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Diamond Offshore Drilling, Inc. (NYSE:DO)

Q1 2009 Earnings Call Transcript

April 23, 2009 10:00 am ET

Executives

Les Van Dyke – Director, IR

Larry Dickerson – President and CEO

Gary Krenek – SVP and CFO

John Gabriel – SVP, Contracts & Marketing

Analysts

Ian Macpherson – Simmons & Company

Angie Sedita – Macquarie

Collin Gerry – Raymond James

Judson Bailey – Jefferies & Company

Arun Jayaram – Credit Suisse

Waqar Syed – Tristone Capital

Pierre Conner – Capital One Southcoast

Presentation

Operator

Good morning. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Diamond Offshore Drilling First Quarter 2009 Results Conference Call. (Operator instructions).

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

Les Van Dyke

Good morning. Thank you for joining us. With me on the call today are Larry Dickerson, President and Chief Executive Officer; 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 discussion about future revenues and earnings, capital expenditures, industry conditions and competition, dates the drilling rigs will enter service, as well as management's plans and objectives for the future. A discussion of the risk factors that could impact these areas and 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 change in the Company's expectation or changes in events, conditions or circumstances on which any forward-looking statements is based.

With that I'll turn the meeting over to Larry.

Larry Dickerson

Thank you, Les, and welcome everybody to our first quarter 2009 conference call with America's largest offshore driller. I like to begin by commenting on our dividend announcement that was included there. It's the same special dividend that was paid as the last quarter and same regular dividend. This brings our cumulative dividends paid since beginning of 2006 when we made our first special dividend to $15.88. We hope our shareholders appreciate that.

Talking about the results for the quarter, I think first of all I'm going to focus just a moment on cost. Costs were under the guidance that we had given last quarter. We gave a range, but taking the midpoint of the range of $335 million of drilling costs. We came in at $298 million or a $37 million advantage.

We have made it a – one of our key goals as we go into this year with the uncertainties involved in that to be very stringent on our cost to reduce cost wherever possible and defer other cost, but that's not responsible for the whole $37 million. It's about $11 million of deferral of cost on both the Quest and the Monarch, which we're preparing for contracts, which we had not included in our guidance.

And then we got a special survey that switched from quarter-to-quarter or didn't spend as much time in this particular quarter as we had thought on Ocean America which was worth another $4 million. So that leaves you about $22 million which we achieved through a combination of cost control and deferral of cost. I don't have an exact breakout of that number, but I'm going to guess that about 60% of that is cost reduction, 40% of that would be cost deferral. And that means on deferrals that means each quarter we constantly are re-examining, do we need to spend this now, does have to be done now. So I can't really tell you how that's going to swing back and forth, but it would be our goal to continue to achieve cost reductions as we go forward.

On the revenue side, we had very favorable results due to reduced amount of downtime due to failure or repair issues of only 58 days for the quarter. We had 159 days in the fourth quarter of 2008, so that was a – one of the lowest that we have achieved on record. And we hope to achieve that going forward, but I would imagine we would revert closer to mean as we go in there.

Now talking about markets and John Gabriel will certainly elaborate on this to your questions as we go through this. But talking right now about idle rigs, the Ocean Guardian is idle in the North Sea, continues to be following its release by Oilexco due to the failure of that and liquidation of that customer.

We do have an LOI for a one well job that should be starting very shortly. And we have a – we are working on a – taking a commitment to paper on a separate follow-on well, so we could have two wells that would take us well into the summer on that rig.

We have the Ocean Heritage as a jack-up that's idle in Egypt and continues idle, although we are continuing to market it and have some interest in the unit. And then in the Gulf of Mexico, all three of our mat rigs are idle and we also currently have the Ocean Spartan idle, which is a 300 foot unit.

I think the continued employment prospects on the mat rigs are very dim and we have those currently stacked in our cluster so that we'll be able to look at further cost reductions, should we decide not to market those rigs.

The Ocean Star is our fourth generation unit that going into this downturn. We had a LOI which disappeared on us and we have continuously worked at rig in the short-term market. We're coming to an end on our current well and should be completed that well within the next two days or three days. We do not have a follow-up job on that rig at the moment.

I think Gulf of Mexico opportunities are clouded. There are some out there, but there are a lot of farm outs of other rigs that we have to compete against. And so we're primarily focusing our efforts on the international work for that rig. Been a lot of talk about bidding the rig in Mexico, we think it could be a great addition to Pemex's portfolio down there, but we have not received that bid yet. And then we have other international bids outstanding that we can go forward on.

And then the final rig that I like to talk about is the Ocean America. We just concluded a deal with Woodside to substitute the Ocean America at – in mid 2010 for the Ocean Bounty.

The Ocean Bounty has a multi-year contract at about 4.25 in western Australia, but it needed an upgrade to get to that water depth and the condition of the rig became apparent to us that it was going to take some extended time in the shipyard and we thought it would better serve our customer to take the Ocean America and go ahead and relocate it to that market and let it work out that contract. That reduces the number of fourth gen units that we have here in the Gulf of Mexico and it also enabled us to re-evaluate what we want to do with the Ocean Bounty, what amount of money we need to spend, and so that would be potentially a cost savings or cost deferral and we don't have to do the upgrade that's on there, so net-net we think that's a good cash move for us and it serves our customer.

So that will leave us then with just two fourth gen units in the Gulf of Mexico, which is down quite a bit from where we were previously. The Ocean Valiant will be leaving shortly for West Africa to work for Total on two-year commitment. And we'll be left with just the Ocean Star and the Ocean Victory in the Gulf of Mexico. So that's kind of an overview of what happened in the quarter and at least talking about our idle rigs that we got and what our plans are for that.

I'm going to turn it over to Gary Krenek to give you some additional financial guidance, comment on our tax rate, and some of the other things that you might be interested in.

Gary Krenek

Thanks, Larry. As has been our custom I'm not going to waste everyone's time regards to take the information from our press release, but rather try to anticipate your questions regarding the details of our first quarter results and some of your future guidance requests. Larry has already touched on a couple of these items, so I'll just try to give you a little bit more detail.

Looking first at rig operating costs as Larry said our guidance in the last conference call was for us to incur $330 million to $340 million in rig operating expenses in Q1 and we came in at $297 million. Larry has already given you the details as to why we beat that in the first quarter. So I'll just move on to let you know what we expect in the second quarter.

We expect to incur normal daily operating costs for our rigs as outlined in our last rig status report that we filed on April 15th. I'll let you look at that to see those numbers. In addition to these normal operating costs, we expect to incur some $10 million to $12 million in survey costs as Ocean America wraps up its survey this quarter. And some $2 million to $3 million in survey cost for the jack-up Ocean Titan.

We will also record in the second quarter some $10 million in amortized mob and contract prep costs that had previously been deferred. Offsetting these costs will be a reduction in our daily operating expense of approximately $5 million as we defer operating cost incurred during contract preparation time, by the Ocean Quest and Summit related to term contracts that these rigs have in Brazil and Mexico, respectively. And if you do the math correctly, this should result in expected rig operating cost, excluding reimbursable costs of some $320 million to $330 million for the second quarter of 2009.

Our prior guidance for depreciation expense was $90 million per quarter. That now appears slightly high and the $85 million that we reported in Q1 will be closer to the norm. We expect future quarters depreciation expense to run in the $85 million to $87 million range in each of the quarters of 2009.

Interest expense for the first quarter was reduced by some $5.5 million related to reversing an uncertain tax position as a result of the statute of limitations expiring on that tax position. Rather than take 30 minutes here to explain a complex tax accounting GAAP rule, and why a tax related item affected our interest expense amount for this quarter, I would ask that you wait and read the explanation that will be provided when we file our 10-Q early next week.

Suffice to say we complied with GAAP and do not anticipate this occurring again in the near future. Our interest expense should return to the normal $6 million to $7 million per quarter for the rest of 2009.

Looking at the actual tax line on the income statement, our tax rate guidance in our last conference call was for tax rate of between 25% and 27%. Our actual tax rate on normal operations was within these guidelines during the first quarter, coming in at just over 25%. However, we had two credits that we have reported the tax expense in Q1 that reduced the overall rate to just over 23%.

We recognized the $2 million credit as a result of a return to tax provision adjustment in the quarter, along with $6 million credit to tax expense related to the reversing of the uncertain tax position that I mentioned earlier. We do not expect these two items to reoccur. And as a result, we expect our tax rate for the next three quarters to be in the 25% to 26% range. But as always the actual rate will depend on the ultimate breakdown between U.S. and international income and where that international income is earned.

And finally, our capital expenditure guidance remains unchanged at $470 million for the entire year of 2009. As always, I would refer you to our rig status report, which can be found on our Web site, expected downtime for our rigs for the remainder of the year, contract durations, timing of contract rollovers and other pertinent rig information. And with that I'll turn it back over to Larry.

Larry Dickerson

Okay. Les, we have some questions in queue?

Les Van Dyke

Yes we do. Operator, we are ready for our questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions). Your first question is from Ian Macpherson of Simmons & Company.

Ian Macpherson – Simmons & Company

Hey good morning, everybody. Congratulations on the good results. I guess my question would be about the fourth generation market. Larry, it sounds like the Gulf of Mexico is not a super hot market right now for bidding activity. Could you characterize what you think the pricing and contract term expectations are for customers? I know that Pemex did not accept your original bid for the Star I think it was. Where should analysts have expectations for fourth generation rigs as we kind of reset this year?

Larry Dickerson

Well, I'm a little loathe to just publish, here is what we're going to bid in a public forum. But I think everybody needs to understand that if you got weak demand on a large number of farm-outs that you are going to see rates decline from the levels that they were at. And we had pretty much closed the gap between fourth generation and fifth generation rigs when our fourth generation units were priced at $500,000 a day. And with farm outs available on fifth gens, I think it's natural to assume that a logical gap will reestablish itself for the capability differences. What that gap is, is going to depend upon ours and a number of actions. And I just can't – I don't want you assuming that we're going to bust out earnings on that one level, but I can't see us telegraphing where exactly that we would bid. That data will certainly be coming out shortly.

Ian Macpherson – Simmons & Company

Okay. With respect to customer appetite for long-term contracts, is that gone or at an appropriate price, do you think you'll still be able to sign-up mid water rigs and fourth generation rigs with some decent term?

Gary Krenek

Well, in today's environment, that that term does presently exist, not necessarily in the U.S. Gulf of Mexico, but we are seeing opportunities, particularly in West Africa for fourth generation and fifth generation capable rigs. You mentioned Mexico earlier. There are opportunities I think in Brazil that have at least come to the market in form – in the form of a market inquiry, that will we suspect ultimately develop into commitments. I don't see the term at least in the near-term being here in the Gulf of Mexico, but it does exist internationally.

Ian Macpherson – Simmons & Company

Okay. Thank you.

Operator

Your next question is from Angie Sedita of Macquarie.

Angie Sedita – Macquarie

Thanks. Congratulations on being now the America's largest offshore driller.

Larry Dickerson

We're also Delaware's larger offshore driller.

Angie Sedita – Macquarie

Great. Just to follow-up on the prior questions on – in the mid water market, just give us a little bit of the tone of the customers, I mean, clearly it is probably a combination here of both the economics and conserving cash, particularly in the Gulf of Mexico. But are you hearing commentary about postponing programs to 2010 or just little commentary in the U.S. Gulf of Mexico. And then you touched on some demand in West Africa and Brazil. And could you give us a little further details on the timing of that demand?

Gary Krenek

Well, I guess in the – certainly in the Gulf of Mexico is where we see U.S. based operators who typically will say in, in their forums they are going to try to keep their CapEx certainly within budget often times within cash flow. And so I think that's, that's impacting and yes, there's probably times where they're, they are seeking to defer things out of this year so they can meet that particular target. I think in international markets, you are generally looking at larger term and you are looking at more a mix that has, has more development drilling in it that, that might seem to take a little bit longer time. John, do you have anything to add to that?

John Gabriel

Well, I think those are the key points, sensitivity to available financing, and sensitivity to living within or having to live within cash flow as opposed to making a conscious decision to do it. The markets that are – with a higher level of the smaller to mid size operators who are the ones where we're seeing that sensitivity manifest itself the most. And that's primarily the U.S. Gulf of Mexico on the shelf and the UK sector of the North Sea. Outside of those two theaters, a lot of its business as usual. There are people sitting on the sidelines with money to spend, maybe just waiting to see how oil price evolves and how rig rates react to that, but the opportunities are there outside of the Gulf of Mexico in particular.

Angie Sedita – Macquarie

Okay. And then I also as a follow-up, the timing on that demand, you mentioned West Africa and potentially Brazil?

John Gabriel

I'm not sure about the Brazil, but the West Africa what we're looking at is – or what we're aware of is within calendar year 2010.

Angie Sedita – Macquarie

Okay. Okay. And then finally as a follow-up, you discussed sublets that are out there. Are you seeing any interest in the sublets, seeing some increasing of the term of the sublets? Could you give us a little color there?

John Gabriel

I think what we're seeing – and maybe I'm misunderstanding your question, but the sublets are our customers, subletting existing commitments and in a lot of cases we're actually competing with ourselves, with our own rigs. It runs the gambit, from short-term to, to trying to layoff as much term as they possibly can. So to be specific about a definition as to how these things all, all line up, it would be a little bit difficult.

Angie Sedita – Macquarie

Okay.

Larry Dickerson

And there's always a normal level of farm-outs available rig time. For instance, the Ocean Monarch came over here where I think with Anadarko and we were drilling our first well with Plains. I believe that arrangement was made quite a bit ago back in last year and I would characterize that as a normal type farmout. So it's kind of hard to separate, but certainly the number of farmouts that are available in talking to customers you can see that there are instances where they are trying to meet or reduce CapEx commitment. And they are doing that, they are trying to achieve that via subletting time and saving on both rig rate and drilling cost to meet their budgetary goals.

Angie Sedita – Macquarie

And then I guess finally on the mat jack-ups in the Gulf of Mexico, when will you start to evaluate whether you are going to cold stack these rigs?

Larry Dickerson

Well, we have them in a cluster currently and we're going through kind of looking at what's what, the – I think we got a pretty good understanding of the market and we will – we have got two goals and that is to preserve as many jobs as we possibly can for our rig crews, which are very loyal to us and we want to be loyal to them. But at the same time, if the market is going to be one where we don't achieve the desired amount of utilization. And you look at the large number of mat rigs, fortunately, we have a fairly small presence in that market that large number of mat rigs are idle in the gulf it certainly points in that direction. So we also have the goal of reducing costs and continuing to deliver results where we can, where our costs are controlled if not reduced.

Angie Sedita – Macquarie

Thanks, guys.

Operator

Your next question is from Collin Gerry of Raymond James.

Collin Gerry – Raymond James

Hey, good morning.

Larry Dickerson

Good morning.

Collin Gerry – Raymond James

I wanted to hone in a little bit on the CapEx side. I don't know if I missed the '09 guidance and maybe just given where market conditions are and maybe the opportunity to put some more rigs back in the yard and do some upgrades. If you had a chance to look at where you think '010 CapEx could go?

Gary Krenek

We really haven't projected 2010 at this point. It's going to depend on as you said where the market goes. What we have been telling people is somewhere around $350 million to $400 million is our expectation. That could radically change as time goes on. But 2009 CapEx guidance that is $470 million, that's $400 million of maintenance capital and of that 400, about $50 million is upgrade for international contracts, another $50 million for spare parts on our ongoing program of spare part additions and $300 million just repairing our rigs. $70 million of it then will – has been tagged for the Ocean Bounty, as Larry said, with the swap out of the America and the Bounty, we will be reevaluating that. But at this point in time we still expect to spend that this year we'll update you later.

Larry Dickerson

I guess the one thing to remember though is with the delivery of the Ocean Monarch, our multi-year, multi-billion dollars upgrade and new construction program is concluded. So we don't have anything in process there. Everything that we will be spending will be maintenance CapEx and potential upgrade opportunities as we see them.

Collin Gerry – Raymond James

Right. That kind of goes into my next question. If you look at your balance sheet, obviously, we hear that there is a lot of M&A opportunities kind of getting circled around out there in terms of all of these new build in the yards. But also you'll have some opportunities maybe to upgrade some of your rigs like you have done in the past. How do you balance those two decisions as we go into maybe a little bit of a softer market over the next, call it short-term here? And what are the likelihood of maybe upgrading some of your second or third gen rigs?

Larry Dickerson

It all depends on the opportunities as we see them. Certainly moving in that favor is you don't have the lost opportunity costs at the same level you would have had in previous markets. However, if there are a lot of third-party upgraded – or third-party additional people that have new rigs that might be for sale. In many cases if you can get that at a discount, I think we might be tempted to buy new rather than upgrade.

Collin Gerry – Raymond James

Okay. And then just kind of final question following up on that, looking at your balance sheet, relatively low debt to cap there, how much leverage would you be willing to put on the balance sheet to pursue some of these growth opportunities at bargain prices?

Gary Krenek

Well, we have almost no debt on there, so we're not establishing an upper limit or anything, but clearly, with very low levels of debt, we would have some capability, but I can't really say at this time because we don't know the opportunities we're looking at. We don't know the situation we're in.

Collin Gerry – Raymond James

Okay. Thanks, guys.

Operator

Your next question is from Judson Bailey of Jefferies & Company.

Judson Bailey – Jefferies & Company

Thank you. Good morning. I wanted to follow-up on the arrangement where you're going to take the America to swap that out for the Bounty. I just wanted to clarify the time line. So the America will do its upcoming job with Mariner and then mobilize to Australia, and the Bounty will then – will it be idle or are you going to do any upgrades to it at all? Or should we assume from a modeling perspective, it's going to be idle once it completes its current job?

Larry Dickerson

I think at the moment, it's going to be idle. We're going to evaluate what we want to do with it. What we didn't want to do was, was rush it in the shipyard at this time period and have the job last a long time. I think– and then do upgrades, which can now be satisfied with the America. So we'll be looking at what to do with that right now. But when it finishes its current work, I wouldn't assume – it does need some work to be done on it, so I would not assume that it's going to go to work for the balance of this year.

Judson Bailey – Jefferies & Company

Okay, great and then you mentioned earlier some of the sublet activity out there, and now coming from fifth generation units, are you seeing sublets being offered at rates below what previous market was or below what those fifth gen rigs are currently committed for?

Larry Dickerson

I don't – we don't see that part of it, but I think the bigger issue would be that many of the fifth gen units were committed earlier in the cycle and have day rates with two and three handles on the front. So – I just – again because we're not on the receiving end of those offers, but we can assume that even if they are priced at the existing rates that, that would be at a discount to where the – some of the fourth generation units have been working in short-term market.

Judson Bailey – Jefferies & Company

Okay. And did you – I'm sorry if I missed it – but did you disclose a rate for the Guardian and the letter of intent for the one well job?

Gary Krenek

We did not disclose a rate. I don't want to do that until we get actual paper signed up on it.

Judson Bailey – Jefferies & Company

Okay. Understood. Thank you.

Operator

Next question come is from Arun Jayaram of Credit Suisse.

Arun Jayaram – Credit Suisse

Good morning, guys.

Larry Dickerson

Good morning, Arun.

Arun Jayaram – Credit Suisse

Larry, I was wondering if you could provide a little bit of perhaps color, you guys issued a mix shelf a few weeks back, and just your thought process there in terms of thinking about some counter cyclical investments?

Larry Dickerson

Well, we just – we didn't have any capability out there and so we thought we needed to get a shelf. And in that document we disclose that it would be a variety of uses for that cash, so I don't want to upend what we filed and hone in on one particular one.

Gary Krenek

I would just add that we had a shelf filing that was already out before this and it expired in November or December of last year or maybe early part of this year. So those things are only good for three years, so it was more of just an ordinary course of business re-upping that shelf.

Arun Jayaram – Credit Suisse

Okay. But Larry, perhaps you could just provide us your current thought process as the market is softening little bit on potential uses of future free cash flow. Obviously, the dividend has been very, very important. But how are you thinking about upgrading the fleet of future acquisitions in terms of shipyard costs coming down? And the ability to perhaps pick off some assets that at costs below shipyard costs?

Larry Dickerson

Well, those are all opportunities that, that we're looking at and I know our competitors are looking at. And we don't think dividends are very important to us, and we're not giving guidance on where we are on a go-forward basis. But fortunately with low debt levels, I don't think we necessarily have to choose one versus another. So far as upgrades, those would also be an opportunity. It all depends on what our projected return on investment is on new builds versus upgrades. But I think – I don't think shipyard costs have fallen yet substantially nor equipment and all of the components therein. So I think – I think on new construction, where they are already funded with equity or debt that may be underwater, that would be your best opportunity to get a significant discount.

Arun Jayaram – Credit Suisse

Okay. Couple of final questions. I know that Petrobras is getting ready to issue some tenders for a substantial number of deep water rigs. Do you have any initial color on that? And how do you plan to perhaps participate in this? Is there opportunities to joint venture with some indigenous companies down in Brazil?

Larry Dickerson

Certainly, all those opportunities are there. In the past, we have not participated in those because of the returns in the past markets were lower than we looked at it at other places and didn't necessarily meet our hurdles. I can't tell you what our expected returns would be in these particular markets going forward. We certainly want to participate in any opportunities that are out there. So we would – we would look at it. I just – I don't know ultimately where the Brazilian situation is going to come out. There are a large number of rigs that are already under construction that have no commitments so we'll just need to see what parameters they put around their new construction program.

Arun Jayaram – Credit Suisse

Okay, just got a couple quick ones for Gary. Gary, on the balance sheet, on the current liability section, there's a payable for marketable securities purchased.

Gary Krenek

Right.

Arun Jayaram – Credit Suisse

Can you add a little color there's a $200 million difference from year-end?

Gary Krenek

If you notice in the asset, there is also a line for receivable from sale of marketable security of $100 million. That relates to us buying and selling marketable securities on the last day of the quarter and those trades not settling until 2nd or 3rd of April.

Arun Jayaram – Credit Suisse

Okay.

Gary Krenek

So what I would tell everybody that in order to get our cash balance – actual cash balance add up the lines of cash, marketable securities, receivable for marketable securities and then subtract out that payable for marketable securities, which will net you to about $710 million worth of cash and cash equivalents.

Arun Jayaram – Credit Suisse

Okay. That makes sense to me looking at it. And finally in terms of – Gary you had given us a very detailed cost guidance, can you give us a sense of how the cost change if a rig is warm stacked versus cold stacked?

Gary Krenek

Warm stacked there are no – virtually no cost savings. Matter of fact costs can go up, because we now have to pay for fuel, we have to pay for boats, helicopters, which when that rig is working, the customer pays for. After a rig stays stacked for a period of time, certainly, we begin curtailing some of the crews and we can cut costs back. For the second quarter, we're talking about looking at the mat jack-ups, potentially stacking them for an extended period. I would not assume any cost savings in the second quarter if we're able to cut those costs back, it will probably be in the second half of the year.

Arun Jayaram – Credit Suisse

Okay. That's very helpful. Thanks, guys.

Operator

Your next question is from Waqar Syed of Tristone Capital.

Waqar Syed – Tristone Capital

Hello, congratulations, Larry, on a great quarter. Couple of questions, first on the North Sea, there's some reports that the UK government is looking for financial incentives for the E&P industry there. How are you seeing that develop? How – do you expect those measures to impact activity in the North Sea, later this year and into 2010?

Larry Dickerson

Well, I think the UK sector is one that just if you look back over the years they have provided substantial incentives in that market. And it has in the past had impacts to (inaudible) because they view the tax revenue and the jobs and everything out of the North Sea very highly. And I think that's terrific. It's a shame that the U.S. does not treat the offshore in the same way. I can't say though, in the current financial crisis situation whether or not the, what they are talking about will be substantial enough to encourage substantial amounts of additional drilling. But it's a step in the right direction and I applaud them for that and I would point out in the past it has worked.

Waqar Syed – Tristone Capital

Alright. Secondly, and you alluded to this as well, but if you could provide more color on the pricing transfer for spare parts, rig moves and surveys. You mentioned you have not seen much impact so far, but what would you see happening over the next six months, eight months and then into next year? And how are you seeing your survey costs change from prior years?

Gary Krenek

The biggest single factor would be the quantity of surveys that we did. Our 45-rig fleet clusters around a period where – in a two-year period, I think we do almost 20 of the rigs and then the other periods, we do a fewer number, and we completed that two year cluster in 2007, 2008. So we have fewer surveys, so we would expect compared to those years, the survey costs to go down. The actual cost of doing a survey is highly dependent upon the rig condition. And one thing we do know is that the surveys that we do now are the rig is five years older than it was before. And then all of that leads to when we go in the shipyard, more stuff being done. And – but so far as the pricing that we receive from shipyards and from equipment and manufacturers and steel providers, I'm not sure yet that there's a substantial amount of cost decreases available to us in the next year or so in that area.

Waqar Syed – Tristone Capital

How about moving rigs in terms of mobilization from one region to another? Is there any change now versus where they were last year?

Larry Dickerson

No, I think the people that have heavy lift vessels have not seen the kind of pricing pressures that may exist elsewhere in the oil field. And they got a lot of new rigs being delivered, so I'm not looking for much reduction there.

Waqar Syed – Tristone Capital

Thank you very much.

Larry Dickerson

Operator, we have time for one more question.

Operator

Thank you, sir. The final question is from Pierre Conner of Capital One Southcoast.

Pierre Conner – Capital One Southcoast

I think that was me. Good morning, gentlemen.

Larry Dickerson

Good morning.

Pierre Conner – Capital One Southcoast

Thanks for taking the question. I guess maybe for John actually. I know in terms of rates, I know you don't want to give your rate bidded on the phone. But in the other sectors, international jack-ups, could you talk about the rate range maybe discussing on the Heritage and or disclose the scepter would be the next available that you would be talking about, can you give us some range of where those rates are being discussed?

Larry Dickerson

With respect to our specific conversations, I still don't think it's appropriate to talk about what we're are doing. I think you can look at where commitment levels – recent commitment levels have been to get a flavor for where the market is in specific areas. I think – and there's not a lot of data points right now.

Pierre Conner – Capital One Southcoast

Yes.

Larry Dickerson

But I have seen a commitment in the Persian Gulf in the 80s, short-term and some of the price extensions on the early commitments in that same theater, just north of 100 have been exercised. As to anything else, I don't think it really – anything else that we're seeing, I don't think it really doesn't really reflect where the market is or where it's headed, because it is so short-term.

Pierre Conner – Capital One Southcoast

It is an issue that you find negotiation on price or there just aren't the available opportunities to put rigs to work in those areas?

Larry Dickerson

The opportunities are limited and if we get the opportunity, there is a negotiation on price as well, so it's a – the answer is yes to both of them.

Pierre Conner – Capital One Southcoast

Understand.

John Gabriel

I think, clearly, you can see there's still continuing to be uncommitted rigs being delivered in the jack-up space and some rigs being released out of certain markets, so I – clearly there's downward pressure on the – on the prices.

Pierre Conner – Capital One Southcoast

Okay. John, what is your current understanding of the next round of Pemex jack-up opportunities? Do you have any specifics on numbers and timing?

John Gabriel

What we understand right now is that there will be two bids coming out, I think one in May, and one in June, and one is for three jack-ups, and the other one is for four jack-ups, all independent leg – I guess independent leg cantilevers, there are no mats involved in that. I suspect one of them is probably against the renewal of our rig that's down there, the Columbia. As to how many of (inaudible) I don't know the answer to it. But I do know that there are seven right now.

Pierre Conner – Capital One Southcoast

Okay. Other – the final ones just quickly for Gary. I know you gave us the next quarter of cost, last quarter, you gave us a full year outlook, any – any change to the full year outlook on OpEx previously –?

Gary Krenek

The full year we gave was in order of around $1.3 billion, slightly below that at this point. Of course, it will depend on if we ultimately cold stack jack-ups and don't incur any operating costs with them. Then it could be down to $1.2 billion, but nothing – no more guidance on that at this point.

Pierre Conner – Capital One Southcoast

No, I understand. G&A unchanged on a year-on-year percentage increase as per last quarter as well?

Gary Krenek

8 to 9 – 8% to 10% increase from last year, which is where the first quarter came out. Same thing on a go-forward basis.

Pierre Conner – Capital One Southcoast

Got it. And then last one, and your insurance renewal for wind storm in the Gulf of Mexico, when does that come up? Prior to hurricane?

Gary Krenek

Yes.

Pierre Conner – Capital One Southcoast

Prior to?

Gary Krenek

May 1.

Pierre Conner – Capital One Southcoast

May 1. Okay. Very good. Thanks gentlemen. Appreciate the opportunity.

Larry Dickerson

Thanks a lot. And I appreciate everybody listening in. I'll let you hang up and move on to your next conference call. Thank you very much.

Operator

Thank you. This concludes today's conference. You may now disconnect.

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Source: Diamond Offshore Drilling, Inc. Q1 2009 Earnings Call Transcript
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