Diamond Offshore Drilling Inc (DO) 2014 Q2 法說會逐字稿

Good morning. My name is Maria and I'll be your conference operator today. At this time I would like to welcome everyone to the Diamond Offshore second-quarter 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; Ron Woll, Senior Vice President and Chief Commercial Officer; and Kane Liddelow, 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 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 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 forward-looking statements.

And now, I will turn the call over to Mark.

Thank you, Darren. Good morning, everyone, and welcome to our second-quarter 2014 earnings conference call. During last quarter's call, I outlined three main value drivers that will be my focus moving forward. So as a quick reminder, the first of these is investment excellence, which is a long-term goal and over the next several quarters we will continue developing our strategy for asset optimization and capital allocation.

The second is commercial excellence which is centered around customer relationships, pricing, utilization and fleet positioning. A prerequisite for achieving commercial excellence is of course assembling the right team, and I am confident that with the recent appointment of Ron Woll as Senior Vice President and Chief Commercial Officer we are progressing in the right direction. Ron will have oversight of Company marketing and contract acquisition activities and his extensive experience will be an important addition to an already strong working team. And the third is operational excellence, whereby we operate safely, minimize downtime and maintain discipline in operating expense and SG&A.

I have been here a full quarter now. The initial impressions I shared with you the last call have only been reinforced as I continue to visit our rigs offshore and meet our customers and employees around the world. Diamond is a proven performer with a solid track record. There continues to be a lot of market commentary around the age of our fleet, but not enough around the quality.

In Q2, our entire fleet experienced only 53 days of unplanned downtime. This is the best quarterly reliability figure we have delivered in more than seven years and it is a testament to the hard-working people we have here at Diamond Offshore. I like to refer to this as the Diamond Difference. It is tangible and many of our clients understand it.

Let me now turn to the results for the second quarter. We posted earnings per share of $0.65, which included a few nonrecurring items highlighted in this morning's press release. Two favorable items were firstly, the receipt of the payment from Niko Resources related to our settlement agreement reached last year. And secondly, the sale of the cold stack jackup rig, the Ocean Spartan.

A nonrecurring items that had a significant negative impact on results for the quarter was the termination of the Ocean Vanguard contract by Statoil. As its basis for counseling the contract, Statoil has claimed that the rig is not in compliance with certain customer-specific technical requirements, even though the rig has a long history of successful performance in Norway. Diamond offshore believes that our customer had no basis to terminate the relationship under the terms of the contract and we intend to defend the Company's best interest in this regard.

We have positioned the Ocean Vanguard at a stack location in the UK and while she is a capable rig, we are unlikely to find immediate opportunities, given that we did not have sufficient advance notice to market this rig. In all likelihood, we expect the rig to remain idle over the winter season, but we believe we have opportunities to work at as we move into 2015.

Elsewhere in the North Sea, the Ocean Patriot is shortly to arrive in the UK after its upgrade and mobilization from Southeast Asia, whereupon it will be ready to begin a three-year contract working for Shell, commencing in Q4. Last night, we announced in the rig status report that we signed the Ocean Princess to a one-well job at a rate of $230,000 per day, which was lower than some are expecting.

Certainly, this was an aggressive rate in order to keep the rig working, but I would not necessarily view this as the new benchmark day rate. Given that this contract will extend into the winter months, we were comfortable securing an extension with our customer, EnQuest, for some short-term work, albeit at the reduced rate.

Additionally, we continue to explore opportunities for the Ocean Valiant in the North Sea market, including Western Shetlands. After completing equipment upgrades currently ongoing in the Canary Islands, we are optimistic we can put this rig to work during 2015.

You may have noticed a theme here for the North Sea. After harsh winter last year in which operators experienced significant downtime while waiting on weather, we have seen some reluctance to sign rigs over the upcoming winter months. The result is that we are seeing an element of seasonality in the North Sea which is pressuring rigs in this market with near-term availability.

The bigger news with respect to our fleet is that we have negotiated with our customer, Murphy, of $550,000 per day contract that enables the Rhino to take outstanding backlog with the added option to convert the contract into a multi-year term at a rate of either $485,000 per day for three years, or $500,000 for two. The backlog was originally with the Ocean Confidence, which has recently entered the shipyard to undergo a special survey along with maintenance and equipment upgrades. By moving the term to the BlackRhino, we have pulled revenue forward in 2015 while gaining time to pursue opportunities that are aligned with completion of the upgrades to the Ocean Confidence.

So let me now say a few words regarding Brazil. We have been in discussions with Petrobras regarding contract extensions on the ultra-deepwater semis, the Courage, Valor and the Baroness.

We have concluded the pricing negotiations and we are close to being able to announce these. However, we are still awaiting final approval from the relevant stakeholder and when ready we will announce these contracts accordingly in our rig status report.

Which brings me to the midwater market in general. It is challenging, although opportunities for good returns continue to exist. During Q2, we secured a three-year term for the Ocean Lexington, an SS-2000 rig that is one of the more mature assets in our fleet. This fixture illustrates that well-maintained second-generation units can remain marketable.

Midwater rigs are generally cheaper to operate than the higher spec units and well maintained units can exhibit less downtime. On the back of possible over supply of ultra-deepwater rigs, bifurcation of the market will occur as the higher generation rigs compete down. However, not all markets require the same technology and good returns can still be generated at a price point below that of the six generation assets.

Nevertheless as we focus on capital allocation and asset optimization, we will see some of our low-end midwater units retired while we progress through 2015. This will not be unique to Diamond Offshore but will also happen across the industry. This should not be news to anyone and it is already factored into current valuations. However, midwater rigs will continue to play an important role in our clients' operational portfolios for a while to come.

So stepping up to the office or semi and drill market in general, well, we cannot predict where future day rates are headed but we feel the market is likely to have an oversupply of rigs throughout 2015 and into 2016. As I mentioned on the last call, we have had a warm wind on our backs over the past few years but choppy waters do lie ahead for the short term.

We all understand the challenges facing our clients with regard to their immediate needs to address shareholder returns and rein in expenditures. We believe these will be short-term drivers and our clients will ultimately have to return to prioritizing production and reserve replacement as project economics benefit from the correction in supply chain costs moving forward.

Geopolitical issues aside, any market recovery for offshore drillers will likely be drawn out. Either way, we believe Diamond Offshore's credit rating and balance sheet give us the right tools with which to navigate through this particular ebb in the cycle and uniquely benefit from the opportunities this then presents. I have some closing remarks, but first I will hand the call over to Gary to discuss our results in greater detail.

Thanks, Marc. As always, I will give a little color and this past quarter results and then give what is expected for the upcoming quarter and the remainder of 2014. For the quarter just ended, we reported after-tax net income of $89.7 million, or $0.65 per share, based on contract drilling revenues of $650 million. This is a decrease of EPS from $1.05 in the first quarter, which was driven by both the decrease in contract drilling revenues and an increase in contract drilling expenses.

As Marc mentioned, revenues were negatively affected by the cancellation of the Ocean Vanguard contract in Norway, as the rig recognized only 39 days of revenue during Q2. Revenues were also negatively impacted by both the delay in the Ocean Blackhawk, which reported only 17 days of revenue in Q2, and additional downtime for surveys incurred for the Ocean Yahtzee and the Ocean Alliance in the quarter.

The Yahtzee was down for 41 days as its survey was moved forward into Q2 after being projected to be down in Q3. Alliance was down 81 days for its survey during the quarter, which, due to weather and shipyard delays was 30 days longer than anticipated. Both rigs, however, completed their service during the quarter and were back on contract as Q3 started.

These negative items were partially offset by $15 million proceeds received from Niko Resources, related primarily to the cancellation of Ocean Monarch contract last year. These proceeds were recorded as contract drilling revenue in the second quarter.

Contract drilling expense increased over last quarter by $26 million to $395 million. The increase was due primarily to additional survey costs incurred, plus normal operating cost of rigs that began working in Q2, specifically the BlackHawk here in the US Gulf for Anadarko and the Ocean Ambassador, which began its two-year contract with Pemex in Mexico.

While increasing over last quarter, Q2's contract drilling expense was below our guidance of $405 million to $425 million. This favorable variance was primarily due to cost savings from rigs that did not work during the quarter. Specifically, the Ocean Valiant and Monarch.

While these rigs continue to be marketed during the second quarter, we successfully instituted measures to reduce costs as much is possible while still keeping the rigs ready to work on short notice. The delay in recognizing cost on the BlackHawk also contributed to the favorable expense variance. 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 now to couple of other line items on the income statement, our Q2 results included in an $8 million gain on the sale of Ocean Spartan jackup, which had been cold stacked in the Gulf of Mexico since 2010. Our tax rate for second quarter was 20.3%, which was slightly below our guidance of 22% to 25%.

The lower rate resulted from changes to our estimates and 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 20% to 24% for the remaining two quarters of 2014.

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

In Q3 we expect the Ocean Valor and the Ocean Concorde to incur downtime and additional cost related to their five-year surveys. In addition to foregoing revenue during the shipyard stay, these surveys will add approximately $15 million to $20 million to our normal operating expenses.

We have two other rigs, however, which will have their operating expenses capitalized and deferred to the third quarter, thereby reducing normally recognized costs. These rigs are the Ocean Confidence, which, as previously forecasted, will continue in the shipyard, undergoing a service life extension, and the Ocean Patriot, which continues its shipyard upgrade in (inaudible) three-year contract with Shell in the North Sea.

While this accounting treatment reduces normal operating costs for Q3, both of these rigs also had their cost of deferred in Q2, so there will be no quarter-over-quarter change in expected cost for these two rigs. For exact number of down days expected in the third quarter and the timing of these projects, I will refer you to our rig status report that we filed last night.

Offsetting these decreases in contract drilling expense, we have several items which will increase cost in the third quarter. First will be the operating cost for our new drill ship, the Ocean Blackhawk, which operated for only the final portion of Q2 but will incur a full quarter's worth of cost in Q3. The Ocean Endeavor, which previously had been deferring operating costs while it prepared for its 18-month contract in the Black Sea with Exxon, began that contract earlier this month and will recognize a full quarter's worth of cost.

The Ocean Clipper has moved to Columbia for a 90-day project for Petrobras, and as a result will see an uplift in cost which, however, will be offset by a higher day rate as indicated in our rig status report. The Ocean Monarch has returned to work in Southeast Asia in July for Total after being stacked with reduced costs since late last year. While all of these events increased contract drilling expense, they will also increase our topline revenue.

And finally, we will also recognize amortized mobilization and contract preparation expenses related to various rigs in our fleet, which should total $16 million to $18 million in Q3. As a result of all of these items, contract drilling expense should increase to between $410 million and $430 million in the third quarter, with cost associated with rigs returning to work being the largest driver for the increase.

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

Depreciation expense for Q3 is expected to increase to $110 million to $115 million with the full-year depreciation expense now expected to be between $445 million and $455 million. This is a little lower than our previous guidance and it is driven primarily by the delivery delays in our drill ships.

Interest expense should be in the $15 million to $20 million range in Q3 and G&A expenses should be in the range of $18 million to $21 million per quarter for the rest of the year. And as I previously stated, our tax rate for the final two quarters of the year is expected to fall between 20% and 24%.

Our capital expenditure guidance again remains unchanged from the last quarter. For 2014, we expect to incur $285 million of maintenance CapEx 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 completion payment on the BlackLion plus maintenance CapEx.

And with that, I will turn it back over to Mark.

Thank you, Gary. In summary, we will continue to focus on the things we can control, such as safety, the quality of our operations, managing costs and the efficient use of our capital. We firmly believe that Diamond Offshore is best positioned to weather a difficult market, and with the strongest balance sheet in our industry segment, we are looking to opportunistically position the Company for growth for that when the cycle inevitably turns.

And with that, we will now take some questions.

Thank you.

(Operator instructions)

Ian Macpherson, Simmons.

Marc, I guess the BlackRhino for the Confidence situation kind of underscores the near-term replacement risk for some of the older ultra-deepwater rigs. And with that backdrop, can you give us a sense for how comfortable you are committing significant shipyard dollars to rigs like the Confidence? And I guess also the Valiant, which you said has a decent bidding opportunity West of Shetland. But in a way, spending a lot of money on those rigs in the yard is speculative capital, so can you kind of frame the magnitude of that money and sort of what triggers you need to see from demand to spend more than the might be out late at the beginning of those projects?

Yes, sure, Ian, and thanks for the question. Let me address the Murphy and the Confidence, which for one of our ultra-deepwater drillships first. We saw that as actually a good opportunity in this current market to do a couple of things. First of all, secure work for our third ultra-deepwater drillship. As you know already, the first two are already contracted at a rate of around $495,000 a day. This one pulls over revenue, or backlog, from the Confidence contract but critically, we add to that contract the two options that were announced in the rig report last night. In other words, the three-year option at just below $500,000 and a two-year option at around $500,000 exactly.

Couple of things on that. I know there has been some commentary overnight. The people have been discounting that based on limited knowledge around the mobilization. There is a mobilization associated with that and I think for the perspective of the models that the analysts run, you could probably put a typical mobilization cost in there at around 50% of what we would normally get in the kind of market. The rig itself probably will end up working in the Gulf of Mexico.

So couple of things for that. We do know that the Gulf of Mexico has a lower operating cost than other areas around the world. And then you can do your own math around calculating that mob fee accordingly. So that's somewhat of a positive.

I also think that getting an extension or options to extend with Murphy is a very positive thing. Murphy, as you all know, is a very key client of Diamond Offshore. Have a very good relationship with them. And the intent is to maintain that moving forward.

As it relates to investing capital on the other units, the Valiant itself has a great history in the North Sea. The Valiant is likely to go back up there. It can operate west of Shetlands. It is a very stable rig in that market. It can weather the issues that come on a seasonality basis. And we are typically looking at it upgrade there that covers deck space, loading, mud pumps, et cetera, et cetera. So I don't want to go specifically into the details of how much that specifically will cost us. Again, you can draw your own conclusions.

And the Confidence itself. The Confidence is a great rig. It has performed admirably around the world already. And we do feel that, much that we felt around the Onyx and the Apex, that the upgrade will actually be able us to position it is a better rig moving forward.

Now, around the timing of spending capital, I would just like to put on the table that Diamond has a reputation for being somewhat countercyclical. We did purchase two rigs a number of years ago that are operating today in Brazil that when we purchased them, at a discount in the market, were not immediately put to work. They were stacked for a while and then if you look at it from a long-term perspective, the returns from those rigs themselves have more than paid back that investment. So again, I would like to perhaps leave that on the table of suggesting that we will continue to opportunistically invest in our fleet as the time that requires and we're looking at this from a long-term perspective. We're not looking at this on a quarter-by-quarter basis.

That's good. Thank you very much for that color, Mark. Just going back to the mobilization on the Rhino, so do I understand correctly that the stated day rates on your fleet status our exclusive of an undisclosed mob fee which you will receive on top of those rates?

That is correct. There is a mob fee in there already, but indeed if we take it to a location that is further away than what the current contract suggests, then we have the ability to claw part of the mobilization back. I think I already indicated, perhaps, would be a good number for you guys to put into your models.

Thanks. I'll turn it over and re-queue. Thanks.

Clayton Kovach, Tudor, Pickering and Hold.

Given the soft floater market, will we begin to see more contracts structured similarly to the Rhino, which trades rate for term?

I think that, that can happen. What we are seeing in the market in general is a move to shorter-term contract terms. If you look back a number of years, when obviously the market was under supplied, our clients were keen to lock in and obviously take the pain of a high rate over a longer term, not knowing where the would market would be. I think those rates typically -- or terms were typically three to five years. I think now what you are going to see is a typical term two to three years on those kinds of contracts and also there will be somewhat of a transactional market that will appear where people will contract on a well-by-well basis and put options on that and I think you have seen an example of both of those during -- as we stated in our rig report last night.

Okay. Thanks. And then just as a follow-up, what characteristics will you look for when deciding whether or not to retire a midwater rig in 2015?

You know, at this moment in time, we would look at stacking rigs on a case-by-case basis, if and when, of course, rigs either get an extension or they do not. We would look to move a rig to another market, such as we were able to do when we put the Lexington to work. For example, on the term contract in Mexico, just staying on the Lexington for a minute. Let's not forget the rigs that this particular SS-2000 went up against. It went up against a fourth-gen rig that was upgraded in 2009. This is the rig that is a work horse, and perhaps one of our more mature assets in the fleet, but we have taken care of it. And it is secured work at a day rate which I think was somewhat of a surprise to the market, but still nevertheless provides a very good return to our shareholders and we won that work.

So it's probably premature at this stage to, as we move into 2015, discuss the specifics of which rigs were likely to de-mob during the course of the next 12 to 18 months. But as I said in my prepared statement, we are already working on that and we do have a pretty clear idea as to what will be exiting the fleet moving forward. I think it would be naive to suggest otherwise. The market is turning somewhat against us. But we are still optimistic that some of those assets that are being modeled out as going stacked by some of the analysts will be able to maintain some element of work going forward.

Okay, great. Thanks, guys.

Gregory Lewis, Credit Suisse.

Could we talk a little bit about the Onyx? As I think about that, and I realize it's not a big move down to Trinidad for that four-month piece of work, but I guess a couple of questions. One is, is there a mob and de-mob associated with that with that, say a day rate? And then my other question is, in thinking about moving the Onyx down to Trinidad, is there the opportunity or the expectation for additional work for that rig going forward in Trinidad?

Yes. In respect to the mob and de-mob, we will be compensated for that in a lump sum basis and part of the decision to take that job in Trinidad is that, yes, we do see work behind the one well that PG has committed.

Okay, great. And then just one other question for me is in the press release for the midwater fleet, there is a note talking about the exclusion of 22 revenue earning days which were not recognized. If you could just provide a little color behind that?

In our press release?

Yes. There is 22 revenue midwater days that were excluded because of gap. It is at the bottom of the table. Note A.

That may have been associated with the Vanguard. Greg, we're going to have to look at that.

Okay. Great. I'll follow up after the call. Thanks, guys.

Dave Wilson, Howard Weil.

Good morning, gentlemen. Thanks for taking my questions. I just wanted to follow-up a bit on the BlackRhino, trying to reconcile everything and its implications. I know we talked about it and you said in your prepared remarks you answered questions about it, but just to be clear that taking this contract with Murphy with the BlackRhino, the implication there that there was no other demand for new build in this time frame. That's my first question. And then the second one, the contract with Murphy with the Confidence, did that preclude you from marketing the Confidence elsewhere, because that was under contractual obligation? It seemed like that one kept getting pushed to the right a bit and I wonder if this was a way to free up the Confidence to market it.

Yes, Dave, thanks for the question, there. So there's nothing that prevents us from marketing the Confidence from now moving forward. Let me be clear on that. One of the other things, of course, with taking the backlog here over to the Murphy is -- sorry, over to the Rhino is we are actually bringing revenue somewhat forward in 2015.

So the Confidence has gone into the shipyard in the Canary Isles. It is likely to come out of their towards the end of Q1, beginning of Q2, and then obviously it's got to be mobbed to where ever it's going to work. The Rhino comes available before then and is likely to go on contract, let's say around mid-Q1. So we are bringing revenue forward on that as well that otherwise would have been pushed further out into 2015.

So why did we do the switch? Well, we have secured the extra backlog. It's not backlog as yet, but at least the options on a two-year or three-year term, which might not have been the case if we had just stayed with the Confidence. The market is tight for ultra-deepwater drillships. Again, that is not news to anybody out there.

There's probably less than a handful of real opportunities that exist in the market space right now that enable contracting of rigs where drilling takes place in 2015. Diamond Offshore is on the short, short list for a number of those opportunities, whether they are in Asia, whether they are in the Gulf of Mexico, or whether they are in Latin America. Everyone knows the competition, for example, for a particular opportunity with an IOC offshore in Brazil. It's good that Diamond Offshore gets to -- I guess to these short, short list and it speaks to the Diamond difference that it took about earlier.

One other thing I'll just bring to the table from a point of caution. When people are looking at day rates moving forward in this market space, and the commentary that comes around those, let's be cognizant of the actual costs associated with operating in different parts of the world. And also, when it comes to places like Brazil, let's also be cognizant of the local content that is required on those contracts. So if I could just caution or counsel around commentary regarding were day rates are going, let's put a little bit more science into interpreting that as it relates to the specific geographies in which we go.

Now and having said that, there is pressure on day rates and there will continue to be pressure on day rates. As it relates to this particular space being mid- to ultra-deepwater drilling, let's not escape the fact that we compete with shale gas moving forward -- sorry, shale moving forward. And although we have had a boom here in North America, and it begs the question where would prices had gone if we had not had those boom in terms of offshore drilling.

But, if we're looking at the energy demand and I'm kind of taking this down a part that is perhaps not necessarily related to your question, but I want to point this out. If we look at the amount of additional competing hydrocarbon supply to the mid- to ultra-deepwater space moving forward, and the, let's say the inability of international shale to come onboard, people were talking about maybe incremental over the next three years in terms of hydrocarbon shale of around 0.5 million barrels of oil per day coming from Canada and Russia or Argentina. But if you wind this out over the next few years, the incremental energy demand has to come from mid- to deep -- or supply has to come from mid- to ultra-deepwater space.

So we do see this as somewhat of a short-term ebb in the cycle. And if you suppose our energy demand is going up by, let's say, over just 1 million barrels of oil per day, much of that supply over the next few years is actually going to have to come from this space. As the economics change, as pricing normalizes, and this is why I am talking about this, we will see projects that have been pushed over the horizon come back into -- well, come back onto the horizon. And I spoke about the Block 32 deal in Angola that has now come back over the horizon. Another project that people are now beginning to talk about, of course, is in the West of Australia, the Equus project out there, people are now talking about that one coming back over the horizon.

So we are going to see a floor in pricing in the next, let's say, 12 to 18 months, materialize. The big question is, is what is that floor going to be and we don't have that at this moment in time. And then from there, we should see as the supply of units gets taken up, we should then possibly see a recovery at some stage. I spoke about u-shaped down recovery in the past and our own opinions around that have not changed.

Okay, great. Things for answering the question and the additional insight. I will turn the call back over. Thanks.

David Smith, Heikkinen Energy.

Wanted to ask if deepwater supply continues to outgrow demand, do the conventional moored deepwater units have an advantage because they have the option to pursue work in midwater depths where operators would want to avoid working the dynamically positioned rigs?

Well, again, a good question. The midwater space is not going to go away. If you look at Brazil for example, we have done a lot of work modeling where Brazil is going, for obvious reasons. Brazil is an important market for us. If you look at the ultra-deepwater space in Brazil, yes, sure, it's going to triple over the next five years. You're going to be up around 44 ultra-deepwater units serving that market.

The midwater space itself is not crashing and won't disappear. It will still exist. And if you look at perhaps the North Sea, if you look at other places around the world, Mexico, et cetera, et cetera, it is cheaper to run a moored unit than a DP unit. So that space is going to exist moving forward.

I don't question the viability of the midwater space at all. I was wondering if, given the tolerance to move off location for DP units as you start to go into shallower depths, if that present an opportunity where you have in excess deepwater supply overall. If there's moored units, those fourth-gen rigs, and then if you get some higher spec moored units would have the option of rather than being idle for a long time, taking midwater jobs until the deepwater demand starts to grow.

Yes, that will happen. There will be some competing down from the six-and-a-half, six generation rigs into the five and the four -- four spaces. That is going to happen and I would just like to refer to a comment that I put earlier on the table here, is yes, some of the let's say more mature assets in the fleet will have to be looked at and that's something -- we will make the hard decisions around that. In other words, yes. And element of that will take place. How much? It's hard to say at this moment in time.

And a direct follow-up on that; I noticed that the five-year survey downtime for the Yahtzee was removed from the last fleet status report. I was hoping to ask what that survey cost was budgeted at and whether that survey is being postponed until the contract is secured or if we should take that as a signal towards your retirement comments.

No, just because of timing of wells, we moved that survey forward into Q2. So that has been done. We're projecting 3, moved in 2. It cost about $5 million and was actually a fairly -- one of our lesser amount surveys.

Perfect. I missed that. Thank you very much.

Anders Bergland, Platou Markets.

Thank you for taking my question. Some of them have been answered. But can you say something about the demand side in the ultra-deepwater space? Is it more or less activity today than we saw last quarter? Or are there any private contracts available or are we going into (inaudible) work for the next six months before the market pick up again in first half of 2015?

Good morning. Thank you for that question. There is a little bit more churn around, or noise around, contracting opportunities. But if we say there was nothing in Q1, there is slightly more than that today. But it is certainly not what we have seen in the past years. And that goes back to my commentary around, many of our clients have a sophisticated supply chain. They know what is going on in the market, and by deferring opportunities in a market where the suggestion is pricing may continue to fall with the arrival of almost 50 drillships between now and the end of next year, many of them are holding back and there is a bottleneck of opportunities. But at some stage that will have to be uncorked and we will see opportunities move forward.

In my prepared comments, I suggested that yes, sure, we understand that many of the clients are having to look at return of -- well, shareholder returns right now, but we don't think that, that is sustainable in any sense of the imagination, and as pricing comes down, these projects will come back on the horizon. Let me give some color around this. Let's take a project in Latin America, offshore. IC goes in there, let's say around 60% of the installed well costs makes up the project costs and the drillship is maybe then equivalent of 30% of the total project cost. As we see the rates coming down from $600,000 to, the suggestion is, $450,000, than what kind of impact does that make on a total project economics? I would suggest that it is material.

So at some stage in the near future, the slack that is in the market will be taken up. The question is when. And I perhaps cannot further comment on that than to suggest that it is probably going to be 2015 before we see a material change, the beginning of 2015 before we see a material change in contracting opportunities for what is coming to the market.

But as I mentioned earlier, we have bought assets in the past opportunistically that we have not put straightaway to work. But when opportunity has come and the market changes, we have been very successful in returning shareholder value through those investments. As we see the market kind of going through this ebb in the cycle, we look at that countercyclical and we say that, that provides opportunities for companies that are positioned like us, and there's not many that are positioned like us as we go into this cycle.

Okay. On that note, will you be looking at the harsh environment for the common units, or would you prefer benign environments with other units.

Well a harsh environment is generally spoken about more typically in the jackup space, but I know what you are talking about, the Arctic or other places like that. You could argue that we've got another investment. You could call it a harsh environment semi that we're building for BP, and it is going to work in the Bering Sea, offshore Australia. That is a harsh environment semi, if that is what we want to label that rig as. Sorry, it's the Bight, not the Bering Sea, offshore Australia.

We will look at assets on a case-by-case basis moving forward. We put in the place the opportunity to bring to the market five of effective new builds during the course of 2014, with another one coming in January 2015, which are high spec units. In terms of harsh environment, are we are likely to go into the Arctic? It depends on the opportunity. I think you're very familiar with our investment strategies in the past and we are optimistic moving forward that at some stage in the near future we may be able to repeat those kind of cycles -- the strategy that the cycle they're moving into presents itself. So I cannot necessarily say at this stage that we will target harsh environment at the expense other opportunities. It's more of a case of, what truly makes sense from a capital investment perspective and how then that translates to maximizing our shareholder returns.

Okay. Thank you very much for that. Have a great day. Thank you.

Harry Mateer, Barclays.

I was wondering if you could just walk us through any updated expectations you have for liquidity and balance sheet management during the next couple of quarters. In particular, I know you have a maturity coming up in September, about $250 million. I think your intention previously was to pay that down. You certainly do have plenty of cash on the balance sheet but in light of market conditions, are you thinking about maybe preserving that cash liquidity and refinancing that or putting that under your revolver? Or is your intention still to pay that down?

We have the payment coming up first of September, as you said. You're also correct; we have a lot options. We have right at $1.3 billion worth of cash on the balance sheet along with our $1 billion worth of revolver. At the same time, we have any number of payment coming up on the last three drillships. We are going to keep our options open. We raised an additional $1 billion last fall and it will -- said, we will keep our options open. Interest rates continue to remain at low but we have a lot of cash available. So a lot will also depends on opportunities, as Marc has been talking about, that come up in the future as to what we do.

Okay, that's helpful. And then just in terms of liquidity, how much cash plus marketable securities do like to keep on the balance sheet? Is this the right level? Would you be happy running the business with a lower amount?

We certainly could run the business with a quite a bit lower amount. We've always kept a large amount on the balance sheet. Not as much is we have now, but again, as I said, we have got a lot of payments coming up. We have, as I pointed out in my opening remarks, $2.1 billion worth of CapEx this year, of which a lot of it is yet to be spent in the second half. So we will certainly run that cash balance down much lower, but we have always remained a conservative -- have been a conservative company. We will be. We want to be able to take advantage of opportunities as they come up. That's what we have done for the past 25 years and will continue to do so.

Understood. Thanks very much.

Ladies and gentlemen, we have time for one final question. JB Lowe, Cowen and Company

I know we touched on this earlier, but I just had a question on Brazil and specifically the midwater market there, and what you guys are seeing as potential to keep some of your older midwater units down there. I know that Petrobras has been releasing some older midwater units recently. I just wanted to see what your thoughts were on their preference is going forward and what kind of opportunities you're seeing there. And if not Petrobras, than other opportunities in Brazil.

I think it is, if I recall correctly, 111 blocks going to companies outside of Petrobras in Brazil right now. There's going to be opportunities with Total, BG, BP, BHP, Primere, and those are just the number of the -- well, the international companies, nevermind local outfits that have blocks down there. So this just is not a Petrobras story in Brazil. It is something that we're looking at very, very closely.

On the midwater side, the majority of that production comes from midwater today. That space is going to need maintenance, it's going to need further drilling, but once again, it is a tough market down there and there is a number of local players that we will have to compete with. But Brasdril, which is our entity down there, has been there for 43 years. We know the market. They've got a high local content. We are very well respected they players that are down there, not least the senior executives of Petrobras itself. There's no reason to assume otherwise that Brasdril will have a great future in Brazil for the next 43 years as well.

Having said that, it is a tight market and Petrobras is short of cash and ICs are not ready at this moment in time to start drilling, to start turning to the right, if that is the correct term. That will happen over the next year to 18 months. And really that gets back to the commentary around yes, we are going to period of uncertainty. We are not at the bottom of the cycle just generally in our space by any sense of the imagination. But this is a cyclical business. We understand it and we have been there before and we know how to manage through it and we know how to come out of it better than we went into it. So that is the general commentary around Brazil, but really also applies elsewhere in the world, too.

All right. Thanks very much.

Okay. Well, folks, thanks very much for being online today and we will visit at the next quarterly call. Thank you.

Thank you. This concludes today's Diamond Offshore second-quarter 2014 earnings conference call. You may now disconnect.