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Executives

Les Van Dyke – Director, IR

Larry Dickerson – President and CEO

Gary Krenek – SVP and CFO

Bob Blair – SVP, Contracts and Marketing.

Analysts

Dan Boyd – Goldman Sachs

Angie Sedita – UBS

Jim Crandell – Barclays

Ian McPherson – Simmons & Company

Dave Wilson – Howard Weil

Joe Hill – Tudor, Pickering, Holt & Co.

Robin Shoemaker – Citigroup

Scott Burk – Oppenheimer

Geoff Kieburtz – Weeden & Company

Philip Dodge – Tuohy Brothers Investments

Diamond Offshore Drilling, Inc. (DO) Q1 2010 Earnings Call Transcript April 22, 2010 10:00 AM ET

Operator

Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Diamond Offshore Drilling First Quarter 2010 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).

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

Les Van Dyke

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

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

Forward-looking statements include but are not limited to 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 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 changes in the company's expectation or changes in events, conditions or circumstances on which any forward-looking statements 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.

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

Larry Dickerson

Thank you and good morning. I want to get right to the news everyone’s focused on today, which is the new level of our special quarterly dividend. We know how important the special dividend is to all of our shareholders and even post this cut, it remains an important part of our effort to enhance shareholder value. However, day rates on renewal contracts for our industry have declined from peak levels which will impact revenues, earnings and cash flow. With that in mind, the company’s Board of Directors has elected to reduce the special quarterly dividend by $0.50 from a $1.875 a share to $1.375 a share in this particular quarter.

So the combined special and total dividend – combined, I am sorry, regular and special dividend declines from $2 a share to $1.5 share a quarter. I am making this decision the company also believes is prudent at this time and to retain some cash for potential rig acquisition opportunities and other corporate purposes.

I would remind everybody that since the company began paying a special dividend in January 2006, we paid our total dividends of $23.88 per share, which aggregates to a total over $3.3 billion. At $1.50 per share, our combined current level of regular and special dividends continues to lead our industry. The industry – the company believes that this new level of special quarterly dividend could be maintained through at least 2010, subject to of course, the changes in the company’s financial situation, our capital spending plans and other relevant factors, which we disclosed in our press release.

I think that looking at this, the dividend reduction is not so much a reflection of our future expectations of the day rates, which happens to be positive, as we comment upon where days rates are currently. Again, we are no longer at peak levels and that is being reflected in new contracts that we and others in the industry have signed. I think one data point would be to look at the mid water semi rates. Transocean has recently reported rates this week which are in line with the rates which we previously reported, which falls somewhere between $240,000 and $280,000 a day dependent upon the market and the individual rigs. These are solidly profitable rates and anytime up until the last three or four years, that had been banner rates for the industry. However, they have declined from peak rates that we were signing in the mid to high 300s and in some cases over $400,000 a day. So I think that's just reflective of a type of day rates that has declined.

Day rates do appear to be relatively stable right now with oil prices above $80 and while per barrel we would expect that, and as the global economy begins to show signs of improvement, then we would expect that that would also yield a great demand for oil. In this environment, it seems possible that the uncontracted new bill floaters can be absorbed without much of any negative impact on the market, but we don't have a crystal ball. If industry conditions should deteriorate, we want to be in a position to maintain at given levels special quarterly dividend over a period of time as well as retaining cash, take advantage of any attractive rig acquisition opportunities that may arise. As an example, both in the past 12 months, we acquired rigs that renamed Ocean Courage and Ocean Valor at very attractive rates.

That said, I want to head off your questions regarding potential asset acquisitions. We won't comment on specific M&A type activities, so you shouldn't read anything into our dividend announcement. We have historically maintained a significant amount of cash on hand, which has allowed us to act rapidly. We have been very successful in the past, (inaudible) are a great example, resulting in the highest current on the (inaudible). If opportunities present themselves as always, we want to take them into consideration.

So with that, I am going to let Gary Krenek to talk about our financial results, guide you through some of the things that happened during the quarter and then Bob Blair and I will be available to take your individual questions on the market. I assume that we will have the call – additional dividend questions as well. So Gary?

Gary Krenek

Thank you, Larry. Three things that I would like to address in my opening remarks. There are a couple of items on the income statement that I believe need additional color. As you can see from the press release, we did record – report $2.09 of earnings per share for the quarter, and I will comment on a couple of those items. Secondly, there is something in the balance sheet that I think needs further clarification regarding our cash balances and I’ll talk about that. And finally, as Larry said, I’ll talk about what we expect to see in the upcoming quarter.

On the current income statement, the two line items that I believe everyone has a question on are contract drilling expense and on tax expense line. With respect to contract drilling expenses, in our last conference call, we indicated that we expected those expenses to come in at approximately $1.5 billion for the year of 2010 and gave the reasons for the increase of our 2009 total amounts including additional rigs added to our fleet, relocation of a number of rigs to different markets, etcetera. We are still projecting that same $1.5 billion of contract drilling expenses for this year.

First quarter expenses of $305 million were below our guidance of $335 million to $350 million, partially due to cost controls, which the company continues to emphasize, but more so due to various timing differences related to major expense projects on our rigs being pushed back and the timing of several rig mobes. As a result, we expect to incur the bulk of those delayed expenses in the coming months of 2010. I will talk about what we expect for the second quarter with respect to contract drilling cost in a second.

While contract drilling expense for the quarter came in under our expectations, our tax expense came in higher with the tax rate for Q1 being 28.3% as opposed to the expected 24% to 27% range that we guided to previously. There were a couple of reasons for this, but by far the main one was the failure of Congress to extend certain tax laws related to some part of foreign earnings beyond December 31st, 2009 that we along with just about everyone else assumed would be extended. Congress had previously given indications that those laws would be extended but with the various things going on, the Congress has just never got around to extending that in the first quarter.

Failure to extend this law, which if extended would have enabled us to defer certain amounts of foreign earnings from U.S. taxation accounted for 2.5 point increase our tax rate during the first quarter. In addition, the change in our foreign versus domestic earnings mix projections another 1 point increase to the rise. On a go-forward basis, if the law in question that I have been talking about is ultimately not extended, we expect our tax rates for the year to come in between 28% and 30% now. However, there is still a chance that the U.S. Congress may pass this extension and if does so, and if the extension is retroactive back to January 1st, which many people think it will be, our tax rate for 2010 will fall approximately 2.5 points back to the 26% to 28% range.

Looking at our balance sheet, normally, in order to continue the cash balance available at Diamond Offshore, there is two lines that you need to add together. One is cash and cash equivalents, which this quarter we reported $300 million approximately and then the marketable securities line, which we will quote at $650 million.

This quarter we had an anomaly in that, we purchased marketable securities on the last day of the quarter and didn't settle until after the end of the quarter. As a result, as required by GAAP, we ended up grossing up marketable securities with the offset going to payable for marketable securities down in the liability section as opposed to reducing our cash balance.

In short, rather than adding the two lines, cash and cash equivalents and marketable securities together, to get the cash balance you also need to take into account this $100 million that's in the liability section. So the short answer is cash available for the company is actually $850 million as opposed to the apparent (inaudible). It’s still a very large cash balance as Larry said, the company historically has kept.

Now, looking forward to the second quarter, the daily rig operating expense by type and location that I gave out in our last conference call and that additional cost associated with the expected surveys. That guidance still stands. During Q2, we expect to incur some 20 million of cost as a result of surveys scheduled to be conducted on the Ocean Vanguard, Alliance and Winner. We will also incur some $10 million above and beyond the first quarter’s cost for the Ocean Heritage and that rig will now be active for the full quarter in Q2 after having been official delivered for service midway in Q1 and that's only have – having had one half of a quarter’s operating cost reported in the first quarter for that rig.

The rig is also currently on the high seas heading for Brazil and we will incur mobe costs, which will be expensed currently in Q2. Combined, this means as I said, an additional $10 million of cost for the Ocean Heritage in Q2 versus Q1. Similarly the Guardian, Star and Lexington, all had fortunes of their Q1 operating cost deferred as they were relocating in different operating areas in Q1. Those three rigs will also incur a full quarter’s worth of operating expense in the second quarter. We expect this to add some $15 million or so to expense. As always, in the upcoming quarters, we will record through expense the amortization of previously deferred mobe cost, that amount being currently estimated at $24 million in the second and third quarters of $18 million in Q4. That's in comparison to the $16 million that we recognized in the first quarter.

As I mentioned before, we had some cost primarily major expense for (inaudible) items on our rigs that were not incurred as expected in Q1, but are still expected to being spent, some of which will be spent in the upcoming quarter. When you take all of this information into account, we expect contract drilling expense, which I will remind you as always excludes reimbursable cost to total between $365 million and $380 million in the second quarter.

Looking at few other cost areas for Q2, we expect depreciation expense to be between $100 million and $103 million for the quarter, and that will also carry forward to Q3 and Q4 and G&A and interest expense to be relatively flat quarter-over-quarter.

And finally, for capital expenditures, we are increasing our total CapEx forecast for 2010 by some $70 million from the previously reported $440 million to $510 million. This increase is a result of modifications needed for the Valor, Baroness and Clipper in conjunction with the 11-year worth of contracts totaling some $1.4 billion in revenues that we were awarded for our Brazil work and had announced earlier in the year.

And with that, we will open it up for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Dan Boyd with Goldman Sachs.

Dan Boyd – Goldman Sachs

Had a question on, as we look out on rigs that might need investment, we have seen a number of your competitors either swapping out rigs that required large surveys or investment to continue to work or even to making a decision to stack some because of the investment required. When we look through your fleet, are there any rigs that we should be aware of that might require an investment of greater than, say $50 million to continue to work just to be on the radar screen?

Larry Dickerson

I think Dan the one rig that we done that with up to this point was the Ocean Bounty, where we took the Ocean America to the Gulf of Mexico and it’s on its way currently to Australia to fulfill that job so that we didn't have to spend something in excess of $50 million. I do not believe that we have anything that tallies that. We do have a couple of jackups that may be facing surveys that would be drawing on cash and if the markets themselves are close to breakeven, then we would question whether or not we think we should spend that. Nothing on the floater side I believe that approaches a $50 million number.

Dan Boyd – Goldman Sachs

Okay. And maybe I will follow up with you guys offline on the jackups, which one. And then just, a separate question on the M&A strategy, I recognize you are not going to comment on any specific opportunities but overall – of course, if the economics make sense, but is there a desire to high grade your jackup fleet potentially acquire high spec jackups, should the opportunities present themselves or are you – for the same type of return more focused on the deep water assets.

Larry Dickerson

I think we have always been a deep water company with the majority of our investments on the floater side of – where we are looking at and we think we made some great acquisitions in that space, I can’t tell you what the prices would be but certainly looking at the third (PERTAMINA) rig, prices did rise quite a bit with more activity coming from more participants. So we would also look I think at high spec jackups if the values really become compelling. Certainly we wouldn't be making those investments saying, “Oh, strategically we need to high grade jackups.” It would be more where we did an estimate to solve that perhaps that might be a better return over time for us. And again, just because jackups are so small, I wouldn’t see them small in cost ever being a significant opportunity for us.

Dan Boyd – Goldman Sachs

Okay, but you could see situations that one of the competitors recently did where they acquired a rig from the shipyard, contingent on securing a contract.

Larry Dickerson

That’s always a possibility but certainly we get hesitant to grab something in a shipyard where there is unknown cost in there and that’s what I reflected in the price (inaudible).

Operator

Your next question comes from the line of Angie Sedita with UBS.

Angie Sedita – UBS

Larry, so just as a follow-up to that, are you – and again, just in generality, are you seeing more opportunities for – are more rigs available for purchase either in the jackup and deep water market and are you seeing any narrowing in the bid and ask more so in jackup for deep water or neither in either space?

Larry Dickerson

I would say there is really a shortage of real opportunities to act on right now but that doesn't mean that they are not going to pop up. But as you look forward, I mean you could see the (PERTAMINA) rigs coming quite a bit and it’s difficult right now to actually see where there may be a new construction or a smaller guy that's going to be available on that end and on the jackups space, I just – I don't think there have been that many transactions, we are not hearing of that. And so, that seem to be quite a ways away.

Angie Sedita – UBS

All right. And then also on the mid water market, you talked about the recent signings of Transocean. Could you give us your thoughts on the outlook for the new era, which is in Mexico, rolling off I believe in July and then the Voyager in the Gulf rolling off also in July?

Larry Dickerson

I’ll let Bob talk on that. The Voyager, we brought that up for Mexico and there is just a real shortage of any kind of mid water units in the Gulf of Mexico. We have our Saratoga committed for some time and I believe Noble has one rig. So the Voyager seems to, for the moment, have found a short-term (hit).

Bob Blair

We are having discussions currently with operators about work for the Voyager at the end of its current commitments. There seems to be continued interest. Also we are having discussions with Pemex. I think they are trying to sort out in their organization. What they are allowed to do is for is up through a pure negotiation (forward) required to go through a bid process, but they do have some interest in extinction of the new era. We are continuing discussions in the U.S. Gulf of Mexico as well for the new era.

Angie Sedita – UBS

Okay. And then those rigs are generally at this spot market already which fair. Is that – does one would assume they should generally roll over at that spot market?

Bob Blair

There could be some effect through – because of the hurricane seasons encouraging operators to take the risk associated with drilling during hurricane season. But basically it shouldn't be much different.

Angie Sedita – UBS

Okay, great, thank you.

Operator

Your next question comes from the line of Jim Crandell with Barclays.

Jim Crandell – Barclays

Good morning.

Larry Dickerson

Hello, Jim.

Jim Crandell – Barclays

Larry, could you comment on the Brazilian market in regards to two items, number one, how do you see them responding here and how do you see them acting to the requests for the tenders for a 28 rigs? And secondly, do you see Petrobras coming into the market to take some of this idle capacity off the market that’s going to be delivered in the second half of this year or early 2011?

Larry Dickerson

I think it’s very difficult get into their – know exactly what they are doing, they are very confident. People understand the market really well and so I just don’t – I don’t know if I can really add much there. They are also our largest customer and I don’t – certainly don’t want to say anything, make a comment or about their activity.

Certainly the 28 rigs, I think everybody understands including Petrobras how challenging that will be to deliver given that capacity to build such rigs that are really at a startup stage and then they also have some aggressive targets for local content which will also be difficult to achieve.

So – but, Petrobras has done a lot of things that have been very difficult and they lead the industry. And I think there will be problems, but they will work to solve them. I think net-net at the end of the day, it’s it will take some time to solve the problems.

Jim Crandell – Barclays

Okay. And just to come back to the dividend issue, Larry, I think you said that there was no real incremental negative or it doesn’t seem to be an incremental negative change versus your expectations for the business as of three months ago. And I think you said in response to Angie’s question there was a real shortage of real opportunities to buy rig. But I think those two things would I guess question or question whether the rationale for a dividend reduction at this point.

Larry Dickerson

Well, two parts, I mean, we do think at $80 oil that there will be some demand that needs to work its way out. But certainly as we have been seeing, replacement day rates that are being signed out, they are below peak as you put those in. And then you are going to – as those begin filtering through income statements of us and others, then I think that you will see reduced earnings and cash flow that could come from that.

The saying that we want to retain money for acquisition opportunities, I mean, the amount of money that we are talking about having available is not going to in and of itself buy a rig in any one quarter, so it would – it would take some time to build up for that.

Jim Crandell – Barclays

Okay, you also made the – I think made the statement in your press release that you feel confident about maintaining the dividend out through 2010. And I think you said early on that your outlook for the business is quite positive and should we take from that that we can look at the current dividend as being – as likely to be sustained out through 2011 if your view of the industry is right?

Larry Dickerson

Well, we didn’t make a comment on 2011. That does get to be far out there. We sighted all the factors that we consider in setting a level of dividend. But we recognized at a point and time that we would reduce the dividend that there would be an issue for shareholders to know try to be able to see what’s going to happen just subsequent to this, it would go up or down in the subsequent quarters, so we thought that it’s appropriate to stay that the Board said that subject to all – everything else that we could see sustaining this dividend through 2010.

We like to pay dividends. That’s a key part of our strategy. But we need to see how the earnings are going to come in and what renewal rates are going to be, so there is too much uncertainty really in 2011 to extend our forward visibility on where we think dividends will be. But at the end of the day, we started this dividend, significant dividend payment within the industry. It’s been a key part of our strategy and all those factors still are in place.

Jim Crandell – Barclays

Okay, thank you.

Operator

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

Ian McPherson – Simmons & Company

Hi, good morning. Larry, you made the remarks that the Voyager is sort of in the sweet spot of a – to Gulf of Mexico mid water market without a lot of competition, but you also have the victory I believe with an open window in the back half of the year. What would be the strategy with that rig? Is there an intermediate deepwater work that you could attach that rig and if not would you be willing to take it down market or would you prefer not to necessarily setup maybe an anomalously low day rate on the 14 rig given maybe the negative pull through that might have for the rest of your fourth gen fleet?

Larry Dickerson

I would say we would prefer not have negative impact from rates. But the victory, we need to restructure a peak day rate on that unit that was at 540 to fit our customers’ revised need and to maintain that contract. So we took a net profit interest in some wells, which we think is working out nice for us, and we also agreed to take some windows. So anytime you take windows in your program, it is challenging.

If we can find opportunities in deeper water then we think we can get a deeper water day rate, which again it’s not going to be at peak rates. But if that’s not available to us and we need to work an immediate water depth and I think we would do that on a short-term basis to fill a window. And I think it all depends on whether there is enough demand to cover both it and the Voyager. We would look at our total marketplaces.

Bob Blair

The customers we are talking to right now, some of that activity that we are looking at is in Voyager, in excess of what the Voyager could drill. So I think there is a nice split there between the two rigs. But it will be a challenge to build the year with – for both of the rigs during the hurricane season.

Ian McPherson – Simmons & Company

Okay. And then kind of maybe an unrelated follow-up; the global mid water market, where do you see day rates going over two years if crude say stays here at $85? Would you see activity recovering and rates going higher or vice versa or neither?

Larry Dickerson

All the above you didn’t give us that choice, which is probably the correct one. At $80 an oil is good for the industry and it’s good for our business and it’s good for demand. Where that actually translates is going to be impacted by a variety of things, but if rates stayed where they are today rather than recovery, we can make a lot of money, we will not be earning that kind of levels we did when we were able to price these rigs all, so that kind of boom time market rates that you would otherwise get.

Bob Blair

I think stable oil price in confidence helps the operators plan their activity. And we have seen that the peak day rates have dropped somewhat, because they haven’t gone to plummeted to extremely low rates. I think that the – that as long as oil price stays stable that we will see eventually in rates.

Ian McPherson – Simmons & Company

Okay, thanks.

Operator

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

Dave Wilson – Howard Weil

Good morning, guys. Just real quickly kind of a follow-up on the Gulf of Mexico and more related to your jack-ups in light of the hurricane activity. Can you talk a little bit about what you are seeing as far interesting getting some of those contracts extended through that – through the summer months?

Bob Blair

Yes. Typically operators have not ceased all activity during hurricane season and the jack-up markets. We continue to have discussions with operators about ongoing work, there is activity, especially for the independent light rigs the only place where that really is a falloff in activity has been the mat sector of the market. We have a lot of bid activity going on right now through the Gulf of Mexico and I think very good prospects are ongoing work.

Dave Wilson – Howard Weil

Okay, thank you.

Operator

Your next question comes from the line of Joe Hill with Tudor, Pickering, Holt & Co.

Joe Hill – Tudor, Pickering, Holt & Co.

Good morning.

Larry Dickerson

Good morning.

Joe Hill – Tudor, Pickering, Holt & Co.

Guys, I had a question about capital allocation and whether or not it’s worth trying to upgrade some of your more semis to DP or whether it’s cost prohibitive given the design, given the fact that if we look at the inflows to deepwater capacity and the potential impact on rates, it may imply that more rigs may come under some pressure. Is that a possibility to upgrade?

Larry Dickerson

Yes, it is a possibility to upgrade. However the question is what is economic? Certainly a point and time when we could buy new capacity on the Courage and Valor, for a shipyard price below $500 million, it doesn’t make much sense in my judgment to spend a lot of money on a moored rig to put it in a DP mode.

And we don't have a total handle on that cost where that might be in the present market, but it would be significant, at least a couple hundred million dollars plus some lost opportunity cost if we work it. However there does – there could be the possibility with all of the DP rigs coming to market that moored rigs may have a challenge that might be reflected in the day rates, but we just don’t know yet.

Joe Hill – Tudor, Pickering, Holt & Co.

Okay. And Larry just a follow-up real quickly, the – I know that Guardian has been operating in the Falklands and the Argentine government was making some noises a while back about that. What’s the situation there today and are we anticipating the Guardian fulfill its contracts down there?

Larry Dickerson

That is our expectation. We have drilled previously in Argentina and think that we have good relations in the country, don’t know how it impacts us, but we are drilling under the auspices of the Falkland Islands and the UK government is also involved in that. And it’s our expectation that we will be permitted to continue. I think a lot of the issues around that were related to our arrival in the area. And it’s there maybe arguments going forward politically as to who should have the oil, but I think it’s in everybody’s interest to go out and explore and find whether or not there is producible oil in that area of the world.

Joe Hill – Tudor, Pickering, Holt & Co.

Okay, thank you.

Operator

Your next question comes from the line of Robin Shoemaker with Citigroup.

Robin Shoemaker – Citigroup

Thank you, good morning. Just if you could comment on the international jack-up market and how you see it. In terms of the recent contracting signings that we have all noted you see, are you encouraged by anything you see in the international jack-up arena? And do you have a view as to what the 50 plus new jack-ups entering the market could potentially do in terms of holding back or impacting the rate structure over the balance of the year?

Bob Blair

I think the encouraging signs in the international jack-up market is there is activity in all areas. So it’s not like we have seen in the past where activity just seizes in certain areas where there is no work. We are very active bidding in all areas that we are operating in.

We have I think excellent prospects for continuing work for either existing operators or new operators with our rigs. And the fact that there is activities, the big problem is that there is excess supply and therefore there is pressure on day rates, it’s pushed down rates. So a lot just has to do with during the bid, the negotiation process, just getting your price ideas correct and securing the work.

Robin Shoemaker – Citigroup

Okay. In terms of – how do you assess your potential with regard to adding or moving more rigs into the Mexico market with the existing tender that they have for future wells?

Bob Blair

Well, of course, we are going through the tender process right now. The first submission is due next week for a unit for a little over a 1000 days with the term. We are looking at that and certainly have the rigs that meets the 10-year requirements that we are looking at the possibility of bidding that rig into Mexico. I think it’s going to be quite a competitive tender exercise.

There will be several rigs bidding, including some Mexican owned rigs that are in the area. There is additional tender out for four jack-ups of a shorter duration – for shorter duration programs. That bid submission has been delayed into May. I think they are relooking at some of the technical requirements and perhaps the age, the 10-year age restriction.

But we feel like the Mexico continues to be in market that we will be interested in. It’s just Pemex actually giving their tenders out and also deciding with certainty whether or not they are going to require this equipment to be 10 years young or younger or if they are going to waive that requirement.

Robin Shoemaker – Citigroup

Okay. So you have won I guess in the US Gulf of Mexico that would be less than 10 years.

Bob Blair

Yes, we have the Ocean Scepter that's currently working here in the US for an operator. Fairly short-term work.

Robin Shoemaker – Citigroup

Right, okay, thank you.

Operator

Your next question comes from the line of Scott Burk with Oppenheimer.

Scott Burk – Oppenheimer

Good morning, guys.

Larry Dickerson

Good morning, Scott.

Scott Burk – Oppenheimer

I just wanted to kind of go back to the reasoning behind the reduction in dividend. And just wanted to understand, you mentioned the various reasons that the Board considered when looking at that. But was the decision weighted more towards a concern about current rate levels and the expectations for future rate levels or more towards wanting to keep a high cash balance for potential acquisitions perhaps next year?

Larry Dickerson

I would say both factors were present, but the – I am not trying to pick one versus the other. But it is a fact that and it has been for a while that day rates, although solidly profitable in most classes are below peak rates. And so I think that is a – if we were faced with sustained peak level pricing then the desire to build cash, it would probably still be present but it just wouldn't be as big an issue as it is with being able to look out to maybe less cash coming in the door.

Scott Burk – Oppenheimer

Okay. And was there any issue about not having enough kind of US tax cash available to continue paying the dividend. Was that an issue at all?

Larry Dickerson

No.

Scott Burk – Oppenheimer

Okay. And then just one other question, could you restate the DD&A guidance for the next quarter?

Gary Krenek

Between $100 million and $103 million, that will be consistent for all three quarters versus the year.

Scott Burk – Oppenheimer

Alright, thanks. That’s all I have.

Operator

Your next question comes from the line of Geoff Kieburtz with Weeden & Company.

Geoff Kieburtz – Weeden & Company

Thanks very much. Larry just to clarify on a dividend question, you are making the point that rates come down from the peak rate. I just want to make sure that we are understanding this as you – do you need to get back to peak rates in order for that special dividend to come back up to the $1.87 a quarter?

Larry Dickerson

I don’t know, we haven’t said that. Certainly if we had – if we had a situation where we had rising earnings, which result from rates, but when we had rising earnings, then we would, among other things consider increasing the dividend. But I can’t give you a scale that says when we reach X price and we will pay Y dividend.

Geoff Kieburtz – Weeden & Company

And somewhat related, it seems that you made a point earlier that that the dividend decision is really being driven by what rates are, not by some projection of what they will be. Is that correct?

Larry Dickerson

That is correct. I mean, we have said that we will remain optimistic, but we cannot know where the dividends are going to be.

Geoff Kieburtz – Weeden & Company

Okay, alright. And if I could – one more question just simply topical together, you have had a lot of insight into the Brazilian market and I understand your reluctance to sort of speak for Petrobras, but is it your – I guess, what do you think the probabilities are that the – the tender – the tenders for both of the nine Petrobras rigs and the 19 contractor rigs actually still with the May submission dates versus you are having that rescheduled again?

Larry Dickerson

I am sorry, I am just – I don’t think –

Geoff Kieburtz – Weeden & Company

You don’t want to speak for them, that’s okay.

Larry Dickerson

Well, I just can't contribute. It's just my guess. I would suppose that they will receive something in that timeframe.

Geoff Kieburtz – Weeden & Company

Okay, alright, great, thank you very much.

Larry Dickerson

Let me take one more question.

Operator

Your final question comes from the line of Philip Dodge with Tuohy Brothers Investments.

Philip Dodge – Tuohy Brothers Investments

Good morning. Thanks for the comments. Question on offshore Brazil other than Petrobras, there are several discoveries by other companies and now BP is coming into the picture. Do you expect any increase in activity related to that group of operators other than Petrobras?

Bob Blair

We have been bidding our units into other operators for some time now that have been shortlisted by some, for certain jobs. We just – at this point in time, we have not been successful with our offers. Certainly there is going to be other units come into the area to fulfill those requirements and we hope we continue to bid and we hope that maybe one of them will be ours.

Larry Dickerson

And I will point out that we do have four rigs working for OGX down in Brazil, so we have been very successful with that customer.

Philip Dodge – Tuohy Brothers Investments

Yes, fair enough. And then let me just wind up offshore Mexico, whether you think that the poor results that Pemex has had in their deepwater activity will be a detour going forward or does it look that they are going to keep trying?

Larry Dickerson

We have at various times drilled deepwater prospects for Pemex and I just can’t really comment on the results and how they would evaluate those results from either our rigs or other people’s rigs.

Philip Dodge – Tuohy Brothers Investments

Okay, understood. Thanks very much.

Larry Dickerson

Okay. Well, thanks everybody. We will talk again in roughly 90 days. Thank you.

Operator

This concludes today’s Diamond Offshore Drilling’s first quarter 2010 results conference call. You may all disconnect.

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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.

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Source: Diamond Offshore Drilling, Inc. Q1 2010 Earnings Call Transcript
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