Diamond Offshore Drilling Inc (DO) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Diamond Offshore's third-quarter 2013 earnings call.

(Operator Instructions)

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

Thank you, Maria. Good morning, everyone, and thank you for joining us today. With me on the call are Larry Dickerson, President and Chief Executive Officer; John Vecchio, Executive Vice President; Gary Krenek, Senior Vice President and Chief Financial Officer; Kane Liddelow, Director of Contracts and Marketing; and joining us on the call from Croatia is Richard Male, VIce President of Contracts and 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 that 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.

Now I will turn the call over to Larry.

Thank you, Darren. Good morning, and welcome to the Diamond Offshore third-quarter conference call. We reported what would have been otherwise a solid quarter, but by now you have seen that our results were negatively impacted by certain customers' credit issues. Let me begin by saying that in the 22 years since we gained our present size following a merger, we have suffered only one significant customer credit issue. However, the events of this quarter have added two clients for which we believe we should post reserves against our billings.

Financial difficulties of OGX have been well documented in the press. Although it was once a very strong company, projects that were ultimately judged non-commercial have deprived OGX of the cash necessary to meet its obligations. Going into the third quarter, we had two rigs working for OGX -- the 3,500-foot Ocean Quest and the fourth-generation Ocean Star. Our write-off related to these rigs consisted of $23 million of receivables for second-quarter billings and a loss of $35 million of revenues attributable to third-quarter billings.

Let's talk about the current status of those two rigs and their future plans. We were able to transfer our contract on the Ocean Star to another Brazilian operator, Queiroz Galvao, which will begin in late September, and run through February of 2014. This will take the rig past the end of its original OGX time commitment. We believe there may be future interest in this rig in Brazil, and depending upon our success in obtaining additional work, we plan to leave the Star in that country.

The Ocean Quest had been contracted with OGX through December of this year, but we negotiated into the contract in late October. This was done so that we could begin our marketing efforts and secure passage on a heavy-lift vessel to take the Quest to Malaysia for operations in Asia-Pacific. We do not at this time have a job for the Ocean Quest, but we believe this rig will be able to take the place of the Ocean Patriot, our third-generation rig currently in Asia-Pacific that will be returning to the North Sea for a three-year job with Shell.

While the loss of billed revenues and off-contract time for the Quest were significant in the third quarter, we think it's important not to lose sight of the overall success of our past relationship with OGX. This write-down was less than 5% of the total revenue collected over the past several years. Since 2008 we have had as many as five rigs working for OGX in Brazil, and have received revenues in excess of $1.4 billion.

Our other challenged customer, Niko Resources, is a Canadian company with activities in India and Indonesia. The Ocean Monarch was signed with Niko in late 2011 for a four-year commitment beginning in 2012. We originally brought the Monarch to the Asia-Pacific region from the US in 2011 as part of our effort to relocate equipment from the US Gulf of Mexico following Macondo. At that time, we judged Niko as being capable of fulfilling this long-term contract based upon the financial strength of its partners in the Indonesian prospects. And additionally, we were impressed by Niko's knowledge of the various basins in that country.

Recently, two things have impacted Niko -- major cash flow disruptions in their India assets, and the withdrawal of some of its partners from participation in the Indonesian program. At present, the Ocean Monarch is idle, while we attempt to negotiate a repayment plan for our owed receivables, and determine Niko's future commitment to the rig. We have interest in the rig from other operators, but typical customer lead time in this region makes it unlikely that we will be back on day rate before the second quarter of 2014. While we have not yet resolved the future of the Ocean Monarch, we believe that the rig's 10,000-foot capability and its excellent operating history will earn it an Asia-Pacific job.

We also have another rig, the Ocean Lexington, currently working in Trinidad for a consortium of companies, including Niko and the lead operator, BG. In late September, the Lexington was scheduled to begin work for Niko, but having been notified that we would be unlikely to collect those billings for the Niko job, we elected to sit idle for approximately 30 days before resuming operations for BG. The impact to revenue of not working for this period is expected to be approximately $9 million of lost fourth-quarter revenue.

Let me turn to shipyard delays. In our rig status report issued yesterday, we updated the delivery schedule of rigs under construction to reflect delays on some of the units. If there is a common thread, it's that equipment suppliers continue to impact these projects. Equipment delivery challenges are not limited just to BOP, but effect equipment across the board, from engines to drilling systems. And we believe tight schedules are affecting the entire industry, not just Diamond Offshore. That said, we believe that we have adequately accounted for all of this on our revised schedule, and you can continue to monitor our rig status report for further updates. We look forward to the imminent deliveries of the BlackHawk and BlackHornet, and their work with Anadarko in the Gulf of Mexico for the next five years.

Finally, I would like to say a few words on overall market conditions, which, apart from these customer-specific problems, remain stable. In ultra-deep water, there have been some fixtures announced with term at attractive rates, which provide solid data points of demand for rigs to be delivered next year. We are participating in customer discussions, and believe that a number of potential opportunities exist for the Ocean BlackRhino, as well as the BlackLion.

In deep water, we have seen strong customer interest in our units for upcoming availability. The Ocean Apex, our 6,000-foot semi, has received a letter of intent from a major oil company to begin working in Q4 of next year for approximately six months at a day rate that is comparable to our other new deep-water semi, the Ocean Onyx. We see additional opportunities for both the Onyx and Apex beyond what we have initially contracted.

Finally, for our new, harsh-environment semi, we have decided to follow a naming convention of using ocean predators. Our first rig, which is contracted with BP, will be named the Ocean Great White. As our initial location will be off south Australia where that species is active, we think the Great White will reflect that locality, and provide a strong identity for our customers and crews.

With that, I will turn it over to Gary.

Thanks, Larry. As always, I will give a little color on this past quarter's results, and then cover what is to be expected for the fourth quarter of 2013.

For the quarter just ended, we had after-tax net income of $95 million or $0.68 per share. That was based on contract drilling revenues of $691 million. EPS decreased from $1.33 in the second quarter due to lower contract drilling revenues and an increase in quarter-over-quarter contract-drilling expenses.

Larry has already discussed our customer non-payment situation, so I will not add much additional commentary other than to recap the numbers. Per GAAP rules, we were required to record a bad debt expense of $23 million pretax for outstanding receivables at June 30, and we were not able to recognize revenues in the third quarter of approximately $70 million that we billed our customers in accordance with our contracts, thus reducing drilling revenue for the current quarter by that amount. All totaled, these items resulted in an after-tax EPS reduction of $0.54 per share. Otherwise, our results for the third quarter were fairly clean.

Next, I would like to discuss contract-drilling expenses. We came in at $419 million, which was about 3% over the high end of our guidance of $405 million. There were three main items contributing to costs running higher than expected. The mobe with Ocean Ambassador to a shipyard to prepare for its Pemex contract; slightly higher-than-expected labor costs associated with crewing up our new build rigs; and we also had a catch up in spending for deferred major maintenance project costs in the prior quarters. Taking results for the first nine months into account, for the full-year 2013 we still expect contract-drilling expense to come in slightly below the low end of our original guidance range of $1.6 billion to $1.7 billion.

Looking at the other lines on the income statement -- depreciation, G&A, interest expense and our Q3 tax rate -- those all came in relatively close to where we had guided in our last conference call. In order to save time, I won't restate these numbers here, but rather refer you to the income statement included in our press release.

Now, looking forward to a few of the items that will impact our next quarter's earnings. The Ocean Valiant and Ocean Ambassador will be out of service the entire quarter, with the Valiant out for its five-year survey, and the Ambassador doing both its five-year survey, as well as preparing for its upcoming two-year contract in Mexico. The Ocean Princess and Ocean America will also be in port for a portion of Q4, completing their five-year surveys. In addition to these survey projects, we expect the Ocean Patriot to complete its contract in southeast Asia, and mobe to a shipyard to begin its upgrade work before relocating to the North Sea for a three-year contract with Shell.

Also, as previously mentioned by Larry, the Ocean Quest will be mobing from Brazil to southeast Asia. I refer you to our rig status report that we released this morning for the exact timing of all this work, and the exact number of days we expect rigs to be down in the fourth quarter. As previously mentioned, during the fourth quarter we do not expect to recognize revenue from our customer Niko on the Ocean Monarch or the Ocean Lexington.

Before I discuss contract-drilling expenses in Q4, as always, I would remind everyone that I will be talking about specific line item contract-drilling expenses on our income statement. These numbers do not include reimbursable expenses, which are reported on a separate line. We estimate that contract-drilling expenses in the fourth quarter will be between $405 million and $425 million. This will be comprised of our normal operating costs, as well as survey costs for the America, Valiant, Princess and Ambassador that I mentioned earlier. Survey costs for these rigs, which are already included in my estimate, should be approximately $25 million to $30 million during the quarter.

Also included are costs to mobe the Quest to southeast Asia, which will total approximately $12 million, and be expensed in Q4. Amortized costs and contract-prep costs will add another $7 million to $10 million to contract-drilling expense in Q4.

Finally, our large maintenance, major maintenance projects have historically been completed and their cost recorded during the fourth quarter. I anticipate this will occur again this year, and have an impact on total costs. Adding all these items together, we expect Q4 costs to run $405 million to $425 million, as I had previously stated.

I would like to take a moment to reiterate comments I made on our previous earnings call. Darren and I are still getting questions as to when we will start recognizing operating costs on the Ocean BlackHawk. As dictated by GAAP and our own accounting policies, we will capitalize any type of rig-based cost while the rig is in the shipyard and during its commissioning period. Therefore, we will not record any operating expense for our new build rigs during those periods. Rather, those costs will be capitalized and depreciated over the useful life of the rig.

After we finish commissioning the rig, we will mobe the BlackHawk to the Gulf of Mexico where it will begin its five-year contract with Anadarko. These mobe costs will also be deferred and amortized over the length of the contract.

After arriving in the Gulf of Mexico, we expect the final outfitting and acceptant testing of the rig to last about 30 days. Rig operating costs during this period will also be deferred and amortized over the length of the contract. The result of this is that we won't be seeing any type of rig operating costs hit our operating cost line for that rig until we actually go on contract with Anadarko.

For our other six rigs under construction, including the Ocean Onyx and the Ocean Apex, the cost incurred during the construction, commissioning, mobe, final outfitting and acceptance testing periods will be handled exactly the same way. These costs will be capitalized or deferred, and then depreciated, as part of the original construction cost of the rig, or amortized over the length of its first contract.

Looking to the other lines on the income statement, we forecast G&A for the next quarter to remain constant at somewhere between $16 million to $18 million, the same amount that we have been guiding to for the past two years. Likewise, depreciation should continue at the $97-million to $100-million level for the final quarter of 2013. In the fourth quarter, we expect to capitalize approximately $20 million of our gross interest expense. Guidance for our tax rate in Q4 remains unchanged at the 27% to 29% rate.

Finally, I will update capital expenditures for the full-year 2013. We do not expect a change to our maintenance capital estimate of $325 million. And new build capital expenditures should be approximately $1.1 billion. Together, total capital expenditures for 2013 should come in around $1.425 billion.

With that, I will turn it back to Larry for any further comments.

Thank you, let's take a question.

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

(Operator Instructions)

Our first question is from the line of Gregory Lewis of Credit Suisse.

Gary, could you touch on a little bit more how we should think about Niko going forward? Is this fully behind us or is this going -- how should we think about factoring this out over the next couple of quarters?

This is Larry. We have on the Ocean Lexington, which is a smaller amount. They have a $300,000 a day commitment. As soon as we go back to work for BG, we have solid work with other operators and we have a commitment with Niko on the end of that period. We have got plenty of advanced time to seek alternatives. I think that that thing should not be an issue.

On the Monarch, we are idle right now and are pursuing other jobs actively, as we indicated. We think that may take a while to secure that. So, we will be -- we expect it will be idle through Q4 before we can obtain something. We have some interest, but I can't give you a particular date. Then we will work with Niko to pursue receivables that we have outstanding and, if appropriate, to modify the contract for whoever else we may work for.

Okay, great.

Certainly, we have got a way forward, but we don't have a customer identified or a date that we are starting yet.

Okay. But when we think about the remaining for the rig sharing, it sounds like that is at the back end -- beyond this initial 30 days, that is at the back end of the contract?

That's correct.

Okay. Thank you. And then when we think about opportunities for the Ocean Victory in the US Gulf of Mexico, I guess that rig is on contract through late 2014. Should we think about that rig leaving the US Gulf of Mexico and if it does, just thinking about from what we hear there is difficulties securing heavy lift boats to mobilize rigs throughout the world. Is that something where if the rig is to leave the US Gulf of Mexico the transportation of that rig out of the Gulf of Mexico needs to be lined up sooner rather than later?

I think that is correct. We are here through just the beginning of 2014, January of 2014 on the Ocean Victory. But we do have other interests in it in this theater. I can't say that we wouldn't mobilize it somewhere. I think with moving some of the other rigs around, we are adequately covered and we are not flooding the Gulf of Mexico with excess capacity in this area and there is demand for this type of rig reflective of the kind of rates that we received on the Ocean Apex and Onyx that are being newly delivered. This is not one of my big worry points going forward.

Okay, thanks. One final one on the conversions for the Onyx and the Apex, it looked like those slipped a bit as well. Is that the same type of slippage related to the new builds in terms of equipment or is there something specific to those conversions that is making them take a little bit longer?

When we adjusted, we looked at each individual rig and in some cases we didn't have a specific item, but we thought it was appropriate if we are adjusting this to put a contingency for things that might happen that we don't know about. I would say the Onyx, as we indicated, is due to more steel work required and some issues with the shipyard and we do have equipment deliveries. The Apex has not been delayed as long, but there are some of those factors present.

Okay, perfect. Thank you very much.

Our next question is from the line of Ian Macpherson of Simmons.

Thanks. Larry, in mobilizing the Quest to southeast Asia without a contract, I think you mentioned that that rig has good potential to replace the Patriot in that market in terms of demand absorption. One of the questions I have with, I guess, with the Monarch is that the Niko's problem seemed to also underline the fact that there hasn't been exploration success offshore Indonesia. To me that puts a damper on the demand visibility for the region. Can you just talk about sort of the character of deep water and floater demand in Asia as it's evolved and how you see the term and rate opportunities for those rigs developing with these many moving parts.

I will let Kane comment on that. I guess the one thing is we can't comment on Niko's results. They're active. But there are other active bids right now in Indonesia. There are -- I'm not sure that that's condemned other prospects.

Certainly, we see forward demand both on exploration prospects and some meaningful development programs in the same region.

Okay. And then I guess with the Star, I think you mentioned has reasonable visibility for follow-on work in Brazil. Is there going to be, I think, any needle moving demand growth from non-Petrobras participants in 2014 as it relates to floater demand?

I'm not sure we can pinpoint that. As you know, there has been some leasing activity and movements for more leasing activity from international oil companies. That might be -- that is going to be a demand mover. What we are pleased with right now is that there are other companies besides OGX and Petrobras that are active down there. We are working for one of them right now. We are in discussions with others. I would say that would be more likely where we would be working in the near term, while the international oil company prospects develop.

Got it. Okay. Thank you very much.

Our next question is from the line of Todd Scholl of Wunderlich.

Good morning, guys.

Good morning.

And congratulations, Larry, on your upcoming retirement.

Thank you.

My question, first, I just want to get a little bit of clarity. In your press release you mentioned that the LOI for the Apex is similar to the one for the Onyx. Is that similar both in terms of term and day rate.

No. We indicated it is a six-month term and the Onyx is a year. But we are indicating that the day rate is very close.

Okay. Thanks. Additionally, can you maybe give us an update on the marketing efforts for the Ocean General and then maybe tell us what your thoughts are for the Ocean Yatzy once it completes its five year survey after its contract with Petrobras is done.

I will let Kane talk about the Ocean General and then we will come to the Ocean Yatzy.

Well, we see the General good through first quarter, certainly. Then there is a range of shorter term and some interesting long-term prospects for the rig in the region. So, we remain confident we will keep her working. That has been typical of her work history in that region and we see it remaining fairly consistent with that.

And the Ocean Yatzy, we are talking right now with Petrobras on some additional work for it. But the rig itself is small and is primarily designed for some workover type activities. It has got a unique market to itself. It's too hard to speculate nor is there data there that I think really points to overall market trends for the rest of the fleet. We got to find the right series of jobs for that rig and then the rig will probably require some investment. And weighing that investment versus the job prospects will be part of what we go through to determine its future life.

Okay. Just one more if I might. Kind of just following up on kind of talking about niche market. The accommodations market seems like it has really picked up. I'm curious, have you guys been approached at all about potentially anybody buying some of your stacked rigs and maybe trying to convert them into accommodation units. Is that something that you guys have even considered doing?

We have been approached in the past to look at these. I think each of these players are analyzing what rigs are available. There is nothing definite in the line right now.

Okay. Great. Thank you.

(Operator Instructions)

Our next question comes from Collin Gerry of Raymond James.

I will echo the sentiments regarding your retirement, Larry. The industry is going to miss you. You certainly took a leadership role during Macondo and I think that is a pretty good legacy to have. Congrats and excellent work over the years for your shareholders.

Thank you very much.

I guess the question now is there is a ton of moving parts that I think we are all trying to wrestle with and it's been the source of a bulk of your commentary and some of the questions. I think what we are trying to really get to is how to handle some of these in the near term. And maybe bucking conventional ways we do things on this call, but can you give us a little bit of insight into how revenues should work in the fourth quarter relative to kind of the 706-ish range if you include all the downtime in the third quarter? I'm considering maybe 5% lower than that. Is that the right range with the downtime?

I think we did a pretty good job of disclosing what rigs are in for survey. We do have a good cluster of them coming up in fourth quarter. Some which were delayed from earlier quarters. And then we are pretty much telling everybody that it's not our expectation that the Monarch will find a job in the next 90 days. It will take some time to get it lined up where comfortable. Those are the really big factors.

And of course, then the Quest will be mobilizing where -- Gary gave some guidance on mobilization, but this will be a fact mobilization without a job. So, we will be expensing that in the quarter. And I think if you factor those in, I think that will point you in the right direction as to what kind of revenues we would have. It is going to, obviously, decline versus some of our earlier quarters where we had much greater uptime than we are looking at presently.

The only thing I would add is on the surveys, as everyone knows, those things when we put that rig status report out, that is our best estimate at the time. Most of those surveys are -- the timing is dictated by when a well is going to end and we bring the rig in at the end of the well. The times will slip and slide. So, please continue to watch future rig status reports. We put them out every three or four [weeks] to watch where those surveys actually go because that will have a big impact on the revenues.

Yes, I'm with you. I think the goal here is to get everybody on the same page in terms of expectations for fourth quarter. Down seems reasonable and maybe pressing a little bit further, is it in terms of order of magnitude, is it 5% or 10% or is that as much as I am going to get?

We give you all the tools and I'm sorry we don't actually then say and the answer is.

Fair enough.

It's a math problem working off of that rig status report.

All right. Moving forward, Gary, you were speaking of the surveys, and with your fleet five year surveys is always something that comes up and cycles through. Could you just describe in context how 2013 and 2014 are shaping up to be in magnitude of five year surveys versus what the average should be. Is it a high year and then that should oscillate down in 2015 and 2016 or vice versa. Is there some sort of profound move versus the average that we should moderate for in outer years.

2012 was a large year and 2013 has been and will be a large year. 2014 will go down some. As, since they are five years, I can already tell you model in 2017 and 2018 are going to be higher than average. So, next year we are right now projecting seven surveys. We will have done 11 in 2013. We thought it was going to be 12 and 6, but the Valiant here just recently got pushed out of the fourth quarter of 2013 into the first quarter of 2014. So, again -- I'm sorry, not the Valiant, the Alliance. So, again, continue to watch that rig status report. Overall 2014 will be less than 2013.

Excellent color. Thanks, guys.

Let's do one more question.

The final question today comes from Brad Handler of Jefferies.

Good morning, guys. It's actually Eduardo in for Brad. How are you?

Just to go back to the Monarch one more time and then I got one other one. When you guys are talking about maybe finding work in the next four to six months or so for that, is that a sublet of the existing contract? In other words those guys will get a steal of a day rate that Niko had at 385 or is that a kind of cut your losses out right, cancel the contract and market that thing effectively at a competitive day rate, assuming 385, obviously, still well below market.

Well, since the contract is still in place right now, I can't tell you which way it is going to go. We will be looking out after our interest and I'm sure Niko will be pursuing theirs.

But I guess it can go either way, right? Either one of those options is valid?

Certainly, it could work out to where the contract is terminated and --.

Okay.

and we would have a repricing opportunity.

Okay. Got you, thanks.

Then my follow-on, you hinted about the Yatzy being a unique rig. I think that is something that is harder for us to see just by looking at a rig status report. If I think out, obviously, we know anything that needs major jobs. I think we know pretty much everything in 2014, but as I look out to 2015 and you start seeing a lot of that core mid-water and some of the other deep-water rigs, especially in Brazil, become more available.

Is there anything else you can highlight to us, because we have seen some of this in the industry lately where certain rigs rolled off contract and it turned out the rig needed a couple hundred million bucks and maybe the visibility wasn't there. Is there anything else that falls into that bucket, unique type rigs or rigs where you think there is going to be a lot of investment needed, if you will?

I would say the Yatzy is unique. It has a 16 three-quarter inch BOP, which is not the industry standard of 18.5. We added that to stretch the rig. Its water depth is ranged and it has very little deck load. Those are all the operating envelopes that we work in which points it in the direction of unique. Don't have an estimate of how much cost. We have been combing through our fleet and the rigs that we've got in cold stack or held for resale are the rigs that we don't think it's worth the money going in. It's not always the case of just the money, but the limited capacity of the rigs or the age of those particular rigs.

There may be some more that fall in that range and they would come out of our mid-water fleet, but I don't think we are faced with any of our deep-water significant 5,000-foot rigs that aren't in good shape. They might, from time to time, take some money, but we think the market will absorb that and can sustain that. When the rig comes out, it will have adequate capabilities to keep working and that's not always the case on some of the smaller rigs. That's as good as I know at this stage. So, you are sharing that.

Okay. Thank you, I appreciate it. I will turn it back. Thanks.

All right. Thank you very much. We will talk to you again in a few days.

Thank you. This concludes today's third-quarter 2013 earnings call. You may now disconnect.