Diamond Offshore Drilling Inc (DO) 2014 Q1 法說會逐字稿

Welcome to Diamond Offshore' s first- quarter 2014 earnings conference call.

(Operator Instructions)

It is now my pleasure 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. With me on the call today are Marc Edwards, President and Chief Executive Officer; Gary Krenek, Senior Vice President and Chief Financial Officer; and Kane Liddelow, Director 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 the drilling rigs will enter service, as well as managements plans and objectives for the future.

A discussion of these risk factors that could impact these areas in 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 Marc.

Thank you Darren. Good morning everyone. Welcome to our first-quarter conference call.

Many of you will already know me from my prior role in the broader oil field services sector. And no doubt you will be keen to learn what will be my areas of focus moving forward as President and CEO of Diamond Offshore.

I don't think it will come as a surprise that I will be focusing on three main value drivers. These being: investment excellence, to include asset optimization and capital efficiency allocation. Commercial excellence centered around customer relationships, pricing, utilization, and fleet positioning. And operational excellence, whereby we minimize downtime and maintain discipline in operating expense and SG&A. While of course continuing our ongoing focus on the health and safety of our constituents.

Allow me to dwell on that last point for just a moment. I've been with Diamond Offshore for little over seven weeks. One of my first undertakings was to understand and review Diamonds approach to safety and the protection of the environment. I also reviewed our operations management systems and I am pleased to report I liked what I saw.

I have met all of our rig managers, spent time in our new training facility, witnessed the ongoing construction of our drill ships in south Korea and I have been offshore to visit our newest semi, the Ocean Onyx where I witnessed firsthand the outstanding reliability and advanced technologies that such a rig from the Victory Class [era] can offer.

I have visited clients, both here in the US and overseas, met many of our front-line employees and a number of our investors. The message I received is consistent. Diamond is a proven performer with great people and a solid track record. We are well known for our strong safety culture, have a competent and highly trained workforce, and cost controls that are amongst the best in the industry.

And as you of course know, Diamond Offshore has recently added new builds and upgraded its fleet, whilst maintaining the highest credit rating and the strongest balance sheet amongst its industry peers. So when people ask me what is it that attracted me to become a part of the Diamond family, frankly it is all of the above. Which leads me into our first-quarter 2014 financials.

Results were good although we did have a few items working in our favor. Most notable was a $0.12 per share benefit to tax expense related to a settlement with Egyptian tax authorities. Additionally, our operating costs benefited from some rig surveys shifting into the second quarter, as well as our successful efforts at managing expenses. More from Gary on this topic in a few minutes.

As for the fleet, allow me to say a few words as an update on contract fixtures as well as the status of some specific rigs. Last night we released our rig status report. Which included the announcement that the Ocean Quest has received a contract in Vietnam that should extend until year end.

This rig is new to the Southeast Asian market following its relocation from Brazil, and the rate at $199,000 per day is considered a rate that was opportunistic to get the rig working in that part of the world. We are consequently pleased to put this rig to work and anticipate additional follow-on opportunities.

Also in Southeast Asia, we have announced that the Ocean Monarch has been signed to a job in Indonesia for our customers Total. This should commence in late May or early June at a rate of $420,000 per day and last between 60 and 150 days. I am very pleased to see this rig return to work and we are also in advanced discussions on some additional longer-term opportunities for the Monarch in the region.

We previously announced the two-year term contract for the Ocean Victory in Trinidad at a rate of $398,000 per day. We are actively marketing the rig to fill the gap before this contract begins next year. But in all likelihood, we will see some idle time during the remainder of this year.

Our deep water rig, the Ocean Valiant, has been idled since completing its special survey earlier this year in the Canary Islands. We are therefore looking at mobilizing this rig to the North Sea, were we believe there will be ongoing opportunities.

The Valiant was originally designed to work there, so will require a limited number of modifications to meet the most up-to-date North Sea requirements. However, due to long equipment lead times typical in the industry right now, this work cannot be completed prior to year end. In the meantime, we will continue to market the rig for opportunities outside of the North Sea.

I do have additional comments, but first I will hand the call over to Gary to discuss our financial results in greater detail.

Thanks Marc. As always, I will give a little color on our quarterly results and then cover what is to be expected for the upcoming quarter and the remainder of 2014.

For the quarter just ended we reported after-tax net income of $146 million or $1.05 per share based on contract drilling revenues of $685 million. This is an increase in EPS from $0.67 in the fourth quarter of last year, and as Marc has mentioned, was mainly driven by a decrease in both tax expense and contract drilling expense.

The reduction in tax expense was primarily due to two reasons. First, was a successful settlement with Egyptian taxing authorities of certain items related to our operations there for the years 2006 through 2008. The settlement enabled us to record a $17 million decrease in tax expense in the first quarter.

Second, the normal tax rate, excluding the Egyptian settlement, was slightly lower than expected which also benefited net income. I will provide a little but more information on that momentarily.

Our quarterly results were also aided by incurring rig contract drilling expense of $370 million, which was below the prior quarters expense of $409 million, as well as the guidance of $405 million to $425 million issued on our last conference call. Part of this reduced cost is simply timing. Both the Onyx and Alliance had there Q1 survey shifted into the second quarter which reduced our cost in Q1.

Additionally, the Ocean Endeavor completed its job in Egypt a month ahead of schedule, allowing the rig to mobilize to the shipyard to prepare for its next job in the black sea working for ExxonMobil. The derrick was taken down and the rig was then transported aboard a heavy-lift vessel through the [Boselur] Strait. We are now reassembling the derrick and preparing the rig to go to work. During the rig transport and while in the shipyard operating cost were capitalized, further reducing first quarter cost.

In total, shipping and ship yard time accounted for about one half of the variance between expected and actual contract drilling cost. The remaining favorable variance can best be attributed to our ongoing efforts to control costs, which as always, after safety, remains one of our top priorities.

Turning to a few of the other line items on the income statement. The increase in depreciation expense to $107 million from $97 million the prior quarter was primarily a result of a shipyard deliveries of Ocean Onyx and the drill ship Ocean BlackHawk which were delivered in Q1. The increase in interest expense to $18 million, versus $8 million we reported in the prior quarter, stems from additional debt that we issued in Q4 of last year, along with a decrease in capitalized interest again due to the delivery of the Onyx and the BlackHawk.

As I stated earlier, our tax rate for the quarter was impacted by the Egyptian tax settlement. Without that discrete item the tax rate would've been approximately 23%, below our guidance of 25% to 28%. The lower rate resulted from changes in our estimates from the geographies and various foreign tax rates where we earn our pretax income. As a result of these changes we are now forecasting a tax rate of 22% to 25% for the remaining three quarters of 2014.

Now for a look at some of the items that will affect our financial performance in the coming quarter. As always, downtime for survey and shipyard projects will affect not only revenue numbers but also contract drilling cost.

In Q2 we expect the Alliance, Titan and Courage to incur downtime in additional cost related to their five year special surveys. In addition to foregoing revenue during the yard stay these surveys will add some $20 million to our normal operating expenses.

We have three other rigs however, which during the second quarter will have their operating expenses capitalized and deferred, thereby reducing total Q2 cost. These rigs are the Ocean Confidence which, as previously forecasted, will be in the shipyard undergoing service life extension. The Ocean Endeavor, which will continue its preparation to work in the Black Sea, and the Ocean Patriot which continues its ship yard up rate for its three year contract with Shell in the North Sea. For an exact number of down days expected in Q2 and the timing of these projects I will refer you to our rig status report we filed last night.

Adding two contract drilling expense in upcoming quarter will be the operating cost for our new drill ship the Ocean BlackHawk, which we expect to begin operations in the Gulf of Mexico in the second quarter. We will also recognize amortized mobilization and contract preparation expenses related to various rigs in our fleet, which should total $10 million to $12 million. With these pluses and minuses we expect contract drilling expense in Q2 to increase to between $405 million to $425 million.

As always, I remind everyone that I've been talking about the line on our income statement Contract Drilling Expenses. These numbers that I've just given you do not include costs incurred in the line reimbursable expenses. Reimbursable expenses has always, whatever the amount incurred, will be offset almost dollar for dollar with additional reimbursable revenues.

Depreciation expense for Q2 is expected to increase to $113 million to $118 million, just as we previously forecasted. Interest expense should be $15 million to $20 million in Q2, and G&A expense should return to the range of $17 million to $20 million, all in line with amounts we indicated in last quarters conference call.

As I previously stated, our tax rate for the final three quarters of the year is expected to fall to between 22% and 25%. Our capital expenditure guidance remains unchanged from the last quarter. For 2014 we expect to incur $285 million of maintenance capital and $1.8 billion of new-build CapEx for a total of $2.1 billion. For 2015 we are still anticipating capital expenditures to be approximately $800 million, primarily made up of the shipyard patient payments on Black Lion, plus maintenance CapEx.

And finally, we have increased our syndicated five-year revolving credit agreement by $250 million to a total of $1 billion of borrowing capacity maturing in 2019. The entire amount of the facility is available for all revolving loans, which adds considerable flexibility to the $1.5 billion of cash and cash equivalents we hold on our balance sheet. With that I will turn it back to Marc.

Given the disclosure this morning of our share repurchases, I'd just like to make a few comments regarding our thoughts on the return of cash to shareholders. We fully recognize the dividend income is an important attribute of Diamond Offshore stock for many of our shareholders.

Accordingly, we anticipate that there could be some confusion as to whether our share repurchase may signal a shift in our strategy for capital allocation. The answer is no. Our strategy has always been to take advantage of industry ups and downs in order to make opportune investments, and this can include share buybacks.

Just to be clear, we anticipate that the special dividend will remain a priority. Whereas we would approach share repurchase on an opportunistic basis. However, we will not give specific guidance on our plans with respect to the special dividend or future share repurchases. Our policy remains that the decision to repurchase shares and/or declare a special dividend will be determined by our Board of Directors based on the Company's financial position, earnings outlook, capital spending, and other relevant factors.

Clearly I started my tenure at Diamond Offshore at an interesting time. After several years of strength in the offshore market where demand for deep water drilling rigs exceeded supply, today we find ourselves with a somewhat uncertain outlook ahead. There is a consensus view developing, suggesting that it's going to get worse before it gets better.

The 2014/2015 could be a tough environment for the offshore drillers. The large number of rig deliveries is transparent to all. Yet the short-term demand forecast is not as assured. Such market dynamics are not new to me, for those of you that are familiar with my background.

Although we cannot exactly predict where future day rates are headed, we do believe that Diamond Offshore is best positioned amongst its peers to weather any market conditions. Offshore drilling is a cyclical industry. And by maintaining the strongest balance sheets and the credit ratings in the industry segment, Diamond can take advantage of these cycles as it has demonstrated in the past.

From an organizational standpoint I am impressed with what I've seen so far. I think Diamond's offshore safety culture and service delivery, training, cost controls are all top drawer. Nevertheless I will continue to work with the management team towards constantly improving all of our value drivers.

Over the next several months I will be further developing our longer-term strategic options and of course visiting our client base, many of whom I already know will. What I can say is that my mission is to continue to focus on safe operations whilst enhancing our already strong stakeholder relationships. At the same time, I will be seeking further opportunities to maximize shareholder returns through efficient capital utilization.

It remains for me to thank you for participating in this call today, and with that I will take questions.

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

(Operator Instructions)

Matt Conlan of Wells Fargo.

Hi guys, and, Marc, welcome to Diamond. Congratulations on starting with a good quarter.

In the past, Diamond has used its strong balance sheet to acquire assets countercycliclly. What are the opportunities that you see out there now? Do you think there will be opportunities to buy new distressed assets?

Thanks, Matt. Yes, certainly there will be.

If you look at Diamond, if you look at our balance sheet, if you look at our credit rating, we've got a pretty good deck of hands that we are holding close to our chest. I'm not going to take the opportunity right now to tip that hand and suggest specifically what opportunities are out there. But let me just say I think we are best positioned going into this downside of the cycle to take opportunities as they materialize and address some of the asset issues parts of the investment community are suggesting are holding us back in this moment in time.

Without getting specific, can we talk about what kind of size investment you would feel comfortable making if assets become available? Would you have a limited $1 billion, $2 billion, $3 billion, where would you feel comfortable taking the balance sheet?

That's something that would be a decision made by the Board. I've got certain ideas around that and I'm sharing those ideas as we speak, because I've met with the Board, we've had a number of meetings already. I've been up in New York a couple of times, and what I am saying right now is that everything is on the table and nothing is off the table. But at the same time, but we do have to look closely at what kind of leverage we take on as we take advantage of opportunistic issues as they arise as we approach this downturn.

Thank you very much.

Ian Macpherson of Simmons.

Yes, thanks, Marc, let me echo that. Congratulations and welcome to this fun time in drilling and to Diamond. The share buyback was, at least in the past many years, pretty unprecedented so I think from that standpoint a bit of a surprise to us. And when we think about your first pillar to be highlighted in your opening remarks with regard to investment excellence, and your balance sheet relative competitive advantage of the balance sheet. How are we to interpret this recent opportunistic share buyback?

Obviously, if you do that with much more scale you're eating in to your balance sheet advantage going forward. Is this simply the Board wanting to draw a line in the sand with regard to intrinsic value of the Company or can you give us any more color about behind what spurred that repurchase at this time?

Sure, I will be totally frank here. The Board authorization was given before I joined Diamond. The Board authorized management early in the year to repurchase shares. I don't think it's necessarily an indication of putting a floor under our share price right now. I think it was just taking a look at our balance sheet and there's various different ways we can return value to our -- or cash to our shareholders. And at the time it was thought opportune to step in the market and do such.

You're right, we last purchased shares in 2004, but all the time the Board is looking at opportunities to maximize return to shareholders and decided at that particular moment that it would be good for our shareholders to step into the market and buy those shares. I won't comment on possible future share buybacks, particularly since Diamond specifically does not have a plan or target with regard to share repurchases. But suffice to say the Board regularly reviews the Company's liquidity and prospects and makes these decisions regarding capital allocation and value creation alternatives and that's what they felt was appropriate at the time.

That's very helpful answer, thanks. If I can have a separate follow-up. Brazil demand. It's obviously been a pretty clear downward trend for the past year, year-and-a-half I guess. And it is still an important mid-water market for Diamond today. You have numerous rigs facing rollovers over the next year or so.

What is your view of where we are, what inning might we be in in terms of this unline in terms of Petrobras' low-end floater demand and how you see that market? Regardless of what happens with the sets and new build, how do you think their demand looks over the next year or two with regards to the mid-water fleet that is rolling off contracts?

Look, we generally have contract coverage in Brazil well into 2015. And, of course, as you know we are engaged in discussions on expanding a number of rigs down there. Those discussions had slowed down but they speeded up again and we are at a sensitive stage in those negotiations right now. I am not specifically going to cover where we are on that.

Suffice to say that we should have stuff pretty close to inked up during Q2. And then, of course, they need to go to their stakeholders, so perhaps later in the year we will be able to give you the outcome of those discussions. But we remain optimistic in that market.

Having said that, yes, there is very concerned about the general direction of that market. What we have done in the seven weeks that I've been there is we have gone back to a clean sheet of paper and looked at the ultimate deepwater market.

Sure, we are going into a period of uncertainty. The cycle is probably going to be a U-shaped recovery rather than a V-shaped recovery. But you cannot escape the fact that in the long run the deepwater market is going to be very, very important for our energy needs moving forward. And Brazil is going to be a component of that.

We've certainly got headwinds in our face in that market space. Petrobras, of course is, from a supply chain perspective, not only a good customer to be positioned with but also one that is very sophisticated in that market. So, we believe Brazil -- we've got a good propensity down there. They'll be part of Diamond's future and we're very pleased to be participating in that market. We have had a lot of success down there in the past and we will do so moving forward.

That is very helpful, thanks. Pass it over.

Todd Schull of Wunderlich Securities.

Good morning, guys.

Good morning.

Congratulations on a great quarter. I just wanted to touch base with you guys on the Yorktown. Are you guys -- that comes due in the middle of summer. Are you guys at the point where you are having conversations with Pemex on the future of that rig after its contract is complete?

Yes, I can answer that. Yes, we are in discussions. We believe that rig will be extended and we also see follow-on opportunities for that rig in that market.

Okay. And I know you guys don't have a lot of jackups anymore, but in the regions where you do have jackups, what is the sense of that market that you -- and for the Titan once it completes its five-year survey, is that rig expected to go back to work for Pemex or is that going to [bid] outside of Mexico?

We would expect the Titan to continue to working in Mexico. Whether or not it's for Pemex or potentially another operator remains to be seen. We certainly see a future for her in that market.

What is your sense of the jackup market in general in the regions you operate?

Well, we are only operating in Mexico and, of course, the Gulf of Mexico. Let me just go back to some commentary I was saying earlier about what we believe is the ultimate strength of the mid and deepwater market.

Certainly, if you look at energy needs out for the next ten years, a lot of that growth is going to come from the mid-water and the deepwater space. We don't quite see the same coming from the shallow-water space with probably the exception of the Middle East. The Middle East is certainly going to be relatively strong moving forward.

But the Gulf of Mexico, and to a certain degree Mexico, I think this is not news to anybody, is not going to show the same growth as perhaps Mexico moving forward. What we're going to see in terms of growth in Mexico is Pemex and the IC's that are going in there. They move into the deeper water space which, of course, we are well positioned in.

Great, thanks, I will leave it there.

Gregory Lewis of Credit Suisse.

Yes, thank you, and good morning.

Good morning Greg.

My first question is around the BlackRhino and really the opportunities for that rig. And the way I would ask this question is when we think about opportunities for new-build rigs coming out of the yard, it seems like bifurcation in the price spread between older and new rigs has really been wide. Do you get a sense that the spread between a six gen new build and the fifth gen rigs that you have in your fleet, do you get the sense that spread is actually widening, staying the same, or even potentially contracting?

Let me talk about the BlackRhino for a minute. That was a rig that I was actually climbing all over in South Korea a few weeks ago. And therefore, naturally it is our next deepwater drill ship that is coming out of the yard.

Let me first address it by suggesting that there was a rumor going out in the market space that we'd contracted the rig for $400,000 a day. That's incorrect, I don't know where that came from. But let me follow up on that.

The BlackRhino will be leaving the shipyard probably September or October time this year. And we are in advanced discussions with a key client of ours that has already established as one of our key customers on contracting that rig. And I will have an update for you during our Q2 conference call.

In terms of the rates, again, we have seen what one of our competitors offered for a 5 1/2 generation rig, if you want to call it that, in Brazil. We are at a sensitive time on negotiations with some of our ultra-deepwater ships. I don't specifically want to come out here and tip our hand with respect to rates. But suffice to say, we will get the Rhino contracted at a rate that will be higher than the rumor that was suggested at $400,000 a day.

Okay, and just moving over to the North Sea, the Princess was contracted. It was that one well extension. Was that option already priced? Or is that an indication of where a short-term work in the North Sea currently is?

I would say yes to both. That option was priced and we are in discussions about following work at similar price levels.

Okay, perfect, thank you for the time.

Darren Gacicia of Guggenheim.

First, welcome, good to speak with you. I wanted to ask, there were comments made in this earnings season so far about plowing through some of this capital budgeted vetting issue that has kind of pushed a lot of activity to the right, and we're starting to find -- it seems like we're starting to find some solutions via standardization, being finding ways to lower some of the production infrastructure that is involved with some of these fields, and it may bring activity back a little bit sooner rather than later.

If we think over the last six months in terms of change of view on the floater market, is it starting to get a little bit -- a little bit better in terms of maybe the -- with a thought toward duration or is it staying the same? How are we thinking about how the market outlook is changing and maybe how you're thinking about contract durations as you go forward in light of that?

That's an interesting observation because we have certainly seen some improved points of that scenario somewhat starting to develop. If you go to Total, that is one that's in the public domain and what they recently announced some ten days ago about block 32, and how they have taken the investment cost down from $20 billion down to $16 billion, on the back of addressing some of the infrastructure costs and the like. But nevertheless, you cannot escape from the fact that with the repositioning of deepwater day rates, some of our clients, and I've heard this -- I can speak to Total because that's in the public domain. But I have heard some commentary from some of the larger clients suggesting that those rates normalize, if that is the correct term, that it does change their investment metrics. So we might see some of the projects that have been pushed somewhat out towards the horizon becoming more attractive and coming forward.

At the same time, I think, let's not underestimate the sophistication of the supply-chain that exists in -- supply chain processes that exist in some of the larger IOCs. And obviously they are differing many of the contracting opportunities that they otherwise would have taken today on the assumption that rates are coming down.

So, if they can push those decisions out or those RFQs out further, the assumption then would be they would get a better price, which again, impacts the economics of these very, very huge investments. And we have certainly seen that. We have seen zero contracting over the last -- well, as we closed out 2013 and moved into 2014. And some of the contracting opportunities have slightly improved, but I guess the suggestion, as one commentator put it, it was still next to zero.

I think there is going to be somewhat of a bottleneck that will need to be uncorked at some stage moving forward. We will start to see opportunities and contracting opportunities manifesting themselves, more so than they have been in the past as we move towards the end of 2014. I am not suggesting specifically that we're out of the woods or that we are beginning to see the early seeds of the market turning around at this stage. You've got to take that into consideration. And I certainly heard it from some of the operators that I've been speaking to in the past where my suggestion is the economics are somewhat changing that might bring back into play what we exactly saw with Total in Angola just ten days ago.

From a benchmarking perspective, if you are following the market and you're trying make sure -- you see where the signposts are. I s it one of those things where if some projects were to enter the queue for 2015, when would you really start to -- given the dynamic you just mentioned about the gamesmanship, the clients and the rest on timing of contracting, when is the latest you may start seeing or when is the expected time to start seeing people come to the table with inquiries for rigs and the rest.

I think it's going to be certainly a quarter or two away. Towards the end of this year. We cannot escape the fact that we've got a lot of supply coming to the market over the next 18 months. And that's going to keep a dampener on, certainly, pricing moving forward. The current scenario that is playing out today I don't think is a long-term scenario.

I think, sure, we've got the issue with the supply coming to market, but the lack of contracting opportunities that we are witnessing today is not something that is sustainable. I think the market will have to turn probably towards the end of this year in terms of opportunity.

As you look -- if I could squeeze one last one in, if you think about your fleet albeit well-maintained, somewhat older and maybe kind of more challenged by, say, the, quote-unquote, bifurcation issue that has been mentioned earlier on the call. As a person at the helm now, how do you really think about managing those assets, what their duration is and maybe giving us an indication of what may be ripe for retirement and what may be ripe to move on? Because it's one of those challenges I think that people following the Company sort of try to struggle with to see what those asset values are and how to think about that.

Yes. As we look at the fleet portfolio we have, there is various opportunities or scenarios that can play out and we're looking at those right now. Let me just reiterate one thing. We have built seven deepwater and ultra-deepwater rigs that will be delivered this year through 2016.

In 2010 we bought two new ultra-deepwater semis at distressed prices and we will continue to grow the fleet. We will do so on an opportunistic basis, picking and choosing our entry points to address some of the fleet issues that are out there.

But I will say this, when I came into the business and looked at it with fresh eyes, I was surprised at the commentary, or the extent of the commentary regarding the age of our fleet. At one stage my career I was in the military where we flew assets that were actually very aged.

It is horses for courses. It is how you maintain them. It's how you upgrade them that is important.

So it's no coincidence that the first rig visit that I did was to the Ocean Onyx. That is effectively a brand new rig. It is very different to what came to the market in 1972. And I will stand up and argue that is the case till I am blue in the face with anybody who would want to take me up on that.

I visited the rig; it is a brand new rig. I spoke to the client that is on that rig, Apache. It just so happened that the company man running the rig was somebody that I knew 30 years ago, by coincidence, on the rig floor of a couple of rigs in the Middle East. He spoke very highly of the unit. It is horses for courses and for the job that it is doing today it is ideal.

So I do take some umbrance with the issue that our fleet is very old. It needs to be looked at. Is it fit for purpose? How well is it maintained? How well is it operated? And I think if you look at it from that perspective, I think it will alleviate many of the concerns, or even the suggestion, that we are encumbered by the age of our fleet.

So I'm quite passionate about what the folk at Diamond are doing. We have a great technical services department. I've sat with them; I've spoken to a lot of their staff. And so I've answered the question in many different ways. Yes, okay, we will continue to invest as we grow the fleet and new assets. But, at the same time, let's not underestimate the capability of some of the assets that are described as older in our fleet.

And I do want to make that point, that our clients don't necessarily see it in the same ways that it has been suggested by some of the commentators out there in the market. And I will leave it with that. I am not going to go into the specifics of what are the 45 assets we believe are perhaps nearing the end of their lifecycle. I just want to leave that as a general comment, if I may.

That is great, great color. I appreciate it, thank you very much.

JB Little of Cowen and Company.

Good morning, guys, and Marc, once again, welcome to Diamond. I have a follow-up question on some of the Brazil commentary that you guys had earlier in the call. I was just curious as to -- we have seen some rigs be released by Petrobras before their contracts actually ended, and I was just wondering if the contracts on any your rigs that are down there, if you have terms that allow Petrobras to do something similar in terms of releasing the rig before the contract actually ends? And if so, do you guys have termination fees associated with that? Just wanted to get an idea if that's something you guys might be exposed to.

Well, there's no provisions in the contract that would allow Petrobras to do that. If any arrangements were to be made it would have to be on a mutually beneficial basis.

Fair enough. Another question I had was on potential growth of the fleet as opposed to alternate uses of capital.

Where would you guys rank ordering new builds in your list of options for using capital; be it share repurchases or dividends? I am just trying to get an idea of where you guys stand in terms of potential to grow the fleet anytime soon, or is this something you would look at further down the line?

We have dusted off some of our old plans. We're looking at everything right now. We're starting with a white sheet of paper.

In terms of returning cash to shareholders, you've got the dividend, you've got the special dividends, you've got share repurchases. And, of course, you have got investing in assets. That downturn provides opportunity, especially for a company like Diamond. So we'll return cash to shareholders as I suggested, on and opportunistic basis, picking and choosing what maximizes return on our capital.

There is various stuff that we're looking at right now. The priority does remain with the dividend, of course. But we are also looking at other opportunities that remain out there. So we've got a lot in our armory and as we select what we are going to fire to return cash to shareholders, everything is on the table.

Okay, great, if I could squeeze one more in there. I had a question on the Yatzee, I know that's kind of a unique rig. I was just wondering, what type of work are you guys going to be putting into it when it goes in for its five-year survey? And are there a number of opportunities for that rig coming out of that survey or are options limited for that rig? I'm just curious as to where that rig might end up as we look into 2015.

Well, the first thing I would say is that Petrobras liked that rig and it fits a specific purpose for them down there. We are exploring further opportunities with Petrobras down there. And depending on what they see themselves needing to use that rig for will determine the scope of the five-year survey. That is something that is still under discussion and we can't really go into any more details at this time.

Okay, but safe to say that there could be a range of things that the survey might entail and also a range of costs associated with that?

Yes, and depending on which opportunities selected will depend which course we would have to undertake. But presumably the contract terms would reflect the investment required.

Thanks, I will turn it back over.

David Smith of Heikkinen Energy Advisors.

Good Morning, Marc, and congratulations on your new role. Regarding the floater idle time, could you please talk about cost control opportunities to minimize the costs associated with those rigs when they lack the contract visibility, or should we continue to model just regular operating cost?

For the time being, normal operating costs may be slightly reduced as we evaluate future opportunities. Of course, if we see these rigs stay in stack for longer periods of time we will reduce crews on there and it could cut cost as much as 50% per rig.

Rigs that are short-term stack, that we believe will go to work quickly, we will keep the full crews on there. Costs actually go up for those rigs because while we are working we don't pay for boats and helicopters, we don't pay for the fuel. But while they're stacked, those costs are on our nickel. It depends on the circumstances for individual rigs.

I appreciate that. And the follow-up question is I liked your characterization of the Ocean Quest as opportunistic. I'm thinking about the Valiant and the Victory. Both fortune rigs you've got visibility on them after year-end 2014. I'm curious, as they are burning up cash just to keep in service, would you consider bidding those fortune rigs for jobs that might otherwise go to third gen rigs at opportunistic day rates? And how do you think about the risk of doing that versus operators going to try to use those opportunistic rates in the future to negotiate for lower fortune appropriate work?

Well, I would say that the capital constraints that our operators are facing in 2014 is likely that there will be some additional idle time for those rigs for the remainder of the year. There will be opportunities that come up. But in terms of opportunities that we could price to bring forward, I just don't know that they are actually there.

We do see visibility of genuine fourth gen opportunities, particularly in the second half of the year. There is no third gen type work that you could price and bring forward at this stage at this stage.

Okay, appreciate that. Thank you.

Thank you for joining us on the call today. A replay will be available on our website shortly. That concludes today's call.

Thank you, this concludes today's first-quarter 2014 earnings conference call. You may now disconnect and have a wonderful day.