Diamond Offshore Drilling Inc (DO) Management Discusses Q2 2013 Results - Earnings Call Transcript

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Diamond Offshore Drilling (NYSE:DO)

Q2 2013 Earnings Call

July 25, 2013 10:00 am ET

Executives

Darren Daugherty

Lawrence R. Dickerson - Chief Executive Officer, President, Director and Member of Executive Committee

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

Richard Male

Kane Liddelow

John M. Vecchio - Executive Vice President

Analysts

Ian Macpherson - Simmons & Company International, Research Division

David Wilson - Howard Weil Incorporated, Research Division

Judson E. Bailey - ISI Group Inc., Research Division

Todd P. Scholl - Wunderlich Securities Inc., Research Division

John Booth Lowe - Cowen Securities LLC, Research Division

Gregory Lewis - Crédit Suisse AG, Research Division

David C. Smith - Johnson Rice & Company, L.L.C., Research Division

Operator

Good day. My name is Maria, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Diamond Offshore Second Quarter 2013 Earnings Results Conference Call. [Operator Instructions]

I would now like to turn the call over to Darren Daugherty, Director of Investor Relations. Please go ahead, sir.

Darren Daugherty

Thank you, Maria. Good morning, everyone, and thank you for joining us. With me on the call today are Larry Dickerson, President and Chief Executive Officer; John Vecchio, Executive Vice President; Gary Krenek, Senior Vice President and Chief Financial Officer; Kane Liddelow, Director of Contracts & Marketing; and also joining us on the call today from Aberdeen, Scotland, is Richard Male, Vice President of Contracts & Marketing.

Following our prepared remarks this morning, we will have a question-and-answer session. Before we begin our remarks, I should remind you that statements made during this conference call may constitute forward-looking statements, which are inherently subject to a variety of risks and uncertainties. Actual results achieved by the company may differ materially from projections made in any forward-looking statements. Forward-looking statements may include, but are not limited to, discussions 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 10-K and 10-Q filings with the SEC.

Given these factors, investors and analysts should not place undue reliance on forward-looking statements. Forward-looking statements reflect circumstances at the time they are made, and the company expressly disclaims any obligation to update or revise any forward-looking statements.

And now, I'll turn the call over to Larry.

Lawrence R. Dickerson

Thank you, Darren, and welcome to our second quarter conference call. I want to expand on some of the issues that I spoke on in our press release, and I will also address some of the delays that we put out there in our Fleet Status Report.

First, as I noted that we had another quarter of excellent results on 2 fronts: One, equipment downtime as a result of failures of equipment. It's very hard -- we have no idea how to estimate that, although we know through our systems a range that we can operate in. We ended up with 97 days where we were off of contract due to equipment problems. Last quarter, we had 157 days. We had 100 days back in Q4, so we were within that range. And so I'm very comfortable that we continue to put in maintenance procedures and equipment checks so that we can maintain performance within that range. Although we've made that savings, we were offset by almost an equal amount of survey time that ran over 60 days, and the primary component of that was we incurred 46 days off of contract. And I say survey, surveys and mobes, due to the Ocean Lexington, which relocated from Brazil to Trinidad. We had customs problems getting our equipment out of Brazil to be able to start the work in Trinidad, and that cost us 46 of those 61 days. Certainly, that would have shown up quite a bit negatively if we hadn't been able to perform as we did on unanticipated equipment downtime.

On the cost front, which I think has been noted, our cost came in slightly below guidance. Our guidance is in a range that, in itself, I think reflects a number of programs that we have in place to try to control our cost and make sure that we deliver every dollar of revenue that we can down to EBITDA, and ultimately, into earnings. And we would expect that to continue as we go into Q3. We have given, effective 1 July, a rig wage increase across the fleet. So that will be a factor and Gary will expand on that when he comments on some of the cost guidance going forward.

So now, let's talk about some of the equipment downtime. I'll talk about the Ocean Confidence first. The Ocean Confidence is a rig that we delivered in 2001. It's a 10,000-foot DP unit, and we had -- that rig was at work in the Gulf of Mexico, and post-Macondo we relocated it to Africa. And at that point in time, we delayed and deferred a shipyard job, where we planned to bring it in to a Gulf of Mexico shipyard and do some paintwork on that particular rig. And then, arriving into Africa, we've had just well after well of -- where the customers -- it's very important for them to get well done either through deadlines or we've worked on some high-profile wells that our customers are very interested in getting done. So we've never really had the chance to do paint and other work.

Additionally, we've had some DP problems earlier in the year, and this really is a result of the DP vendor was purchased by someone outside the industry and the new owner of that organization is -- frankly, does not want to have any exposure to Macondo-like potential liabilities. And so we've had huge problems in getting service out of that vendor. So we've elected to take some steps to replace that system. In addition to that, we need to do some crane work and there's other things that have built up the deferral of the paintwork, of course, then does not allow you to stay on top of rust. And so the scope of that paint job has grown. Additionally, there's just not any facility in West Africa to be able to do this work. So we need to take the rig up to the Canary Islands, which is a significant mobe in terms of time, and I do not want to take the rig up there and do less than everything that we need to be -- get done. So we've challenged ourselves to within a reasonable -- what we believe is a reasonable time, to do the type of work that I've described. I've been on top of the DP system, get on top of paint and maintenance issues, do the crane work and several other systems that we need to work on, and frankly, count it inclusive of the mobe up there and back then that works out at our 10-month period. Now previously, we were looking at a 6-month all-in job, but this just was not time to do all the work that needed to be done. This is a first-class rig, and we need to maintain it in first-class shape and ultimately, we believe, certainly assert such item as getting on top of the DP system will prevent future downtime, when we have problems with the rig and we can't get any response from the vendor to help us solve those problems easily.

So that pretty much explains the Ocean Confidence. Unfortunately, that will be 10 months out of 2014. But that's just -- that's the way the business is going to work. Certainly, for us, and I know other people face that as well when you're looking at maintaining these assets.

Then at the same time, the Ocean BlackHawk, which was the first of our 4 drillships out of Brazil. We announced a 2-month additional delay where the rig will now be available in late February. That is where it will be available and ready to go to work in the Gulf of Mexico. It is out of the dry dock, and we're doing commissioning tests. And we discovered on the Ocean BlackHawk, problems with the engine cooling, cooling water that there had not been inhibitors placed into that system that would prevent damage to the engines themselves. And this damage would manifest itself over the life of the rig, where we would take additional downtime and have power problems down the road. So we've elected to make sure that we can fix that. So we're replacing the damaged engine parts. Additionally, now that we know of the problem, we are on top of what's being done by the subcontractors in the shipyard so that we can assure ourselves that, that will not be the case. We do not have any of these problems presently on drillships 2, 3 or 4, which is the Hornet, the Rhino and the Lion. In addition, we've got procedures to make sure that we will not have this problem introduced into the system. So I think if there's good news, it's that the delay is exposed just to the BlackHawk.

Additionally, I think John Vecchio will give you some color as to how the status of the construction on the subsequent rigs is going compared to the BlackHawk. So we can -- I think we're very comfortable that we're much more on schedule with those subsequent units than we are presently with the BlackHawk. Additionally, we had a couple month delay on the Onyx coming out of Brownsville. That's due to equipment deliveries. It's due to some manpower issues in the shipyard and due to the amount of work that we did on steel replacement on the existing haulages. We utilized it to start the Ocean Onyx, but we're still very excited about having a rig of that capability coming into the Gulf of Mexico.

So with that, I'll pass it over to you, Gary, to make your comments.

Gary T. Krenek

Thanks, Larry. As in the past, we'll talk a little bit about what happened in this past quarter, and then I'll give you a few more details on what to expect for the next quarter and the second half of 2013.

For the quarter just ended, we had bottom line net income of some $185 million or $1.33 per share, and that was based on contract drilling revenues of $745 million. This is $0.09 better than the first quarter, and most of that was driven by the increase in drilling revenues that increased some $45 million. Larry talked about some of the items in what drove revenue. We did have, while we had survey downtime in the second quarter, it was a little bit less than what we had in the first quarter. And we had forecasted that and given that guidance in our last conference call. So that was to be expected. That had a positive impact. And then of course, the decrease in equipment repair downtime that Larry talked about also helped. That was offset by the Lexington and the delay in that rig going to work down in Trinidad, but all net total drove an increase in our revenues.

The quarter, otherwise, was pretty clean, not a lot to talk about. We'll give you a little bit of color on the contract drilling expense that always gets a great deal of scrutiny every quarter. That work came in at $369 million, as Larry said. We had guided to $375 million to $395 million, so we came in just under the lower end of the guidance. Part of the reason for that is the Lexington. When we are preparing for a contract, accounting rules call for us to suspend recognition of operating expense and rather defer that and amortize it over the length of the contract. We did that, and because it took longer than we thought, we saved some $7 million of operating expense. I say saved, we didn't recognize it. It's a deferred. We will incur that and amortize that over the 18-or-so months that the Lexington is working in Trinidad.

So if you add that $7 million to what we reported, we come in at the very low end of the guidance but within the guidance that I gave. Again, we come in at the low end of the guidance, excellent cost controls that continue to signify how we're running the company, and we're very happy with that.

Looking at the other line items in the income statement: Depreciation, D&A , interest tax rate. Those all came in relatively close to where we guided and I won't go over that to save time, but rather let you look at that on our press release.

Looking into the next quarter, some of the things that are going to drive our next quarter's earnings. The Ocean Nomad will be in survey -- import for survey during the quarter. Also the America, Valiant and Princess will begin their surveys in the third quarter with some of that dragging over into the fourth quarter. The Ocean Saratoga is currently preparing for a contract in Nicaragua and doing some contract prep work, then we have to mobe down there before beginning that work later in the quarter.

Also, we expect the Ocean Patriot to complete its contract out in Southeast Asia and go into the shipyard to begin its preparations for its North Sea upgrade that ultimately will result in that rig mobing to the North Sea and beginning a 3-year contract with Shell that we've announced previously. I'll refer you to our Rig Status Report that we released yesterday for the exact timing of all of this work, and the exact number of days we expect these rigs to be down both in the third and the fourth quarter.

Looking forward to the contract drilling expenses, and as always, I would remind everyone again that I'll be talking about the line contract drilling expenses on our income statement only, and these numbers don't include costs incurred in the line reimbursable expenses. We estimate that the contract drilling expenses in Q3 will be between $385 million and $405 million. This is -- will be comprised of normal operating costs, as always, but then also, the survey costs for the America, Valiant and Nomad that I talked about earlier. These rigs are some of our larger expense items in the surveys for this year, and a little bit above the average of all of our surveys and we believe will drive approximately $28 million of operating cost in the quarter. Amortized mobe cost, and that includes contract prep cost, will add another $12 million to $14 million of cost. And as Larry spoke about, we did give a pay increase to our rig hands effective July 1, and so that will affect our cost on a go-forward basis. So you take all that together, we do expect an increase in the cost because of these bigger surveys and the pay increase driving it, as I said, to the $385 million to $405 million.

I'd take this time to address a question that I and Darren have been getting quite a bit, and everyone else may be interested in the answer. But we've gotten questions as to when will we start recognizing operating cost on the Ocean BlackHawk and the Ocean Onyx. And just to explain our GAAP accounting and our policies, looking at the BlackHawk, we will capitalize any type of rig-based costs while we were in the shipyard and during our commissioning period. So we'll not see any operating expense, rather those costs will be capitalized and depreciated over the life of the rig. After we finish commissioning, we will mobe back here to the Gulf of Mexico part and beginning the Anadarko work. And those mobe cost will be also deferred and amortized over the length of the contract. After getting here, as per our Rig Status Report, we expect to spend about 30 days on the final outfitting of that rig and some acceptance testing. Those cost also -- the rig operating, the crew cost, everything else, those costs will be deferred and also amortized over the length of the contract. So we won't be seeing any type of rig operating cost hit our operating cost line for that rig until we actually go on contract with Anadarko. Same can be said for the Onyx, until we begin our contract with Apache, the cost will either be capitalized or deferred. So you can expect that on a go-forward basis.

Looking at some of the other lines on the income statement. G&A for the next quarter, we expect to remain constant at something between $16 million and $18 million, the same that we've been saying. Similar with the depreciation, going forward, $97 million to $100 million per quarter. Interest expense is where we will have a change because of the down payment we made on the DP rig that we're building, and also the ongoing costs that we continue to capitalize with our other projects. We are now hitting a point to where, virtually, all of our interest expense is going to be capitalized interest. We have $22 million worth of gross interest expense in the quarter, and we are expecting anywhere from 0 to $1 million of resulting net interest expense. That's both Q3 and Q4. And so virtually, no interest expense.

Tax rate will remain somewhere between 27% and 29%. I think that's just a little bit lower than our prior guidance. That's what we see on a go-forward basis. And finally, capital expenditures for the year, we still maintain the $325 million of maintenance capital. With the DP rig, we are raising our guidance for the new build CapEx to a little over $1.5 billion. So you add those 2 together, total capital expenditures for 2013 should come in around $1.9 billion.

With that, I'll turn it back to Larry for any further comments.

Lawrence R. Dickerson

And let's take some questions.

Darren Daugherty

Operator, we'll open it up for questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ian Macpherson of Simmons.

Ian Macpherson - Simmons & Company International, Research Division

Larry, thank you for the description of what the work you're doing with the Confidence. It does sound like that 10 months is pretty exceptional with regards to the circumstances of that rig. But can you -- can we draw any sort of broad characterizations of regular maintenance creeping up for the fourth and fifth generation rigs now relative to the past few years, or if you think this is really rig-specific here?

Lawrence R. Dickerson

I believe it's rig-specific, the factor that it's in West Africa. Our only other rig in West Africa is the Ocean Valiant and the special survey that we've been performing. We've been trying to do that in bits and pieces, and we're not anticipating anything similar to that. And then the unique part of the Confidence is the way it -- we've essentially skipped out on work that we planned to do to get it located -- relocated out of the Gulf of Mexico, impacted that. The other rigs that we'd pull out of the Gulf of Mexico are Endeavor, Monarch, the America. Endeavor and Monarch were just recently being constructed and were and continue to be very good shape. The best thing you can do on rigs is maintain them constantly and not let them get behind. And the Confidence got behind due to the quick move out of the Gulf of Mexico and then we've fallen behind in West Africa. It's always difficult to do things there just because the environment that you work in. So I would not say that, that extends throughout the fleet, although from time to time there will be a rig in our fleet and other companies' fleets that gets in a situation like this where we got to maintain that asset.

Ian Macpherson - Simmons & Company International, Research Division

Okay. As a follow-up, I wanted to see if you could give us some perspective on some of your near-term deepwater rollovers and how the marketing prospects look for rigs such as the Ocean Victory, which is rolling off contract next quarter, as well as the Valiant, which I believe is completing its backlog with Murphy at the end of this quarter. So can you comment on either of those rigs and what you see in the future?

Lawrence R. Dickerson

Yes, I'm going to let Richard Male, who's on the line from our Aberdeen office. He is our Vice President of Contracts & Marketing. He was recently over here and called on a number of customers for deepwater and ultra-deepwater. And I'll let him make some comments on that.

Richard Male

Sure. We're continuing to see opportunities for the Valiant. We've had some recent prequalifications that we've responded to. And I think, at the moment, we still feel that we'll be able to utilize the rig in West African area. In the Southern Cameroon, Gabon, Equatorial Guinea, we still see a lot of demand in that area for that rig. The Victory -- again, the Victory, we're seeing signs. We're beginning to see some interest in the Gulf of Mexico. Relatively, short-term at this point in time, but we hope that, that will change as we progress through the year.

Ian Macpherson - Simmons & Company International, Research Division

Does that contrast with the opportunities you see in Africa for the Valiant that are longer term in nature?

Richard Male

A little bit. I mean, the Valiant, we've been running relatively well-by-well but we know that there's some upcoming development work and some longer-term exploration work coming up in West Africa. So we probably got more opportunity to secure some longer-term work on the Valiant in West Africa.

Lawrence R. Dickerson

Yes. And I would just close that out by saying that the deepwater market has fewer assets in there, and typically, we'll be reverting, I think, to shorter-term work opportunities and we'll be working at a couple of wells. We're getting a 6-month a year contract on many of those assets and continue to roll them that way.

Operator

Our next question comes from the line of Dave Wilson of Howard Weil.

David Wilson - Howard Weil Incorporated, Research Division

I wanted to talk a little bit about the Ambassador. I noticed on the rig status update yesterday. The special survey was delayed. Should we read that, from that delay, that there's not really been any productive conversations taking place for that rig, knowing that you're not going to recertify it unless you have something to do?

Lawrence R. Dickerson

Well, I don't think in the U.S. Gulf of Mexico there's much demand for a 1,000-foot rig. That's just not something that's there. We've got some opportunities in Mexico and other markets, but in all likelihood, you're right. We will not do the survey until -- commit the survey plans until we have a better perspective on when that rig might go to work.

David Wilson - Howard Weil Incorporated, Research Division

When does the certification for that rig lapse?

Lawrence R. Dickerson

Right now.

David Wilson - Howard Weil Incorporated, Research Division

Got it. All right. And then just kind of a follow-up on the Confidence in the maintenance. How should we think about the cost during that 10 months? It sounds like some of that stuff should be capitalized. I'm not sure the breakout between what will be expense and what will be capitalized?

Lawrence R. Dickerson

We're still evaluating that, Dave. It's possible that we may capitalize virtually all of the cost and it'll actually have a positive impact next year. But I can't tell you that until we finished the scope of work and determine exactly what all we're doing to that rig. So we'll make that decision here in the next quarter. And by the next conference call, I'll be able to answer that more succinctly.

David Wilson - Howard Weil Incorporated, Research Division

Okay. And then one final one, if I could sneak one in. Regarding your cold-stacked rigs, I wanted to get a status update there. I know you're taking some writedowns there. I wanted to see if there's any interest in them, perhaps, maybe the jack-up. And also wanted to see if -- because you took the writedowns, there was anything that kind of forces your hand to actually do something like selling them for scrap or something from a tax perspective?

Lawrence R. Dickerson

Well, we said at the time that it was our belief that we would be able to sell those within the coming year and we're actively working on that. We just got the one jack-up and we've got 3 floaters in that group. And the floater demand is pretty thin out there. So there's not huge numbers of people. We get a lot of folks with no cash that want to come forward and tie up the rig, go bid it somewhere and that, to me, is not a sale. And so we are actively pursuing the sale opportunities on those and we will continue to push it on through the year, and should scrapping be one of the best alternatives, then we'll certainly look at that as well. We wrote them down such that we felt like it adequately reflected all those possibilities. Our jack-ups does have some good interest in it.

Operator

Our next question comes from the line of Jud Bailey of ISI Group.

Judson E. Bailey - ISI Group Inc., Research Division

Larry, I was wondering if you could just make a market comment just on how you see deepwater rates overall relative to ultra-deepwater. Obviously, it has gotten a lot of discussion, I think, in the industry. And it seems like the deepwater rates have slipped a bit and demand is coming a little more spot oriented. I wonder if you could just give us your thoughts on how you see the market for the 5,000- to 6000-foot kind of moored-asset class progressing over the next, I don't know, 6 to 12 months?

Lawrence R. Dickerson

Well, I think the fourth gen market is in the 4s and they build ultra-deeps in the 5s will be my belief of where we see it. And there's always exceptions based upon capabilities of rigs or a unique market. But that would be a general rule of thumb, and I know that's a wide range within that group, but I think that would cover it.

Judson E. Bailey - ISI Group Inc., Research Division

Would it be fair to say that on deepwater in the 4s, though, that maybe leading edge has slipped, I don't know, 10% or 15%? Is that -- would you agree with that statement?

Lawrence R. Dickerson

I'll let Kane Liddelow, he's in our Marketing department, make that comment.

Kane Liddelow

I'd probably describe it as more flat. We are certainly in discussions with the Victory. We've got several operators talking to us about different terms, but I would say the writes [ph] are comparable with what we're seeing now. And our expectations in the customers are much aligned.

Judson E. Bailey - ISI Group Inc., Research Division

Okay. And then just a follow-up regarding Brazil. You have a couple of rigs rolling down there with OGX later in the year. Can you talk about the prospects on those rigs and has OGX -- they are, obviously, having some of their own issues. What are the prospects for those rigs later in the year, and then just overall comments on what you're seeing out of Brazil after the recent lease sale?

Lawrence R. Dickerson

Well, we have the Star and the Quest down there and the Star is farmed out from OGX to a Brazilian company. And we're discussing with other Brazilian companies additional farm out availabilities. So you're right, there is a significant interest there. The Quest continues with OGX. Should OGX not elect to renew, which happens end of this year beginning of '14 on both of those rigs, I would think there would be markets that would be able to take those. It's not something that we can just immediately go find a job, but the Star's a 5,000-foot rig and the Quest is in the mid-3s. So think of the Quest, really, as a -- grabbing higher spec third-generation type jobs and that the Star would be one of the deepwater market type assets, and there's active demand for that in the Caribbean and in West Africa with the closer markets to Brazil.

Judson E. Bailey - ISI Group Inc., Research Division

Okay. And if I could just sneak in one last question for Gary. You mentioned a capitalized -- given the high capitalized interest for the rest of the year, you're going to have, I believe you said, virtually no interest income on the income statement. How do we think about that for next year? Will that continue into '14, or has that start to -- did the capitalized interest scale down a bit, and could you give us any sense of how quickly that may happen?

Gary T. Krenek

It varies, Jud. We probably -- when we take delivery of the BlackHawk, we'll remove part of the base that we're working off of. But at the same time, we have other things going in. I would imagine we will have some interest expense in 2014, but it will not -- we certainly won't go back to our full interest expense. We'll be capitalizing quite a bit of it. So of the $22 million per quarter, 3/4 of it at least be capitalized would be my estimate at this point. So we'll -- as we do our budget this coming several months, we'll have much better guidance in our next call.

Operator

Our next question comes from the line of Todd Scholl of Wunderlich Securities.

Todd P. Scholl - Wunderlich Securities Inc., Research Division

I have a question on the delay in the BlackHawk. It sounds like that was a bit of shipyard issue. And if that's the case, do you guys have any recourse there for the delay, or is that just kind of the cost of doing business? Can you give us a little bit more color on that?

Lawrence R. Dickerson

Well, there will be provisions, generally in shipyard contracts that at -- past a certain point, there will be some potential fines for the shipyard. I'm not saying that, that applies in this particular case but that's negotiated upfront and it's -- I'm not aware of any contracts with shipyards where they take consequential damages or where stay rate that you have, there's just not -- when you look at the cost that your paying for these assets, there's nothing in there for that.

Todd P. Scholl - Wunderlich Securities Inc., Research Division

Right. Okay. And let me ask you this. Because you guys have now done -- you have an upgrade you're working on and you had some rigs that you've built on spec in yards, and then you've also got one that you're starting that has a contract now. You don't have any more rigs that you can upgrade, so I guess this is really more of a question that -- do you think that if you're likely to pursue another new build, it would be something similar to the rig that you have with BP that will have a contract, or do you think that you would likely build on spec again? And can you maybe talk about some opportunities out there that you're seeing to build with the contract?

Lawrence R. Dickerson

Well, building on contract is -- there's not huge numbers of those, and so if you set yourself up for that then there's not a lot of opportunities to pursue that. We're comfortable with having a certain amount of rigs on spec and we've got 2 drillships and the Ocean Apex that need to go to work probably before we would consider adding more to our spec construction backlog, and we would assess the market at that particular time. I think the harsh environment synergy that we're constructing for BP would be something that might be appealing to replicate that. But that market itself is not huge, so we would have to assess all the construction out there make sure that we're comfortable with our prospects before we'd initiate a spec construction in that area.

Operator

Our next question comes from Ian Macpherson of Simmons.

Ian Macpherson - Simmons & Company International, Research Division

Just a couple more quick follow-ups, if I may. Gary, could you -- since you updated us with the third quarter cost guidance, would you be able to provide us with the refresh on the full year, or just give us Q4 discreetly as well? And then secondly, had a question about the Courage and Valor, which are going in for the first 5-year pit stops next year. And what those might entail in terms of the time down and the cost associated with those, which I presume would be relatively benign compared to your typical surveys? But maybe a comment on that will be appreciated.

Gary T. Krenek

Well, we have previously given cost guidance for the year at $1.6 billion to $1.7 billion [ph], and it's pretty evident that we're going to come in under that. That's driven by a couple of things. The Scepter survey has been moved back, the Valiant and Alliance surveys have also been moved back rather than incurring all those cost in 2013, we would incur some this year and some in '14. Also, the delay of the Onyx that we've been talking about. We're not going to have operating cost as soon as we expected. And frankly, our cost controls have been better than what we expected. So I can't really give you any kind of estimate for the fourth quarter. It -- a lot will depend on what all actually occurs in the third quarter, but for year -- for the year, we will come in under that $1.6 million [ph], and it's very evident at this point. So we'll see costs for the fourth quarter. There are some large surveys there. And so it's going to be what we have this quarter if not a little bit more -- not this quarter but the guidance for this quarter, we're a little bit above that.

Ian Macpherson - Simmons & Company International, Research Division

Okay. That's helpful. And then on the Valor and the Courage?

Gary T. Krenek

John, do you anything on the scope of work that will be done?

John M. Vecchio

Basically, if you look at the survey, that part will not be the governing issue. What will be -- because that will be very quick. These rigs are virtually new. The maintenance will be the critical path on that and even that should be pretty benign. I don't have a full scope yet. We're actually just starting to develop that right now.

Lawrence R. Dickerson

It should come in where our average survey is. It will come in less than the Valiant and the Alliance, which were on the top end. So somewhere average if not a little bit below average just because of the age of the rigs, the newness of the rigs.

Operator

Our next question comes from JB Lowe of Cowen.

John Booth Lowe - Cowen Securities LLC, Research Division

I just had a quick question on the wage increase that you said was put into effect July 1. I know that it's baked into your guidance for Q3, but what percentage increase was that? Did you guys say that?

Lawrence R. Dickerson

No, we didn't. We'll comment on it after-the-fact, but we're very competitive for labor and it's a nice raise. But we don't want to give signals out there specifically.

John Booth Lowe - Cowen Securities LLC, Research Division

Okay. And then just on the Ocean General in Southeast Asia. I know it's rolling off toward the end of this year, too. Do you guys have any options on that rig, or what's the outlook for that market, for that type of rig?

Richard Male

We're seeing continued interest, and we're confident we'll be able to keep her working. She's got a good reputation down there, and we have a good reputation in that region. So she's probably one of the rigs of choice in that class. We are in discussions for work within Vietnam and Indonesia. It will continue to be well-to-well type prospects, which is typical of Southeast Asia. But we're not anticipating any problems keeping her working. There is the option to extend the current contract in Indonesia, so we're hopeful.

John Booth Lowe - Cowen Securities LLC, Research Division

Would that just be on a well-by-well basis for the extension as well?

Richard Male

That's right. That's right.

Operator

Our next question comes from the line of Greg Lewis of Crédit Suisse.

Gregory Lewis - Crédit Suisse AG, Research Division

Larry, if we can talk a little bit about the fleet in terms of -- I guess, there's the Chinese China Oilfield Services out in the market looking for a rig to do some work in the mid-water. I believe they're looking for maybe a second or third generation rig, maybe not one that's stacked, maybe one that's in operation. Is there any thought about [indiscernible] potentially offering up one of their existing rigs that is actually in operation as it rolls off contract for a sale type situation like that?

Lawrence R. Dickerson

We're not actively pursuing that, but certainly, we would consider. We've got a substantial mid-water fleet and if somebody wanted a rig that was recently off contract, I think we could probably accommodate that. It would be in their interest and our interest as well.

Gregory Lewis - Crédit Suisse AG, Research Division

Otherwise have you had any discussions with anyone over in Asia about potentially selling any of your second or third generation semis, or is it still probably too preliminary?

Lawrence R. Dickerson

We're having the discussions. We get called all the time. Just one last question, please.

Operator

Our final question comes from the line of David Smith of Johnson Rice.

David C. Smith - Johnson Rice & Company, L.L.C., Research Division

I'm sorry if you mentioned this, but did you have an estimate on what portion of the scheduled Ocean Confidence downtime is related to the change out of the DP system?

Lawrence R. Dickerson

We're doing all of these things simultaneously, so it's not like if we didn't have to do the DP system I could tell you necessarily that it would be shortened. John?

John M. Vecchio

It's not the critical path.

Lawrence R. Dickerson

Right.

David C. Smith - Johnson Rice & Company, L.L.C., Research Division

And I think the Ocean Clipper also has a similar DP system. Did you have any other rigs with this manufacturer? And if so, would those likely be change-out programs in the future?

Lawrence R. Dickerson

No, we do not.

Lawrence R. Dickerson

All right. Thank you very much for your interest in Diamond Offshore. We'll talk to you subsequently.

Operator

Thank you. This concludes today's second quarter 2013 earnings results conference call. You may now disconnect.

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