Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Diamond Offshore Drilling, Inc. (NYSE:DO)

Q4 2009 Earnings Call Transcript

February 4, 2010 10:00 am ET

Executives

Les Van Dyke – Director, IR

Larry Dickerson – President and CEO

Gary Krenek – SVP and CFO

John Vecchio – EVP

Bob Blair – SVP, Contracts and Marketing

Analysts

Angie Sedita – UBS

Dave Wilson – Howard Weil

Dan Boyd – Goldman Sachs

Collin Gerry – Raymond James

Robin Shoemaker – Citi

Ian McPherson – Simmons & Company

Joe Hill – Tudor, Pickering Holt

Judd Bailey – Jefferies & Company

Waqar Syed – Macquarie Capital

Operator

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

Thank you. I will now turn the call over to Les Van Dyke, Director of Investor Relations. Mr. Van Dyke, you may begin.

Les Van Dyke

Good morning and thank you for joining us. With me on the call today are Larry Dickerson, President and Chief Executive Officer, John Vecchio, Executive Vice President, Gary Krenek, Senior Vice President and Chief Financial Officer, and Bob Blair, Senior Vice President of Contracts and Marketing.

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

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

A discussion of the risk factors that could impact these areas 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 expectations for changes and events, conditions or circumstances in which any forward-looking statement is based.

After we have discussed our results, we will have a question-and-answer session, during which we ask that you please limit yourself to one question and one follow-up, so that we can open the floor to as many people as possible.

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

Larry Dickerson

Thank you, Les and welcome everybody to our fourth quarter conference call, ending out the year of 2009 to talk first about the earnings that we just recently reported. Obviously they're down quarter-over-quarter, perhaps the quarter compared to expectations, and certainly according to what we had planned on. I would point out that all of the negative items are below the rig operating line, our top-line revenue was as expected, which was the day rates that we have last downtime for either mobilizations or repairs or within our allowance for equipment downtime, in fact, well below that.

And so let me concentrate on the items that were the cause of our decline in reported earnings. Primarily that's a tax rate of almost $0.29 changeover, and I'm going to allow Gary Krenek to explain that to you in greater detail. We had a $0.05 reduction on our earnings due to bad debt expense arising out of Egypt. We had a customer on one of our jack-ups that effectively ran out of money through declines in oil prices during the year, and then their CapEx, which set-up much of their cash. Under ordinary circumstances, we would expect to only be exposed to much less in terms of unpaid day rate.

But in this particular contract, they had the ability to withhold day rate to cover importation duties that may be on the rig until the conclusion of the contract. So, that's responsible for the size of that bad debt. It was offset by about $0.04 on the sale of the Ocean Tower, which if you recall, was the rig that was damaged in Hurricane Ike. And then we sold it to some parties that are going to use the rig for in a combination unit. If you recall, we lost the drilling package in Derrick, whole Cantilever group went over the end and everything else was though in really great shape. And we had a $0.03 currency loss, and most of the other items were also below the line and were unable to go in total.

During the quarter and extending here into the first part of this year, we have had a couple of rig relocations. The Ocean Courage arrived in the Gulf of Mexico right at the end of last December and is continuing with load-out and operations for acceptance by our customer here in the Gulf of Mexico. The Ocean Scepter has returned from Argentina, and just this last week off loaded in Corpus Christi bay, and has a job as reported that we will be going into the U.S. Gulf of Mexico.

The Ocean Star has arrived in Brazil, although it's not fully off loaded yet. Also during the quarter, the Ocean Lexington came from Egypt also to Brazil. I think if we also simultaneously today released a rig status report and I guess the one new item that's on there is the Ocean Voyager, which returned from Mexico. That's not a very long mobilization or is in the process of returning from Mexico, and then we have a couple of well jobs to put it to work here in the U.S. Gulf of Mexico. So, that's a good thing for us.

We didn't report on the ocean nomad, but I can say that we have paper going back and forth that will put the rig to work. The rig has been idle throughout the winter season. Coming up here in the spring because the paper is not finalized, we're not going to disclose day rates or customers on that unit. But I think that's in general in the trend in the North Sea where we see a number of the idle rigs going back to work as we exit the rough winter season; and of course our customers have greater confidence in the price of product.

Talking about our new rig that we bought, the Ocean Valor, the Ocean Valor is still in Singapore and we are completing testing on that rig and we'll probably be available to depart that area at the end of the month, first part of March. We have multiple programs that are expressing interest in that rig. I think the real advantage that we have on the rig is near-term viability. And quite a bit of reliability versus any of the other new construction items that we deliver later in the year or in '011 that our rig is already well down the road on already having been tested. We're very confident that we will land one of those programs.

And finally, we again posted a combined special and regular dividend of $2 a share a for the quarter, looked at the schedule, just recently that showed combined return to our shareholders for the point time that initiated special dividends adding the cash that we've turned over plus the evaluation of the stock, and we are well above any of the other competitors in terms of total shareholders. And so, we're very pleased to continue that process.

So with that, I'll turn it over to Gary, who will give you more color on some of the financial items and also give you guidance on operating costs as we go forward into 2010.

Gary Krenek

Thanks, Larry. Since Larry has already commented on several of the significant events which have effected our fourth quarter earnings. I'll give you a little more color on the quarter and then look forward to what we can expect in the coming year. First for the basics, in our last conference call, we indicated that our Q4 rig operating expenses, excluding reimbursable costs, were expected to come in between $315 million and $330 million. Actual costs came in within this guidance at $317 million. Likewise, depreciation, G&A costs and interest expense were materially within expected amounts.

As Larry said, what did not come in within specific guidance from our last call was our tax rate. This was due to several fourth quarter items including an assessment on our Brazil earnings related to prior periods and currency changes in the last quarter, which changed the valuation of foreign tax credits we were able to book and recognized. While these two items caused an increase in our Q4 tax rate, the main impact was from our mixed and domestic versus international earnings.

As I have stated in prior calls, because we work in multiple taxing jurisdictions with varying tax rates, our ultimate tax rate will depend on a mix of domestic versus international earnings and to a lesser extent, the mix of which tax season [ph] jurisdictions the individual international earnings come from. In other words, the amount of earnings that come from the UK and are taxed 30% versus the percentage that come from Brazil and taxed to 10%.

Primarily as a result of this changing mix, our effective tax rate for the year 2009 changed from 24% to 26% in the fourth quarter, or just two percentage points. However, since this rate has to be applied to the year-to-date earnings, it cost a disproportionate effect on our fourth quarter tax expense and a result was to drive our Q4 tax rate up to 34%.

Looking forward to 2010, we expect our tax rate for this coming year to be in the 24% to 27% range; but again, will ultimately depend on that mix between domestic and foreign earnings. As is our custom annually, we give everyone our expected cost of each of our rigs, by class and location fourth quarter conference call so as to aid in estimating our future rig operating costs. And so that this becomes public information, I'll do this again.

Rig operating expense, daily expenses for 2010, again, excluding reimbursable costs are as follows

For our jack-ups, for standard jack-ups -- in other words non-scepter and shield, in the Gulf of Mexico, we expect daily operating rates to be in the mid 40s, in the Mideast the high 40s, Indonesia low 50s, and Mexico in the upper 50s. For our high-end jack-ups, the Gulf of Mexico in the mid 50s, and Australia in the mid 90s.

For our conventionally more floaters for those mid-water and conventionally more floaters, the Gulf of Mexico in the low 60s, Mexico upper 60s, Vietnam low 70s, oil plunged in the mid 80s, UK North Sea also in the mid 80s, Brazil mid 90s, Australia 100,000 to 109,000 a day, and Norway in the mid 130s. For deepwater high spec conventionally more rigs, the Gulf of Mexico mid 80s operating rate, Malaysia 100 to 109, West Africa in the mid one teens, Brazil in the low 120s and Australia in the mid 120s.

For our dynamically positioned floaters, mid-water rigs, Brazil in the upper one teens, and for our deepwater high spec DP floaters, Gulf of Mexico low 130s, and Brazil in the mid 130s. We'll also incur an additional $30,000 to $35,000 a day related to spare equipment and extra crews on associated with any individual rig.

In addition to these normal daily operating costs, we expect to incur additional cost of rigs that will be shipped during 2010, either doing survey work or maintenance work. Costs for these rigs are as follows. For the Spartan and Spur, $4 to $6 million each; Clipper and New Era $6 million to $8 million each; Winner and Alliance, $12 million to $14 million each, and the Vanguard will incur a $16 million to $18 million of additional costs while in the shipyard. Again, these are costs in addition to their normal daily operating costs.

We also expect to incur some $70 million in amortized mode costs during2010, approximately $20 million to $22 million in the first two quarters of the year and $14 million to $16 million in the final two quarters of the year. When you take all this information into account and add in the fact that operating costs or mobilizations are deferred and amortized over lengths of applicable contracts, total rig operating expenses, excluding reimbursable costs, should total approximately $1.5 billion in 2010. This increase in operating expense over our 2009 operating expense is the result of several items. First of all, operating costs for the Courage and the Valor as they begin operating this year.

Additional rigs, that are moving into international markets and moving into higher operating arenas, the mode cost to get our rigs into the international markets, which we incurred both in 2009 and will incur in 2010, and will be amortizing in 2010, and we also anticipated a slightly weaker dollar in 2010. I will point out that of those items I just talked about, three of the four, everything except the weaker U.S. dollar is associated with additional contracts and additional revenues this company will be earning.

With respect just to the first quarter alone, we expect rig operating expenses to be somewhere between $335 million and $350 million for the quarter. Looking at a few other cost areas for 2010, we expect depreciation expense to be approximately $420 million for the year, and G&A expense is expected to increase in the 9% to 11% range year over year. Interest expense will increase in 2010 as a result of the two debt offerings the company did during 2009. That expense should be around $88 million for the year spread equally in each of the four quarters.

And finally for capital expenditures, we’re expecting to spend approximately $365 million for normal maintenance capital items in the coming year, and are expecting to add an additional $75 million in total to complete commissioning of the Courage and the Valor. Adding all of that up, it will give us some $440 million worth of CapEx for 2010.

I would like to again remind everyone, as Larry said, that we filed our rig status report on a monthly basis and have filed an updated version this morning which can be found on our website. Today’s report lists the total amount of downtime we expect for our rigs during this coming year. I will not reiterate that information here, but suffice to say we expect just a little over a thousand down days in 2010 for our fleet. Almost half of those days being mode, contract prep or acceptance days for rigs, and we’ll be starting new contracts during the coming year.

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

Larry Dickerson

Okay. So I think we’re now ready for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Angie Sedita of UBS.

Angie Sedita – UBS

Thank you. Good morning, guys.

Larry Dickerson

Good morning.

Gary Krenek

Good morning.

Angie Sedita – UBS

Good to see the Ocean Nomad going back to work in North Sea, and it sounds like it's ticking up a bit. Could you give us a little bit of color is it still a well to well market, or are you seeing some interest in term, and then you also have the Bounty in the Far East that's stacked, and can you give us some thoughts there on the outlook for that rig to go back to work?

Larry Dickerson

I'll let Bob Blair talk about the North Sea, and I'll come back to Bounty.

Bob Blair

Okay. Well, in the North Sea, we have been in conversation with numerous operators. The programs that we're talking about are multi-well programs that will – they're relatively short duration though, so we're not talking about term market at this stage.

Larry Dickerson

The Bounty, Angie, is a rig that we had a two year contract on but we had quite a bit of CapEx that required both for the a contract and just general maintenance and catch-up and life extension on the unit, and we came to the conclusion that the best way to maximize our cash was to cold-stack the Bounty, bring the America out of the Gulf of Mexico, so that it's away from Europeans [ph] and having finish out that particular job. So the Bounty is really on hold. What we're trying to do is get a gauge on where shipyard costs are going to end up, and then we will come up with a plan potentially to figure out where is the sweet spot of spending money on that unit to, and how should it finish out its life? I mean, at the high end I guess we could spend as much money as we did on the Monarch and Endeavor and that class of rigs for a super upgrade; but at the moment, I think that's off the table.

Angie Sedita – UBS

Okay.

Larry Dickerson

And so we're looking at smaller items, but I would not expect it to come into service at all in 2010.

Angie Sedita – UBS

Okay, fair enough. And then following up on the term with the Ocean Valor, are you seeing interest in term for as long as three years, or one to two years? What are you seeing for term there?

John Vecchio

Well, we've had a lot of discussions with many operators in various – in all sectors of the world. So we're talking about all different kinds of programs from short-term well to well type work in the near-term; but also with the longer term programs of three to five years.

Larry Dickerson

I would say three is the preponderance of the kind of term we look at.

Angie Sedita – UBS

Okay. And then finally staying on the – going back to the mid-water, on the New Era, which then kind of, should that assume – should we assume that comes back to the US Gulf as well, and is there any chance that we may see a tender for mid-water work out of Pemex again in the future?

Larry Dickerson

We are actively discussing the future of the New Era with Pemex, if they have some interest in retaining the unit, and we're talking about a different scenarios in the timeframe that they are interested in retaining. So it’s not necessarily coming back to the US Gulf of Mexico.

Angie Sedita – UBS

Okay great. Thank you.

Operator

Your next question comes from Dave Wilson of Howard Weil.

Dave Wilson – Howard Weil

Good morning guys, just a real quick question here. On the recent fleet report, you had a lot of near-term activity; and Larry, you mentioned some near-term possibilities for the Valor, which is nice to see. But is there anything happen kind of midterm, longer term especially with regards to the floater market that you can comment on as far as activities when the rigs roll off in late 2010? Is there any interest out there for getting those contracted?

Larry Dickerson

It varies by market. I think we've generally seen there are some farm-outs in the near term. So, I don't think there's farm-outs for longer term to any great extent, but near term is impacted by that, but then in a market, all of the sudden, as we get into the summer, which we certainly expected to see a rise of activity, all of the sudden, we're getting quite a bit of activity out of that market, and then there's other jobs that appear on the horizon. I mean, it's certainly a different market than it was two years ago. Our overall push was for our customers. The period is when you act quickly they can give, I think that's certainly gone from the market, but still healthy activity that you would expect oil prices in the 70s.

Dave Wilson – Howard Weil

So, I guess my follow-up to that will be so from a standpoint of how we think about modeling everything in. Should we be expecting some downtime, I guess one, one rig rolls off before get to another contract further out as far that rolling from one contract right to another, but there might be a few months of downtime or as would be relocated from one market to another?

Larry Dickerson

I think that would be fair.

Gary Krenek

One of the things that I will say is that -- I think the oil company's budgets are complete or in from their planning process is complete for the year, that we had numerous companies that appeared ready to release the rig or are not talking about the future of a rig, to begin talking about ongoing work programs, which has been of kind of a bright sign. When we thought they wouldn't continue with the rig, now all of the sudden, they're talking about continuing it maybe for the full year.

Dave Wilson – Howard Weil

Okay. Thank you, gentlemen. Very helpful.

Operator

Your next question comes from Dan Boyd of Goldman Sachs.

Dan Boyd – Goldman Sachs

Hi, thanks. Gary, I had a question for you on costs. I was just trying to follow you as quickly as I could on the expected cost for the different types of rigs, but it look like generally, they were all coming in with some decent amount of cost inflation relative to what you gave last year. Can you just give us some guidance on where those costs are currently, how you expect them to trend as the year goes on and where the inflation pressure is coming from?

Gary Krenek

Well, normally what we have seen is the cost that I gave will come in a little bit lower in the first half of the year, and escalate a little bit in the second half, whether it's -- we built in just a slight amount of industry inflation. We'll see whether that occurs or not. But as to what is included in those costs are what we call major expense, our bigger projects that we incur, and those things are approved in our budget process. It takes a while to get them approved, they appease with them equipment order, et cetera, et cetera, so some of those costs will come in later in the year. So, normally it will escalate little bit more in the back half of the year. As comparing it to what we've seen in the past, most of them are -- can be fairly similar. If you see some that are abnormally higher than last year, it could mean that you have an area that has only one or two rigs and that individual rig may have some specific projects associated with it. And so the nuts and bolts maybe close to being the same, but the specific projects will drive that per-day cost up for the class of rig in that area?

Larry Dickerson

In general, if you look at the total cost where Gary talked about remember we're including now costs on Courage and Valor which we didn't have last year as an inflation, I mean as an increase in quantity of rig expenditures. We have rigs that are relocating between markets, a number of rigs going into Brazil, which is a higher-class market than the markets that they came from, America leaves the Gulf of Mexico and goes to Australia, that's a higher-class market.

So, the underlying inflationary provisions that are in there for paying a higher rate than we did last year is actually pretty lost.

Dan Boyd – Goldman Sachs

Okay. That's helpful. This is somewhat of a follow-up to the prior questions; but on the Ocean Barren specifically, are you seeing opportunities in the gulf, or to you think there are better markets there out there to lock that up over term time period?

Gary Krenek

We're talking to customers both here in the gulf and outside of the gulf about term opportunity.

Dan Boyd – Goldman Sachs

At day rates similar to what that is getting currently?

Gary Krenek

It really depends on the term, the term we're talking about and the costs associated in the area.

Dan Boyd – Goldman Sachs

Okay. Are there just maybe push a little bit on that one, are you seeing any pressure on that class of rig to get rates lower than -- in the low 300. I think mostly they've come out around the mid 300 regardless of term.

Gary Krenek

When we sit down with a customer, they bring the pressure to bear in all markets. Two years ago they didn't have, they had bigger concerns on getting rig and afraid that it would lead. I think that has abated. So the cost pressure is more severe today than it was in the future. But you know, where we end up, we'll just have to wait and see, but it would be difficult for us to raise rates certainly in this environment.

Dan Boyd – Goldman Sachs

And then, one last follow-up, relativity your prior strategy, do you feel any pressure at all to lock rigs up for a longer term given your preference for the dividend to have that surety of cash flow?

Gary Krenek

You know, we would love to latter our fleet at term, because then you can plan your business better. I think and if you ladder it over time then you'll do just as well as constantly trying to work the spot market. But I wouldn't say that we have any increased pressure today than we had two years ago.

Dan Boyd – Goldman Sachs

Okay. Thanks. I'll turn it back over. Appreciate it.

Operator

Your next question comes from Collin Gary of Raymond James.

Collin Gerry – Raymond James

Hi, good morning, guys. Quick question, looking through the fleet status on the down-time, it looks like we're seeing less downtime in 2009 thus 2010, that certainly a positive trend.

If I look to the initial guidance for 2011, that looks even better. Maybe comment to us, is that something that can change to the upside quite a bit? Obvious there is not a lot of mobilization we don't know about there yet. But is that a big deal?

Gary Krenek

Yes. One thing to keep in mind, when we give that 2011, that's downtime we know we're going to incur. Those are five-year surveys that are going to occur during the year. So what you can kind of look at, if that's the minimum amount of downtime. If we continue to get contracts in different markets, we're going to have to move rigs to those markets. We're going to have to take downtime to prep for those contracts, perhaps acceptance testing. So those days will go up at some point. We can't give you any type of guidance, because we don't know what's going to happen in 2011. So take that 2011 as the minimum amount of downtime we’re expecting this point.

Collin Gerry – Raymond James

Okay. Fair enough. I guess what I am getting at is the roughly 350 days and it looks like it's mostly on some smaller rigs. Is that -- from looking two years out, is that lower than what you would have seen maybe if we're looking the same analysis, the last year or the year before in terms of visibility, is that a small number or would you really expect that if we're in the same position a year or two ago?

Gary Krenek

It varies depending on the number of five year surveys we have. It's probably close to what we had in '09, it significantly less than what we had in '08 and '07. Because of five year cycle, you will see 2012 go up again, because we hit the same thing that we had in 2007.

Collin Gerry – Raymond James

Okay, thanks. Last question, I guess, recently we've seen -- they who had some contracts to renew deepwater rigs and it looked like the cost came down quite a bit, maybe even closer in line with what you guys paid for the two new rigs. Could you maybe talk to us about what that means for leading edge day rates, I mean, is that -- if new build costs are coming down, does that mean that new build day rates are coming down, and that could something that brings deepwater rates down?

Larry Dickerson

Certainly increases in the cost of rigs drove rates up, so yeah, I would say that probably on the long-term basis, but -- and we have talked, John is in here, was just in Singapore, was talking to people there, and we talked to Korea as well, and so we've been quoted these decreased prices. You often got a check and see what's included, really, because we've seen some prices quoted they are down, but there's no subsidy equipment or price are -- which is a huge number.

Collin Gerry – Raymond James

Right.

Larry Dickerson

But certainly the -- I mean, I think the 750 was the number, which doesn't necessarily always include all of the post-commissioning testing. $750 million was the peak number, I would say, on most normal equipment. There were exceptions to that, and probably that 750 number is probably at 650, wouldn't you say, John?

John Vecchio

In around that range.

Larry Dickerson

Yeah. When you hear a '600,' I am not quite sure they are there yet. So it's certainly moving down. We paid 490 for the last one and then we have got some commissioning costs -- we still have a discount, plus we've got our rig now, and then we don't have to compete with as many uncommitted rigs when -- that you're looking at I think in late '11 and '12.

Collin Gerry – Raymond James

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

Operator

Your next question comes from Robin Shoemaker of Citi.

Robin Shoemaker – Citi

Thank you. I wanted to ask if there is anything you can tell us relative to Petrobras requirement for 2008 ultra deepwater rigs. Our understanding is nine that they would build for themselves, 19 would come from contractors. Supposedly, the tender is out there. The bids are due in the first week of March. Is it likely to go forward on that time frame from your perspective? Is it likely to be a delay, and where -- if you can tell us anything about your interest in that Petrobras?

Larry Dickerson

Well, Petrobras is our largest customer, and they have got an ambitious program; and I am not going to comment on what their motives would be or what our bid processes would be just because we feel a certain loyalty to them. Certainly they have an enormous resource that haven’t been active and very successful in developing, and that is as involved. Most would be legacy drilling contractors and their high-performance standards and helping them achieve that, and our expectation is, regardless of how they deal with it, that we bring value to the table, an we'll continue to be involved.

Robin Shoemaker – Citi

Okay. And can you broadly comment on the mid-water floater market. The Voyager day rate, we can see, it’s a pretty good rate, given the number of mid-water rigs that are currently idle worldwide. But, just in terms of what you see in terms of potential demand for mid-water rigs and the lack of new supply, obviously we are not building any, is there a potential for that market to stabilize at this current level and then potentially improve based on what you see is potential demand for mid-water rigs?

Larry Dickerson

Well, I think you have to look at various segments around the world, the various market places, where there is going to be ongoing work in those areas. With the voyager coming to the U.S. Gulf, there is actually – with many operators concerned about the exodus of that type of unit from the area, that they’re worried -- beginning to worry about getting work done in timeframe that they are allowed to do their drilling, there just wasn’t equipment available to them. So, I think they are very happy to see a unit become available, and there is difference -- like I say, different stories in the various market segments. We feel like – that the most of the mid-water sector is going to continue to be short-term in nature, not -- but real long-term contracts except for they are already term contracts in places like Brazil.

Robin Shoemaker – Citi

Okay.

Larry Dickerson

And I would say rates have come down, the Voyager rate that we had in Mexico, which was reflective of the market that existed two years ago was higher than we got. Here in the Gulf of Mexico we are comfortable with what we have in the Gulf of Mexico. So, I think there is a little bit of that price pressure, and I think ultimately, where the new deep-water market goes, if that market is moving down somewhat, then it would be hard to push up on the second.

Robin Shoemaker – Citi

I see. Okay. Thank you.

Operator

Your next question comes from Ian McPherson of Simmons & Company.

Ian McPherson – Simmons & Company

Hey, good morning. Thanks. I guess first question regarding the Valor, I know there are obviously numerous opportunities that are being contemplated here. So it’s not a single dimension answer, but what do you think would be the earliest that we might expect to see a contract commencing or the day we are commencing for that rig this year?

Larry Dickerson

Well, unless we get a job and we do have some indication of interest in the far east -- but if we have some handover into the Atlantic, which is where most of the work would be, and there is a mode barrier, and we are not going to be ready to depart until the first part of March, then you are out 60, 70 days and months we get here it takes 30 days to well the grade up and get it accepted. So we're looking at a mid-year start date at the earliest.

Ian McPherson – Simmons & Company

Are you looking at customer requirements that want the rig as soon you can get it, or are some of these starting no earlier than Q4, for example?

Larry Dickerson

We're looking at both, we're talking to some customers that are very much wanting to start as quickly as possible.

Ian McPherson – Simmons & Company

Okay. Can I ask about your feeling on the barrenness, which is current contract with Hess is expiring fairly soon, what's your accounting factor on keeping fairly seamless utilization for that rig this year?

Larry Dickerson

We're talking to customers both within the US Gulf of Mexico and outside. So it would depend on whether it would move out or not.

Ian McPherson – Simmons & Company

Okay. Lastly, I guess the Spurs, [ph] the rig that had the receivables issue in Egypt. So what's the currently status of that contract going forward and the backlog on the rig relative to what happened before?

Larry Dickerson

Well, we moved on from that customer, and we're still working for some smaller Egyptian companies. We're reasonably comfortable with our due diligence that they're in much better financial shape than what happened with that particular company, and we have contracts that do not permit us greater withholding or wholly. So I think we've improved our RY, but certainly, when you work for smaller guys anywhere in the world, you do have some risk.

Now in many countries, if it’s primarily in the west, we're able to get letters of credit, escrow agreements or something to protect ourselves. And in some of these other areas where you are at, you pretty much have to work under the terms and conditions of the country or incur a big expense to move the rig out. . So bad debt expense is not normally a part of this business. We had one last year – a significant one when we had a bankruptcy occur from a longtime contractor in Alaska, who had paid for many years. So you do have that kind of exposure, but it’s our goal to keep this part of the business.

Gary Krenek

And I would also add, we reserved that receivable for accounting purposes and recorded as a bad debt expense. We’ll continue to pursue collection of that receivable regardless of what we've done for book purposes.

Larry Dickerson

And by have in past quarters had slight gains as we collect against things that accounting standards cause us to reserve against.

Ian McPherson – Simmons & Company

I see. So Webco, the customer on your status sheet now through the end of August is not the customer that you took this charge against?

Larry Dickerson

No.

Gary Krenek

No.

Ian McPherson – Simmons & Company

Okay. That was all I wanted to clarify. That's helpful. Thank you very much.

Operator

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

Joe Hill – Tudor, Pickering Holt

Good morning, guys.

Larry Dickerson

Good morning.

Joe Hill – Tudor, Pickering Holt

Most of my questions have been touched on, but I did want to ask you about your outlook for the Gulf of Mexico jack-up fleet and how you feel the day relative to how you felt in the third quarter?

Larry Dickerson

Well, of course, we made the hard decision last year to cold-stack the mat rigs, which is where the big problem area is in the US Gulf. The independent cantilever market is actually in equilibrium, and we've actually been able to push rates up here recently. We just had the Columbia come back from Mexico, and its set to go immediately work for a major company. So we feel pretty well placed with our jack-up fleet in the gulf.

Joe Hill – Tudor, Pickering Holt

Okay. In the near term, you said the market is in equilibrium. Do you see anything pushing it to either side of the equilibrium in the next six months or so?

Gary Krenek

We actually brought one -- we brought two back recently with the staff [ph] they are coming back from South America and the Columbia coming from Mexico. So we don't think there's a lot of excess work there, but we do have -- customers actually talking about getting in line for units rather than us having to find work for the rig?

Joe Hill – Tudor, Pickering Holt

I'm sure that's refreshing to hear. Thank you very much.

Operator

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

Judd Bailey – Jefferies & Company

Thank you. Good morning. First a follow-up on one of the prior questions. To the extent that mid-water market and I guess to a lesser extent the lower tier of the deep water market that becomes a little more spot oriented than what we've seen last several years and there's not as many term opportunities. How does that impact in your dividend decision if you don't have that level of backlog, or not the comfort level that you have as many long-term contract opportunities to lock up that cash flow?

Larry Dickerson

Well, on a standard basis, we've declared that our special dividend is set by the Board and lists a variety of factors, including investment alternatives and CapEx requirements and cash flow, and backlog would clearly be one of those. In backlog certainly would come down, as we've pointed out, if we revert to a spot market. So, I think it would be dependent upon our comfort level with that spot market, as long as the cash was made available from earnings then that would enable us to take that into account in setting the dividend policy, it's not just totally backlog.

Judd Bailey – Jefferies & Company

Okay. That's helpful. A follow-up question, another question, just on the baroness, the various opportunities that you're looking at, I'm curious, are the jobs that are out there, are you fully utilizing that rig's capabilities, are you looking at opportunities where you're kind of going I guess, down market so to speak?

Larry Dickerson

Well, it depends on the operator we're talking to that we have both scenarios that we're talking, so, it's not necessarily maximum capabilities.

Judd Bailey – Jefferies & Company

Okay. And then my last question, and I apologize if you've missed this, but the Voyager bringing it back to the gulf, pretty nice contract. Are you having discussions for follow on work beyond those couple of wells and if so, should we expect a gap during Hurricane season in all likelihood?

Larry Dickerson

Well, that's the biggest problem with more rigs in the Gulf of Mexico is the potential problems that operators have in getting permits. So, it's short term in nature we're booked right now to Hurricane season. We just have to see which operators may have a portfolio of acreage that would allow drilling during the summer season.

Judd Bailey – Jefferies & Company

Okay. Great. Thank you.

Larry Dickerson

Let's take one more question, please.

Operator

Your final question will come from Waqar Syed at Macquarie Capital

Waqar Syed – Macquarie Capital

Good morning. My question relates to the UK North Sea markets. There is a 25th licensing round coming up. It appears that there is going to be a lot more acreage being offered and a lot of acreage that has been closed for the last 10 years is being offered. So how do you see that impact demand this year and than into 2011 and beyond?

Larry Dickerson

Well, I think it's a positive. It certainly takes a while for leases to be evaluated and awarded and all that stuff. So you can't have a lease sale and the next day, everybody goes to work. But I'll try to remind everybody, our customers generally find the North Sea. It can be a high-cost area. You have weather issues, but the drilling is very simple.

You have huge amounts of infrastructure all around the area, and as we've seen in the Gulf of Mexico and other places you may have drilled to one depth and one horizon, and you can come back through the same fields and find additional horizons to drill to. So there is -- we think it's a market that makes sense, that we've certainly seen in the UK government in the past take actions to encourage drilling as their production declines, because it's a big economic push for them or that, that were the same in the US Gulf.

Waqar Syed – Macquarie Capital

And just lastly, are you considering other quarter stacking of rigs; and then also anything on -- any assets that maybe candidates for sale?

Larry Dickerson

We -- I guess, the driver on cold stacking certainly with the bad [ph] rigs was just as assessment of the market. The driver on the bounty was looking at the cash that we had to spend it to stay in that -- keep the rig competitive and we thought that we would rather use cash at that point in time on things like the Courage and Valor acquisitions. So those would be the two drivers in the market or rigs that are faced with big expenditures. So, as far as rigs for sale, we -- the best time to sell a rig is when you really don’t want to, because the earnings look so good. That’s when you get a better price. I think the prices for rigs today are generally fairly low, but we are always open to an opportune price if we sell that for a particular type of rig. We are committed to staying in the business. We’ve had lots of people come and express interest in Courage and Valor at slight profits from what we put in there, and we are not interested in selling those. Those are core assets that we are going to sign contracts on and earn great returns, and that has been reflected in the prices we are offering.

Waqar Syed – Macquarie Capital

Okay. Thank you very much.

Larry Dickerson

All right. Well, I would like to thank everybody for joining us. We’ll be back in touch with you both at some investor conferences and certainly coming up in April for our next quarterly release. Thank you.

Operator

Thank you for participating in today’s conference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Diamond Offshore Drilling, Inc. Q4 2009 Earnings Call Transcript
This Transcript
All Transcripts