Diamond Offshore Drilling Inc (DO) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Diamond Offshore's third quarter 2014 earnings conference call. All participant lines have been based in listen-only mode. After the speakers' remarks, there will be a question-and-answer session. At that time, more instructions will be given. Is now my pleasure to turn the call over to Darren Daughtery, Director of Investor Relations. These 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 Ron Wall, Senior Vice President and Chief Commercial Officer. Following our prepared remarks this morning, we'll have a question-and-answer session.

Before we begin our remarks, I'll remind you that information reported on this call speaks only as of today and therefore, you are advised that time sensitive information may no longer be accurate at that time of any replay of this call. In addition, certain statements a during this call may constitute statements that are forward-looking in nature. Such statements are based on our current expectations and include known and unknown risks, uncertainties and other factors, many of which are unable to predict or control. That may cause actual results or performance to differ materially from any future or performance expressed or implied in these statements. These risks and uncertainties inclusive the risk factors disclosed by the Company from time to time in our filings with the SEC, including our annual report on Form 10K and then our quarterly reports on Form 10-Q.

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. Furthermore, as we start this call, please refer to the disclosure regarding forward-looking statements incorporated in our press release issued earlier today, and please note that the contents of our call today are covered by that disclosure. Now, I'll turn the call over to Marc.

Thank you, Darren. Good morning, everyone, and welcome to our third quarter conference call. Let me begin by elaborating on the contract awards that we announced earlier this morning as, of course, these awards have added significant backlog in what we see as a challenging market.

Starting with the Hess award, our remaining new build drill ships, the Ocean BlackRhino and the ocean BlackLion, are now contracted to go to work in the Gulf of Mexico on the Hess Stampede project. The BlackLion will begin a four year contract in the fourth quarter of 2015 and the BlackRhino will commence a three-year term in Q4 of 2016 after completing its work for Murphy, the rig's launch customer. This award alone represents over $1 billion of additional revenue backlog.

As you know, the first two of our four new drill ships, the Ocean Blackhawk and the Ocean BlackHornet are each contacted with Anadarko on five year terms, also in the Gulf of Mexico. It will be particularly advantageous for us to have all four of these units working in the same region right here in our backyard. The Gulf of Mexico can be characterized as one of the lowest-cost markets in the world, and we are positioned to gain even further scale efficiencies by having our personnel spare parts support infrastructure for the drill ships centrally located here on the Gulf Coast. Most importantly, we look forward to continuing our long-standing partnership with our customer, Hess, on what is clearly a major investment for them. The competition for this work was very intense, and this award is a vote of confidence in the people and assets of Diamond Offshore.

Additionally, we are able to announce that contract extensions with Petrobras have been finalized for the Ocean Courage, the Ocean Valor, and the Ocean Baroness, and in three years of term for each rig at pricing that is higher than the legacy contract. These are very solid fixtures, totaling a further $1.4 billion of revenue backlog. When combined, these two awards increase Diamond Offshore's backlog by $2.4 billion from when I last spoke to you.

Staying with Brazil and consistent with its stated objective to focus on (inaudible) award of Petrobras has elected not to extend contracts on the mid-water rigs, the Ocean Yatzy and the Ocean Winner. And we have agreed to terminate the Ocean Concorde contract, which had eight months of term remaining. Margin from the Concorde will instead be recovered through a day rate uplift on the Ocean Courage.

As I indicated in our prior earnings call, we will not shy away from making the hard decisions. Because we do not believe these three mid-water rigs will have opportunities to continue working, we have made the decision to retire and sell them for scrap, along with three cold stack units, the EPOC, New Era, and the Whittington. Together the six rigs which we are removing from the market have an average age of 37 years.

The decision to retire these units involve several factors. For the three rigs rolling off contracts with Petrobras, there would have been large mobilization costs associated with taking them out of Brazil, and we were not willing to incur this expense when jobs are unlikely to become available in other regions.

Additionally, the three cold stack rigs were known to require extensive capital upgrades, and given the market outlook investing capital in these units, would not have been in the best interest of our shareholders.

As I've said before, not all markets require the same technologies, and good returns can still be delivered by assets other than those that are recently new out of the shipyards. Competitively priced mid-water rigs can continue to play a role in our clients' operational portfolios for years to come, albeit with a decreasing share of the market. Across our industry, we continue to expect that some of the higher generation rigs will compete down. And as we progress through 2015, we expect to see more low-end mid-water units retired across our industry.

So, let me now turn to the results for the third quarter. While we did have some noise in the results which produced earnings per share of $0.38, this includes an after-tax non-cash impairment charge of $0.84 resulting from the retirement of the six rigs I've just mentioned. Also, results for the quarter benefited by $0.26 resulting from the settlement of various tax issues.

I will now hand the call over to Gary to give further color on this and our Q3 numbers in general, and then I will make some closing remarks. Gary?

Thanks, Marc. As always, I will give a little color on this past quarter's results and then cover what's to be expected for the upcoming quarter. For the quarter just ended, we reported after-tax net income of $53 million, or $0.38 per share, which was based on contract drilling revenues of $728 million. This decrease in EPS from $0.65 from the previous quarter, despite revenues increasing over $78 million quarter over quarter. Obviously, the impairment write-down associated with retiring six mid-water rigs was the main cause for the decline in EPS, despite the rising revenues, but I'll address that in a moment.

Looking at the revenue increase quarter over quarter, the current quarter saw two rigs that were previously idle return to work. The Ocean Monarch for [Totale] in Southeast Asian and Ocean Endeavor, which began its 18 month contract with Exxon in the Black Sea. Also adding to the revenues was first, our new build drillship, the Ocean Blackhawk, which worked for full quarter in Q3, and second, the decrease in survey downtime compared to Q2. These revenue increases were offset by several of our mid-water semis, which contracts ended in Q3 and which have not been able to find follow-on work.

Contract drilling expense was essentially flat quarter over quarter coming in at $400 million, which was less than our guidance of $410 million to $430 million. The decision to scrap the Ocean Concorde and not spend $8 million to $10 million on its five year survey was the primary reason for coming in under the low end of our guidance range. The remaining variable variance compared to the midpoint of our guidance can best be attributed to ongoing efforts to control costs which, as always, after safety, remains one of our top priorities.

As Marc said in his opening comments, the decision to retire and scrap six mid-water semis required $109 million impairment charge in the third quarter. Because this write-down was associated with rigs residing in our international tax structure, no tax benefit was recorded as a result of the write-down. Actually, due to a deferred tax asset that was associated with one of the rigs involved in the write-down, we booked an associated tax expense for the write-down. The net result was an after-tax reduction in earnings of $0.84 per share.

As reported in our press release, we did record tax benefits in the quarter as a result of the conclusion of tax audits related to prior years in Brazil and Malaysia, and we reversed prior-year tax accruals due to the statute of limitations expiring in several countries. Offsetting these benefits were additional taxes recorded for the change in UK tax laws which were passed in the third quarter, but were retroactive to April 1 of this year.

Normal changes to our estimates in geographies and in various foreign tax rates where we earn our pretax income also negatively impacted the amount of tax expense we recorded for the quarter. When taking all these pluses and minuses into account, our tax rate ended up above guidance at 35.5%. Because of accounting rules associated with taxes, some of these items will also impact our Q4 tax rate, which we project will be in the 29% to 32% range.

Now, for a look at some of the items that'll affect our financial performance in the coming quarter. As always, downtime for surveys and shipyard projects will affect not only revenue numbers, but also contract drilling cost. In Q4, we expect to incur downtime for surveys for only the jack-ups Ocean King and Ocean Summit. These are intermediate surveys, so they should take approximately 12 days each with only a nominal cost above and beyond normal rig operating costs.

The Ocean Confidence continues its previously forecasted service life extension shipyard stay through the fourth quarter, which means its operating expenses will be capitalized and deferred, thereby reducing normally recognized cost. This rig also had its cost deferred in Q3, so there will be no quarter over quarter change in recorded costs for the Confidence. For the exact number of down days expected in Q4 and the timing of these projects and other downtime items I've not mentioned here, I will refer you to our rig status report that we filed this morning.

We expect rig operating cost as reported in line Contract Drilling Expense to be approximately the same as our cost in Q3. On one hand, rig cost will decrease as result of our efforts to reduce costs on various rigs that have recently gone stack, or being retired, as we have announced. Offsetting this, the Ocean Patriot returns to work and will begin recognizing operating costs in Q4, costs which in previous quarters have been capitalized as part of the North Sea upgrade.

In addition, we will incur costs to move the Ocean Star back to the US Gulf of Mexico from Brazil. And finally, we will also recognize amortized mobilization and contract preparation expenses related to various rigs in our fleet, which should total $14 million to $16 million in Q4.

As a result of all these items, we are estimating our contract drilling expense for the fourth quarter to be between $390 million and $410 million. This should bring full-year contract drilling expense to $1.6 billion, which is below our original guidance of $1.7 billion to $1.8 billion.

As always, I remind everyone, that I have been talking about the line on our income statement Contract Drilling Expenses. These numbers that I just given to 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.

With regard to other items on the income statement, we're forecasting depreciation for Q4 to increase to $120 million. This increase is driven by the expected delivery and associated depreciation for the Ocean BlackHornet, Ocean BlackLion, and Ocean Apex, along with increased depreciation on the Ocean Winner. Because the Ocean Winner is still under contract with Petrobras until early 2015. It was written down as part of our impairment charge this quarter, to the discounted future cash flows of the rig, which is now being depreciated over the remaining life of its contract. Interest expense should be in the $15 million to $18 million range in Q4, and G&A continue to be between $18 million and $21 million. As I previously stated, our tax rate for the final quarter of this year is expected to be between 29% and 32%, but we do expect that rate to fall back into the mid-20s in 2015. I'll give more color on that in our next earnings conference call.

Our capital expenditure guidance again remains virtually unchanged from last quarter. For the year 2014, we expect to incur $260 million of maintenance CapEx and $1.8 billion of new build CapEx for a total of $2.1 billion. For 2015, we're still anticipating capital expenditures to be approximately $80 million (sic - see Q&A �$800 million�). , primary made up of the shipyard completion payment on the BlackLion, plus maintenance CapEx.

And finally, from a financial and liquidity standpoint, yesterday we successfully increased our credit facility from $1 billion to $1.5 billion, and Marc will expand upon that in just a moment. We also paid $250 million to bondholders as a result of our 5% ten year debt issued back in 2004, maturing during the third quarter. And with that, I'll turn it back to Marc.

Thank you, Gary. So, allow me to provide additional commentary on the offshore drilling space. There's been no change for assessment that the market is likely to have a significant oversupply of rigs throughout 2015 and well into 2016. The market recovery will likely be drawn out; however, we are a cyclical business. I have no doubt, that eventually, market practice will balance and our clients will have to return to prioritize the production and reserve replacement benefiting from the current decline and supply chain costs.

We've positioned ourselves with the revenue backlog totaling $8.2 billion. This is an increase in backlog of over 40% following the contracts announced this morning. And most importantly, all of our new build units, four drill ships, and a harsh environment semisubmersible, are now contracted at good returns with tier 1 clients well into 2019 and beyond.

Before we move to the Q&A session, allow me to elaborate on Gary's remarks around increase in our revolving credit facility to $1.5 billion with an extended term of five years. This action increases the flexibility of our already strong balance sheet so that we are well-positioned to further enhance the fleet beyond that which we have already undertaken.

Recall that we have retained our A grade credit rating while investing over $5 billion in new assets and fleet upgrades during the past several years. Capital allocation is important to us. In that context, the opportunity to renew our fleet by using our balance sheet to buy assets will be a focus moving forward, especially as the current downturn could put further stress on our industry and provide opportunity. We will continue to look for ways to reposition the Company for the inevitable change in this current cycle.

And with that, we will now take your questions.

Thank you.

(Operator Instructions)

Ian Macpherson, Simmons.

Mark, congratulations on the backlog conditions. I wanted to see if I could see clarification on the precise day rates with Hess, because you've given a total contract value. Does that number include any consideration for mobilization on the second rig or any other capital update enhancements that we need to think about when doing the day rate?

Let me just be clear around the day rate here, because obviously this is considered to be, by some, a new low in the market. We don't see it that way. I run this business from a cash flow perspective, not a headline market rate perspective.

You're correct, there is no mobilization on the second unit. So, out of the four units that we've now got in the Gulf of Mexico, three of them did have mobilization, this one didn't. But I do believe that in terms of the contribution to the Company, from a scale economies perspective, we more than recovered the mobilization there.

I'll talk about this $400,000 day rate just for a minute. I don't believe it's a new low in terms of pricing these assets, at least from a cash flow perspective.

Let's first remember that we do have the four sixth gen drill ships working in our backyard at rates that do provide a solid return on capital. Scale economies are substantial as it relates to personnel, inventory, logistics, support infrastructure and so on. So, however one chooses to slice and dice this opportunity, it brings to us so much more than the headline rate would at first indicate.

You will -- this is important. You will recall from our last call that I had pointed out that we were not able to quantify all pricing as being the same, and comparable across geographies. So somewhat in this context, we know that the cost of operating an asset, let's say in West Africa, or Brazil, for that matter, are substantially higher than operating in the Gulf of Mexico.

So once again, from a cash flow perspective, I would suggest that this is actually not the lowest fixture we have already seen this year. And there's one example out there being a sixth generation drill ship in Brazil contracted over the summer that is more than likely to provide less cash flow than receive on these awards here. That's basically it, from a day rate perspective.

And then as my follow up, I just wanted to touch on a few of your rigs that are open now or soon, the Confidence finishing its shipyard early next quarter and then also the Valiant, which is also idle. And then you've got a couple of your rigs in Asia PAC, the Quest and the America, rolling next May.

Out of those four rigs, which I think are your next four deepwater rigs with some availability, are there any stacking candidates? Do think that there is demand in the market to keep four out of four of those rigs working? Or how do you assess that today?

Ian, good morning, this is Ron Woll, thanks for the question. Let's talk about a few of those rigs.

The Confidence, her upgrades are coming along quite nicely. New crew quarters, new deck cranes, refurbishments of pipe handling will control. We're having a number of conversations with customers about her availability and are very optimistic about her role in our 2015 fleet. Although I won't get into specific conversations, but suffice it to say that the pipeline there, I think, is relatively positive, so I think we're optimistic on the Confidence.

You mentioned the Valiant as a second rig there. Our decision to proceed with her UK, I think, safety case has proven to be a good choice. We do have significant customer conversations underway.

I am very optimistic she will work in 2015, but can't only -- Ian, probably not in the first quarter. I think you have got to look a little bit past the first quarter for her to get some traction.

Okay. And your rollovers in Vietnam and Australia?

Yes, if you look east there, we do like the work that the Quest is doing in Vietnam. She has a good reputation. Based on her performance, we continue to have, I think, some good inquiries from customers. Nothing I think it want to report in this conversation, but good traction.

I think that stands in contrast, where we made a hard decision to sideline some of the older rigs, like the General that just really don't have that traction. We don't really put the Quest, or the America, of course which, the America is doing good work in Australia and again, generating good conversation. Those stand, I think, apart from the ones we've decided to sideline, like the Saratoga and the General.

Gregory Lewis, Credit Suisse.

Marc, I'm sure you're breathing a nice sigh of relief with all of these contracts. I guess what I would say is with the new build fleet now in place, clearly you can start focusing on what Diamond does in its -- in going forward. And just in thinking about that, congratulations on extending the credit facility. At what point does it make sense for Diamond, as we move through this downcycle, to start trying to build up cash war chest so that eventually the Company can start to go after incremental new rigs?

That is a good question. As you know, we have an A grade credit rating. We have got a healthy balance sheet, and as you rightly point out, all of our new build assets are now contracted through 2019 and beyond at good returns.

Specifically, we don't give future guidance as it is relates to capital allocation, but let me say this. It goes without saying that driving capital efficiency is our senior management team's most fundamental responsibility here at Diamond. And in this regard, we regularly review our options with the goal of building long-term value per share.

We've got many levers that we could pull depending on the opportunity, and all options remain on the table. In my opening remarks, I mentioned that we have increased our revolver to $1.5 billion, as you point out, and we are considering our strategic options with respect to the forward allocation of capital.

With that said, one of the options is, of course, to build this war chest so that we can go and take advantage as opportunities materialize to renew the fleet. We've got a -- let's say, a war room that is already in place, and we are looking for those opportunities as perhaps they materialize.

With that said, we'll see how the market progresses over the next 12 to 18 months and see what opportunities materialize. But we're really at the beginning of those stages, and we do hope, as I mentioned in my prepared statement, that as the cycle turns, the Company will look somewhat different than it currently does today.

And then just, my other question is on clearly you identified the six rigs that are going to be -- I guess scrapped was the -- mentioned in the press release. Three of those rigs were already cold stacked, two came off, one is currently still on work.

I guess my question is, I'm just trying to understand, what made those -- the six vessels -- well, obviously the three that were stacked, what made it three -- the two more currently working in Brazil and then the final one that's working, what made those the scrap candidates? Just because as I look at the fleet, there are some other rigs spread in and around the globe that I would argue have very similar characteristics to the six that were actually chosen to be stacked or scrapped?

Yes and no, is the answer to what your last sentence suggested there. The -- again, we looked at it from a shareholder perspective. For the ones that we are scrapping right now, was it worth the capital investment, the mobilization cost to take them into another market, in this current market that we're looking at from a global basis.

And every quarter we look at our entire feet and determine whether we should impair assets. Probably right now, we do not expect to have to write down more assets in the near future, but obviously, we've not done the next quarter review. The -- probably the specific treatment of the Winner should give you an indication of our current thinking.

However, that should not imply we will not have write down assets at some stage again. With what I know today, I'd be surprised if we have to do it again in the next few quarters, but it gets back to the first question that you asked: how are we repositioning Diamond right now so that when we come out of this downturn, we are much -- in a more appropriate position to provide long-term shareholder value moving forward?

Klayton Kovac, Tudor, Pickering & Holt.

First question on the cost energies for the Gulf of Mexico drill ships, could you quantify these synergies or at least provide us with daily operating costs?

Operating cost should be -- this is Gary, Klay. Somewhere in that $175,000 a day range, give or take. We will also have some amortized load in there that will drive actual reported costs a little bit higher than that.

But as far as the synergies, we have -- by having all four rigs here in the Gulf of Mexico, we will be able to -- instead of buying separate spares for each one of them, we can buy one or two spares. All of them can share that, they can share equipment. And the number of the people, the training of people, being able to move people back and forth, and so that means a lot to us.

We compare the cost that we look at if -- had we taken these rigs someplace else, say, Brazil, which the costs would've been $50,000 a day more. Which again, as Marc pointed out, we're very happy with the day rate we got and the returns that we'll get on these rigs.

Follow-up question, just further on the cost structure, how should we think about the scrapping of the six midwater semis, given three are stacked, two idle, one working?

As far as costs going forward?

Yes.

Certainly -- well, first of all, the Winner continues working until February or March of next year, so that won't have any impact on the cost. The Yatzy and the Concord, we are demanning those rigs as we speak, and so those costs will come down. And as I said in my prepared costs, we will have costs decrease for those.

The three cold stack rigs will have virtually no impact. So, yes, costs will come down some in the fourth quarter, with more in the first quarter of next year, but offset by some of things I talked about earlier.

Thanks a lot for your time -- go ahead.

Let me add one other thing. I was passed a note, just clarify my prepared comments. I said CapEx -- capital expenditures in 2015, I said $80 million, of course I meant $800 million, for anybody that has that question.

Praveen Narra, Raymond James.

Quick question, if we could talk about the prospects for the Worker, Alliance and the Clipper. They didn't receive extensions yet, so if you could talk about where you see those in terms of opportunities and as part of the fleet?

Sure, this is Ron, thanks for that question of course, the Worker were exit Brazil after her work concludes in Q1. There's no doubt she's going to face, I think, some strong midwater competition. There's no way around that fact.

We do, though, plan to move her out of Brazil, and do see her in our future. I think with her and other rigs as well, the faster contracting cycles play in, which give us, I think, less visibility on how far out her next jobs will get served up, but we do see her moving forward without a doubt.

The Alliance, she's good in Brazil there, out through the middle of 2016, so we're pretty focused on her operating productively and safely, but still look favorably on her. But I think there is a driving force here, with regard to operators can show up in the market with a relatively short lead time and get the rigs they want. And so in contrast perhaps to some previous periods, the visibility on where they will work probably has a shorter horizon now than it has previously.

And then just in terms of choosing to scrap the six rigs, and this might just be optics, but could you discuss the decision not to spend time to pursue a different sale to a different purpose market? Or I suppose your view of the secondary market for older rigs as a whole?

These rigs will be taken out of the market. They will be -- we've got a number of entities that we're talking to right now, but they will be sold for scrap and removed from the market.

Lucas [Dahl], [ABG].

I was wondering on the Petrobras contracts, if you could say something about the MPD capabilities of those rigs? Are you adding a managed pressure drilling kit, and is that included in the day rate? Or are you somehow being compensated for that?

The Baroness and the Courage -- sorry, the Valor, are MPD. The Courage is not MPD. That's all ready. They are already positioned that way.

Okay. So, they already have the kit?

That's correct.

And then I was wondering, not getting any mob fee on the fourth new build when getting it to the US Gulf, is that a feature that you are maybe observing on more tenders at the moment? That oil companies are holding back on paying the mob fee?

Not necessarily. We contracted the Rhino and got a mob fee for that, albeit not traditionally where the market rate has been in the past. But let's not misunderstand the competition that was out there for this Hess contract. There were 32 rigs bidding for this; it was very, very competitive.

We've are spoken at length about the scale economies that we see by having all four of our drill ships working here in our own backyard in the Gulf of Mexico. We've already spoken about how the costs for running these drill ships, let's say in Brazil, is at least $50,000, possibly more -- per day more expensive. When we looked at this from a strategic perspective, yes, it was something that we had to give away in order to meet the objective of getting all of our new build drill ships working within what is likely to be a 150-radius offshore the Gulf of Mexico here.

At the end of the day, you put all this into a big melting pot, and then look at it from a cash flow perspective. And frankly speaking, in this market today, we were very, very comfortable with the rate, the overall package, the overall cash flow that we're generating from these assets moving forward for the next four to five years.

Some people suggest, where is the headline day rate going from an ultra-deepwater sixth generation perspective? And from that aspect, I can tell you where the bottom is, the Diamond Offshore. It is $400,000 per day.

The -- obviously the number is different for the other 32 or so drill ships that have yet to be delivered, and yet to secure work. But let's not underestimate the benefit of these contracts, without even the mobilization fee coming into consideration for the shareholders of this Company.

And finally, can you say something about the future outlook for Princess in the UK?

Thanks for the question, this is Ron here. There's no doubt that the oversupply of rigs and somewhat, I think, modest activity level from the operators suggest that she's going to see some idle time in 2015. I think that we will continue to market her and are optimistic on our outlook, but for modeling purposes, I think her utilization will be -- will trend lower, at least in the early part of 2015.

Tom Curran, FBR.

Given how you described the outlook for the floating drilling rig market, where I think your language got more severe, both in terms of the nature and duration of the downturn you now see. Given that, could you provide us with an update on what the ceiling would be for you leverage-wise until the cycle turns, and which metrics you'll be focusing on for how high you will be willing to take leverage?

It depends on the opportunity. We've always been self-funding. We haven't gone to our controlling entity to increase leverage.

There are a number of opportunities out there that we could execute on without having to take leverage up significantly. I think you're very familiar with how this Company has been run in the past. It's been somewhat conservative, but then that gives us our current credit rating, which is an A grade, and the healthy balance sheet that we have as well.

I'm not specifically going to tip my hand right now and say, okay, this is going to be the size of the war chest, and this is the kind of leverage that we're going to have moving forward. Suffice to perhaps say that maintaining an investment-grade rating for us is important.

Okay, and then as you continue to have conversations with customers, especially in the Gulf of Mexico, have any signaled to you a threshold for leading edge rates at which -- should it hit it, they would definitely be willing to take a specific rig or move forward with the program? Are there levels that you're focusing on that if pricing gets there, you would see the demand response?

Tom, absolutely yes. There's undoubtedly a lot of assets which are competing down, and that will continue. But obviously there -- well, one would have to think that there's a price floor at which certain assets become uneconomic from a -- yes, if we're looking at the sixth and fifth generations rigs competing down.

Pricing is moving down, we know that. But some of the older generation assets will find their niche application from a price perspective again. And to your point, we are in discussions with a particular client here in the Gulf of Mexico, for example, for midwater work, where project economics dictate that newer generation fleet is simply too expensive.

So, we're going through our own fleet and seeing what kind of asset and what kind of return, what kind of cash flow, that is still in the interest of our shareholders dictates that we can go and get that work. The business development, the business acquisition, the marketing cycle is very, very different to what we've seen over the past few years, and that requires a new approach.

So absolutely, yes, we are talking with clients. We're looking at their project economics when they share them with us, and then [throwing] it out from perhaps the other end of the eyeglass to what typically we did in terms of contracting assets in the past.

Okay, last one from me, could you just give us an update on what the deal pipeline looks like? What kind of prospects are out there at the moment, ranging from individual attractive assets all the way up to potential corporate acquisitions?

I'm not going to address potential corporate acquisitions. That's -- I will just leave it at that. But from specific assets, I'll pass it over to Ron.

Sure, this is Ron here. From a pipeline standpoint, I think there's a couple themes that we see. I think there certainly is a spreading out of opportunities on the high end of the scale. You look at what sixth gen opportunities are out there, we've had a lot, as you well know, of tenders get sidelined, delayed, or canceled.

You look at Noble in the Mediterranean, Totale in Brazil, [Chevron] in Indonesia. So we've seen a real, I think, draining of the pond of opportunities for where high-end ships may go, and so for that reason, we, of course, are quite glad to have Hess with us.

If you look further down in the pipeline, there are some nice midwater tenders out there that we look forward to competing in. But I think as a general theme, what we're finding is that operators have sublets that they can play in, in addition to new work they can put out. And so we're finding, I think, shorter contracting cycles, as I mentioned a few questions ago. So operators really can go to market pretty quick and get what they want, virtually on demand.

So, there's no doubt about it. It's over-supplied in a tough market, but we continue to have, I think, very productive conversations with customers in virtually all markets.

So, there is work out there. It will just take, I think more effort to earn those wins.

All right. I was actually speaking to the pipeline for potential asset acquisitions. What you're seeing get shopped around out there that you might actually consider picking off?

Yes, just going back to my initial statement there, Tom, it's early days. I think the market will continue to be challenging moving forward.

As we look at the market itself, this downturn is likely to be protracted. And given the lead time between RFQs and the start of drilling, we are some distance from seeing any green shoots.

There's a large number of drill ships still to be delivered, a high amount of sublet availability. There's not much commentary around that, but there is a high amount of sublet availability, and we've got a client base that is CapEx adverse at present.

I think that -- we're watching the oil price. It was interesting to note today that I think Saudi has started to cut back production.

But this downturn is going to be U-shaped. Are we at the bottom of the U? I don't think so yet.

When it does turn around, I think there will be a sharp recovery, but it's hard to predict when that timing materializes. It's very hard to predict.

We've got a list of potential things we can do, probably more on the asset, on individual asset basis at this moment in time. But I think that the opportunity, or the window, is going to fall perhaps -- going into the market and picking up assets is going to be better for us in a number of courses out rather than doing it right now.

We're watching the market very closely, and I'm not going to give you -- tip my hand, as I suggested earlier, on what we are specifically looking at. But let me tell you, with the help of our controlling Company, controlling shareholder, we've got a lot of resources that are looking at debt, are looking at assets, and we are focused on what opportunities may materialize.

Now, I'm not naive enough to suggest that if we sit here in 12 months' time, we will look materially different. It depends on what opportunities materialize in the future. So, let me just leave it at that.

David Smith, Heikkinen Energy.

I wanted to ask, could you estimate your daily cash operating costs for midwater and fourth gen rigs in Southeast Asia?

It depends, of course, on the individual rig, which rig you're talking about, and the individual company. But the operating costs will range anywhere from $60,000 a day to $110,000 a day.

And that includes the fourth gen rigs maybe at the -- towards the higher end?

That would certainly include the fourth gen rigs, the conventionally moored rigs that we have out there.

I appreciate it's good to be the low cost operator. Also wanted to ask if your view of the eventual U-shaped recovery also contains a view of how many floaters need to be removed from the global marketed fleet, before that right half of the U starts to form?

That's -- how long is a piece of string? It depends how hard it bounces back. In terms of specific numbers, we're not going to so that on the table right now. We've done some work around that.

One of the first things I did like when I came in here was work closely with other entities, let's just say, from a strategic perspective. We've got some idea around that. I do suspect that although we've announced six assets that we're going to turn into razor blades, I think some others in the market space will move forward and also retire assets.

But it really is, how hard will that come back? There's a lot of uncertainty in the marketplace. But let's not forget one thing. The steeper the decline in -- let's say in the price of our commodity now in the [hydrocarbon] prices, the higher they will have to recover at some point in the future.

This business is a treadmill, and if we step off it now, then we only have to run harder further down the road. There's been commentary around the IEA dropping the demand numbers, but let's remember, that is not demand dropping. It's the rate -- it's the decline in the rate of demand growth, not demand going backwards.

This will bounce back at some stage in the future. I can't predict when, but when it does bounce back, it will be pretty hard. And that then depends how much of the midwater fleet gets recontacted.

So there's no specific one answer to your question. Suffice to say that we've done some homework around it, and we have a kind of envelope as to what that number should be.

You've helped push that process forward. Thank you very much for the color.

JB Lowe, Cowen.

I just wanted to ask about capital allocation strategies going forward. I know that you guys had repurchased some shares, I think, in the first quarter. What's your thought around doing something similar to that at this point?

And also around the dividend, I saw that the language in the press release for the dividend changed a little bit to say that there is no assurance that any special dividend is going to be paid or what level going forward. If you could just talk about those two things briefly?

Yes, the -- so, just me start with share buybacks. As I've said before, we don't really give guidance on future capital allocations.

We did have a share buyback program in place prior to my tenure but -- and this could be an option again in the future. We look at this on an opportunistic basis from quarter to quarter. The special dividend is a special dividend; however, at this stage, no final decision on capital occasion priorities has been made.

And of course, the Board of Directors recently approved the payment of the special dividend for the third quarter, and we will continue to review this special dividend on a quarterly basis moving forward. And I think, really, that's as much as I could declare at this stage.

Okay, fair enough. My other question was on the three rigs that you have cold stacked that you decided not to retire. What's the difference between those rigs and how come -- if you're not actively marketing some of those, how come you didn't choose to retire those as well?

I'm talking about the Saratoga and the General, but also the Vanguard. What is the thought process there between cold stacking and retiring those rigs?

Yes, JB, this is Ron, thanks for that question. If you look at the Saratoga, the General and the Vanguard, we do think they have a future. We think that future, though, is probably productive when the demand, I think, tightens up more than it has right now.

As Marc has mentioned more than once, this is a cyclical business, and we expect that positive cycles will follow negative cycles. And so, whereas I think some of the rigs that we chose to exit the fleet permanently, I think we've recognized that their best days were behind him.

I think in the case of the Saratoga, the General and the Vanguard, they can and likely will work again. We just have to find the right market conditions where they reenter the fleet.

Okay. That's a good explanation. We've talked about almost every single rig in your fleet, but I guess one we haven't talked about is the Apex. It's the one that's in Vietnam, and I was just wondering, do you think that has the potential to stay in the region when it rolls off in the first quarter? Or could that be -- potentially need to be moved somewhere else?

Yes, appreciate the question. In fact, I was wondering who was going to ask about Apex. It only took 55 minutes. As you mentioned, she's got final preparations underway in Singapore to work in Vietnam with Exxon, that's coming along on schedule as planned.

It's interesting that we are getting quite a number of inquiries about her. Some, I think, within the same theater, but not limited to Asia. And so I think for that reason we are pretty positive on what she can do after the Vietnam work.

Ian Macpherson, Simmons.

Gary, could just give us a sneak peak of the 10-Q? What was your CapEx for the quarter and the implied CapEx for Q4?

CapEx for the third quarter was about $230 million, give or take. And for the fourth quarter, the big -- I'm not sure what we'll spend, but we have both the Lion and the Hornet scheduled to be delivered from the shipyard. And if you'll remember, those contracts were a 30% down payment, 70% upon completion, so we -- both of those will be in the $400 million range per rig, so it's going to be substantially increased, mostly because of the new build drill ships.

All right, well, thanks for joining us, folks. We will see you in three months' time, and appreciate you listening in for what has been a very positive quarter for Diamond Offshore. Thank you.

Thank you. This concludes Diamond Offshore's third quarter 2014 earnings conference call. You may disconnect your lines at this time and have a wonderful day.