Diamond Offshore Drilling Inc. Q2 2009 Earnings Call Transcript

Jul.23.09 | About: Diamond Offshore (DO)

Diamond Offshore Drilling Inc. (NYSE:DO)

Q2 2009 Earnings Call

July 23, 2009; 10:00 am ET

Executives

Larry Dickerson - President & Chief Executive Officer

Gary Krenek - Senior Vice President & Chief Financial Officer

Les Van Dyke - Director of Investor Relations

Analysts

Ian Macpherson - Simmons & Company

Joe Hill - Tudor, Pickering

Collin Gerry - Raymond James

Jim Crandell - Barclays

Dan Boyd - Goldman Sachs

Waqar Syed - Tristone Capital

Judd Bailey - Jefferies & Company

Tom Curran - Wells Fargo

Robin Shoemaker - Citigroup

Pierre Conner - Capital One Southcoast

Operator

Good morning. My name is Christy and I will be your conference operator today. At this time I would like to welcome everyone to the Diamond Offshore Drilling, second quarter 2009 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)

Mr. Les Van Dyke, you may begin your conference.

Les Van Dyke

Good morning. Thank you for joining us. With me on the call today are Larry Dickerson, President and Chief Executive Officer; and Gary Krenek, Senior Vice President and Chief Financial Officer.

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 any changes in events, conditions or circumstances on which any forward-looking statement is based.

With that, I’ll turn the meeting over to Larry.

Larry Dickerson

Thank you very much and thank you all for joining us here for this quarterly conference call. It was an excellent quarter for Diamond Offshore. I think we’re pleased with the amount of earnings that we delivered here and I’ll talk a bit more above how we achieved that.

At the same time its a quarter where I can report as was previously announced, that we closed on the acquisition of a new construction rig to a foreclosure auction from the shipyard and that rig has been renamed The Ocean Courage. We are in the midst of discussions with more than one operator for the use of that rig. I won’t go beyond that, but it’s an excellent rig.

We’ve had employees staffed onboard the unit. We’re pleased with its capability, we’re please with the construction quality that came from the shipyard and I think that will be an excellent source of earnings in the future. I think its validation of our typical strategy which is to try to acquire rigs at points in time when the market maybe a little weaker and I think that’s reflected in the acquisition price we had on that.

At the same time we also announced a dividend over the last year or so. I would imagine that we received a number of questions along the ideas trying to probe and see whether or not there would be a conflict between our acquisition strategy and our ability to continue to make the dividend payment and of course, as everybody knows, we don’t give guidance on future dividends.

Looking back we were able to issue $500 million worth of debt in May of this year and then subsequently spend a good portion of that on the acquisition of The Ocean Courage. We are pleased with the rate of just under 6% and there’s been several other drilling company pricing points, both before and after that at a substantially higher rate. So again, I think the market reflected its confidence in our ability to perform.

The results that we had for the quarter, about 88% of our revenues are working off of contracts that were signed greater than a year ago. In fact, we don’t have any really large scales contracts to announce in this particular quarter, but the things that we do control are the utilization of our rigs.

We had very few rigs that were in the shipyard. We had the Ocean Yahtzee that was having some routine surveys and then we had the Ocean Ambassador and the Ocean Summit, both doing some preparation for longer term contracts in Mexico, but other than that, by and large, our rigs were operating. Among the rigs that were operating, we did an excellent job of managing equipment downtime, so that we had high utilization.

Then on the cost side, we continued our efforts to stay on top of cost. I think we had excellent results in the first quarter of this year and then as I watched our competitors come out, that was almost a universal theme of everyone, with the uncertainty was staying on top of the cost and we continued that here into the second quarter.

Not that we’re relaxed at any other period of time and certainly we’re not going to forego paint expenditures that then have to be paid for with additional steel to deal with rust issues down the road, but there are a number of things that we can delay purchasing on. We can refurbish rather than purchase new and a variety of type items that we can go forward with.

At the same time, in the quarter we did take our three Matt jack-ups, and have idled those and stacked them in the Gulf of Mexico in a cluster, which is typical in the industry and have a skelton crew to keep powered and keep the rigs up to snuff, but for the movement we’ve elected not to beat our heads against the Matt jack-up area.

Our other two jack-ups that we have in the Gulf of Mexico, the Titan and the Spartan have for a short term market, some contracts that extend in good ways throughout the year. So we’re pleased with our ability to operate there. The market for jack-ups here in the Gulf of Mexico was obviously very severely impacted. It’ll be difficult. I think you’ll have to go all the way back to 1986 to see as few jack-ups operating as though we have currently.

At the same time there’s lots of demand for deeper water units. Prices have gone up and down. We were certainly at the point in time when prices were above 70, I was getting positive lots of positive feedback from more than one customer, with the happiness that they have with that rate. Everybody was looking for even higher rates and we pulled back a little bit, but I still think we’re in much better shape than we may have been earlier when we had oil with the three handle on it. So, that sort of the way we continue.

Having made all those comments, I will now let Gary Krenek, our Chief Financial Officer give you a little more color on the cost and talk about how that might be on a go forward basis.

Gary Krenek

Thanks Larry. I’m happy to report that for the quarter ended June 30, 2009, the Diamond Offshore recorded net income of some $387 million on revenues of just slightly under $1 billion. This resulted in earnings of $2.79 per share, which is the second best quarterly earnings in the history of the company.

Now, to dig a little deeper in the numbers concentrating on expenses; unlike last quarter when we also came in below guidance on rig operating expenses, very little of this quarter’s favorable variance was due to timing differences or any type of key accounting items. Rather it was more the result as Larry said, of our continuing efforts to control cost.

The Ocean America survey, which concluded in the second quarter, came in around $5 million under our expectations, with part of those savings being in the cost to mob the rig into the shipyard and back out to work. The remaining favorable variance was spread throughout the fleet and again, a direct result of our cost control program.

The rest of the income statement for this quarter is fairly routine. With G&A cost, depreciation expense and our tax rate coming in within the guidance that we gave out in our last quarterly conference call. The only line item that came in over guidance was interest expense, which should surprise no one as it was a result of our $500 million debt issuance in early May that Larry spoke about.

Now looking forward to the third quarter, we expect to incur a normal daily operating cost for our rigs as outlined in our last rig status report that we filed on July 15. In addition to those normal operating costs, we expect to incur an additional $3 million to $5 million to complete the survey of Ocean Yahtzee, which begun in the second quarter and some $4 million to $6 million to Mob and begin work on Ocean Bounty, which is located in Australia.

We will also record in the upcoming quarter, some $6.5 million in amortize mob and contract preparation cost that had been previously deferred. Offsetting these costs will be a reduction in our daily operating expense of approximately $7 million, as we defer our operating cost incurred during the contract preparation time by the Ocean Ambassador and Ocean Valiant, which relate to term contracts in Brazil and West Africa respectively.

We’ll also save another approximately $10 million per quarter, as a result of our cluster stacking of the three mat jack-ups in the Gulf of Mexico. If you do the math correctly, this should result in the expected rig operating cost excluding all reimbursable cost of some $305 million to $315 million for the third quarter of 2009.

We’re revising our guidance for DD&A in interest expense as a result of the acquisition of Ocean Courage and our most recent debt issuance this last quarter. Depreciation expense should now run about $91 million to $92 million in both the third and fourth quarters of this year; and interest expense should be approximately $14 million per quarter for the rest of the year.

As I pointed out earlier, our tax rate for the second quarter came in within our prior guidance of 25% to 27%. We expect this range to hold for the rest of the year, 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.

Our capital expenditure guidance for 2009 is for us to spend some $425 million for maintenance capital, additional spare parts and also for required upgrade needed to comply with International contracts we’ve been awarded. In addition, we expect to spend another $510 million, which will include the acquisition of Ocean Courage and other major upgrades that were completed earlier of this year, primarily the completion of the Ocean Monarch.

Finally as always, I’d refer you to our rig status report which can be found on the website for expected down time of our rigs, for the remainder of this year, for any contract durations, timing of contract rollovers and other pertinent information. You will note that as of this date, expected downtime for our fleet continues to be very close to the guidance that we gave back in our January conference call.

With that, I’ll turn it back over to Larry.

Larry Dickerson

Okay. So, I think we’re ready for questions. Les.

Les Van Dyke

Operator, we’re ready for our questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ian Macpherson with Simmons & Company.

Larry Dickerson

Good morning, Ian.

Ian Macpherson - Simmons & Company

Sorry, I had the mute button, sorry Larry. So good results. I want to ask you about the dividend versus acquisitions per say, but I did want to ask you to talk about further acquisition possibilities beyond the Ocean Courage, because you still have seemingly a lot of balance sheet capacity and I would imagine there’s some other rigs out there in play, so are you content with what you have or still looking?

Larry Dickerson

Well, I think we would like to have rigs that we see an excellent possibility for putting them to work and so it all depends on the acquisition price, depends on the number of other bidders that may come forward, but as you noted, I think we have the balance sheet capacity to add some more rigs into our fleet mix. I think, also it would be would be influenced by whatever contract we would be able to put in place on the Courage before we move onto the next one.

Ian Macpherson - Simmons & Company

I assume that we would probably see a contract for the Courage before we would see another rig acquired without a contract?

Larry Dickerson

We like that sequencing yes, for sure, but it would all depend upon what sort of opportunities might be out there.

Ian Macpherson - Simmons & Company

Okay. Second question, unrelated, regarding the contract that you renegotiated with ATP for I think it was the Victory. Just accounting wise, are you going to still be recognizing Gary, the full day rate or will you be sort of recognizing only the cash portion of that for the foreseeable future?

Gary Krenek

We’re going to record that as normal GAAP accrual accounting, so we’ll be recognizing $540,000 a day as drilling revenue. We got an additional $20,000 since there was a deferral of the payments and that additional $20,000 per day will be recorded as interest income.

Ian Macpherson - Simmons & Company

Okay, are there any other contracts out there in the backlog that might be subject to similar type renegotiations at this point?

Larry Dickerson

We like cash. Cash is good. I think there was some unique circumstances here and we’re not actively seeking these kind of things and this was because of a net profit interest that was more of a deferral than an equity participation in wells, which we’re just not interested in that. Because I just don’t think that’s our business and I don’t think there’s a strong history of drilling contractors getting into the oil and gas business and having that successfully reflect into their stock price.

Having said all of that, we understand from time to time our customer base is stressed in one fashion or another and within our limited abilities, given that we still have to serve the shareholders and we still need to turn our revenue into cash, we will look at certain opportunities that might make sense, but I would say that it’s more of a one-off type event, than something that would be repeated on a larger scale.

Ian Macpherson - Simmons & Company

Okay, thanks. Good Job.

Operator

Your next question comes from Joe Hill of Tudor, Pickering.

Larry Dickerson

Joe, does your mute button work also? Joe, I’m not hearing you. We want to move on to another question, we can come back with Joe higher in the queue or something.

Les Van Dyke

Operator, let’s move onto another question and then we’ll come back to Joe.

Larry Dickerson

I’m sorry, Joe. We didn’t hear you. I don’t know if the rest of the conference call heard you, but all I heard was right at the end you saying 2Q, so if you could summarize your question again.

Joe Hill - Tudor, Pickering

Okay, certainly. The Ocean Courage, what are your current operating costs and how much of those did you recognize in 2Q?

Gary Krenek

The vast bulk of the cost on the Courage right now is being capitalized as we complete the commissioning of that rig and so virtually nil cost in the second quarter. We will have very little cost in the third quarter that will be recognized expense.

Joe Hill - Tudor, Pickering

Okay, and with regards to work prospects for the Guardian and Nomad in the North Sea post the current contracts, how do those look?

Larry Dickerson

I think we’ve seen some interest in the North Sea and in some other markets that those rigs could potentially relocate. We don’t have anything firm to announce, but I think the level of discussion and the level of interest has improved over where it was, say 90 days ago.

Joe Hill - Tudor, Pickering

Okay and are there any developments for the Ocean Star here, domestically?

Larry Dickerson

No, the Star remains idle. We’ve been pursuing some international opportunities for the rig and we have some discussions of Gulf of Mexico jobs, but I would suspect that those would not occur until after hurricane season.

Joe Hill - Tudor, Pickering

Okay, and finally given some of the developments in Brazil with the incremental tenders perhaps being locally focused and having a lot of local content requirements, can you give us an update as to what you think your opportunity set is to put more rigs into that market?

Larry Dickerson

Well, I think over the years we have grown our Brazilian fleet from four to 11 and we did that by Petrobras taking an interest in a number of our second generation rigs. So we upped Petrobras component from four to eight and then we put three rigs to work for OGX, this new company down there.

I think most of the current focus though is not in that class of rigs, but is in new ultra deep type equipment. So, I would suspect our ability to put rigs in that market would likely come from potential acquisitions that we might make.

Joe Hill - Tudor, Pickering

Okay. That’s it for me, thanks a lot guys.

Larry Dickerson

Thank you.

Operator

Your next question comes from Collin Gerry of Raymond James.

Collin Gerry - Raymond James

Good morning.

Larry Dickerson

Good morning.

Collin Gerry - Raymond James

Hey, good morning. I’m going to pry a little bit on the Courage, I don’t know if I’ll get an answer, but we saw a nice contract on the 8500-foot rig out of Petrobras in the 500 range recently from one of your competitors. Does that set the bar as far as what we should expect from the Courage or should we expect something closer to its old day rate. Maybe give us a little bit of color on what the opportunities for that are?

Larry Dickerson

Well, we would be more than pleased to look at the number that you’ve spoken about. I think that may have been a unique situation and I just don’t have all the facts on that. Numbers that we have been talking about are one, given what we paid for, we would be more than pleased to get a number in the fours. What we obviously want is higher day rate as we can and it would all depend upon whatever market it ended up.

Collin Gerry -Raymond James

Okay. My next question is, I hate asking you jack-up questions, but kind on the newer builds you’ll have on the fleet, what would you say leading edge for something of that caliber would be in the international community for the 350-footers?

Larry Dickerson

Well, again it varies by market, but they are certainly down from the rates. Our two units, we had a rig in the 190s and we’ve got a rig still in Australia working in the 200s and I don’t think we’re going to see those type rates, because you have a number of the new builds; the new generation of jack-ups that they are rolling and you continue to have new units delivered.

Collin Gerry -Raymond James

So, would you just say closer to 100 or closer to 150?

Larry Dickerson

I think you could bracket it in that. I think in some circumstances you could exceed the 150, probably in little ways away from 100.

Collin Gerry -Raymond James

Okay. Appreciate it guys.

Larry Dickerson

Thanks.

Operator

Your next question comes from Jim Crandell of Barclays.

Jim Crandell - Barclays

Good morning. Outside of Petrobras, do you see any market for new build, new generation floating rigs over the next let’s say six to nine months, here from IOCs or NOCs?

Larry Dickerson

Well, I think West Africa is a market, you’ve heard some positive stirrings out of there. You’ve got other independent oil companies that are looking for some deep water rigs. I mean the psychology is not where it was a year ago. Where you have this mass, let me get a rig kind of movement, but it’s by no means dead.

Jim Crandell - Barclays

I mean, would they consider signing a three to four year contract at a minimum for a new build in this market?

Larry Dickerson

Perhaps some of them would. I don’t think this is a five year type market. My expectation would be two to three would be more typical.

Jim Crandell - Barclays

Okay, and what do you see from the IOCs outside of Brazil, particularly in India and China and their willingness to sign contracts for new builds?

Larry Dickerson

We just got our new build and I don’t really have any data to reveal coming out of these two markets.

Jim Crandell - Barclays

Okay. If there was interest in your clients in new builds, do you think you’d be among the leaders in building them if you did receive these, let’s say, three to four year contract?

Larry Dickerson

Well, I would be surprised. I mean there’s enough uncommitted capacity. There are some rigs such as the Courage that might be available for purchase, but those would typically fill and fill quicker than an order for a new bill.

I don’t see a big market for new builds being constructed, with the exception of Petrobras and perhaps their unique needs and their desire to build down there and then perhaps even China, but a lot of that maybe just driven by having the shipyards staying busy.

Jim Crandell - Barclays

Okay and my second question is, how many more floaters and jack-ups that are new builds today, that are being built, you think could be to similar to Petro and come on the market for sales over, let’s just say a six to nine month period?

Larry Dickerson

I don’t know; there are too many factors to really tell, who might be in those particular positions, but it’s more than zero, but I don’t think it’s as many as 10.

Jim Crandell - Barclays Capital

How do you think that mix would be in terms of floating rigs and jack-ups?

Larry Dickerson

I’m just talking about floaters.

Jim Crandell - Barclays Capital

Just floaters, how about jack-ups? Do you expect jack-ups to come on the market as well?

Larry Dickerson

Yes, I would just think so, just from the shear number of them and the size of the companies that are billing them.

Jim Crandell - Barclays Capital

So, there’s going to be plenty of opportunities to buy equipment under construction in your opinion over the next six to 12 months?

Larry Dickerson

I would think so.

Jim Crandell - Barclays Capital

Okay, good. Thank you.

Operator

Your next question comes from Dan Boyd of Goldman Sachs.

Dan Boyd - Goldman Sachs

Yes, thanks. Just Larry to go back on the Ocean Courage you mentioned, you would be happy with something in the $400,000 range and that doesn’t makes sense given what you paid for the asset, but would you consider that a one-off rate or would you consider that the market rate at this point?

Larry Dickerson

There is going to be some other renewals, so I don’t think you got the one data point everyone is making reference of near 500 and then what we would expect to have a Courage data point going forward, but the length of term, where the rigs are working, all these things would come to bear and so, I wouldn’t take the Courage as just one single data point as where the market is.

Dan Boyd - Goldman Sachs

Yes, I guess, that’s kind of what I’m getting to. Given that rig did have a prior contract with Petrobras, I would think that whatever rate you end up getting, if it is with Petrobras, it’s not necessarily the market rate. Is that a correct way of accurately looking at it?

Larry Dickerson

Yes. There’s a single point. Backing up a year, year and a half ago, there was an ongoing series of plenty of transactions and so you could see where markets were and see how it’s evolving, but at least I think going forward to the balance of the year, there’ll be few data points with great differences between the circumstances surrounding equipment capability and customer and who wants and timing that you’ll see a much more scattered result.

Dan Boyd - Goldman Sachs

Okay, and then just looking at your most recent new build purchase and what might come along in the market this year, if your recent purchase did actually mark the bottom in terms of asset prices for deepwater rig, would you still be as interested in making further acquisitions or will you potentially look to the jack-up market, where asset prices may be more depressed?

Larry Dickerson

Well, we are primarily a floater company and we would primarily stay interested in there, but we are also driven by bargains. I think if you get a bargain in new build jack-up, you are getting a bargain because you have to endure some period of time of depressed rates.

Dan Boyd - Goldman Sachs

Well, that’s historically what you have done, right; counter cyclical acquisitions where you had to endure that, because you felt you’re getting a good through cycle return.

Larry Dickerson

Right, but I think the floaters; I think you have much greater possibility to put them to work at nice contracts and potentially even nice term.

Dan Boyd - Goldman Sachs

Okay, and then just this last one. Do you see any other opportunities to invest in your current fleet, given that some rigs will likely be idle and then if you could just update on the plans with the Bounty?

Larry Dickerson

I think we’ve done a whole lot with our existing fleet and there may be other opportunities, but when you look at the kind of discount that we were able to get on the Courage versus new construction, I just think that maybe a better place to spend your money than upgrading older rigs and it’s not as if we have a lot of rigs that haven’t been dealt with.

The Bounty, we haven’t made that call yet, but when we decided to substitute and bring in the Ocean America to work that particular job, part of that was to not to have to spend the amount of money that we were looking for on the Bounty and so in effect, we kind of diverted that cash into the Courage acquisition. So there may be a likely hood that we hold that rig for some period of time, before we decide what to do with it.

Dan Boyd - Goldman Sachs

It sounds like you’re making a commitment to be able to keep enough free cash flow available to maintain the special dividend.

Larry Dickerson

We are not making a commitment. If you look at the history, we’ve sustained that dividend for some period of time and we know that it’s an important thing to our shareholders and we don’t look at it lightly, but again, we always say that our dividends going forward will be set in each quarter.

Dan Boyd - Goldman Sachs

Appreciate it. I’ll turn it back over.

Larry Dickerson

Sure.

Operator

Your next question comes from Waqar Syed with Tristone Capital.

Waqar Syed - Tristone Capital

Good morning Larry. I have couple of questions; first on your Gulf of Mexico jack-ups and the Spartan, Titan. The contracts are expiring; do you expect them to work through the Hurricane season? Do you see some downtime here for those rigs?

Larry Dickerson

Well, as we presently said, I think we are comfortable that we’ll be able to renew those and then have them continue to work.

Waqar Syed - Tristone Capital

Okay, and how about any prospects for the Spartan Egypt?

Larry Dickerson

Yes, there is some activity in that area that we’re looking at. I don’t think we have anything that we’ve announced yet.

Waqar Syed - Tristone Capital

Okay, and then for Columbia and Mexico, do you expect any tenders or renewals for that rig?

Larry Dickerson

Well, we were able to extend it for four months and it’s our expectation that Mexico, I just think through the expiration of existing contracts will have a few jack-ups renewals that will come out and because we’re already in country and we have all the equipment installed. I think there will be some opportunities for that rig to bid, but we don’t have a definitive schedule and things sometimes get delayed down there.

Waqar Syed - Tristone Capital

Sure and then just one final on your deeper water rigs, Victory and Baroness, is it too early for discussions to start and the contracts for sometime in 2010?

Larry Dickerson

No, we have been looking at bidding both of those rigs and of course, we have the Star in front of those as well.

Waqar Syed - Tristone Capital

Sure, but Victory and Baroness, which regions do you expect them to end up in, to stay in the current places or to move around?

Larry Dickerson

Don’t know. I think between those two and the Star, I think there’s a pretty good opportunity for at least one of them to leave the Gulf of Mexico.

Waqar Syed - Tristone Capital

Okay. Thank you very much sir.

Operator

Your next question comes from Judd Bailey of Jefferies & Company.

Judd Bailey - Jefferies & Company

Thanks, good morning. A broad question on the fourth-generation rig market, that’s one area where we haven’t really seen any fixtures so far in this downturn. Would you be willing to give us, maybe some sort of broad range on where you think we might see some of the rigs start to price over the next few months? I believe there are some opportunities out there for some decent term work internationally.

Larry Dickerson

All I can do is just point you to past fixtures and you’re right, we’re kind of lacking some data points. So I can’t really tell you where they would price. Going into latter part of last year, the prices for fourth generation rigs were in line.

They had closed gap and were pricing at and in sometime cases above fifth generation rates, just due to their early availability, and I don’t think that’s any longer the case. I think there’ll be a discount to fifth generation rights, but as we just discussed, we don’t yet know exactly where fifth generation rates are. So, it’s hard to really say where the forces are going to be, but they’ll be at a discount.

Judd Bailey - Jefferies & Company

Would it be fair to assume that that discount could be pretty sizeable? Maybe see some fourth-gens re-price in kind of the mid-300 type range?

Larry Dickerson

Look, on a long term basis we’re more than happy with those type of rates, because your operating costs are much less and you can make a solid amount of money. So, we are not afraid of those type of prices, but again, we just don’t have any data; I’m just really speculating on where they might want to go and I’d rather report to you guys some hard and fast data.

Judd Bailey - Jefferies & Company

Okay, fair enough. My follow-up question is on the jack-up market or potential opportunities. One of your competitors recently sold a jack-up for about $175 million, which seems pretty high or seemed very high. Do you think that was more of a one-off situation? I don’t know if you have any insight there and would you care to guess on maybe where the market would be for the type of rig that was sold?

Larry Dickerson

Yes, I thought that was a little high and my understanding is there maybe some circumstances around there that helped put it into that place. So I would think, the market would seem to me for new construction rigs to be below that number.

Jud Bailey - Jefferies & Company

Okay great. That’s all I have. Thank you.

Operator

Your next question comes from Tom Curran of Wells Fargo.

Tom Curran - Wells Fargo

Good morning, guys.

Larry Dickerson

Good morning.

Tom Curran - Wells Fargo

I heard that with the Courage, with the PetroMena I rig, there may have been up to $50 million worth of third-party equipment on board the rig. The exact status of which wasn’t clear at the time the auction took place.

Could you just clarify whether or not at this point there is any additional potential investment you might have to make on that rig or was the price you guys disclosed, the final all-in cost of the rig?

Larry Dickerson

Well, what we disclosed was not the all-in cost. As Gary indicated, we are capitalizing some cost towards commissioning and for instance, the rig did not have any drill pipe. I don’t think there was not any material third-party that we now have to buy. The cement unit, the ROV’s, those are third-party, but we just would take over the charter or charter from somewhere else.

So far, extra money that we have to put in the rig has been inline with our understanding of what that of what we thought we would put in when we bid it, so we don’t have a negative surprise on that.

Tom Curran - Wells Fargo

Okay. I’m sorry if I missed Gary’s opening comments on that, but did you guys quantify around how much that may be when all is said and done?

Larry Dickerson

No. I don’t think we have, but we announced that our winning bid was 460 and we have an estimate in there for commissioning and then we knew that we had to buy some drill pipe and we had some other pieces of equipment. Some of which we already owned in stock and so that had to go in there, but it’s not a huge number.

Gary Krenek

What I did say Tom in the opening remarks, is we expect to spend some $510 million for the acquisition of the Courage. Also included in that $510 million is completion of major upgrade of the Monarch that we completed in the first quarter of this year. So we bracket it with that number. We did not break that out individual items.

Tom Curran - Wells Fargo

Okay, so within that $510 million, it’s not just for Courage, but a bit more for the Monarch as well?

Gary Krenek

That is correct.

Tom Curran - Wells Fargo

Then Larry, looking out to the next up cycle for mid-water, which markets are you guys looking to sustain demand for the actual specs of the second to early fourth generation semis? So not just demand at that water depth, where we are starting to see obviously ever deeper and more complicated wells being drilled, which often result in a requirement for a latter generation rigs because of the actual specs. Which market you guys looking to sustain demand for the actual drilling capabilities of the second and fourth generation rigs?

Larry Dickerson

Well I think the North Sea is a market where the wells drilled are not that complicated, with weather issues and all that. I think fleet just there is designed for that market, so it’s just a matter of demand returning. I think in the Pacific area, it’s just so much coast that’s unexplored, where a simpler rig that’s designed for 2000 feet or something can operate pretty well.

We have got a number of rigs down in Brazil. If Mexico gets kicked-off on production, there could be a lot of rigs there. I think that the one market that is probably shrunk in the area is certainly the U.S. Gulf of Mexico, where we just have one now. The Ocean Saratoga is only second generation rig there and I think Noble has one and if you count it in, [Ocean Amerantae] is being somewhat less than a full fourth, then there may just be three and there are a lot many more rigs there two years ago than they are today.

Tom Curran - Wells Fargo

Okay. When it comes to the North Sea, do you see it sustaining its share of global mid water activity through the next, lets say three to five years? Is there enough remaining prospects there that based on a consensus, oil price expectations, that it’ll be able to generate enough demand to sustain that 30% to 35% share of global mid water demand it has.

Then also, which markets do you think could see the most incremental growth for that mid water, basic spec demand, would it be Asia-Pacific like you cited?

Larry Dickerson

Yes, I would guess it would be Asia Pacific. I think the mid water fleet is going to have a future, but it’s all dependent upon the price of oil and how that drives. I can’t really tell you on the North Sea.

There was a point in time where people had said the North Sea was dead, no one was going do anything there and then also the oil prices got really high and then the advantages of infrastructure and shallow targets and the fact that there were a lot of things that have been already been explored and identified and passed over, because of previous pricing. All of those kind of things, I just don’t have the ability to quantify, but I think those factors could line up and keep the North Sea going.

Tom Curran - Wells Fargo

The North Sea is dead; long live the North Sea again?

Larry Dickerson

I don’t know it’s dead, but I mean prices are down from where they were. From what I hear from the customers in that market, they are hoping for cost to also decline so that they can have more activity.

Tom Curran - Wells Fargo

Fair enough. Thanks guys. I’ll turn it back.

Operator

Your next question comes from Robin Shoemaker of Citigroup.

Robin Shoemaker - Citigroup

Thank you. I wanted to ask one more question here on the Ocean Courage; its availability in January of next year seems to put it in a kind of a unique, competitive position and correct me if I’m wrong, but in 2010 as opposed to ‘11, there’s not too much availability of a rig like the Courage in the timeframe. Is that roughly correct?

Larry Dickerson

Yes, I think so. I mean the one of the thing we really liked about this rig was the near term availability of it.

Robin Shoemaker - Citigroup

So, we’ve seen a few cases in recent years where customers have had an urgent need for a rig and day rates have gotten really high in kind of not a multi year timeframe, but kind of a short term one year timeframe. It sounds like your preference would be to look at the rig and go for a multi year contract in the 400s as you mentioned versus looking for the highest sort of perhaps shorter term rate that that rig might be able to get.

Larry Dickerson

Yes, I think so. We would like term and we would like a solid rate that gives us a great return on our money and if we don’t have to push it. I mean look, we want the highest day rate we can get, but that’s not necessary our goal, is to go for the highest day rate, but I think the company would be equally well served by a term and a reasonable day rate.

Robin Shoemaker - Citigroup

Right. Just wanted to ask then about Mexico which hasn’t come up yet, but could you share with us your latest understanding of incremental needs that PEMEX may have this year for either jack-ups or deep water rigs?

Larry Dickerson

I think Mexico has a couple of deepwater rigs contracted into their market, but I believe they would certainly like to have one sooner. Then on the jack-up side, there is going to be a number of renewals on the existing fleet as they rollover. I don’t know, I’ve heard numbers of some incremental jack-ups going in there, but low numbers not huge numbers going on.

I don’t have a better feel than that, but I think Mexico will continue forward. They’ve got some problems though with the currency has worked against them. The Peso has weakened versus the dollar. So, that’s causing issues potentially and there’s just so many factors with the market like that where you got one buyer, where he may be parity to Mexican budget issues and all kind of things that I don’t have a sense of.

So it’s not like I’m trying to gauge a regular market, where all the data is on the table and I can estimate, but I would think rigs would continue to work there and any growth that comes would be pretty small.

Robin Shoemaker - Citigroup

Okay, just one other on the kind of broad international market for jack-ups; would you describe the tendering activity internationally for jack-ups as remaining at a low level. Any signs of, say fourth quarter, first quarter tendering that may create a little bit of a pick up in activity or does it continue to be very slow?

Larry Dickerson

It’s slower than it was. It’s not totally dead. I don’t have a sense that there is anything that’s going to make it pick up down the road; that I think the market that we’ve got right now, when you just look at the number of rigs that are being delivered into the market and the rigs that are rolling, I don’t see pick up in rates.

Robin Shoemaker – Citigroup

Okay. Thank you.

Larry Dickerson

We have time for one more question.

Operator

Your final question comes from Pierre Conner of Capital One Southcoast.

Pierre Conner - Capital One Southcoast

Good morning gentlemen. Thanks for taking the call. Quick question; on the contract gaps on the Victory, how firm are the return dates? Example; if you had an opportunity that lasted longer than that window, obviously will the customer take a deferral on the return date?

Larry Dickerson

When we sequence wells, we always have to have some ability to complete the well that we are on and so that’s understood in there; that when we establish a date that he would get the rig back, that’s the target date, but having said that, if there is a 90 day window contemplated then we are going to go take a three year job.

Pierre Conner - Capital One Southcoast

Yes, but just some flexibility in there, okay.

Larry Dickerson

Remember, we still have the Ocean Star to put to work. So, it’s not like we have to pass on some big opportunity.

Pierre Conner - Capital One Southcoast

Yes, on mid water equipment, and this might be an academic question based on your commentary of some opportunities you might be pursuing in that region or elsewhere, but relative to stacking decisions, it seems like on the jack-ups front sort of six months out, with no clear opportunity moves in that direction, can you bracket the window on the mid-water floaters. It would be longer I’d assume, but if your window is lack of visibility forward, what kind of time frame does it move you towards reducing the cost and stacking equipment?

Larry Dickerson

Well, something like the Bounty is where we have a lot of money that has to go into the rig to keep it in class and to keep it up to standard would be a factor. We look at the whole market and where we see that going. I think we have a better feel for the floater market than the jack-up market, because we are a bigger player in it.

The jack-ups, there’s so much new equipment being delivered and there’s gas problems here in North America and lots of already idle mat rigs, so it was pretty clear that we didn’t see a future there. If we move beyond the mat rigs and look to any other rigs, I wouldn’t say it’s a formula or it would be our view of the marketplace, probably longer than six months.

Pierre Conner - Capital One Southcoast

I appreciate it. Well, that’s it. Thank you very much gentlemen.

Larry Dickerson

Thanks Pierre and thanks to everyone for joining us and we’ll talk to you at various interim locations, but certainly at next quarter’s conference call in October.

Operator

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

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