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Diamond Offshore Drilling (NYSE:DO)

Q2 2010 Earnings Call

July 22, 2010 9:00 am ET

Executives

Gary Krenek - Chief Financial Officer and Senior Vice President

Robert Blair - Senior Vice President of Contracts & Marketing

Les Van Dyke - Director of Investor Relations

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

Analysts

Ian Macpherson - Simmons & Company

Arun Jayaram - Crédit Suisse AG

Judson Bailey - Jefferies & Company, Inc.

Waqar Syed - Macquarie Research

Robin Shoemaker - Citigroup Inc

Joe Hill - Copia Capital

Angie Sedita - UBS Investment Bank

Daniel Boyd - Goldman Sachs Group Inc.

Operator

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Diamond Offshore Drilling Second Quarter 2010 Results Conference Call. [Operator Instructions] I will now introduce to you Les Van Dyke, Director of Investor Relations. Please go ahead, sir.

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; Gary Krenek, Senior Vice President and Chief Financial Officer; and Bob Blair, Senior Vice President, Contracts & 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 that drilling rigs will enter service, as well as management’s plans and objectives for the future. The discussion of the risk factors that could impact these areas and the company's overall business and financial performance can be found on 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 or any changes in events, conditions or circumstances on which any forward-looking statement is based.

After we have discussed our results, we will have a question-and-answer session, during which that 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 will turn the meeting over to Larry.

Lawrence Dickerson

Thank you, and good morning. I have several topics I'm going to talk about this morning. First of which would be the moratorium and its ongoing continuing impact on Diamond Offshore. During the quarter, we have announced two relocations of rigs, which I believe are for the -- certainly, the Endeavor was the first, Confidence is the second. There's also been other announcements of modifications of contracts and various things from other drilling contractors.

I think pretty much each company and each rig plays out differently, depending upon its circumstances and situations, so I'll give you a little color behind ours. The Endeavor, which was our first rig that we announced is relocating to Egypt. It was under contract to Devon. Devon sold all their offshore properties while advancing more plan and retain contract on the Ocean Endeavor. We expected I believe to work with some farm-outs and they were very keen to assist us in coming up with a plan where we could relocate the rig. I think we disclosed the terms of that. The general scheme was that between the day rates and when we receive from our contract in Egypt and the termination payment from Devon that will be placed in the same economic position as if we stayed in the Gulf of Mexico. We believe that we have that advantage of being able to preserve some U.S. jobs that we would also have a rig, a very good rig relocating to the Mediterranean, which is a good market and certainly has more certainty going forward than the U.S. market.

Subsequent to that, about a week later, we announced, although the rig actually left earlier, was a modification to the Ocean Confidence contract with Murphy. We have little over three months left with Murphy and agreed to build a job of theirs in the Congo in West Africa, where they would relocate the rig and then we committed to bring the rig back for a year under the original terms of the contract. At such point in time that the situation is almost cleared up. If there is time that host our arrival in our drilling in the Congo, then we will be free and will be responsible for chasing other work in West Africa. So we are pleased with that arrangement. There is less revenue coming to us than probably staying in the Gulf of Mexico, but we think that was a net win for everybody.

Among our other rigs that are in the Gulf of Mexico are floaters, Ocean Voyager finished its series of oil subsequent to events of April 20 in moratorium, and that has now been cold-stacked. Saratoga was permitted to continue on. The Victory is also continuing on some production-related drilling. And the Ocean Monarch is our large rig with a big contract, which is still yet to be determined. The rig was assigned from its primary contract Anadarko to Cobalt. Cobalt had a certain commitment. And they're working through that commitment at which point in time, sometime in August, we would expect the rig to be returned to Anadarko. All that is still open. So that's the primary impact on our Floater business, our jackups. We've had mixed results. I'm seeing our customers being able to get permits. So we've had some impact there, but we've had less rigs there.

Let me now switch and talk about a general overview of results that we had for the quarter. And I'm going to focus on some of the impacts that we've had that resulted in operating performance that was less than, I think, through the first call view of where we would be. We had about $0.05 directly related to the moratorium of hit, and that was when we agreed to relocate the Confidence to West Africa, we moved up a survey by about two years, I'm sorry, not quite two years. I performed that in the Gulf of Mexico, and so that cost us $0.05 in revenue that we might otherwise have had. Additionally, the Ocean America, and we had committed sometime in advanced of the moratorium to relocate that rig out of the Gulf of Mexico down to Australia. And that was done at a time when we just wanted to have more diversification among our fleet and produce our concentration of rigs in the Gulf of Mexico, and I think was for the two of those obviously. But the rig arrived in Australia and we had about a month later of acceptance in going on full contract than we had anticipated. Just contract acceptance issues, some repairs that we needed to do, and that cost $0.07 off of our guidance.

We also suffered in the quarter equivalent downtime on the Ocean Epoch and Ocean Patriot, both of which are operating in Australia, which cost us about $0.06. And then we had a $0.02 impact on tax rating, and Gary Krenek will expound on that a little bit later. All that was offset by about $0.05 positive cost throughout the rest of the fleet. It's good certainly indicates that where cost, but revenues obviously have been impacted in the quarter for downtime or acceptance issue.

Finally, let me talk about the dividend. Dividends remain an important part of our philosophy of returning value to shareholders. However, we believe that the events in Gulf of Mexico primarily and the moratorium and the uncertainty that's hit the industry calls for us to make a reduction in the dividend. We're still maintaining a healthy dividend that we think shows our commitment. And if you look over time, the total amount of dividends that we've distributed, I think have been very significant and had an annual run rate of $0.75 a share special dividend combined with the regular dividend would be an annual run rate of $3.50 is still a very decent yield.

Now in my statement in the press release, earnings release, I think covers all the reasons behind it. But we put particular emphasis on the need to deploy cash if and when we get that opportunity to buy rigs into the fleet. Last year, our acquisitions were especially timely. We've got great prices and we've got them in a point in time when it was pretty clear that we would able to put those to work at near full payout contracts. So we prefer to emphasize that we are shepherding cash for the opportunities that we see will develop from the moratorium rather than just as a cautionary, "Oh, we don't know what's going to happen to the moratorium, let's build cash."

And finally, I'll just close out again coming back to the moratorium. I had an opportunity to testify with Gerry Collin of engineering over the first hearing of the national commission on the BP Horizon oil spill and also drilling. And used most of my time to make the case that moratorium was economically hurtful to the point that opportunities in affected states of Louisiana, Mississippi and Texas made arguments that did not make sense. Gerry Collin joined me in that, Senator Andrew was over there testifying for local congressmen and allow us to put forward before the commission. But all of that paled to be eloquent of an oilfield who testified at the conclusion during the three minutes that she was allotted for the public to make comment. I'm encourage everybody has checked that out. That's posted at YouTube under the title research oilfield and oil spill. I think you can see that and I think that reminds everybody really the employment prospects and how important it is for the people in that area that we continue to push to return to safe operations in the Gulf of Mexico as soon as possible. So with that, am going to turn it over to Gary to give a little bit more elaboration on the numbers.

Gary Krenek

Thanks, Larry. I really don't have a lot to add to the second quarter results. Larry went over that in some detail, and did a good job on that. The line items that he did not address were pretty much consistent with what we expected, and I believe everybody else did. So if anyone has any question on those, I'll certainly address them in the Q&A portion.

Looking forward to the third quarter, just a little bit of guidance there, rig operating expense, again, the main one, we expect to see somewhere between $380 million to $390 million worth of costs in the third quarter. Again, you can compute that by taking our daily operating costs that we have given out earlier in the year. Adding to that is, in the third quarter, we'll recognize some $34 million, $35 million worth of amortized deferred move costs and startup costs. So that needs to be added to the normal operating cost.

In addition, the Vanguard, the Winner, Alliance and Spur will all be in the ship hard shipyard for surveys during the third quarter, or expect to be. That will cost us another $20 million. Costs will be reduced by approximately $30 million for the Valor, Confidence, Baroness, as they moved or acceptance testing for contracts in international markets. Remember, we are removing or doing acceptance testing, we defer those costs and defer them over the length of the contracts. That's where the original $34 million that I gave you came up with as we amortize those out. So again, that all net down to approximately $380 million to $390 million. That is an increase from the second quarter, which was approximately $350 million. And that increase is due to two things. One, we had several rigs that were moving in the second quarter to various locations. They are now operating in the third quarter and so we'll be recognizing their cost. Also, we have some of our major project that we account for as an expense projects that are back loaded into the second half of the year. This is normal for our business. We do the budgeting. We budget in the fall of the previous year. We write AFPs, place orders for equipment first half of the year and a lot of that equipment comes in and the work is done in the second half.

We had previously said that we expect that rig operating costs for the year 2010 to be right at $1.5 billion. We now expect that to come in slightly below that number. Two reasons, one, as Larry said, concentrated effort by our operations group to control our costs and they've done a good job on that; also we've cold-stacked a couple of rigs, the Bounty and the Voyager. And some of those costs will not be incurred, operating costs will not be incurred and we have other fleet for that.

As Larry said, the tax expense for the second quarter was slightly higher. Actually, it was at the high end of our guidance. And that was driven by the fact that we have, as we've announced, the sale of Ocean Scepter. While that is not occurring until actually in the third quarter, for accounting purposes, we computed what that tax would be and you required to spread that taxed equally throughout the year. And based on that, that changed our tax calculations and resulted in a 30% tax rate for the second quarter. We expect the tax rate for the third and fourth quarter to be somewhere between 29% and 31%. Depreciation expense, interest, G&A for the third quarter should all be consistent with the second quarter. So we're not expecting any surprises there.

And finally, looking at capital expenditures, we're now forecasting $485 million worth of maintenance capital for the year and an additional $70 million, which much of it has already been incurred but to complete the commissioning of the Valor and Courage, that will give us a total expected CapEx for 2010 of $555 million. Maintenance capital is up slightly from our last projections, and that's driven primarily by some equipment requirements and also additional rigs leaving the Gulf of Mexico and going overseas and some equipment that we need to purchase with that. Larry, unless you have any other comments?

Lawrence Dickerson

Lets open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Daniel Boyd, Goldman Sachs.

Daniel Boyd - Goldman Sachs Group Inc.

Larry, just wanted to start up asking a little bit about to better understand the go-forward strategy. I thought it was to improve the fleet with high-spec assets, and that always included both floaters and jackups. But with the recent sale of a high-spec jackup, can you help you understand that? Is it to one, maintain a certain dividend yield; and number two , add deepwater rigs? What was the thought process behind wanting to monetize that asset?

Lawrence Dickerson

Well, we kind of view that as a one-off sale and not as a strategic indication of what's going on with the way we like the price. The asset was all alone. Our only premium asset jackup lies in the Asia Pacific and there's a lot of assets being delivered there. So right in Australia, we had low points. So weighing all that together, we elected to take the price that was offered with the idea that we would put that into higher-spec acquisitions on the floaters side.

Daniel Boyd - Goldman Sachs Group Inc.

And have you seen anything on the acquisition side of number of opportunities increased over the past three or four months? Or is this in anticipation with the moratorium you think number of opportunities will increase?

Lawrence Dickerson

I think it's more our projection of what's going to happen. I mean, it's not sales on the courthouse staff at this point in time. But there is uncertainty in the market that will be additional assets leave in Gulf of Mexico and compete for jobs that are out there. And then there is an impact on the operator side. The uncertainty that they got from the Gulf of Mexico I think will in fact they come back. So we believe that , that will help yield some additional opportunities on the either the newly delivered or rigs that are on the hands of folks that may not be as well capitalized as you in this industry

Daniel Boyd - Goldman Sachs Group Inc.

Then that also means that the current dividend is a reflection of not only opportunities that might arise, but it is a reflection that market conditions may realistically could deteriorate from here, and then you just want to be ahead of that?

Lawrence Dickerson

We are more focused on building cash, but you can see that they have even before the moratorium were breaking a little bit. They're solidly profitable, but we're not at peak rates. If you wanted all that line on a continued downslope or make future projections, we don't give any guidance on that.

Daniel Boyd - Goldman Sachs Group Inc.

I was just saying though that the current rate is, if things were to stay as they are today, the dividend will likely be higher. However, do you have some cushion in there should things deteriorate? But I understand if you don't want to answer that on a conference call.

Operator

Your next question comes from the line of Joe Hill with Tudor Pickering.

Joe Hill - Copia Capital

Larry, where do you think leading edge day rates for Deepwater assets are today?

Lawrence Dickerson

It depends on the market, but certainly, in West Africa, we're seeing in the 300.

Joe Hill - Copia Capital

And then are you guys still booking revenue on the Monarch? Or has the force Majeure attempt forced you to not to do that?

Gary Krenek

As of the end of the second quarter, that has had no effect on us.

Joe Hill - Copia Capital

Shipyard costs are evidently coming down a little bit. I'm wondering if there's a price at which you guys would rather build a new asset as opposed to buy a new asset without a contract?

Lawrence Dickerson

I think that's probably no because of the time differential. And even if there is a price today, it will take you three years to build a new rig even at a discounted price. We think we have a very good handle on that. The price of existing assets will move down while we're waiting.

Joe Hill - Copia Capital

Gary, are there any issues surrounding the contract with ATP and the Victory did with a moratorium? Or is that pretty much as is?

Gary Krenek

No issues as is.

Operator

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

Ian Macpherson - Simmons & Company

Larry, with the Courage and the Valor, your strategy was pretty effective with buying the rigs gaining contracts. Secondarily, with the market still assuming to be on a downward trend or in a losing trend anyway, is that still an advisable strategy? Or do you need to be more prudent in the way you prosecute acquisitions in terms of getting a contract ahead of time?

Lawrence Dickerson

Well, I think in the market today, you're not going to have as many opportunities. There will be some, but to immediately contact it, we were on a position where we will borrow, buy and contract all in one time. And if you boxed up today, if you look, I think some of the opportunities they come from uncommitted rigs that are out there. And I think that it'll be able to work, but it will be challenging to find long-term contract.

Robert Blair

You were looking at being able to find work, it'll be relatively short term and you had a piece a puzzle together to keep them working.

Ian Macpherson - Simmons & Company

I'm trying to reconcile that outlook with how it makes sense to consolidate the spec capacity if the near-term returns are not quite.

Gary Krenek

We would look at the rate of the rig. I mean, we're not going to go buy something and if we don't think it makes economics. If we can't make the numbers work for us, we're not going to buy it. Or to a greater degree that you're speculating, then you're right, that would indicate loss.

Ian Macpherson - Simmons & Company

Can you talk about what you're seeing with regard to the prescribed BOP upgrade scenarios for the Gulf of Mexico between down now to Victory and the Monarch I suppose, any early read on what's happening there? What am I see in costs? What the likelihood is BOP or other capital upgrades being prescribed outside of the Gulf of Mexico as well?

Ian Macpherson - Simmons & Company

I'm trying to reconcile that outlook with how it makes sense to consolidate the spec capacity if the near-term returns are not quite...

Gary Krenek

We would look at the life of the rig. I mean, we're not going to go buy something if we don't think it makes economic sense. If we can't make the numbers work, we're not going to buy it. Or to the greater degree that you're speculating, then you're right, that would indicate [indiscernible] (28:52).

Ian Macpherson - Simmons & Company

Can you talk about what you're seeing with regard to prescribed BOP upgrade scenarios for the Gulf of Mexico? Granted you're only down now to the Victory and the Monarch, I suppose. Any early read on what's happening there? What it might entail? What it might cost? And what the likelihood is of BOP or other capital upgrades being prescribed outside of the Gulf of Mexico as well?

Gary Krenek

I wish I knew. We've got people working on that. We've got folks working on industry task force dealing with all of those particular issues. And it's difficult to say at this point in time, different rigs would have different upgrade requirements depending upon the final standards. We are sure that there will be additional specifications and additional inspections on BOPs and exactly how those play out, I don't know. Spreading to other markets, there will be an impact on what comes out of the Gulf of Mexico. We've seen people asking questions, but there are other markets, I think, where they have been through enhanced regulation already. If you look at the U.K., following the Piper Alpha, they've had a pretty robust scheme for the price. And I think they're pretty comfortable with the effectiveness of what goes on there. So I'm not sure that what flows out of the U.S. will most naturally flow overseas.

Operator

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

Angie Sedita - UBS Investment Bank

Larry, could you give us an update on first, the Guardian and the Nomad, both were up [ph] (30:55), one in September, one in November, mid-water floaters and the outlook for staying in the region and keeping those rigs working?

Robert Blair

This is Bob, Larry. First, with the Guardian, there has been some success with the rig in the area. One of the operators has announced a discovery. We are actually currently having discussions with that operator to possibly extend the work program down there for the rig. And additional, some of the option wells that were still outstanding, the operators have also indicated an interest in exercising those options. So we see that there's good possibilities of the rig staying in the area for some period of time. But we're just trying to define that at this stage. And then there is also a demobilization provision in that contract, which allows for a full mobilization back to the North Sea. On the Nomad, we have received a further commitment to the rig that takes the rig into November. We're just in the space [ph] (32:19) of finalizing that deal in the next few days. And there are prospects to continue with the rig, although none of them have progressed to what I'd call a real solid stage. So we're still looking at this point in time trying to find work through the winter months in the North Sea.

Angie Sedita - UBS Investment Bank

You have six international jackups, one that is currently idle and then four that are up for renewal in November, October, August. Color there, any of additional rigs that could become idle or you think that those rigs will stay working where they are?

Robert Blair

Discussions again with the existing contract operators indicate good prospects for all of them to continue work. And again, we're still trying to define the timeframe that those extensions will be. They should be relatively short in nature at this stage.

Angie Sedita - UBS Investment Bank

Larry, a question for you, Diamond Offshore did file a case in the Houston court against the moratorium. Can you give us an update on where this stands? I believe the judge put it on hold given the New Orleans case, but any color there?

Lawrence Dickerson

Well, we can't comment on the case itself, but technically, we moved our case and we're doing the that gays and that's pretty much where we stand out. So we're following the Hornbeck case. That's pretty much where we stand on that so we're following the Hornbeck. Didn't see any purpose in pursuing a separate venue at that time.

Operator

Your next question comes from the line of Waqar Syed with Macquarie.

Waqar Syed - Macquarie Research

The question on Mexico, Larry, are you hearing anything from PEMEX regarding the plans and maybe some talk of maybe they've asked for a budget increase? And also one of your peers in building industry mentioned that they may be looking for a number of additional jackups. I believe the number was 21, not additional, but to maybe send out a tender for 21 and maybe 10 of those could be additional. Do you have any color on that?

Robert Blair

Well, we had meetings earlier in the week with PEMEX. And certainly their tenders are in process of being developed four jackup units for delivery before the end of the year. A lot of those are going to be against existing units, incumbent units. I think there's currently 18 rigs that are scheduled to come off contract before the end of this year. So certainly, a lot of them will be renewed through this new tender process. We have not heard an exact number on the number of new units that will be required, but there is indication that there will be some. Right now, it's just -- the big question is when will these extenders come out. What PEMEX has been able to do if the tenders are delayed, they have been able to keep the existing units working through short-term extensions. So we feel like there are prospects for additional wells as well as keeping existing fleet occupied.

Waqar Syed - Macquarie Research

And do you have any sense of what type of additional rigs would they requiring? Would this be 350 plus or some of the lower end [indiscernible] (36:06) kind of units or more IC rigs?

Robert Blair

At this time, I think it'll be primarily the existing units. There may be requirements for some additional 350 units, but we do not have the full definition of that. We also had discussions about floating work with them that there seems to be some interest in retaining existing units, as well as looking at some deepwater work.

Waqar Syed - Macquarie Research

And when you said deepwater work, are we talking what, 3,000 to 5,000 for water depth [ph] (36:41) or more like 6,500 [indiscernible] (36:44), do you think?

Lawrence Dickerson

No, we're talking 3,000 to 5,000 for it.

Operator

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

Judson Bailey - Jefferies & Company, Inc.

Larry, question on as you're looking at that potential acquisition opportunity, how do you think about the purchase price in such an uncertain rate environment? And should we think about maybe if you look at it in terms of around what new construction is? Is that kind of the one metric we should think about or do we think about where you think rates may ultimately be in a couple of years?

Lawrence Dickerson

These are long-term assets. And in a boom time, you have the luxury of saying, "Okay. Investment out over the next five years." And those are fabulous opportunities and almost everybody recognize how good they are, so you had lots of response in that area, you had new interest into the business. Now it'll be a little bit more difficult. And you do have uncertainty, and you do have the possibility of idle time, the job that you have would be shorter in duration. So you've got to build all that into there. And I think that expresses itself, I believe, in terms of a lower price. And you are -- you should get a discount from peak pricing, clearly. And you should get a discount also for current prices because you're going to have to take that rig over to stay [ph] (38:29). Where that discount is, we'll have our own view, but other bidders will have other views and it will all come out in the wash as to how you weigh all that stuff together.

Gary Krenek

Well, you do have to get comfortable with the long-term nature of the business. It is cyclical, it comes and it goes. As we sit today, we talk about some weakness out there, but we still have a very strong oil price. We still have decent demand, I think, worldwide. We've got [indiscernible] (39:02) industrialized. Those are the things that drove us in the boom period, and all those factors will be here as rates slack off. And eventually they will, I believe, result in higher prices that we're looking at today.

Judson Bailey - Jefferies & Company, Inc.

In your opinion, is there any type of floor on asset value given there are some contractors out there who have a pretty substantial payment left to make to the yard? So does that theoretically could be above maybe what some people are willing to pay? Does that mean you got to pay the yard no matter what in [indiscernible] (39:47)?

Gary Krenek

Presently, I don't think the yards are in the mode of taking haircut, but in a really terrible market, they would have to do that. So know that there's not a floor, but I mean in a short-term basis for you to get a discount on an asset that's being constructed at a higher price, somebody will better take that haircut.

Judson Bailey - Jefferies & Company, Inc.

If I could just clarify one answer from earlier, you'd indicated, you said deepwater rates, you felt like in West Africa are in the 300, are you referring to ultra-deepwater or kind of deepwater in the 5,000- to 6,000-foot kind of water depth range?

Robert Blair

5,000 and above.

Operator

Your next question comes from the line of Arun Jayaram with Credit Suisse.

Arun Jayaram - Crédit Suisse AG

Gary, I was wondering if you can help us on how you're going to account for the early termination or the $31 million in revenue from Devon? Do you recognize that in the current quarter or over the life of the contract with [indiscernible] (41:09)?

Gary Krenek

I have no idea. We'd redone the accounting on that and we will recognize $31 million in the third quarter.

Arun Jayaram - Crédit Suisse AG

Second question, just kind of a follow-up on the consonants. During the mobilization period, is it zero revenue?

Gary Krenek

Yes.

Arun Jayaram - Crédit Suisse AG

So the $390 million will be the day rate, what type of mobilization revenue will you recognize on top of that? Ballpark is fine.

Gary Krenek

It will be minimal. We're earning $125 million.

Lawrence Dickerson

We'll give some guidance on that [indiscernible] (41:54). We just settled it and now we're going to get it to the accountants and do the calculations, but that will probably [indiscernible] (42:01).

Gary Krenek

It's not going to have a real material effect.

Arun Jayaram - Crédit Suisse AG

Guys, obviously, there's a lot of deepwater rig availability next year. How do you think the interplay between the midwater and deepwater plays out next year? Do you expect some substitution? Operators maybe trying the high grade towards deepwater rigs or do you not expect that?

Lawrence Dickerson

It depends on the market.

Robert Blair

Yes, it depends on the operators programs as well. Some of the operators will not necessarily want to go to a higher tech unit for a lower spec program. There may be some of that, but...

Arun Jayaram - Crédit Suisse AG

And maybe a quick follow-up to that is in most of the periods from '05 to '09, the industry was short of deepwater rigs. With the moratorium, are you seeing some international opportunities step up for rigs? And could you highlight maybe some opportunities where there is some incremental demand on the deepwater side?

Robert Blair

I don't think operators have had an opportunity yet to sort those type of things through. If that's going to happen, I think it's still down the line a while, when they have time to rationalize where their budget money is going, what type of spending and what prospects they've got to look at. I think it's all happening a little quick for them to make those decisions today. I think one of the things you can see is that operators are willing to pay money to hold on to a core fleet rather than just make an attempt to release them. So certainly, I think there'll be some opportunity before that later, but it's all too early yet.

Operator

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

Robin Shoemaker - Citigroup Inc

Wanted to ask you about the latest bidding round in Brazil. And we saw there that several local contractors submitted bids on new built multi-year contracts, and most of the established contracts, of course, did not. So can you share with us any of your thoughts about where we go next and with regard to Petrobras meeting their rig requirements?

Lawrence Dickerson

I don't know if have an opinion that I have enough confidence in to put out there. But be evolved in [ph] (44:49), we were not surprised that local participants bid and they do tend to bid at lower levels, but got a different view of the situation. I think -- there's a number of reasons for that, but as to what their capacity is, what ship their capacity is, all that stuff in subsequent rounds, we need to get a little further down the road before we have an opinion on that.

Robin Shoemaker - Citigroup Inc

And for the more near term, are you seeing additional rig requirements for Petrobras?

Robert Blair

Well, Petrobras, yearly, puts out a plan. Typically, it's about September, October every year. And so that plan should be coming out shortly. They'd filled all of their rig requirements for 2010, but they'll be developing them for 2011 and announcing those --

Robin Shoemaker - Citigroup Inc

I want to ask one other question, clarification On this whole M&A environment, which you have already addressed. But it seems that the sellers here are small, typically many of them start up companies that either apart from the financing difficulties, they may encounter, I wonder if there is a, in the post Macondo world, a challenge to them to get new contracts. In other words, the two rigs you bought last year had been built by a small operator and they had gotten a five-year contract on those rigs. But is that likely to cause more of the smaller start-up companies to look to sell the difficulty they have of acquiring or winning contracts from major operators in the kind of post Macondo world?

Lawrence Dickerson

I can give you our view, I don't know whether that translates in the market, but we believe that Diamond Offshore had other contractors of that size bringing a lot to the table, experienced personnel depth of spares and placement people, credible [ph] (47:12) experts in-house to address important issues of maintenance, equipment reliability and safety; and not hurting people that operational integrity. We've got fleet integrity programs that go back a number of years, which we've already addressed that and we think those are important selling points. And I think this is the kind of market where that should get some appropriate attention, but ultimately you'll have to ask the customers as to whether or not there is a price at which they would take the risk inherent with going with a new or less established contractor.

Robin Shoemaker - Citigroup Inc

If I could ask, Gary, one final clarification, when you mentioned that the Monarch would have -- there would be no effect as of June 30. Do you mean you're recognizing no revenue there?

Gary Krenek

No, we continue to recognize revenue through the end of June.

Robin Shoemaker - Citigroup Inc

Through the end of June and then subsequently?

Gary Krenek

Subsequently, we're in negotiations and talking with our customer.

Lawrence Dickerson

I would say in general, I think most of your -- and I can't talk to other people, but force majeure issues ultimately deal with cessation of very good year [indiscernible] (48:36) contract cancellation point. But there's really not -- but interim impacts on the revenue stream as you work off the number of days. That's not addressing disputes that may exist between us and the operator as to whether or not that condition falls under force majeure.

Lawrence Dickerson

I appreciate the great amount of interest that we had in the quarter. Obviously, there's a lot of things happening out there. We are in a market that's dynamic and so we appreciate the opportunity to get that information out to everybody. Thank you again and we'll talk to you at the next quarter.

Operator

Thank you. And this concludes today's conference call. You may now disconnect.

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Source: Diamond Offshore Drilling Q2 2010 Earnings Call Transcript
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