Diamond Offshore Drilling Inc (DO) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Diamond Offshore's fourth-quarter 2014 earnings conference call.

(Operator Instructions)

Thank you. 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 Ron Woll, Senior Vice President and Chief Commercial Officer. Following our prepared remarks this morning, we will have a question-and-answer session.

Before we begin our remarks I 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 the time of any replay of this call. In addition, certain statements made 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 we are unable to predict or control, that may cause our actual results or performance to differ materially from any future results or performance expressed or implied by these statements.

These risks and uncertainties include the risk factors disclosed by the Company from time to time in our filings with the SEC, including our annual report on form 10-K, and in 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

And now I'll turn the call over to Marc.

Thank you, Darren. Good morning, everyone, and welcome to our-fourth quarter conference call. I'd like to start off by adding some context around our announcement today that our Board of Directors has declared a regular quarterly dividend of $0.125. But for the first time in 29 quarters, not declared a special quarterly dividend. As in prior quarters, the Board arrived at this decision after careful consideration of our Company's financial position, future earnings outlook, capital spending plan, and future market conditions.

Since our earnings call in October, market fundamentals in the oil and gas space have continue to deteriorate, leading many of our clients to announce significant cuts to their 2015 capital spending plans. We believe that our market will contract by over 20% year on year, leaving little if any opportunity for new industry fixtures to be announced. This is driven by the continued decline in the pricing of commodity benchmarks such as Brent and WTI, which we all know are down by more than 50% since last summer. The impacted to the 2015 operating cash flows of our clients should not be underestimated, especially as they were already under pressure to deliver enhanced shareholder value.

Many of our clients are seeking to sublet contracted drilling units which are then competing in the market against rigs that become available. These would be both the newbuilds and that those which naturally roll off contract at term completion.

In my previous calls, I had suggested that this would be a U-shaped downturn. I believe we are now well established in what could be a severe and protected cycle, and any green shoots of a recovery are still a long way over the horizon. It will get worse before it gets better.

Across the industry, there are already a significant number of rigs going idle, including some recently delivered sixth generation drillships. There remain over 30 uncontracted floaters that are yet to be launched. And with the few potential contracting opportunities being pushed out, and a lack of contracting opportunities for rollovers, we believe we could see a significant number of ultra-deepwater rigs idled without a contract by year end.

As we enter the downturn, Diamond Offshore successfully secured fixtures for our last two ultra-deepwater newbuild drillships. We now have all of our new drillships under contract with top-tier clients through at least 2019.

Additionally, our harsh environment semi, the Ocean GreatWhite, is contracted on a three-year fixture, commencing upon its scheduled delivery in late 2016. The GreatWhite's final yard payment in Q2 2016 represents our last remaining significant newbuild capital obligation.

Many offshore drilling contractors are highly levered and could face liquidity issues. Sixth-generation assets are expensive to stack and debt has to be serviced whether the asset is working or not. As the downturn continues, we see the potential for an environment in which Diamond Offshore made buy assets at attractive prices.

With our conservative capitalization, strong liquidity position, and the strong investment-grade credit rating, we believe that Diamond Offshore is well-positioned to take advantage of any opportunities to acquire assets that may materialize during this downturn. Therefore, we believe this is the right time to revisit our capital allocation strategy so that we are in a better position to take advantage of these opportunities.

To maximize capital flexibility, the Board of Directors has elected not to pay a special dividend for the foreseeable future, and in so doing, free an additional $400 million per year that could be opportunistically deployed. As always, our management and our Board remain committed to generating shareholder value. And if the market conditions improve in a meaningful way, we will revisit our capital allocation options accordingly.

Now let me turn specifically to the last quarter. For the fourth quarter, recorded earnings per share of $0.72 versus $0.67 in the fourth quarter of last year.

The biggest operational driver versus the prior-year quarter was that during 2014, we stacked or sold eight rigs. This was partially offset by the contributions of our new units, the Ocean BlackHawk, and the Ocean Onyx which went to work during 2014. Gary will discuss the results shortly in greater detail.

In December, we took delivery of our second and third drillships, the Ocean BlackHornet and Ocean BlackRhino, which are now headed towards the US Gulf of Mexico for contract commencement. Also in December we took delivery of our deepwater semi, the Ocean Apex, which has begun its inaugural assignment in Vietnam. We plan to take delivery of the Ocean BlackLion during the first quarter, as it should begin working also in the Gulf of Mexico later this year.

Our first newbuild drillships, the Ocean BlackHawk, began its operation in the Gulf of Mexico in May 2014 working for Anadarko. And since then the rig's crew has been able to deliver best-in-class metrics for our sixth-generation drillship. The Ocean BlackHawk completed the fourth quarter without any unpaid downtime and in the process set a series of new drilling records for the client.

Turning now to our legacy mid-water fleet, we believe that unless market conditions improve unexpectedly, some of the units in our legacy fleet may be cold stacked during the year. We continue to expect that some of the newer generation rigs will compete down and that we will see more low end mid-water units retired across the entire industry. While there is no immediate solution to the supply-demand imbalance, such retirement should help accelerate a recovery in the current market cycle.

I will now hand over the call to Gary to give further color on the financials and then I'll make some closing remarks. Gary?

Thanks, Marc. As always, I'll give a little color on this past quarter's results and then cover what's to be expected for the upcoming quarter. In addition, as is our custom with our fourth-quarter earnings call, I'll spend some time providing additional selected information on what we expect for the entire year of 2015 with regards to various line items on the income statement, expected capital expenditures, downtime, et cetera.

For the quarter just ended, we had after-tax net income of $99 million or $0.72 per share, which was based on contract drilling revenues of $674 million. This is an increase in EPS from $0.38 reported in our prior-quarter's earnings, primarily as a result of the $109 million pretax impairment write-down associated with the retiring of six mid-water rigs in Q3 of 2014.

Despite the increase in EPS quarter over quarter, contract drilling revenues decreased from the $726 million reported in the previous quarter. This was driven mainly by a number of rigs which concluded contracts in Q4 or in the second half of Q3 and remain uncontracted at December 31.

These reductions were partially offset by the Ocean Patriot which began a three-year contract with Shell in the North Sea early in the fourth quarter following extended shipyard upgrade. For more details concerning individual contract timings, I'd refer you to our rig status reports that we file on a monthly basis.

I will now address some of the additional line items on our fourth-quarter income statement. First of all, contract drilling expenses for the quarter came in at $359 million, which is $41 million less than the prior quarter and below our Q4 guidance of $390 million to $410 million.

This favorable variance is the result of two items. First, we recorded a fourth-quarter accounting adjustment that reduced operating expense by about $19 million. These costs were capitalized during the quarter, thus reducing anticipated expense.

While this first item was merely due to a change in an accounting convention during the quarter, the remaining favorable variance in operating expense was a result of true cost savings. Responding to market conditions, we were able to de-man some of our cold-stacked rigs quicker than expected, thus reducing costs. As I've stated in prior earnings calls, after safety, cost controls and efficiency remain one of our top goals.

Depreciation expense increased, as expected, quarter over quarter, to $132 million, but slightly above our prior guidance of $118 million to $120 million. A portion of this is a result of the depreciation associated with the additional $19 million capitalized as a result of the Q4 change in an accounting convention that I previously mentioned. The remaining variance is due to the normal true up of depreciation at year end to reflect the exact timing of capital purchases made during the year.

G&A costs and interest expense for the fourth quarter of 2014 came within previous guidance ranges, while our effective tax rate of 35.5% was slightly above. The higher tax rate was simply a result of changes to our estimates in the geographies, and the various foreign tax rate where we earn our pretax income.

And, finally, we incurred a little over $1 billion in capital expenditures in the quarter, the bulk of which relates to the final shipyard payments made on the delivery of the Ocean BlackHornet and the Ocean BlackRhino, both of which are currently en route to term contracts in the US Gulf of Mexico.

Now, looking forward into 2015 and some of the items that will affect our financial performance next quarter and for the coming full year, during 2014 we incurred a significant number of downtime days related to seven rigs being out of service for their five-year special surveys. For 2015, we are projecting only two rigs to undergo regulatory surveys with that associated downtime, those being the Ocean Lexington and the Ocean Guardian.

In addition to survey downtime, we have a number of rigs that will be mobing during the year and several that will incur downtime for equipment upgrades, acceptance testing, et cetera. For the exact number of down days expected in 2015 and the timing of these projects, I refer you to our rig status report that we filed just this morning.

Now turning to our guidance for the year ahead, I will give estimates for the first-quarter and full-year 2015 for individual line items on the income statement with the exception being of contract drilling expense. Because of the uncertain industry outlook, it is difficult to predict longer-term rig utilization and therefore I will only comment on operating expense for the first quarter of 2015.

For the first quarter of 2015, contract drilling expense, not including reimbursable expense, is expected to be in the range of $340 million to $360 million. In addition to normal daily operating costs, this will now include operating costs for the Ocean Apex as she begins her contract with ExxonMobil in Vietnam after delivery from the shipyard. We also expected to incur cost of $6 million to $8 million to mobe the Ocean Worker back to the US Gulf of Mexico.

Offsetting these items will be operating cost savings as we continue to de-man rigs that have recently come off contract. As always, I remind everyone that I've been talking about the line contract drilling expenses on the income statement which does not include costs incurred in the line reimbursable expenses.

Depreciation expense for the full year 2015 is estimated to be in the range of $530 million to $550 million, an increase over 2014 DD&A primarily due to the delivery of our newbuild drillships. We expect Q1 depreciation costs to come in at $130 million to $140 million and remain in that range for the remaining quarters of the year. G&A costs are expected to total $75 million to $85 million for the year, with approximately $19 million to $22 million incurred during each quarter of 2015.

Interest expense on our current that and expected borrowings on our bank line of credit to fund delivery of the Ocean BlackLion this year, net of capitalized interest, is projected to total $105 million to $115 million, or about $50 million above the total for 2014. This increase is a result of lower capitalized interest in 2015 due to the delivery of our drillships. Net interest in the first two quarters of 2015 should run close to $30 million and then decrease to closer to $25 million in the final two quarters.

We're looking at an effective tax rate for the year to be in the range of 24% to 28%. As always, any changes in the geographic mix of the sources of our earnings, as well as tax assessment or settlements or movements in exchange rates, will impact our effective tax rate.

And, finally, moving on to capital expenditure guidance, we believe that we will spend maintenance capital of approximately $340 million for the full year 2015, which is up slightly from our 2014 maintenance CapEx spend of $290 million. This increase is mainly driven by equipment requirements associated with multi-year contract beginning in 2015. I would note here that these equipment upgrades, which total about $68 million, will be reimbursed by our customers and are in addition to any operating day rate we disclose in our rig status report.

Newbuild CapEx for 2015 is expected to be $590 million, which includes the final 70% shipyard payment for the BlackLion, along with oversight cost for the Ocean GreatWhite and the completion costs for the service line extension project on the Ocean Confidence. Together, maintenance and newbuild capital expenditures are expected to total approximately $930 million in 2015.

And with that I'll turn it back to Marc.

Thank you Gary. As I said in my previous remarks, we expect that the market will have a significant oversupply of rigs through the remainder of the year and well into 2016. Many challenges lie ahead in the coming quarters while clients revise their plans in response to the dramatic decline in oil prices.

In a depressed market, certain clients may seek to renegotiate or otherwise take advantage of negotiated terms to terminate a rig contract. This is a possibility facing both ourselves and our competition.

Diamond Offshore has cash on hand and borrowing capacity in place to complete our remaining newbuild projects. And, most importantly, all of these units are contracted with tier 1 clients well into 2019 and beyond. We will react to this downturn by continuing to focus on the things that we can control such as safety, the quality of our operations, rationalizing costs, and the efficient use of our capital.

We are in a cyclical business and eventually market supply and demand will come into balance as our clients return to prioritizing production and reserve replacement. We are hoping to have an opportunity to repeat what has been successful in the past. That is, we want to acquire very good assets at attractive prices.

We cannot predict the timing of the market recovery. As a result, we must position the Company financially so that we are able to act decisively when opportunities appear.

It is because of this strategy that we have delivered amongst the highest return on capital employed of our industry peers whilst being able to pay substantial dividends. When the market turns, and eventually it will, we plan to have positioned the Company accordingly.

And with that, I will now take your questions.

(Operator Instructions)

Jud Bailey, Wells Fargo.

Thank you. Good morning. I've got a question -- obviously, thank you, Marc, for all of the realistic commentary on the outlook on the market.

And I'm just curious, you obviously painted a pretty realistic picture on asset utilization going forward. If I just triangulate some things, you are not giving full-year operating cost guidance. Do we take that to mean you're probably contemplating stacking quite a few more rigs as they role off contract? Or how should we think about the lack of annual operating cost guidance in the context of a deteriorating market like we're seeing today?

Jud, thanks very much bigger. A very pertinent question there. Let me start by saying currently we have no plans to scrap any additional rigs in the near future. We pre-announced the scrapping of the Ocean Winner in the last earnings call, and of course that still has a couple of months to run on its contract.

But depending on market conditions moving forward, we are likely to see additional rigs in our fleet become cold stacked. But, having said that, at this time I'm not expecting these to be scrapped unless the market further substantially turns down.

Every quarter we look at the entire fleet and determine whether we should impair assets. And this quarter we found we had no need to further do so. We'll undertake the same review on a quarterly basis moving forward and obviously advise accordingly, but that's probably relevant to the lack of operational guidance moving forward.

Okay. All right. I appreciate that.

And then, if I could, my follow, up if I could ask you about a couple of specific regions, Brazil and Mexico where you have some exposure. And I think both NOCs in those regions are going to be cutting spending quite a bit. I just wanted to see if you could give any color or commentary as to what your customer down there are telling you.

Yes, Jud, good morning, this is Ron Woll.

Those are two good markets where both NOCs have been rather public in their intentions to renegotiate and adjust their portfolio. And Pemex really, I think, specifically so. We have five rigs with Pemex today and one more starting later this year.

I would say that we are in discussions with Pemex around our portfolio and what their ongoing needs are. For obvious reasons we won't get into the details this morning on those discussions but I would describe them as broadly collaborative and ongoing. So, I think we continue to work that with Pemex.

In the case of Petrobras, like other operators, they have strong downward pressures on them right now, and they are certainly pulled back on new programs. So, that certainly is informing them pretty heavily on work going forward. We continue to work with them on what needs they have, but their pressures also become our pressures.

All right. Thank you.

Ian Macpherson, Simmons.

Thank you very much.

Marc, if your forecast of really no new fixtures signed this year comes to pass, can you describe with regard to your fleet exposure which of your rigs are least likely to be cold stacked? Presumably the Apex and the Onyx, of course, because they are the newest that have contract rollover exposure. Also the Valiant, which has received significant capital recently, I would assume that would be high on your list of keeping marketed. Is that correct, first of all? And then what else would be on that list possibly?

Ian, this is Ron Woll again here.

The Valiant, of course, we picked up some work in the North Sea there. So, as we look at the fact that there are relatively, I think, few new fixtures to talk about today or on the near horizon, clearly the older rigs will have a difficult time competing going forward.

We're not announcing today any new plans on who will be stacked, and so will have to make the decision as the market, I think, reveals itself. But clearly we look at some of the rigs where we've invested more recently, like the Apex, we certainly will continue to work her in the marketplace. But we have to respect the fact that fixtures are what they are and we'll have to make those decisions going forward.

Okay. Gary, I don't know if I missed this in your comments before, what was the bad debt expense last quarter? And is there any concern that that is a canary in a coal mine with regard to a specific customer?

We had no bad debt expense last quarter. We had it in the third quarter of 2013, which was related to OGX.

$2.2 million in Q4 2013? Maybe I have a bad printout here. I'll call you off-line on that.

Okay.

Sorry, I correct myself. I was looking on the wrong line there with your loss on disposition, so never mind on. I'll follow up on it.

That was just miscellaneous equipment being sold.

Got you. Thanks.

Klayton Kovac, Tudor Pickering and Holt.

Good morning.

When you said the market was down 20% year over year, is this just Q4 to Q4 working rig count, or is this like full-year average versus full-year average? Also, could you just describe how you're thinking about this a bit more? For instance, is it being driven by specific region or customer?

Klay, when I said the market is going to be down 20% that's really on a year-on-year basis. I think if you look across our clients' portfolio, what's been communicated to the external market as it relates to their capital spending plans for 2015, I think that you see that significant reductions have taken place in terms of North America land, and specifically in the unconventional arena. And numbers that have been suggested are in the 30%-plus range. I think in the international arena, however, especially with our NOCs, much of the reduction in capital expenditure from a 2015 perspective compared with 2014 is less than that.

So, if you put everything into the melting pot, I think generally in the overseas market, there is less of a contraction outside of the United States. But of course we still play big in the Gulf of Mexico. And overall, I think that the market the offshore drillers are facing is about a 20% reduction in capital year over year. So, that's the basis for making that statement.

Okay. Thank you. Then, just as a follow-up, in your prepared remarks you highlighted many clients seeking to sublet drilling units. Could you further elaborate on this? For instance, how many of your rigs specifically are being sublet? And then do you have any idea what your customers are bidding these rigs for?

Yes. As it specifically relates to the industry in general, with regards to our own fleet, we don't see too many of our own fleet out there being marketed on a sublet basis. But we do stay in touch with our clients around the world. And I think that if you look at each specific client on an individual basis, I don't think that there is one client -- and I'm speaking about from an industry perspective, not just our own fleet -- that does not have at least one rig available to sublet.

Specific to client Statoil, we know that they've got a number of units that they are trying to sublet -- unsuccessfully -- as indeed do companies like Total and most of the major players. So, we've got to be cognizant of the fact that these sublets are competing in a market space for rigs that are coming out of the shipyards today and other rigs that are rolling off contracts on a natural basis as the term expires.

Okay. Thank you. I'll turn it back over.

Gregory Lewis, Credit Suisse.

Yes. Thank you and good morning.

Marc, when the Ocean Confidence was put in the yard in the Canary Islands for maintenance, I think the plan was to move that rig potentially up to the North Sea. Just given the slowdown in that market and just given the caliber of that rig, is that something where we could see that rig being, as it's actively marketed, be swapped in for another contract as you've done in the past?

Thank you, Greg, for that question.

Yes, the Confidence will be coming out of the shipyard in the Canary Islands in another couple of months. It was a significant upgrade to the rig. It's a very capable unit. It wasn't really designed to go up to the North Sea. We're taking the Valiant up to the North Sea and of course that has secured work recently up there.

The Confidence has more of a worldwide market in which it plays. We were looking at an opportunity in India, we were looking at an opportunity back here in the Gulf of Mexico. And at the end of the day, there is a possibility that we might consider a rig swap -- in other words, upgrade what might be a unit under contract already with the Confidence in terms of relationship building with our clients.

Okay. Great. And then just, Gary, you mentioned that the Guardian is expected to go in for special survey work. That rig, after it rolls off contract mid year, that rig doesn't look like it has any additional work post that. In the event that it doesn't have post work, is that a project where it could be delayed?

Yes, we'll take a look at that. We would hope that we do find additional work and we go forward with that survey. That's the plan right now.

And, actually, as I'm looking at it, we will do that survey because we have to do the survey in the second quarter. It's coming due. So more likely than not that survey will go on regardless of what happens with the rig. We're going to have to finish the current contract we're on.

Okay, great. All right. Thanks.

Darren Gacicia, Guggenheim.

Thanks for taking my question. Curious on the highest-spec floaters, if they go idle and/or we're warm stacking, where do you think we can bring the cost per day of those rigs down to? And how quickly can it be done?

And how do you think about it even if it's for gap periods of time and the rest? If you could walk me through how you're thinking that it would be great.

From a newbuild perspective, the sixth-generation drillships will be expensive to stack. As it relates to Diamond Offshore, we don't have any that will be moving down that path because all of our newbuild drillships, of course, are contracted through 2019 and beyond.

But for those drillships that are coming out of the yard without contracts, you are probably looking at about a minimum of $100,000 a day. And then on top of that, some of the other companies that are bringing them out also have to service debt. So it's not a cheap exercise.

The other units in the fleets out there, the less high-spec units actually lend themselves quite well to stacking, because you can really take the costs out of these units. But these sixth-generation drillships you've got to find a deepwater port. You can't really drop an anchor down and let them swing around.

They've got to be maintained. They're high SPEC. So, there is a substantial cost of stacking these units.

Of the $100,000, is most of that fuel? Just running the DP? How do you break down the $100,000 cost, if you don't mind?

You've still got to keep these units quite well manned. You've got to run the DP system to a certain extent. So it's a combination of everything.

There is a lot of electronic gadgetry on these units, and electronics don't lend themselves to idle time in a, let's say, corrosive seawater environment. So, you've got to keep the unit basically running and you've got to cycle the stuff on the drill floor. It's a combination of everything, really.

Okay. If I could follow up, I know that there's been a lot of turmoil down in Brazil. I'm trying to figure out the polite way to ask the question. How functional of an organization right now is Petrobras to really have negotiations with?

Petrobras -- you're right -- went through some changes over the last week or so. But I was actually down in Brazil in Rio last week and it's still a very functional organization. We had meetings with the appropriate people that are involved in the drilling space. So, I don't really expect much of a change in what's already been telegraphed to the community.

Having said that, we do know that, as it relates to perhaps the award of new fixtures moving forward, you might see a delay in that. But in terms of what's already under contract and their ability to deliver from an exploration and production perspective, I don't really see much change moving forward.

Is there something where there's a whole new process is going to have to be put in place in order to get contracts approved? Or is it something where just new management has to take hold and therefore you restart those type of dialogues?

A bit of both. Apart from the CEO, which came in from the outside, many of the positions are, on an interim basis, being filled with people who are already in the organization. As I said earlier, yes, there will be perhaps some more diligence around the award of new contracts, but in terms of what's already in place, I think that it's likely to be businesses as normal.

Okay. Great. Thank you very much.

Praveen Narra, Raymond James.

Based on your commentary, it's clear that you expect the market to get worse from here. But is there anything that you need to see before you get more comfortable that there is at least clarity into the market cycle to do M&A? Or would you just dollar cost average down and do acquisitions over time through the downturn?

We're in the early stages of what is likely to be a protracted downturn for offshore drillers. We need to see more fixtures coming to the market.

Now, just to clarify something that was brought up earlier in the Q&A session, we're not saying that there's going to be no fixtures awarded in 2015. It's just there's going to be a very limited number that are out there. They're going to be few and far between.

In terms of timing to take advantage of the downturn, I do not want to create an expectation of a specific timeframe or that we're even eager to pull the trigger in the near future. What is more important for us is that any opportunity we pursue needs to create long-term shareholder value. So, notwithstanding a sudden turnaround in the market, let's say, for geopolitical reasons or similar, we will be very patient in our approach moving forward.

Okay. I think that makes a lot of sense.

And then just in terms, getting back to that contract signing in 2015, could you clarify -- is that for work to begin in 2015 or your customers approaching signing rigs for 2016, or are they at least engaging in some conversations for 2016?

It's pretty arid out there. In terms of even dialogue around any fixtures that may materialize, there's not much chatter in the market. From an offshore driller perspective, the fixture engine needs a while to spin up, so to speak. So, anything that people bring to the marketplace today, you're really looking at a 12- to 18-month cycle before the bit starts turning to the right and you start generating revenue.

So, in terms of the timing of any uptick, it is going to be a while before it happens. There's the odd fixture that's out there today that really is looking for a sixth-generation drillship. There's one here in the Gulf of Mexico, for example. But there's going to be a lot of people chasing that. We're not in the market itself because all our newbuild units are already on contract.

So, let's not misunderstand the timing that it takes to be on ticket from when the opportunity is first identified by our clients. And as we've spoken to already on the call, there really isn't much chatter in the market at this moment in time.

That's really helpful commentary. Thank you very much.

Jeffrey Campbell, Tuohy Brothers Investment.

Good morning.

You stressed earlier in the call that in 2015 cold-stacked rigs were not expected to be scrapped. With higher-spec rigs moving down market and newbuilds coming to market, what gives you the confidence that cold-stacked mid-water rigs can eventually return to market?

Yes, let me just clarify a point here. Every quarter, according to financial regulations, we have to look at our fleet and decide what will be scrapped and what won't be scrapped. And then we take the appropriate write-down.

What I actually said was at this moment in time we've taken a look at the fleet and established that there is nothing that needs to be cold stacked beyond what we did earlier, at the end of last year. So, I just want to be clear on that. I'm not necessarily stating that we won't actually cold stack anything later the year, depending on what happens in the market.

But in terms of marketing rigs, and how these rigs will come back, I'd just like to say one thing. I specifically remember in March 1999, many on the street were worried that the oil price had fallen by half and were predicting that we had another 50% decline moving forward. That's not unsimilar to where we're at by today. It's fallen by half and many people are suggesting it can go down by another half.

Okay, it declined slightly further from that point back in 1999. But actually what happened is it came back and over the years we ended up seeing oil increase from what was at the time $10 to $140. So, it's very difficult to say many of our rigs will never work again. We are certainly not in that position.

I think the cure for low oil prices, as many have said, is low oil prices and the market will rebound. At that time, we will consider what we're doing with our fleet and I think you'll see many of the units that are out there today that people are suggesting don't have value still will have value moving forward. I've said that before. It's horses for courses. Much of our fleet is cheap to operate, and in a declining market there may be an advantage around that.

Okay. Actually that's very helpful.

Turning to a more optimistic scenario, you mentioned that you want to be positioned for opportunities as they might come up. And I was wondering if you could add a little more color as to what your specific interests might be -- for example, newbuilds versus existing rigs. And bearing in mind what you said a little while ago about the cost to warm stack rigs, would you be willing to buy a rig that you might have to warm stack?

The simple answer to that is yes. We've done it in the past and we've been successful in that. I do believe the downturn will create opportunities for consolidation, as, indeed, most downturns in the past have shown.

History is not necessarily a good predictor of the future, so we'll just have to see how things play out. But I would be willing to purchase assets that would be stacked for a period of time moving forward.

Okay. Great. Thank you very much.

Lukas Daul, ABG.

Thank you. Good morning.

You mentioned the discussion regarding potential concellation or contract renegotiations. And I was wondering, beside the notion of Pemex, if you have been approached or if you have discussed this with your clients. And how do you see it playing out in terms of one-sided terminations, or is it going to be a mutual agreement?

Yes, Greg, this is Ron Woll. Thanks for that question.

The most obvious example of a one-sided act on contracts would be Statoil, which of course we've taken a very firm position on. I think more broadly if you look at our overall customers, both in good markets and bad, customers do occasionally seek to adjust contract terms. And there's no doubt this market has provided some sharp motivation for operators to take that on more aggressively. So, there's no doubt, this topic is real for us in 2015.

I would say that Diamond, we are generally open to what I would call collaborative discussions with customers to make adjustments. I would say, though, that we do stand by the integrity of our contracts. We are not open to what I'd call one-sided reductions of either rates or term. But we are open to solutions that are mutually beneficial. So, I think this market serves up those conversations and it will be part of where our energy goes this year.

Okay. And just going back on the 2015 activity, if there is, on my count, roughly 110 floaters becoming available during the year, including newbuilds and rigs rolling off contracts, how many of them do you think will find work in 2015?

This is Ron again.

I think it's very safe to say that few of those are going to earn some new work here in 2015. Operators from a capital standpoint are simply locked it down on new projects, and even those that they have are certainly under harsh scrutiny. So, I think you're going to have to look on the lower end of that spectrum in terms of who will pick up new work.

All right. Thank you very much.

JB Lowe, Cowen and Company.

Good morning. I just had a quick follow up on potential acquisition targets that you are looking at. Would there be any sort of equipment that you would rule out? What I mean by that is, would you look for to pick up assets that have similar characteristics as your current fleet in terms of the yard where they were built or equipment on different rigs in order to better streamline an acquisition?

JB, thanks for the question.

Perhaps the best way of answering that is to suggest that everything is on the table and nothing is off it. Certainly we will have a preference for higher-spec assets. But we will look at any and all options that materialize and only deploy capital to this end if we are, let's say, comfortable with the long-term return profiles of such assets.

For example, this could include purchasing individual assets, doing an acquisition, or even perhaps both. The key here is really to look at it from a long-term shareholder value perspective.

Okay. Fair enough.

My other question was on at the Apex and the Onyx. These are unique rigs in the marketplace right now, just given how they've been refurbished. I'm just curious as to how you see those rigs fitting into the global scenario right now in terms of competing against newbuilds or competing against older assets. What types of projects are those purpose-built for and could potentially compete better against other assets for?

JB, this is Ron. Appreciate the question.

Before the market lost so much ground, I think the Apex and the Onyx both were rigs that were attracting a lot of attention. If you think about when the market does recover -- and I guess we should emphasize, although the news is tough these days, the market will recover. These are cycles they go through, lows and highs and there will be a turn. I think it's safe to say that those kinds of rigs will have, I think, some good demand when the market does pick back up.

I'd also add that, with all the high-spec sixth-gen assets coming in, some of these other rigs that we have, of course, are much less expensive and much more affordable to operate. So, I think there are some advantages for operators to contemplate when they think about budget-constrained projects.

But all that said, I think that the overall market forces still apply. There really is not a lot of new work to talk about. And even the Apex and the Onyx, I think, have a tough market road ahead. But those are rigs, there's no doubt in our minds, they have a good future, and when the market picks back up they'll go back to work.

All right. Thanks very much.

Harry Mateer, Barclays.

Hi. Good morning.

Just one question for you on the balance sheet. I know you have a maturity coming up in a few months. With the newbuilds you've had, your cash and marketable securities have come down quite a bit in the past few months. What are your intentions for that maturity? Is it something you'll have to just take down on your credit facility? Or do you think you'll be looking at the bond market?

That comes due on July 1. We certainly have the ability to cover that with the line of credit that we have in place. And will take a look at that on July 1 and evaluate our options, evaluate interest rates, and make a determination at that time.

I'll just add to that. A couple of quarters ago we increased our revolver, as you know, to $1.5 billion. That, combined with our ability to issue debt at reasonable levels, provides us ample dry powder to pursue opportunities as they arise.

The amount of debt that we have or we have access to will be completely dependent on whatever opportunity materializes. And at this moment in time I'm very comfortable with our debt position and our ability to issue while still remaining investment grade.

Okay. Thank you.

That was our final question. I would now like to turn the floor back over to management for any additional or closing remarks.

Gentlemen, thanks very much for attending the call. As we've stated earlier, and during our prepared remarks, we are entering a protracted downturn. We're probably already well into the horizontal aspect of the year that I've been talking about.

But we do know that we're in a very cyclical industry. And, as I mentioned earlier, the cure for low oil prices is low oil prices. So, we remain optimistic that the offshore drillers will have their day in the sun again, moving along. So with that, thank you very much and we'll see you on the Q1 quarter call.

Thank you. This does conclude today's conference call. You may now disconnect.