robin Shoemaker of Citi.

First question has to do with just in terms of the 12 kind of concurrent special surveys and so forth. In terms of your internal manpower and what you need for the -- from outside vendors and shipyards. Is everything lined up satisfactorily from your point of view at this point? Is it going to be a bit of a stretch? Or should we expect you to kind of make these estimated days? Or perhaps shave a little time off of those estimated shipyard days?

Well, while we are hopeful, I don't think we're going to shave days. We've got a couple in Brazil where customs issues can impact you, and you have to have a port cap and clearance before you leave. So there's issues there. There's always weather. And there is some negative stuff built in there. And during the year, invariably, we will have a survey that we will chop 10, 12 days off. We'll come up with some new way to do it. We did one last year offshore. We've done that kind of thing. But it will be more than offset usually by weather. These are good estimates that we can work on, but I just don't think that there is much positive side on that. But otherwise, we're happy with them. We wish the Canaries was closer to Angola. But other than that --

Having said that, the guidance we gave on the -- the ones for 2012, I don't believe we significantly missed any of them, plus or minus. Where we miss the most is in the timing, which is something that we just can't control.

Okay. So then my other question has to do with the CapEx budget that you described, $1.75 billion, and then your dividend at the current levels, roughly $500 million. Now you've got $1.5 billion in cash and marketable securities. So from a liquidity standpoint, are you all set for this year in terms of funding those CapEx requirements? And then what about 2014? How does that look from a CapEx point of view?

Well in 2014, we will have the other two drillships coming out, and the final charges for the Apex coming out. From a liquidity standpoint, you know, as you said, $1.5 billion of cash on hand. In addition to that, we have a $750 million bank line of credit that we put into effect last quarter. So we have that to draw upon. And we have only $1.5 billion worth of total debt outstanding. So if we do have additional liquidity needs, we certainly have the wherewithal to be able to go back to the market and supplement what we have on hand right now.

Right, okay, thanks a lot.

Matt Conlan of Wells Fargo.

Just a quick housekeeping question. What is the total book value now of your four held-for-sale rigs, after the impairment charge?

It's whatever line-item is on that asset-held-for-sale. What, some $10 million, $12 million? I'm looking. $11.594 million.

Yes. And I think a little bit over $7 million of the is the jack-up.

Yes. $7.5 million is the Spartan.

Okay, so the three rigs you had were $38 million as of September 30. So there is somewhere around a $30 million write-down of those rigs? Is that -- am I thinking about that right?

I'm not following that calculation.

Yes, we took a $62 million write-down, almost all on the three semis.

Okay.

It was totally all on the three semis. We did not write the jack-up down at all.

Okay. I will follow-up offline with Darren. Thank you.

Thank you. Let's do one last question, Darren.

Darren Gacicia of Guggenheim.

Thanks for fitting me in. Had a couple of questions, a little bit different areas. First, when you're looking at it, I have the rigs you put up as held-for-sale. You've had now -- you're upgrading some rigs and that it's sort of a consideration -- I'm assuming you're at the margin between what do we upgrade and how do we conduct those surveys and upgrades versus how do we employ capital on new rigs? Is there a balance between looking at kind of equipment and the life of the equipment that needs to go on rigs if you are going to upgrade them, versus maybe the life of the rig itself, versus how you employ capital maybe on new rigs? And can you just walk me through a little bit how you are thinking about that? Because it strikes me that some of these rigs are probably coming up against life, and the life of the equipment that you're going to put on them is actually maybe longer than the asset life itself. How are you thinking about that? I'm just trying to get a sense for the logic.

Well, I'd say the number one criteria is the actual design of the rig. And what you do with that. The Victory-class rigs lent themselves very well to -- had the strength and the longevity to be able to take additional weight and additional capacity. And it falls off from there. Some of these rigs, Epoch and New Era, are very small. They have a shallow draft and a -- so that there is not much can you do with that. And so that kind of restricts their water depth and it is difficult to really upsize the rigs to any degree without spending a lot of money. The quarters on some of these things are shot, so then you're looking at quite a bit of cost to go ahead and replace those. So it's the capability and design specs of the rigs that really impact how it goes forward. And these units just fell out of the bottom, and we did not think the capital required to get these rigs in a workable shape -- you would have a limited capacity rig, and it would suck up capital that could be better spent on new equipment.

Got you. And how much do you think it would cost to convert those into kind of a production unit, ballpark? Do you have any --?

That's not our business, and that all usually depends upon the specs of the customer, so there is a wide range there.

Okay. If I can have one more, just a different angle, different approach. I know some people have asked about Brazil on the call. It would strike me that, given their impetus to move into the Campos, to go back into a bigger kind of cash flowing of assets thought process, that that would be very good for demand for your rigs, at least through '15 and possibly beyond. You know, maybe '15, they go to -- start looking more towards the pre-salt and developing that. But it seems like the impetus is the cash flow and meet kind of reduced targets. Is that your sense as well? Because that strikes me as being very positive for you guys, versus being a liability.

I guess, all I can say is, I know what we've got and what we can offer. And it's matched up very well with what they've done in the past. They are looking where they want to develop fields and what production they want to move on. And whatever they do with new construction, it's still many, many years before that is delivered.

Right.

And don't forget the Campos Basin work and stuff. We're contracted until 2015 for all of that as we currently sit. So we are positive that that is going to continue even beyond '15. So that really is, I agree, is good for our fleet as it sits. And then we've got assets that work in the pre-salt, which is, of course, the future of Brazil. But we don't have a big concern in Brazil at the moment. We have discussions with them and we continue to see developments in the Campos area, and so we see it as a positive for us.

I would imagine, given the fact that whatever they have contracted kind of across their fleet, let's call it, there -- is going to have a mark-up in day rates significantly. Actually keeping mid-water rigs employed at probably what is lower than kind of a marginal, you know, ultra-deepwater rate -- you can fill in the blank over what time period you think that is -- probably still makes a lot of economic sense to them even beyond 2015, especially if they're going to be cost-conscious.

I would agree with that statement.

Great, I will turn it back. Thanks very much.

All right. I would like to thank everybody for joining us, and we will talk to you soon. Thank you.

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