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Executives

Christian Beckett – Chief Executive Officer

William Restrepo – Chief Financial Officer

Robin Phillips – VP of Investor Relations & External Communications

Analysts

David Wilson – Howard Weil

Michael Urban – Deutsche Bank Securities

Andreas Stubsrud – Pareto Securities AS

Darren T. Hicks – Evercore Partners

Darren Gacicia – Guggenheim Partners

Pacific Drilling SA (PACD) Q1 2013 Earnings Call May 7, 2013 10:00 AM ET

Operator

Good day and welcome to the Pacific Drilling Services, First Quarter 2013 Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Robin Phillips with Pacific Drilling. Please go ahead.

Robin Phillips

Thank you, Lindy, and welcome everyone to Pacific Drilling’s, first quarter 2013 earnings conference call. Joining me on this morning’s call are Chris Beckett, our CEO and William Restrepo, CFO. Before I turn the call over to Chris, I would like to remind everyone that any statements we make about our plans, expectations, estimates, predictions or other statements about the future, including, but not limited to those concerning future financial and operating performance, revenue efficiency, operating cost, contract backlog, day-rate, market outlook, contract commencements and durations, new build delivered cost and dates, capital expenditures and plans and objectives of management for future operations, are all forward-looking statements.

These statements are not guarantees of future performance and are subject to risks and uncertainties. Our filings with the U.S. Securities and Exchange Commission which are posted on our website, discuss the risks and uncertainties in our business and industry, and other factors which could prevent us from realizing the outcome of any forward-looking statements. Our actual results could differ materially from any forward-looking statements made during this conference call.

I will now turn the call over to Chris Beckett, Chief Executive Officer of Pacific Drilling.

Christian Beckett

Thank you, Robin, and good morning everyone and thank you for joining us today. I am happy to report that we began the year with a solid first quarter building on the strong results of the fourth quarter of last year. The fully delivered operational uptime in line with expectations and we continue to focus on our operating expenses. So we have under our belt two back to back quarters with robust financial performance and strong cash generation.

Our revenue for the quarter was $175 million, and our operating fleet achieved a revenue efficiency of 90.3%, this efficiency level includes the impact of the planned periodic maintenance on both the Pacific Bora and the Pacific Scirocco blowout preventers following six months of uninterrupted operations.

As I’ve mentioned in earlier earnings calls that we’ll take time for our contracts to catch up with the new regulatory regime for BOP maintenance. However, excluding the impact of these planned maintenance periods, our revenue efficiency was in line with the fourth quarter.

Our operating expenses for the quarter came in line with guidance for the year and below guidance for the first quarter with non-reimbursable direct rig cost of approximately $178,000 per day.

Now Williams is going to go over these costs in more detail in a few minutes, but I’m pleased to see the fleet starting to deliver the sort of operating performance that we’re targeting anchored by strong safety record including recognition by Total of the full year’s operations on Scirocco during its time on the contract with Total without an LTI and the achievement of two full years on Bora since we took the regard of the yards without an LTI.

Specific Scirocco’s performance is like the Total to extend the rig for a further year, which has added approximately $180 million of backlog to our fleet, and overall performance is positioning us well for the contract discussions and renewals, and for new rigs that are available in the next couple of years.

So moving on to those new rigs under construction on our plans for future fleet growth. Our new build construction projects remain on track, as a result of our over site team’s continued focus on timely delivery of these drill ships on budget. Two weeks ago we held the naming ceremony for the Pacific (inaudible) which scheduled for delivery by the end of June, and should be a fantastic addition to the fleet.

We’re expected to start a latent contract with Chevron in Nigeria in the fourth quarter, and we are pleased to have senior management from Chevron Nigeria present at the christening. The further additions to the fleet, the Pacific Scirocco, the Pacific Meltem and our eighth rig, which will be called the Pacific Zonda are progressing according to plans for on time and on budget delivery.

As I previously stated, we didn’t expect to exercise the option for the ninth rig that was due to expire on April 30, and but we have in fact allowed it to expire. We don’t expect to order another rig before early next year but we focus on executing with the existing fleets on delivering the already ordered new builds. Although our longer-term goal still remains the 10 to 12 rig fleet.

Now I’ll turn to the state of the market for ultra-deepwater rigs and our contracting activities. Over the past few weeks, we’ve seen a string of constructive announcements in the Gulf of Mexico, Africa, around the far east with strong day rates.

I continue to feel confident about the strength of the market and the supply and demand balance though 2015 and beyond. We’re beginning to get more visibility of that period past 2015 at this time. We expect day rates to continue to provide superior returns for some time to come. Our regular contract with existing and potential clients gives us reassurance that we’ll see attractive contracts for the Meltem, which is now one of the earliest available new build deliveries and for the Pacific Zonda which will be delivered in early 2015.

We feel optimistic that the opportunities to improve the level of future day rates for our current operating drillships as they roll off existing contracts and re-price. I think it’s also worth noting there has been some discussion in the market recently that Q1 was a relative viewed as a slow period for contracting and the reality is that Q1 was in line with the average level of contracting, we’ve seen over the last five years, something like 17 rig years worth of commitments might be – what the commitments in the quarter. But interesting to note that just in the month of April, we’ve seen 17 more. So we’ve already seen an acceleration on the pick up in the last few weeks, we look for that to continue as more contracts come to market in the near future.

Before I turn the things over to William, I’d like to just make a comment the company has managed to put in place a great pipeline of remarkable growth that’s going to materialize over the next couple of yeas. Our focus now is to ensure that this new revenue growth comes with superior margins and cash flow generation. We’ve put in place an impressive cost effective and strong capital structure of a company in our stage of development, and in doing so we’ve raised almost $6 billion in capital.

We continue to work hard at improving our debt structure and anticipate on next significant financial transaction will be the refinancing of our initial credit facility of our first four drill ships. If and when completed, this refinancing will be the culmination of the last three years of constant efforts to build a solid financial foundation for the future development of the company.

With that I’m going to turn it over to William to review the financial results.

William J. Restrepo

Thank you, Chris. Good morning.

In summary, the trends we experienced in the fourth quarter of 2012, also continued during the first quarter of 2013. Our rates delivered strong performances meeting our expectations in terms of revenue efficiency and operational expenses.

Contract earning revenue for the first quarter was $175 million as compared to revenue of $191.9 million during the fourth quarter of last year. The $16.9 million decrease in drilling revenue came mostly from a $9.6 million reduction in deferred revenue. As the Scirocco’s deferred revenue and deferred costs were fully amortized by the end of the 2012.

In addition, revenue efficiency was 4.3 points lower for the fleet, essentially as a result of the planned BOP maintenance for the Bora and the Scirocco.

Finally, the first quarter of 2013 had 90 days only as compared to the fourth quarter’s 92 days. The age rig day reduction for a fleet had an unfavorable revenue impact of $3.4 million. All of these revenue decreases were partially offset by higher reimbursable revenue.

In the first quarter of 2013, we have added additional disclosure on a direct rig operating expenses. Specifically on the level of cost reimburse by our client. These reimbursable costs include one-time as well as recurring items there beyond the initial scope of our contract and the corresponding initial contractual day rates.

We incur these costs on behalf of our customers and are subsequently reimbursed fully, but these expenses have no material impact on our margins. Reimbursable cost can be sizable and often fluctuate significantly between periods based on the needs of our customers. Making these cost difficult to forecast. For this we similar will continue to provide additional disclosure on actual and forecast direct rig related daily operating expenses showing the estimated range inclusive and exclusive of reimbursable expenses.

Contract drilling expenses for the first quarter of 2013 were $84.5 million as compared to $86.9 million for the fourth quarter of 2012. Direct rig related daily operating expenses excluding reimbursable costs that are fully recovered in the revenue averaged $178,000 in the first quarter of 2013, as compared to a $168,000 for the fourth quarter of 2012. This increase resulted primarily from higher maintenance cost related to the planned BOP maintenance on the Scirocco and the Bora and from annual salary increases for operating personnel.

Contract drilling expenses for the first quarter of 2013 included $9.6 million in amortization of deferred mobilization cost and $5.6 million in shore base and other support cost, that’s compared to $18.6 million in deferred costs and $4.6 million in support cost for the fourth quarter of 2012. The $9 million decrease in deferred mobilization cost corresponds with the reduction in deferred revenue discussed earlier and resulted from the completion of the Scirocco’s initial one year primary contract term.

Total direct rig related daily operating expenses including reimbursable cost averaged $182,000 in the first quarter of 2013 as compared to $173,000 for the fourth quarter of 2012. Reimbursable cost accounted for approximately $14,000 per day in the first quarter of this year as compared to approximately $5,000 per day in the fourth quarter of 2012.

In addition to the normal recurring level of reimbursable expenses, the first quarter of 2013 included approximately $2.7 million of specific projects and modification cost fully reimbursed by our customers.

General and administrative expenses for the first quarter were $11 million as compared to $11.6 million in the fourth quarter of last year. The important thing to note, that the first quarter SG&A does not include the impact of annual salary increases or annual equity grants effective April 1, 2013.

Interest expense for the first quarter of $22.8 million, down by $10 million over the fourth quarter of last year, mainly as a result of last quarter’s one-time non-cash $2.8 million charge related to the accounting for interest rates cash flow hedges, through an interest rate reduction on the project facilities agreement triggered by an improved leverage metric and through lower outstanding balances on our amortizing bad bank debt.

EBITDA for the first quarter of 2013 was $79.7 million, as compared to EBITDA of $92.7 million during the fourth quarter of 2012. The sequential reduction in EBITDA was driven by the plant maintenance downtime was effected both revenue and operational expenses. By the salary increases for operational personnel by the few days available in the first quarter and by the completion of the (inaudible) modification period for the full revenues and expenses.

I will now turn to recent financing transactions and investment program and during the first quarter, we invested $98 million in the construction of the fleet and at the end of the quarter we had approximately $2 billion in remaining capital expenditure for the completion of our four new builds. The Pacific Zonda which was started in the first quarter accounted for $608 million of the total remaining investment. The recent closing of our $1 billion secured credit facility for the financing of the Sharav and Meltem provides solid financing for the first seven rigs and considerable strength – considerably strengthens our capital structure. We have now refocused our attention in the project facility agreement, our initial credit facility for the first four rigs, the PFA. This facility with $1.35 billion of standing at May 1 and expiring in October 2015 this put in place to support the financing of the first four rigs in operation.

The facility requires $220 million in annual modification payment in the minimum of $150 million in restricted cash balances. Given the development of Pacific Drilling as well as the current appetite by financial markets for existing bonds and similar debt, we believe it will be advantageous to replace the PFA with longer maturity and less restricted debt. We have made considerable progress in evaluating and preparing alternatives. And believe we will be able to make announcements in the near future.

Turning now to guidance for the second quarter of full-year 2013; including reimbursable expenses we reiterate our annual guidance of total direct rig related operating expenses ranging between $102,000 and $107,000 for operating rig per day. Excluding reimbursable expenses we estimate the range for full-year direct rig related operating expenses to be between $175,000 and $180,000 per day. The latter operating expense metric is more relevant to the forecasting of our net income and EBITDA since the reimbursable expenses should have limited impact in our margins as they are normally offset by equivalent reimbursable revenue.

Our 2013 guidance in general and administrative costs represented an increase over 2012, and also represented an increased to the annualized G&A expenses incurred during the first quarter of 2013. We reiterate our expectations for increases in estimated general and administrative expenses to occur in future quarters as a result of annual compensation increases to employees made in beginning of April.

Increases in share-based compensation expenses due to the new 2013 grant and increases in the number of employees during to 2013 to support an eight rig fleet. We expect the SG&A expenses for the second quarter to rise between $13 million and $14 million. I would like to point out that the second quarter SG&A expense guidance is consistent with our current annual guidance.

Finally, we also reiterate our remaining annual guidance provided with the fourth quarter and full-year 2012 results. For our Investor Toolkit, please keep in mind that this information is only provided for the existing fleet and for the existing financing facilities with the need to help our investors prepare their own projections. For instance 2013 and 2014, interest expense only take into account the debt facilities currently in place and do not intend to reflect our total forecast for those years. As an example at this point the two that’s not been modified for the impact of any future refinancing of our existing project facilities agreement.

Similarly it provides more guidance related to the potential impact of available refinancing transactions, such as non-cash charges related to deferred financing cost write off, where charges related to the unwinding of interest rate swaps.

With that I will turn the call back to Robin.

Robin Phillips

Thank you, William, Lindy we are now ready to begin the question-and-answer portion of the call.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from David Wilson with Howard Weil. Please go ahead, your line is open.

David Wilson – Howard Weil

Good morning gentlemen, thanks for taking my questions, Chris, just wanted to get a little more clarifications on the patent infringement claim, is there any potential impact for the rigs operating in Nigeria, Brazil and also will they have any impact on the way, Chevron plans to use the Santa Ana in the Gulf of Mexico.

Christian Beckett

Obviously we don’t want to say too much because it’s somewhat actively processed, but simple answer is what transaction filed against was the Pacific Santa Ana and the Pacific Sharav in advance, other words two rigs coming to the Gulf of Mexico, so there is no impact on the rigs outside of the Gulf of Mexico, with respect to Santa Ana’s operations we have not been using drill activity on the rig and we don’t plan to do so until and unless this issue was resolved. So it happens to had any impacts on the way Chevron is using the rig. We drilled the Coronado discovery well without it. We drilled all series open water work in the last couple of months without it. So, it has a small impact on the speed of top-hole drilling process and we have an arrangement in place with Chevron that accommodates that. So, the simple answer is a small impact, but not really material.

David Wilson – Howard Weil

Okay great, thanks for the clarification. And then, Chris, in your prepared comments you mentioned the recent contracts within the industry on the ultra-deepwater side. We saw some from Seadrill and Noble was small cap players. Should we read anything into this like the big players are done for now, or is it the small cap guys have to be a little more aggressive in getting rig secure, or is it just kind of a function of the region that they were contacted in, anything to take away here besides just small string of contracting activity?

Christian Beckett

I mean, look, I think, we had what the market perceived as relatively quiet Q1, although, I think, it was kind of in line with averages over the last five years or so. And, we’ve seen a flurry in the beginning of this year. I don’t know that you can read too much into individual contracts as being terribly indicative of any sort of fundamental change to the market. Our view today is the market continues to be very strong. I think, everybody has their own drivers with respect to how aggressively they want to chase contracts and some of that to do with the need to secure financing or other drivers that maybe can potentially add more impact on some of the smaller players than the large guys. But, I think we’ve seen a mixed bag of strong contacts from across the spectrum, either way $600,000 a day rates in the Gulf of Mexico is a very healthy day rate that we’ve said before we’ll be quite happy to see it continuing in that vein for the foreseeable future.

David Wilson – Howard Weil

Sure, sure. Okay thanks for the additional color to that. And then final one, if I could squeeze one in for William, as far as planned maintenance days in the next quarter to like we saw in the first quarter, are you aware of any that we needed to take account for making our projections?

William J. Restrepo

No. I think you don’t need to account for anything planned this time. We expect to be in the range.

David Wilson – Howard Weil

Okay, great. I will turn the call back over. Thank you.

Operator

And we will take our next question from Mike Urban with Deutsche Bank. Please go ahead. Your line is opened.

Michael Urban – Deutsche Bank Securities

Thanks. Good morning, guys.

William J. Restrepo

Good morning Mike.

Michael Urban – Deutsche Bank Securities

Christian, you talked a little bit about post 2015 visibility improving a bit. Can you elaborate on that a little bit? Where do you see those opportunities? Is that just based on some of the discoveries we have seen? We have seen obviously get that of exploration success or other specific opportunities that you are beginning to see customers inquiring about?

Christian J. Beckett

Yeah, I mean like I don’t want to talk specifically about individual customers or specific opportunities, but what I can say is that we have – both on the back of recent discoveries, which clearly are causing some of those successful companies to evaluate what their longer term red line requirements are, both in the Gulf of Mexico and outside. And on the back of the further movement forwards of these development programs in West Africa, we are seeing declines in pretty much all the markets talking about, what they are going to need 2015, 2016. Going a little away from those that been converted into firm contracts, but I think it’s having an influence both on the fact that declines are starting to look at 2016 onwards, and I think in particular they are looking at the term of contracts they are willing to talk about now and potentially looking at that now being willing to consider longer term than the two to three years maybe been the norm for the last six to eight months. So it’s early days, I would say but I think that we see the beginning of visibility of strength beyond 2015 at this point.

Michael Urban – Deutsche Bank Securities

Right correct and given that backdrop why not go ahead and have exercise that that option if you’re beginning to see that that visibility develop just given that you know if you’re ordering a rig at some point this year probably looking at something into 2015 or beyond that at this point or is just not necessarily sense of urgency financing is available or available then it can kind of take a little bit of wait and see.

Christian Beckett

Yeah I mean I would give you sort of an answer in two parts firstly, you are exactly right, we don’t have a lot of urgency because the yard that is clearly available and relatively aggressive on pricing. So there is no and frankly the limiting factor today is about subsea equipment and drilling equipment not yard space. So we don’t think we’ll lose anything in terms of delivery time by holding up on an order at this point.

I think the other side of it is as we said before it’s a key criteria for us to be able to make sure we can introduce these rigs to the market and operate them the way we intend to and to the standard that our clients expect. So we would like to make sure we can give adequate attention to the four rigs economy after the yards in the next year and half and make sure that we get them fully start and operational and up and running before we add other one on the end of it.

So doesn’t change our long-term view of where we would like to be doesn’t really it’s not indicative of any kind of concerns about the market, it’s more a practical reality of the fact that now the industries got to add 30,000 people there about over the course of the next three, four years, as these new builds will get delivered and that creates its own challenge in terms of training and operating personnel for everybody. So we’re just being prudent about making sure, we can handle that the challenges of introducing new rigs.

Michael Urban – Deutsche Bank Securities

Great. Good answer. Thanks for the color. That’s all for me, thank you.

Christian J. Beckett

Thank you.

Operator

(Operator Instructions) Our next question comes from Andreas Stubsrud from Pareto. Please go ahead, your line is open.

Andreas Stubsrud – Pareto Securities AS

Thank you for taking my question. It looks like we can see some better news from Brazil. There are some news in local media around there that’s the pre-sell flow might be in the review. I’m thinking about the Mistral, is it a long-term strategy to have Mistral in Brazil or will it be open to move it to one of the two other regions you are in 2015?

William J. Restrepo

Sure, Andreas. I would say our long-term strategy is to generate the best returns we can with Mistral. So if that happens to be in Brazil, then we’ll leave it there and if it happens to be elsewhere, then we’ll move it. But our general expectation is to be present in the Brazilian market for the foreseeable future. We think that it’s a market that offers attractive returns. It can be a challenging environment to work in, but frankly our time and revenue performance out of Mistral is coming in line with the rest of our rigs.

So, we’re certainly not averse to or afraid of operating in Brazil and if the opportunity was there, we would certainly be considered putting two rigs together. That would be the optimal use of our overhead structure there. So, we’re not contemplating an exit from Brazil. That rig is about 18 months into its contract. We have already initiated some conversations with Petrobras about what should happen at the end of it, suggesting turmoil, see where those goes, but we’re not actively looking to remove it.

Andreas Stubsrud – Pareto Securities AS

Hey great that was a very good answer on my question on Brazil. Thanks a lot.

Christian J. Beckett

Thanks.

Operator

And we’ll take our next question from Darren Hicks with Evercore Partners. Please go ahead your line is open.

Darren T. Hicks – Evercore Partners

Hi good morning. My question has to do with the potential piece and acquisitions going forward, I understand that it’s high priority for you to transition assets into your fleet at a prudent rate, but assuming that the financing environment, and the offshore operating environment remains constant for the next couple of years, what would you say as your pace of acquisitions from this point going on.

Christian J. Beckett

Darren, hi, it’s Chris. I’ll take a shot at it, we’ve said in the past that we take into account a couple of different variables when we think about the pace at which we grow the fleet. One is obviously the ability, the access to capital from to put the necessary that load off. The second is obviously the availability from the yards and our view of the long term availability of contracts or in other words the strength of the drilling contract market.

All those are pretty solid right now, we then have a second set of criteria around operations in terms of our comfort with the pace at which we can add rigs or fleet make sure we can deliver operational performance levels we expect. You roll all that together and our general view is adding a better rig per year is a comfortable level both in terms of being able to handle the rig construction process, handle the delivery and start-up process and handle the financing, without having to do any kind of incremental equity issues.

Darren T. Hicks – Evercore Partners

Great, thank you. Thanks a lot. Also we appreciate the breakout in reimbursement cost in your OpEx there, but I’m just curious, is there a meaningful lag in the reimbursement time that we should be concerned about?

Christian Beckett

No, actually those revenues and costs are matched even on a monthly basis.

Darren T. Hicks – Evercore Partners

Okay, great. And finally, are you able to breakout how much cash or equity has been put down on your new buildings versus debt?

Christian Beckett

The new buildings have mostly they have been done with – we did have an equity issue for about $600 million, but was to finance the first two of those buildings there, their equity portion of those two new builds. We put in about a $150 million of equity into those the first two of the remaining four new builds. The last two drill shifts that have been done exclusively with debt and internal cash flow generation to this point.

Darren T. Hicks – Evercore Partners

Okay, great. Thanks a lot.

Operator

(Operator Instructions) Our next question comes from Darren Gacicia with Guggenheim Partners. Please go ahead. Your line is open.

Darren Gacicia – Guggenheim Partners

Hey, thanks for taking me. I wanted to follow-up on the [drilling] question and get a little bit more granular in terms of – if you’re spreading our delivery times return rigs, have you sorted any key points for kind of dynamic positioning people for subsea operators. And is there any differential in terms of staffing depending on where the rigs going to work? And just sort of little more light on that would be great.

Christian Beckett

Yeah. I mean our general approach to this is in – we would like to be able to see the start up of each new rig with trained personnel of our existing rigs. And that’s obviously an advantage we have now that we didn’t have when we put the first flow in the order. We look to put something like pool of 25 to 30 personnel as the core on each new rig from our existing rigs and that means we’ve got to take six, seven people of the existing four rigs today when we get to five obviously it’s a few of the rig but it’s 10% of the senior positions. So we need to be very careful about the price of which we do that, so we don’t run the risk of reducing the capabilities of the existing rigs.

I wouldn’t say that it’s the challenge of staffing people is in any given field, I mean frankly it’s across the board, finding good subsea people and staff, I think you’ll find that’s true across the industry and I think the industry is making significant efforts to try and find new sources of hydraulic specialists outside of the drilling space to try and to fill the needs of whole industry.

DP operators that tend to be a little easier to find and as much as the much bigger market for the DP operators beyond just drilling, and so we can find them and frankly we can get good mariners and often do the conversion. So the marine position is tend to generally be easier to find just because of the much bigger installed base of marine positions, outside of drilling, but now one position is of particular concern and now one position is something we don’t worry about.

Darren Gacicia – Guggenheim Partners

So suddenly there is an element of organic training as well as kind of looking outside. When you think about training some of these key positions internally, now that you have rigs up and running, is that kind of a year long process or two year long process before you are comfortable kind of moving them for one rig to the next, how should we kind of actually think about that?

Christian Beckett

It’s very dependent on the individual and the capabilities that are already on the rigs. So, I think the other thing that is worth noting in others is, there’s clearly a challenge – difference in the challenge by geography. The local content rules, which frankly are more restrictive in the developed markets that nobody thinks about like the U.S. and Australia or Norway than they are in the emerging markets, create the biggest constraint in our ability to move stop around.

So our rigs work in the U.S. Gulf has to be stopped by U.S. personnel and that’s (inaudible) requirement, and then that – if anything is the biggest impediment to flexibility.

Darren Gacicia – Guggenheim Partners

And to me what is the step-change in terms of – I mean does that make it much more difficult to kind of staff in the U.S.? Does it make it much less difficult to maybe in Nigeria and do the same from an order of magnitude standpoint?

Christian Beckett

I would say today the hardest place to find experienced senior staff for is the U.S., because it’s a – hardly because of the way in which they get personally tapped when U.S. and partly because of the restrictions something we can add that and frankly, we find it easier to both recruit and retain in Nigeria, because the guys are looking on those international rigs, expect an international lifestyle. So, I mean they don’t really mind what country they are in so much.

But I don’t think – we don’t see a step change. This is another developing market and it will continue to develop. I think there are some countries it is going to be much harder to end this. One of the reasons we would like to not to go to Angola, because we see that as being an extremely difficult market to start with qualified or educated people as a fundamental dynamic of the market there. For that side of that, we will deal with the challenges in where we are.

Darren Gacicia – Guggenheim Partners

Excellent, thanks a lot. I appreciate it.

Christian Beckett

Thanks.

Operator

And we’ll take our next question from (inaudible) with Clarkson Captial Markets. Please go ahead. Your line is open.

Unidentified Analyst

Hi, good morning.

Christian Beckett

Good morning.

Unidentified Analyst

I was hoping you could comment a little bit about the dual gradient operations for the Santa Ana in Gulf of Mexico and maybe kind of how you would gauge success of the technology overall?

Christian Beckett

Yes, I mean I think worth noting to this one in time we’ve pretty much finished all of the necessary tweaks and modifications, the actual (inaudible) comps that is the final key part of the system is not yet onboard the rig. It’s due to go onboard shortly, frankly it was due to go onboard already, but with the success on the current well with the decline has reshuffled that drilling program or drilling plant a little bit, so push back the point of which we load on that that last piece of equipment and go through the final field testing. But our expectation is still that it will be onboard and we will drill initiate anyway the first dual gradient well in Q3. And that will probably take the best part of six months to have a proper evaluation of its performance. I think that for this first well success will be delivering a well that frankly can’t be grilled any other way. It will be less about the speed of the process because we’re going to take it slow and steady and make sure we would do it right and that we would take a little earnings we can from the process, but I think getting the well completed will be the real truth in the footing.

Unidentified Analyst

Okay, that's helpful. Yeah, that's all I had, thank you.

Christian Beckett

Okay, thanks.

Operator

And it appears we have no further questions at this time.

William J. Restrepo

Okay, thank you very much.

Christian Beckett

Thank you everyone for participating in Pacific Drilling’s first quarter 2013 results conference call. William will be available for additional questions later in the day. Thank you.

Operator

This concludes today’s program. You may disconnect at this time. Thank you and have a great day.

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