Diamond Offshore Drilling Inc (DO) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Diamond Offshore's third-quarter 2016 earnings call. At this time all participant lines have been placed in a listen-only mode. After the presenters' prepared remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

It is now my pleasure to turn the call over to Samir Ali, Senior Director of Investor Relations and Corporate Development. Please go ahead.

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; Ron Woll, Senior Vice President and Chief Commercial Officer; and Kelly Youngblood, Senior Vice President and Chief Financial Officer.

Before we begin our remarks, I remind you that the information reported today speaks only as of today and therefore be 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 be forward-looking in nature. Those statements are based on our current expectations and include known and unknown uncertain risks 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 risk and uncertainties include the risk factors disclosed in our filings with the SEC included in our 10-K and 10-Q filings. Further, we expressly disclaim any obligation to update or revise any forward-looking statement. 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 will turn the call over to Marc.

Thank you, Samir. Good morning, everyone, and thank you for joining us. Earlier today we announced earnings per share of $0.10 for the third quarter of 2016 which includes a higher-than-expected effective tax rate that Kelly will address in his prepared remarks. This compares to our earnings per share of $0.99 in the third quarter of 2015 highlighting what is an ongoing deterioration of offshore drilling fundamentals. The severity and duration of this downturn is unprecedented.

But allow me to further comment on the offshore market in general. Earlier this year we developed an in-depth study of the market which subsequently helped form the basis of our multiyear corporate strategy, while also providing insights into the offshore market in the coming years. One of the overarching conclusions is that while the offshore drilling market will likely continue to suffer in the near- to medium-term, the long-term fundamentals of this sector remain very sound.

Our belief in the viability of deepwater drilling is driven by a number of factors. Firstly, annual oil demand is expected to continue to grow at slightly more than 1 million barrels per day which stacked against a conservative production decline means that over the next decade we as an industry have to find an additional 33 million barrels per day of new production. Onshore including unconventional shale cannot fill this gap alone.

Of this shortfall, we estimate that the deepwater segment will have to find an additional 6 million barrels of production over and above that which has already been sanctioned and approved. This alone is equivalent to 70% of all the deepwater production that is available today and to meet this production requirement our customers will need to return to very active drilling programs in the coming years.

During the month of October, I visited with the senior management of deepwater producers in Asia, Europe and Latin America and can advise that deepwater drilling remains at the forefront of the minds of our clients.

Secondly and despite the recent uptick in oil pricing, we are witnessing what will become three years of consecutive cuts in our clients' capital expenditures, something which has not previously occurred in the history of the hydrocarbon industry. This dramatic cut in spending will impact future oil production which should bring the oil markets back into balance from a supply and demand perspective with obvious consequences for pricing.

Finally, the full lifecycle project NPV of an offshore project is becoming more competitive when compared against an onshore unconventional project as costs and efficiency gains are realized in offshore developments. Over the life of a deepwater development, offshore wells have proven to deliver high returns and cash flow to our clients. Today's challenge however is the timing of the cash flows of an offshore project. Lower commodity prices have forced our customers to preserve cash in the near-term and this has postponed drilling of the more economic deepwater wells.

However, as bad as the market remains, we were able to secure two fixture awards during the third quarter. The Ocean Valiant won an approximate 12-month campaign with Maersk in the North Sea. Naturally, the competitive landscape in this region is as tough as any in the world and our client had numerous options available to them. However, demand was able to prevail -- I beg your pardon -- however Diamond was able to prevail through innovative pricing while also presenting one of the most capable assets in the North Sea. It also allows Diamond to keep one of our premier rigs in the North Sea hot well into the next year.

Also the jack-up, the Ocean Scepter, was also awarded an approximate eight-month contract with Fieldwood in Mexico. This is one of the first non-PEMEX awards in Mexico and enables us to maintain a presence in country for when the industry recovers and deepwater exploration takes off on the Mexican side of the Gulf of Mexico. We view Mexico as an area of strategic importance for the Company. This sense of importance is shared by our customers, many of whom are bidding on the upcoming licensing rounds, and we plan to be ready to support their drilling programs when the time comes.

So turning to other news during the quarter, in August Diamond received notice that Petrobras has terminated the Ocean Valor contract. We strongly dispute Petrobras' right to terminate and so immediately following the termination notification, we filed for injunctive relief which was subsequently granted by the Rio Courts. As of today the contract remains in place by court order subject to further judicial rulings. Since then and as expected, Petrobras has filed an appeal to our injunction. We expect the judge to make a preliminary ruling on this appeal in the coming months.

If Diamond prevails, the appeal would advance to a panel of judges for final review. The final review process would likely take an additional number of months before a decision is rendered. However, each case is unique and the timing may vary. The key point here is the contract remains in effect pending a judicial decision on our clients' appeal.

Despite the litigation, however, our relationship with Petrobras remains strong and we have continued a constructive dialogue relating to our other ongoing operations in the country.

Also, earlier in the month BP announced that the company will no longer pursue a drilling campaign in the Great Australian Bight. BP had previously selected Diamond's recently delivered harsh environment ultradeep water semi, the Ocean GreatWhite to be the primary drilling rig for this campaign. As both BP and Diamond have previously reported, the contract for the Ocean GreatWhite remains in place and is not currently impacted by the decision not to progress the Great Australian Bight drilling program.

Following post-delivery upgrades and testing, the rig has now departed Singapore for East Malaysia where we plan to commence the contracts initial acceptance testing. We are working with BP to find alternative drilling programs both within the BP portfolio and also as a sublet.

Further during the quarter, the Ocean BlackRhino had an unplanned BOP disconnect resulting in 20 days of nonproductive time and lost revenue. The stack has already been placed back into service following a quick retrieval. The ability to return the stack to service within such a short time frame is an example of the benefits of Diamond's unique to the industry agreement with GE, the original equipment manufacturer for the Pressure Control by the Hour service.

So finally, I would like to reiterate that as of today our backlog remains one of the strongest amongst our peers. The Ocean Valor remains on contract pending a judicial appeal from the client and the Ocean GreatWhite remains contracted despite the cancellation of the Australian drilling program.

So now let me turn the call over to Kelly to discuss the financials for the quarter and then I will have some closing remarks. Kelly?

Thanks, Marc. As Marc just discussed, we have seen industry fundamentals continue to dramatically deteriorate this year and although we believe long-term fundamentals remain intact, it will continue to be a bumpy road in the near to midterm.

In the interim, we will continue to navigate through this downturn by proactively managing our cost structure. Our relentless focus on this effort is demonstrated by the declining cost trends seen in our financial results. Now we are certainly in the late innings with our ability to further reduce costs but nevertheless, we remain focused on innovative ideas to further streamline the organization. As we go through this exercise, our primary goal is to balance any cost reductions against positioning the Company for the eventual market recovery.

Moving on to our third-quarter 2016 results, we reported after-tax net income of $14 million or $0.10 per share compared to a normalized $22 million or $0.16 per share in the second quarter. Our net income this quarter was negatively impacted by a higher than expected effective tax rate due to the recording of a return to provision true up and other discrete tax items. Adjusting for these items, our normalized effective tax rate for the quarter would have been 33%.

Contract drilling revenues of $340 million represented a sequential decrease of 5% primarily as a result of unplanned downtime during the quarter including the Ocean BlackHornet BOP issue discussed earlier by Marc. Also contributing to the decline were contracts that ended during the second quarter for the Ocean Valiant and Ocean Scepter. As a reminder, the Ocean Valiant is in route and will be commencing her one-year contract for Maersk in the coming weeks. The Ocean Scepter also has a new contract that is scheduled to begin operations in January of 2017.

Partially offsetting these decreases was a full quarter of operational activity for the Ocean Apex. If you recall, the rig began working under a new contract during the middle of the second quarter. It is also noteworthy that in addition to receiving a full quarter of revenue contribution, the Ocean Apex experienced near-perfect operating efficiency.

Other notable items that are unique to the third-quarter include the following.

First, contract drilling costs came in lower than our previous guidance primarily due to the positive impact of a reserve true up related to offshore injury claims. This lower reserve requirement is a direct reflection of our strong operational and safety performance over the last few years. Excluding this adjustment, our drilling costs for the quarter would have come in at the low end of our previous guidance.

Next, our interest expense came in lower than expected this quarter as a result of our decision to perform rig upgrades and testing on the Ocean GreatWhite prior to presenting the rig to BP for acceptance testing. Since the rig has not yet been placed into service it allowed us to continue capitalizing interest associated with the rig's financing cost during the quarter.

The remaining income statement items were within the guidance we provided in our second-quarter call. Depreciation came in at the low-end of our guidance at $86 million for the quarter. This again was mainly driven by the timing of placing the Ocean GreatWhite into service.

G&A also came in at the low end of our guidance at $15 million for the quarter due to our continued focus on cost management.

Now let me provide some comments about the fourth quarter. Consistent with commentary from our last conference call, we have no special surveys for rigs scheduled for the remainder of 2016. To see projections of currently scheduled downtime, please refer to our quarterly rig status report that we filed this morning.

We expect contract drilling costs for the quarter to come in between $190 million to $195 million which is lower than our third-quarter cost after adjusting for the reserve true up credit related to offshore injury claims.

We estimate our depreciation expense to be approximately $385 million for the full year with the fourth-quarter coming in around $90 million. The sequential increase for the fourth quarter is a result of the Ocean GreatWhite being placed into service later this quarter.

G&A costs are expected to average around $15 million to $18 million in the fourth quarter. Interest expense on our current debt and expected borrowings on our bank line of credit net of capitalized interest is projected to be approximately $26 million in the fourth quarter. We anticipate our effective tax rate to be approximately 33% in the fourth quarter. Of course the rate may fluctuate up or down based on a variety of factors to include but not limited to changes of geographic mix of earnings as well as tax assessments, settlements or movements in exchange rates.

Moving on to our capital expenditure guidance, we estimate that we will incur maintenance capital costs of approximately $125 million for the full year of 2016, which is down approximately 40% compared to our prior-year spend. New build capital expenditures for 2016 are expected to approximate $500 million, which includes the final payment related to the delivery of the Ocean GreatWhite. So in total we are expecting our capital expenditures to be approximately $625 million for the full year of 2016.

Finally, I would like to make a few comments about our balance sheet, which differentiates us within our peer group and places us in an enviable position to navigate this unprecedented downturn. If you recall in the second quarter, we borrowed against our revolving credit line to fund the final payment for the Ocean GreatWhite, which represented our last new build capital obligation. During the third quarter, we reduced our revolver balance by over 40% and expect to have the remaining balance of $182 million fully paid off in the coming quarters.

Our current contractual backlog is approximately $4.1 billion of which the Ocean Valor contract represents approximately 7.5%. Our next debt maturity of $500 million is not due until the second quarter of 2019. And finally, we expect our overall liquidity position to remain well above $1 billion for the foreseeable future.

We believe our strong financial position provides us with many options to take advantage of this downturn and better position Diamond Offshore for the market's eventual recovery.

With that I will turn it back to Marc.

Thank you, Kelly. The newsfeed this quarter has been somewhat mixed. However, we are pleased with the announcement of two new fixtures one of which includes the strategically important Mexican market and we have notably added 20 months of backlog this past quarter alone. We have been able to mitigate the consequences of the potential Ocean Valor contract termination with a successful injunction and our contract for the Ocean GreatWhite remains in place despite the cancellation of the Great Australian Bight drilling program.

We are investigating potential work for this rig once we have completed its shakedown with BP and I will remind all that as of today, all of our six generation assets remain contracted to 2019 and beyond.

As we continue to navigate through the trough of this cycle, offshore drillers with superior balance sheets, strong liquidity and thought leadership will continue to win contracts ahead of others. We will continue to look for innovative ways to drive efficiencies into deepwater drilling to include Pressure Control by the Hour and Floating Factory options while at the same time maintaining a laser focus on forward capital efficiencies.

So I realize that there is some breaking news ever the weekend related to the oilfield services sector that has lowered attendees to our call. But let's move forward and take what Q&A is out there.

(Operator Instructions). Gregory Lewis, Credit Suisse.

It looks like Gregory withdrew his question. Ian Macpherson, Simmons.

Good morning. Can you just clarify, I gather that you will be booking your Ocean Valor revenues throughout the fourth quarter as the litigation process runs its course. Is that correct?

Ian, that is absolutely correct. We are technically still under contract and it will be on a standby rate and we are still recording that revenue.

Got it. And then for GreatWhite, we are seeing this step up in depreciation in Q4 but it looks like your day rate date is moving to January 1. When you say you are still on contract with BP, will they have a provision for a standby day rate if they accept the rig but it is not drilling? Will it go to anything meaningfully below its contracted day rate in the first quarter?

This is Ron Woll. The short answer to your question is yes, that is comprehended although the details of where, when and how are still being worked through but the short answer is yes.

Okay. And then I guess last one for me, I don't know if you could provide any color on the Valiant contract with Maersk Oil. I know the day rate is undisclosed. Can you comment at all about the profitability on a gross margin basis with that contract just to give us a flavor of what a 13-well mark contract in the North Sea looks like these days?

Yes, this is Ron. As you'd well expect, the oversupply in the market puts some pretty strong downward pressure on rates so I would say it is highly competitive although from our standpoint not a tough call to make regarding how to bid that to keep the rig utilized. And so from a financial standpoint, we feel very comfortable to support the contract in its form, but there is no doubt the rates are highly competitive given the supply conditions.

Just curious if you can answer whether it is a cash breakeven contract above or below?

Yes, that is actually the kind of detail we probably won't get into in this conversation. I appreciate why you are asking but I think if I were to characterize it as highly competitive but not a Kamikaze job in that sense. It is something we thought through and feel very comfortable how we bid the work.

Great. Thanks, Ron. I will pass it over. Thank you.

Samantha Hoh, Evercore ISI.

Thanks for taking my question. I was really impressed that backlog held pretty stable sequentially and I was just wondering, there is a couple of floaters rolling off contract in early 2017. Have conversations been initiated with the existing customers about possibly keeping those rigs on contract?

Yes, this is Ron. So if we think about 2017, I think there a few rigs come to mind that we are kind of paying attention to. I think the Guardian is one in the UK market where she is working for Dana now, will continue in early 2017. And given her hot working status, we are pretty focused on how we sort of keep her in that market for the balance of 2017. So that is one we are paying attention to.

I would also argue that if you looked at kind of where other rigs are kind of in the market sequence, who is on rate, who is off rate. We do think about the Ocean Monarch is one we are paying attention to. Nothing new to announce today but we are certainly paying a lot of effort to making sure she stays utilized in 2017.

But I think broadly speaking, rigs that do come off contract in 2017 are facing headwinds regarding re-contracting, but we are focused on the right rigs and the right markets to make sure utilization and backlog stays healthy.

So just following up, you mentioned the backlog. I think it is noteworthy that despite certain headwinds, we have done a good job of keeping the backlog intact. And also I will just reiterate the point once again that as of today despite the headwinds that we are facing, all of our six generation assets are under contract to 2019. And the sixth generation fleet is frankly the one that is most distressed at this moment in time. So we will continue to do everything we can to maintain the sanctity of the backlog on those rigs and others.

Great, thanks, Marc. The other thing that I would actually love to hear you talk about would be how you think about the jack-up market class these days. You guys put your other four cold stack units up for sale. Are you seeing any interest from our side? It looks like there is a lot of jack-ups that effectively scrapped these days and was kind of wondering how you are thinking about the jack-up market?

Yes, we are primarily a deepwater driller in the floater market and as you are rightly point out, we put the majority of our jack-ups up for sale. I mean critically the Ocean Scepter has just gone back to work. That is a high spec jack-up. It is basically the only one that we are marketing in our fleet so it has just gone back into Mexico. That is a hugely important market. When the price of oil recovers, which of course it will, of that we have no doubt, we still maintain a presence in Mexico so we are rightly positioned to take advantage as to how that market grows which it will on the deepwater side.

Now specifically to the jack-up market, I think one thing you've got to remember is that there is over 120 jack-ups that are being built of which around 15 only have contracts. So if you just do the math on the supply and demand perspective, you can see that market is going to be oversupplied for a long time to come.

Okay, thanks so much.

(inaudible) Credit Suisse

It is Greg again having some technical difficulties over here this morning. Anyway, I just wanted to touch on -- I mean Diamond keeps it pretty simple. You guys have your cold stacked rigs, you don't really have different degrees of stacking. As you think about your stack vessels, and as we play out the next couple of years I mean how quickly could we see one of -- are any of these rigs, could they be bid on work and come back to the market in say a three- to six-month period or are we at a point now where people are stacking rigs and really the active marketed supply is really shrinking?

That is a good question. We have done a lot of work on obviously stacking and keeping stacking costs low. The market, let's be honest, the market is distressed right now and so when we take a rig out of the fleet, we generally go straight to cold stacking. Now as it relates to reactivation costs and reactivation timing, obviously the longer that it is cold stacked the longer it will take to bring the unit back into market and be able to market it from a business acquisition perspective.

I think what you've got to look at though especially in the six generation fleet that as that cost increases with time through activation costs, one has to consider and I have said this before that ultimately will you bring these highly complex rigs back into the market by investing in them without a contract?

So there is almost a barrier to reentry and I think what you will see especially in the six generation fleet because they are more complex, they are harder to reactivate, that some of those rigs may not see the light of day again. So some of the high spec units, some of the older high spec units and I'm talking about those, the six gen assets that were delivered say in the 2010, 2011 timeframe, if they are not working and they get stacked for a considerable period of time, they could effectively be scrapped and that is something that will tighten the market and help it recover.

So I think the six gen fleet will bifurcate. We will get those that are stacked early, those with less higher specs, those are likely in the long run to be scrapped. And those that kept working, those that are let's say higher spec of the six gen assets, will likely have a better future. And this is -- I will reemphasize this point. Recall that we do have a strong backlog, we're fighting to keep the sanctity of that backlog in place despite some strong headwinds. And all of our fleet, as we are sitting here today of our high spec assets are contracted for the next three years.

Now on let's say the third and fourth fleet, of which we've got a very competitive fleet, we have been through the scrapping exercise on the third and fourth generation fleet, those would have to be scrapped, they will be easier to bring back. I think the reactivation cost will be lower and certainly they can be bought back faster than the more complex assets.

Okay, great. Thanks, Marc. Then just on the BOP retrieval, was that all completed in the third quarter or is there going to be any impact in Q4 that we should be thinking about? And just generally speaking, you mentioned the retrieval processing and getting the BOP back on track and up and running. Was there any sort of cost associated with that?

There was. There were costs associated with the recovery of the BOP itself. There was effectively no damage to the BOP. When we brought it back and put it on the stump, we did the laser alignment and so on and so forth. We retrieved it within seven days but the actual downtime was approximately 19 days and it was all recorded in Q3. Now don't forget that we had two BOPs on this stack. So as soon the BOP was brought back to surface, we actually ran the second BOP and put it back to work. And effectively the BOP that we recovered all we had to do was put it back through an end up well maintenance program.

So as it sits today, it is ready to go. So there was no further loss of revenue other than that 19 days of downtime and really the recovery costs were measured in the single digit millions. It was a contractor that we bought out of Aberdeen to help us recover the unit. We got it back up on the stump within seven days, very little damage and we were back to work with the second BOP, the redundant BOP on the rig. So no further cost impact per se and no further revenue loss either.

Okay, perfect. Thanks for the time, gentlemen.

Eduardo Royes, Jefferies.

Good morning. A quick question for you guys and this is probably more for Marc and Ron. If I am thinking about the market today as you guys go out and bid for work, I can sort of start to see a scenario where if you have a potential one well job here or there, we are hearing of guys bidding potentially below cash breakeven or well below cash breakeven. Is there any sort of situation right now or how should I think about what you guys may be willing to walk away from? Or maybe put differently, if I think about how effectively you can stack rigs and bring the cost down, you can make a case where sitting around waiting two months partially crewed, fully crewed for a one well job where you lose money obviously is much more economic than just going stack paying right away.

Do you see situations or do you think it can work out where you guys talk to customers and say look I will wait around and I will do this job for minus X k per day but I am not going to keep doing this if this is a potential one well program that could turn into three or four. Any scenario where you can say I will do this but after that I will have to push pricing up or it is not going to work, maybe contingent on the oil price or something like that. Just some perspective on creativity sort of marketing tactics as you start to think about as things maybe turn a little bit, the scenario where you actually lose more money by sitting around chasing these lossmaking jobs with a rig warm stacked in between as opposed to just cold stacking or bringing costs down a lot more?

Eduardo, this is Ron. I think you are right in the sense that how we approach let's say kind of a one well job versus sort of a longer-term program, we do think about that differently and sort of might we tolerate some thinner margins to bridge between sort of two programs or the gap in the middle. Perhaps. But we've got a pretty I think precise commercialization process and we are not going to pursue your negative margin jobs or open ended just for the sake of utilization and keeping rigs in front of customers. I think we are pretty astute in terms of the economics of what it takes to keep a rig working and be profitable.

So we are not going to chase I think perennial works or negative margins just for its own sake. And if the right answer is to take a rig down and put her into stack mode that is an acceptable choice that we would make sort of with eyes open wide. So I think we look at it differently if it is bridging between two anchor programs versus just wide-open calendar with not sort of clear end in sight.

Great, thank you. Then I guess Kelly, this one would be for you. In the operating expense guidance for 4Q, does that include -- how should we think about the cost on the GreatWhite because I know that is obviously a pretty expensive rig to run or at least it would be when it was going to be in Australia? Is that thing fully crewed? How do I think about the impact of that in the 4Q number from GreatWhite?

Yes, Eduardo, you are going to see some additional costs coming in in Q4. Once we present the rig for acceptance testing with BP, we will start to incur depreciation on the rig at this time. And as you saw this quarter, we have been capitalizing some of the associated interest costs, that will stop once we present the rig. But then some of the other costs you are thinking of, labor, things like that will actually kick in once the rig actually goes into service.

So there is very little actual in the OpEx line contract drilling OpEx line from that rig in the fourth quarter?

In the fourth quarter, that is correct. You will see it more in depreciation and interest expense.

Great. All right, thanks, guys. I'll turn it over.

Haithum Nokta, Clarkson.

Good morning, guys. Marc and Kelly, curious if you can give us some of your updated thoughts on capital allocation specifically with M&A? I know you guys have talked about wanting to build the floating factory but also trying to be acquisitive potentially in the downturn but you also marked through some cold water on some of the prospects for some of these 6G rigs that are kind of early in that build generation.

I'm curious if you can just give us some updated thoughts on how you guys see the market today for asset acquisitions or kind of more corporate move? But some extra color would be great at this point.

Sure. So just some general market commentary. I think if you look at the way utilization is going and specifically in the sixth generation assets, actually let me just say this for a quick minute. I think if you look at our fleet as it stands today and you look at our third and fourth generation assets and how we have materially changed those assets through rebuild programs over the last five a little bit more years, I think if you truly look at our fleet today, you will see that our average fleet age is better the median of our peers. We are in a very good position today. We are very comfortable with our fleet.

So as we look forward as to the strategic opportunities that present themselves to us, we have to do it in the context that there is still over 30 -- well let's exclude the (inaudible) rigs, there's still over 32 rigs that are so coming to market of which only two have a contract. That is in the sixth generation fleet.

And then you've got to look at the subsectors of our space specifically and look at utilization rates and how they are still declining. Utilization is on a falling trajectory. There let's say there is around 294, 295 floaters out there. 160, 165 of them are on contract and even within that space, if you look at the Ocean GreatWhite which was effectively going onto a standby program, of that 165, maybe 127, 128 are working. And as rigs, the high spec rigs are coming up for contract, very few of them will have their contracts extended or continue working.

So utilization has not hit a bottom as of yet. It is still on a downward trajectory and I think I said on the last call, we are estimating that that downward trajectory will likely continue to fall through Q4 and at least into the third-quarter, maybe fourth-quarter 2017.

So it is all about timing and a certain number of our peers will become distressed as we go through this cycle. Of course, we've got a good balance sheet. Our liquidity is over $1 billion well into the future. My next step payment is $500 million in 2019 and we have a very strong shareholder that continues to back us and believe in us moving forward.

So as to strategic options whether it is a Floating Factory, whether it is individual distressed asset purchase or possibly participating in consolidation of the industry from an M&A perspective, those options remain in place. But the timing is not today as it relates to where we are going to spend our very precious capital moving forward. It is all about capital efficiency, it is return to shareholders. That is something that we have a laser focus on and will remain laser focused on moving forward.

So everything is out there but we are not declaring and we don't believe that we are close to declaring on what we are going to do moving forward but let's stay tuned to this over the coming quarters and we will see what happens.

I appreciate the thoughts there. If I could just expand a little bit on you commented that the downward draft and further demand is likely to continue into 3Q, 4Q of 2017. I'm just curious if there is anything that kind of gives you any confidence that that is in fact the timing of maybe a flattening out or inflection point in floater demand. Is it based on conversations or is it based on historical activity levels and at that point it seems the contracted rig count will be at such a low point? Or is there more around the timing specifically at this point?

It is a combination of all of that plus a little bit more. Now I have traveled extensively during the month of October, I've spoken to deepwater drillers in the Far East, I've spoken to deepwater drillers in Europe, I've spoken to deepwater drillers in Latin America and also of course that doesn't exclude people in our own backyard here in the Gulf of Mexico.

As it relates to my clients' CapEx options moving forward, we are still in a space whereby the oil price I don't think we have had a recovery in the oil price but it is not quite where it needs to be from a deepwater perspective. And let's face it, our own clients are cash constrained. So when they are going to spend their important CapEx dollars, they want to invest in a space where the cash flows are not quite so long-term as it relates to return on investment as we find in deepwater drilling.

But as I mentioned in my opening remarks, that is a limited market and eventually the deepwater drillers, Petrobras of course, Total to name but a few that I've spoken to in this last month alone are starting to think about what happens when the oil price is recovered, when it is stabilized and they have to go back and invest in deepwater drilling. Deepwater drilling is absolutely not going away, it is just we are in the phase in the cycle whereby our clients have somewhat of an alternative but it is only an alternative for a short-term program. And we will see deepwater assets start to get contracted on term contracts, but I don't think it is going to happen like I said in the next four quarters. It is probably going to be the back end of 2017 when we start truly to see activity pick up and utilization recover.

Okay. I guess just one last one related to that if I can is there has been some talk about infill type of floater demand, shorter cycle type of projects. Is that something that the larger deepwater operators are discussing with you as well or are they kind of just still trying to game the timing of major projects?

No, they are discussing that with that. The number of fixtures that we are actually talking about with clients has actually gone up over the last quarter, maybe quarter and a half. There is lots of opportunities strangely enough outside of the Golden Triangle that are related to perhaps third and fourth generation assets that we are talking to clients about. It tends to be shorter-term than traditionally we have seen. Nevertheless, it is more than the typical just one well opportunity.

So I don't think it is too far of a stretch of the imagination to say right now that the number of contact points around fixtures with our clients is actually going up, it is the shorter-term work than we have seen in the past. But the long-term deepwater exploration and development programs are still somewhat over the horizon. We haven't seen yet the green shoots of a recovery unlike perhaps some of the more focused onshore players, the Halliburtons and Schlumbergers have been suggesting that are out there on offshore. But our time will come.

Looking forward to that day. Appreciate the thoughts, Marc.

Thank you, ladies and gentlemen. With that we do conclude today's Diamond Offshore third-quarter earnings conference call. You may disconnect at this time and have a wonderful day.