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Diamond Offshore Drilling, Inc. (NYSE:DO)

Q4 2008 Earnings Call

February 05, 2009 10:00 AM ET

Executives

Les Van Dyke - Director, Investor Relations

Lawrence R. Dickerson - President and Chief Executive Officer

Gary T. Krenek - Senior Vice President and Chief Financial Officer

John L. Gabriel - Senior Vice President, Contracts and Marketing

Analysts

Jeff Tillery - Tudor, Pickering, Holt & Co., LLC

Daniel Boyd - Goldman Sachs

Angeline Sedita - Macquarie Research Equities

Ian Macpherson - Simmons & Co.

Waqar Syed - Tristone Capital

Judson Bailey - Jefferies & Co.

David Smith - JPMorgan

Michael Urban - Deutsche Bank

Robin Shoemaker - Citigroup

Collin Gerry - Raymond James

Robert MacKenzie - Friedman, Billings, Ramsey & Co., Inc.

Operator

Good morning, my name is Julian and I'll be your conference operator today.

At this time, I would like to welcome everyone to the Diamond Offshore Drilling Fourth Quarter 2008 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. I would now like to turn the conference over to Mr. Les Van Dyke, Director of Investor Relations. Please go ahead.

Les Van Dyke

Good morning, and thank you for joining us.

With me on the call today are Larry Dickerson, President and Chief Executive Officer. He is on the line from Perth, Australia. And here in the office, Gary Krenek, Senior Vice President and Chief Financial Officer; and John Gabriel, Senior Vice President, Contracts and Marketing.

Before Larry begins his remarks, I should remind you that statements made during this conference call may constitute forward-looking statements, and are inherently subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected.

Forward-looking statements include, but are not limited to discussions about future revenues and earnings, capital expenditures, industry conditions and competition, dates that drilling rigs will enter service, as well as management's plans and objectives for the future.

A discussion of the risk factors that could impact these areas of the company's overall business and financial performance can be found in the company's reports filed with the Securities and Exchange Commission. Given these concerns, investors and analysts should not place undue reliance on forward-looking statements.

The company expressly disclaims any obligation to release publicly any updates to any forward-looking statements to reflect any changes in the company's expectations or any changes in events, conditions, or circumstances, on which any forward-looking statement is based.

And with that, I'll turn the meeting over to Larry.

Lawrence R. Dickerson

Thank you, Les.

I am here in Perth visiting a number of our officers and customers here in the region and so far met with two clients based here in Australia.

To comment on the results for the quarter, I think you need to look through obviously or consider the impacts of two things outside of the ordinary, which were the bad debt experience related to the Oilexco bankruptcy equivalent filing in the UK, and that impact on our financial statements, our currency loss. But excluding those two items our cost were in line with guidance, and we were generally pleased with results.

Let me give you a little more color on those two things. Oilexco, as you know had the Ocean Guardian of ours, they also had a Transocean rig. And we had been working with Oilexco for some time dealing with their cash crunch issues. They had released some announcements that they had obtained interim financing.

And without having access to their particular financial position, we are least impressed that we are making progress in that regard. And we had moved and we are negotiating an agreement to accept half payment with the deferral of some of those items to the yen. But obviously when they had to go into administration, all that was put aside. So we recorded $32 million of pre tax bad debt expense that represents about 90 days of day rate. About 60 days of that was what I would call work in process.

You've got the 30 days for a month that you've build and that has 30 days until that is due ordinarily, and then you've got the month that may have not been filed, they file... build to them. They filed in early January, so essentially we have a little bit of 60 days of work in process. And the other amount were the 50% of earlier portions that we had agreed to defer. But all that has been recognized as bad debt expense.

We still have a claim for future contract, but clearly that's all dependent upon the amount of financial assets within that company and frankly will be unsecured. So we will, on a go-forward basis, no longer be including that in our backlog. So our future commitments that will not be included in that are about $340 million.

The currency loss was $51 million for the quarter. That represents about $20 million of currency contracts that were unwound in the quarter. And so that's offset by an equivalent $20 million of reduced cost primarily in the contract drilling lines, so those two netted out. And then $30 million of the loss was a mark-to-market on future positions.

That mark-to-market number will change as we go forward depending up on movements of the dollar. But, if it were to freeze at this particular position, then it would be offset by gains... I'm sorry, offset by decreased expenses again primarily in the contract drilling line. We do not qualify or have not qualified to-date for hedge... current hedge accounting. So we show those two positions in this manner. But the underlying economics remain the same.

So, those are the two commentary on the two items in the financial statements. Gary Krenek will make some additional commentary and give you some guidance as is our tradition for the year 2009 as we go forward.

The other things I would like to mention is that last week, the Ocean Monarch unloaded from its heavy lift vessels in the Gulf of Mexico. And we are loading the rig up and doing some additional commissioning and crude training, and expect to be on contract some time in March with Anadarko. And with that, that will complete our capital program for either new or upgraded rigs that replaced and delivered within this cycle. Accounting the Monarch, the Ocean Endeavour, which was the first unit ordered in this cycle has already been delivered last year.

And then the two new built jack-ups; Shield and Scepter, that totals about $880 million. So, for a little bit more than the cost of a new built drillship or semi late in the cycle, we were able to deliver two 10,000 foot units, which are contracted going forward, and two new construction heavy duty jack-ups.

So, I think that illustrates clearly the capital discipline that we pursue. But the fact that that program is completed, means that we are now at a point in the cycle. We have no more substantial commitments. Our CapEx will just be maintenance CapEx. We've got upgrade program on a minor scale, about $70 million going forward on the bounty in the coming year that Gary Krenek will talk about.

But that primarily release our resources available for other uses. And among those uses, our dividends and so, I will point out clearly, it's in the press release that between regular and special dividends, it was a $2 dividend declared. This is the second quarter that we've done that. And that's a substantial yield on where our stock price is today.

So, that completes my opening remarks and now I'll let Gary Krenek give you some additional financial details.

Gary T. Krenek

Thanks, Larry.

As Larry said, he's already gone over of the two most significant items on the financial segments; bad debt expense and our foreign currency loss. The only other color I'd like to add is on our rig operating expenses. They were flat to slightly down from the third quarter and the fourth quarter. That's despite the fact that we added the Scepter, going to work in the fourth quarter; that added about $10 million worth of cost to rig operating expense.

And we had approximately $18 million of additional cost of survey various rigs in the fourth quarter over the third quarter. Those increases were offset by, as Larry said, the strengthening of the U.S. dollar that offset a portion of them. And the other offset was a result of our continued cost control efforts of the company.

If any one has any additional questions regarding the fourth quarter results, I'll be happy to answer them in the Q&A portion of the call.

As these are accustomed annually, we give everyone our expected cost for each of our rigs by class and location in the fourth quarter conference call, so as to aid in estimating our future rig operating costs. Rather than spend the time here on this call, we're going to take that information. We have included it this year on our rig status report that we released this morning.

And I would refer you to that document, which can be found on our website. Likewise, this rigs status report includes our expected downtime by rig for 2009. That downtime includes five rigs, which will be undergoing their five year surveys this year and an additional nine rig that we will incur downtime for preparation and the remote time related to upcoming long-term international contracts. Again, please see the rig status report for details on this expected downturn.

With respect to rig operating expenses in addition to the normal daily operating costs that I've just spoke about, we will also incur cost related to amortization of past mobs that we've incurred. We expect these amortized mob cost to be approximately $32 million in 2009 with the 10 million of that being incurred in the first quarter.

Additionally, it will incur cost or surveys of the Titan, Yusen, (ph) Concord, Champion in the 5 to $7 million range, and we expect to incur 23 or 25 million during the survey and related maintenance work for the Ocean America. Also, this will result in expected rig operating expense, excluding reimbursable expenses of some 1.3 billion for the entire year and between 330 and 340 million during the first quarter.

The amount of 1.3 billion for the year is an increase of approximately 10% over our 2008 rig operating expense amount. It should be pointed out that this 10% increase is on a financial statement basis. And our 2009 numbers will include rig costs for the Ocean Monarch, a 10,000 foot upgrade Larry, talked about, which was in the shipyard all of 2008 and thus incurred no operating cost last year.

'09 will also include a full year of cost for the two new built jack-ups Scepter and the Shield, which were delivered in '08, and thus incurred only a partial years worth of cost in the prior year. These three rigs account for about one-half of the 10% expected year-over-year increase on costs.

The remaining increase is due both to a small inflation factor that we are assuming and the company's continuing process of diversifying our rigs from the U.S Gulf of Mexico to higher cost international areas. These increases in costs are somewhat offset by savings, by having a stronger U.S. dollar in our international operations.

I would again like to take this opportunity to point out and what we refer to rig operating expense, we are referring to a line item in our income statement labeled contract drilling cost only. And it does not include reimbursable expenses, which is a separate line item on the P&L statement. Reimbursable expenses are driven by the amount of consumables we were asked to purchase and provide to our customers and are offset by approximately a similar amount of reimbursable of revenues.

Looking at a few other cost areas for 2009, we expect depreciation expense to be approximately $360 million for a year and G&A expense is expected to increase in the 9 to 11% range year-over-year. Interest expense will increase in '09 as a result of those no longer capitalizing interest on our upgrade new build projects as we did in 2008. That expense should be around $26 million for the year and would be spread equally in each of the four quarters.

Our tax rate for '09 is expected to be decreased slightly to between 25% and 27%. As always, the actual rate will depend on the ultimate breakdown between U.S. and international income and where that international income is on.

And finally, capital expenditure guidance for the upcoming year, we expect total capital expenditures for '09 to be approximately $470 million. That's broken down by the $70 million that Larry mentioned on the Ocean Bounty for both upgrade and for maintenance and repairs on that rig.

We have about $50 million related to be spent on rigs that are... will be required from international contract requirements. We have noted 50 million for spare equipment, which is a continuation of our revenue preservation plan. And finally, the last 300 million is general maintenance capital. And if you add all of that up, it should come to 470 million.

And with that, we will turn it over for the Q&A portion.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question is from the line of Jeff Tillery with Tudor Pickering & Holt.

Jeff Tillery - Tudor, Pickering, Holt & Co., LLC

Hi, good morning.

Gary Krenek

Good morning.

Lawrence Dickerson

Good morning.

Jeff Tillery - Tudor, Pickering, Holt & Co., LLC

I wonder if you can just talk about the rig that was with the Oilexco; I see that somewhat still on the fleet status report. How is that handled, and do you the have ability remarket that rig at this time?

Lawrence Dickerson

I'll let John Gabriel make some commentary on the market. But, we're in a position, where we want to preserve our claims on that. However, we're... that we're not going to engage in that at the expense of having the rig just stack at the dock. Right now, it is at the dock. And replacement work in the Gulf of... in the North Sea is primarily driven right now on a worldwide basis with the desire to start time of most customers being sometime outside of the severe weather window, which would be starting in spring to summer.

Jeff Tillery - Tudor, Pickering, Holt & Co., LLC

And then could you just talk about the general marketing environment for your... is your report... (ph) 5000, where you've got the Star enrolling out in May of this year. Can you just talk about just generally where recently you're marketing those and what is your expectation on day rates?

John Gabriel

The only rig that we've got available is you mentioned is the Star; and I guess that's about May of this year. Our primary focus right now is Mexico. We have submitted a tender to Pemex for a three year job starting, I think late July, notionally of 2009. The bid is a matter of public record as is the day rate that we bid; it's been published.

That's our primary opportunity right now. I think we may see some more things start to develop here in the U.S. Gulf of Mexico, not long-term things at this juncture, but our primary focus right now is going to be trying to place the rig with Pemex.

Jeff Tillery - Tudor, Pickering, Holt & Co., LLC

And my last question: can you just discuss the opportunities in Mexico; I see this in the fleet status the Summit mentioned as some preparation time till go down there. And then you have two other rigs that rollup contracts kind of middle of this year down in Mexico?

John Gabriel

Well, we submitted tenders for the Ocean Summit against the new requirement in Mexico and against the Ocean Nugget renewal in Mexico. And we were the low bid on those tenders. They have not been awarded yet. It's probably going to take a little while for Pemex to way through evaluation of all those bids. They actually got 29 bids against seven requirements. And they've got a detailed evaluation process, they go through. So, it's going to take them a little while. That actually excludes the floater bid; it was 29 bids against seven jack-up requirements.

Jeff Tillery - Tudor, Pickering, Holt & Co., LLC

Okay. Thank you very much.

Operator

You're next question is from the line of Dan Boyd, with Goldman Sachs.

Daniel Boyd - Goldman Sachs

Hi, thanks. Just wanted to follow-up on the Guardian. It does show the sublevel with Nippon. Is that a signed contract at this point or is that something that's still being negotiated?

John Gabriel

It is an executed assignment of the Oilexco contract. That's about a 60 to 70 day jobs starting late Q1 to early Q2.

Daniel Boyd - Goldman Sachs

Okay. And could you comment on what you are seeing in the sublet market in the North Sea? Is that something we are... there's a lot of competition or will probably be make things a little more difficult for those Guardian to actually get a contract? And can you write any insight on to where you think that, maybe the leading edge day rate is in that for that type of rig?

John Gabriel

They are just not a lot of data points in terms of being able to make any comment on what the existing day rate range is. There just aren't any fixtures. I could tell you that the format activity in the North Sea is increasing. And there are the two released Oilexco rigs available currently although both are still under contract Oilexco. And we anticipate another, probably three ridges rolling of exist in contracts in the second half of '09. But we really don't have any clear indication where the right structure is. There are form outs and that activity is increasing. But if there are any subsidies associated with any of those form outs, I am not aware of where they are, it's not readily apparent yet and that's even going on.

Daniel Boyd - Goldman Sachs

Okay. And then how about coming back to the U.S. with the Ocean America? It looks like Mariner decided they only wanted to keep that rig for six months and not for 12 that they had the option for... and that... have you had any other conversations with them regarding would they take it longer for a lower rate or anything substantial there.

John Gabriel

That decision was just, I guess just made two or three days ago. We haven't had an opportunity to sit down with them and get a feel for what their forward plans are. They have had a rig under contract for a long period of time. And we certainly want to talk to them before we head off in a different direction. I think that decision is just the conscious decision being cautious, given where product prices are today. And we'll sit down and talk to them and try to get a feel for what their thoughts are for 2010.

Daniel Boyd - Goldman Sachs

Okay. And just one last question for Gary. On the cost inflation guidance, thanks for providing all the details, it does look like the cost inflation was above of where we are expecting for the U.S., Gulf of Mexico. Can you comment on that? Was that insurance driven? And then the cost inflation in some cases deflation outside of the U.S. I assume, most of that was just due to positive FX changes in the dollar?

Gary Krenek

You are referring to, what, the fourth quarter, Dan?

Daniel Boyd - Goldman Sachs

Well, just with the guidance that you gave the per day OpEx guidance for 2009 relative to think what that the guidance was for 2008, so when you look year-over-year, it seems like the increases are quite substantial and for the U.S. Gulf focused rigs and not very much at all for anything outside of the U.S. Gulf.

Gary Krenek

I don't know. If you add everything up, it comes to just 10% over the fleet. There can be some mixture between the U.S. Gulf and the international rigs. Remember included in that cost, those cost estimates or some maintenance and repair rigs and that's not necessarily consistent on an individual rig basis from one year to the next year.

So it could be... we are doing a little bit more work on our Gulf of Mexico rigs in '09 versus what we did in '08, and little bit less on the international rigs. But the overall cost, the general inflation that we built into our expectations is probably somewhere on the 5 to 6% range for 2009.

Daniel Boyd - Goldman Sachs

Okay. All right, that's helpful. I was actually under the assumption that per day OpEx did not include survey and maintenance. So that's... thanks for clarifying that.

Gary Krenek

It includes normal operating. It does not include the survey cost that I detailed, the five rigs and five to seven in the America, approximately 25 million. Per day cost do not include that. But the per day cost does include a number of other maintenance projects that we do throughout the year.

Daniel Boyd - Goldman Sachs

Okay. Thanks; appreciate it, guys.

Gary Krenek

Okay.

Operator

Your next question is from the line of Angie Sedita with Macquarie Securities.

Angeline Sedita - Macquarie Research Equities

Thank you guys. I have a follow-up to the prior questions. On the Pemex contracts, you said you are little bidder on the Nugget. And what's the outlook for the Columbia down in the area?

Gary Krenek

It is our understanding, we don't have it in hand yet. But there will be a bid published in the near-term against renewal of the Columbia.

Angeline Sedita - Macquarie Research Equities

Okay. And then you said that there's so much you're bidding down at the Mexico, and you were little bidder there, and then what is the outlook for the Spartan in the Gulf?

Gary Krenek

Spartan is idle right now, obviously.

Angeline Sedita - Macquarie Research Equities

Yeah.

Gary Krenek

And we are looking... we've got a near term opportunity for the rig, and hopefully that will come to fruition here in the next week or so.

Angeline Sedita - Macquarie Research Equities

Okay. And then... you discussed a little bit about the subletting. Obviously there is not a lot of interest that you've mentioned. You didn't have a price point. But I assume or have you heard word about the subletting being at significantly discounted day rates or are they within the contracts that have to be the same day rate of the rig as working. What are you hearing on the subletting and the rates that are being offered out there?

Lawrence Dickerson

Angie, in the discussions I've had with customers, subletting comes up quite a bit. I think there is a lot of activity. But they have not shared with us, and I am not even sure they fixed. At this point, there is just expression among customers of either of subletting out or potential availability of rigs. But I just... I don't have any rate data, and I'm not sure. John, have you picked up anything?

John Gabriel

No. If it's going on, we haven't heard it yet.

Lawrence Dickerson

And typically the way inactive sublet market works is not until there is actually some formal things put in there and people start talking. Do you hear rumors of what rates maybe, and so I am... at the end of the day, I am not sure we're going to be a reliable source of somebody to even repeat those rumors.

Angeline Sedita - Macquarie Research Equities

Okay. That's fair enough. I mean, there is probably not enough demand actually get the rate spectrum at this point anyhow. I guess, the other question is certainly a question is often asked, they ask just to have it official. Are you having any customer besides we already know with all that contact obviously. Trying to renegotiate contracts, have any discussions regarding their current contracts rates duration or anything of that sort.

Lawrence Dickerson

Well, I would say even in normal times, you're always having some sort of discussion on extension issues. And of course that would be the type of thing that we would trade for any kind of rate relief. But beyond that, I don't think we can help you by saying, here is the nature of the discussions are even pointing you in specific directions. There is clearly... our customers are stressed by declines in the price of oil as it's impacted everybody else. So naturally, you'll have some of those type discussions.

Angeline Sedita - Macquarie Research Equities

Okay, fair enough. So you would be willing to take additional term for some rate relief?

Lawrence Dickerson

In the past, that's what we've done in declining markets.

Angeline Sedita - Macquarie Research Equities

Okay. Thanks, guys.

Lawrence Dickerson

But, it's never been something that we just take the whole fleet and go to deal with it. It's typically been a one or two rigs out of the portfolio that's been approached that sort of solution.

Angeline Sedita - Macquarie Research Equities

Okay, special situations. All right, great. Thank you.

Operator

Your next question is from the line of Ian Macpherson with Simmons & Company.

Ian Macpherson - Simmons & Co.

Hey, good morning. Larry or John, I wanted to just ask about the idle status of few of the jack-ups. And what you look at in terms of decision factors for the utilization before you might decide to cold stack any of those. Is it in the cards contemplating that at this point or too premature for that?

John Gabriel

The idle jack-ups that we have now and they haven't been idle very long. All have potential prospects. We're looking at a bit of a gap. We've got the Heritage idle in the Gulf of Suez, but there is an opportunity there that we were pursuing. And the idle jack-ups here in the Gulf of Mexico, we are waiting the outcome of the Pemex bid with respect to the Summit.

We're waiting on a weather window to move the Ocean Crusader to its next job, and we are trying to shift some work around from one rig to another, but the Spartan back to work pretty quick. So I don't think we're at that stage yet, we still have reasonable near term opportunities.

Ian Macpherson - Simmons & Co.

Okay. You haven't... we haven't really seen your day rates for the Gulf of Mexico jack-ups, gap down a lot lower yet. Is that... would that be in your expectations by the end of this quarter to see rates get a little bit lower than the 70s?

John Gabriel

I don't think a lot lower than the 70s; it's hard to tell. Typically, this time of year, we're going to see a little bit more activity coming out of our customers, once we get through the holidays. I think we've already seen some impact on day rates on the Gulf of Mexico. Those rates are published by the various industry source information sources.

Ian Macpherson - Simmons & Co.

Okay.

John Gabriel

I just don't... I don't anticipate anything more significant at this stage, hopefully the activity levels are going to pick up.

Ian Macpherson - Simmons & Co.

Okay. If I could just ask, Larry, quickly since you are in Australia meeting with customers there, what you are hearing in that part of world with respect to on-going demand in the mid-water market there?

Lawrence Dickerson

Well, I think this market is more focused on longer-term prospects and is not so far ahead in this just subject in other places to much negative pressures. I guess that's not a way I'd characterize it, obviously everybody is concerned about prices, and that's... I think the biggest impact will not be on existing programs, but on approval for any kind of new programs.

Certainly, I have talked to some customers, who have plans, who have long-term plans, and are proceeding with what goes on really kind of sticking to the plans that they want to add X number of reserves and they maybe in for whatever reason, they're in a position, where they can look down and say that they think the prices that they are going to get for this product will be higher than what it is today and then there is other folks that have different levels of concerns.

Again, in all markets I mean, there is just not any data points. And that probably reflects as much as anything that people are waiting for more information. And it's probably like many markets even outside their old markets people are a little bit hesitant to make longer term decisions, not knowing whether they're making it on a short-term price postings or not.

But clearly as we have more idle equipment, and there is not a lot of idle equipment right now here in the South East Asia, but if you have idle equipment in markets that will have... I would think downward pressure on prices. But so far, as John indicated, they haven't gapped down that much or as much as some people might have expected.

Ian Macpherson - Simmons & Co.

Okay. Thanks a lot.

Operator

Your next question is from the line of Waqar Syed, with Tristone Capital.

Waqar Syed - Tristone Capital

Larry, my question relates to acquisition opportunities, are you looking at that and how do you weigh acquisition opportunities versus the dividend? And can you pursue both at the same time? That's one.

And then Gary, my other question relates to the five year survey costs and upgrade costs. Are you seeing any decline in those cost in terms of moving rigs or putting new equipment or shipyard to cost and all that? How you're seeing those costs develop versus where they were a year ago? Thank you.

Lawrence Dickerson

Okay. This company has a long-term history of buying rigs in down markets. And so that's a part of our strategy, and one that we will pursue. Because as I mentioned, we've completed our CapEx program and we don't have spec units on order with substantial capital costs yet to come. I think that does put us in a better position than many of the other drillers out there. Although, I am sure on all their conference call, they would all indicate they would buy rigs at the right prices.

So, I think that's sort of the situation we think we're in a little better than the next guy. We think because of our low debt structure that we can't pursue both. Clearly, we can't go out there and pay cash for 5 or $6 billion fleet without at least looking at what they would do with the dividend. But we say each quarter that the Board will arrive with all the alternatives and make the decision in the best interest of shareholders.

But, I would certainly think that at the kind of prices that we anticipate maybe available for some of this equipment that we can acquire one or two units. And I think obviously, since there is no way of knowing where the bottom is, buying them slowly overtime would be the way to go, and I think we can do that without having ... Clearly, with either tapping into our reserved cash or tapping into some borrowing capacity that we would be able to execute on that.

Andso, I'll let Gary answer the next question.

Gary Krenek

With regards to seeing cost coming down, we have not really seen anything come down at this point. What we have seen is the lead time on certain piece of equipment have shortened up. But presently, things are relatively flat As I said in the opening part of the conference call, we're expecting 5% increase, which is substantially less than what's occurred in the last several years. And we'll see whether that 5% occurs or not. Or as you've been finding (ph), Waqar, maybe we'd see some decreases; time will tell.

Waqar Syed - Tristone Capital

And then Larry, just following up on the question regarding acquisitions, between the different asset classes, where would your interest be most between the deep water or fifth, sixth generation rigs versus second, third gen rigs and then floaters versus the jack-ups?

Lawrence Dickerson

Well, I think we would look in all areas. We're going to look at the bargains. The advantage is clearly in the bigger, deeper newer units is that scenario that we are comfortable and our fleet is oriented in that direction and adding some assets like that, I think would be an overall net good for the company. But we've got to look at what the recurrence are present there.

Jack-ups, we think are going to be... if you just look at the sheer number of new units that are delivered with our contacts, we think that prices may fall the most in that area, so that might be most tempting. And I think there maybe some second and third generation bargains. But we have a substantial position already in that market, so that would be almost totally... interest would be driven by what sort of returns with we thought we would get and ultimately we are going to balance all that. But the returns in capital discipline is paranoiac (ph) in what we do.

Waqar Syed - Tristone Capital

Great. Thank you very much.

Operator

Your next question comes from the line of Jud Bailey with Jefferies and Company.

Judson Bailey - Jefferies & Co.

Thanks, good morning. Larry, a follow-up to the last M&A question, you mentioned, you thought jack-up prices could fall the most. Do you think we could see a scenario, where the pricing would fall, say, below what your new build prices were for jack-ups a couple of years ago?

Lawrence Dickerson

I think we may already be at that level. We paid, I guess there are some 80 jack-ups order than other were some cancellation tried at the end and our orders as we counted them were order number 29 and 30, and cost as right at 160 a piece for the units. I think there is not a lot of units for sale right now, but I think you could beat that price today.

Judson Bailey - Jefferies & Co.

Okay. And then switching over to Mexico, it was mentioned earlier there were 29 jack-ups bid for seven tenders. Do we know how many of those were incremental of the seven?

John Gabriel

I know one of them was a renewal against the Nugget, the other four... excuse me, the other six. It's hard to tell what's incremental and what maybe replacing the mat rigs that are down there. I would suspect that couple of them were intended to replace some of the mat rig. So, just as a guess, I'd say 3 or 4.

Judson Bailey - Jefferies & Co.

Okay. And do you have any sense of how many more jack-ups or even semis Pemex may come to tender for this year?

John Gabriel

They put on a preliminary overview. I guess a week or two ago, with their expectations for contracting additional rigs for 2009. And I guess what we gleaned out of that was, there is probably going to be plus or minus 10 jack-up tenders and one floater tender; again, very preliminary. But the floater tender I believe is against renewal of an incumbent rig. And at least one of the jack-up tender is renewal against the Columbia.

Our rig, the jack-up that rolls down there, I guess in the second quarter. So to make a comment about how many your incremental, I can't do that. But again, these are just preliminary indications that we got in the general meeting down there a week or two ago.

Judson Bailey - Jefferies & Co.

Okay. Great. And then one last one. You sold the Ocean Tower last quarter. Can you disclose what... how much that's sold for?

John Gabriel

We... go ahead, Gary.

Gary Krenek

We have a confidentiality agreement with the buyer, and so we will... we can't disclose that. We will disclose it when that transaction is completed which will be sometimes here in the near future.

Judson Bailey - Jefferies & Co.

Okay, great. Thank you.

Operator

You're next question is from the line of David Smith with JPMorgan.

David Smith - JPMorgan

Hi, good morning.

Lawrence Dickerson

Good morning.

David Smith - JPMorgan

Great discussion on your M&A; thank you for that. Wanted to ask if you could characterize discussions for 2011 start dates on the deep-water fleet and maybe distinguish between Petrobras and everyone else

John Gabriel

I'm not sure exactly what you are asking me.

David Smith - JPMorgan

If there are... if there exist still conversation for 2011 starts dates on the deep water fleet.

Lawrence Dickerson

Okay. I think Petrobras has recently come out at least with our press release indicating that they are looking at picking up additional deepwater rigs in that time frame. I think if I remember right, it was about 11 new rigs. As part of the broader plan that at one time it was as large as 40. I suspect at the end of the day that there are some rigs that new bills that are committed to Petrobras to be delivered in late this year and through '10 and '11 that are distressed as well.

So, I think there is going to be opportunity for someone to come in and deal with the void that will exist because of that. That's the primary deepwater area. I think there has been conversation about Pemex moving out in the deepwater. They do have three rigs committed to come in on exactly what the delivery base are. But there is some conversation about those units being distressed as well. And India is probably on a secondary basis one or the part of the world that where there maybe some demand in the '10 to '11 timeframe for deepwater units.

David Smith - JPMorgan

Thank you. I was just asking, because in environment like this, you probably get a significant pricing gap between demand and where supply was a few months ago. And just wondering if discussions are still taking place for 2011.

Lawrence Dickerson

Yes, they are.

David Smith - JPMorgan

Thank you very much.

Operator

Your next question is from the line of Mike Urban with Deutsche Bank.

Michael Urban - Deutsche Bank

Thanks, good morning. We've seen very few fixtures really in most markets globally. And I was just wondering in fact, in a lot of cases when rigs are rolling over their stacking out and instead of going to a new contract. Do you think that's indicative of a significant... pass or a significant bid spread between the contractors and the customers or is it just not right lack of demand right now?

Lawrence Dickerson

Well, I am sure there are probably several explanations. But one of the primary ones, I believe is simply a very cautious approach on the part of our customers. Thinking of being very much concerned where product prices are headed and sitting back and seeing what the dynamic is as it relates to rig rates. There are tenders out there. They are not very many. But they will be used to suspect benchmark decision making as to whether these companies that have deferred their tenders will come back in and start the process up again.

Michael Urban - Deutsche Bank

And you don't have a lot of near term rollovers. But if you can give us a little insight into the discussions that you're having as you look out for this year and more so into next year with potential extensions or renewals or new contracts.

Are customers reaching out to you for that or... and you're not wanting to engage at the kind of rates that are being discussed or as you said earlier, they're taking a cautious view right now and then just taking away to see for now.

Lawrence Dickerson

Well, our floater fleet other than the Star and the uncertainty with respect to the Guardian is basically committed, certainly committed through 2009. Our early availability is going to be in the first half of 2010 and it's just a bit premature for those conversations to be taking place right now.

Michael Urban - Deutsche Bank

Okay. That's all for me. Thank you.

Operator

Your next question is from the line of Robin Shoemaker with Citigroup.

Robin Shoemaker - Citigroup

Good morning. I want to ask you about... there was a comment on National Oilwell Varco's call yesterday, where they indicated that they thought that some of the Brazilian rigs the 12 that were contract towards last year, but those would actually get built with the aid of government funding Korea, Norway, Brazil financial... government financial institutions providing import-export type funding for those rigs. So that they actually will get debt in their opinion.

Is that... it sounds you... from something you were saying earlier that you don't really see that happening, but I do wonder if you think that is unlikely outcome, where if you are hearing that kind of message.

Lawrence Dickerson

I don't want to have anything to... I haven't heard that and those aren't really things that we would follow as closely as in a way, so I can't help you there.

Robin Shoemaker - Citigroup

Okay. Well, the Petrobras tenders, is you are understanding those would be the additional ones beyond the 12 they were last year that those would be for new wealthy quarter rigs?

Lawrence Dickerson

As best as I can determine from the press release, I saw, yes.

Robin Shoemaker - Citigroup

Okay. So, within Diamond's kind of strategy, would a new build against a seven or 10 year contract be an attractive opportunity?

Lawrence Dickerson

I suspect. There is enough spec on new builds there that I just I don't see how you would be competitive coming in later in the cycle. Perhaps you would have some reduction... I'm sure you'd have some reduction on cost on what some of the previous commitments were. But, I don't think enough to tempt somebody into that.

And I think the whole Brazil thing will... is there is so many moving pieces here. But some of the initial rigs that may or may not be cancelled. You've got other units there constructed. You've got Petrobras' demonstrated historical desire to pay rates that are reflective of their longer-term commitments, and are lower than it might be available in other markets. And then you've got the impact of what's happening in other markets.

And it's just... I think it's impossible to say what's going on. But clearly, Petrobras as a company has traditionally taken a long-term view of markets and you've probably got more positive signals coming out of Brazil than you do anywhere else in the world right now. But how that plays out, I think it's impossible to tell.

Robin Shoemaker - Citigroup

All right. Thank you.

Operator

Your next question comes from the line of Collin Gerry with Raymond James.

Collin Gerry - Raymond James

Hi, guys. Actually my question have been answered. Thanks.

Les Dyke

At last, can we have time for another question?

Lawrence Dickerson

Yes.

Operator

Your next question is from the line of Rob MacKenzie with FBR Capital Markets.

Robert MacKenzie - Friedman, Billings, Ramsey & Co., Inc.

Good morning, guys.

Lawrence Dickerson

Good morning.

Robert MacKenzie - Friedman, Billings, Ramsey & Co., Inc.

Looking forward to the next up cycle, how do you think about potentially cutting the dividend to conserve more cash to buy and perhaps build more rigs, perhaps even on spec as costs... specifically, build cost come down?

Lawrence Dickerson

Well, we've set that dividend each quarter and we said that we're going to look at it each quarter. So, clearly, we're going to examine everything that's there. But at the same time, we recognize that this is our primary means of delivering value to shareholders. So, I think we'll do what's prudent. But the one thing that I can tell you that we absolutely do not know and that is when the next cycle starts, but there will be another one.

Robert MacKenzie - Friedman, Billings, Ramsey & Co., Inc.

Okay. And then follow-up to that is, the fleet... your fleet is aging every year. How do you think about when and if and how you recapitalize the fleet with newer rigs perhaps shutting more of the older rigs as time goes on.

Lawrence Dickerson

Well, that's important to note. I don't think we've been inactive to this point. We've added to new jack-ups here. We... the upgrades that we've done to turn rigs that were designed for less than 2000 feet into 6, 8, and now 10,000 foot units have been very successful.

And I can tell you that there is substantially refurnished, and when you look at pictures, you hear customers talking about them in there, and for all intends and purposes, brand new rig. So, I am not sure, just peer looking at the construction date get you a good picture or where the fleet is. But even if you look at some of the older rigs, no one is building or has built a second and third generation units and the fleet there has decreased. And obviously in down markets, those demand may decrease for there. But there is still plenty of pockets around the world while those rigs can drill. So we see quite a future ahead for that fleet and we are not worried about that.

But again you ultimately come back to... if you except that we do need to add more new iron into this fleet, we think, in down cycles is the appropriate time to look at that. I think there maybe greater discounts available on sales of other people's units that they've already ordered than they would necessarily by going into the shipyard and ordering another one at some decreased prices.

Robert MacKenzie - Friedman, Billings, Ramsey & Co., Inc.

Great. Thank you very much.

Lawrence Dickerson

So, we'll take one more question if we have one last.

Operator

Your next question is from the line of Jack Moore with Hartsville Capital (ph).

Unidentified Analyst

Good morning. Thanks for taking my question. Just in light of the discussion about potentially buying rigs for the dividends, I was wondering if you could talk about, where you're really comfortable with your capital structure in the long run. And what threshold is for the debt? And would you issue equity perhaps to deal some of these transactions?

Lawrence Dickerson

I can't give you particular parameters. I mean we've always said that we think of having cash on the balance sheet is a good thing. We've run this company on a very low debt basis consistently throughout the cycles. So, I think looking at how we structured in the past is probably a good view going into the future. We have issued equity.

If you look in the past when we made some acquisition such as the fleet there (ph). So, all those things would be there. But you could... I think everybody can know that we're going to be return driven, and that we view shareholder equity as something to be preserved, and that will balance all of those needs and try to make the appropriate choice.

Unidentified Analyst

Great. Thanks guys.

Lawrence Dickerson

Well, I'd like to thank everybody for joining us. Anymore comments from Houston?

Unidentified Analyst

That's it.

Lawrence Dickerson

Okay. Well, thank you. We'll talk to you again at the next quarterly time or at any of the investment conferences that we attend. Thank you.

Operator

Thank you all for participating in today's Diamond Offshore Drilling fourth quarter 2008 result conference call. You may now disconnect.

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Source: Diamond Offshore Drilling Q4 2008 Earnings Call Transcript
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